Chapter 2 13 A closer look 14 Chairman’s statement 17 Chief Executive’s report 26 Capital 28 Risk management 32 Stakeholder engagement 34 Environmental, social and governance (ESG)
Chapter 3 43 Governance 44 Board of Directors 47 Board statistics 48 Chairman’s letter to shareholders 49 Corporate governance 54 Compliance with the UK
Corporate Governance Code 2018 58 Nominations and Governance Committee report 60 Audit Committee report
Chapter 6 101 Financial summary 102 Independent auditor’s report 108 Consolidated income statement 108 Consolidated statement of comprehensive income 109 Consolidated balance sheet 110 Consolidated statement of changes in equity 111 Consolidated statement of cash flows 112 Notes to the consolidated financial statements 167 Additional performance measures (APMs)
Chapter 5 95 Shareholder information 96 Directors’ report 98 Directors’ responsibilities statement 99 Advisors
Hiscox is a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow.
through Hiscox, which means we are never fully satisfied with what we have achieved.
Why being connected is so important to us At Hiscox, we know that you achieve more together than you ever can alone. Our growth and success have been built on teamwork. We understand that by working as one to achieve shared goals, celebrating together when things go right and supporting each other when they go wrong, the memorable moments become even more special.
We get more from being part of something bigger. That’s why we encourage everyone to step up, not step back. We’re not the kind of people to walk past a ringing phone, or a colleague who we can see needs a hand.
We take the time to get to know the people we work with and work for – our customers.
And we think about the implications of our decisions on everyone else in our Group, our customers, our industry and our community, because we’re committed to building a sustainable business with a legacy we can all be proud of.
Chapter 1: From purpose to performance 1Hiscox Ltd Report and Accounts 2019
Our key performance indicators (KPIs) 2019 showed the value of our long-standing strategy of building and broadening the balance in our business between big-ticket lines and more steady retail earnings.
4th Glassdoor’s Best Places to Work – UK Anonymous employee reviews on recruitment website Glassdoor are used to inform their annual ‘Best Places to Work’ ranking, and we are pleased to have scored so favourably out of the 50 companies included.
Employee engagement (%) 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 heavy influence our people strategy. In 2019, this led to a Group-wide effort to improve manager effectiveness.
Customer satisfaction – UK 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.
Broker satisfaction – UK We annually survey our UK broker partners to understand how satisfied they are with the service they have received from Hiscox, and how likely they would be to recommend Hiscox to their clients. After a decline in satisfaction levels in 2018, in response to our usual service levels being impacted by systems and process changes in our UK business, it is encouraging to see improved satisfaction scores this year.
Everything we do flows from our purpose, because we realise we can achieve more together than we can on our own. For our purpose to be effective it needs to be coherent and widely understood. It needs to underpin our values, which must be embedded throughout the business. Our culture needs to reflect those values. Our vision needs to be clear and attainable. All of that needs to feed into our strategy and how we execute it, taking into account our business model, our customers, our people and other stakeholders’ expectations.
We have had a strong set of values for decades and we believe that they should be lived, not paid lip service to. Over time, as a business grows and changes, it is all too easy for a set of values to become lost in people’s day-to-day work and the business’ evolving priorities. That is why, every five years or so, we undertake an exercise to refresh our values, to ensure they resonate with our employees and have a genuine impact on the way we behave.
From purpose to performance Good performance does not develop in isolation. It flows from the many decisions we make, informed by our purpose, values, culture and vision, and our success in implementing them.
Our culture “Culture isn’t something you can pay lip service to, or that you can impose from the top. We work very hard at nurturing it and one of the things that has pleased me most as the Group has grown is how our culture and values have acted as a magnet for talented people.”
Hiscox was ranked fourth in Glassdoor’s ‘Best Places to Work’ in the UK, according to employee reviews.
A strategy of diversity by product and geography Hiscox has a long-held strategy to ensure we are not overly reliant on any one of our divisions for the Group’s overall profits. As the chart to the right shows, we maintain a balance between big-ticket business – larger premium, globally traded and catastrophe-exposed – and the smaller premium, locally traded, relatively less volatile retail business.
As the nature of risk evolves, we want to be diversified in both the range of insurance we write and its geographical spread. Our business is truly international, with over 3,100 staff across 14 countries and 35 offices and a portfolio of products and services that reach every continent. We are one of the few insurers to cover every size of business, from one-man-bands right up to the largest multinationals; an approach which means we can adapt to market conditions and which gives us opportunities for profitable growth throughout the insurance cycle.
A specialist product approach We seek to excel in our chosen markets, such as small business, flood or kidnap and ransom insurance. In some, such as fine art, we have deep foundations to build on; in others we are relative newcomers. To be successful in any of these fast-moving sectors, we invest in the right people, infrastructure and technology to give us the flexibility and nimbleness to respond quickly to changes. The common thread is our focus on niche products and services that differentiate us.
Our strategy and how we operate Our long-held strategy has delivered throughout the insurance cycle. Central to this is a simple business model.
Business model – a diversified portfolio, focused on organic growth We aim to be industry leaders in material markets. We use our underwriting expertise in Bermuda and London to write larger premium, volatile or complex risks while building distribution and operational effectiveness in the UK, Europe, USA and Asia for our specialist retail products.
A strategy built around our business model, customers, people and other stakeholders such as shareholders, regulators and communities
Business priorities for 2020 Where we will focus our efforts in the year ahead.
Underwriting risk The risk that insurance premiums prove insufficient to cover future insurance claims and associated expenses. Likely causes include failing to price policies adequately, making poor risk selection decisions, allowing insurance exposures to accumulate to an unacceptable level, or accepting underwriting risks outside of agreed underwriting parameters. This includes people, process and system risks directly related to underwriting, such as human error in paying invalid claims or misquoting premium prices.
Reserving risk The Group makes financial provisions for unpaid claims, defence costs and related expenses to cover liabilities both from reported claims and from ‘incurred but not reported’ (IBNR) claims. Reserving risk relates to the possibility of unsuitable case reserves and/or insufficient outstanding reserves being in place to meet incurred losses and associated expenses, which could affect the Group’s future earnings and capital.
Credit risk The risk of a reinsurance counterparty being subject to a default or downgrade that might cause them to renege on a reinsurance contract or alter the terms of an agreement. The Group buys reinsurance as a protection, but if our reinsurers found themselves unable to meet their obligations to us, this could put a strain on our earnings and capital and harm our financial condition and cash flows. Similarly, if a broker were to default, causing them to fail to pass premiums to us or pass the claims payment to a policyholder, this could result in Hiscox losing money.
Market risk The threat of unfavourable or unexpected movements in the value of the Group’s assets or the income expected from them. It includes risks related to investments – for example, losses within a given investment strategy, exposure to inappropriate assets or asset classes, or investments that fall outside of authorised strategic asset allocation or tactical asset allocation limits. It also includes issues of liquidity, which could result in the Group being unable to meet cash requirements from available resources within the appropriate timescales, such as being unable to pay liabilities to customers or other creditors when they fall due.
Read more about how we manage risks in our risk management section
A focus on creating long-term shareholder value, with a progressive dividend policy
In 2019, the Retail businesses accounted for 54% of our overall gross premiums written and 73% of our net premiums written. As I have said before, the growth in the Retail arm demonstrates the power of compounding, each year we aim for between 5% and 15% growth. In 2019, Retail growth moderated to 7% (2018: 11.3%) in constant currency, in line with our expectations, given the result of action taken over the last 18 months to reduce in underperforming lines, and the impact of bedding in new IT systems and ways of working in the UK. Our US business accelerated growth as the year progressed, in the UK we are seeing momentum improve and our European business had another excellent year. The combined ratio for Hiscox Retail is 98.7%, outside of our target range of between 90%-95%, but still profitable, and it’s needed to be as our big-ticket lines took a battering from a series of catastrophes in Japan and an active claims year in the London Market. Paying claims and restoring businesses is the raison d’etre of an insurance company. We have fulfilled our promise to pay this year, having paid out $1.2 billion in claims across the Group. The London Market has responded well, with increased prices across the board; the reinsurance market is a little slower to adjust and we will shrink accordingly.
Our balanced strategy means that we are still able to grow the dividend, despite a large loss year. As such, the Board is pleased to announce a final dividend of 29.6 cents, which is an increase of 3.5% in line with prior year dividend. The record date for the dividend will be 15 May 2020 and the payment date will be 10 June 2020.
I am able to report a profit before tax of $53.1 million (2018: $135.6 million*), with the investment income of $223.0 million (2018: $38.1 million) being a key contributor to the result. Our strategy has remained the same as we continue to build our retail businesses to balance the more volatile big-ticket risks and it is working.
In 2019, Hiscox London Market saw rate rises in 14 out 15 classes, overall up by 11% and continuing to rise. The market
The Board We have a strong Board and Executive team. Our Non Executive Directors have a wealth of experience in insurance, reinsurance, marketing and banking, gained in all corners of the world. They have diverse backgrounds and importantly come from a number of different countries which is very important to us as we continue to build a global business. One test I always apply to a new Non Executive is that in some way, they have already been where we are going.
Joanne Musselle replaces Richard as our new Chief Underwriting Officer for the Group and Executive Director. This was an internal appointment after an extensive search both inside and outside of Hiscox. Joanne has been with Hiscox since 2002 and has some very valuable experience under her belt, gained in claims management, as Chief Underwriting Officer for Hiscox UK & Ireland, and latterly as Chief Underwriting Officer of all our retail operations. I am delighted we will benefit from her expertise on the main Board.
Following nine years of service, at which point the UK Corporate Governance Code deems him not independent, Robert McMillan, stepped down from the Board in May. Bob’s vast experience in building retail businesses has been invaluable and I am pleased that we will continue to benefit from his advice as he remains a Non Executive Director on our Hiscox USA Board.
It is with great sadness that I report the death of Dr James King during 2019, who served on the main Board from 2006 to 2015 and was a valued counsellor. His sound common sense and incisive mind were very important to me. As a Bermudian, he was an able pilot helping us to navigate our arrival on Bermuda in 2006.
As a result of our values re-fresh we’ve adopted ‘connected’ as the theme of this year’s Annual Report. It captures our sense of togetherness and our long-term commitment to building a sustainable business of which everyone can be proud. Part of that connectedness is also about looking out for each other, knowing the people we work with and creating networks beyond teams. I am proud of the WeMind initiative created in the UK by our employees; a mental health and well-being network that introduced mental health first aiders and oversees activities including a ‘walk and talk club’ to bring people together to discuss what’s on their mind and delivered mental health training for over 100 people managers. It was gratifying for the team behind this initiative to receive the Outstanding Employee Network of the Year award at the European Diversity Awards 2019 and shows how our values are being lived by the people who work here. I thank them all for their hard work during the year.
Robert Childs * Restated to reflect previously announced tax provisions. See note 2.2 to the financial statements.
We have the brand, talent and diversity of product and geography to make the most of the opportunities ahead. Outlook
Good performance by Hiscox UK and Hiscox Europe, combined with strong investment returns, offset the impact of a third year of catastrophe events and some adverse claims development in the big-ticket business and Hiscox USA. This allowed us to deliver a combined ratio of 105.7% (2018: 94.9%) and a pre-tax profit of $53.1 million (2018: $135.6 million*). This is below our ambitions and your expectations of us. We have taken necessary action which is having a positive impact.
2019 showed the value of our long-standing strategy of building and broadening the balance in our business between big-ticket lines and more steady retail earnings.
During the year, we made an additional tax provision of up to $60 million following a reappraisal of how we invested in, and classified, marketing activity historically. This additional provision has been presented as a prior year adjustment and, as a result, the previously disclosed profit for 2018 has been restated.
Hiscox UK had a good year of recovery after a challenging 2018 as it adapted to a new IT system with new ways of working which impacted growth. Service levels have now improved and we appreciate the support of our brokers and customers while we worked hard to put things right. Gross premiums were up by 3.9% in constant currency to $746.4 million (2018: $749.6 million) with our commercial business growing by 9%.
Cyber is a growth area and we launched a new and enhanced product called CyberClear during the period. We are proud that it has been rated the most comprehensive cyber insurance policy for SMEs as the first and only policy to receive a 100% score in the Insurance Times Cyber Product Report.
The team’s hard work was recognised with three industry awards; Insurance Times’ Personal Lines Insurer of the Year and Cyber Product of the Year, and, at the British Insurance Awards, Insurance Provider of the Year.
Gross premiums written 2,196.3 2,087.1 Net premiums written 1,957.5 1,874.5 Underwriting profit 36.5 125.4 Investment result 133.9 19.9 Profit before tax 178.4 146.3†
We now serve over 1.2 million retail customers generating $2.2 billion of premiums. Hiscox Retail
An actively managed business mix Total Group controlled premium 31 December 2019: $4,530 million (Period-on-period in constant currency)
Commercial property Onshore energy USA homeowners Flood programmes Managing general agents International property
Hiscox Europe Hiscox Europe operates in Germany, France, Benelux, Iberia and Ireland. These businesses provide personal lines cover, including high-value household, fine art and classic car, as well as commercial insurance for small- and medium-sized businesses.
Our business in Europe has grown since we opened our first office in Paris in 1995, with no business, and lots of ambition. It is now a consistent and important contributor to our profits. Hiscox Germany reached €100 million in premiums in 2019 and France will follow suit in 2020. The market in our segments in Europe is significant and our ambition is to have Hiscox Europe match Hiscox UK in scale and profits. This is a significant opportunity for us.
The business continues to achieve strong growth, with gross premiums written increasing by 6.8% over the year in constant currency to $865.0 million (2018: $809.6 million), growing to 11% in the second half. Despite market challenges in some casualty lines, Hiscox USA delivered a profit in 2019.
