Financial KPIs *These comparative figures have been restated to reflect previously announced tax provisions. See note 2.2 of the financial statements.
Our purpose, values, culture and vision In 2019, one of our strategic initiatives was to develop a purpose and refresh our values.
For 2020, actively managing our portfolio means a strong and sustained focus on underperforming lines, which we call Decile 10, where we will aggressively manage the lowest performing 10% of the business with investments in data and analytics. At the other end, through efficient capital allocation, we will grow our Quartile 1 top-performing lines.
Hiscox is a specialist insurer. We are not a generalist and aim to be very good at some things and leave other classes to the competition. The breadth of the reach of the Company, however, is increasingly impressive. In the big-ticket arena we participate as a significant participant in the ILS market and stretch all the way across into the retail business to offering personal and commercial customers online coverage. This innovative activity emanates from our restless culture of always trying to find a better way of doing insurance and reinsurance. I derive joy from seeing my colleagues creating new opportunities and making Hiscox such a stimulating environment and interesting place to work. New people are attracted by these qualities and the challenging careers we offer and I’m proud that we have been named in the top five of Glassdoor’s Best Places to Work in 2020. This ability to attract talented and driven workers gives me confidence for the future.
Gross premiums written grew in constant currency by 8.1% to $4,030.7 million (2018: $3,778.3 million). We have seen good rate momentum in many areas, and will continue to grow in a disciplined way. We have cut over $200 million of underperforming business, but we are still growing having found new opportunities where conditions are good and rates are healthy. In the same way that our strategy of balance has given us resilience in the short term, it drives opportunities in the medium term and we are optimistic about the prospects for our $2.2 billion Retail business, and in the benefit of the repricing we are seeing in our London Market business.
Public directors and officers’ liability Professional indemnity Large cyber General liability
We extended our footprint in Germany, opening offices in Berlin and Stuttgart, and expanded the team in Munich. Additional investment in marketing and distribution is having a positive impact, and the team were rewarded for their efforts with a ‘Best in Industry’ award for our claims management in D&O, cyber and professional indemnity from AssCompact, a popular broker publication.
The roll-out of our ‘MyHiscox’ broker extranet sites across Europe has made it easier for brokers to do business with us by providing them with access to additional products and self-service features. The robotic process automation (RPA) which has been rolled out across policy administration, claims and finance, has resulted in the automation of 115,000 transactions in 2019. This enables us to not only automate back-end processing but also further improves service levels for our brokers and partners.
Modernisation in the London Market is a multi-year, market-wide initiative which I believe is critical to the long-term success of Lloyd’s. We have been strong supporters of the push towards electronic trading via Placing Platform Limited, an initiative which I chair, and I am pleased to say that over 75% of all business we write at Lloyd’s is now bound electronically.
The goal for Hiscox London Market is ‘to lead the way in emerging risk’ and so we have been focused on driving awareness of new risks. We held a first-of-its-kind ‘cyber cube’ experiential event on the trading floor of Lloyd’s of London which tested cyber security knowledge and promoted our new CyberClear365 product. We created a virtual reality simulation of a US hurricane and an app to assist our client’s understanding of rising sea levels and the downstream impact for homes and communities. These events drive awareness and sales.
Casualty reserve deterioration 40% deterioration on existing casualty reserves of c. $1.5 billion. Estimated 1-in-200 year event.*
Remuneration policy consultation We engaged with major shareholders on our remuneration policy ahead of its renewal in 2020. See pages 64 to 65 for more information.
Partners’ meetings Hiscox Partner is an honorary title given to employees who make significant contributions to the development and profitability of the Group. Up to 5% of the total workforce are Hiscox Partners, and have the opportunity to influence the direction of our business through regular formal and informal Partners’ meetings, which Board members also attend.
Expanding our involvement in ClimateWise During the year we increased our involvement in ClimateWise, which connects us to others in the (re)insurance industry who are focused on adapting to a changing climate. Having already been involved in the ClimateWise working group for some time, our ESG Executive Sponsor and member of the Executive Committee now sits on the ClimateWise Insurance Advisory Council. This group comprises of C-suite executives who work together to strengthen the industry’s response to climate-related risks and inform regulators, policymakers and other stakeholders on how to promote a more systematic response to climate change across the financial system, and we are pleased to play our part.
Highlights s We paid out $1.2 billion in claims worldwide in 2019, helping businesses and individuals recover after a loss, for events including Hurricane Dorian and Typhoons Faxai and Hagibis.
Championing mental health and well-being via our global employee network One of our employee networks, WeMind, has been championing mental health and well-being internally and helping to de-stigmatise mental health issues. Through training, motivational and expert speaker seminars, and story sharing, WeMind brings employees across the Group together. Its 2019 programme of events included newsletters and events to mark Men’s Health Awareness Month, a sleep seminar, suicide prevention webinar, and ‘it’s good to talk’ sessions to mark World Mental Health Day. The network has also received external recognition for its work, winning Outstanding Employee Network of the Year at the European Diversity Awards 2019.
