Corporate Governance Code 2018 68 Nominations and Governance Committee report 71 Audit Committee report 107 Owning our contributions to the local community 108 Directors’ report 111 Directors’ responsibilities statement 111 Advisors 113 Owning our adoption of big-ticket digital trading 114 Independent auditor’s report 122 Consolidated income statement 122 Consolidated statement of comprehensive income 123 Consolidated balance sheet 124 Consolidated statement of changes in equity 125 Consolidated statement of cash flows 126 Notes to the consolidated financial statements 187 Additional performance measures (APMs) 188 Five-year summary 75 Taking ownership of employee well-being 76 Letter from the Chair of the Remuneration Committee 78 Remuneration summary 80 Annual report on remuneration 2020 88 Implementation of remuneration policy for 2021 90 Other remuneration matters 94 Remuneration policy 1Hiscox Ltd Report and Accounts 2020
Be passionate, curious, restless and always look for a better way.
UK claims net promoter score 72 We measure and monitor the satisfaction of our customers at critical points during the policyholder journey, and especially in the event of making a claim. Our UK claims net promoter score is based on customers’ responses as to the likelihood they would recommend Hiscox following a claims experience with us, on a scale where ten is very likely and zero is unlikely, and we are pleased with the stability of these scores over time.
US customer reviews using Feefo 4.8/5 In the USA, we ask customers to review their experience of Hiscox post-purchase. We do this using Feefo, which has a five-star rating system, and are pleased to maintain such high scores year after year even as the business grows.
The Hiscox Cyber Insight Dashboard is an example of this melding of information and insight, as it combines third-party cyber security ratings with our own claims data analysis to create a profile of a business’s cyber exposure. As well as allowing our underwriters to get a valuable overview of what could be a complicated risk and make informed pricing decisions, it also gives brokers and customers a unique insight into their cyber risk.
In 2020, Hiscox reported a pre-tax loss of $268.5 million (2019: profit of $53.1 million). The Group combined ratio was 114.5% (2019: 106.8%). Excluding the impact of Covid-19 claims, Hiscox’s combined ratio was 97.0%, reflecting the underlying improvement in performance in many parts of the Group and the benefit of circa $80 million in expense savings.
The outlook for our Retail business is good and we are beginning to enjoy some positive rate momentum. We anticipate that 2021 Retail gross premiums will grow at the low end of our medium-term target range of 5%-15% on a like-for-like basis after allowing for $200 million reduction in premiums. Thereafter the business is expected to return to a high single digits growth expectation as our direct and partnerships business becomes a bigger contributor to the top line. One of the accelerating trends during the pandemic has been the shift to digital. Approaching $600 million of our 2020 Retail revenues came from our digitally traded direct and partnerships businesses, which now serves over 800,000 customers globally. Continuing historical growth trends, this business grew by 15% in 2020 with considerable room to grow further into an estimated 50 million target market of small, micro and nano businesses. We see this as a long-term opportunity for future growth and value creation.
Over the past five years this segment has made up an increasing and more attractive part of Hiscox USA’s business and it is where we see our long-term future. To accelerate this strategic shift, we have taken the decision to proactively reshape our book by exiting liability business for customers with revenues over $100 million turnover as well as all broker channel stand-alone general liability business. Given the rising ransomware claims facing the market, we will also pull back in cyber until there is significant market re-rating combined with changes in terms and conditions. These actions will result in a reduction of up to $100 million in the USA broker channel which will be partially offset by continued growth in our digital direct and partnership business.
Hiscox Re & ILS The Hiscox Re & ILS segment comprises the Group’s reinsurance activities in London and Bermuda and insurance-linked security (ILS) activity through our family of funds in Bermuda.
After a cautious start at the January renewals, we returned to growth as the market began to harden from April onwards. Overall, we have achieved a 12% average rate increase, with positive rate momentum carrying through to January 2021 renewals.
