In a growing business like ours, taking initiative is something we expect of everyone, regardless of their role. It shows itself in a willingness to speak up, to confront problems, to avoid easy excuses, and to embrace hard work.
These are qualities we have always valued and nurtured. But in 2020, Covid-19 meant that instinct to step up and take ownership was more vital than ever before.
It is in difficult times that our values are tested, but it is also in difficult times that they prove the greatest guide. Throughout this report, you will find some examples of how we showed ownership in 2020.
We are headquartered in Bermuda, listed on the London Stock Exchange, and currently have over 3,000 staff across 14 countries and 35 offices.
Our products and services reach every continent, and we are one of the only insurers to offer everything from small business and home insurance to reinsurance and insurance-linked securities.
Showing ownership in claims Among the many life-changing impacts of Covid-19, a postponed concert, deferred sports event or cancelled flight may seem trivial. But for businesses that rely on events for revenue, or individuals unable to return home or be reunited with family members, these cancellations can be devastating. Travel disruption was one of the earliest impacts of Covid-19, and required immediate ownership from our claims teams. In the first month of the UK lockdown, we processed over 200 travel claims, including repatriation costs for customers who were abroad when the Foreign & Commonwealth Office advised all British nationals to return home immediately.
Travel bans and restrictions were soon followed by event cancellations. Our UK team worked with small- to medium-sized businesses to provide support and find solutions. One example was Motorcycle Live 2020, a Birmingham-based show representing the best of the British motorcycle industry. With a global audience, cancelling the November show was not taken lightly, but as a result of our prompt claims resolution they were able to make an announcement in June, provide significant notice for attendees, and shift their efforts to promoting the 2021 event.
Employee engagement 68% Our annual global employee engagement survey looks at how connected we feel to Hiscox, our managers, teams and roles. The results are shared widely and heavily influence our people strategy.
London Market broker satisfaction 69% Each year, we survey our London Market broker partners to understand more about their experience of working with Hiscox throughout the year. Their feedback is a reflection of our products and service levels, so receiving consistently good scores matters to us.
UK customer satisfaction 92% In the UK, customers who speak to one of our insurance experts in our customer experience centre in York are asked to rate their experience of Hiscox at the end of the call. Whether they have phoned for advice, a quote, to purchase a new policy or make changes to an existing one, their feedback helps us to constantly improve our service.
UK gender pay gap 21.2% As a UK company with 250 or more employees, we are required to disclose our gender pay gap for UK employees, which we have done since 2017. Improving diversity and inclusion at Hiscox is a high priority, and we continue to focus on finding ways to reduce our gender pay gap.
Our response to Covid-19 Coronavirus affected us all in 2020 and as the situation evolves, so has our response. Our efforts are focused on four key areas; our customers, our employees, our operations, and our contribution to the communities in which we live and work.
Reserved $475 million in Covid-19-related claims around the world across our travel, events and business insurance lines.
Provided new ways to quote, negotiate, bind and endorse within our London Market business, with over 90% of risks bound online using the Lloyd’s Placing Platform Limited (PPL) during the third quarter of 2020.
Participated in an insurance industry test case with seven other insurers to provide clarity and certainty on the business interruption cover available to customers as quickly as possible.
Transitioned successfully to home-working, with over 95% of our 3,000 employees working remotely.
Delivered mental health training to over 1,000 employees and provided access to over 30 webinars led by mental health experts on topics such as sleep, resilience, home-schooling and living alone.
“Hiscox extended my travel cover free of charge while I was stranded abroad and trying to get back to the UK. Your quick response and high level of communication helped ease an extremely stressful situation.”
Gave US employees $100 to spend at a local small business of their choice, to support struggling businesses at a time of need.
Founding supporter of the ABI’s Covid-19 Support Fund, the largest UK non-government fundraise to date, with over £100 million in voluntary contributions from the insurance and long-term savings industry pledged so far.
Enabled 630 meals to be delivered to isolated elderly New Yorkers, 91,300 meals for Londoners facing food poverty and almost 10,000 meals for hard-working NHS staff.
Set up small and focused working groups to cover very specific operational elements, including return to office working groups and future ways of working teams.
Additional Board meetings were held during the year, covering specific topics such as the approval of May’s capital raise, the Company’s response to Covid-19 and the insurance industry test case.
Chapter 1 3 A balanced business Our purpose, values, culture and vision
“I have worked at Hiscox for almost 20 years, and in all of the roles I have held – from Hiscox UK to Group functions, in claims, underwriting or operations – I have felt a strong and consistent culture. Our values are our common lexicon, no matter which part of the business you work in. They are lived and breathed, they are talked about often, and they inform decision-making at every level.”
Read more about our performance by product and geography in our Chief Executive’s report.
Stakeholders’ expectations – a respected specialist insurer We constantly adapt to the evolving regulatory environment in each of our regions. We are accountable to our communities and responsible in how we operate.
“I have admired Hiscox for 20 years as both a reinsurance partner and a competitor. For me, Hiscox is synonymous with underwriting acumen and product innovation, and its brand is iconic in our industry. The selection process was refreshingly clear and with a candour that you don’t often find, which really appealed to me. I am joining at an exciting moment – not only in the Company’s growth, but also as conditions in the reinsurance market improve and new opportunities present themselves.”
Liquidity risk This relates to the risk of the Group being unable to meet cash requirements from available resources within the appropriate or required timescales, such as being unable to pay liabilities to customers or other creditors when they fall due. It could result in high costs in selling assets or raising money quickly in order to meet our obligations, with the potential to have a material adverse effect on the Group’s financial condition and cash flows.
In 2021, we will build on last year’s progress in optimising our underwriting portfolios and improving loss ratio performance through a continued focus on active portfolio management. This means addressing poor-performing lines, investing in top quartile business and taking decisive action when needed. We will examine where we can simplify underwriting processes, products and services; boost existing product and pricing controls; and formalise the flow of data and insight between underwriting, claims and actuarial.
After a year of lockdowns and home-working, 2021 is about unleashing potential and investing in talent. This will include embedding new working styles and supporting policies that balance the ability to work remotely with the culture, collaboration and energy of our office environments. It will also mean establishing robust plans in every part of the business for developing talent, more talent sharing across the Group, and focusing on our diversity as well as our succession pipeline at all levels.
total shareholder return over the last ten years, well above the FTSE All-Share of 72%.
A balanced business achieving sustainable growth By running a well-balanced business, underpinned by a clear set of values and characterised by a disciplined approach to underwriting, our aim is to consistently grow the business in a way that is organic, sustainable and profitable. Covid-19 presented some unique challenges in 2020, but as the chart opposite shows, over the past 28 years the Group’s controlled income has broadly risen in a steady manner, despite the industry’s innate volatility. That growth has been fuelled by progress across all our divisions and regions.
“We are an A-rated, well capitalised business, with the financial flexibility, operational strength and talent to drive sustainable long-term growth. In our Retail businesses, our established digital platforms are benefiting from the global shift to digital. In our big-ticket lines, our expertise and underwriting discipline positions us well as the rating environment improves.”
Owning our understanding of the cyber risk The cyber risk landscape is constantly changing, as new risks appear and known risks evolve, but it is vital that we stay ahead in this area. That means taking ownership of developing technical abilities and responding to industry trends. The Hiscox Technical Cyber Training Programme, which launched this year with industry-leading cyber security qualifications CompTIA Security+ and CompTIA Pentest+, ensures a consistent and repeatable approach to underwriter cyber training. This training, along with our cyber efforts around the world, are coordinated by our CyberClear Centre, which provides cyber-related education and advisory services to our cyber teams in every business unit, enabling them to deliver real-time information and external insights to our brokers and customers.
Chairman’s statement 2020 got off to a good start and then came the global pandemic. Over my 48 years in the business, I have experienced most of the challenges that Mother Nature and mankind have thrown at the insurance industry, but Covid-19 and its repercussions have been one of the most testing. As a result, we expect to pay $475 million in Covid-related claims net of reinsurance, the majority for event cancellation and the remaining for business interruption and other claims. These are large sums and disappointingly means that we will make a pre-tax loss for the year of $268 million. Without Covid-19 we would have produced a profit of $207 million.
The pandemic has also affected the way we work and how we interact with each other. In the field of business processing, our response to the pandemic has significantly accelerated our digital progress. For example, in 2020 our London Market business bound over 90% of its business digitally, which is a phenomenal change in the way business is written in the market. Our investment in IT systems and the superb dedication of all our employees meant that the transition to working from home was almost seamless. We all long for a return to more normal working but it is unlikely we will return to exactly the way it was.
Gross written premiums are stable at $4,033.1 million (2019: $4,030.7 million) and the combined ratio increased to 114.5% (2019: 106.8%). Excluding Covid-19 the combined ratio decreased to 97.0% (2019: 106.8%).
In all segments we have benefited from our multi-year investment in new technology and digital tools. These include new underwriting platforms, quote and buy systems, robotics and APIs to connect us with business partners. Global lockdowns have accelerated our customers’ adoption of online systems and this has driven a good underlying performance in Hiscox Retail which delivered growth of 3%. Customer numbers in our Retail business have grown by 10% to 1.3 million over the period.
One of our recent senior joiners has been Kathleen Reardon, our new Hiscox Re & ILS CEO. Kathleen has spent the last six years as CEO of Hamilton Re, where she built a reinsurance business from the ground up. She replaces Mike Krefta, who made an immense contribution to Hiscox during his 17-year tenure, most recently developing our ESG framework. We look forward to benefiting from Kathleen’s depth of knowledge and presence in global reinsurance, and her experience of building businesses through the reinsurance cycle.
Culture and values We have been on the defensive in 2020 as our values have been tested and the trust we have painstakingly built over many years between us and our customers has been challenged to our dismay. It has been a particularly tough year, but during times like these we have to dig deep, go back to our core values, recognise where we need to improve and learn from the past.
In April, we announced the decision not to pay the 2019 final dividend and that the Group would not propose an interim dividend payment. The Board has also decided not to declare a final dividend for 2020. The decision was not taken lightly by the Board, who are acutely aware of the importance of dividends as a source of income for our shareholders, including private shareholders many of whom own shares through pension funds. The Executive Directors will not be taking any cash bonuses until the dividend is reinstated. The Board believes that as our business delivers the 2021 business plan and as profits flow through, it intends, subject to Board approval, to resume paying dividends with the 2021 interim results.
Chapter 2 17 A closer look Chairman’s statement 20 Hiscox Ltd Report and Accounts 2020
Last year we shared the outputs of our most recent culture review; our refreshed values of courage, ownership, integrity, connectedness and being human. This year I was pleased to see them become embedded in our business and being lived. As it turned out, the timing of this exercise was fortuitous, and during a year of remote working at our kitchen tables and home offices, it is our values that have served as a golden thread throughout the Company.
Outlook The challenges of a global pandemic have not withered the green shoots of a hardening market. Rates are rising across all three of our business areas, and the market is turning. Together with our multi-year investments in technology and digital tools, we have the infrastructure, talent and financial firepower to realise the significant opportunities ahead.
Chapter 2 17 A closer look 21Hiscox Ltd Report and Accounts 2020
Chapter 2 17 A closer look Chief Executive’s report 22 Hiscox Ltd Report and Accounts 2020
Global pandemic As the pandemic spread across the countries in which we operate, we rapidly shifted to different ways of working. Our Chief Information Officer described it as instantly going from 35 offices to over 3,000. It was a smooth transition made simpler by past IT investments and the willingness of all staff to adapt, juggling roles as parents, carers and volunteers alongside their work. We committed to our staff that no one would leave the business in 2020 due to the economic impact of the pandemic. To adapt to changing demands we created a talent exchange which saw a number of colleagues moving to new roles, temporarily or permanently, particularly to support our frontline.
The Group’s second largest share of Covid-19 claims is from UK business interruption cover in commercial property policies. Unsatisfactorily for both our policyholders and ourselves, there was disagreement over whether the Hiscox policy wordings responded to the steps taken by the UK government to manage Covid-19. Our claims paying philosophy is deep-rooted: to pay claims quickly, fairly and in line with the intention of the policy. The underwriting intention of these property policies is to respond to local events affecting a firm’s premises and not to nationwide steps taken to manage the pandemic. When a claims decision is challenged it is the wording which determines the coverage in law, and there was room to question whether the Hiscox wording reflected this underwriting intent. We, of course, regret the impact of this disagreement on affected policyholders, and the adverse publicity we received as a result of it has been difficult for all of our stakeholders.
After the High Court decision in September, all parties involved had the option to appeal some or all of the Judgment to a higher court. Although Hiscox was ready to implement the High Court Judgment, once others appealed, we felt we had no option but to appeal and participate in the Supreme Court Hearing.
In January 2021, the Supreme Court Judgment largely confirmed the outcome of the High Court’s ruling in respect of Hiscox that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed. Approximately one third of Hiscox’s 34,000 UK business interruption policies may respond as a result. The Supreme Court Judgment represents the final outcome of the industry test case, and there can be no further appeals. A process that would normally take a number of years was completed within nine months; almost lightning speed for any legal process of this complexity. We have begun paying claims in line with the Supreme Court Judgment. We have increased our claims handling capacity and the process of collecting information from customers who have cover and settling their claims is well under way.
Hiscox’s exposure to potential business interruption claims arising from further UK government restrictions to contain the spread of Covid-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be largely run off by the end of June 2021. Following the Supreme Court Judgment, the Group estimates exposure to restrictions already announced in 2021 to be less than $40 million if restrictions extend to the end of June.
“To adapt to changing demands we created a talent exchange which saw a number of colleagues moving to new roles, temporarily or permanently, particularly to support our frontline.”
Chapter 2 17 A closer look Chief Executive’s report 23Hiscox Ltd Report and Accounts 2020
An actively managed business mix Total Group controlled premium 31 December 2020: $4,532 million (Period-on-period in constant currency) 2020 GWP
Chapter 2 17 A closer look Chief Executive’s report 24 Hiscox Ltd Report and Accounts 2020
Hiscox Retail wrote $2.3 billion of premiums globally in 2020, representing more than half of our Group’s gross premiums and almost three-quarters net of reinsurance. In the face of extremely challenging operating conditions, our Retail business grew its top line by 3.2% and delivered growth in four of its five business units even as the pandemic spread across the globe and caused economic havoc.
London Market. As a result, in 2021, $100 million of Special Risks premium income from Retail will be reported within Hiscox London Market.
Gross premiums written 2,266.3 2,196.3 Net premiums written 1,986.8 1,957.5 Underwriting profit (343.6) 36.5†
The business delivered a strong performance, growing gross premiums by 9.5% to $447.1 million (2019: $408.4 million), against the reduction in economic activity across European markets as the pandemic hampered growth. It was profitable after providing for the Covid-19 losses it faced.
Our operations in France have undergone a major transformation over the last two years. To improve underwriting performance, particularly in high-value household and commercial property, we have exited some unprofitable lines in the portfolio. This resulted in subdued top line growth but improved bottom line profitability.
In Ireland, where our commercial lines book was a strong growth driver early in the year, we have seen a material decline in new business in line with the economic impact of Covid-19. Alongside other local insurers, the team has been supporting customers affected by Covid-19 with extended credit terms, premium adjustments and other financial measures.
Hiscox Europe expects to implement the first phase of a new technology platform during 2021, starting in Germany. This will then roll out to other territories in subsequent years. This new infrastructure will help us capture the growth opportunities we see in both the traditional broker and digital channels.
Hiscox UK delivered a resilient performance in 2020. Gross premiums written grew by 1.3% to $756.1 million (2019: $746.4 million), which is a good performance given the challenges of 2020.
We have modest growth ambitions for the year ahead given the broader economic uncertainties. We expect to see continued headwinds from the implementation of IR35 in April and ongoing subdued activity in media and events. Offsetting this will be growth in new start-ups, either voluntary or forced, which is a pattern we have seen in previous tough economic conditions. We remain convinced that this entrepreneurial activity and the shift to digital will power Hiscox UK’s medium-term growth ambitions. In 2021, we will focus on service quality, operational efficiency through automation and simplification, reviewing our policy wordings, and investing in our broker relationships.
“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.”
We have built this digital business since 2010 through ongoing investment in our brand, technology and operational know-how. Hiscox USA is now over half-way through a platform upgrade which will support future growth. We have pursued an omni-channel approach since we began, and so are less constrained by the channel conflict which affects some of our competitors. Our customers have a choice of buying our policies online end-to-end, by speaking to a Hiscox agent over the telephone, or alternatively through a third-party broker or insurance carrier partner. We follow an ‘all roads lead to Hiscox’ philosophy, ensuring we are available to do business with our target customers whichever way they choose, and it has served us well.