Identifying and addressing emerging risks We have an emerging risks forum which assesses risks and opportunities which could potentially affect the business. This year, topics have included climate change, data regulation and the impact of changes in governments. Monitoring emerging risks and regulations allows us to explore how our business can adapt if necessary to be able to operate in the medium term and respond to change. In addition, the Group compliance function and our exposure management groups regularly perform horizon scanning for regulatory change. This year, topics monitored included general insurance value measures, the 2021 transition from LIBOR and Solvency II enhancements.
Our three-day cyber large loss training exercise brought together over 50 participants across 14 locations to test our response to a market-changing cyber loss event.
Robert joined Hiscox in 1986 and has held a number of senior roles across the Group, including Active Underwriter for Syndicate 33 and Group Chief Underwriting Officer, before becoming Non Executive Chairman in February 2013. He joined the Council of Lloyd’s in 2012 and has served as Deputy Chairman of Lloyd’s since 2017.
s Significant knowledge of providing commercial solutions for small businesses, particularly in the USA.
External board appointments American Express Company (NYSE: AXP); American Express National Bank.
To ensure that the Board operates efficiently, each Director has role responsibilities. The role of the Chairman, Senior Independent Director and Chief Executive are distinct to demonstrate the segregation of responsibilities.
Further governance changes completed in the year include new Board, Committee and Director evaluation processes which focus more clearly on outcomes, outlined on pages 58 to 59, greater oversight of responsibilities, continued formalisation of the control environment and enhanced reporting.
s The Board formalised the Company’s approach to workforce engagement, establishing a new Employee Liaison role which Non Executive Director Anne MacDonald will fulfil as detailed on page 54.
The whistleblowing policy ensures that employees feel empowered to raise concerns in confidence and without fear of unfair treatment. It allows serious concerns to be raised confidentially with senior management or, if they choose, with the Chair of the Audit Committee. Having a supportive and inclusive culture is important to us, and we track how employees feel about working at Hiscox through our annual employee engagement survey.
The Remuneration Committee ensures that appropriate remuneration structures are in place.
From purpose to performance catastrophe events in 2019, the Company strengthened reserves for prior-year claims, specifically claims arising from Typhoon Jebi, Hurricane Michael and within the risk excess reinsurance business, based on materially increased industry loss estimates. Similarly, the Committee received detailed presentations from the Chief Actuary and management relating to this new information and the recommendations arising therefrom. The Committee is satisfied with both the process that was conducted and the reporting and disclosure of the resulting estimates.
Complying with the UK Corporate Governance Code In accordance with the 2018 UK Corporate Governance Code, the Committee has advised the Board that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Over the life of our current remuneration policy (approved by shareholders in 2017) we have made certain implementation changes in direct response to shareholder feedback received as well as evolving market practice. It is our intention to formalise these under the new policy, as well as incorporating the changes set out in the Chairman’s letter, subject to shareholder approval at the 2020 AGM.
Bronek has led the business to achieve growth in gross premiums written of 8.1% in constant currency to $4 billion, however, profits of $53 million were below target. The Retail business increased profits by 22%, however, during the year the business had to publish new guidance for the combined ratio over the medium term, due to an uptick in claims activity and a more cautious approach to reserving in the USA.
Supporting business opportunities to drive value for the Group including Hiscox USA, Hiscox Asia and the use of third-party capital. Progress has been made in Direct Asia, adding new partnerships to drive growth. The direct and partnership division in the USA has had sustained investment in marketing and IT to protect our market position in the direct small business market. The third-party capital strategy is developing well. Refreshing the values, defining a purpose and common vision was also a priority for the Executive Committee. Bronek led this project with good results and engagement across the business.
s Hiscox’s remuneration framework is simple, comprising three main elements: i) fixed pay (base salary, benefits and pension); ii) annual bonus; and iii) PSP awards.
Market value at date of grant * Middle market quotation on 8 April 2019.
The performance condition for these awards, measured over the period 1 January 2019 to 31 December 2021 is as follows: Growth in net asset value plus dividends measured on a per-share basis
Minimum threshold vesting RFR + 6 = 7.5 20 Maximum vesting RFR + 14 = 15.5 100 Straight-line vesting between these points
The net asset value targets, which are reviewed annually, are designed to outperform the risk-free rate (RFR) and motivate the management team while driving the right behaviours. The RFR for the awards granted in 2019 was 1.5%.
Benefits (including retirement benefits) 2.7 2.0 3.3 2.7 *No bonus was paid to the CEO in respect of 2019 or 2017.
A testing the accuracy of the calculations management used to determine the uncertain tax positions as at the balance sheet date.
The impact on the consolidated balance sheet as at 1 January 2019 is shown below: $m
Impact on the consolidated cash flow statement for the year ended 31 December 2019 Compared with the previous accounting for operating leases under IAS 17, the application of the new standard affects the classification of cash flows. In prior years, operating lease payments were presented as operating cash flows. Lease payments are now split into payments of principal that are presented as financing cash flows, and payments of interest that are presented as operating cash flows under interest expense. Payments related to leases for 2019 amounting to $15.5 million, which under IAS 17 would be classified as operating leases, are presented under cash flows from financing activities. Additionally, the interest expense on the lease liabilities calculated under IFRS 16 amounting to $1.8 million is presented under cash flows from operating activities.
