Anti-social networks 35 Governance 36 Risk management 46 Corporate responsibility 50 Insurance carriers 54 Board of Directors 56 Executive Committee 58 Hiscox Partners 60 Chairman’s letter to shareholders 61 Corporate governance 66 Audit Committee report
Long-term shareholder value Hiscox has always had a focus on creating long-term shareholder value with a progressive dividend policy. We have consistently out-performed the market over the medium to long term and returned £881 million of capital to shareholders over the last five years.
Hiscox Re and ILS (insurance-linked securities) has been very successful. Our strategy of reducing volatility in our earnings by diversifying our operations saw us create an ILS business in 2013 which has grown quickly to reach US$1.25 billion in assets under management and is now firmly in the premier league of ILS businesses. It performs a number of very useful functions for the Group, enabling us
Results The result for the year ending 31 December 2016 was a record profit before tax of £354.5 million (2015: £216.1 million). Gross written premium increased by 23.6% to £2,402.6 million (2015: £1,944.2 million). The combined ratio was 84.4% (2015: 85.0%). Earnings per share increased to 119.8p (2015: 72.8p) and the net asset value per share increased by 19.2%, or over £1, to 649.9p (2015: 545.0p). Return on equity was 23.0% (2015: 16.0%).
Our retail businesses doubled profits to £158.0 million (2015: £78.6 million) and delivered a combined ratio of 88.1% (2015: 92.9%), the result of good underwriting decisions and a modest year for claims. Rates are broadly flat in retail, with marginal increases in select areas offset by declines elsewhere. Hiscox UK and Ireland saw increases in personal lines, though new business rates in casualty remain under pressure.
It has been little over a year since we opened our landmark office in York, the home of our UK direct business. We now have 255 people working there and were pleased to be recognised by the British Council for Offices, winning the Best Workplace in the North Award.
Alternative distribution Our support for the underwriting agency White Oak has been a major part of our business, but after five years of working together we are materially reducing
Hiscox’s prudent approach to reserving is again reflected in reserve releases for 2016 of £213.0 million (2015: £205.9 million).
We continue to support the arts through corporate sponsorship such as Sculpture in the City, and through key local partnerships, particularly in York where we are establishing ourselves as a major local employer.
Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modeled losses January 2017
at rin a $5 0b n m ar ke t l os s y ea r r et ur n pe rio d 7J
From the 2016 year end onwards the Group is also required to publish a Financial Condition Report (FCR), which will set out details of the measures governing the business operations, corporate governance framework, solvency and financial performance of the Group. The FCR is also intended to provide additional information to the public in relation to the insurance group’s business model, whereby they may make an informed assessment on whether the business is run in a prudent manner.
A Combined claims and expense ratios The combined claims and expense ratios are a common measure enabling comparability across the insurance industry that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if we owned all of the business, including the 27.5% of Syndicate 33 that the Group does not own. The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables us to measure all of our underwriting businesses on an equal measure. The calculation is discussed further in note 4, operating segments. The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.
During 2016, the Group returned capital to its shareholders of £113 million for the second interim dividend for 2015 and the interim dividend for 2016. The Employee Benefit Trust additionally purchased net £39 million of shares during the year into the Trust.
With 70.5% of fixed income assets invested in US Dollar bonds, our overall returns are heavily dependent on their performance. Given their bias to short duration, they escaped the worst of the post presidential election upheaval and their return for the year of 1.7% represents a healthy margin above the relevant benchmark. The majority of the excess return derived from the allocation to non-government bonds as demand for credit remained buoyant in a low return world. In contrast the Sterling and Euro bond markets were largely unmoved by events across the Atlantic.
“I like to make the comparison with fire as a peril,” says Matthew Webb. “It’s like man has found fire in binary format. But unlike fire, the threat is constantly changing and shifting.”
The market for cyber insurance remains immature, complicated by the fast-moving nature of the peril and hampered by a relative lack of reliable actuarial data. At the same time though, it is also a rapidly growing line of business. According to a recent report from PwC, the worldwide market for cyber insurance is currently estimated to be around US$2.5 billion, and is expected to grow to US$5 billion by the end of 2018 and US$7.5 billion by the end of 2020. This steep trajectory is set to continue as the world becomes ever more connected.