We have also made strides towards a data-based operating model for claims by quadrupling the data analytics team, driving deployment of machine learning tools to analyse our loss portfolios and launching a fraud mitigation tool in the UK. In 2020, we built a quality assurance portal to automate the claims control environment which is already live in the USA and will be deployed to the rest of the business in 2021.
In a year of significant trauma for the communities in which we operate, Hiscox increased its social support significantly. We supplied meals to NHS staff at The Royal Marsden Hospital, together with one of our UK catering partners; supported small businesses in the USA by giving staff $100 each to spend locally; funded ventilators at hospitals in Guernsey and Bermuda; provided 4,000 nights of emergency accommodation for vulnerable young people; and contributed to the Association of British Insurers’ Covid-19 Support Fund. We supported good causes in every country where we operate during the year and donated over $9 million in total.
In October, the Group announced that Kathleen Reardon had been appointed as CEO of Hiscox Re & ILS. Kathleen has spent the last six years as CEO of Hamilton Re and she brings a deep understanding of the market, a huge amount of underwriting expertise, a proven ability to build a business across the cycle and develop talent. She succeeded Mike Krefta who decided to take a career break after 17 years at Hiscox and leaves with our thanks and good wishes. Mike rose through the Hiscox ranks from an entry-level position in a career which spanned both Retail and big-ticket, operations, analytics and underwriting and London and Bermuda. In addition, Mike was our ESG Executive Sponsor and we owe him a debt of gratitude, for leading and at times cajoling our response to inform the proactive, forward-looking approach we have today.
In order to take advantage of opportunities for profitable growth in wholesale and reinsurance markets, as a result of capital contraction and rate improvement across the market following the uncertainty caused by Covid-19, the Group raised £375 million in capital in May 2020 in the form of an equity placement. This has provided additional flexibility throughout the year to respond to growth opportunities and rate improvement, particularly in big-ticket lines.
Our key rating agencies, A.M. Best, S&P and Fitch, calculate capital adequacy by measuring available capital, after making various balance sheet adjustments, and comparing it with required capital, which incorporates charges for catastrophe, premium, reserve, investment and credit risk. Our interpretation of the results of each of these models indicates that we are comfortably able to maintain our current A ratings. Being an A-rated business is important to us, and our intention is to maintain our current strong ratings.
ESG working group s Drives day-to-day efforts on the ground. s Chaired by ESG Executive Sponsor. s Meets at least monthly.
Hiscox Ltd Board s Oversight of ESG strategy and priorities. s Discusses ESG twice-yearly. s Provides challenge and approval of key
We strive to be a good employer, a trusted insurer and a good corporate citizen, recognising that there is not a ‘one-size-fits-all’ solution to such matters; no claim, person or plight is the same as another. We take our role in the world seriously and so our claims philosophy, our strategy for charitable giving and our employment practices all contribute to our social narrative. It’s why we have had a charitable foundation – The Hiscox Foundation – since 1987, and why we have Hiscox Gives, which creates meaningful volunteering opportunities for employees.
Ten climate-related disclosures to regulators and global independent ESG standards completed.
Relevant skills, experience and contribution s Considerable underwriting expertise, including experience of managing underwriting portfolios in our key markets.
Independent Non Executive Director Michael Goodwin (Aged 62) Appointed to the Board: November 2017
Steve Langan Chief Executive Officer, Hiscox USA Joined Hiscox: October 2005
We continue to ensure our governance practices are in line with the UK Corporate Governance Code (the Code) and set out in detail how we have complied with the Code on pages 63 to 67. This should be read in conjunction with the corporate governance section on pages 57 to 62. As with last year’s report, we have included some additional disclosures beyond our reporting requirements, such as our Chief Executive’s pay ratio, where we feel that doing so would give shareholders a better understanding of our governance structures.
This structure is supported by the Executive Committee, Investment Committee and a number of other management committees. Certain administrative matters have been delegated to a committee comprising of two Directors and the Company Secretary.
