Our ambition is to be a respected specialist insurer in key geographies and product lines, valued by our customers, business partners and shareholders. Our values define our business, with a focus on quality, courage, excellence in execution and our people.
37 Governance 63 Remuneration 89 Financial summary2 Strategic report Chairman’s statement
Regulatory burden It’s hard not to feel tormented by regulation. On the one hand we were delighted by the response of our regulators to our requests to grow after recent catastrophes. However, on the other hand, like many businesses we are working hard to navigate geopolitical issues such as Brexit, US tax reform, General Data Protection Regulation (GDPR) and New York’s Cybersecurity regulation. At the same time, insurers are managing the impact of other incoming European regulations such as the Insurance Distribution Directive (IDD). On top of these important and complex customer safeguards, our industry has seen a host of new thematic reviews. I’m all for progress, in fact one of the Hiscox maxims is ‘there is always a better way’, but implementing these changes in tandem drains resource from the day-to-day endeavours of paying claims, collecting premiums, serving our customers and investing in building our business. I’m sure I am not alone in appealing for some reprieve from the regulatory leapfrog while we deal with so many sizable global issues.
Hiscox UK & Europe This division provides commercial insurance for small- and medium-sized businesses, typically operating in white-collar industries, and personal lines cover, including high-value household, fine art and collectibles, and luxury motor. These products are distributed via brokers, through a growing network of partnerships, and direct to consumers.
The IT infrastructure project we are undertaking to replace the existing policy and claims administration system is progressing well, and our direct operations will be the first to benefit from it. Much like the IT projects we have completed in our UK business though, these are multi-year programmes that will create some operational stretch for our teams.
The year started in a soft and softening market for our property team, so we reduced our big-ticket property account while maintaining our personal and small commercial lines where rates were under less pressure. The losses of the second half are driving up property pricing, particularly in loss-affected accounts, and we expect to grow materially here in 2018.
Marketing At Hiscox we see marketing as a way of amplifying the reputation we get from
The next phase of growth for our US businesses will depend on how we build our presence and brand in the US market, which is why Steve Langan, CEO of Hiscox UK & Europe, and Chief Marketing
The business continues to work on major projects; some we have chosen such as the IT infrastructure upgrades, but others, such as Brexit, GDPR, IDD and new US cyber security regulations are driven by external forces. The aggregation of these projects is placing significant demands on the business but they are all necessary. I hope that 2018 will see these reach a crescendo which will subside in subsequent years.
Small property 18 Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report
Hiscox Re & ILS Gross premiums written increased by 9.8% to £543.7 million (2016: £495.2 million), or 4.5% in constant currency. The claims ratio increased to 71.0% (2016: 39.1%) as a result of the hurricane activity, as did the combined ratio which, excluding foreign exchange movements, increased to 98.9% (2016: 64.9%). Foreign exchange had much less impact on the segment in 2017, but provided a positive impact of 11.9% to the combined ratio in 2016. The expense ratio declined to 27.9% (2016: 25.8%). Profit before tax reduced to £19.8 million (2016: £115.5 million).
Outflows for the year were £2.4 million (2016: outflow of £123.8 million). The Group paid £32.1 million of tax during the year compared with £6.1 million in 2016.
We expect our people to question things rather than just passively conform, and we believe it’s this spirit that keeps employees interested, motivated and engaged. A high proportion of our people are here for the long term, and even when others have left for pastures new, a good number have found their way back to us.
#1. Work with smart people 31Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
37Hiscox Ltd Report and Accounts 2017 2 Financial highlights 3 Why invest in Hiscox? 8 Chairman’s statement 10 Chief Executive’s report 18 Building a balanced business 20 Actively managed business mix 21 Actively managed key underwriting exposures 22 Capital 24 Group financial performance 26 Group investments 28 Additional performance measures 29 Ten good reasons to work at Hiscox 38 Risk management 48 Corporate responsibility 52 Board of Directors 54 Chairman’s letter to shareholders 55 Corporate governance 60 Audit Committee report 64 Letter from Chairman of the Remuneration Committee 66 Remuneration summary 68 Annual report on remuneration 2017 76 Remuneration policy 85 Directors’ report 87 Directors’ responsibilities statement 90 Independent auditor’s report 96 Consolidated income statement 96 Consolidated statement of comprehensive income 97 Consolidated balance sheet 98 Consolidated statement of changes in equity 99 Consolidated statement of cash flows 100 Notes to the consolidated financial statements 152 Five-year summary
s The Group Solvency Self-Assessment (GSSA) report, which builds on many of the components described above to summarise the Group’s Own Risk and Solvency Assessment (ORSA), which is described further below.