Our core target market are small, micro and nano businesses. We estimate there are in excess of 30 million businesses in the USA with revenues of less than $25 million. This market is fragmented and these businesses are increasingly shifting to digital ways of buying their insurance. Hiscox already has approximately 430,000 customers in this segment, so we enjoy customer and data insights as well as economies of scale that are not available to others.
Hiscox is already one of America’s leading digital small business insurers. Our goal is to further cement our market position and to continue capturing a leading share of over 30 million small businesses that represent the market opportunity ahead of us.
Hiscox Special Risks Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art, with teams in multiple locations.
The successful reorganisation of the Special Risks business was completed in the fourth quarter of 2020 and as a result Special Risks ceased to exist as a stand-alone unit from 1 January 2021. The Group’s financial reporting in 2021 will reflect this change, resulting in $100 million of premium from the Retail segment now being reported within Hiscox London Market.
Gross premiums written 1,023.4 967.9 Net premiums written 570.9 504.6 Underwriting profit 40.7 (26.3)†
This improvement reflects the hard work under a ‘3-1-1’ plan. Here, we have sought to reduce the loss ratio by 3%, reduce commissions by 1% and reduce the expense ratio by 1%. This was initiated several years ago and its implementation has steadily become more rigorous, requiring a combination of organisational and orchestration skills and effective risk by risk negotiations. This has seen us drive rate improvements of 20% in 2020, with 16 of our 17 lines enjoying price rises and ten lines benefiting from double-digit rate increases. This is now the fourth year of rate increases with cumulative increases of 43% since 2017.
The most significant rate improvement continues to be seen in casualty lines such as US public company D&O and US general liability, alongside terms and conditions improvements, and reduced line sizes. In the marine and energy book trends are positive, with rates increasing by 24% in cargo, and 20% in hull.
In our property lines we saw rate growth of 20% in major property where we grew our average line size over the year. We have reduced exposure in household and commercial binders through non-renewal of contracts, increased rates and by restricting aggregate in certain counties. These will flow into our results in 2021 and 2022 as new terms and increased rates feed into the portfolios. As part of this optimisation, we undertook a large data project which allowed us to match historic policies and claims at a risk level. Going forward, we will aim to do this on a quarterly basis, so we can target rate changes and aggregate management to use our capital in the most effective way.
In 2021, Hiscox Re & ILS will benefit from the deployment of some of the proceeds from the Group’s equity raise earlier in the year. We expect that our net written premium growth will exceed growth in gross written premiums as Hiscox Re & ILS retains more risk in the strongest reinsurance market in several years.
Claims Claims experience in the year has been mixed. We have benefited from some frequency reduction due to the lower levels of activity during the lockdowns. At the same time, we saw a number of large marine liability losses, exposure to the Beirut explosion, floods in the UK, some US tax-related professional liability claims as well as claims from multiple Atlantic hurricanes. All of these claims, and our normal attritional and large losses, together with Covid-19-related claims in all territories, have been handled by our claims teams in their usual award-winning manner. I would like to thank them all for their professionalism in very challenging circumstances.
Information technology and major projects Over the past five years we have progressively been replacing our core systems which has allowed us to benefit from the digital shift accelerated by the pandemic. In the USA we implemented the first two phases of our new technology platform in the direct and partnerships business. We expect to complete the programme by the end of the third quarter in 2021 allowing us to continue marching towards the significant digital SME opportunity. In the UK, we have steadily improved our portfolio underwriting capability and 90% of our new and renewal business is now handled through automated underwriting rules. In Europe we are working on our technology replacement programme, with implementation beginning in Germany during 2021. We have also been working on interfaces to connect our partner’s systems to ours. Across the world we are now connected to 158 partners in this way.
In addition to systems supporting our frontline teams, we are close to the end of our finance transformation programme. This programme has replaced many legacy systems and processes allowing our finance team to keep pace with the scale of business we are now, and the growth to come. The next finance focus is preparing for IFRS 17.
“We have made strides towards a data-based operating model for claims by quadrupling the data analytics team, driving deployment of machine learning tools and launching a fraud mitigation tool in the UK.”
Chapter 2 17 A closer look Chief Executive’s report 29Hiscox Ltd Report and Accounts 2020
“We are close to the end of our finance transformation programme, which will allow our finance team to keep pace with the scale of business we are now, and the growth to come.”
“We manage our investment portfolio to provide sufficient liquidity to pay claims, and capital to support the underwriting business, while generating strong risk-adjusted returns.” Portfolio – asset mix Investment portfolio $7,630 million as at 31 December 2020
Bond currency split USD 68.9 GBP 18.1 EUR 8.8 CAD and other 4.2
Chapter 2 17 A closer look Chief Executive’s report pre-Covid levels, reducing yields materially. The current yield to maturity on the bond portfolio is at its lowest ever at just 0.4% (December 2019: 1.6%).
Our capital position during the year was bolstered by a £375 million non-pre-emptive equity placement. I would like to thank our shareholders for the support they provided to our business during a very challenging time. The capital raised externally was supplemented by action taken internally during the year to generate around $65 million of capital saving by combining our two Bermuda-based reinsurance carriers.
We have a toolset of proactive capital management measures at our disposal which can help provide capital relief, reduce volatility and bolster our balance sheet strength further. In 2020, ahead of the North America hurricane season, we purchased approximately $100 million of additional catastrophe reinsurance in the form of industry loss warranties. We are also looking at legacy reinsurance solutions and may execute one or more of these in 2021 if the cost and capital efficiency they provide is attractive.
Corporate bond spreads have now retraced much of the Q1 2020 widening given the backdrop of ongoing fiscal and monetary policy support. Given the high quality of corporate bonds held, we remain comfortable maintaining our current credit exposures. While equity markets have rebounded generally, we have seen significant divergence in valuations between regions and sectors and so maintain modest exposure to selected risk assets.
While the full year 2020 investment return is well ahead of the original forecast, more meagre investment returns should be expected for 2021. Government bond yields are close to zero, while credit spreads for high-quality bonds are now at
Chapter 2 17 A closer look Chief Executive’s report 32 Hiscox Ltd Report and Accounts 2020
Environmental, social and governance Across the world there has been heightened scrutiny and expectations on companies to consider environmental, social and governance factors in their day-to-day business. As insurers we are keenly aware of the impact of climate trends and volatility on the risks that we face and take them into active consideration in the pricing and management of our exposures. In the 2020 update of the Hiscox view of risk, we adjusted it to account for recent trends in severe typhoon activity and will keep reviewing climate-related activity on a peril-by-peril basis. We also have taken proactive steps to support those at risk from climate impacts through insurance products like FloodPlus, and in reinsurance, FloodXtra.
Hiscox has long sought to reduce its own carbon footprint, targeting a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per FTE by the end of 2020, relative to 2014. We have achieved this target, completing a 45% real-term reduction in Scope 1, 2 and 3 carbon emissions per FTE over that period. Covid-19 has had a one-off positive impact by driving down business travel, currently one of the biggest contributors to our emissions, and we will assess what level of business travel is right for us going forward, though as a global business it cannot be eradicated completely. We will also set new near- to medium-term carbon emission reduction targets in 2021, aligned to the Science Based Targets initiative, and define our action plan for limiting emissions. This will support our established carbon offsetting programme which ensures we operate in a carbon-neutral manner, having been carbon neutral through offsetting since 2014.
With the publication of these results Hiscox has announced its commitment to steadily reduce and eliminate by 2030 the insurance and reinsurance of coal-fired power plants and coal mines; Arctic energy exploration, beginning with the Arctic National Wildlife Refuge; oil sands; and controversial weapons such as land mines. These commitments are aligned with the Lloyd’s ambitions announced in December and will take effect from 1 January 2022, though their implementation has already begun.
“Hiscox London Market’s stellar performance supported by profits in Hiscox Europe and Hiscox Special Risks and better-than-expected investment returns, mitigated the impact of the pandemic.”
People 2020 has been a truly tough year and it is our people who have persevered against all odds, showing resilience, adaptability and determination. Thanks to the individual and collective efforts of over 3,000 staff, Hiscox has weathered the storm and I can only thank each and every one of them.
One of the signs of a hardening market is increasing competition for talent. Hiscox has invested in both new and experienced underwriters and we have been nurturing expertise across all ranks of the organisation. This has helped create our culture and reputation in the market. We are, and want to continue to be, a great place to work for the ambitious and talented, so it is no surprise that we are on occasion targeted by others. Hiscox has business maturity and market presence, so the market conditions that make start-ups attractive investments, apply equally to us on a larger scale. Rewards will follow as our business delivers on its plans.
with The Bright Network, The Brokerage, Afro Caribbean Insurance Network, and targeted recruitment in the USA, Bermuda and Europe with our existing recruitment partners. We also have internal schemes to continue to train and develop mid-ranking staff to reach our target of filling 50% of all promotions with internal candidates.
All these efforts will ensure that Hiscox remains a desirable and fulfilling place to work.
I also expect that we will see good growth of our Retail digital endeavours, focused as they are on the one-to-ten person firms which grow in number as people leave larger firms and set up in business themselves. Hiscox Retail will face headwinds from the 10-250 person firms who are likely to be most affected by the uncertainty of a post-pandemic economy and our own portfolio improvement activity.
Where we see opportunities we will use some of the big-ticket profits to drive our Retail businesses forward with investments greater than they can afford alone, making sure we can capture more than our fair share of the structural shift to digital in the small business segment.
Our priorities next year are to ensure we maintain the strict discipline of underwriting for profit, streamlining our model to simplify the business and, most importantly, energising our teams. 2021 has started well and our sense of ownership and connectedness will allow us to thrive as we capitalise on the opportunity that lies ahead of us.
Capital The Board monitors the Group’s capital strength, ensuring Hiscox remains suitably capitalised for regulatory and rating purposes, and to fund future growth opportunities.
The GSSA is based on the Group’s own internally-assessed capital requirements and is informed by the Group-wide Hiscox integrated capital model (HICM) that, together with the BSCR, forms part of the BMA’s annual solvency assessment. The HICM provides a consistent view of capital requirements for all segments of the business and at Group level.
The Group expects to further mitigate the impact of the changes to the BSCR standard formula through ongoing capital generation over the remaining year of the transition period.
Chapter 2 17 A closer look 36 Hiscox Ltd Report and Accounts 2020
Risk appetites, which are set for each of our insurance carriers and for the Group as a whole, are reviewed annually, enabling us to respond to internal and external factors such as the growth or shrinkage of an area of the business, or changes in the underwriting cycle that may have an impact on capacity and rates. In addition, in 2020 we continued work to enhance and strengthen our risk appetite statements across the Group.
Hiscox Own Risk and Solvency Assessment (ORSA) framework The Group’s ORSA process is an evolution of its long-standing risk management and capital assessment processes.
Provides independent oversight, challenge and support to the first line of defence. Includes the Group risk team and the compliance team.
Chapter 2 17 A closer look Risk management 38 Hiscox Ltd Report and Accounts 2020
2020 has seen a continued focus on improving the efficiency of the risk management framework, mainly through the streamlining and automation of repeatable cycles and further development and embedding of the risk and control self-assessment process. This drive for efficiency allows for an increase in risk deep-dives and for more support to be available to the portfolio of Group-wide change programmes, as well as ensuring appropriate support and challenge is provided to the first-line in assessing, understanding and responding to risks emerging out of Covid-19.
Read more about our key risks.More information on our approach to risk management can be found at hiscoxgroup.com/about-hiscox/ risk-management
Industry loss return period and peril 5–10 year 10–25 year 25–50 year 50–100 year 100–250 year
Chapter 2 17 A closer look Risk management 39Hiscox Ltd Report and Accounts 2020
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Property extreme loss scenarios Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modelled losses January 2021
Financial reporting We report to the market on Company performance four times per year, which provides shareholders with a quarter-by-quarter overview of business performance and trading conditions. These are published on our corporate website, and available as an email alert for subscribers.
Annual Report and Accounts Our Annual Report and Accounts gives shareholders a more detailed view of the business. It also includes some additional corporate governance disclosures beyond our statutory requirements, where we think that doing so improves our narrative reporting.
Investor roadshows Our Chairman and Executive Directors maintain a programme of investor roadshows to give investors an opportunity to learn more about Company strategy, strategic priorities, trading conditions and other factors affecting our operations. In 2020, our Chairman and Executive Directors met with investors representing over 70% of our issued share capital.
Employee networks Over 1,700 employees are actively engaged in at least one of our 12 employee networks. From WeMind (mental health and well-being) and Pan-African to Women at Hiscox and LGBT+, each network provides focused discussion, practical activities and support.
Annual ‘launch’ events and ‘box’ meetings Business unit leaders hold regular all-staff meetings to align on strategy and objectives, share news and celebrate those marking ten or 20 years at Hiscox with long-service awards.
Chartered Insurer status Hiscox UK and Hiscox London Market have Chartered Insurer status from the Chartered Insurance Institute, which recognises the professionalism and expertise of staff, and is a marker for attracting high-quality business partners including brokers.
Annual preferred broker summit and broker academy For the last ten years we have held an annual preferred broker summit for our UK brokers, to share insight and expertise. Our London Market business also hosted its fourth annual broker academy to educate and inform in 2020.
Broker satisfaction survey Each year we measure broker satisfaction with our products and services. In 2020, this involved surveying over 1,000 UK, US and London Market brokers.
Educational seminars Throughout the year we hold educational events and roadshows for brokers to improve knowledge of complex or unusual risks. In 2020, this included events on cyber, claims trends, professional indemnity and navigating market conditions.
Broker newsletters and thought leadership In the UK, our broker newsletter of claims stories, product updates and events is enjoyed by over 5,000 brokers, while our London Market business produces regular thought-leadership content. In 2020, this included a ‘MarketTalk’ video series on topics such as the state of the market, market modernisation and the future of the London insurance marketplace.
Brokers The risks we write through brokers account for around 85% of our business so it is essential that we build strong and lasting relationships with those brokers that share our values.
Employees We want to build teams that are as diverse as our customers and create a vibrant work environment where all employees can thrive.
Sharing useful content We share news, opinion pieces and tips with some of our core customer groups through newsletters and blog content. This includes our US ‘side hustle to small business’ campaign which showcased how individuals turned their side hustle into a fully-fledged small business.
Piloting new technologies We work with our customers to pilot new technologies that aid risk prevention. This includes leak prevention technology, Leakbot, which we have so far provided to almost 2,000 of our UK home buildings insurance customers.
Educational tools We have developed tools to help customers better understand their risk exposure – for example, our cyber exposure calculator helps businesses of different sizes in different jurisdictions to estimate the value of their company’s data.
Regular dialogue Our Chief Compliance Officer and central compliance team lead our relationships with regulators worldwide and maintain regular dialogue with them. In 2020, the team engaged with our various regulators, with involvement from senior management and the Board when required, including on the impact of Covid-19. Discussions included the initial and ongoing operational impact of remote working, customer support initiatives, and the potential solvency impact of different types of claims arising from the pandemic. We also participated in an insurance industry test case organised by the UK Financial Conduct Authority. For more, see page 22.
Regulatory change We contribute to the regulatory change process, both directly and through active membership of trade associations, such as the Association of Bermuda Insurers and Reinsurers and the Association of British Insurers. In 2020, subjects covered included the proposed UK operational resilience regime, potential changes to the EU Solvency II Directive, and changes to privacy requirements in Bermuda and the USA.
Chapter 2 17 A closer look 42 Hiscox Ltd Report and Accounts 2020
Hiscox ESG framework ESG issues touch many different parts of our business and the Hiscox ESG framework helps us stay focused and make an impact. It ensures we are pragmatic and consistent, teaming Group-wide themes with local market relevance. We also evolve as regulation changes and public interest in emerging issues grows.
ESG oversight Our ESG Executive Sponsor is responsible for overseeing our ESG efforts, working with the Executive Committee and the Board to ensure our practices and policies continue to evolve. Facilitated discussions on ESG took place at both an Executive Committee and Board level during 2020, and these sessions focused on approving the Group’s new responsible investment policy and our approach to ESG-related exclusions, developing our internal KPIs and agreeing the ESG plan for 2021.
Oversight in action: Non Executive Director focus groups on ESG During 2020, we held a number of focus groups with our Non Executive Directors to explore a range of ESG issues with them outside of the main Board meetings. These sessions covered issues including our exposure to fossil fuels and other contentious industries in underwriting and investments, ESG measurement and assessment, ESG risks and opportunities, and future ESG training requirements. The outputs from these sessions have proven valuable, informing our 2021 ESG plans, and similar focus groups will now become a regular feature of our annual ESG planning process.