Our direct and partnerships division (DPD) continues to be the star performer to reach $275 million. It has benefited from our sustained investment in marketing and brand building. We launched our first fully integrated marketing campaign with ABC TV and Major League Baseball this year, and have continued to build on our ongoing ‘Encourage Courage’ campaign aimed at small businesses – all of which helps to differentiate us from our competitors.
Our broker channel business has seen strong growth in healthcare and general liability where rates are attractive, but a disciplined approach in private company D&O, media and entertainment business has resulted in a reduction in those areas throughout the year. The action we have taken in these lines is working, as we have seen an improvement in current year loss ratios. Like others in the market, we are seeing increased competition in mid-market cyber, which has led to reduced pricing and widening cover, and we are being selective.
We have an addressable market of 30 million small businesses in the USA. Hiscox USA
104.4% (2018: 89.3%). The most material adverse impact came from attritional losses in property, and large loss activity in D&O and alternative risk. We also suffered adverse prior-year development from healthcare, and prior-year catastrophes.
A second year of rising rates in the London Market has driven above-budget growth of 10.3% to $967.9 million (2018: $877.7 million), or 11.2% in constant currency. Positive momentum has continued in the majority of classes, spurred on by a withdrawal of capacity and the Lloyd’s ‘Decile 10’ initiative which has instilled some much-needed discipline in the market. We have seen material rate increases in major property, cargo, hull, and general liability. In US public company D&O, rates are up by nearly 60% and we have grown substantially. These rate improvements are necessary after the extended soft market, however, in some areas such as Florida small property risks and personal accident, rates are still not reflective of the risk, and where necessary we will shrink.
Our preparations for the US IT systems changes, which are necessary to support our future growth plans, are progressing well, with roll-out to DPD expected during 2020.
Singapore and Thailand have attracted and retained record numbers of customers, driven by the success of new partnerships with firms like Prudential, Shell and Vicom. Similar partnerships with like-minded businesses will enable us to continue on this growth trajectory. An ongoing investment in brand has helped us to combat increased competition and supports our drive to reach scale.
Hiscox London Market’s profits decreased to $30.4 million (2018: $75.8 million*) and the combined ratio deteriorated to
Gross premiums written 967.9 877.7 Net premiums written 504.6 522.9 Underwriting (loss)/profit (26.3) 68.2†
Over 75% of all business we write at Lloyd’s is bound electronically. Hiscox London Market
we drive down cost by using APIs to connect to US coverholders. We also use third-party capital to leverage our expertise, giving us larger lines to deploy through consortia for general liability, space, flood and product recall.
Hiscox Re & ILS Hiscox Re & ILS comprises the Group’s reinsurance teams, based in London and Bermuda, and insurance-linked securities (ILS) activity. The team underwrites on behalf of Hiscox and third-party capital partners, including other insurance companies, Lloyd’s syndicates and capital market investors.
Gross premiums written grew by 7.4% in constant currency to $866.5 million (2018: $812.0 million), as rate improvement in loss-affected property lines and retrocession was offset by deliberate reductions in risk excess and our withdrawal from casualty reinsurance business. Throughout the year, the team remained disciplined in the face of underwhelming, albeit positive, rate improvement, still dampened by an overabundance of capacity despite three years of significant market losses.
In such an uncertain environment as this, it pays to be disciplined and nimble. The vision for Hiscox Re & ILS is ‘one team, unlocking capital and pioneering risk’ and the goal is to bring together our capabilities from underwriting through to analytics, research and claims, in order to profit in changing markets. We continue to believe engaging with multiple capital sources will allow us to write a broader range of products, more of them, and at better margins. At the moment we do not expect to fully use all of the capital available to us in 2020 as rate increases continue to be below our targets. We therefore expect top line growth to remain subdued as we pursue a disciplined path.
Claims It has been a busy year for claims in big-ticket lines and Hiscox USA as outlined previously; however, our Retail businesses in the UK and Europe had a relatively good claims experience.
In 2019, we had a small positive reserve release of $26 million (2018: $326 million) from prior years. Despite its challenges in the USA, Hiscox Retail had a positive prior year reserve development of $46 million (2018: $100 million). Hiscox London Market and Hiscox Re & ILS suffered deteriorations of $20 million in aggregate (2018: $126 million favourable). We seek to reserve cautiously and our reserves are set at 9.4% above actuarial estimates (2018: 11.0%). We expect that we will return to our more normal pattern reserve releases of 9% to 12% of opening reserves over the next three years. In 2020, we expect reserve releases to be between 3-5% of opening net reserves, returning to our normal pattern over the next three years.
Information technology and major projects The significant investment we are making in replacing end-of-life
Given the strength of markets in 2019, we do not expect a repeat in the year ahead. Government bond yields are lower and corporate bond spreads look tight. Having re-rated, equity markets are clearly less well placed than after the falls of 2018. Markets also seem relatively sanguine about political instability but this does not mean such events cannot have an impact; there is no shortage of events in the calendar in the year ahead, the US election amongst them. As such, we enter the year more cautiously, but remain prepared to add risk as opportunities present themselves.
People Building an insurance business requires a pile of money and a group of talented people. As capital will follow talent, we put a disproportionate effort on attracting, developing, retaining and rewarding talented people. This is a never-ending effort with different approaches being used at different levels of seniority.
In 2019 across Hiscox we received around 50,000 applicants for advertised roles, and hired 867. As a parent of children applying for junior roles, I became aware that for many companies the recruitment process can be like a black hole – you apply and hear nothing, not even an acknowledgement. Hiscox was better than this, but not always good enough. In 2019 we re-engineered our approach to job seekers, thinking of them with the same care and intelligence that we apply to customers. We introduced a net promoter score for all applicants, a brave decision when we have 58 rejections for every successful applicant. I am pleased to report that our net promoter score amongst those who were unsuccessful after interview improved by 26 points over the year, a real vindication of a recruitment approach much more in tune with our human value.
Hiscox USA worked on a new system in 2019 and 2020 will see this go live within our DPD business with the project concluding in 2021. Our US broker channel will follow once the new system has had the opportunity to embed. Hiscox Europe is at the start of a similar journey, with preparations under way to begin system changes in Germany, and so will benefit the most from our lessons learnt along the way.
We expect that 2020 will be the last year of peak system change, with the volume of change dropping to a lower level from 2021. As the systems become fully functional we can expect to see benefits in the Group’s expense ratio.
A Specialist knowledge differentiates us and investment in brand builds strong market position. A Profits act as additional capital.
Purpose and values During the year we undertook a Group-wide conversation and workshop process to define our purpose and update our values. This involved over 500 staff from all geographies and seniorities. We last did this five years ago.
A Connected – together, build something better. A Ownership – passionate, commercial and accountable.
Monitoring of the Group’s capital requirements is based on both external risk measures, set by regulators and rating agencies, and our own internal guidelines for risk appetite.
The Group measures its capital requirements against its available capital, which is defined by the Group as the total of net tangible asset value and subordinated debt. The subordinated debt issued by the Group is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements. At 31 December 2019 available capital was $2,276 million (2018 restated: $2,405 million), comprising net tangible asset value of $1,912 million (2018 restated: $2,055 million) and subordinated debt of $364 million (2018: $350 million).
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these sources comprised $800 million at 31 December 2019 (2018: $800 million), of which $50 million was utilised at 31 December 2019 (2018: $50 million).
Our key rating agencies, A.M. Best, S&P and Fitch, calculate capital adequacy by measuring available capital, after making various balance sheet adjustments, and comparing it with required capital, which incorporates charges for catastrophe, premium, reserve, investment and credit risk. Our interpretation of the results of each of these models indicates that we are comfortably able to maintain our current ratings.
The Group’s estimate for the year-end 2019 BSCR solvency coverage ratio is 205%, which includes the first stage of changes to the BSCR standard formula being phased in by the BMA over a three-year period beginning in 2019. The changes are expected to reduce the Group’s BSCR solvency coverage ratio by an estimated ten percentage points per annum over the next two years.
The Group continues to operate with a robust solvency position and expects to maintain an appropriate margin of solvency after these changes have taken effect. In addition, each of the respective insurance carriers holds appropriate capital positions on a local regulatory basis.
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of year end 2019 results. Hiscox uses the internally developed Hiscox integrated capital model to assess its own capital needs on both a trading (economic) and purely regulatory basis. All capital requirements have been normalised with respect to variations in the allowable capital in each assessment for comparison to a consistent available capital figure. The available capital figure comprises net tangible assets and subordinated debt.
reviewed and enhanced to reflect evolving practice on risk management and governance. Over 2019, we continued to embed and strengthen our system of internal control.
Our risk appetite is set out in risk appetite statements, which outline the level of risk we are willing to assume, both by type and overall, and define our risk tolerances: the thresholds whose approach would represent a ‘red alert’ for senior management and the Board.
Risk management framework Our continuing success depends on how well we understand and manage the significant exposures we face.
Responsible for ownership and management of risks on a day-to-day basis. Consists of everyone at every level in the organisation, as all have responsibility for risk management at an operational level.
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 2019 we began work to enhance and strengthen our risk appetite statements across the Group.
Risk management across the business The Group coordinates risk management roles and responsibilities across three lines of defence. These are set out in the table below. Risk is also overseen and managed by formal and informal committees and working groups across the first and second lines of defence. These focus on specific risks such as catastrophe, reserving, investments and credit, as well as emerging risks. The Group Risk and Capital Committee and the Group Underwriting Review Committee make wider decisions on risk.
The Own Risk and Solvency Assessment (ORSA) process The Group’s ORSA process involves a self-assessment of the risk mitigation and capital resources needed to achieve the strategic objectives of the Group and relevant insurance carriers on a current and forward-looking basis, while remaining solvent, given their risk profiles. The annual process includes multi-disciplinary teams from across the business, such as capital, finance and business planning.
The role of the Board in risk management The Board is at the heart of risk governance and is responsible for setting the Group’s risk strategy and appetite, and for overseeing risk management (including the risk management framework). The Risk Committee of the Board advises on how best to manage the Group’s risk profile by reviewing the effectiveness of risk management activities and monitoring the Group’s risk exposures, to inform Board decisions.
The team works with the first-line business units to understand how they manage risks and whether they need to make changes in their approach. It is also responsible for monitoring how the business goes about meeting regulatory expectations around enterprise risk management.
2019 has seen a focus on improving the efficiency of the risk management framework, mainly through the streamlining and automation of repeatable cycles such as the risk and control self-assessment process. This drive for efficiency should allow for an increase in risk deep-dives and for more support to be available to the portfolio of Group-wide change programmes.
Casualty extreme loss scenarios As our casualty businesses continue to grow, we develop extreme loss scenarios to better understand and manage the associated risks.
Losses in the region of $80 million-$750 million could be suffered in the following extreme scenarios: Event Estimated loss ($m)
Multi-year loss ratio deterioration 5% deterioration on three years’ casualty premiums c. $4 billion.
A range of cyber scenarios including mass ransomware outbreaks and cloud outages. Includes ‘silent cyber’ exposures.**
*Losses spread over multiple years. **‘Silent cyber’ refers to losses incurred from traditional lines, from a cyber event.
– $2 b n m ar ke t l os s ye ar re tu rn p er io d
b n m ar ke t l os s -y ea r r et ur n p er io d
Stakeholder engagement We have a diverse range of stakeholders whose engagement is critical to our continued success. We engage with, consider and respond to our stakeholders’ needs at various levels of the Group, up to and including Board level.
Regular investor interaction We maintain regular dialogue with our shareholders throughout the year, outside of the regular drumbeat of the financial reporting cycle. This is undertaken predominantly by the Chief Financial Officer and our investor relations lead, who meet with existing shareholders and potential investors as well as research analysts, and participate in industry conferences and roadshows. During 2019 they met with over 300 investors.
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. Each financial report is made available on our website, and along with other key corporate announcements, is available as an email alert for subscribers, which can be found at hiscoxgroup.com/investors.
Annual Report and Accounts Our Annual Report and Accounts provides shareholders with a wealth of information and is designed to give them a better understanding of a year in the life of Hiscox. When it comes to our corporate governance practices, we include some additional 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, generally following the publication of our preliminary and interim results. The roadshows provide investors with an opportunity to learn more about Company strategy, strategic priorities, trading conditions and other factors affecting our operations. During the 2019 roadshows, our Chairman and Executive Directors met with investors representing over 60% of our issued share capital.
Annual General Meeting (AGM) Our AGM provides another regular investor touchpoint. At the 2019 AGM all resolutions were passed, with votes in favour ranging from 92% to 100%.
Workforce engagement Our annual employee engagement survey gives all our employees the opportunity to provide honest feedback on how they feel about Hiscox. We also have an Employee Engagement Network, led by our Employee Liaison and Non Executive Director, Anne MacDonald. For more, see page 54.
Living Wage We believe a hard day’s work deserves a fair day’s pay, which is why in 2019 we became a Living Wage employer in the UK.
Annual preferred broker summit and rising stars broker summit For the last nine years we have held an annual preferred broker summit for our UK brokers, and more recently we have also hosted a rising stars broker summit for the leaders of tomorrow. These events are designed to inform and entertain our key brokers, with a mixture of Hiscox-led presentations, as well as external guest speakers.
Attending key broker events We participate in key broker events in every part of our broker-facing business. Our teams and Board members attend events including: BIBA, a UK insurance and broker conference; the CIAB, a US marketplace meeting for commercial property and casualty brokers and insurers; and, in our London Market and reinsurance business, Monte Carlo, Baden Baden, and RIMS.