Underwriters are incentivised to make sound decisions that are aligned with the Group’s strategic objectives and risk appetite and clear limits are placed on their underwriting authority. In response to legal developments, policy wordings are regularly reviewed to ensure that, as far as possible, exposure to those risks identified in the policy at the time of issue is maintained.
Rewards and benefits The Group encourages employees to share in its success through performance-related pay, bonuses, savings-related share option schemes and executive performance share plans. We also offer competitive benefits packages, which contain health and fitness benefits and opportunities for flexible working and career breaks. Salary packages are benchmarked against the financial services industry as a whole and against the Lloyd’s market specifically (where applicable), and are also considered on a country-by-country basis.
Committee, who want to hear their ideas for improvement and innovation and views on Hiscox as a place to work.
s Community work was also undertaken across many of our UK offices. In Colchester, the team raised over £32,000 for Mid and North East Essex Mind, and continued its reading partnership programme with local schools. In York, the team raised nearly £6,000 for The Samaritans, and continued to cultivate the colony of bees that we have installed on the roof of our office. In London, we contributed £25,000 to the Evening Standard’s Grenfell Tower fund and took the first steps towards establishing Hiscox Gives, a charity committee to coordinate the charitable activity of our teams in London.
Bob McMillan joined the Hiscox Ltd Board in December 2010. He spent 24 years with the Progressive Insurance Corporation where he served in various positions including National Director of Product Development, then Claims before becoming National Director of Marketing. He led Progressive’s initiatives in multi-channel distribution, financial responsibility-based rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured at the University of Virginia’s Darden School of Business and at the Harvard Business School. He has been a Non Executive Director of Hiscox Inc. since March 2007.
Constantinos Miranthis Independent Non Executive Director (Aged 54) 16 November 2017*
Michael Goodwin joined Hiscox in November 2017. He has over 25 years’ experience in the insurance industry having worked for QBE Insurance between 1992 and 2012. He held a number of roles for QBE in the Australian and Asia Pacific markets and was the CEO for QBE Asia Pacific from 2007 to 2012. Michael is a Fellow of the Institute of Actuaries of Australia.
The Board has appointed an Executive Committee and authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Board or Executive Committee approval is not required.
The Board’s committees The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs, including financial reporting, internal control and risk management. Each committee operates within established written Terms of Reference and each committee Chairman reports directly to the Board.
Taken together the risk and internal audit activities described here enable the Board to monitor the Group’s risk management and internal control systems.
Performance and remuneration outcomes Hiscox reserved US$225 million in catastrophe claims in 2017, a year which saw the highest insured losses ever. The Group was also impacted by foreign exchange losses of £63 million. However, a strong investment return and a good performance by Hiscox Retail meant we were able to deliver a profit of £30.8 million (2016: £354.5 million).
Single figure of £2,287,729 for CEO, is 42% lower than last year.
Performance metrics: combination of ROE and individual performance delivered against set objectives approved by the Board.
Minimum threshold vesting Expected investment return + 5 = 7 25 Maximum vesting Expected investment return + 12.5 =14.5 100
XXX27% or £900,000 71Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017 89 Financial summary
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2016 and 2017 financial years. We have chosen UK-based employees as the comparator group for base salary and benefits as this is where the Chief Executive is based and this allows for the closest comparison in terms of salary increases which take into account country inflation and the benefits package provided. For bonus we have used Group employees as the comparator. The percentage change is based on employees who were employed and eligible for a salary review and bonus in both financial years.
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 on pages 76 to 81) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than 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.