“The other major element of the legislation is around the fines that can be levied for breaches. These will go up to €20 million, or 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher.” Given that in the UK, for example, informing the Information Commissioner’s Office of a breach is currently a matter of best practice rather than legal obligation for the majority of companies, with loss of data attracting a maximum fine of £500,000, this legislative shift is likely to have a seismic impact upon European businesses and, by extension, their insurance requirements.
Second line of defence Assess, challenge and advise on risk objectively
The second line of defence provides oversight, challenge and support to the first line of defence. Functions in the second line of defence include the risk team and the compliance team.
Insurance cycle and pricing Hiscox competes against major international insurance and reinsurance groups. At times, competitors may choose to underwrite risk at prices below the breakeven technical price. Prolonged periods when premium levels are low or when competition is intense are likely to have a negative impact on the Group’s financial performance.
The scope and type of protection we buy may change from year to year depending on the extent and competitiveness of cover available in the market.
Binding authorities Hiscox generates considerable premium income through third parties authorised to underwrite insurance policies on our behalf.
Also, the risk we incur excessive costs by selling assets or raising money quickly to meet our obligations.
The vast majority of our business is written through brokers. We face credit risk where we transfer money to, and receive money from, brokers for premiums or claims.
Operational risk The risk from derivative exposures involving people, processes, systems and external events resulting from running a uniquely diversified insurance business.
Hiscox USA is dedicated to serving those charities local to its offices that aid and improve education, medical science, advancement of the arts and culture, and provide services to disadvantaged and vulnerable members of society. The Hiscox Foundation USA matched donations and pledged money for hours volunteered by Hiscox employees with partner charities throughout the US – St Baldrick’s, the volunteer-powered charity committed to researching cures for childhood cancers in Miami; Wounded Warriors, the military and veterans charity empowering injured veterans and their families; and Girls Inc, which provides more than 140,000 girls across the US and Canada with lifechanging experiences and solutions to the unique challenges that girls face. The Hiscox Foundation USA also continues to support the Parris Foundation, an organisation dedicated to helping disenfranchised communities by teaching children about science, technology, engineering and mathematics.
For more detail on corporate responsibilty see hiscoxgroup.com difficult words, playing word games and building their confidence.
Caroline Foulger Independent Non Executive Director and Chairman of the Audit Committee (Aged 56) 1 January 2013*
Bronek Masojada joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007 and was Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is a past President of The Insuranca Institute of London and a Past Master of The Worshipful Company of Insurers. He is currently a member of the Board of the Association of British Insurers and a Director of Pool Reinsurance Company Limited.
Steve joined Hiscox in 2005 after a highly successful marketing and management career with Diageo, Coca-Cola, Nestlé, Bass Brewers and Scottish & Newcastle across the UK, Europe and South America. He has been at the forefront of developing the Hiscox brand globally, including the development of its first television advertising campaign in 2006 and the successful launch of the brand in the USA, Europe and (under the DirectAsia brand) in Singapore, Hong Kong and Thailand. Since 2013, Steve has led the UK and Ireland and Europe businesses as a combined entity and in 2014 he also became CEO of the DirectAsia Group post-acquisition. Steve became a Fellow of the Marketing Society in 2012, is a Freeman of the City of London, and a member of The Worshipful Company of Distillers.
Jeremy joined in 2005 as Hiscox’s first Claims Director, responsible for co-ordinating and developing claims services across the Group. Jeremy came from Lloyd’s of London where he was the first Head of Claims following the creation of the Franchise Team, and was responsible for the market’s first co-ordinated claims strategy and claims management principles. He joined Lloyd’s as a consultant in early 2002 to head up a team co-ordinating the market’s management of its exposure to the losses arising from 9/11. Jeremy trained as a solicitor, served as General Counsel, and later, Board member of Sedgwick Group, the international insurance broker now part of Marsh. In 2012 Jeremy moved to Bermuda to run Hiscox Insurance Business, becoming Chief Executive Officer of Hiscox Re, Chief Executive Officer of Hiscox Bermuda and Group Company Secretary. In 2016, Jeremy became Chief Executive Officer of the newly created Hiscox Re and ILS business unit.