Executive Committee s Approves ESG strategy and priorities. s Oversight of ESG delivery. s Regularly reviews plans and progress.
James Millard Chief Investment Officer and ESG Executive Sponsor 2020: 66% 2019: 46%*
Strengthening our internal expertise and focus on climate change We continue to invest in our in-house capabilities around climate change. We are creating a new climate change research role to further our understanding of climate-related threats and opportunities, which will contribute to the ongoing development of the Hiscox view of risk from a climate change perspective, and also to business and portfolio insights from a risk management perspective. We are also establishing a new climate implementation group to increase our focus on climaterelated developments and drive climate-related innovation – particularly in our underwriting, research and modelling.
Current carbon reduction targets met and new targets in development Hiscox targeted a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per FTE by the end of 2020, relative to 2014. While we have achieved this target, having completed a 45% real-term reduction in Scope 1, 2 and 3 carbon emissions per FTE over that period, some of this achievement is as a result of the positive impact that Covid-19 has had on reducing business travel, which is currently the biggest contributor to our emissions. We are in the process of setting new targets which are aligned to the Science Based Targets initiative (SBTi) and plan to publish these during 2021.
Scope 1 total 467 Natural gas 1,710,200 316 Company cars 560,441 151 Scope 2 total (location-based) 1,565 Electricity (location-based) 5,176,116 1,565 Scope 3 total 231 Personal vehicles 899,189 231
“We have a market-leading catastrophe research and modelling team, including climate scientists, whose expertise – combined with the latest academic insights and our own underwriting and claims experience – enables us to provide accurate coverage and pricing of climate-related risks, even as these risks evolve. We already consider climate change for perils such as wildfire and Japanese typhoon, and in 2021 our work will focus on quantifying its impact on flood and convective storms.”
Our reappraisal of Japanese windstorm risk is improving underwriting performance in our catastrophe-exposed business.
We worked with Ghani solar renewable power project in India to offset our 11,505 CO2e tonnes of emissions in 2020.
We partnered with Cycle2Work on a UK cycle to work scheme to make travelling to and from the office in a more environmentally-friendly way more affordable.
Scope 1, 2 and 3 emissions reduced by 45% in 2020 to 2.01 tCO2e per full-time employee (FTE)
Redeploying our people to best serve changing customer needs We have always been responsible stewards of our resources and as Covid-19 took hold in the UK we swiftly reassessed the needs of our customers and our people. Recognising that the pandemic would generate increased customer queries and claims, at the same time as some of our employees would need to work fewer or less regular hours due to the demands of juggling work and home life during lockdown, we launched a talent exchange programme to draw more resource to the frontline. This enabled 27 employees – from areas including recruitment, internal audit and facilities management – to be rapidly upskilled and temporarily redeployed to customer-facing roles. The talent exchange programme not only ensured that our customers enjoyed uninterrupted service when they needed us the most, it also invigorated those involved and gave them a host of new skills to take back to their day jobs.
Chapter 2 17 A closer look Environmental, social and governance (ESG)
27 of our UK employees were redeployed to frontline roles to support our customers during Covid-19.
We donated over $9 million to good causes in 2020, and published a special edition Covid-19 impact report.
Establishing a rhythm with our employee engagement network In 2019, we formalised our existing approach to workforce engagement by establishing an employee engagement network, led by Non Executive Director Anne MacDonald in her capacity as Employee Liaison. While the Board has historically engaged with the workforce and continues to leverage the pre-existing infrastructure to ensure that Hiscox is motivating and engaging employees in an effective way, the employee engagement network ensures workforce views are considered in its decision-making process. The Employee Liaison facilitated eight meetings in 2020 with a representative group of 30 employees from across the business, supported by our Head of Diversity and Inclusion and Group Company Secretary. These sessions explored some of the key themes from our most recent employee engagement survey – such as the communication of business plans, how the updated values have been embedded in the organisation, manager effectiveness, and personal development tools and support for career paths – as well as the impact of Covid-19 on home-working and our ability to achieve business objectives. Anne has provided regular Board updates on these sessions, enabling the Board to get even closer to employee engagement and culture trends, and the workforce feedback received has informed Board discussions in areas such as remuneration. Where appropriate, outputs from the network are also raised and addressed at Executive Committee level – allowing course corrective action to be taken swiftly if needed.
Governance Compliance with the Bermuda Companies Act, UK listing rules, and local country laws.
Five new phishing campaigns tested our internal responses to IT threats in 2020, alongside new information security training modules.
The Board held 17 informational sessions in 2020, meeting more frequently to assess Covid-19 exposures and responses.
“As Employee Liaison I have been very pleased with the broad representation and views received through the employee engagement network. I have found the conversations open and honest – a testament to Hiscox’s culture – and the direct communication has served as a valuable tool to give the Directors insight into what people are thinking, and to validate or contribute to matters that, as a Board, we are considering.”
Our Re & ILS team worked to review and refine what we call ‘the Hiscox view of risk’ for both Japanese windstorm and California wildfire. Their work meant examining existing catastrophe models and research, proprietary claims insight and key factors such as hazard level, vulnerability, data quality and climate change. There is complexity in this kind of data analysis, and each natural catastrophe event provides a new data point to challenge, refine and advance our understanding. The team’s work has enabled us to evolve our modelling approach and improve underwriting performance in our catastrophe-exposed business.
Non Executive Chairman Robert Simon Childs (Aged 69) Appointed Chairman: February 2013 Appointed to the Board: September 2006
Executive Director Bronislaw Edmund Masojada (Aged 59) Group Chief Executive Appointed to the Board: October 2006
Relevant skills, experience and contribution s Strong track record of building long-term value, helping guide the Group from initial listing to a $4 billion revenue business.
s Significant knowledge of Hiscox, particularly Hiscox Retail, having worked for the Group for 18 years.
Joanne joined Hiscox in 2002 and has held a number of roles across the Group, including Head of UK Claims, Chief Underwriting Officer for Hiscox UK & Ireland, and Chief Underwriting Officer for Hiscox Retail. Joanne also sits on the Board of a number of Hiscox subsidiary companies. Prior to Hiscox, Joanne spent almost ten years working in a variety of actuarial, pricing and reserving roles at Axa and Aviva in both the UK and Asian markets.
Relevant skills, experience and contribution s Valuable financial services experience. s Significant knowledge of how to run an international financial business.
Relevant skills, experience and contribution s Extensive accounting and financial reporting expertise. s Deep understanding of Bermuda as a reinsurance centre.
Independent Non Executive Director Thomas Hürlimann (Aged 57) Appointed to the Board: November 2017
Relevant skills, experience and contribution s Considerable experience of leading a global business. s Extensive knowledge of the European insurance market.
Thomas has 30 years’ experience in banking, reinsurance and insurance. He was CEO Global Corporate at Zurich Insurance Group, a $9 billion business working in over 200 countries. Prior to that, he held senior positions at Swiss Re Group and National Westminster Bank. Thomas also serves on the Hiscox SA Board as a Non Executive Director.
Independent Non Executive Director Anne MacDonald (Aged 65) Appointed to the Board: May 2015
Anne has served as Chief Marketing Officer at four Fortune 100 companies, and been in charge of some of the most recognised brands in the world, including Citigroup, Traveler’s, Macy’s and Pepsi. Anne also serves as the Employee Liaison for Hiscox.
External board appointments Boot Barn Holdings, Inc.; Zeotap; Tuckerman & Co.; Chops Snacks; IGNITE National; Visiting Nurse & Hospice of Litchfield County.
Group General Counsel and Company Secretary Marc Wetherhill (Aged 48) Group General Counsel and Company Secretary
Marc has significant legal and governance experience, and is the Principal Representative to the Bermuda Monetary Authority for the Hiscox Group. He previously served as Chief Legal Counsel and Chief Compliance Officer at PartnerRe Ltd, having trained as a solicitor in London, and is a member of the Bermuda Bar.
Governance Committee Member of the Remuneration Committee Member of the Risk Committee
Relevant skills, experience and contribution s Deep expertise in developing and implementing HR strategy across multiple geographies.
s Global compensation management including executive compensation policy and shareholder consultation.
Amanda leads our team of 90 HR professionals around the world, overseeing our HR policies and procedures, employee rewards and benefits, recruitment, learning and development, and our approach to remuneration to ensure our continued ability to attract and retain talent at all levels.
Stéphane originally joined Hiscox as Chief Operating Officer for Europe, and has also served as the Group’s Chief Information Officer and latterly as Chief Executive Officer of Hiscox Europe. In 2021, he will take on the newly created role of Chief Transformation Officer, driving critical change programmes including the adoption of new technologies across the Group.
Grace leads our award-winning team of 340 claims specialists across 19 locations – the standard-bearers for Hiscox’s customer promise. In 2021, she will kick-start our claims transformation programme, building on strong foundations through investments in technology, analytics, and operational capability.
Relevant skills, experience and contribution s Qualified actuary with in-depth enterprise risk management and insurance expertise.
s International property and casualty insurance industry experience gained within corporate and consultancies across the UK and Australia.
Paul Lawrence Chief Underwriting Officer, Hiscox London Market and Active Underwriter for Syndicate 33 Joined Hiscox: March 1992
Relevant skills, experience and contribution s Deep expertise in big-ticket and specialty insurance underwriting.
Paul has underwritten a range of insurance lines at Hiscox including fine art, personal accident, specialty, and property insurance. He has also worked through large loss events such as 9/11 in 2001 and Hurricanes Katrina, Rita and Wilma in 2005 and has valuable experience of underwriting in both hard and soft markets.
Relevant skills, experience and contribution s Strong experience of building customer-focused businesses.
Kate originally joined Hiscox to run our UK Direct business, and was promoted to Chief Executive Officer of Hiscox London Market in 2017. She leads our team of 300 London Market underwriters, analysts and support functions in the UK, Guernsey and the USA.
s Twenty years’ experience of managing investment teams, processes and portfolios.
Relevant skills, experience and contribution s Extensive experience of building reinsurance businesses throughout the cycle.
Kathleen joined Hiscox in 2021 from Hamilton Re, where she was Chief Executive Officer. She leads our reinsurance and ILS business, based in London and Bermuda, and is responsible for ensuring the team takes advantage of the hardening market and opportunities as they present themselves.
Bob Thaker Chief Executive Officer, Hiscox UK Joined Hiscox: February 2010
Relevant skills, experience and contribution s Considerable experience of growing retail insurance businesses, particularly in Europe and Asia.
Bob originally joined Hiscox as Head of Group Strategy and has held a range of roles since. These include Group Chief Risk Officer, Head of Claims for Hiscox UK and later, Hiscox Europe, Group Chief Operating Officer for DirectAsia – based in Singapore – and CEO of DirectAsia Group before relocating back to the UK in 2019 as Hiscox UK’s Chief Executive Officer.
Ben Walter Chief Executive Officer, Hiscox Retail Joined Hiscox: March 2011
Relevant skills, experience and contribution s Deep understanding of global retail and digital insurance markets.
Ben originally joined Hiscox as Chief Operating Officer for Hiscox USA before serving as its Chief Executive Officer for six years. He became Chief Executive Officer for Hiscox Retail – with responsibility for our Retail operations in the UK, Europe, and the USA – in 2018, with a focus on product innovation and growth, leveraging scale and driving digitisation.
Dear Shareholder Each year, I talk to you about the continued evolution of our governance structure as our business changes and grows, and I am pleased that, despite Covid-19, 2020 saw us deliver the same steady evolution. While Covid-19 was a dominant discussion point for the Board during the year, and you will find Covid-19-related Board activity outlined in the table on page 61, we have also continued to progress with important activity including employee engagement and climate change.
Employee engagement and the Board Last year I reported that, in light of the Code’s focus on ensuring the views of the workforce have been considered in Board discussions and decision-making, we had reviewed the wide and varied, formal and informal engagement mechanisms already in place and established a new Employee Liaison role and employee engagement network. In its first year, this approach has yielded new insights and ideas, and the Board is benefiting from the information that
Climate change Addressing climate variability has always been a feature of our business and in 2020 we are building on the foundations laid through the Hiscox ESG framework with a Board-approved responsible investment policy and ESG exclusions policy. These policies support our pragmatic approach to ESG issues and complement the Lloyd’s approach, published in December, which as Lloyd’s participants we support. 2020 also saw the baton of responsibility for ESG pass from Mike Krefta – who made an immense contribution to our progress – to James Millard, our Chief Investment Officer and new ESG Executive Sponsor for the Group.
Disclosure is almost as important as action when it comes to ESG, and we completed additional disclosures this year which are outlined on page 43. Our climate report, which generated a 20-percentage-point increase in our ClimateWise score year-on-year, ensures our alignment to the Task Force on Climate-related Financial Disclosures (TCFD) and demonstrates our readiness to meet the UK Government requirements for mandatory TCFD-aligned climate reporting by the end of 2021.
I trust that the information set out in this report will give you a strong understanding of our corporate governance arrangements and assurance that Hiscox continues to be focused on the importance of maintaining a robust corporate governance framework.
Leadership of the Company The Board as a whole is collectively responsible for the success of Hiscox Ltd and the Group.
Directors when necessary. s Being available to shareholders and other stakeholders if they have any concerns which are unable to be resolved through normal channels, or if contact through these channels is deemed inappropriate.
s Facilitating an effective link between the business and the Board in support of effective communication.
s Advises the Board on the Group’s overall risk appetite, tolerance and strategy.
More information on risk management can be found on pages 12 and 36 to 39.
More information on our approach to corporate governance, including the Board and Committee terms of reference can be found at hiscoxgroup.com/investors/ corporate-governance
Read about our going concern and viability statements in our Directors’ report.
Chapter 3 51 Governance Corporate governance 60 Hiscox Ltd Report and Accounts 2020
The governance manual defines the Group-wide governance standards required of all legal entities, and supports the delivery of strategy and business objectives within a framework of good corporate governance practice.
The Company’s Bye-laws prohibit any Director who is in the UK or the USA from counting towards the quorum necessary for the transaction of business at a Board meeting. This restricts the ability of the Company’s Directors based in the UK or USA to participate in Board meetings by telephone or other electronic means. Although the Company’s February 2020 Board and Committee meetings were held in-person in Bermuda as scheduled, from March 2020, in-person Board activity was significantly disrupted due to government imposed Covid-19-related travel restrictions and guidance. As a result, it was not possible in many instances for our UK- and USA-based
All Directors were able to fulfil their fiduciary responsibilities during 2020 and attended all Board and Committee meetings that they were eligible to attend (that is, those Board and Committee meetings that they were not precluded from attending as a result of Covid-19-related travel restrictions and guidance, and the Company’s Bye-laws). With respect to the four comprehensive Board meetings in 2020, the Directors attendance (and the number of meetings that they were eligible to attend) is as follows: Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Costas Miranthis (4/4); Robert Childs; Aki Hussain; Bronek Masojada; Joanne Musselle (3/3); Colin Keogh (2/2); Anne MacDonald, Lynn Pike (1/1). Joanne Musselle was appointed to the Board in March 2020 and, although not required, attended the February 2020 Board meeting.
All Directors intend to attend future Board and Committee meetings in person when circumstances allow.
An alert service is available on hiscoxgroup.com to notify any stakeholder of new stock exchange announcements.
Chapter 3 51 Governance Corporate governance 61Hiscox Ltd Report and Accounts 2020
Board activity and key themes The Board receives appropriate and timely information to enable Directors to review business strategy, trading performance, business risks and opportunities. Executive Directors and senior management from the business are invited to present on key items, allowing the Board the opportunity to debate and challenge initiatives directly with Executive Directors and senior managers. Naturally, the impact of Covid-19 was a dominant feature in much of the Board’s discussion in 2020.
Strategy, culture and business performance s Approval of the 2021 business plan.
s The Board regularly considered the Group’s relationship with various stakeholder groups. It discussed shareholder matters, employee engagement, customers, and the Group’s impact on, and relationship with, wider society as detailed on pages 40 to 41 and 46 to 47.
s The Board received regular updates on workforce engagement, via the Employee Liaison role (Anne MacDonald, Non Executive Director). Further details can be found on page 48.
Governance s Approval of financial measures taken as a result of Covid-19 including: withdrawal of the 2019 final dividend, the 2020 interim dividend payment and 2020 share buybacks; the purchase of more than $100 million of additional catastrophe reinsurance in the form of industry loss warranties; and a £375 million equity raise.
s Appointment of the external facilitator for the 2020 Board evaluation and discussion of the outcomes of the Board evaluation review. Further details can be found on pages 68 to 70.
s Approval of the Hiscox Responsible Investment Policy, the ESG exclusions policy and ongoing engagement with the ESG framework.