The Board is responsible for the success of the Company and the underlying Hiscox Group of companies and as part of this the Board sets the governance framework and the overarching principles which should be applied across the Group. The framework is supported by a formal governance manual which explicitly sets out our corporate governance standards. The Group governance manual sets out the overall Group structures, the division of responsibilities between Group and principal subsidiary boards, operational requirements for the Board and the principles applied to subsidiary management. The Group governance manual and supporting subsidiary governance manual ensures that the underlying processes throughout the Group follow consistent and effective governance procedures.
“I have been very pleased with how our governance processes have stood up to the exceptional challenges that presented themselves in 2020. They have proven to be robust and effective. We made use of technology and additional informational sessions to ensure that we were not only able to understand how the challenges were impacting Hiscox, but were also able to contribute to the process by sharing thoughts and ideas.”
In 2019, the Company formalised its approach to workforce engagement by establishing an Employee Engagement Network, which is led by Non Executive Director Anne MacDonald, who also now holds the role of Employee Liaison. The Board continues to engage with the workforce through both the pre-existing infrastructure and via the employee engagement network, to ensure that Hiscox is motivating and engaging employees in an effective way. The Employee Liaison is responsible for providing a summary of findings at Board meetings, and more information on the work of the employee engagement network during 2020 can be found on page 48.
All Directors stand for re-election by shareholders each year at the AGM. The Board considers that all Directors continue to perform effectively and demonstrate appropriate levels of commitment. The biographical details of the Board on pages 52 to 53 summarise each Director’s relevant skills and experience as well as the specific reasons why each Director’s contribution is important to the Company’s long-term sustainable success. As recommended by the Code, this information will also be included in the Notice of Annual General Meeting.
A Director, Board and Committee effectiveness evaluation is carried out each year and results in effectiveness reviews, which are discussed by the Board and each of the Committees. The Nominations and Governance Committee was central to these reviews. Every third year, the Board evaluation is externally facilitated and this was the case in 2020. The external evaluation confirmed a strong, positive dynamic which fosters constructive discussion and decision-making. More information on the findings can be found in the Nominations and Governance Committee report on pages 68 to 70.
The Committee believes that for all employees, basic pay should be competitive but not excessive, with bonuses reflecting personal performance, the profitability of their business area and the performance of the whole Group. We expect all employees to meet or exceed a series of objectives based on our strategy and values, which are essential to Hiscox’s business operations and reputation, including delivering great customer service, complying with regulation and managing risk.
Response to Covid-19 The impact of a global pandemic has been wide and varied, and an overview of Hiscox’s response can be found on pages 6 to 7. We have supported our employees globally in the transition to home-working and offered flexible working options to help with the new demands of juggling work life and home life. We have also provided socially distanced office working, in line with local government guidelines, and increased the provision of mental health and well-being services across the workforce to ensure all employees have access to appropriate support, advice and training. We have not furloughed any staff or accessed any of the UK, US or European government’s support schemes.
During 2020, remuneration arrangements across the organisation were reviewed and, below Board level, a new element has been introduced to the 2021 annual bonus criteria to incentivise and reward individual contribution, including individual contributions towards the delivery of business area priorities for the year. The 2021 Group-wide business priorities are outlined on page 13. The Committee discussed whether this would also be appropriate for the Executive Directors but determined that this was not the right time to make such a change, although this will be kept under review.
The multi-year priority of digital distribution, particularly across Hiscox Retail and in the big-ticket adoption of the Lloyd’s PPL initiative, has been successfully accelerated during the year. Operational resilience became an increased focus for the Executive Committee in light of Covid-19, and the Group did well here, pivoting to remote working and maintaining good levels of service including paying $1.9 billion in claims, despite the disruption.
Our multi-year finance transformation programme concluded this year with the deployment of the remaining four of the nine systems. A process of periodic reviews and assessments, including spotting new ways finance can contribute to business strategy, drive profits and increase shareholder value has also begun.