Educational seminars Throughout the year we hold a range of educational events and roadshows for brokers, focused on improving knowledge around complex or unusual risks. In 2019 this included cyber and commercial schemes.
Experiential events We look to bring to life evolving and emerging risks, and how our products respond to them, through interactive broker events. During the year, we held a ‘can you crack the cube’ event at Lloyd’s of London to test brokers’ cyber risk knowledge, as well as a virtual reality experience at WSIA in San Diego which simulated to over 120 brokers the impact on a homeowner of a Category 5 hurricane hitting the East Coast of the USA.
Customers We have over 1.2 million retail customers worldwide and providing each of them with products they can rely on is our reason for being.
Regulators We are a global business with a responsibility to engage with regulators in all jurisdictions where we operate. The Group is regulated in Bermuda, and has regulated subsidiaries worldwide.
Piloting new technologies Our customers play an important role in helping us to pilot new technologies that can improve our role in risk prevention. We have done this with leak prevention technologies in the home as well as internet alerts for home and small business customers that help keep connections secure, and we continue to explore other potentially valuable preventative measures.
Regular meetings Our Chief Compliance Officer and central compliance team lead our relationships with regulators worldwide and maintain regular dialogue with them through informal meetings and calls. In 2019, the team engaged with our various regulators, with involvement from senior management and the Board when required.
Read more about our work in the communities in which we operate in the environmental, social and governance (ESG) section
Environmental, social and governance (ESG) We take our role in the world seriously and want to play a responsible part in society.
Ap pr op ria te s tr uc tu re an d ov er si gh t inclusive workforce
li st in g ru le s, a nd lo ca l c ou ntry laws Understanding clim ate risk and helping our custom ers to adapt
ESG approach We take our role in the world seriously and want to play a responsible part in society. As an insurer, if we do our job well, our customers and society benefit when times are tough. Being an insurer our customers can rely on matters to us, and it’s this philosophy that underpins our approach to ESG issues.
More information on our approach to ESG can be found at hiscoxgroup.com/responsibility/what-guides-us
ESG measurement Our ESG efforts are measured both internally and externally. Externally, we participate in a number of key ESG indices including CDP, Dow Jones Sustainability Index and FTSE4Good, and we reported against TCFD-aligned principles for the first time in our 2019 climate report and ClimateWise submission. Internally, we set key performance indicators for ESG issues including carbon emissions and gender parity in recruitment. We will look to build on these in 2020, with areas of focus to include setting new carbon emissions targets and further developing our approach to diversity and inclusion, with a particular focus on ethnic diversity.
Hiscox Ltd Board sDiscusses ESG twice-yearly. sProvides challenge and approval of key ESG matters.
Executive Committee s Sets strategy and reviews plans and progress quarterly.
ESG working group sChaired by ESG Executive Sponsor. sMeets monthly. s Includes representatives from underwriting, investments, risk and corporate affairs.
We carefully manage our environmental impact and work with our customers, suppliers and business partners to respond to the changing climate. For Hiscox, this means looking at our operations and how we can reduce waste – water, electricity and other consumption – helped by our growing network of Green Teams. It also means investing in areas such as research, catastrophe modelling and new technologies that improve our underwriting capabilities and benefit our brokers and customers.
s We are a founding member of ClimateWise, a global insurance industry network, which leverages members’ expertise to better understand, communicate and act on climate-related risks.
s We built on the successes of our Green Team in Bermuda with a UK Green Team to help us make positive environmental changes across our UK offices, and will look to establish other country green teams in 2020.
Case studies US virtual reality event raises awareness of flood risk Flood is a growing climate risk faced by many of our customers and we have focused on raising awareness of the risk through education at the same time as developing products that respond to it. We hosted a virtual reality event in the USA which was attended by over 120 guests including some of our key US brokers, giving them the opportunity to experience a Category 5 hurricane for themselves, and bringing to life the nature of the risk as well as the uniqueness of our FloodPlus product offering.
New UK recycling processes helps reduce waste going to landfill We introduced new recycling processes in our York and London offices to ensure less of the waste we generate ends up in landfill. Although we encourage employees to use re-usable cups, our disposable cups are now recycled by a specialist company which turns the plastic elements into tubing or park benches, and the paper elements back into high quality paper and paper products. We also now collect our plastic milk bottle lids and drinks tops, which go to high street store Lush for recycling.
Investment in research and modelling improves wildfire risk understanding The devastating California wildfires of 2018 highlighted the wildfire risk for (re)insurers worldwide. We invested in new research and modelling throughout 2019 to further increase our understanding of the risk. By licensing a new risk model for wildfire, and applying our own in-house research to it – what we call the ‘Hiscox view of risk’ – not only have we significantly increased our understanding of the risk, we are now able to price risks more accurately.
Reporting against ClimateWise’s TCFD-aligned principles in 2019 resulted in a score of 46%.
Our virtual reality event in the USA was attended by over 120 guests including some of our key US brokers, giving them the opportunity to experience a Category 5 hurricane for themselves. FloodPlus
Beach clean-ups in Bermuda.We have been a carbon neutral business since 2014.
s Our employees spent almost 2,000 hours volunteering for good causes – including collecting surplus food for redistribution to those in need, going into schools to help children with their reading, and helping to build a house for a disadvantaged family in Sri Lanka.
s We continue to work hard to reduce our gender pay gap, which in 2019 was 22.6% on a median basis. We have seen steady reductions in our gender pay gap for two consecutive years now, but there is more still to do. You can read our latest report at hiscoxgroup.com/gender-pay-gap.
s We are becoming a more diverse and inclusive business; one in four employees are now members of at least one of our nine employee networks, over 400 employees have received unconscious bias training, and we have over 75 trained mental health first aiders.
Case studies Building homes for disadvantaged families in Sri Lanka Hiscox London Market supports the Dust Project, a charity which helps disadvantaged children in Sri Lanka by pairing building projects with child sponsorship. As part of our multi-year programme of support, we raised over £64,000 in 2019 and ten members of our London Market team spent a week in Sri Lanka helping to build a home for a local family.
Supporting community art initiatives around the world Art is a long-held passion of ours, and we relish finding ways to share it with the wider community. We supported a whole range of art-related initiatives around the world during the year, including Sculpture in the City and Art Night in London, which make art accessible to all in the city; and through our work with Hamburg’s renowned university of fine art, HFBK, where we support promising young artists with a €7,500 art prize.
Through training, motivational and expert speaker seminars, and story sharing, WeMind brings employees across the Group together. WeMind
Financial summary $1 million donated to good causes around the world in 2019.
Governance Compliance with Bermuda Companies Act, UK listing rules, and local country laws.
s We continued to review and refine our policies and procedures, with an updated whistleblowing policy, an enhanced conflicts of interest policy, updated Board and Committee terms of reference, and a revised outsourcing policy which responds to regulatory interest in outsourcing and cloud services.
Case studies Maintaining a regular programme of internal training and testing Working in a regulated industry means we take staff training seriously. We deliver a year-round programme of monthly internal training, testing, awareness and education on issues such as information security, financial crime, Senior Managers & Certification Regime, data privacy and data protection, and how to report an incident. This includes a cyber security awareness month, where we educate employees on what to look out for when it comes to phishing, smishing and other cyber security issues; Company-wide phishing tests to monitor internal vigilance when it comes to suspicious emails; and timely news items on issues such as mobile security during the summer holidays or online shopping security in the run-up to Christmas.
Financial summary the development of our cyber exposure management models. We also conducted a series of desktop simulations with country leadership teams to work through operational challenges arising from a reputational event.
Monthly video-linked ‘box meetings’, regular social events and a popular social media group all reinforce this sense of togetherness. This connectedness has definitely produced results – our Iberia unit has been a standout success in recent years.
Aki joined Hiscox in 2016 from Prudential, where he was Chief Financial Officer of its UK and Europe business. Before that, he held a number of senior roles across a range of sectors, including Finance Director for Lloyds Banking Group’s consumer bank division until 2009. Aki is a Chartered Accountant, having trained with KPMG.
Colin Keogh Independent Non Executive Director (Aged 66) Appointed to the Board: November 2015
Colin has spent his career in financial services, principally at Close Brothers Group plc where he worked for 24 years and served as CEO for seven years until 2009.
Bronislaw Edmund Masojada Group Chief Executive (Aged 58) Appointed to the Board: October 2006
External board appointments Association of British Insurers; Pool Reinsurance Company Limited; Policy Placement Limited; Bajka Investments (Pty) Ltd; Heptagon Assets Ltd; Heptagon Bir Ltd.
Joanne Musselle Group Chief Underwriting Officer (Aged 49) Appointed to the Board: March 2020
Relevant skills and experience s Considerable underwriting expertise, including experience of managing underwriting portfolios in our key markets.
Robert Simon Childs Non Executive Chairman (Aged 68) Appointed Chairman: February 2013 Appointed to the Board: September 2006
Michael has over 25 years’ experience in the insurance industry, having worked in Australia and the Asia Pacific region for QBE Insurance Group for over 20 years. Michael started his career as an actuary, is a Fellow of the Institute of Actuaries of Australia and served as Vice President of the General Insurance Association of Singapore between 2006 and 2012.
Caroline Foulger Independent Non Executive Director (Aged 59) Appointed to the Board: January 2013
Relevant skills and experience s Extensive accounting and financial reporting expertise.
External board appointments Oakley Capital Investments Limited; Catalina Holdings (Bermuda) Ltd; Generation Life Ltd; General Two Ltd; Bank of Butterfield.
Anne MacDonald Independent Non Executive Director (Aged 64) Appointed to the Board: May 2015
External board appointments Boot Barn Holdings, Inc.; Zeotap; Ignite National; Tuckerman & Co.; Chops Snacks.
Lynn Pike Independent Non Executive Director (Aged 63) Appointed to the Board: May 2015
Lynn worked in the US banking industry for nearly four decades, most recently as President of Capital One Bank. Before that, she was President of Bank of America’s small business banking division, a multi-billion-Dollar business with 110,000 clients and over 2,000 employees.
Robert McMillan Independent Non Executive Director (Aged 67) Appointed to the Board: November 2010
Richard Colin Watson Group Chief Underwriting Officer (Aged 56) Appointed to the Board: May 2013
All Directors attended all Board meetings during 2019. Robert Childs missed November’s Risk Committee and Investment Committee due to personal commitments. Bob McMillan was only eligible to attend the February and May meetings due to his retirement from the Ltd Board in May.
Engagement The Chairman of the Remuneration Committee engaged with major shareholders on the remuneration policy renewal. We are satisfied that the remuneration policy reflects the feedback that we received and is in the best interests of the Company and all shareholders. The proposed policy includes new provisions required by the Code and will be put to shareholders at the AGM in May 2020 for approval. More information on this can be found in the remuneration section on pages 64 to 93, and you can read more on how we engage with shareholders and other stakeholders on pages 32 to 33.
Governance During the year we strengthened our underlying governance structures with a Group governance model which defines the Group-wide governance standards required of all legal entities. There is a balance to be found in how information flows from Group Board level through to our subsidiary Boards, and vice versa, and this model helps us to articulate that.
I trust that the updates we have made to corporate governance together with the additional detail we have provided 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.
Purpose, values and strategy This year we undertook a comprehensive review of our values and developed a Group purpose. The Code emphasises the importance of the Board’s role in establishing a company’s purpose, values and strategy and ensuring these are aligned with its culture but this has always been important at Hiscox, and reviewing our values is something we endeavour to do every five years or so. As new people join and the business evolves, we think it is important to take a fresh look at our values to ensure that they continue to relate to our business and our people. You can read more on our purpose, values, culture, vision and strategy on pages 4 to 7 and in my Chairman’s statement on pages 14 to 16.
s Leading initiatives to assess the culture of the Company and ensure that the Board leads by example.
s Advisor to the Chairman. s Leading the Chairman’s performance evaluation. s Serving as an intermediary to other
Corporate governance oversight The Board operates within an established governance structure to ensure that through the delegations, strategy can be implemented effectively and is supported by transparent, well informed and balanced decision-making. The Board’s terms of reference include a schedule of matters reserved for Board decision, a copy of which can be found at hiscoxgroup.com/investors/corporate-governance, which was updated in 2018 to ensure ongoing compliance with the updated Code. Each Board committee operates within established written terms of reference, which were also updated in line with the Code, and each committee Chairman reports directly to the Board. The matters reserved for Board decision and the committee terms of reference were further reviewed in late 2019 as part of the annual review of terms of reference.
The Audit Committee report can be found on pages 60 to 61.
The Nominations and Governance Committee report can be found on pages 58 to 59.
The remuneration report can be found on pages 68 to 81.
Each agenda is typically divided between special strategy items (‘deep dives’), and management reports. Deep dive sessions are selected for a variety of reasons, including identified actions from previous meetings, issues escalated from management, and items requested either formally or informally by Non Executive Directors. Any issues highlighted will be addressed either at the Board, during Committee discussions, or during informal informational sessions, depending on the nature of the matter. The management reports follow a short standard format which aids discussion and understanding. At each meeting the Board receives an update from the Committee Chairs to keep them abreast of the items discussed, the outcomes agreed, and to summarise recommendations for Board approval from the Committees. Board agendas are also set out in line with the Committee agenda setting to ensure that the most appropriate method of progressing an item is utilised.
An alert service is available on hiscoxgroup.com to notify any stakeholder of new stock exchange announcements. Shareholder engagement
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.
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 32 to 33.
Compliance with the UK Corporate Governance Code 2018 The UK Corporate Governance Code (the Code) was published by the Financial Reporting Council in July 2018 and is applicable to accounting periods from 1 January 2019. As a company listed on the London Stock Exchange, the Code is applicable to Hiscox.
The terms of reference explicitly state that the Board and Committees shall have unfettered access to the resources they determine as being necessary to fulfil their obligations.
The Board is kept aware of major shareholder issues and concerns through reports from a variety of sources, including the Chairman, the Chief Executive, the 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. Shareholder engagement is not limited to the period following the publication of financial results or other significant announcements.
In 2019, the Company formalised its existing approach to workforce engagement by establishing an Employee engagement Network, which is led by Non Executive Director Anne MacDonald, who will also now hold the role of Employee Liaison. While the Board has historically engaged with the workforce and will continue to leverage the pre-existing infrastructure to ensure that Hiscox is motivating and engaging employees in an effective way, the new Employee Engagement Network will ensure workforce views are considered in its decision-making process. It sits separate to the existing HR mechanisms. The Employee Liaison is responsible for providing a verbal summary of findings at Board meetings. The Employee Liaison facilitated several meetings in 2019 with individuals and representatives from the Company’s employee networks, the Head of Diversity and Inclusion and the Group Company Secretary.
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 49 to 53, 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 Board operates within a Group-wide governance framework which was also explicitly set out in a Board-approved governance manual during 2019. For further details see pages 50 to 51. The governance framework complements the Company’s internal controls which are designed to enable risk to be properly assessed and managed. To support this, the Board has a formal schedule of matters reserved for the Board’s determination that covers areas including: setting the Group’s purpose and strategic vision; monitoring performance of the delivery of the strategy; approving major investments, acquisitions and divestments; the oversight of risk and the setting of the Group’s risk appetite; and reviewing the Group’s governance.
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 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, where 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.
In the Annual Report and Accounts last year, we stated that the Board believed the Chairman’s experience and expertise in underwriting and risk management continued to be a valuable asset in the performance of its functions. In light of the new provision of the Code, the question of the Chairman’s tenure on the Board was discussed by the Non Executive Directors (without the Chairman being present) and the meeting concluded, having taken soundings from all of the 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 he continues to show the independence of character and judgement necessary to chair the Board effectively.
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 page 46.
From purpose to performance the delivery of the Company’s strategy. More information can be found in the Nominations and Governance Committee report on pages 58 to 59.
On joining the Board, all Non Executive Directors take part in a full, formal induction programme which is tailored to their specific requirements. Board members can also participate in training and development opportunities throughout the year, including visits to Hiscox overseas offices and inclusion at the annual Hiscox Partners event, attended by those employees who make significant contributions to the development and profitability of the Group. These visits provide an opportunity to meet employees and other key stakeholders, and to develop a deeper understanding of the challenges and opportunities at operational sites and in the business areas more generally. The Chairman holds annual appraisal meetings with all Directors to review their performance, and to discuss their training and development needs. The Board also enjoys a full programme of informal meetings that support the Board meetings; this helps to ensure that the Non Executive Directors in particular have wide access to all levels of the business.
The Board’s policy is that all Directors stand for re-election by shareholders each year at the AGM. The Board considers that all Directors continue to perform effectively and demonstrate appropriate levels of commitment. The biographical details of the Board on pages 44 to 45 summarise each Director’s relevant skills and experience as well as the specific reasons why each Director’s contribution is important to the Company’s long-term sustainable success. As recommended by the Code, this information will also be included in the Notice of Annual General Meeting.
A Director, Board and Committee effectiveness evaluation is carried out each year and results in effectiveness reviews, which are discussed by the Board and each of the Committees.
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-and-disclosures. Details of our diversity activities are detailed on pages 38 to 39 and 59.
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. 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 2019. 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 remuneration report also contains details of the procedure that has been established for developing the Company’s policy on Executive pay and determining Director and senior management remuneration outcomes. No Director is involved in deciding their own remuneration.
Every third year, the Board evaluation is externally facilitated and this is next scheduled to take place later this year. More information can be found in the Nominations and Governance Committee report on pages 58 to 59.
Hiscox’s response to section 3 of the Code The Company complied with all of the provisions of section 3 with the exception of Provision 19. The Chairman has been in post since 2013, and therefore served less than nine years.
For the reasons outlined in section 2, the Chairman has remained in post to facilitate effective succession planning and the development of a diverse Board. For more information see Hiscox’s response to section 2 of the Code.
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 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 96 to 98.
Hiscox’s response to section 4 of the Code The Company complied with all of the provisions of section 4.
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 compliance with governance requirements, a review of conflicts and the approval of Group policies.
In 2019, the process for our interim Board and Committee reviews – undertaken in the years between external evaluations – was updated to deliver an even more robust evaluation.
The key themes of the 2019 internal review were: composition and diversity; updated skills review; succession planning; independence of mind of the Board; effectiveness of working relationships; key themes for the future; progress with employee liaison development; and regulatory and legal compliance.
The findings of the evaluation were discussed by the Nominations and Governance Committee, and by the Board as a whole, and resulted in confirmed actions which will be tracked to completion during the year.
The Board and its Committees are focused on continuous improvement and this was reiterated in the questionnaire, with incremental changes highlighted for improvement. Themes of improvement were linked to the continued development of the Board and Committees and related to: further strategy development with strengthened competitor analysis; revised plans for focusing deeper in the organisation; the enhancement of certain management information; further review of remuneration philosophy; and Board succession planning.
We complied with the provisions of the Hampton-Alexander Review, which examines female representation within FTSE 350 companies at both Board and senior manager level. This included a target of 33% representation of women on FTSE 350 boards and leadership teams (which they consider as comprising the Executive Committee and the direct reports to the Executive Committee, and which we call ‘senior management’) by the end of 2020, which as the table opposite shows we have met.
* Hiscox Partner is an honorary title given to employees who make significant contributions to the development and profitability of the Group. The Partnership encourages a proprietorial attitude, and comprises of up to 5% of the workforce.
Stage 2 Committee review s Detailed questionnaire completed to assess the effectiveness of the Committees.
Stage 3 Board review s Detailed questionnaire completed to assess the effectiveness of the Board.
Stage 5 Action plan agreed s Action plan overseen to completion.
ii) Accounting for taxation During the year, the Company made an additional tax provision of up to $60 million, following a reappraisal of how the Company invested in and classified marketing activity historically. This additional tax provision has been presented as a prior year adjustment and, as a result, the previously disclosed profit for 2018 has been restated. The Committee received detailed information from management on the reclassification, the enquiries conducted and the enhanced controls and procedures introduced. The Committee also heard from the external and internal auditors relating to the matter. The Committee is satisfied with the actions taken and the reporting and disclosures of the matter.
iii) The valuation of the investment portfolio The Group values and reports its investment assets at fair value. Due to the nature of the investments, as disclosed in note 17, the fair value is generally straightforward to determine for most of the portfolio which is highly liquid. For the element of the portfolio held in risk assets, a small proportion relies on a higher degree of estimation. The Committee, through the Investment Committee, receives quarterly reports on the portfolio valuation and is content with the process and the estimates reported.
iv) Accounting for the defined benefit scheme As explained in note 2.16, the Group recognises the present value of the defined benefit obligation, less the fair value of plan assets at the balance sheet date. The Audit Committee reviewed the report of the key judgements and estimates in the financial statements from the Chief Financial Officer, and the results of
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. During the year, the value of non-audit services provided by PwC amounted to nil (2018: $168,000).
v) The recoverability of reinsurance assets As a result of the large loss activity in the year, the level of exposure to reinsurers has increased. The Committee received an update on the process to monitor the levels of recoverability, including the level of collateral held, and the regular contact with counterparties, the ratings of reinsurers and the concentration of risk. The Committee is satisfied with the approach taken and the recoverability of those assets.
vi) Estimated premium income The Hiscox Syndicates write a large proportion of their business through binding authorities. Due to a time lag between the binding of business and reporting to the insurance carrier, significant judgements are made in estimating the gross written premiums. The estimated gross written premium is regularly compared to the actuals and no significant differences have been noted. The Committee is satisfied with the approach taken.
vii) The level of rounding A change to the level of rounding was applied in the consolidated financial statements from nearest thousand to nearest hundred thousand. This reflects the growth of the business and further aligns the Group’s external reporting with its peers, a change which was approved by the Committee.
Systems and process change projects The various systems and process change projects under way across the Group continued this year and include systems changes in our retail businesses as well as a Group-wide finance change programme (FTP), which involves a wide-ranging transformation of the finance IT systems and controls. The Committee receives a quarterly update on the status of the FTP which enables it to monitor progress, obtain updates on delivery and provide challenge where necessary. Delivering the major projects already under way remains a business priority for 2020, and is outlined on page 8.
Guests were blown away – virtually – by the unique experience, which brought the threat of flood to life and underlined the importance of catch-all flood insurance. Using a VR headset, they followed Joe, an avatar of a New Jersey homeowner, as he hurried to protect his home.
They then witnessed the devastation caused by the storm, before being transported to the future, where the FloodPlus intelligent algorithms and modelling software, aided by computer graphics, demonstrated how rising sea levels could affect real US towns.
We believe this approach works well for both our employees and shareholders. It has helped the business to be profitable across the insurance cycle and to deliver good returns to shareholders. The total return on Hiscox shares over the last five years is 112%, more than double that of the FTSE All-Share Index. Hiscox employee retention is also generally high at 76%.
hurdle rate of 6.5% was not achieved no bonuses were paid. Similarly, post-tax ROE over three years of 3% was below the 7% hurdle for the Performance Share Plan awards granted in 2017, therefore none of these awards will vest.
The net result of the above is that the remuneration package and single figure result reported for the Chief Executive is lower than previous years at £698,196, a decrease of 60%.
Changes to the remuneration policy in 2020 Over the life of the current policy we have made a number of changes in direct response to shareholder feedback and changing market practice, and we intend to formalise these changes under the new policy. These are: — to use growth in net asset value (NAV) plus dividends measured on a per-share basis as the basis for our long-term incentive (the Performance Share Plan or PSP) awards, which from 2018 replaced return on equity (ROE) as the benchmark for awards; — to reduce the level of vesting of PSP awards for threshold performance from 25% of maximum to 20% for awards from 2018; and — to increase the shareholding requirements for Executive Directors from 150% to 200% of salary.
After extensive consultation, the response to these proposed changes from shareholders to date has been positive.
Our Executive Directors’ pension benefits have always been consistent with the wider UK workforce, and all three Executive Directors in 2019 received a 10% cash allowance in lieu of the standard employer pension contribution.
Gender pay reporting In 2019, Hiscox published its third annual gender pay report for the UK, which showed further year-on-year improvement in our median pay gap. While this remains higher than we would like, at 22.6% (2018: 24.5%), we continue to make good progress in getting more women into more senior, higher-paid roles. The proportion of women in the upper pay quartile, which is the key reason for the discrepancy, improved to 30% in 2019 (2018: 26%). For examples of our work around diversity and inclusion go to page 38, and details of our gender composition are outlined on page 59.
Executive Director changes during 2019 Upon his retirement from the board, Richard Watson stepped down as an Executive Director on 31 December 2019. Richard will continue to be employed as an advisor to the business as well as holding positions on a number of subsidiary boards. His successor, Joanne Musselle, joined the Board in March 2020. Further details on Joanne and Richard’s remuneration are set out in the annual remuneration report on pages 78 to 79.
Long-term performance impacted by catastrophes; PSP awards granted in 2017 will not vest.
Maximum opportunity: — up to 400% of salary for CEO and CFO; — up to 500% of salary for CUO. Over the past ten years, the average bonus to the CEO has been equivalent to 28% of the current maximum opportunity.
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 2019 is provided on pages 69 to 71.
2019 actual as percentage of salary: — Bronek Masojada: 0% — Aki Hussain: 0% — Richard Watson: 0% ROE performance has been below the predetermined hurdle so irrespective of personal performance, no bonus is payable.
2019 award as percentage of salary: — Bronek Masojada: 200% — Aki Hussain: 200% — Richard Watson: 200%
2019 actual: — Bronek Masojada: 6,800% — Aki Hussain*: 200% — Richard Watson: 1,400% *Aki Hussain was appointed in September 2016.
Salaries for 2020: — Bronek Masojada: £654,000 — Aki Hussain: £503,500 — Joanne Musselle: £503,500 Salary increase of 2.7%, in line with the average UK employee increase.
Share ownership guideline unchanged. Post-employment shareholding requirement introduced under the new policy.
Annual report on remuneration 2019 This report explains how the remuneration policy was implemented for the financial year ending 31 December 2019 and how it will be applied for the 2020 financial year.
PwC has been engaged to audit the sections in the annual report on remuneration 2019 below entitled ‘Executive Director remuneration’ and additional notes, ‘annual bonus’, ‘long-term incentives’, ‘details of pension entitlements’, ‘Non Executive Director fees’, ‘Directors’ shareholding and share interest’, ‘Performance Share Plan’ and ‘Sharesave Schemes’, ‘Payments to past Directors’, ‘Richard Watson’s retirement from the Board’, to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
1 2019 long-term incentives relate to performance share awards granted in 2017 where the performance period ends on 31 December 2019. The award is due to vest on 7 April 2020. Based on performance achieved, this award is due to lapse in full.
2 A proportion of the bonus amount was deferred as set out on page 86 of the policy report. 3 The 2018 long-term incentive award relates to performance share awards granted in 2016 where the performance period ended on 31 December 2018. The amount also includes dividend equivalents accrued on this award. The value of the awards have been updated to reflect the actual share price at vesting on 8 April 2019 of £15.46. Of the vested amount, 41% relates to share price appreciation over the performance period (35% for Aki Hussain based on his later date of grant).