Recruitment policy A new hire will ordinarily be remunerated in accordance with the policy described in the table on the previous pages. In order to define the remuneration for an incoming Executive Director, the Committee will take account of: 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. Performance measure targets and target setting 89 Financial summary
On the appointment of a new Non Executive Chairman or Non Executive Director, the fees will normally be consistent with the policy. Fees to Non 89 Financial summary
Below target 84 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Remuneration policy
Major interests in shares As at the year end, the Company had been notified of the interests of 5% or more of voting rights in its ordinary shares outlined in the table above.
The Group is a global specialist insurer and reinsurer. The Group’s operations primarily consist of the legal entity operations in the United Kingdom, United States and Bermuda. A full scope audit was performed for four components located in the United Kingdom and United States. Specified audit procedures were also performed in the United Kingdom and Bermuda. Taken together this work gave us over 90% coverage of the Group’s total assets and 90% of gross earned premium.
The amendments included minor changes to the following standards: – Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative. The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). The Group has provided the information for both the current and the comparative period in the consolidated statement of cash flows. – Amendments to IAS 12 Income
Notes to the consolidated financial statements 100 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
101Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Land is not depreciated as it is deemed to have an indefinite useful economic life. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost, less their residual values, over their estimated useful lives.
2 Basis of preparation continued 2.10 Derivative financial instruments continued 104 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Employee retirement benefit obligations 56,139 – – – 56,139 Deferred tax 17,030 – – – 17,030
Hiscox Insurance Company Limited A (Excellent) A+ A (Strong) Hiscox Insurance Company (Bermuda) Limited A (Excellent) A+ A (Strong) Hiscox Insurance Company (Guernsey) Limited A (Excellent) A+ – Hiscox Insurance Company Inc. A (Excellent) – – Hiscox Société Anonyme – – A (Strong)
Share of profit of associates after tax (192) – – 393 201 1,137 (1,003) – – 134
The Group’s wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. The Group’s percentage participation in Syndicate 33 can fluctuate from year to year and, consequently, presentation of the results at the 100% level removes any distortions arising therefrom.
Interest charge associated with long-term debt 18 16,844 16,844 Interest and expenses associated with bank borrowing facilities 2,664 1,703 Interest and charges associated with Letters of Credit 32 705 580 Interest charges on experience account 650 1,139 11 Auditor’s remuneration Fees payable to the Group’s main external auditors, PwC, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group 2017
Amounts receivable by the auditor and associates in respect of: The auditing of the accounts of any associate of the Group 1,934 1,349 All audit-related regulatory services 206 196 All non-audit-related assurance services 200 315
125Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
14 Property, plant and equipment 126 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Total assets no longer recognised in the consolidated balance sheet (24,556) Total currency translation reserve no longer recognised in the consolidated balance sheet 1 Cash received on disposal 38,341 Profit recognised in the consolidated income statement 13,786 15 Subsidiaries, associates and interests in other entities continued 128 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £748,000 (2016: gain of £664,000) as included in investment result in note 7. There was no initial purchase cost associated with these instruments.
Unrealised gains and losses in the year on securities held at the end of the year (255) (7,082) (7,337)
Cash at bank and in hand 525,002 568,186 Short-term deposits 117,787 96,630
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,778,462 1,674,538 After one year 1,313,754 1,372,789
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,266,621 949,379 1,149,653 1,478,091 1,235,048 989,712 1,082,686 1,163,310 1,444,780 2,521,450 13,280,730 eight years later 885,864 672,197 – – – – – – – – 1,558,061 nine years later 888,380 – – – – – – – – – 888,380
Current estimate of cumulative claims 888,380 672,197 819,209 1,193,663 998,221 719,687 817,362 957,756 1,282,020 2,521,450 10,869,945
Additional memorandum information at the end of the current and previous six accounting periods is presented below: Present value of scheme obligations 273,803 271,072 199,120 227,375 179,479 173,420 155,685 Fair value of scheme assets (226,311) (214,933) (199,045) (195,209) (185,666) (156,513) (140,517) Present value of unfunded obligations/(surplus scheme assets) 47,492 56,139
151Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements