Brexit Our business is ready for Brexit; our new European subsidiary Hiscox SA is fully operational and we are already utilising the Lloyd’s Brussels subsidiary.
A Hiscox UK was recognised with a Marketing New Thinking Award for its CyberLive advertising campaign, thanks to its use of data creativity in brand-building, and a Media Week Award in the Media Idea (Budget Under £250,000) category.
Big-ticket business A Hiscox Security Incident Response product won the Innovation Award at Business Insurance magazine’s Innovation Awards 2018. A Hiscox London Market received
Our long-held strategy of balancing the volatility of big-ticket lines with more steady retail earnings continues to serve us well, and the strength of our products, people and brand mean we are able to seize opportunities.
Our retail businesses had a good year, delivering double-digit growth and solid profits as we reached the milestone of one million retail customers. Our business in the USA continues to develop strongly, however as we continue to exercise discipline in the under-performing directors and officers’ account, growth will be tempered.
Hiscox Re & ILS has been hit by a second year of catastrophe claims. Our aggregate protection products, our risk excess covers and some specialty areas – all areas of focus since 2012 – meant that the higher frequency of mid-sized catastrophes and individual large losses in 2018 hit us harder than 2017’s fewer but larger catastrophes.
Cyber remains a bright spot and has grown ahead of budget. The introduction of the EU’s General Data Protection Regulation, and no doubt the constant deluge of data breaches that we all read about in the media, are rapidly increasing demand for specialist cover.
Gross premiums written grew 15.9% to $812.0 million (2017: $700.8 million), or 15.0% in constant currency. Property catastrophe reinsurance and specialty reinsurance were the key drivers of growth. A number of natural catastrophes and large claims impacted profits which resulted in a loss of $23.2 million (2017: profit of $25.5 million) and a combined ratio of 116.9% (2017: 101.3%). As explained earlier, the product mix sold to customers responded more to the run of mid-sized catastrophes and large individual losses that occurred in 2018 as compared to the fewer larger catastrophes in 2017. That is the nature of our business – fortuity influences our year-to-year performance, but good underwriting shines through over time.
Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modelled losses January 2019
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these sources comprised $800 million at 31 December 2018 (2017: $500 million), of which $50 million was utilised at 31 December 2018 (2017: $10 million).
Hiscox Retail Hiscox Retail accounts for 55% (2017: 56%) of the Group’s gross premiums written at $2,087.1 million (2017: $1,835.4 million). Gross premiums written for Hiscox UK & Ireland were up by 11.5% at $799.5 million (2017: $717.1 million), or 7.8% in constant currency. Hiscox Europe’s gross premiums written saw very healthy growth, up 17.2% to $322.3 million (2017: $275.0 million), or 11.4% in constant currency. Hiscox USA’s strong growth continued, with gross premiums written up 15.4% to $809.6 million (2017: $701.4 million). Gross premiums written within Hiscox Special Risks increased to $136.2 million (2017: $127.2 million), up 5.5% in constant currency, and DirectAsia grew premiums by 32.7%, contributing $19.5 million of gross premiums written (2017: $14.7 million).
First line of defence Owns risk and controls The first line of defence is responsible for ownership and management of risks on a day-to-day basis, and consists of everyone at every level in the organisation, as all have responsibility for risk management at an operational level.
During 2018, the Board and Risk Committee reviewed a number of risk-related matters. s The Group’s risk profile, compared with its Board-approved risk appetite.
The Group’s investment policy recognises the demands created by our underwriting strategy, so that some investments may need to be sold before maturity or at short notice. A high proportion of our investments are in liquid assets, which reduces the risk of losses being incurred if a quick sale is needed. Funds held for reserves are invested primarily in high-quality, short duration bonds and cash so the Group can meet its aim of paying valid claims quickly.
Our business is based on trust from customers and partners, and that trust depends on our ability to keep their information secure.
The information security group, which is chaired by the Chief Financial Officer and attended by the information security risk owners, manages the risk in line with the Group’s risk appetite, supported by experts from around the business.
Tonnes CO2e per FTE (Scope 1 and 2) 1.20 1.14 0.97 0.76
Whistleblowing policy Our whistleblowing policy, which we updated in 2018, ensures employees feel empowered to raise concerns relating to malpractice or wrongdoing in confidence and without fear of unfair treatment. If an employee has a serious concern relating to the operation of the business, our whistleblowing procedures enable them to confidentially raise their concerns with senior management or, if they choose, with the Chair of the Hiscox Ltd Audit Committee. All Hiscox staff can also access free, confidential advice from the whistleblowing charity Public Concern at Work.
The women in leadership training we launched in 2015 has now been completed by 175 female employees and continues to prove popular. Based on 2015-2017 analysis, 86% of employees felt the training was beneficial and have been able to apply it to a real-world work situation, and 34% have since been promoted. We have extended the course to more junior employees this year and will continue to roll-out this training in 2019.
The Committee is also responsible for monitoring developments relating to corporate governance and informing the Board accordingly. The composition of the Board was reviewed as part of the Board evaluation described on page 63.
The Board has set voluntary restrictions on the number of other Directorships a Non Executive Director is permitted to hold. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 58.
To aid the review, the Committee considered the key judgements and estimates found in the financial statements by the Chief Financial Officer, as well as reports from the external auditor on the outcomes of its annual audit and half-year review. The Committee supported the auditor, PwC, in displaying the necessary professional scepticism its role requires. The primary areas considered by the Committee in relation to the 2018 Annual Report and Accounts were: i) The reserving for insurance losses As set out in our significant accounting policies on pages 112 and 113, the reserving for insurance losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet.
The Chief Actuary presented a Group reserving report to the Committee, which reviewed the approach taken by management when making its selection of reserving estimates. The Committee is satisfied with the judgements taken and the reporting and disclosure of these estimates.
Finance transformation programme (FTP) The Company continued with its finance change initiatives, which involves a wide-ranging transformation of the finance IT systems and controls. The head of the FTP provides a quarterly update to the Committee on the status of the project.
Incentives require demanding performance targets to be met. The outcomes from bonus and long-term share awards reflect the part played in delivering profits in excess of a specified return threshold and value we create for our shareholders.
The Committee already monitors market practice and receives a variety of information on wider workforce pay policies, including information on aggregate workforce pay and gender pay analysis. We are now improving visibility of remuneration metrics across the Group through a regularly updated dashboard. This new responsibility has also been added to the Committee’s formal Terms of Reference.
We value the views of our shareholders and we will seek to maintain dialogue to ensure there is clarity regarding the decision-making of the Committee. Together with the rest of the Board, I look forward to receiving your approval and hearing your feedback at our 2019 AGM.
Annual report on remuneration 2018 This report explains how the remuneration policy was implemented for the financial year ending 31 December 2018 and how it will be applied for the 2019 financial year.
The vest date is 6 April 2021. Executive Directors will be required to retain any shares vesting (net of tax charges) at the end of the performance periods for a further two years (five years post the start of the performance period).
Balance between pay elements The chart below shows the balance between fixed pay, annual variable pay and long-term variable pay for the CEO over the past five years. The value of vested PSPs has been the material element of the CEO’s remuneration. Good performance and share price appreciation has increased the value of PSPs over time. For example, the PSP award with a performance period ending in 2016 had a value at grant of £1,082,640 and at vesting was £1,826,470.
The interests of Executive and Non Executive Directors are set out below, including shares held by connected persons. There have been no changes in the Director share interests between 31 December 2018 and 26 February 2019.
In addition to the external advisors, the Group HR Director provided material assistance to the Remuneration Committee during the year.
Share awards (typically structured as either conditional awards or nil cost options) are made at the discretion of the Remuneration Committee.
Detailed provisions The Committee may make minor changes to this remuneration policy to aid in its operation or implementation without seeking shareholder approval (for example, 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 share awards under the 2006 and 2016 PSP in accordance with the rules (for example, the treatment of awards in the context of a change of control or other forms of corporate restructure).
For awards granted in respect of 2015 and future years, in the circumstances described above, annual bonus and PSP awards granted to Executive Directors shall also be subject to clawback provisions for up to two years after the end of the relevant performance period.
including potential value, time horizons and any performance conditions which apply. The objective of the Committee will be to suitably limit any buy-out to the commercial value forfeited by the individual.
On initial appointment (including interim Director appointments) the maximum level of variable remuneration (excluding any buy-outs) is capped at the maximum level set out in the policy table on pages 84 to 89. Within these limits and where appropriate the Committee may tailor the award (for example, time frame, form, performance criteria) based on the commercial circumstances. Shareholders would be informed of the terms for any such arrangements. Ordinarily, it would be expected that the package on recruitment would be consistent with the usual ongoing Hiscox incentive arrangements.
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 22 to the consolidated financial statements. The ordinary shares of 6.5p each are the only class of shares presently in issue and carry voting rights. There is power under Bye-law 45 of the Company’s Bye-laws for voting rights to be suspended if calls on shares are unpaid. However, there are no nil or partly paid shares in issue on which calls could be made. The Bye-laws also allow the Company to investigate interests in its shares and apply restrictions including suspending voting rights where information is not provided. No such restrictions are presently in place. The Company was authorised by shareholders at the 2018 Annual General Meeting to purchase in the market up to 10% of the Company’s issued ordinary shares. No shares have been bought back under this authority as at the date of this report.
Any acquisitions or disposals of major shareholdings notified to the Company in accordance with DTR 5.1 are announced and those announcements are available on the Company’s website, www.hiscoxgroup.com.
Valuation of incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves.
A We agreed the rates of exchange utilised to an independent source.
For other components, we identified certain account balances which were considered to be significant in size or audit risk at the financial statement line item level in relation to the Group’s consolidated financial statements, and scoped the audit of these by performing financial statement line item audits over the specified balances. Analytical procedures over the remaining components that were not inconsequential were performed by the Group engagement team.
Proceeds from the sale of subsidiaries 14 – 18,696 Proceeds from the sale of associates 14 – 32,225 Purchase of property, plant and equipment (7,832) (9,074) Purchase of intangible assets (51,799) (38,576) Net cash flows from investing activities (59,631) 3,271
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2018
Average contractual maturity analysed by denominational currency of investments as at 31 December 2018 Years
The Group’s exposures to foreign exchange risk arise mainly with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: – operational foreign exchange exposure arises from the conversion of foreign currency transactions resulting from the activities of entering into insurance, investment and operational contracts in a currency that is different to each respective entity’s functional currency; and – structural foreign exchange exposure arises from the translation of the Group’s net investment in foreign operations to the
The Group does not hedge operational foreign exchange risk arising from the accounting mismatch due to the translation of monetary and non-monetary items. Non-monetary items including unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums, are recorded at historical transaction rates and are not remeasured at the reporting date. Monetary items including claims reserves, reinsurers’ share of claims reserves, and investments are remeasured at each reporting date at the closing rates.
Gearing The Group currently utilises gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: –Letter of Credit and revolving credit facility – the Group’s main facility of $800 million may be drawn as cash (under a revolving credit facility), utilised as Letter of Credit or a combination thereof. This facility was increased to $800 million from $500 million in June 2018 by the Company’s subsidiary Hiscox plc with the maximum cash portion increased to $800 million from $300 million. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2018, 2019 and 2020 years of account. The facility can also be used to provide regulatory ancillary own funds within a number of the Group’s insurance companies. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2018 $50 million was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings outstanding to support general trading activities (2017: $10 million and £nil respectively); – £275 million of fixed-to-floating rate subordinated notes that are classified as Tier 2 debt. This was raised in November 2015 and matures in 2045. The debt is rated BBB- by S&P and Fitch; – £275 million of fixed rate senior notes raised in March 2018 and maturing in 2022. The debt is rated BBB+ by S&P and Fitch; 3 Management of risk continued 125Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Debt and fixed income securities 57,507 1.3 54,241 1.2 Equities and units in unit trusts (27,513) (6.2) 53,434 12.9 Deposits with credit institutions/cash and cash equivalents 12,494 0.8 4,840 0.5 Investment result – financial assets 42,488 0.7 112,515 2.0 *See note 2.1 for further details.
Profit-commission income attributed to non-insurance entities, for example, Lloyd’s managing agent and ILS investment managers are determined based on a best estimate of the variable consideration. The income is recognised to the extent that it is highly probable that it will not be subject to significant reversal.
Interest charge associated with long-term debt 17 28,360 21,713 Interest and expenses associated with bank borrowing facilities 2,485 3,435 Interest and charges associated with Letters of Credit 30 3,199 909 Interest charges on experience account 629 838 Finance costs 34,673 26,895 *See note 2.1 for further details.
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures denominated in a range of currencies to informally hedge interest rate risk on specific long portfolios. All contracts are exchange traded and the Group made a loss on these futures contracts of $259,000 (2017: loss of $545,000) as included in the investment result in note 7.
Unrealised gains and losses in the year on securities held at the end of the year (381) (3,140) (3,521) * Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance-linked fund.
Fair value gains or losses through profit or loss* (440) (7,360) (7,800) Foreign exchange gains/(losses) 1,010 (203) 807
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and Performance Share Plan award instruments issued to employees, over their vesting period through the income statement. The amount recognised in the consolidated income statement during the year was income of $3,638,000 (2017: expense of $32,465,000). This comprises income of $4,641,000 (2017: expense of $31,439,000) in respect of Performance Share Plan awards and an expense of $1,002,000 (2017: expense of $1,026,000) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,257,195 1,522,742 1,951,781 1,623,266 1,307,839 1,432,809 1,539,243 1,913,464 3,370,767 3,129,834 19,048,940 one year later 1,029,375 1,281,949 1,753,802 1,441,377 1,143,133 1,215,388 1,375,233 1,699,442 3,058,051 – 13,997,750 two years later 943,522 1,193,676 1,700,298 1,331,898 1,016,916 1,127,259 1,267,856 1,609,341 – – 10,190,766 three years later 938,199 1,174,939 1,715,202 1,327,293 949,298 1,081,118 1,263,033 – – – 8,449,082 four years later 937,351 1,143,832 1,688,798 1,316,119 948,159 1,056,275 – – – – 7,090,534 five years later 931,294 1,125,507 1,639,391 1,306,145 925,591 – – – – – 5,927,928 six years later 913,063 1,097,412 1,571,359 1,312,011 – – – – – – 4,893,845 seven years later 910,334 1,080,226 1,533,346 – – – – – – – 3,523,906 eight years later 888,036 1,082,618 – – – – – – – – 1,970,654 nine years later 894,574 – – – – – – – – – 894,574
23 Insurance liabilities and reinsurance assets continued 149Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Deferred tax assets of $47,540,000 (2017: $46,601,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits, have been recognised. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. $4,868,000 (2017: $1,682,000) of the tax losses to which these assets relate will expire within ten years; a further $42,672,000 (2017: $44,109,000) will expire after ten years. The Group has not provided for deferred tax assets totalling $13,946,000 (2017: $9,771,000) in relation to losses in overseas companies of $76,855,000 (2017: $53,611,000). 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 $47,540,000 (2017: $45,791,000).
Discount rate 2.90 2.6 Inflation assumption (RPI) 3.10 3.1 Inflation assumption (CPI) 2.10 2.1 Pension increases 3.10 3.1
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 2018 as follows: Present value of unfunded obligations before change in assumption