– IFRS 17 Insurance Contracts IFRS 17 will replace IFRS 4 and includes a number of significant changes to the measurement, presentation and disclosure of insurance contracts. It prescribes a general measurement model based on the discounted current estimates of future cash flows, including an explicit risk adjustment and a contractual service margin which represents the unearned profit of the contracts. Application of a simplified premium allocation approach, which is similar to the current unearned premium approach, is permitted if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. IFRS 17 requires any expected losses arising from loss-making contracts to be accounted for in the income statement when the entity determines that losses are expected. The Group is evaluating the impact of adopting IFRS 17 on the financial statements which includes: –performing a PAA eligibility assessment on a group of (re)insurance contracts with a coverage period of more than one year; –making initial accounting policy decisions under IFRS 17 to continue amortising acquisition expenses under PAA approach, and to present insurance finance income and expenses in the income statement.
Earnings per share (¢) 45.1 (3.5) 41.6 Diluted earnings per share (¢) 44.3 (3.5) 40.8 NAV per share (¢) 819.1 (20.5) 798.6 Tangible net asset value per share (¢) 746.8 (20.6) 726.2 Return on equity (ROE) (%) 5.6 (0.3) 5.3
2.13 Revenue Revenue comprises insurance and reinsurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are set out in note 2.14.
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2018 Types of insurance risk in the Group
The final quantum for casualty claims may not be established for many years after the event. Consequently a significant proportion of the casualty insurance amounts reserved on the balance sheet may not be expected to settle within 24 months of the balance sheet date. This has been considered in the reserving process.
The key financial risk for the Group is that the proceeds from its financial assets and investment result generated thereon are not sufficient to fund the obligations. The most important elements and economic variables that could result in such an outcome relate to the reliability of fair value measures, equity price risk, interest rate risk, credit risk, liquidity risk and currency risk. The Group’s policies and procedures for managing exposure to these specific categories of risk are detailed below.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and units in unit trusts, based on S&P or equivalent rating, is presented below: As at 31 December 2019 Note AAA
Debt and fixed income securities 17 762.1 1,951.8 1,044.1 767.6 49.0 4,574.6 Deposits with credit institutions 17 – – – 0.4 – 0.4 3 Management of risk 3.2 Financial risk (d) Credit risk continued 128 Hiscox Ltd Report and Accounts 2019
The largest aggregated counterparty exposure related to debt and fixed income securities holdings at 31 December 2019 of $1,279 million is to the US Treasury (2018: $1,214 million).
Debt and fixed income securities 1,447.3 1,389.6 1,735.0 418.0 4,989.9 4,574.6 Deposits with credit institutions – – – – – 0.4 Cash and cash equivalents 1,115.9 – – – 1,115.9 1,288.8
An analysis of the credit risk and contractual maturity profiles of the Group’s financial instruments is given in notes 3.2(d) and 3.2(e).
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,535.8 1,969.8 1,637.8 1,323.6 1,448.9 1,556.3 1,935.0 3,391.5 3,157.8 3,358.1 21,314.6 eight years later 1,094.5 1,522.9 – – – – – – – – 2,617.4 nine years later 1,085.8 – – – – – – – – – 1,085.8
The UK Finance Act 2015 introduced a new tax with effect from April 2015, the Diverted Profits Tax (DPT), which in certain situations applies a tax of 25% to income which would not otherwise be chargeable to UK tax. The Group has been proactively engaged in ongoing discussions with the UK’s tax authority regarding taxing rights with respect to one long-standing intra-group arrangement. These discussions have now reached a conclusion with no assessment to DPT being raised. The Group therefore does not consider it probable that this transaction may be found to be subject to DPT and consequently no provision is made at 31 December 2019.
27 Employee retirement benefit obligations continued The amounts recognised in total comprehensive income are as follows: Note $m $m
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Holdings Inc. Holding company USA (Delaware) ALTOHA, Inc. Insurance holding company USA (Delaware) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox Inc. Insurance intermediary USA (Delaware) Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox ASM Ltd. Insurance intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox Capital Ltd* Reinsurance Bermuda Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox Société Anonyme* General insurance Luxembourg Hiscox Assure SAS Insurance intermediary France Direct Asia Insurance (Holdings) Pte Ltd Holding company Singapore Direct Asia Insurance (Singapore) Pte Limited General insurance Singapore *Held directly.
Following the change in the functional currency at the beginning of 2018, which has significantly reduced the impact of foreign exchange movements to the Group’s profit or loss, the Directors decided to stop disclosing the profit excluding foreign exchange gains/(losses) key performance measure. This APM is deemed as no longer providing meaningful information.
– Premium growth in local currency Gross premiums written, as reported in the consolidated income statement, is measured in the underlying currency and compared to prior years on a constant currency rate basis. This eliminates the impact that exchange fluctuations have on the result and therefore allows a direct comparison between years. This is performed on a business unit basis and gives an accurate indication of premium growth compared to prior years.