Risk, compliance and internal controls s Oversight of all key risk, compliance, internal control and governance matters as detailed in the Audit Committee report on pages 71 to 73 and in the risk management section on pages 36 to 39.
s Review of the changed control environment in the move to remote working due to Covid-19, which was found to be satisfactory.
s Updates on key underwriting exposures (Hiscox view of risk), taking into account Covid-19.
Chapter 3 51 Governance Corporate governance 62 Hiscox Ltd Report and Accounts 2020 liaise with management on activities aligned to their key skills, and attend appropriate management strategy and training events. They also have the opportunity to attend briefings with Executive Committee members and senior management, to understand key issues and conduct ‘deep dives’ on specialist subjects. In 2020, among other things, this included: marketing and branding; strategic assessment; workforce engagement; and digitisation. Specific sessions are held for succession planning and strategy.
Board evaluation 2020 The externally facilitated Board evaluation in 2020 was facilitated by Lintstock, further details of which can be found in the Nominations and Governance Committee report on pages 68 to 70.
Board agenda planning in action The Board agenda is set by the Chairman following discussion with the Chief Executive and Company Secretary, taking into consideration feedback from the individual Directors. Board agendas focus on strategically important issues and regular reports from key business areas.
The scheduled meetings follow an agreed format; agendas are developed from the Board’s annual plan of business, with flexibility built in to ensure the agendas can accommodate relevant upcoming issues.
Director duties As a company incorporated under the laws of Bermuda, Hiscox complies with the Bermuda Company Law and as such the UK Companies Act 2006 and associated reporting regulations do not apply. Although there is no prescription of statutory duties in Bermuda, Directors are bound by fiduciary duties to the Company and statutory duties of skill and care. This includes exercising care, diligence, and skill that a reasonably prudent person would be expected to exercise in comparable circumstance. The Directors act in a way that they consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole.
Section 1 of the Code: Board leadership and Company purpose The Board is collectively responsible for the stewardship and long-term success of the Company and for setting the strategic direction for the Group. In the corporate governance section on pages 57 to 62, we have set out the governance structure which supports the Board in setting and overseeing the delivery of the Company’s strategy. We have also described some of the key decisions taken by the Board during the year and how the Board’s view of emerging risks influenced those decisions to ensure the focus remains on delivering long-term, sustainable, good performance.
The Company’s terms of reference explicitly state that the Board and its Committees shall have unfettered access to the resources they determine as being necessary to fulfil their obligations.
The Board is ultimately responsible for our risk management and internal controls, and for ensuring that the systems in place are robust and take into account the principal and emerging risks faced by the Company. The Board delegates certain matters to the Risk Committee, whose work is outlined on pages 37 to 38, and the Audit Committee, whose work is outlined on pages 71 to 73. The Committees provide updates to the Board on matters discussed at each meeting.
The Board is kept aware of major shareholder issues and concerns through reports from a variety of sources, including the Chairman, Chief Executive, Chief Financial Officer, senior management and external consultants. Other ways in which the Board maintains dialogue with shareholders include general meetings, investor roadshows and interim and full-year results presentations, ensuring shareholder engagement is not limited to the period following the publication of financial results or other significant announcements. Dialogue with shareholders has adapted throughout the period to respond to communicating remotely where needed.
Having a supportive and inclusive culture is important to us, and we track how employees feel about working at Hiscox through our annual global employee engagement survey. More information on our 2020 results can be found on page 46.
The Board, at least quarterly, assesses and monitors culture via a culture dashboard; wide metrics are used to ensure that the Board can have oversight of any issues and seek corrective action where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the Company’s purpose, values and strategy. More information on the culture dashboards can be found on page 48.
Chapter 3 51 Governance Compliance with the UK Corporate Governance Code 2018 64 Hiscox Ltd Report and Accounts 2020
The Remuneration Committee ensures that appropriate remuneration structures are in place on behalf of the Board, more information of which is outlined on pages 76 to 105.
Colin Keogh, the Senior Independent Director, provides a sounding board for the Chairman and serves as intermediary for other Directors when necessary. His other role responsibilities are outlined on page 57.
Hiscox’s response to section 1 of the Code The Board has complied with all of the applicable provisions of section 1. Provision 5 states that, in the context of how the Board understands the view of key stakeholders, the Board should describe in the Annual Report how the matters set out in section 172 of the Companies Act 2006 have been considered in Board discussions and decision-making. Section 172 applies only to companies incorporated in the
UK, therefore as a Bermuda-incorporated company the Board is not subject to section 172 statutory duties. Nevertheless, where appropriate the Board as a matter of good governance has set out how we deliver comparable Director duties against the Bermuda Companies Act 1981. More information on Director duties can be found on pages 108 to 110, while stakeholder engagement is covered on pages 40 to 41 and ESG on pages 42 to 49.
Hiscox’s response to section 2 of the Code The Company complied with all of the provisions of section 2 with the exception of Provision 9. As previously disclosed, the Chairman, Robert Childs, was not deemed to be independent upon his appointment as Chairman in 2013.
At that time, major shareholders were consulted ahead of Robert’s appointment and the Board set out its reasons for his appointment.
The Board continues to believe that the Chairman’s experience and expertise in underwriting and risk management remain a valuable asset in the performance of its functions. In 2019, following the introduction of the new provision of the Code, a more robust annual process was introduced which allows the question of the Chairman’s tenure on the Board to be discussed by the Non Executive Directors (without the Chairman being present). This meeting happened in November 2020 and the meeting concluded, having taken soundings from all other Directors on the Board, that the Board continues to highly value the Chairman’s skills and experience, and that he demonstrates independence, constructive challenge and engagement in the Board as well as valuable guidance to Executive management. The Board is therefore satisfied that the Chairman continues to show the independence of character and judgement necessary to chair the Board effectively.
Separately, there are a number of further measures to ensure the robustness of these arrangements. There is a strong Senior Independent Director in place; an annual review of independence of mind as part of the effectiveness review, and oversight of this at the Nominations and Governance Committee; the Chairman is not a member of the Remuneration Committee or the Audit Committee; and a majority of Board Directors are independent Directors. A key focus of the 2020 externally facilitated Board evaluation was an assessment of the independence of the Board, the role of the Chairman and the robustness of the Non Executive Director succession plan; the results of which were positive and are detailed on pages 68 to 70.
Diversity of thought, which is vital at every level of the business including at Board level, remains vital and we are guided by both our diversity and inclusion policy and our Board diversity statement, which are available to view at hiscoxgroup.com/about-hiscox/group-policies-anddisclosures. Details of our diversity activities are detailed on pages 46 to 47 and 70.
The Nominations and Governance Committee also assesses the independence of each Non Executive Director, taking into account, among other things, the circumstances set out in the Code that are likely to impair, or could appear to impair, their independence. The Committee remains of the view that the most important factor is the extent to which they are independent of mind. All Non Executive Directors, other than the Chairman, were considered to be independent when appointed to the Board, and the Nominations and Governance Committee has determined that they all continued to be independent in 2020. In line with good governance practice, a particularly rigorous independence review was conducted for Caroline Foulger as she has served on the Board for more than six years, and concluded that she continues to demonstrate independence. The Board approved that Caroline Foulger could continue in office until May 2022, to allow for the completion of the 2021 financial statement process, as at this point Caroline continues to be independent.
The Nominations and Governance Committee plays a vital part in ensuring a formal, rigorous and transparent procedure for the appointment of new Directors and is responsible for Board succession planning, regularly assessing the balance of skills, experience, diversity and capacity required to oversee the delivery of the Company’s strategy.
Chapter 3 51 Governance Compliance with the UK Corporate Governance Code 2018 66 Hiscox Ltd Report and Accounts 2020
More information can be found in the Nominations and Governance Committee report on pages 68 to 70.
Each Non Executive Director’s letter of appointment outlines the commitments expected of them throughout the year. Each Director has undertaken to allocate sufficient time to the Group in order to discharge their responsibilities effectively, and this is kept under review by the Nominations and Governance Committee. Executive Directors are prohibited from taking more than one Non Executive Directorship in a FTSE 100 company, or the Chairmanship of such a company. Information on Board members’ other appointments are listed on pages 52 to 53.
Section 4 of the Code: Audit, risk and internal control A key part of the Audit Committee’s and Risk Committee’s responsibilities is to provide oversight, on behalf of the Board, of the Company’s internal financial controls, control and risk management systems, and to monitor the integrity of the financial statements of the Company. A report from Caroline Foulger, Chair of the Audit Committee, on the work of the Committee during the year can be found on pages 71 to 73. The risk management framework is set out on page 36.
The Board is responsible for the preparation of the Annual Report and Accounts and for stating whether it considers the Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable, and to provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy. The Directors’ responsibilities statement, going concern and viability statements are set out on pages 108 to 111.
s Shareholders’ views on the key changes to the policy are sought. s Although the Committee did not consult directly with the broader workforce on Executive
Directors’ remuneration policy, there is a process by which employees’ views are gathered on a range of topics and reflected in Board discussion. The Remuneration Committee also receives information on broader workforce remuneration policies and practices during the year which informs its consideration of the policy for Executive Directors.
Simplicity – remuneration structures should avoid complexity and their rationale and operation should be easy to understand.
s The remuneration philosophy is a simple one: to reward performance. For over a decade, the foundation of the Group’s remuneration strategy has been the belief that the best way to foster a high-performance culture across the Group is to ensure that pay reflects our results, not just effort.
s The remuneration policy’s operation, including form of awards, time horizons, and performance measures, is designed to avoid complexity and is fully disclosed in the Directors’ remuneration report on page 80.
s The Committee has the ability to apply independent judgement to ensure that the vesting outcome of performance share awards is a fair reflection of both the Company’s performance and that of the individual over that period.
s Part of the annual bonus is subject to deferral, and share awards are subject to a holding period following vesting. Deferred bonus and share grants are subject to malus and clawback.
Predictability – the range of possible values of rewards to individual Directors and any other limits or discretions should be identified and explained at the time of approving the policy.
s Limits and ability to exercise discretion are also set out in the policy.
Chapter 3 51 Governance 68 Hiscox Ltd Report and Accounts 2020
The work of the Nominations and Governance Committee is wide-ranging, with a specific focus on the appointment and succession of Directors and Executive management, the Board evaluation, and Company strategy relating to diversity and inclusion and the gender balance of both the Board and senior management. The Nominations and Governance Committee also carries out several other Group activities, including a review of governance compliance, a review of conflicts and the approval of Group policies. The Committee is comprised of eight members (seven independent Non Executive Directors). The Chair of the Board is also Chair of the Nominations and Governance Committee.
The Nominations and Governance Committee also leads on Executive succession planning. There is an established and robust process which reviews the key talent plans throughout the Group across three time horizons; zero-to-two years, two-to-five years and the watch list. The Group talent review is assessed by the Nominations and Governance Committee annually and fed into senior management performance development plans. This process is replicated at a business unit level to ensure they too have a sufficient pipeline of talent. Talent plans are also reviewed when vacancies arise; for example, in 2019, Joanne Musselle was identified as part of the talent plan for her predecessor and, following an open market exercise, was appointed as Group Chief Underwriting Officer.
Chapter 3 51 Governance Nominations and Governance Committee report 69Hiscox Ltd Report and Accounts 2020
*Stages 2 to 4 were delivered as part of the external Board evaluation for 2020.
The Board evaluation process: assessing Board, Committee Chair and individual Director performance*
One-to-one interviews between the Chairman and the Directors to assess Director effectiveness.
Senior Independent Director meets with the Non Executive Directors to assess the effectiveness of the Chairman.
constructive discussion and decision-making was highlighted as being particularly noteworthy. The review was weighted towards a few particular themes, including: s the independence of the Board, as currently composed, which was deemed satisfactory; s the role of the Chair, who was seen to have demonstrated strong leadership over the past year; and s the robustness of Non Executive Director succession plans, which continue to be given active consideration and are the subject of ongoing discussion as a part of the usual process of Director rotation.
The review included a number of key priorities for the Board to consider during the coming year, alongside a schedule of detailed recommendations to assist with the formulation of a robust action plan. As a result of the exercise, the Board agreed to focus on the following actions: s maintaining its focus on the succession of Executive
Directors and other key leadership positions below the Board; s transitioning back to in-person meetings when Covid-19-related restrictions reduce, while retaining the use of video-conferencing for interim Board calls and updates; s driving accountability and excellence in execution, including in the continued monitoring of progress against the Company’s business priorities and key projects; s continuing discussions on strategy, including business mix and capital allocation; s devoting more time to considering changes in the external environment and their impact on Hiscox, including competitor activity in key markets; and s maintaining its focus on talent management, employee engagement and the retention of high performers.
In 2020, we complied with the provisions of the Hampton-Alexander Review, which set a minimum target for FTSE 350 companies to achieve 33% representation of women on FTSE 350 boards and in the two layers of leadership below the Board (the Executive Committee and the direct reports to the Executive Committee) by the end of 2020.
Executive Committee 60% 40% Direct reports to the Executive Committee 57% 43% All employees 50% 50%
In addition, we have fulfilled our UK obligations to report our gender pay gap ratios with respect to our UK subsidiaries, and published our fourth annual gender pay report during the year. This report sets out in detail the D&I programmes and initiatives we pursued during 2020, and can also be found on our corporate website.
In relation to financial reporting, the primary role of the Audit Committee (the Committee) is to monitor the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance, and review significant financial reporting judgements contained within them. Working with both management and the external auditor, the Committee reviewed the appropriateness of the half-year and annual financial statements, concentrating on, among other matters: s the quality and acceptability of accounting policies and practices; s the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; s material areas in which significant judgements and estimates have been applied or where there has been discussion with the external auditor; and s any correspondence from third parties in relation to our financial reporting.
ii) Reserving for insurance losses As set out in our significant accounting policies on pages 134 to 135, the reserving for insurance losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet.
Chapter 3 51 Governance Audit Committee report it reported no material misstatements in respect of the level of reserves held by the Group at the balance sheet date. On the basis of these assessments and the consistent application of the Group’s reserving principles, the Committee was satisfied that the valuation of insurance liabilities at 31 December 2020 were appropriate.
iv) Recoverability of goodwill and other intangible assets Judgements in relation to impairment testing relate primarily to the assumptions underlying the calculation of the value in use of the Group’s businesses, being the achievability of the long-term business plans and the macroeconomic and related modelling assumptions underlying the valuation process.
The Committee focused its attention on the updates made to assumptions as a result of managements’ assessment of the impact of Covid-19 on the forecast cash flows, the cash generating units most impacted and the extent of sensitivity analysis performed.
vii) The recoverability of deferred tax assets A deferred tax asset can be recognised only to the extent that it is recoverable. The recoverability of deferred tax assets in respect of carry forward losses requires consideration of the future levels of taxable profit which will be available to utilise the tax losses. The deterioration in the economic environment together with significant Covid-19-related claims in 2020 has affected the results of the Group and its subsidiaries for the period and changed assumptions around the timing of when carried forward losses could be utilised. The Audit Committee challenged the underlying assumptions for the recognition of deferred tax assets, principally the availability of future taxable profits and utilisation period.
viii) Estimated premium income Another key estimate contained within the Group’s close process is an estimate of gross premiums written during the year. For certain contracts, premium is initially recognised based on estimates of ultimate premium. This occurs where pricing is based on variables which are not known with certainty at the point of binding the policy. In determining the estimated premium, the Group uses information provided by brokers and coverholders, as well as past underwriting experience, the contractual terms of the policy and prevailing market conditions. Subsequently, adjustments to those estimates arise as updated information relating to pricing variables becomes available – for example, due to declarations obtained on binding authority contracts, reinstatement premium on reinsurance
The internal audit plan is derived using a risk-based approach. In 2020, key themes included core operating controls, the embedding of transformational change, the financial control framework, data governance and controls, the risk management framework, privacy and conduct risk.
The Audit Committee receives reports from PwC at each meeting which include the progress of the audit, key matters identified and the views of PwC on the judgements outlined above. PwC also reports on matters such as their observations on the Company’s financial control environment, developments in the audit profession, key upcoming accounting and regulatory changes and certain other mandatory communications.
Subsequent to the 2020 year-end audit, the UK lead audit partner at PwC is required to rotate from the engagement, and this succession planning is well under way.
In 2019, management, in consultation with the Committee, updated its policy to ensure that no non-audit services will be contracted with PwC unless it is clear that there is no practical alternative and there are no conflicts of interest or independence considerations.
Taking ownership of employee well-being At Hiscox we genuinely care for our customers, for the business and for each other. When Covid-19 emerged, our first priority was the physical safety of our employees and their families. Then, as it became clear that lockdown measures would be prolonged, we recognised the need to further support employees who were struggling with the uncertainty and isolation of extended homeworking.