Bronek Masojada £636,500 Richard Watson £490,000 Aki Hussain £490,000 68 Hiscox Ltd Report and Accounts 2019
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 three occasions when the Group delivered a pre-tax ROE below the required threshold and no bonuses were paid to Executive Directors.
When setting targets, the Committee seeks to motivate strong performance while also encouraging sustainable behaviours, in line with the defined risk appetite of the business. In determining the size of the Executive Director bonuses for 2019, the Committee used the following framework.
Performance outcomes for 2019 The pre-tax ROE for 2019 was 2.2%. Despite delivery of good progress against their key individual objectives during the year, in accordance with the bonus framework on page 69, no bonuses were paid to the Executive Directors as the threshold performance hurdle had not been met. For completeness, the table opposite sets out the key objectives and individual achievements of each Executive Director.
Balancing the portfolio takes constant course correction and there is still more to do. However, Richard drove decisive action in underperforming lines, cutting over $200 million of business in 2019. At the same time we have grown in profitable areas to achieve overall growth in constant currency of 8.1%.
Richard has driven refinements in talent monitoring processes and has encouraged courageous career moves for high potential underwriters. The successful move of Hiscox Re & ILS’s CUO to Hiscox USA is a good example of this.
An Executive Committee priority has been to reduce Hiscox’s expense ratio over time, which has been impacted by a series of capital intensive projects to support greater scale in the business. Although improvements in efficiency are being made, for example through increased automation, there is more to do, and plans for 2020 include moving 300 roles out of London to more cost-effective locations.
s Shareholders’ views on the key changes to the policy have been sought. s Although the Committee did not consult directly with the broader workforce on Executive
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.
s Incentive awards are capped and are not considered excessive. s Executive Directors’ annual bonus awards are judgement based to ensure they reflect their overall performance rather than being measured according to a formulaic outcome. Risk is also taken into consideration as part of this.
Proportionality – the link between individual awards, the delivery of strategy and the long-term performance of the Company should be clear. Outcomes should not reward poor performance.
Long-term incentives Performance Share Plan awards (PSP) where the performance period ends with the 2019 financial year The Executive Directors were granted nil-cost options under the PSP on 7 April 2017 for the three-year performance period 1 January 2017 to 31 December 2019.
The performance conditions for this award were set at the start of the performance period and are as follows: Required average post-tax ROE over three-year performance period
Performance outcome Based on the three-year average post-tax return on equity of 3%, the awards ending with the 2019 performance year will not vest as the minimum performance threshold has not been met.
PSP awards granted during the 2019 financial year On 8 April 2019, the Executive Directors were granted nil-cost options under the PSP.
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 four years. The value of vested PSPs has been the material element of the CEO’s remuneration. Good performance and share price appreciation has increased the value of PSPs over time.
Details of pension entitlements Bronek Masojada, Richard Watson and Aki Hussain hold lifetime allowance protection certificates and have therefore opted out of the Company defined contribution pension scheme. They receive a 10% cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. The value of this benefit is shown in the Executive Director remuneration table on page 68. 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.
In the event of early retirement the Directors receive a reduced pension to reflect early payment in accordance with the scheme rules.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2019 and 31 December 2018.
The interests of Executive and Non Executive Directors are set out below, including shares held by connected persons. There have been no changes in the Director share interests between 31 December 2019 and 2 March 2020.
Executive Directors Bronek Masojada 2,990,109 3,014,894 Richard Watson 494,946 614,973 Aki Hussain 71,794 64,794 Non Executive Directors Robert Childs 1,200,810 1,274,610 Caroline Foulger 13,231 8,231 Michael Goodwin 4,986 4,950 Thomas Hürlimann 8,863 3,660 Colin Keogh 24,967 20,942 Anne MacDonald 35,375 28,611 Bob McMillan – – Constantinos Miranthis 4,525 4,525 Lynn Pike – –
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 based on an average share price over five days prior to the invitation date, with a 20% discount.
Richard Watson 1,557 – – – 1,557 11.556 01-Jun-21 30-Nov-21 Aki Hussain 2,081 – – – 2,081 8.648 01-Jun-20 30-Nov-20
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past ten years.
CEO single figure of remuneration (£) 1,759,123 1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,394,428 1,818,086 698,196 Annual bonus as percentage of current max 29 0 46 51 44 39 64 0 9 0 PSP vesting as percentage of maximum opportunity 100 85 39 53 100 100 100 85 47 0
Prior to 2015 the annual bonus was operated on an uncapped basis. In order to facilitate comparison the current 400% salary cap has been applied retrospectively.
Total shareholder return performance The graph below shows the total shareholder return of the Group against the FTSE All-Share and FTSE Non-Life Insurance indices. These reference points have been shown to assess performance against the general market and industry peers. Between December 2009 and 2019, Hiscox delivered total shareholder return of 422% – well above the FTSE All-Share and FTSE Non-Life Insurance indices.
Relative importance of the spend on pay The charts below show the relative movement in profit, shareholder returns and employee remuneration for the 2018 and 2019 financial years. Shareholder return for the year incorporates the distribution made in respect of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits. Profit is the ultimate driver behind the performance metrics of the bonus and long-term incentive schemes. Profit before tax can be located on page 108.
Dividend and return of capital to shareholders ($m) +4.2 (% change)
Remuneration for the wider workforce The Remuneration Committee receives information on Group-wide remuneration policies and uses internal and external measures to assess the appropriateness of the remuneration policy and outcomes for Executive Directors. During the year, the Committee reviewed information on market levels of pay in our peer group, bonus pools split by business area, levels of share plan participation and pay ratios between Executives and average employees.
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 2019 is shown below, along with the 25th and 75th percentiles.
2019 A 1:19 1:11 1:7 2018* B 1:35 1:29 1:15 *Based on restated CEO single figure for 2018.
The Committee has considered the pay data for the three employees identified and believes that it fairly reflects pay at the relevant quartiles amongst the UK employee population. The calculations were in line with the single figure methodology, with no elements of pay and benefits omitted.
In accordance with the remuneration policy and plan rules, Richard’s outstanding deferred bonuses earned and disclosed in previous years (of £107,500) and unvested PSP awards (121,250 shares) will subsist, subject to performance testing and continued employment with the Group. His outstanding options under the HMRC-approved all-employee Sharesave Scheme have been dealt with in accordance with the rules of the scheme.
As an internal promotion, there is no buyout associated with her appointment. All other elements of her package are in line with the remuneration policy.
Implementation of remuneration policy for 2020 Salary Annual salary reviews take effect from April each year. The Committee takes account of a number of factors, primarily the increase applied to other UK-based employees. The Committee applies judgement when using external market data.
For 2020, salaries for Executive Directors will be increased by 2.7%. This is in line with other UK-based employees. Salaries from April 2020 will be as follows: April 2020 £
The maximum opportunity and overall bonus structure for the year ending 31 December 2020 will be 300% of salary (and 400% of salary for the CUO).
Bonuses are not paid unless the Group’s performance exceeds a given ROE threshold. There is no change in this threshold for 2020 (ROE of risk-free rate (RFR) plus 5%). A maximum bonus will only be achieved for ROE performance of at least RFR plus 20%, taking into account individual performance and risk management. The ranges used to support the Committee’s decision-making will be disclosed in next year’s Directors’ remuneration report, together with an overview of the individual objectives set.
Performance Share Plan (PSP) As set out elsewhere in this report, under the new remuneration policy (pages 83 to 93) we are proposing to increase the maximum PSP opportunity to 250% of salary, as part of the rebalancing of the incentive opportunity towards the long-term. This increased opportunity will only be delivered where more stretching performance targets have been met over a three-year period.
Subject to the new remuneration policy being approved by shareholders, the maximum opportunity for the awards to be granted to the Executive Directors in 2020 will be 250% of salary. These award levels will be kept under review for future years.
Growth in NAV plus dividends measured on a per-share basis Award vesting (% of salary)
Membership of the Remuneration Committee The Committee members during the year were Caroline Foulger, Bob McMillan, Lynn Pike, Anne MacDonald, Thomas Hürlimann, Michael Goodwin, Constantinos Miranthis and Colin Keogh (Chairman).
The Non Executive Director fees which apply for 2020 are set out below.
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 £92,625 based on a time and materials basis. The Committee regularly reviews the advice it receives and is satisfied that this has been objective and independent. During the year Deloitte also provided the Company with other tax and consulting services.
In addition to the external advisors, the Chief Executive and Group HR Director attend the Committee meetings by invitation and provided material assistance to the Remuneration Committee during the year. No Director or Committee member was involved in determining their own remuneration during the year.
Remuneration policy Hiscox has a forward-looking remuneration policy for its Board members.
The core function of the Remuneration Committee’s role is to determine: p the overall remuneration strategy, policy and cost for the Group; p the levels and make-up of remuneration for Executive
Directors and senior management; p the award of material bonuses to individuals other than the Executive Directors; and p the awards and wider operation of the Company’s share plans, including the Performance Share Plan.
We are a Bermuda-incorporated company and therefore is not subject to the UK Companies Act and related UK secondary legislation. Our intention, however, has always been to provide transparent remuneration disclosure and to engage with shareholders on the topic, therefore our remuneration reporting is consistent with the UK regulations and we will be submitting the policy and remuneration report for an advisory vote at the Annual General Meeting on 14 May 2020.
Changes to the policy The new remuneration policy has been determined by the Committee following a robust process, which took into account the views of Hiscox’s major shareholders.
The policy has been drafted to incorporate the changes previously adopted by the Company in 2017. These have been communicated to shareholders in prior years and are formalised under the new policy. The changes previously adopted are: p threshold vesting – a reduction in the minimum vesting threshold of PSP awards from up to 25% to up to 20% of maximum; p performance condition – an amendment to the performance condition used to determine PSP awards from ROE to growth in net asset value plus dividends per share; and p shareholding guidelines – an increase in shareholding guidelines from 150% to 200% of salary for all Executive Directors.
In addition to the above, the Remuneration Committee has been mindful of the views of shareholders and the provisions detailed within the revised UK Corporate Governance Code. As a result we are proposing the following additional changes to our policy. p Rebalancing the weighting of incentives further towards the long term – in order to encourage and support an ownership culture and increase the focus on long-term performance, it is proposed to increase the maximum award opportunity under the PSP from 200% to 250% of salary. The maximum opportunity under the annual bonus opportunity will be reduced from 400% to 300% of salary for the CEO and CFO and from 500% to 400% of salary for the CUO.
p Post-employment shareholding guidelines – in recognition of the changes to the UK Corporate Governance Code, Executive Directors will now be expected to maintain an interest in Hiscox shares after they step down from the Board.
p Recovery and discretion – the recovery provisions have been strengthened and discretion to override formulaic returns introduced to the PSP to enable the Committee to apply judgement to plan outcomes under the PSP in exceptional circumstances, in line with the 2018 UK Corporate Governance Code.
Other minor drafting changes are proposed to clarify areas of implementation.
Increases above this level may be considered in other circumstances as appropriate (for example, to address market competitiveness, development in the role, or a change in role size, scope or responsibility).
Purpose and link to strategy Fixed-pay elements enable the Company to be competitive in the recruitment market when looking to employ individuals of the calibre required by the business.
Operation Retirement benefits These vary by local country practice but all open Hiscox retirement schemes are based on defined contributions or an equivalent cash allowance. This approach will be generally maintained for any new appointments other than in specific scenarios (for example, local market practice dictates other terms). For current Executive Directors, a cash allowance of up to 10% of salary is paid in lieu of the standard employer pension contribution, or a combination of pension contributions and cash allowance, totalling 10% of salary.
Certain Board members retain legacy interests in closed defined benefit schemes. However, there is no entitlement to any further accrual under these schemes.
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results. For 2020, the bonus pool will be funded by a set percentage of profits on achievement of a hurdle rate of ROE. The bonus for prior years was determined on a similar basis. Further detail is set out on page 69.
Maximum potential value The maximum bonus opportunity for the Executive Directors will be as follows: p CEO and CFO – 300% of salary; p CUO – up to 400% of salary.
Balance of bonus split 50% to be paid after year two (24 months after the start of the bonus year), and 50% after year three (36 months after the start of the bonus year).
Maximum annual grant of up to 250% of salary in respect of any one financial year.
Maximum potential value The performance conditions for awards are set to align with the long-term objectives of the Company.
Performance metrics The Committee reviews the targets prior to each grant to ensure that they remain appropriate.
For delivery of the threshold hurdle, up to 20% of the relevant award will vest. For full vesting, the stretch hurdle needs to be met in full.
The discretions available to the Committee in assessing the achievement of the performance target are as set out in the notes to the policy table on page 90.
Where the Committee considers it appropriate to do so, under the plan rules the Committee is able to modify performance criteria for outstanding awards on the occurrence of certain events (for example, major disposal).
Operation Within five years of becoming an Executive Director, individuals will normally be expected to have acquired an interest in Hiscox shares valued at 200% of salary. Shares owned by the Executive Director (and any connected person) count towards the guidelines as do shares subject to any vested but unexercised PSP award (net of assumed taxes).
The Company operates a bonus pool approach for the annual incentive. This ensures that both individual bonus levels and overall spend are commensurate with the performance of the Company. The Committee applies judgement based on a range of factors (as described in the table on page 85) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than on a formulaic outcome. The profit pool approach currently used ensures that overall bonus amounts are aligned to the performance of the Company and remain appropriate and affordable.
Recruitment policy A new hire will ordinarily be remunerated in accordance with the policy described in the table on the previous pages. In order to define the remuneration for an incoming Executive Director, the Committee will take account of: p prevailing competitive pay levels for the role; p experience and skills of the candidate; p awards (shares or earned bonuses) and other elements which will be forfeited by the candidate; p transition implications on initial appointment; p the overall Hiscox approach.