Annual bonus The maximum opportunity for the year ending 31 December 2021 will remain unchanged from 2020, being 300% of salary for both the Chief Executive Officer and Chief Financial Officer and 400% of salary for the Chief Underwriting Officer. In determining the bonuses to be paid to Executive Directors, the Committee bases its judgements on both the performance of the Group and a robust assessment of individual performance. Bonuses will not be not paid unless the Group’s performance exceeds a given ROE threshold. This threshold and the ranges used to support the Committee’s decision-making are considered to be commercially sensitive at this time and will be disclosed in the 2021 Directors’ remuneration report, together with an overview of the individual objectives set and performance against these.
Equal to or greater than RFR +17% p.a. 100 The risk-free rate (RFR) will be 0% for 2021.
Non Executive Director fees The Non Executive Director fees which apply for 2021 are set out below. These remain unchanged from 2020.
CEO single figure of remuneration (£) 1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,394,428 1,818,086 698,196 717,243 Annual bonus as percentage of current max 0 46 51 44 39 64 0 9 0 0 PSP vesting as percentage of maximum opportunity 85 39 53 100 100 100 85 47 0 0
Currently, the performance measures are linked to the achievement of growth in net asset value plus dividends, measured on a per-share basis, over the performance period. For 2021 awards, an additional measure of relative TSR will apply to awards alongside growth in net asset value plus dividends per share.
It is fundamental to the Group’s longer-term strategy that the Directors manage and monitor risk, taking into account all key risks the Group faces, including insurance risks, so that it can continue to meet its obligations to policyholders. The Group is also subject to extensive regulation and supervision including Bermuda Solvency Capital Requirement.
Chapter 5 107 Shareholder information 111Hiscox Ltd Report and Accounts 2020
Key audit matter 1. The impact of Covid-19 on the Group
The results of our procedures indicated that management’s position in relation to residency and PE risk was supported by the evidence we obtained.
The carrying value of finite lived intangible assets (software development costs) amounts to $241.9 million as at 31 December 2020. Management considered whether or not there was an indicator of impairment in respect of these assets.
When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain, or loss, on sale.
The Group had no derivative instruments designated for hedge accounting during the current and prior financial year.
Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds and geographical disaster event risk exposures are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors.
The specific insurance risks accepted by the Group fall broadly into the following main categories: reinsurance inwards, marine and major asset property, other property risks, casualty professional indemnity and casualty other insurance risks. These specific categories are defined for risk review purposes only, as each contains risks specific to the nature of the cover provided. They are not exclusively aligned to any specific reportable segment in the Group’s operational structure or the primary internal reports reviewed by the chief operating decision-maker. The following describes the policies and procedures used to identify and measure the risks associated with each individual category of business.
At 31 December 2020, the Group had borrowings of £691 million (2019: £550 million). The borrowings comprised of £141 million drawn on the Group’s borrowing facility (2019: $nil) and £550 million (2019: £550 million) of long-term debt. The £550 million includes two listed instruments of £275 million each, as explained in note 17: the first being fixed-to-floating rate notes where the floating rate becomes effective from November 2025; the second being fixed rate notes maturing in December 2022. In addition, the Group has additional borrowings of £50 million and $125 million, which were drawn down in 2020. The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 30.
There has been an increase in claims net of reinsurance recoveries in 2020 which are mainly attributed to Covid-19 as described in note 23. This has increased the liquidity requirement to pay for these claims. The Group has actively monitored and taken actions to further strengthen the liquidity position. In April 2020, the Group announced the decision to withdraw the 2019 final dividend and that the Group would not propose an interim dividend payment, or conduct any further share buybacks in 2020. In May 2020, the Group successfully raised £375 million ($459.5 million) through a non-pre-emptive placing of new ordinary shares. The proceeds of the placing will be used to respond to growth opportunities and rate improvement, particularly in big-ticket lines, and to further strengthen our capital buffers.
In periods of significant volatility that are expected to persist for an extended period of time, the Group may elect to utilise derivatives to mitigate or reduce the risk in order to preserve capital.
Goodwill and intangible assets 141.1 146.0 7.7 4.1 298.9 Property, plant and equipment 35.3 49.1 22.4 2.6 109.4 Investments in associates – 4.9 – – 4.9 Deferred income tax 26.4 37.1 7.2 – 70.7 Deferred acquisition costs 240.0 116.3 63.5 19.4 439.2 Financial assets carried at fair value 4,159.3 1,221.9 607.0 128.6 6,116.8 Reinsurance assets 2,525.4 746.7 221.2 151.3 3,644.6 Loans and receivables including insurance receivables 938.6 533.1 99.7 84.0 1,655.4 Current tax asset 2.3 – 1.0 – 3.3 Cash and cash equivalents 754.0 493.0 197.7 132.5 1,577.2 Total assets 8,822.4 3,348.1 1,227.4 522.5 13,920.4
A Hiscox Re & ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda and London. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also includes the performance and fee income from the ILS funds, along with the gains and losses made as a result of the Group’s investment in the funds.
A Corporate Centre comprises finance costs and administrative costs associated with Group management activities and intragroup borrowings, as well as all foreign exchange gains and losses. The segment includes results from run-off portfolios where the Group has ceded all insurance risks to third-party reinsurers.
Costs allocated to Corporate Centre are non-underwriting related costs and are not included within the combined ratio. The impact on profit before tax of a 1% change in each component of the segmental combined ratios is shown in the following table. Any further ratio change is linear in nature.
Agency-related income relates to commission received from a non-Group insurer by an insurance intermediary (‘agency’) for placement services and in limited cases claims handling services. Commission income associated with the placement services are recognised at the point in time when the agency has satisfied its performance obligation. That is when the terms of the insurance policy have been agreed contractually by the insurer and policyholder and the insurer has a present right to payment from the policyholder. Where the agency also provides the insurer with claims handling services, the commission income associated with these services are recognised over time in line with the terms of the contractual arrangements.
Total assets no longer recognised in the consolidated balance sheet (7.0) (5.8) (12.8) Costs on disposal – (0.1) (0.1)
Associates incorporated in the UK and USA from 29% to 35% 18.7 13.7 12.2 (0.3) Associates incorporated in Europe from 26% 4.4 2.8 2.6 0.8 Total at the end of 2019 23.1 16.5 14.8 0.5
Level 2 of the hierarchy contains certain government bonds, US government agencies, corporate securities, asset-backed securities and mortgage-backed securities. The fair value of these assets is based on the prices obtained from independent pricing sources, investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level 2. Also included within Level 2 are units held in collective investment vehicles investing in traditional and alternative investment strategies and over-the-counter derivatives.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 23 Insurance liabilities and reinsurance assets continued 23.2 Movements in insurance claims liabilities and reinsurance claims assets A reconciliation of the insurance claims liabilities is as follows: Year ended 31 December Gross $m
The amounts expected to be settled before and after one year are estimated as follows: $m $m
Group defined benefit liabilities at beginning of year 55.1 35.8 Third-party Names’ share of liability (10.5) (6.6) Net defined benefit liability at beginning of year 44.6 29.2 Defined benefit cost included in net income 1.1 1.0 Contribution by employer (30.4) (3.6) Credit from third-party Names (0.2) (0.2) Foreign exchange movements 1.6 1.7 Total remeasurement included in other comprehensive income 38.0 16.5 Net defined benefit liability at end of year 54.7 44.6 Third-party Names’ share of liability 18.8 10.5 Group defined benefit liability at end of year 73.5 55.1
Assumptions regarding future mortality experience are set based on the S2PA light tables. Reductions in future mortality rates are allowed for by using the CMI 2017 projections (core model) with 1.25% p.a. long-term trend for improvements.
The scheme operates under UK trust law and the Trust is a separate legal entity from the Group. The scheme is governed by a board of trustees, comprised of member-nominated and employer-appointed trustees. The trustees are required by law to act in the best interests of scheme members and are responsible for setting certain policies together with the principal employer. The scheme is funded by the Group when required. Funding of the scheme is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions above. Funding requirements are formally set out in the statement of funding principles, schedule of contributions and recovery plan agreed between the trustees and the Group.
(Loss)/profit for the year after tax (293.7) 48.9 117.9 22.7 447.2 Assets employed