Enter WeMind, the mental health and well-being employee network at Hiscox. The members of this passion-led, employee-driven network became champions of well-being during lockdown. In the UK and Europe, their effective programme of activities included training for managers and employees on mental health for homeworkers, a weekly newsletter on an array of mental health topics, and a new employee award focused on kindness. In the US and Bermuda, WeMind’s work ranged from a webinar series dealing with racial trauma following the death of George Floyd to the delivery of special ‘wellness kits’ to employees’ homes. When we think about ‘owning the moment’, we could not be more proud of WeMind’s efforts to help employees look after themselves during uncertain times.
We believe this approach works well for both our employees and shareholders, and I would like to thank shareholders for the high levels of support for our remuneration policy in 2020, when we made some important changes. These changes rebalanced the weighting of incentives towards the long term in order to encourage and support an ownership culture, increased the focus on long-term performance, and addressed our requirements under the UK Corporate Governance Code.
Shareholder information 2021 remuneration Executive Directors have been awarded a 2.0% salary increase effective from 1 April 2021, in line with the average UK employee increase.
Wider workforce During the year the Committee was updated on wider workforce remuneration trends and policies to aid our understanding of how Executive Director’s remuneration aligns to employees.
UK gender pay reporting In 2020, Hiscox published its fourth annual gender pay report for the UK. The gender make-up of our business continues to evolve, and these changes are reflected in this year’s numbers. The mean pay gap of 21.2% (26.1% prior year) shows our steady progress at getting more women into senior (and higher-paid) roles and we are pleased to see the year-on-year improvement since we started reporting.
The median figure of 25.0% (22.6% prior year) has been impacted this year by the introduction of part-time teams in our entry-level customer-facing roles. The majority of these lower-paid positions were filled by females, which has increased the proportion of women in our lower quartile and naturally altered the midpoint pay gap metric. Although its impact on our gender pay reporting is disappointing, the part-time teams have been a success in delivering our strategic objective of increasing tenure within our customer experience centre in York, and embracing flexible working opportunities has enabled new sources of talent to join us.
Improving diversity and inclusion remains a priority, and while our progress so far has been helped by the policies, processes and partnerships we have established, we recognise there is more to do. For more on our approach to D&I, and areas of focus in 2020, see pages 46 to 47 and 70.
In summary The Remuneration Committee is satisfied that the 2020 outcomes are aligned with the experience of shareholders and reflective of performance in what has been a challenging year.
Performance Share Plan (PSP) Aligned to long-term shareholder interests and performance.
No bonus for Executive Directors following suspension of the dividend and not achieving the bonus performance hurdle.
Long-term performance impacted by Covid-19 events and catastrophe claims. PSP awards granted in 2018 will not vest.
Salary increase of 2.75%, in line with average UK employee increase.
Maximum opportunity: — up to 300% of salary for CEO and CFO; — up to 400% of salary for CUO.
Performance metrics: combination of ROE and individual performance delivered against set objectives approved by the Board. Disclosure of the ROE target ranges and detail around the individual performance factors including specific risk-based objectives used to determine outcomes for 2020 is provided on pages 82 to 83.
Vesting subject to: net asset value per share growth plus dividends. 20% of maximum vests for achievement of threshold performance.
Holding period: awards subject to a further two-year holding period following vesting.
Salaries for 2021: — Bronek Masojada: £667,000 — Aki Hussain: £513,500 —Joanne Musselle: £513,500 Salary increase of 2.0%, in line with the average UK employee increase.
Share ownership guidelines of 200% of salary for all Executive Directors, after five years in role.
2020 actual: — Bronek Masojada: 4,580% — Aki Hussain: 159% Aki Hussain was appointed in September 2016. — Joanne Musselle: 81% Joanne Musselle was appointed in March 2020.
2 Joanne Musselle joined the Board 2 March 2020, following her appointment as Group Chief Underwriting Officer effective 1 January 2020. Details of Joanne’s remuneration package on appointment were included in the 2019 Directors’ remuneration report. All aspects of the package are in line with the remuneration policy. The figures in the 2020 table above relate to 2 March-31 December 2020.
Additional notes to the Executive Director remuneration table Salary Salary reviews take place in the first quarter of the year, effective from 1 April. As noted in last year’s remuneration report, Executive Directors’ salaries were increased by 2.75% from April 2020, the same as the average UK-based employee salary increase. Base salaries for Executive Directors from 1 April 2020 were as follows: April 2020 £
Retirement benefits Bronek Masojada and Aki Hussain both receive a 10% of salary cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. Joanne Musselle receives a combination of cash allowance and employer pension contribution totalling 10% of salary (less an offset for employer’s UK National Insurance on the cash allowance). The value of these retirement benefits are shown in the Executive Director remuneration table on page 80. Executive Director retirement benefits are consistent with those offered to the majority of UK employees. This has been the policy at Hiscox for a number of years.
There are no further accruals under this plan. In the event of retirement prior to the normal retirement age, a reduced pension would be payable (in accordance with the scheme rules) to reflect the earlier payment date.
The Executive Directors, along with other employees across the Group, participate in profit-related bonus pools, which are calculated at a business unit level and for the Group as a whole. In determining the bonuses to be paid to Executive Directors, the Remuneration Committee bases its judgement on both the performance of the Group and a robust assessment of individual performance, including adherence to specific risk management objectives. The Remuneration Committee also seeks input from the Chief Risk Officer and Chief Actuary to aid its assessment of whether bonus outcomes are appropriate.
Bonuses are not paid unless the Group’s performance exceeds a given threshold, irrespective of individual performance. Over the past ten years there have been four occasions when the Group delivered a pre-tax ROE below the required threshold and no bonuses were paid to Executive Directors. A commitment was made in 2020 that Executive Directors would not be paid a bonus until the dividend had resumed, irrespective of the Group’s performance.
Performance outcomes for 2020 In recognition of the withdrawal of the 2019 final dividend, the Committee agreed that Executive Directors would not be paid a bonus until the dividend has resumed. For completeness, the table opposite sets out the key objectives and individual achievements of each Executive Director. The pre-tax ROE for 2020 was -10.8%.
Bronek has led the business to deliver a stable top-line, despite the economic challenges brought on by Covid-19. The Group expects to pay $475 million in Covid-19-related claims; however, excluding this impact, Hiscox’s combined ratio was 97.0%, reflecting the underlying improvement in performance in many parts of the Group and the benefit of around $80 million in one-off expense savings – the result of a recruitment freeze and curtailment of travel and entertainment expenditure, alongside existing efficiency programmes already underway.
Bronek led the business’s response to Covid-19 including Hiscox UK’s efforts to provide clarity and certainty to business interruption policyholders via the FCA’s UK business interruption test case. Commencing and concluding the legal process in just seven months is exceptionally fast and allows the business of paying valid claims to continue.
Aki oversaw the optimisation of the Group’s capital and liquidity position to ensure ongoing financial flexibility, particularly in light of Covid-19. This included withdrawal of the 2019 final and 2020 interim dividend payments; the purchase of more than $100 million of additional reinsurance, renegotiation of our bank lending facilities; and a £375 million equity raise. Consequently, the balance sheet remains strong and the Group can seize opportunities as they emerge.
Aki has ensured that ROE enhancing opportunities are identified through a repeatable process of cross-business unit and functions analysis and insight. This has driven consistency in how the Group identifies business that generates a sufficient return.
Joanne leads the Group’s efforts on continuous improvement in underwriting, which includes a focus on fixing or materially shrinking the bottom decile business while investing in top performing lines. Although Covid-19 had a significant impact on the 2020 underwriting year, the underlying loss ratio is promising; the result of discipline, remediation of underperforming lines – where poorest decile business exposure has reduced by 26% – and improving market conditions.
Joanne has driven continued investment in the Hiscox view of risk. In 2020, this included model changes for Japanese typhoon, US wind, US flood and Californian wildfire, an investment in enhanced modelling capabilities for both cyber and casualty risks, and detailed assessment of Covid-19-related third-party claims and/or recessionary trends to inform underwriting approach and adjustment where necessary.
Long-term incentives Performance Share Plan awards (PSP) where the performance period ends with the 2020 financial year The Executive Directors were granted nil-cost options under the PSP on 6 April 2018 for the three-year performance period 1 January 2018 to 31 December 2020.
Performance outcome Based on the three-year average growth in net asset value plus dividends of -2.04%, the awards ending with the 2020 performance year will not vest as the minimum performance threshold has not been met.
On 15 May 2020, the Executive Directors were granted nil-cost options under the PSP as shown below.
The performance condition for these awards, measured over the period 1 January 2020 to 31 December 2022 is as follows: Growth in net asset value plus dividends
The net asset value plus dividends 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 2020 was 1%.
1Benefits include life assurance and healthcare. 2 Robert Childs also chairs subsidiary Boards for no additional fee. The total 2019 fee has not changed but the presentation has been amended in order to be consistent with 2020.
Fees are paid in multiple currencies – 2019 fees were converted using £1: €1.14 and £1: $1.276. 2020 fees were converted using £1: €1.13 and £1: $1.37.
Membership of the Remuneration Committee The Remuneration Committee members during the year were Caroline Foulger, Lynn Pike, Anne MacDonald, Thomas Hürlimann, Michael Goodwin, Constantinos Miranthis and Colin Keogh (Chairman).
Directors’ shareholding and share interests To align their interests with those of Hiscox shareholders, senior managers are expected to own a minimum number of Hiscox shares. Executive Directors are required to hold Hiscox shares valued at 200% of salary within five years of becoming an Executive Director. Bronek Masojada has over 20 years’ service so his shareholding of 4,580% far exceeds the guidelines. Aki Hussain and Joanne Musselle have not yet been Executive Directors for five years. Aki Hussain’s shareholding is 159% and Joanne Musselle’s is 81%, using the closing share price on 31 December 2020.
The interests of Executive and Non Executive Directors are set out below, including shares held by connected persons. On 8 January 2021, Colin Keogh received 1,404 shares in lieu of fees, otherwise there have been no changes in the Director share interests between 31 December 2020 and 3 March 2021.
Directors 6.5p ordinary shares number of shares beneficial 6.5p ordinary shares number of shares beneficial
Performance Share Plan (PSP) Awards in the form of nil-cost options are granted under the PSP as a percentage of salary. All awards are subject to performance conditions. The interests of Executive Directors are set out below: Name
Sharesave Schemes The interests of Executive Directors under the Sharesave Schemes are set out below: The scheme offers a three-year savings contract where the exercise price of the options is calculated on an average share price over five days prior to the invitation date, with a 20% discount. Sharesave options are not subject to performance.
Aki Hussain 2,081 – (2,081) – – 8.648 01-Jun-20 30-Nov-20 Joanne Musselle 1,557 – – – 1,557 11.556 01-May-21 31-Oct-21
Payments to past Directors No payments were made to former Directors during the year.
Performance Share Plan (PSP) In line with our shareholder-approved remuneration policy, the maximum opportunity for the awards to be granted to the Executive Directors in 2021 will be 250% of salary. Awards will continue to be based on a three-year performance period followed by a two-year holding period.
For 2021, 60% of awards will be based on stretching growth in net asset value (NAV) plus dividends targets, measured on a per share basis with 40% based on relative total shareholder return (TSR) against a group of global insurance peers.
The Committee considers that growth in NAV continues to be a key metric for the PSP given that our strategy is built around the objective of generating long-term shareholder value and NAV is aligned with shareholder value creation. The targets for the 2021 awards are unchanged from those set out in the 2019 Directors’ remuneration report and the Committee considers that they are very stretching targets in the current environment.
*Applies to 60% of awards. Maximum is 250% salary. Straight-line vesting in between each point.
Relative total shareholder return has been selected as a measure for the 2021 awards to complement the absolute NAV metric and is aligned to our strategy of generating long-term value for shareholders, benchmarking those returns versus our closest listed peers. The vesting schedule for the element of the award based on TSR is set out below.
Board Chairman and subsidiary services £295,000 Basic fee $86,000 Additional fees for: Audit Committee Chair $26,000 Audit Committee member $16,000 Remuneration Committee Chair $18,000 Remuneration Committee member $9,000 Risk Committee Chair $17,000 Risk Committee member $10,000 Nominations and Governance Committee member $4,000 Senior Independent Director fee $17,000 Employee Liaison fee $10,000
External advisors The Committee received independent advice from Deloitte, who were appointed by the Committee in 2013 following a competitive tender process. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views, and on the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £78,700 based on a time and materials basis.
Statement of shareholder voting At the AGM on 14 May 2020, the Directors’ annual report on remuneration and remuneration policy received the votes below from shareholders.
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.
Chief Executive pay ratio The CEO’s total remuneration compared with the median (50th percentile) remuneration of the Company’s UK employees as at 31 December 2020 is shown below, along with the 25th and 75th percentiles.
We selected calculation method ‘Option A’ as it is the more robust approach and favoured by investors. This method captures all pay (excluding overtime due to its volatility) and benefits for the financial year to 31 December 2020 and aligns with how the ‘single figure’ table is calculated (from which there has been no deviation). Part-time employee single figures were annualised to provide more meaningful comparison.
Percentage change in remuneration of the Board Directors The table below shows the percentage change in remuneration for each Executive and Non Executive Director, between the year ended 31 December 2019 and 31 December 2020. Salary and bonus are compared against all employees globally, benefits are compared against all UK-based employees, reflecting the location of the Executive Directors.
Executive Directors: Bronek Masojada 2.8 2.7 – Aki Hussain 2.8 (6.9) – Joanne Musselle3 – – – Non Executive Directors:4
2No bonuses were paid to Executive Directors in respect of 2019 and 2020. 3Joanne Musselle was appointed to the Board on 2 March 2020. 4Non Executive Director fees are subject to exchange rate fluctuations.
Operation Base salary is normally reviewed annually, taking into account a range of factors including inflation rate movements by country, relevant market data and the competitive position of Hiscox salaries by role.
The policy was approved at the 2020 AGM and is replicated below, including how it will be implemented in 2021 shown in italics. The original policy can be viewed in the 2019 Annual Report and Accounts at hiscoxgroup.com.
Other benefits Benefits are set within agreed principles but reflect normal practice for each country. Hiscox benefits include, but are not limited to: health insurance, life assurance, long-term disability schemes and participation in all-employee share plans such as the Sharesave Scheme. Executive Directors are included on the directors and officers’ indemnity insurance.
The Committee may provide reasonable additional benefits based on the circumstances (for example, travel allowance and relocation expenses) for new hires and changes in role.
Amounts are paid in accordance with the bonus deferral mechanism described on page 97. Bonus awards are non-pensionable.
In determining the level of bonuses awarded, the Committee also considers a range of other factors including the achievement of stretching personal and strategic objectives during the relevant year together with a consideration of risk, ensuring a robust assessment of performance.
The operation of the annual incentive is consistent for the majority of employees across the Group.
Arrangements tailored to roles and responsibilities are operated for selected positions. Bonuses for more junior employees are calculated using a more formulaic approach. Further details are set out on page 82.
50% of bonus paid shortly after the end of the financial year following the announcement of results.
Participants are able to (subject to any local tax/legal/regulatory restrictions) draw deferred bonuses early in certain circumstances in order to enable the acquisition of Hiscox shares. Such amounts remain subject to continued employment.
Performance metrics In accordance with the operation of the annual bonus.
Awards are generally subject to continued employment; however, awards may vest to leavers in certain scenarios (for example, ‘good’ leaver circumstances).
Executive Directors are normally expected to remain aligned with the interests of shareholders for an extended period after leaving the Company. Executive Directors will typically be expected to retain a shareholding at the level of the in-employment shareholding guideline for one year (or the actual shareholding on stepping down, if lower) and at half of this amount for the following year, unless the Committee determines otherwise in exceptional circumstances.
General approach The total aggregate fees payable are set within the limit specified by the Company’s Bye-laws. The fees paid are determined by reference to the skills and experience required by the Company as well as the time commitment associated with the role. The decision-making process is informed by appropriate market data. Non Executive Directors are not eligible for participation in the Company’s incentive plans. Travel and other reasonable expenses incurred in the course of performing their duties are reimbursed to Non Executive Directors (including any tax thereon where these are deemed to be taxable benefits). Non Executive Directors are included on the directors and officers’ indemnity insurance.
Chairman The Chairman typically receives an all-inclusive fee in respect of the role. In addition to his fees the Chairman may be provided with incidental benefits, for example, private healthcare and life assurance (including any tax thereon where these are deemed to be taxable benefits). The remuneration of the Chairman is determined by the Committee.