Bevis Tetlow Head of North American Underwriting Bermuda, Hiscox Re and ILS
The Committee also has a role in considering the succession planning for Executive Directors and senior managers, and a remit to make recommendations on the succession planning for the Chairman and the Chief Executive and other members of the senior management group. In 2015 the previous Chief Financial Officer resigned in order to take up an alternative role outside the Group. The Committee approved a role specification and oversaw the process of finding a successor, which included the appointment of JCA Group, to carry out a search including internal and external candidates. This culminated in the appointment of Mr Hamayou Akbar (Aki) Hussain in September 2016.
Performance evaluation The Code requires an externally facilitated Board evaluation to be undertaken every three years and this last took place in 2014. In 2016 an internal evaluation was conducted. The evaluation included a review of Board composition and whether there was an appropriate balance of skills, experience, independence and knowledge and whether the Board worked together as a unit. It also asked Directors to rate the level of diversity on the Board. Other areas covered were succession planning, 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. As part of the Board evaluation Directors were asked to rate the Board materials and make recommendations for improving them. Whilst a number of suggestions were made for improvement, the overall rating was positive. The findings of the evaluation were discussed by the Board as a whole.
In the coming years, Hiscox will play its part in ensuring that the recommendations made in the paper are acted upon, because one thing is certain: a market-turning event is coming. It may be a cyber-attack, it may be a hurricane, or it may be something entirely different. Quite what it will be, or when it will hit, is beside the point. The point is that the market must be ready when it does.
Awards normally vest after a three-year period subject to the achievement of performance conditions. An additional holding period, which is currently two years, may also apply.
Executive Directors BE Masojada 3,211,033 3,006,378 RC Watson 700,000 751,397 HA Hussain* – – Non Executive Directors L Carter – – RS Childs 1,511,866 1,511,866
PSP vesting as % of 1 Prior to 2015, the annual bonus plan was operated on an uncapped basis. Subsequently, the outcomes are shown as a percentage of salary, in order to facilitate comparison. From 2015, the bonus for the CEO was capped at 400% of salary, and therefore the outcome for 2015 and 2016 represented 39% and 64% of the maximum opportunity respectively.
– the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Share consolidation and sub-division (930) 930 – – – – – – Shares purchased by Trust – – – – (6,712) (6,712) – (6,712) Shares issued in relation to Scrip Dividend 24, 32 18 2,516 – – – 2,534 – 2,534 Dividends paid to owners of the Company 32 – – – – (22,403
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. These two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 37 in accordance with a recognised set of Generally Accepted Accounting Principles (GAAP).
The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.
Statements – IAS 16: Property, Plant and Equipment – IAS 38: Intangible Assets
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total gross estimate as at 31 December 2016 is £1,588 million (2015: £1,214 million) and is included within total insurance liabilities on the balance sheet.
Contracts are underwritten by reference to the commercial replacement value of the properties and contents insured. Claims payment limits are always included to cap the amount payable on occurrence of the insured event.
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a durationconvexity -based sensitivity analysis, if market interest rates had risen by 100 basis points at the balance sheet date, the Group equity and profit after tax for the year might have been expected to decrease by approximately £61 million (2015: £42 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets. This is higher than the prior year, as a result of increased valuations and the weakened Sterling value of currency investments.
125Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Financial assets Debt and fixed income securities 836,950 1,778,064 – 2,615,014 Equities and shares in unit trusts – 246,065 13,640 259,705 Deposits with credit institutions 6,684 – – 6,684 Insurance-linked fund – – 40,045 40,045 Derivative instrument assets – 137 – 137
Fair value gains or losses through profit or loss* (230) 2,189 1,959 6,374
Cash at bank and in hand 568,186 601,301 Short-term deposits 96,630 126,579
Employee share option scheme – proceeds from shares issued 29 1,400 – – – Issue of E/F Shares – (32) – 143,176 46,351 Redemption of E/F Shares – – – (143,176) (46,351) Share consolidation and subdivision (930) 930 – – – Scrip dividends to owners of the Company 18 2,516 – – –
At 31 December 2016 Hiscox Ltd held 7,523,190 shares in treasury (2015: 8,098,190). Additional details are shown in note 35 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
26 Insurance liabilities and reinsurance assets 26.1 Insurance contracts assumptions (b) Claims development tables continued 151Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: 2016 years 2015 years
36 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2016 on pages 85 to 91. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.