Notes to the policy table Performance measures, target setting and assessment The performance targets for the annual bonus and share plan awards to Executive Directors are closely aligned with the Company’s short-term and long-term objectives. The intention is to provide a direct link between reward levels and performance.
Malus and clawback provisions Deferred bonus awards and PSP awards granted for 2020 onwards are subject to malus and clawback provisions as set out below. The Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, defer, cancel or impose further conditions in the following circumstances: p a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; p an error in assessing a performance condition applicable to the award or in the information or assumptions on which the award was granted, or vests; p actions of gross misconduct or material error, including fraud, by the participant or their team; p significant reputational or financial damage to the Company (as a result of the participant’s conduct).
The malus and clawback provisions that apply to awards made prior to 2020 are as set out in the relevant remuneration policy as at the date of award.
Shareholder information p awards (shares or earned bonuses) and other elements which will be forfeited by the candidate; p transition implications on initial appointment; and p the overall Hiscox approach.
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 94 to 100. 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.
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 Executives will not include share options or other performance-related elements.
Consideration of employment conditions elsewhere At Hiscox we encourage employees to share in the Group’s success through competitive pay, profit and performance-related bonuses, all employee share plans and a generous benefits package.
Salary reviews are applied consistently throughout the Group, ensuring employees are paid fairly in line with their responsibilities, experience and the market rate for the role. All employees (including Executive Directors) are encouraged to become Hiscox shareholders through our SAYE schemes and have benefited from the strong share price growth over recent years. Employees participate in a discretionary profit-related bonus scheme, with the overall level of payout based primarily on financial performance. For 2021, a separate individual and strategic element has been introduced for employees below Board to incentivise and reward individual contribution and delivery of key strategic objectives.
While the Committee did not consult directly with the broader workforce on the remuneration policy for Executive Directors, we have introduced a process by which employee views are gathered on a range of topics and presented to the Board. The Remuneration Committee also receives an update on the broader workforce remuneration policies and practices during the year which informs the Committee’s consideration of the policy for Executive Directors.
p Benefits as received during 2020, as disclosed in the Executive Director remuneration table on page 80.
p Retirement benefit as received during 2020, as disclosed in the Executive Director remuneration table on page 80.
Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum bonus equivalent to 300% of salary for the CEO and CFO
and 400% of salary for the CUO. p PSP: vesting of 100% of the maximum award plus assumed share price growth of 50%.
The impact of our charitable donations has been diverse and far-reaching; from the ventilators and essential PPE we helped purchase for hospitals in Bermuda and Guernsey, to the 630 meals we helped deliver to vulnerable New Yorkers or the 9,710 meals provided to hard-working NHS staff. Our impact has also been realised through the many meaningful ways that individual employees have contributed – volunteers like Olivia, a London-based staff member who used her extra time during lockdown to become a career mentor to under-served young people in her local area.
Chapter 5 107 Shareholder information 108 Hiscox Ltd Report and Accounts 2020
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the USA, the UK, Guernsey, Europe and Asia. The information found on pages 21 to 33, 36 to 39, 122 to 186 and 188 fulfils the requirements of the management report as referred to in Chapter 4 of the Disclosure Guidance and Transparency Rules (DTR). This includes additional explanation of the figures detailed in the financial statements and the office locations of the Group in different countries.
The key performance indicators are shown on pages 4 to 5. Details of the use of financial instruments are set out in note 19 to the consolidated financial statements. An analysis of the development and performance of the business during the financial year, its position at the end of the year, any important events since the end of the year and the likely future development can be found within the Chief Executive’s report on pages 21 to 33. The Chief Executive’s report also describes the main trends and factors likely to affect the future development, performance and position of the Company’s business. A description of the Company’s strategy and business model is set out on pages 10 to 11. A description of the principal risks and uncertainties and how they are managed or mitigated can be found in the key risks section on page 12 and the risk management section on pages 36 to 39. In addition, note 3 to the consolidated financial statements provides a detailed explanation of the principal risks which are inherent to the Group’s business and how those risks are managed.
Compliance with the UK Corporate Governance Code 2018 (the Code) Details of how the Company has applied the principles set out in the Code and the extent to which it has complied with the provisions of the Code are set out on pages 63 to 67.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in DTR 7.2 can be found on pages 57 to 62 in this report.
Diversity The diversity of the business is outlined in the Nominations and Governance Committee report on pages 68 to 70.
The Board has reviewed the Group’s current and forecast solvency and liquidity positions for the next twelve months and beyond. As part of the consideration of the appropriateness of adopting the going concern basis, the Directors use scenario analysis and stress testing to assess the robustness of the Group’s solvency and liquidity positions. To make the assessment, the Group constructed a combined scenario which included applying material sensitivities to (re)insurance claims relating to Covid-19, modelling a significant catastrophe loss and a default in the Group’s reinsurance programme. An aggregated scenario such as this, and the sequence of events it involves, is considered to be remote and there are mitigating recovery actions that have been and can be taken further to restore the capital position to the Group’s target range.
In undertaking this analysis, no material uncertainty in relation to going concern has been identified. This is due to the Group’s strong capital and liquidity positions, which provide considerable resilience to these shocks, underpinned by the Group’s approach to risk management which is described in note 3.
The assessment of the Group’s prospects by the Directors covers the three years to 2023 and is underpinned by management’s 2021-2023 business plan which includes projections of the Group’s capital, liquidity and solvency and reflects the Group’s risk profile of a portfolio of diversified short-tailed and medium-tailed insurance liabilities. The Board acknowledges in a Covid-19 environment the certainty of those plans, the potential fluctuations in the global economy, the impact on competitors and customer behaviours in a post-Covid-19 world remains uncertain. In making the viability statement, the Board carried out, as part of the own risk and solvency assessment (ORSA) process, a robust assessment using scenario analysis and stress testing to consider the Group’s capacity to respond to a series of relevant financial, insurance-related or operational shocks should future circumstances or events differ from these current assumptions. These allow the Board to review and challenge the risk management strategy and consider potential mitigating actions. Based on these assessments, the Board confirms that it has reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year assessment period.
Dividends In the face of the uncertainty arising from Covid-19 and the losses it generated, the Board took the decision not to declare a 2019 final or 2020 interim dividend. In view of the full year loss and a desire to have capital to deploy into a strong market, the Board has also taken the decision not to declare a 2020 final dividend for shareholder approval. The Board believes that as our business delivers the 2021 business plan and as profits flow through, it expects, subject to the Board being satisfied that it is appropriate to do so, to resume paying dividends with the 2021 interim results.
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 2020 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.
Hiscox Ltd was authorised to allot shares in 2020. With respect to the share placing undertaken in 2020, as previously disclosed, the level of discount achieved was 6.1% and the net proceeds raised were £375 million. This has provided additional flexibility throughout the year to respond to growth opportunities and rate improvement, particularly in big-ticket lines. The percentage increase in issued share capital due to non pre-emptive issuance for cash over the three-year period preceding the issue was 19.99%.
Chapter 5 107 Shareholder information Directors’ report 110 Hiscox Ltd Report and Accounts 2020
Directors The names and details of all Directors of the Company who served during the year and up to the date of this report are set out on pages 52 to 53. Details of the Chairman’s professional commitments are included in his biography on page 52. The Bye-laws of the Company govern the appointment and replacement of Directors. In accordance with the Code, the Directors will submit themselves for re-election at the Annual General Meeting. Biographical details of the Directors are set out on pages 52 to 53, as are the reasons why the Board believes their contribution is (and continues to be) important to the Company’s long-term sustainable success. This information will also be set out in the circular which will accompany the notice of Annual General Meeting.
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, hiscoxgroup.com.
Sun Life Financial Group 30,599,289 8.83 The Capital Group Companies, Inc. 29,757,411 8.59 Fidelity Management & Research 26,481,266 7.64 BlackRock, Inc. 22,104,652 6.38 * There were 346,431,494 shares in issue (excluding Treasury shares) as at 18 February 2021.
As at 1 March 2021, no changes have been notified to the Company.
Power of Directors The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2020, the Directors were granted authorities to allot and issue shares and to make market purchases of shares and intend to seek renewal of these authorities in 2021.
Annual General Meeting The notice of the Annual General Meeting, to be held on 13 May 2021, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
Owning our adoption of big-ticket digital trading Lockdown and social distancing measures meant that many businesses had to adapt to a digital trading environment for which they were unprepared. In the London Market, where efforts to modernise were already under way, the Lloyd’s Placing Platform Limited (PPL) became the dominant way in which to write big-ticket business in London. Hiscox has long been a strong supporter of the push towards electronic trading and was an early adopter of PPL as a multi-year, market-wide initiative chaired by our Group CEO.
A Overall group materiality: $30.5 million, which represents 0.75% of the gross earned premium for the year ended 31 December 2020.
Audit scope As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including, among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
The Group is a global specialist insurer and reinsurer, and its operations primarily consist of the legal entity operations in the United Kingdom, Europe, the United States and Bermuda. A full scope audit was performed for five components located in the United Kingdom, the United States and Bermuda. Financial statement line item audit procedures were also performed over components in the United Kingdom, United States and Bermuda. Taken together this work provided over 85% coverage of the Group’s gross earned premium and over 80% of the Group’s total assets.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or by the component audit teams within the PwC United Kingdom, PwC United States and PwC Bermuda firms operating under our instruction. Where the work was performed by component audit teams, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained. The Group engagement team had regular interaction with the component teams during the audit process. The engagement leader and senior members of the Group engagement team reviewed in detail all reports with regards to the audit approach and findings submitted by the component auditors. This together with additional procedures performed at the Group level, as described above, gave us the evidence we needed for our opinion on the consolidated financial statements as a whole.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $1.5 million, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Refer to note 2 and 3.5 to the consolidated financial statements for related disclosures.
A assessed the impact of Covid-19 on the Group’s ability to continue as a going concern (see the impact of Covid-19 on going concern below).
The results of our procedures indicated that management’s application of the going concern basis of accounting and the associated disclosures within the consolidated financial statements were supported by the evidence we obtained.
We have understood, evaluated and tested the design and operational effectiveness of key controls in place in respect of the valuation of gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves.
This work, supplemented with tests of detail, included: A reviewing and testing the reconciliation of data from the underlying policy administration systems to the data used in the actuarial projections; A testing the completeness and accuracy of premiums and claims data used in the actuarial projections; A testing the completeness and accuracy of policy and claims data, where applicable, used to establish Covid-19, natural catastrophe and other large loss reserves; and
A testing to ensure gross IBNR loss reserves, as a component of insurance liabilities, and the associated reinsurers’ share of IBNR loss reserves were reviewed, approved and reconciled to the consolidated financial statements.
Key audit matter 3. Assessment of the carrying value of certain finite lived intangible assets
Where management undertook an impairment analysis, they performed recoverable amount (i.e. value-in-use) calculations using future cashflow forecasts. These calculations include a number of assumptions and associated judgements. The recoverable amount of the associated finite lived intangible assets was compared to the book value in determining whether or not an impairment was required.
Our procedures in relation to management’s assessment of the carrying value of certain finite lived intangible assets (software development costs) as at 31 December 2020 included the following: A performing an independent assessment of impairment indicators, challenging management’s assessment accordingly; A testing the calculation of the recoverable amount for certain finite lived intangible assets for which an impairment indicator was present. This comprised: A obtaining the supporting cashflow forecasts, agreeing them to Board approvals, assessing management’s track record of forecast accuracy and considering the impact of the current economic environment; A performing sensitivity analysis over key assumptions and considering the likelihood of those outcomes; A evaluating the discount rate applied, with the assistance of our PwC valuation specialists; A re-calculating the mathematical accuracy of management’s calculations; and A comparing the final recoverable amount to the associated carrying value of that asset.
Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: A identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; A obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; A evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; A conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; A evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial
A obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
Report on other legal and regulatory requirements Going concern The Directors have concluded that it is appropriate to adopt the going concern basis in preparing the consolidated financial statements, as explained on page 108. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the balance sheet date. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
Corporate governance statement Under the United Kingdom’s Listing Rules we are required to review the part of the corporate governance statement on pages 63 to 67 relating to the provisions of the UK Corporate Governance Code (the Code) specified for auditor review and the Directors have requested that we also review their statements on going concern and the longer-term viability of the Company as required for UK-registered companies with a premium listing on the London Stock Exchange. Our additional responsibilities with respect to the corporate governance statement and the statements on going concern and the longer-term viability of the Company as other information are described in the ‘other information’ section of this report.
The engagement partner on the audit resulting in this independent auditor’s report is Arthur Wightman.
Share of (loss)/profit of associates after tax 4, 14 (0.3) 0.1 (Loss)/profit before tax (268.5) 53.1
(Loss)/earnings per share on (loss)/profit attributable to owners of the Company
(Loss)/profit for the year (293.7) 48.9 Other comprehensive income Items that will not be reclassified to the income statement: Remeasurements of the net defined benefit obligation 27 (38.0) (16.5) Income tax effect 8.8 3.4
Items that may be reclassified subsequently to the income statement: Exchange gains/(losses) on translating foreign operations 55.5 (1.0)
Assets Goodwill and intangible assets 12 298.9 278.0 Property, plant and equipment 13 109.4 128.4 Investments in associates 14 4.9 8.6
Loans and receivables including insurance receivables 18 1,591.2 1,556.3 Current tax asset 3.3 4.7 Cash and cash equivalents 21 1,577.2 1,115.9 Total assets 13,856.2 12,550.8
Currency translation reserve (270.8) (326.3) Retained earnings 1,884.4 2,226.3 Equity attributable to owners of the Company 2,352.8 2,188.6 Non-controlling interest 1.1 1.1 Total equity 2,353.9 2,189.7 Employee retirement benefit obligations 27 73.5 55.1
Current tax 30.4 62.0 Trade and other payables 24 1,335.6 1,420.3 Total liabilities 11,502.3 10,361.1 Total equity and liabilities 13,856.2 12,550.8
The consolidated financial statements were approved by the Board of Directors on 3 March 2021 and signed on its behalf by: Aki Hussain Chief Financial Officer
Profit for the year (all attributable to owners of the Company) – – – – 48.9 48.9 – 48.9 Other comprehensive income net of tax (all attributable to owners of the Company) – – – (1.0) (13.1) (14.1) – (14.1) Employee share options: Equity settled share-based payments – – – – 3.6 3.6 – 3.6 Proceeds from
Deferred and current tax on employee share options – – – – 0.2 0.2 – 0.2 Shares issued in relation to Scrip Dividend 22, 29 0.1 9.3 – – – 9.4 – 9.4 Dividends paid to owners of the Company 29 – – – – (120.9) (120.9) – (120.9)
Proceeds from the issue of ordinary shares 22 450.6 3.6 Shares repurchased 22 (23.9) – Distributions made to owners of the Company 22, 29 – (111.6) Proceeds from drawdown of short-term borrowings 470.0 – Repayment of short term borrowings (289.4) – Principal elements of lease payments (14.5) (15.5) Net cash flows from/(used in) financing activities 592.8 (123.5) Net increase/(decrease) in cash and cash equivalents 423.0 (181.3)
Cash and cash equivalents at 1 January 1,115.9 1,288.8 Net increase/(decrease) in cash and cash equivalents 423.0 (181.3) Effect of exchange rate fluctuations on cash and cash equivalents 38.3 8.4 Cash and cash equivalents at 31 December 1,577.2 1,115.9
Included within cash and cash equivalents held by the Group are balances totalling $172 million (2019: $167 million) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, $9 million (2019: $41 million) is pledged cash held against Funds at Lloyd’s, and $0.5 million (2019: $0.3 million) held within trust funds against reinsurance arrangements.
The notes on pages 126 to 186 are an integral part of these consolidated financial statements.
In undertaking this analysis, no material uncertainty in relation to going concern has been identified, due to the Group’s strong capital and liquidity positions providing considerable resilience to these shocks, underpinned by the Group’s approach to risk management described in note 3.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence over a period of at least 12 months from the date of this report. For this reason, the Group continues to adopt the going concern basis in preparing the consolidated financial statements.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in US Dollars millions ($m) and rounded to the nearest hundred thousand Dollars, unless otherwise stated.
The principal accounting policies applied in the preparation of these consolidated Group financial statements are set out below. The most critical individual components of these financial statements that involve the highest degree of judgement or significant assumptions and estimations are identified in note 2.21.
New accounting standards, interpretations and amendments to published standards A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on, or after, 1 January 2020. They have been applied in preparing these consolidated financial statements.
A Amendments to IAS 1 and IAS 8 Definition of Material The amendments provide a new definition of material that states ‘information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity’. The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to, the Group.
A Conceptual Framework for Financial Reporting issued on 29 March 2018
There were no other new standards or amendments that had a material impact on the Group.
The following new standards, and amendments to standards, are effective for annual periods beginning after 1 January 2020 and have not been applied in preparing these financial statements: A IFRS 9 Financial Instruments This standard incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39 and new hedge accounting requirements. The Group satisfies the criteria set out in IFRS 4 Insurance Contracts for the temporary exemption from IFRS 9. At 31 December 2015 (the date specified by IFRS 4), the carrying value of the Group’s liabilities connected with insurance comprised over 90% of the total liabilities. These include significant insurance liabilities; the subordinated debt ($0.4 billion) as this debt counts towards the Group’s regulatory and rating agency capital requirements; and creditors arising from insurance operations ($0.3 billion). The activities of the Group remain predominantly connected with insurance.
Under the current requirements (IAS 39), a majority of the Group’s investments were designated as at fair value through profit or loss on initial recognition and subsequently remeasured to fair value at each reporting date, reflecting the Group’s business model for managing and evaluating the investment portfolio. Adoption of IFRS 9 is not expected to result in any changes to the measurement of the Group’s investments, which continues to be at fair value through profit or loss.
In addition to those balances, loans and receivables also includes due from brokers, agents and intermediaries and other financial assets which are within the scope of IFRS 9. Under IFRS 9, these assets continue to be recognised at amortised cost less impairment, with the measurement of impairment 2 Basis of preparation continued 2.1 Significant accounting policies
A IFRS 17 Insurance Contracts IFRS 17 will significantly change the accounting for 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 (PAA), 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. Any expected losses arising from loss-making contracts are to be accounted for in the income statement when the entity determines that losses are expected. The presentation of the income statement will also change, with premium and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income and expense. The Group is evaluating the impact of adopting IFRS 17 on the financial statements which includes: Adeveloping the Group’s accounting policy under IFRS 17; Aperforming a PAA eligibility assessment; Apreparing end-to-end system architecture and configuring an actuarial calculation engine; Aoutlining an operational readiness framework including stakeholder engagement and an internal training plan.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets.
(b) Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50% of an entity’s voting rights. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity-accounted basis from the date that significant influence commences until the date that significant influence ceases.
The Group’s share of its associates’ post-acquisition profits or losses after tax is recognised in the income statement for each period, and its share of the movement in the associates’ net assets is reflected in the investments’ carrying values on the balance sheet. When the Group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.
2.3 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). Entities operating in France, Germany, The Netherlands, Spain, Portugal, Ireland and Belgium have functional currency of Euros; those subsidiary entities operating from the USA, Bermuda, Guernsey and Syndicates have functional currency of US Dollars with the exception of Hiscox Ltd, a public company incorporated and domiciled in Bermuda with functional currency of Sterling. Functional currencies of entities operating in Asia include US Dollars, Singapore Dollars and Thai Baht. All other entities have functional currency of Sterling.
A all resulting exchange differences are recognised as a separate component of equity.
(b) Other intangible assets Intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business combination is recognised outside of goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Customer relationships, syndicate capacity and software acquired are capitalised at cost, being the fair value of the consideration paid. Software is capitalised on the basis of the costs incurred to acquire and bring it into use. Intangible assets with indefinite lives such as syndicate capacity are subsequently valued at cost and are subject to annual impairment assessment.
If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 20.
(c) Borrowings All borrowings are initially recognised at fair value. Subsequent to initial recognition, borrowings are measured at amortised cost. Any difference between the value recognised at initial recognition and the ultimate redemption amount is recognised in the income statement over the period to redemption using the effective interest method.
(a) Non-financial assets Objective factors that are considered when determining whether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: A adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; A the likelihood of accelerated obsolescence arising from the development of new technologies and products; and
(b) Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may 2 Basis of preparation 2.5 Intangible assets (b) Other intangible assets continued
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
2.11 Own shares Where any Group company purchases the Parent Company’s equity share capital (own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s owners on consolidation. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company’s owners, net of any directly attributable incremental transaction costs and the related tax effects.
2.12 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 2.13.
The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The amount recognised on the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. Plan assets include insurance contracts. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in the income statement.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in the income statement through operating expenses.
2.16 Net investment hedge accounting In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at each period end to ensure that the hedge remains highly 2 Basis of preparation 2.15 Employee benefits (a) Pension obligations continued
2.19 Leases (a) Hiscox as lessee The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Right-of-use assets are presented on the balance sheet as ‘property, plant and equipment’.
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as an expense in the period in which the event or condition that triggers the payment occurs. Lease liabilities are included in ‘trade and other payables’ on the balance sheet.
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Between the reporting and final settlement of a claim circumstances may change, which may result in changes to established liability. The overall reserving risk is discussed in more detail in note 3.2 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 23.
The Group tests the adequacy of its unearned premium liability by comparing current estimates of future claims and claims handling expenses attributable to the unexpired periods of policies at the balance sheet date which to the unearned premium liability net of acquisition costs. As set out in note 2.13(d), any deficiency is recognised in the income statement. The related deferred acquisition costs are first written down and any additional liability required is then recognised as an unexpired risk reserve (URR). In 2020, the Group has recognised a loss due to this test and established an URR. If this estimation were to prove inadequate, the unexpired risk reserve could be understated. The total estimate for URR net of reinsurers’ shares as at 31 December 2020 was $22.9 million (2019: nil). Another key estimate contained within the Group’s consolidated financial statements is an estimate of gross premium written during the year. For certain contracts, premium is initially recognised based on estimates of ultimate premium. This occurs where pricing is based on variables, which are not known with certainty at the point of binding the policy. In determining the estimated premium, the Group uses information provided by brokers and coverholders, past underwriting experience, the contractual terms of the policy and prevailing market conditions. Subsequently, adjustments to those estimates arise as updated information relating to those pricing variables becomes available, for example due to declarations obtained on binding authority contracts, reinstatement premium on reinsurance contracts or other policy amendments. Such adjustments are recorded in the period in which they are determined and impact gross written premiums in the consolidated income statements and premiums receivable from insureds and cedants recorded on the consolidated balance sheet.
The Group operates in a complex multinational environment and legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the financial statements, the Group applies significant judgements in identifying uncertainties over tax treatments and in the measurement of the provision being the best estimate of the amount expected to become payable. The assessment is based on the judgement of tax professionals within the Group supported by previous experience in respect of such activities and based on advice sought from specialist tax advisors.
A deferred tax asset can be recognised only to the extent that it is recoverable. The recoverability of deferred tax assets in respect of carry forward losses requires consideration of the future levels of taxable profit in the Group. In preparing the Group’s financial statements, management estimates taxation assets and liabilities after taking appropriate professional advice, as shown in note 25. Significant estimates and assumptions used in the valuation of deferred tax relate to the forecast taxable profits, taking into account the Group’s financial and strategic plans. See note 26 for further details of adjustments made to deferred tax during the year.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures through the Risk Committee and ongoing compliance therewith, through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in line with the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such premium inflows is reasonably predictable. In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events, although the timing, frequency and severity of claims can fluctuate.
The Group continues to monitor and respond to Covid-19, in particular the impact related to our operations, insurance claims, reinsurance assets and investments on the Group’s capital and liquidity positions. A The Group responded quickly to the lockdowns in each location and transitioned to a remote working structure within a few days. The Group’s IT infrastructure supported over 95% of its 3,000 employees around the world in working from home with no significant impact on trading capabilities or business processes.
A The estimate of insurance claims related to Covid-19 is $475 million net of reinsurance which has been reflected in the consolidated financial statements. This loss estimate along with other insurance claims are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant and are also updated for expectations of prospective future developments.
A The Group utilises a broad, high-quality panel of reinsurers across multiple treaties and actively monitors its credit risk exposure and concentration risk. To date, the Group has not experienced any defaults, as detailed in note 3.3 (d).
The principal sources of risk relevant to the Group’s operations and its financial statements fall into three broad categories: operational risk, insurance risk and financial risk, which are described in notes 3.1, 3.2 and 3.3 below. The Group also actively manages its capital risks as detailed in note 3.4 and tax risks as detailed in note 3.5. Additional unaudited information is also provided in the corporate governance, risk management and capital sections of this Report and Accounts.
3.1 Operational risk Covid-19 has required the Group’s ongoing focus on safeguarding the well-being of its employees, serving its clients, and preserving operational continuity. At one point, the Group had over 95% of its more than 3,000 employees around the world working from home, and it continues to support them through flexible working and the provision of mental health and well-being services. This has also meant that internal processes, capability of people and IT systems have been put to the test. The Group has adapted to the changes in the operational environment and business processes have continued to be carried out effectively and efficiently.
The Group demonstrated resilience in 2020, underscoring the benefits of its business model, disciplined risk management and ongoing investment in technology and infrastructure.
3.2 Insurance risk The predominant risk to which the Group is exposed is insurance risk which is assumed through the underwriting process. Insurance risk can be sub-categorised into i) underwriting risk including the risk of catastrophe and systemic insurance losses and the insurance competition and cycle, and ii) reserving risk.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross premiums written and maximum aggregated exposures per geographical zone and risk class. Regular meetings are held between the Chief Underwriting Officer and a specialist team in order to monitor claims development patterns and discuss individual underwriting issues as they arise. The Group compiles estimates of losses arising from extreme loss events using statistical models alongside input from its underwriters. These require significant management judgement. The extreme loss scenarios, shown on page 38, represent hypothetical major events occurring in areas with large insured values. They also represent areas of potentially significant exposure for Hiscox.
3 Management of risk 3.2 Insurance risk i) Underwriting risk continued
Estimated concentration of gross and net insurance liabilities on the balance sheet as at 31 December 2019 Types of insurance risk in the Group
$m Total $m *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures.
For this reason the Group accepts major property insurance risks for periods of mainly one year so that each contract can be repriced on renewal to reflect the continually evolving risk profile. The most significant risks covered for periods exceeding one year are certain specialist lines such as marine and offshore construction projects which can typically have building and assembling periods of between three and four years. These form a small proportion of the Group’s overall portfolio.
The Group’s home and contents insurance contracts are exposed to weather and climate-related risks such as floods and windstorms and their consequences. As outlined earlier, the frequency and severity of these losses do not lend themselves to accurate prediction over the short term. Contract periods are therefore not normally more than one year at a time to enable risks to be regularly repriced.
Casualty insurance risks The casualty underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of potential hazard, industry and geography.
However, the Group’s exposure is more focused towards professional, general, technological and marine liability risks rather than human bodily injury risks, which are only accepted under limited circumstances. Claims typically arise from incidents such as errors and omissions attributed to the insured, professional negligence and specific losses suffered as a result of electronic or technological failure of software products and websites.
Similar to the underwriting risk detailed above, the Group’s reserve risks are well diversified. Short-tailed claims are normally notified and settled within 12 to 24 months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence. The length of time required to obtain definitive legal judgements and make eventual settlements exposes the Group to a degree of reserving risk in an inflationary environment.
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.
In addressing specific aspects of the impact of Covid-19 to Hiscox in relation to insurance risk, the Group focuses on: A existing exposures, reinsurance coverage and, from a forward-looking perspective, the underwriting functions develop a projection of exposures taking account changes to coverage including exclusions and incorporating rate changes; the assessment is undertaken on a portfolio-by-portfolio basis across the Group’s geographic footprint; A handling claims arising from Covid-19 in a fair, consistent and efficient way, and actively settling claims for event cancellation and abandonment, media and entertainment and other segments including travel.
3.3 Financial risk Overview The Group is exposed to financial risk through its ownership of financial instruments including financial liabilities. These items collectively represent a significant element of the Group’s net shareholder funds. The Group invests in financial assets in order to fund obligations arising from its insurance contracts and financial liabilities.
3 Management of risk 3.2 Insurance risk i) Underwriting risk Casualty insurance risks continued
At 31 December 2020, the Group held asset-backed and mortgage-backed fixed income instruments in its investment portfolio, but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group did not experience any material defaults on debt securities during the year.
Valuation of these securities will continue to be impacted by external market factors including default rates, rating agency actions and liquidity. The Group will make adjustments to the investment portfolio as appropriate as part of its overall portfolio strategy, but its ability to mitigate its risk by selling or hedging its exposures may be limited by the market environment. The Group’s future results may be impacted, both positively and negatively, by the valuation adjustments applied to these securities.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and investment funds. This is limited to a relatively small and controlled proportion of the overall investment portfolio and the equity and investment funds involved are diversified over a number of companies and industries. The fair value of equity and investment fund assets in the Group’s balance sheet at 31 December 2020 was $578 million (2019: $486 million). A 10% downward correction in equity and investment fund prices at 31 December 2020 would have been expected to reduce Group equity and profit after tax by approximately $49 million (2019: $44 million).
These may be analysed as follows: Nature of equity and investment fund holdings
Government issued bonds and instruments 20 28 Agency and government supported debt 6 6 Asset-backed securities – 1 Mortgage-backed instruments – agency 6 5 Mortgage-backed instruments – non-agency – 1 Corporate bonds 65 57 Lloyd’s deposits and bond funds 3 2
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a duration-convexity-based sensitivity analysis, if market interest rates had increased or decreased by 100 basis points at the balance sheet date, the Group equity and profit after tax for the year might have been expected to increase 3 Management of risk 3.3 Financial risk (a) Reliability of fair values continued
Chapter 6 113 Financial summary Notes to the consolidated financial statements 141Hiscox Ltd Report and Accounts 2020 or decrease by approximately $88 million (2019: $76 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets. Duration is the weighted average length of time required for an instrument’s cash flow stream to be recovered, where the weightings involved are based on the discounted present values of each cash flow. A closely related concept, modified duration, measures the sensitivity of the instrument’s price to a change in its yield to maturity. Convexity measures the sensitivity of modified duration to changes in the yield to maturity. Using these three concepts, scenario modelling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
Key areas of exposure to credit risk include: A reinsurers’ share of insurance liabilities; 3 Management of risk 3.3 Financial risk (c) Interest rate risk continued
A amounts due from reinsurers in respect of claims already paid; A amounts due from insurance contract holders; and A counterparty risk with respect to cash and cash equivalents, and investments including deposits, derivative transactions and catastrophe bonds.
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
The Group Credit Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance as well as detailed analysis from the Group’s analysis team. The financial analysis of reinsurers produces an assessment categorised by factors including their S&P rating (or equivalent when not available from S&P).
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 2020 Note AAA
Debt and fixed income securities 17 411.3 1,948.2 1,586.7 1,426.8 101.5 5,474.5
Debt and fixed income securities 17 629.7 2,083.7 1,259.1 972.8 44.6 4,989.9
Within the debt and fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.
The largest aggregated counterparty exposure related to debt and fixed income securities holdings at 31 December 2020 of $920 million is to the US Treasury (2019: $1,279 million).
Chapter 6 113 Financial summary Notes to the consolidated financial statements
The Group’s equities and investment funds and other non-dated instruments have no contractual maturity terms but predominantly could be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.
During the year, the Group has drawn down $193 million cash from its revolving credit facility in order to maximise access to liquidity during a period of uncertainty and significant volatility in financial markets.
The available headroom of working capital is monitored through the use of a detailed Group cash flow forecast which is reviewed by management quarterly, or more frequently as required.
Canadian Dollar 2.02 1.82 3 Management of risk 3.3 Financial risk (e) Liquidity risk continued
Property – marine and major assets 76.9 47.0 42.8 13.1 179.8 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures.
A structural foreign exchange exposure arises from the translation of the Group’s net investment in foreign operations to the US Dollar, the Group’s reporting currency.
3 Management of risk 3.3 Financial risk (e) Liquidity risk continued
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2020 US Dollar $m
Sensitivity analysis As at 31 December 2020, the Group used closing rates of exchange of $1: £0.73 and $1: €0.82 (2019: $1:£0.76 and $1:€0.89). The Group performs sensitivity analysis based on a 10% strengthening or weakening of the US Dollar against Sterling and the Euro.
The Group sets the amount of capital required in its funding structure in proportion to risk. The Group then manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
3 Management of risk 3.3 Financial risk (f) Currency risk continued
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these sources comprised $946 million at 31 December 2020 (2019: $800 million).
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded capital modelling tools within its business.
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 in weaker markets, particularly with respect to the more volatile business. The Group’s gearing is obtained from a number of sources, including: A LOC and revolving credit facility – the Group’s main facility maybe drawn in cash up to £450 million (under a revolving credit facility) and utilised as LOC up to $266 million. The facility was renewed during 2020, enabling the Group to utilise the LOC as Funds at Lloyd’s to support underwriting on the 2020, 2021 and 2022 years of account. The revolving credit facility is available until the end of 2022. As at 31 December 2020, $266 million was utilised by way of LOC to support the Funds at Lloyd’s requirement and $193.4 million cash drawings outstanding to support general trading activities (2019: $50 million and $nil respectively); A during the year, the Group sourced an additional $65 million of funding in the form of a Funds at Lloyd’s facility. Under this facility assets are pledged with the Corporation of Lloyd’s on the Group’s behalf, providing regulatory tier 1 capital. As at 31 December 2020 the facility was fully drawn; A £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; A £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; A External Names – 27.4% of Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 20%; A Syndicate 6104 at Lloyd’s – with a capacity of £23 million for the 2021 year of account (2020 year of account: £45 million).
A qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes.
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through Hiscox Insurance Company Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company Inc., Hiscox Société Anonyme and Direct Asia Insurance (Singapore) Pte Limited is driven by the level of resources necessary to maintain regulatory requirements.
For Syndicate 33 and Syndicate 3624, internal model results are uplifted by Lloyd’s to the level of capital required to support its ratings. Capital models are used more widely across the Group to monitor exposure to key risk types, inform decision-making and measure ROE across different segments of the business. From the 2016 year-end, the Group has been required to publish a financial condition report, as part of its regulatory filing with the BMA. This is a public document and sets out the financial performance and solvency position of the Group in accordance with the economic balance sheet return filed with the BMA. It is intended to provide the public with certain information to be able to make informed assessments about the Group. In the Group’s other geographical territories, including the USA and Asia, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
In particular, from March 2020, government imposed Covid-19-related travel restrictions and guidance increased the risk for multinational enterprises in general, including the Group, of tax exposures arising from the unintended creation of a tax permanent establishment or corporate residence. The Group actively manages both residence and permanent establishment risk through well-established internal procedures, and continues to monitor its position carefully.
The Group recognises uncertain tax provisions where there is uncertainty that a tax treatment will be accepted under local law, including matters which are under discussion with the tax authorities. Based on facts and circumstances at the balance sheet date, the range of the total exposure is estimated between $31 million and $89 million. The estimate is subject to review on an ongoing basis and is susceptible to the progress of the settlement discussions with the tax authorities. Matters under discussion which could affect the estimate include the Hiscox Group’s policy on the allocation of expenses between companies within the Group, the allocation of income and expenses between branches of the same company, and the period subject to re-assessment.
(a) Profit before tax by segment continued The following charges are included within the consolidated income statement: Year to 31 December 2020 Year to 31 December 2019
As previously reported Net foreign exchange gains/(losses) – – – – – 9.2 7.1 13.8 (21.6) 8.5 100% ratio analysis *See note 4 on page 150 for further details.
(a) Profit before tax by segment continued The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, operational expenses, including profit-related pay as a proportion of net premiums earned. The combined ratio is the total of the claims and expenses ratios. All ratios are calculated using the 100% results and excludes a run-off portfolio, where the Group has ceded all insurance risks to a third-party reinsurer, included within Corporate Centre.
Claims and claim adjustment expenses, net of reinsurance (1,449.1) (407.3) (266.7) – (2,123.1) (945.5) (478.6) (331.3) – (1,755.4) Expenses for the acquisition of insurance contracts (550.6) (200.0) (32.9) – (783.5) (509.2) (205.1) (20.7) – (735.0)
Chapter 6 113 Financial summary Notes to the consolidated financial statements 4 Operating segments continued (c) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK, USA, Guernsey, France, Germany, Belgium, The Netherlands, Spain, Portugal, Ireland, Singapore and Thailand.
Rest of world 11.3 9.5 5 Net asset value per share and net tangible asset value per share net asset value
(total equity) $m net asset value per share cents net asset value
Investment income including interest receivable 107.4 123.7 Net realised gains on financial investments at fair value through profit or loss 45.5 34.4 Net fair value gains on financial investments at fair value through profit or loss 51.2 73.0 Investment result – financial assets 8 204.1 231.1 Net fair value losses on derivative financial instruments 19 (2.1) (2.2) Investment expenses (4.5) (5.9) Total result 197.5 223.0 8 Analysis of return on financial investments (a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was: %
Debt and fixed income securities 141.3 2.8 161.8 3.4 Equities and investment funds 58.4 10.8 61.4 13.3 Deposits with credit institutions/cash and cash equivalents 4.4 0.3 7.9 0.7 Investment result – financial assets 204.1 2.8 231.1 3.6
Chapter 6 113 Financial summary Notes to the consolidated financial statements 9 Other income and operational expenses $m $m
Agency-related income 22.1 28.6 Profit commission 1.5 3.9 Other underwriting income 2.5 0.9 Other income 24.1 19.7 Other income 50.2 53.1 Wages and salaries 188.7 192.3 Social security costs 33.1 33.9 Pension cost – defined contribution 13.1 16.7 Pension cost – defined benefit 1.1 1.0 Share-based payments 10.3 3.6 Temporary staff costs 40.2 49.6 Travel and entertainment 6.2 20.6 Legal and professional 63.0 40.7 Office costs 15.7 12.7 Computer costs 58.6 70.4 Marketing expenses 59.4 88.9 Depreciation, amortisation and impairment 56.8 44.6 Other expenses 26.8 18.5 Operational expenses 573.0 593.5
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.
Other underwriting income represents results from the insurance-linked securities managed by the Group and other income includes management fees which are recognised when the investment management services are rendered to the ILS funds.
As a result of the disposals of MGA yacht business and the associated intangible assets and the RH Specialist vehicle insurance customer relationships, the Group has derecognised the relevant assets and liabilities. Below is a table disclosing the impact to the consolidated financial statements following the disposals.
Interest charge associated with borrowings 17 28.6 28.7 Interest and expenses associated with bank borrowing facilities 10.7 3.2 Interest and charges associated with Letters of Credit 30 2.4 2.0 Other interest expenses† 2.3 2.7 Finance costs 44.0 36.6 †Including interest expenses on lease liabilities of $1.4 million (2019: $1.8 million).
The full audit fee payable for the Syndicate 33 and Syndicate 6104 audit has been included above, although an element of this is borne by the third-party participants in the Syndicate.
At 1 January 2019 Cost 13.6 33.1 8.5 220.7 65.5 341.4 Accumulated amortisation and impairment (5.2) – – (96.4) (35.2) (136.8)
Closing net book amount 8.8 33.1 8.5 241.9 6.6 298.9 At 31 December 2020 Cost 13.9 33.1 8.5 336.4 40.4 432.3 Accumulated amortisation and impairment (5.1) – – (94.5) (33.8) (133.4)
Goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to the smallest identifiable unit to which cash flows are generated. $7.6 million (2019: $7.2 million) is allocated to the Lloyd’s corporate member entity CGU and $1.2 million (2019: $1.1 million) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use. During 2020 there was no impairment charge on goodwill (2019: $5.2 million).
To test the sensitivity to variances, management flexed the key assumptions within a reasonably expected range. Within this range, goodwill and other intangible assets recoveries were stress tested and remain supportable across all cash-generating units or assets.
The carrying value of software and development costs is reviewed for impairment on an ongoing basis by reference to the stage and expectation of a project. Additionally, at the end of each reporting period, the Group reviews the positions for any indication of impairment, and as a result of this no impairment was provided for 2020 (2019: $nil).
At 31 December 2020 there were $16.4 million of assets under development on which amortisation has yet to be charged (2019: $79.8 million).
At the end of each reporting period, an assessment is made on whether there is any indication that customer contractual relationships may be impaired. Where indications of impairment are identified, the carrying value is tested for impairment based on the recoverable amount which is considered to be the higher of the fair value less costs to sell or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated using the same method as described above for goodwill and the same discount rate used. The results of this test led to the impairment of $0.2 million being recognised (2019: no impairment).
(e) Disposals During the year, the Group disposed of the yacht business and the associated intangible assets and the RH Specialist vehicle insurance customer relationships. Please see note 9 for the result of the sale.
The Group’s land and buildings assets relate to freehold property in the UK. There was an impairment charge during the year of $nil (2019: $1.5 million).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 14 Subsidiaries, associates and interests in other entities This note provides details of the Syndicates and Special Purpose Insurers (SPI) managed by the Group, the acquisition and disposal of subsidiaries and associates during the year and investments in associates.
The Kiskadee Cadence Fund was launched in December 2019 to achieve attractive risk-adjusted returns by investing primarily in a worldwide reinsurance and retrocession portfolio. The fund is a segregated account of Kiskadee ILS Fund SAC Ltd, which is managed by Hiscox Re Insurance Linked Strategies Ltd, the wholly owned subsidiary of the Group. The Group determined that it does control this entity and hence the fund is consolidated.
As at 31 December 2020, the Group recognised a financial asset at fair value of $63.2 million (2019: $61.2 million) in relation to its investment in the Funds (note 17). In assessing the maximum exposure to loss from its interest in the Funds and SPIs, the Group has determined it is no greater than the fair value recognised as at the balance sheet date. The total size of the funds were $899 million at 31 December 2020 (2019: $888 million). In addition to the return on the financial asset, the Group also receives fee income through Hiscox Re Insurance Linked Strategies Ltd and Hiscox Insurance Company (Bermuda) Limited, both wholly owned subsidiaries, under normal commercial terms.
The deferred amount of insurance contract acquisition costs attributable to reinsurers of $106.9 million (2019: $124.7 million) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 24).
Within one year 236.7 301.7 After one year 95.6 29.7 14 Subsidiaries, associates and interests in other entities continued
Reinsurers’ share of insurance liabilities 3,645.0 3,387.7 Provision for non-recovery and impairment (0.4) (0.8)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 18). The Group recognised a gain during the year of $0.4 million (2019: gain of $0.014 million) in respect of previously impaired balances.
The effective maturity of the debt and fixed income securities due within and after one year are as follows: $m $m
Accrued interest on borrowings 2.8 2.6 Total financial liabilities carried at amortised cost 946.1 728.2
The notes bear interest from, and including, 24 November 2015 at a fixed rate of 6.125% per annum annually in arrears starting 24 November 2016 up until the first call date in November 2025 and thereafter at a floating rate of interest equal to three-month LIBOR plus 5.076% payable quarterly in arrears on each floating interest payment date.
On 14 March 2018, the notes were admitted for trading on the Luxembourg Stock Exchange’s Euro MTF. The notes were rated BBB+ by S&P as well as by Fitch.
The increase in the carrying value of the borrowings and accrued interest during the year comprises new short-term borrowings of $180.6 million (2019: $nil), the amortisation of the difference between the net proceeds received and the redemption amounts of $0.8 million (2019: $0.8 million), the movement in accrued interest of $0.1 million (2019: $0.2 million) plus exchange movements of $36.4 million (2019: plus exchange movements of $27.8 million).
Investments at 31 December are denominated in the following currencies at their fair value: $m $m
Gross receivables arising from insurance and reinsurance contracts 1,453.8 1,419.0 Provision for impairment (5.1) (7.4) Net receivables arising from insurance and reinsurance contracts 1,448.7 1,411.6
Derivative financial instruments included on balance sheet Foreign exchange forward contracts 155.0 1.4 (0.6) 0.8 Interest rate futures contracts 82.4 0.1 – 0.1
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 124.5 28.0 152.5 Gross fair value of liabilities (123.1) (28.6) (151.7)
20 Fair value measurements In accordance with IFRS 13 Fair Value Measurement, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value, is set out below.
Financial assets Debt and fixed income securities 1,118.8 4,355.7 – 5,474.5 Equities and investment funds – 532.8 45.5 578.3 Insurance-linked funds – – 63.2 63.2 Derivative financial instruments – 0.8 – 0.8
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, borrowings and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the borrowings that is carried at amortised cost, is estimated at $822.6 million (2019: $787.3 million) and is considered as Level 1 in the fair value hierarchy.
Level 3 contains investments in a limited partnership, unquoted equity securities and insurance-linked funds which have limited observable inputs on which to measure fair value. Unquoted equities, including equity instruments in limited partnerships are carried at fair value. Fair value is determined to be net asset value for the limited partnerships, and for the equity holdings it is determined to be the latest available traded price. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant. At 31 December 2020, the insurance-linked fund of $63.2 million represents the Group’s investment in the Kiskadee Funds (2019: $61.2 million).
The fair value of the Kiskadee Funds is estimated to be the net asset value as at the balance sheet date. The net asset value is based on the fair value of the assets and liabilities in the Fund. The majority of the assets of the Funds are cash and cash equivalents. Significant inputs and assumptions in calculating the fair value of the assets and liabilities associated with reinsurance contracts written by the Kiskadee Funds include the amount and timing of claims payable in respect of claims incurred and periods of unexpired risk. The Group has considered changes in the net asset valuation of the Kiskadee Funds if reasonably different inputs and assumptions were used and has found that a 12% decrease in fair value of the liabilities would increase the fair value of the fund by $9.8 million. Similarly, a 12% increase in fair value of liabilities would decrease the fair value of the fund by $9.5 million.
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Financial assets 31 December 2020 Equities and investment funds $m
Fair value gains or losses through profit or loss* (5.4) 2.7 (2.7) Foreign exchange gains 1.9 – 1.9
Unrealised gains and (losses) in the year on securities held at the end of the year (0.4) 2.7 2.3 * Fair value gains/(losses) are included within the investment result in the income statement for equities and investment funds and through other income for the insurance-linked fund.
Authorised ordinary share capital of 6.5p (2019: 6.5p) 425.8 3,692,308 425.8 3,692,308 Issued ordinary share capital of 6.5p (2019: 6.5p) 38.7 353,955 34.1 296,108
Changes in Group share capital and contributed surplus Ordinary share capital
The Company relies on dividend streams from its subsidiary companies to provide the cash flow required for distributions to be made to shareholders. The ability of the subsidiaries to pay dividends is subject to regulatory restrictions within the jurisdiction from which they operate.
Share options and Performance Share Plan awards Performance Share Plan awards are granted to Directors and senior employees. No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’ service (the vesting period) and the Group achieving targeted levels of returns on equity for pre-2018 awards and net asset value targets for awards from 2018. Share options are also conditional on the employees completing two or three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity or net asset value; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
Annual risk-free rates of return and discount rates (%) (0.12)-0.08 0.42-0.68 Long-term dividend yield (%) 2.19 2.39 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 41.0 21.0 Weighted average share price (p) 819.7 1,555.3
The weighted average fair value of each share option granted during the year was 225.1p (2019: 306.1p). The weighted average fair value of each Performance Share Plan award granted during the year was 836.5p (2019: 1,554.2p).
For options issued after 1 January 2006, the assumptions regarding long-term dividend yield have been aligned to the progressive dividend policy announced during the 2005 Rights Issue.
Gross Claims reported and claim adjustment expenses 2,688.0 2,259.0 Unexpired risk reserve 31.5 – Claims incurred but not reported 4,571.9 4,017.0 Unearned premiums 1,822.0 1,818.5 Total insurance liabilities, gross 9,113.4 8,094.5 Recoverable from reinsurers Claims reported and claim adjustment expenses 976.7 814.6 Unexpired risk reserve 8.6 – Claims incurred but not reported 2,227.7 2,106.4 Unearned premiums 431.6 465.9 Total reinsurers’ share of insurance liabilities 16 3,644.6 3,386.9 Net Claims reported and claim adjustment expenses 1,711.3 1,444.4 Unexpired risk reserve 22.9 – Claims incurred but not reported 2,344.2 1,910.6 Unearned premiums 1,390.4 1,352.6 Total insurance liabilities, net 5,468.8 4,707.6 22 Share capital continued
The net amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: $m $m
Unpaid claims reserves are made for known or anticipated liabilities which have not been settled up to the reporting date. Included within the provision is an allowance for the future costs of settling those claims.
Booked reserves are held above the best estimate to help mitigate the uncertainty within the reserve estimates. As the best estimate matures and becomes more certain, the management margin is gradually released in line with the reserving policy. This approach is consistent with last year. The margin included in the insurance liabilities at 31 December 2020 was 9.8% above the best estimate (2019: 9.4%).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 23.1 Insurance contracts assumptions (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – gross at 100%
Accident year 2011 $m $m $m $m $m $m $m $m $m $m
Current estimate of cumulative claims 1,190.0 902.6 811.5 836.7 1,088.8 1,331.0 1,665.1 1,801.6 1,751.7 2,234.8 13,613.8 Less: attributable to external Names (159.4) (93.2) (80.2) (81.0) (112.5) (125.7) (155.4) (168.3) (183.3) (240.7) (1,399.7) Group’s share of current ultimate claims estimate 1,030.6 809.4 731.3 755.7 976.3 1,205.3 1,509.7 1,633.3 1,568.4 1,994.1 12,214.1