Non Executive Directors are appointed for a three-year term, which is renewable, with three months’ notice on either side, no contractual termination payments being due and subject to re-election pursuant to the Bye-laws at the Annual General Meeting. The contract for the Chairman is subject to a six-month notice provision on either side.
Policy on payment for loss of office Subject to the execution of an appropriate general release of claims an Executive Director may receive on termination of employment by the Company: 1. Notice period of up to 12 months In the normal course of events, an Executive will remain on the payroll but may be placed on gardening leave for the duration of the notice period (or until they leave early by mutual agreement, whichever is sooner). During this period they will be paid as normal, including base pay, pension contributions (or cash allowance as appropriate) and other benefits (for example, healthcare).
The Committee may also make a payment in respect of outplacement costs, legal fees and costs of settling any potential claims where appropriate.
5. Change of control In the event of a change of control, outstanding PSP awards will normally vest early to the extent that the performance condition, as determined by the Committee in its discretion, has been satisfied and unless the Committee determines otherwise, would be pro-rated to reflect the period which has elapsed from the commencement of the award to the date of the relevant corporate event.
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. More junior employees may also receive a personal performance bonus.
p Retirement benefit as received during 2019, as disclosed in the Executive Director remuneration table on page 68.
p PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 87. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
The insurance industry is a huge part of the City of London, yet many children who grow up in its shadows never consider working in it. That’s why Hiscox supports social mobility charity The Brokerage: to connect with young Londoners so we can spread the word about the great career opportunities that insurance can offer them.
The key performance indicators are shown on pages 2 to 3. 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 17 to 25. 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 6 to 7. 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 9 and the risk management section on pages 28 to 31. 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 54 to 57.
Emerging and principal risks The confirmation required by provision 28 of the Code in relation to the Board’s assessment of the Company’s emerging and principal risks can be found on page 9.
Going concern A review of the financial performance of the Group is set out in the Chief Executive’s report on pages 17 to 25. The financial position of the Group, its cash flows and borrowing facilities are included in the capital section on pages 26 and 27. The Group has considerable financial resources and a well-balanced book of business.
Viability statement It is fundamental to the Group’s longer-term strategy that the Directors manage and monitor risk, taking into account all key risks the Group faces, including insurance risks, so that it can continue to meet its obligations to policyholders. The Group is also subject to extensive regulation and supervision including Bermuda Solvency Capital Requirement.
Against this background, the Directors have assessed the prospects of the Group in accordance with provision 31 of the UK Corporate Governance Code 2018, with reference to the Group’s current position and prospects, its strategy, risk appetite and key risks, as detailed in the key risks section on page 9 and the risk management section on pages 28 to 31, as well as note 3 to the consolidated financial statements. The assessment of the Group’s prospects by the Directors covers the three years to 2022 and is underpinned by management’s 2020-2022 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 Group’s stress and scenario testing considers 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 this assessment, the Directors have a 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.
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 2019 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.
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 44 and 46. Details of the Chairman’s professional commitments are included in his biography on page 44 and there were no changes during the year. 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, with the exception of Richard Watson who stepped down from the Ltd Board with effect from 31 December 2019 following his retirement as Chief Underwriting Officer. Joanne Musselle was appointed as his successor with effect from 1 January 2020, and joined the Board in March, subject to her re-election by shareholders at the Annual General Meeting. Biographical details of the Directors are set out on pages 44 to 45, 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.
Major interests in shares The Company has been notified of the following interests of 5% or more of voting rights in its ordinary shares: Number of shares
Note 22 to the consolidated financial statements on employee share schemes (page 151)
The Board is responsible for ensuring the maintenance of proper accounting records which disclose with reasonable accuracy the financial position of the Group. It is required to ensure that the financial statements present a fair view for each financial period. The Directors explain in the Annual Report their responsibility for preparing the Annual Report and Accounts.
• the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Registered office Chesney House 96 Pitts Bay Road Pembroke HM 08 Bermuda
Bankers HSBC Bank Bermuda Limited 37 Front Street Hamilton HM 11 Bermuda
Registrars Equiniti (Jersey) Limited c/o Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA United Kingdom
At Hiscox, we want our customers to be at the centre of everything we do. That’s why we regularly connect with micro and small businesses in the UK and USA – the backbone of both economies and Hiscox Retail’s core clientele.
We trust their judgement – if they don’t like something we’ll 100 Hiscox Ltd Report and Accounts 2019 change it. They’re our very own focus groups, ensuring we never rest on our laurels. By connecting with them and garnering their feedback, we are able to continually improve our service and make our products even better.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the ‘auditor’s responsibilities for the audit of the consolidated financial statements’ section of our report.
Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the ethical requirements of the Chartered Professional Accountants of Bermuda Rules of Professional Conduct (CPA Bermuda Rules) that are relevant to our audit of the consolidated financial statements in Bermuda. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the ethical requirements of the CPA Bermuda Rules.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $1.4 million, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Valuation of gross incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves
Refer to note 2.14, 2.22 and 23 to the consolidated financial statements for disclosures of related accounting policies and balances.
A the risk that key assumptions in respect of natural catastrophes and other large claims losses are inappropriate. There is significant judgement involved in these loss estimates, particularly as they are often based on limited data.
This work, supplemented with tests of detail, included: (i) reviewing and testing the reconciliation of data from the underlying policy administration systems to the data used in the actuarial projections; (ii) testing the completeness and accuracy of premiums and claims data used in the actuarial projections; and (iii) 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.
In performing our detailed audit work over the valuation of gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves we used PwC actuarial specialists, where appropriate. Our procedures included: A developing independent point estimates for classes of business considered to be higher risk, particularly focusing on the largest and most uncertain estimates, as at 30 September 2019 and performing roll-forward testing to 31 December 2019; A testing, for certain other classes of business (including those impacted by natural catastrophes and other large claims), the methodology and assumptions used by management to derive the gross IBNR loss reserve estimates; A performing analytical review procedures over the remaining classes of business to evaluate gross IBNR loss reserves; A evaluating the appropriateness of the booked gross IBNR management margin, taking into account estimation uncertainty inherent in the underlying insurance business; A re-calculating gross to net ratios on a sample basis against the estimated gross IBNR loss reserves to calculate the estimated reinsurers’ share of IBNR loss reserves; and
A comparing our estimates, based on the procedures performed above, to those booked by management.
The results of our procedures indicated that the valuation of gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves were supported by the evidence we obtained.
Refer to note 2.15, 2.22, 3.4 and 25 to the consolidated financial statements for disclosures of related accounting policies and balances.
We focused on this area because the Group is subject to taxation in multiple jurisdictions and, in some cases, the ultimate tax treatment is uncertain until resolved with the relevant tax authority. Consequently, management make judgements and estimates with respect to the incidence and quantum of tax liabilities. The provision for uncertain tax positions may be materially impacted by numerous factors including: A decisions and pronouncements made by the relevant tax authorities; A assumptions used in interpreting the relevant tax regulations; and A assumptions used in determining transactions subject to the relevant tax regulations.
For certain other components, we identified account balances which were considered to be significant in size or audit risk at the financial statement line item level in relation to the consolidated financial statements, and scoped the audit of these by performing financial statement line item audits over the specified balances. Analytical procedures over the remaining components that were not inconsequential were performed by the Group engagement team.
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 Luxembourg, 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, and senior engagement team members visited the United Kingdom, Europe (Portugal), and Bermuda during the audit process. 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.
Except as noted in the ‘report on other legal and regulatory requirements’ section, our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
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 IFRS 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.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
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 statements represent the underlying transactions and events in a manner that achieves fair presentation; 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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
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 96. 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.
Directors’ remuneration The Company voluntarily prepares an annual report on remuneration in accordance with the provisions of the UK Companies Act 2006. The Directors have requested that we audit the part of the annual report on remuneration specified by the UK Companies Act 2006 to be audited as if the Company were a UK registered company.
Corporate governance statement Under the United Kingdom’s Listing Rules we are required to review the part of the corporate governance statement on pages 49 to 57 relating to 11 provisions of the UK Corporate Governance Code 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 review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Income Gross premiums written 4 4,030.7 3,778.3 Outward reinsurance premiums (1,351.9) (1,196.8)
Gross premiums earned 3,931.9 3,699.8 Premiums ceded to reinsurers (1,296.3) (1,126.2)
Claims and claim adjustment expenses, net of reinsurance 23.2 (1,576.1) (1,225.8) Expenses for the acquisition of insurance contracts 15 (944.9) (882.0) Reinsurance commission income 15 283.9 240.3
Earnings per share on profit attributable to owners of the Company *See note 2.2 for further details.
Items that may be reclassified subsequently to the income statement: Exchange losses on translating foreign operations (1.0) (14.7)
Assets Goodwill and intangible assets 12 278.0 204.6 186.0 Property, plant and equipment 13 128.4 61.4 65.6
Balance at 1 January 2018 as reported previously 33.9 45.8 184.0 (310.6) 2,414.2 2,367.3 1.1 2,368.4 Cumulative impact of prior period adjustments – – – – (51.2) (51.2) – (51.2)
Profit for the year (all attributable to owners of the Company) – – – – 117.9 117.9 – 117.9 Other comprehensive income net of tax (all attributable to owners of the Company) – – – (14.7) 16.1 1.4 – 1.4 Employee share options: Equity settled share-based
Proceeds from shares issued 22 – 3.6 – – – 3.6 – 3.6 Deferred and current tax on employee share options – – – – 0.2 0.2 – 0.2 Net movements of treasury shares held by Trust – – – – – – – – 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)
Cash and cash equivalents at 1 January 1,288.8 867.8 Net (decrease)/increase in cash and cash equivalents (181.3) 443.0 Effect of exchange rate fluctuations on cash and cash equivalents 8.4 (22.0) Cash and cash equivalents at 31 December 21 1,115.9 1,288.8 *See note 2.2 for further details.
Included within cash and cash equivalents held by the Group are balances totalling $167 million (2018: $211 million) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, $41 million (2018: $24 million) is pledged cash held against Funds at Lloyd’s, and $0.3 million (2018: $10 million) held within trust funds against reinsurance arrangements.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in US Dollars millions ($m) rounded to the nearest hundred thousand Dollars, unless otherwise stated.
The financial statements were approved for issue by the Board of Directors on 2 March 2020.
2.1 Significant accounting policies 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 2.22.
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 2019. They have been applied in preparing these consolidated financial statements.
IFRS 16 supersedes IAS 17 Leases and sets out the principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 requires lessees to account for leases under a single on-balance sheet model. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.
Notes to the consolidated financial statements 112 Hiscox Ltd Report and Accounts 2019
The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. Right-of-use assets are presented in the balance sheet under property, plant and equipment.
The Group has elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its previous application of IAS 17. As permitted by IFRS 16, the Group also elected to use hindsight in determining the lease term if the contract contains options to extend or terminate the lease.
In addition, the Group has opted to use the recognition exemptions for lease contracts that, at the commencement date: –have a lease term of 12 months or less and do not contain a purchase option (short-term leases); and –lease contracts for which the underlying asset is of low value (low-value assets).
Assets Increase in property, plant and equipment 78.8 Analysed as right-of-use assets related to: Properties 77.9 Other 0.9
The weighted average incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.4%.
This Interpretation clarifies the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: –whether an entity considers uncertain tax treatments separately; –the assumptions an entity makes about the examination of tax treatments by taxation authorities; –how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; –how an entity considers changes in facts and circumstances.
The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty.
The Group applies significant judgement in identifying uncertainties over income tax treatments. Since the Group operates in a complex multinational environment, it assessed whether the interpretation had an impact on its consolidated financial statements. The adoption of the interpretation did not have an impact on the consolidated financial statements as the clarified guidance is consistent with the Group’s accounting policy.
The following new standards, and amendments to standards, are effective for annual periods beginning after 1 January 2018 and have not been applied in preparing these financial statements: – IFRS 9 Financial Instruments
2 Basis of preparation continued 2.1 Significant accounting policies New accounting standards, interpretations and amendments to published standards continued 114 Hiscox Ltd Report and Accounts 2019
2.2 Prior-period adjustments In 2019, the Group has made an additional tax provision relating to reappraisal of uncertain tax positions, the most significant one relates to a classification of marketing activity affecting a historical tax position. This has been presented as a prior-period adjustment and has led to a decrease in profit after tax of $10.1 million in 2018 and a decrease in opening retained earnings for 2018 of $51.2 million, with a decrease in closing equity at 31 December 2018 of $58.1 million. The impact on the consolidated income statement, balance sheet, equity and cash flow statements are shown in the tables below.
Profit for the year 128.0 (10.1) 117.9 Exchange losses on translating foreign operations (17.9) 3.2 (14.7) Total comprehensive income 126.2 (6.9) 119.3
Effect analysed as adjustments to: Effect analysed as adjustments to: Effect analysed as adjustments to: Other 2018 As reported previously
(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as IAS 39 effective net investment hedges or when the underlying balance is deemed to form part of the Group’s net investment in a subsidiary operation and is unlikely to be settled in the foreseeable future. Non-monetary items carried at historical cost are translated in the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined.
– all resulting exchange differences are recognised as a separate component of equity.
2.7 Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.
The rates applied are as follows: – buildings 20–50 years – vehicles 3 years – leasehold improvements including fixtures and fittings 10–15 years – furniture, fittings and equipment 3–15 years
The impairment review process examines whether or not the carrying value of the goodwill attributable to 2 Basis of preparation continued 117Hiscox Ltd Report and Accounts 2019
an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
(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: – adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; – the likelihood of accelerated obsolescence arising from the development of new technologies and products; and
– the disintegration of the active market(s) to which the asset is related.
(c) Impairment loss An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). For financial assets, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
2.8 Financial assets and liabilities including loans and receivables The Group classifies its financial assets as a) financial assets at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial assets based on the purpose for which the financial assets are held at initial recognition. The decision by the Group to designate debt and fixed income securities, equities and investment funds and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis.
2.9 Cash and cash equivalents The Group has classified cash deposits and short-term highly-liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each business unit to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk provision’). Any DAC written-off as a result of this test is not subsequently reinstated.
2.12 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.
(h) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to, and from, agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in the income statement.
A provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at 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 in certain cases based on advice sought from specialist tax advisors.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and 2 Basis of preparation 2.14 Insurance contracts continued 120 Hiscox Ltd Report and Accounts 2019
(c) Share-based compensation The Group operates a number of equity settled share-based employee compensation plans. These include the share option schemes, and the Group’s Performance Share Plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes. The fair value of the employee services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense, with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions (for example, profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest.
2.18 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit and interest in respect of lease liabilities. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
2.22 Use of significant judgements, estimates and assumptions The preparation of financial statements requires the Group to select accounting policies and make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses in the consolidated financial statements.
The Audit Committee reviews the reasonableness of critical judgements, estimates and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee report on pages 60 to 61.
Critical accounting judgements The following accounting policies are those considered to have a significant impact on the amounts recognised in the consolidated financial statements, with those judgements involving estimation summarised thereafter. – Consolidation: assessment of whether the Group controls an underlying entity, for example, the treatment of insurance-linked securities funds including consideration of its decision-making authority and its rights to the variable returns from the entity; – Insurance contract: assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as an insurance contract or as a financial instrument; – Financial investments: classification and measurement of investments including the application of the fair value option.
The employee retirement benefit scheme obligations are calculated and valued with reference to a number of actuarial assumptions including mortality, inflation rates and discount rate, many of which have been subject to specific recent volatility. This complex set of economic 122 Hiscox Ltd Report and Accounts 2019
The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the reporting date and consequently the final amounts payable or receivable may differ from those presented in these financial statements.
2.23 Reporting of additional performance measures The Directors consider that the combined ratio measures reported in respect of operating segments and the Group overall in note 4 and net asset value per share and return on equity measures disclosed in notes 5 and 6, provide useful information regarding the underlying performance of the Group’s businesses. These measures are widely recognised by the insurance industry and are consistent with the internal performance measures reviewed by senior management including the chief operating decision-maker. However, these measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported with similarly titled additional performance measures reported by other companies.
3 Management of risk The Group’s overall appetite for accepting and managing varying classes of risk is defined by the Group’s Board of Directors. The Board has developed a governance framework and has set Group-wide risk management policies and procedures which include risk identification, risk management and mitigation and risk reporting. The objective of these policies and procedures is to protect the Group’s shareholders, policyholders and other stakeholders from negative events that could hinder the Group’s delivery of its contractual obligations and its achievement of sustainable profitable economic and social performance.
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 common 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.
To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: – regularly updating the Group’s risk models; – documenting, monitoring and reporting on the Group’s strategy to manage risk; – developing systems that facilitate the identification of emerging issues promptly; – utilising sophisticated computer modelling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; – monitoring legal developments and amending the wording of policies when necessary; – regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; – examining the aggregated exposures in advance of underwriting further large risks; and
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 claim development patterns and discuss individual underwriting issues as they arise.
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2019
3 Management of risk 3.1 Insurance risk i) Underwriting risk continued Reinsurance inwards The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the high-frequency, low-severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or man-made occurrence. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to predict over the short term which complicates attempts to anticipate claims frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, claims frequencies on the reinsurance inwards book can be relatively low.
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.
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.
In addition there is increased potential for accumulation in casualty risk due to the growing complexity of business, technological advances, and greater interconnectivity and interdependency across the world due to globalisation.
The Group’s provision estimates are subject to rigorous review by senior management from all areas of the business. The managed Syndicates and US business receive a review of their estimates from independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
3 Management of risk 3.1 Insurance risk i) Underwriting risk Casualty insurance risks continued 126 Hiscox Ltd Report and Accounts 2019 3.2 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.
(a) Reliability of fair values The Group has elected to carry loans and receivables at amortised cost and all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments and the insurance-linked funds shown in note 20, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their closing market prices at the balance sheet date. The ability to obtain quoted market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
At 31 December 2019, the Group holds 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.
Directly held equity securities 4 4 Units held in funds – traditional long only 52 58 Units held in funds – long and short and special strategies 44 38 Geographic focus Specific UK mandates 29 36 Global mandates 71 64
The Group may also, from time to time, enter into interest rate future contracts in order to reduce interest rate risk on specific portfolios. The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2019 was $4,990 million (2018: $4,575 million).
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 or decrease by approximately $76 million (2018: $69 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.
At 31 December 2019, no cash was drawn on the Group’s borrowing facility (2018: $nil). At 31 December 2019, the Group had long-term debt of £550 million (2018: £550 million). The £550 million consists of two listed instruments of £275 million each, as explained in note 17: the first being fixed-to-floating rate notes where the floating rate becomes effective from November 2025; the second being fixed rate notes maturing in December 2022. The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 30.
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets, but collateral may be requested to be held against these assets. The Group structures the levels of credit risk accepted by placing limits on its exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review. 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.
Debt and fixed income securities 17 629.7 2,083.7 1,259.1 972.8 44.6 4,989.9 Deposits with credit institutions 17 – – – – – –
The Group’s equities and investment funds and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.
Average contractual maturity analysed by denominational currency of investments as at 31 December 2019 years years
Canadian Dollar 1.82 1.71 3 Management of risk 3.2 Financial risk (d) Credit risk continued 129Hiscox Ltd Report and Accounts 2019
Property – marine and major assets 76.9 47.0 42.8 13.1 179.8
Liquidity requirements to settle estimated profile of gross claim liabilities on balance sheet
Property – marine and major assets 109.6 56.1 42.6 9.5 217.8 *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.
The Group’s exposures to foreign exchange risk arise mainly with respect to the US Dollar, Sterling and the Euro. These exposures may be classified in two main categories: – operational foreign exchange exposure arises from the conversion of foreign currency transactions resulting from the activities of entering into insurance, investment and operational contracts in a currency that is different to each respective entity’s functional currency; and
– structural foreign exchange exposure arises from the translation of the Group’s net investment in foreign operations to the US Dollar, the Group’s reporting currency.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2019 US Dollar $m
Loans and receivables including insurance receivables 856.8 503.8 97.8 97.9 1,556.3 Current tax asset 0.6 – 4.1 – 4.7
Financial assets carried at fair value** 3,450.4 991.7 436.3 151.3 5,029.7
Loans and receivables including insurance receivables 689.6 464.4 71.3 39.8 1,265.1
3 Management of risk 3.2 Financial risk (f) Currency risk Structural currency risk continued 131Hiscox Ltd Report and Accounts 2019
3.3 Capital risk management The Group’s primary objectives when managing its capital position are: – to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; – to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; – to maintain an efficient cost of capital; – to comply with all regulatory requirements by an appropriate margin; – to maintain financial strength ratings of A in each of its insurance entities; and – to settle policyholders' claims as they arise.
The subordinated debt issued by the Group is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements.
At 31 December 2019 available capital was $2,276 million (2018 restated: $2,405 million), comprising net tangible asset value of $1,912 million (2018 restated: $2,055 million) and subordinated debt of $364 million (2018: $350 million).
3 Management of risk 3.2 Financial risk (f) Currency risk continued 132 Hiscox Ltd Report and Accounts 2019
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The Group had sufficient capital at all times throughout the year to meet the BMA’s requirements. The BMA is planning to phase in capital requirements changes between the 2019 and 2021 year-ends. The Group expect to maintain an appropriate margin of solvency after these changes have taken effect.
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.
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 $25 million and $88 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.
4 Operating segments In the first half of 2019, the Group reviewed the segmental presentation of financial information it requires to assess performance and allocate resources. To further align to how the Group manages its investments through a centralised investment function, and the basis for internal performance incentivisation, the Group has changed the method of allocation of the investment result to the reportable operating segments. Previously this was presented based on investment returns recognised by legal entities that made up the segments, and this is now allocated to each segment based on: attributed capital at the beginning of the year under the Group’s capital allocation methodology; and weighted average insurance liabilities net of reinsurance. There is no impact on the consolidated investment result and following this change, the comparative figures in the segmental reporting have been re-presented.
Hiscox Special Risks. Hiscox UK and Hiscox Europe underwrite personal and commercial lines of business through Hiscox Insurance Company Limited and Hiscox Société Anonyme (Hiscox SA), together with the fine art and non-US household insurance business written through Syndicate 33. In addition, Hiscox UK includes elements of specialty and international employees and officers’ insurance written by Syndicate 3624. Hiscox Europe excludes the kidnap and ransom business written by Hiscox SA. Hiscox Special Risks comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited and the European kidnap and ransom business written by Hiscox SA and Syndicate 33. Hiscox USA comprises commercial, property and specialty business written by Hiscox Insurance Company Inc. and Syndicate 3624.
3 Management of risk 3.3 Capital risk management Capital modelling and regulation continued 134 Hiscox Ltd Report and Accounts 2019
4 Operating segments continued – Hiscox London Market comprises the internationally traded insurance business written by the Group’s London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage and aviation business.
– Corporate Centre comprises finance costs and administrative costs associated with Group management activities and intragroup borrowings. The segment includes results from run-off portfolios where the Group has ceded all insurance risks to third-party reinsurers.
Claims and claim adjustment expenses, net of reinsurance (929.7) (356.1) (290.3) – (1,576.1) (812.1) (253.3) (217.9) 57.5 (1,225.8) Expenses for the acquisition of insurance contracts (497.0) (147.9) (16.1) – (661.0) (459.3) (164.6) (17.4) (0.4) (641.7)
Share of profit/(loss) of associates after tax – – – 0.1 0.1 (0.2) – – 0.6 0.4 *See note 2.2 for further details. † Includes a run-off casualty portfolio following the completion of a loss portfolio transfer reinsurance treaty effective from 2018 ceding any future payments on losses arising from claims developments related to policies written from 2010 to 2016, with premiums earned of $(57.4) million and claims adjustment expenses net of reinsurance of $57.5 million.
‡ Re-presented to reflect change in the method of allocation of the investment result to reportable operating segments. The impact as at 31 December 2018 amounted to an increase of $10.4 million in Hiscox Retail, and decreases of $2.5 million in Hiscox London Market, $5.5 million in Hiscox Re & ILS and $2.4 million in Corporate Centre. See page 134 for further details.
Net foreign exchange gains/(losses) 9.4 8.4 14.9 (21.6) 11.1 0.3 (2.7) (13.2) (0.6) (16.2)
The net asset value per share is based on 285,051,997 shares (2018: 282,886,319 shares), being the shares in issue at 31 December 2019, less those held in treasury and those held by the Group Employee Benefit Trust.
7 Investment result The total investment result for the Group comprises: Note $m $m
11 Auditor’s remuneration Fees payable to the Group’s external auditor, PwC, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group 2019 $m 2018 $m
Amounts receivable by the auditor and its associates in respect of: The auditing of the accounts of the Group and its subsidiaries 3.2 2.7 All audit-related assurance services 0.3 0.3 All other non-audit services – 0.2 *See note 2.1 for further details.
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 7.0% (2018: 7.0%), has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is written down to this amount.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value less costs to sell or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2019 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
The licences are tested annually for impairment, and accumulated impairment losses are deducted from the historical cost. The carrying value of this asset is tested for impairment based on its value in use. The value in use is calculated using a projected cash flow based on business plans approved by management and discounted at the WACC rate. Key assumptions include new business growth, retention rates, market cycle and claims inflation. The results of the test show there is no impairment.
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 (2018: $nil).
At 31 December 2019 there were $79.8 million of assets under development on which amortisation has yet to be charged (2018: $37.5 million).
12 Goodwill and intangible assets Intangible assets (c) Software and development costs continued The assets are expected to be recovered or settled more than 12 months after the reporting date and as such are considered to be non-current.
Year ended 31 December 2018 Opening net book amount 27.7 4.0 33.9 – – 65.6
Impairment – – – – – – Foreign exchange movements (1.5) – (1.7) – – (3.2) Closing net book amount 25.1 3.3 33.0 – – 61.4
The income from subleasing right-of-use assets amounted to $0.7 million (2018: $nil).
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.
(a) Subsidiaries Hiscox Dedicated Corporate Member Limited (HDCM) underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the main managed Syndicates numbered 33 and 3624).
As at 31 December 2019, the Group recognised a financial asset at fair value of $61.2 million (2018: $55.2 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 $888 million at 31 December 2019 (2018: $951 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) Ltd, both wholly owned subsidiaries, under normal commercial terms.
14 Subsidiaries, associates and interests in other entities continued (c) Investments in associates
At beginning of year 9.9 10.7 Disposals during the year – – Impairments (1.3) – Transfer to equity investments (0.5) – Distributions received (0.3) (0.4) Net profit from investments in associates 0.1 0.4 Foreign exchange movements 0.7 (0.8) At end of year 8.6 9.9
Associates incorporated in the UK and USA from 29% to 35% 18.7 13.7 12.2 (0.3) Associates incorporated in Europe from 26% 4.4 2.8 2.6 0.8 Total at the end of 2019 23.1 16.5 14.8 0.5 100% results
% interest held at 31 December Assets $m Liabilities $m Revenues $m Profit after tax $m 2018 Associates incorporated in the UK from 17% to 35% 16.9 11.8 16.3 1.3 Associates incorporated in Europe from 10% to 26% 2.8 1.3 2.6 0.8 Total at the end of 2018 19.7 13.1 18.9 2.1
Acquisition costs incurred in relation to insurance contracts written 943.4 (301.4) 642.0 898.2 (255.9) 642.3 Acquisition costs expensed to the income statement (944.9) 283.9 (661.0) (882.0) 240.3 (641.7) Foreign exchange and other adjustments 1.7 (0.4) 1.3 (6.4) 0.6 (5.8)
The deferred amount of insurance contract acquisition costs attributable to reinsurers of $124.7 million (2018: $106.8 million) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 24).
Reinsurers’ share of insurance liabilities 3,387.7 2,457.4 Provision for non-recovery and impairment (0.8) (0.8)
The effective maturity of the debt and fixed income securities due within and after one year are as follows: $m
Within one year 1,447.3 1,258.0 After one year 3,542.6 3,316.6 *Following a review of the contractual maturity of the securities, an amount of $40 million has been reclassified from within one year to after one year category.
Equities, investment funds and insurance-linked securities do not have any maturity dates. The effective maturity of all other financial assets are due within one year.
On 14 March 2018, the Group issued £275.0 million 2% notes due December 2022. The notes will be redeemed on the maturity date at their principal amount together with accrued interest.
The notes bear interest from, and including, 14 March 2018 at a fixed rate of 2% per annum annually in arrears starting 14 December 2018 until maturity on 14 December 2022.
The increase in the carrying value of the long-term debt and accrued interest during the year comprises new debt issued at $nil million (2018: $380.3 million), the amortisation of the difference between the net proceeds received and the redemption amounts of $0.8 million (2018: $0.6 million) the movement in accrued interest of $0.2 million (2018: $nil million) plus exchange movements of $27.8 million (2018: less exchange movements of $53.9 million).
Investments at 31 December are denominated in the following currencies at their fair value: $m
Gross receivables arising from insurance and reinsurance contracts 1,419.0 1,143.9 Provision for impairment (7.4) (2.1) Net receivables arising from insurance and reinsurance contracts 1,411.6 1,141.8
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 1,305.0 1,138.9 After one year 251.3 126.2
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. The Group has recognised a loss of $5.3 million (2018: gain of $0.1 million) for the impairment of receivables during the year ended 31 December 2019. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
Foreign exchange forward contracts 104.6 1.5 (0.6) 0.9 Interest rate futures contracts 118.5 – (0.5) (0.5)
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 72.6 32.9 105.5 Gross fair value of liabilities (71.1) (33.5) (104.6)
19 Derivative financial instruments continued Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of $1.5 million (2018: gain of $1.5 million) as included in the investment result in note 7. There was no initial purchase cost associated with these instruments.
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of $0.7 million (2018: loss of $0.2 million) as included in the investment result in note 7.
Equity index options During the year, no equity index futures were purchased.
Financial assets Debt and fixed income securities 1,495.9 3,494.0 – 4,989.9 Equities and investment funds – 467.9 18.5 486.4 Insurance-linked funds – – 61.2 61.2 Derivative financial instruments – 1.5 – 1.5
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 2019, the insurance-linked fund of $61.2 million represents the Group’s investment in the Kiskadee Funds (2018: $55.2 million).
20 Fair value measurements continued 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
Employee share option scheme – proceeds from shares issued 41 4,013 – Scrip dividends to owners of the Company 32 7,818 –
The weighted average fair value of each share option granted during the year was 306.1p (2018: 302.5p). The weighted average fair value of each Performance Share Plan award granted during the year was 1,554.2p (2018: 1,492.9p).
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2019 for the Executive Directors are shown in the annual report on remuneration 2019. The total number of options and Performance Share Plan awards outstanding is 9,293,491 (2018: 9,804,430) of which 2,682,751 are exercisable (2018: 3,032,437). The total number of SAYE options outstanding is 1,530,653 (2018: 1,528,496).
The net amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: 2019 $m $m
23 Insurance liabilities and reinsurance assets continued 23.1 Insurance contracts assumptions (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – gross at 100%
Current estimate of cumulative claims 1,085.8 1,522.9 1,301.8 932.9 1,050.8 1,292.9 1,657.7 3,038.3 3,605.0 3,358.1 18,846.2
Accident year 2010 $m $m $m $m $m $m $m $m $m $m
Current estimate of cumulative claims 1,085.8 1,522.9 1,301.8 932.9 1,050.8 1,292.9 1,657.7 3,038.3 3,605.0 3,358.1 18,846.2 Less: attributable to external Names (171.6) (220.6) (168.6) (100.4) (112.6) (132.7) (182.6) (412.8) (471.7) (431.3) (2,404.9) Group’s share of current ultimate claims estimate 914.2 1,302.3 1,133.2 832.5 938.2 1,160.2 1,475.1 2,625.5 3,133.3 2,926.8 16,441.3
Reconciliation of 100% disclosures above to Group’s share – net of reinsurance
23 Insurance liabilities and reinsurance assets continued 23.2 Movements in insurance claims liabilities and reinsurance claims assets A reconciliation of the insurance claims liabilities is as follows: Year ended 31 December Gross $m
Total at beginning of year 4,992.2 (2,047.1) 2,945.1 4,350.6 (1,492.3) 2,858.3 Claims and claim adjustment expenses for the year 3,206.7 (1,630.6) 1,576.1 2,326.6 (1,100.8) 1,225.8 Cash paid for claims settled in the year (1,940.6) 761.9 (1,178.7) (1,567.2) 531.8 (1,035.4) Foreign exchange and other adjustments 17.7 (5.2) 12.5 (117.8) 14.2 (103.6) Total at end of year 6,276.0 (2,921.0) 3,355.0 4,992.2 (2,047.1) 2,945.1
Current year claims and claim adjustment expenses 3,584.6 (1,982.6) 1,602.0 2,780.1 (1,227.8) 1,552.3 Over-provision in respect of prior year claims and claim adjustment expenses
A reconciliation of the unearned premium reserves is as follows: Gross $m
Premiums earned through the income statement (3,931.9) 1,296.3 (2,635.6) (3,699.8) 1,126.2 (2,573.6) Foreign exchange and other adjustments 10.4 (0.8) 9.6 (26.5) 2.2 (24.3)
Included within accruals and deferred income is $6.4 million (2018: $7.0 million) of deferred gain on retroactive reinsurance contracts.
Not later than one year 15.9 Later than one year and not later than five years 46.5 Later than five years 18.0 Total undiscounted lease liabilities at 31 December 80.4
Deferred tax Credit for the year (28.7) (11.3) Adjustments in respect of prior years 3.8 (1.0) Effect of rate change 0.1 0.5 Total deferred tax credit (24.8) (11.8) Total tax charged to the income statement 4.2 17.7 *See note 2.2 for further details.
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 8% (2018: 13%).
Profit before tax 53.1 135.6 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2018: 0%) – – Effects of Group entities subject to overseas tax at different rates 7.9 4.4 Impact of overseas tax rates on: Effect of rate change 0.6 0.5 Expenses not deductible for tax purposes 1.2 9.7 Tax losses for which no deferred tax asset is recognised 1.6 5.3
The Group companies’ tax filings include transactions which are subject to transfer pricing legislation and the taxation authorities may challenge the tax treatment of those transactions. The Directors are proactively engaged in discussions with the tax authorities regarding these tax positions. The Group determines, based on tax and transfer pricing advice provided by external specialist tax advisors, that: it is probable that the tax authorities will assess additional taxes in respect of these filings, for which provisions have been made; the amount recognised at the balance sheet date represents the best estimate of the amount expected to be settled, taking into account the range of potential outcomes and the current progression of discussions with tax authorities.
Trading losses in overseas entities 51.5 47.6 Deferred tax assets 76.1 48.0 Deferred tax liabilities (50.7) (34.9) Total deferred tax asset 76.9 60.7
UK capital losses 0.8 (0.8) – – – Trade and other payables 2.9 1.0 – 0.1 4.0 Intangible assets – Syndicate capacity 1.6 (0.2) – 0.1 1.5
Open years of account 24.7 14.2 – 1.5 40.4 Unearned premium – 8.3 – – 8.3 Loss reserve discounting – 5.7 – – 5.7
Deferred acquisition costs – (14.1) – – (14.1) Other items – (0.8) – – (0.8) Total deferred tax liabilities (34.9) (14.3) – (1.5) (50.7) Net total deferred tax assets/(liabilities) 13.1 12.1 (0.6) 0.8 25.4
Net total deferred tax position liabilities (9.1) 8.7 – – (0.4) Net Group deferred tax asset/(liability) 51.6 24.8 (0.6) 0.7 76.5 *See note 2.2 for further details.
Following changes to the future UK main rate of corporation tax introduced in the Finance Act 2016, the deferred tax on the Syndicates’ open years of account is calculated with reference to the tax rate expected to be in force when those years close. Equally, the deferred tax liability on equalisation provision is calculated at the tax rate expected to be applicable as it unwinds. All other UK deferred income tax assets and liabilities are calculated at 17% for the year ended 31 December 2019 (2018: 17%).
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: $m $m
Present value of scheme obligations 366.7 302.0 Fair value of scheme assets (311.6) (266.2) Net amount recognised as a defined benefit obligation 55.1 35.8
The scheme assets are invested are as follows: At 31 December 2019 $m $m *
Investment assets Pooled investment vehicles 219.1 190.0 * On review of the 2018 net scheme assets available for benefits, two investment funds previously presented under bonds and equities have been reclassified consistent with their 2019 classification and in line with their underlying investment category. This reclassification had no impact on net assets and no impact upon the fund account.
Interest cost on defined benefit obligation 8.6 9.2 Interest income on plan assets (7.6) (7.6) Net interest cost 1.0 1.6 Administrative expenses and taxes – 0.5 Total expense recognised in operational expenses in the income statement 9 1.0 2.2 Remeasurements Effect of changes in actuarial assumptions 52.6 (46.3) Return on plan assets (excluding interest income) (32.8) 22.0 Remeasurement of third-party Names share of defined benefit obligation (3.3) 4.1 Total remeasurement included in other comprehensive income 16.5 (20.2) Total defined benefit credit recognised in comprehensive income 17.5 (18.0)
In October 2018, the High Court in the UK issued a ruling to address inequalities in the calculation of guaranteed minimum pensions (GMPs) for members of pension schemes. This ruling requires pension funds to increase the benefits of some members of the pension scheme.
The movement in liability recognised in the Group’s balance sheet is as follows: $m 2018 $m
Group defined benefit liabilities at beginning of year 35.8 64.1 Third-party Names’ share of liability (6.6) (10.7) Net defined benefit liability at beginning of year 29.2 53.4 Defined benefit cost included in net income 1.0 2.2 Contribution by employer (3.6) (3.7) Credit from third-party Names (0.2) (0.4) Foreign exchange movements 1.7 (2.1) Total remeasurement included in other comprehensive income 16.5 (20.2) Net defined benefit liability at end of year 44.6 29.2 Third-party Names’ share of liability 10.5 6.6 Group defined benefit liability at end of year 55.1 35.8
A reconciliation of the fair value of scheme assets is as follows: $m $m
Opening fair value of scheme assets 266.2 305.5 Interest income 7.6 7.6 Cash flows Contribution by the employer 3.6 3.7 Benefit payments (10.4) (8.7) Administration expenses – (0.5) Remeasurements Return on plan assets (excluding interest income) 32.8 (22.0) Foreign exchange movements 11.8 (19.4) Closing fair value of scheme assets 311.6 266.2 161Hiscox Ltd Report and Accounts 2019
Opening present value of scheme obligations 302.0 369.6 Past service cost – 0.1 Interest expense 8.6 9.3 Cash flows Benefit payments (10.4) (8.7) Remeasurements Changes in actuarial assumptions 52.6 (46.3) Foreign exchange movements 13.9 (22.0) Closing present value of scheme obligations 366.7 302.0
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: 2019 years 2018 years
While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and income statement. For example, an additional one year of life expectancy for all scheme members would increase the scheme obligations by £11.8 million ($15.6 million) at 31 December 2019 (2018: £8.8 million ($11.2 million), and would increase the recorded net deficit on the balance sheet by the same amounts.
27 Employee retirement benefit obligations continued The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2019 as follows: Present value of unfunded obligations before change in assumption $m
Effect of a change in discount rate Use of discount rate of 2.35% 55.1 37.2 17.9 Use of discount rate of 1.85% 55.1 74.4 (19.3)
Profit for the year attributable to the owners of the Company ($m) 48.9 117.9 Weighted average number of ordinary shares (thousands) 284,015 283,564 Basic earnings per share (cents per share) 17.2¢ 41.6¢ Basic earnings per share (pence per share) 13.5p 31.2p *See note 2.2 for further details.
Profit for the year attributable to the owners of the Company ($m) 48.9 117.9 Weighted average number of ordinary shares in issue (thousands) 284,015 283,564 Adjustments for share options (thousands) 4,361 5,650 Weighted average number of ordinary shares for diluted earnings per share (thousands) 288,376 289,214 Diluted earnings per share (cents per share) 16.9¢ 40.8¢ Diluted earnings per share (pence per share) 13.3p 30.6p *See note 2.2 for further details.
Diluted earnings per share has been calculated after taking account of 4,067,881 (2018: 5,103,924) Performance Share Plan awards and 293,028 (2018: 546,186) options under Save As You Earn schemes.
The interim dividends for 2019 and 2018 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim dividend for the year ended 31 December 2019 was paid in cash of $36.4 million (2018: $35.7 million) and 157,487 shares for the scrip dividend (2018: 107,896).
30 Contingencies and guarantees The Group’s parent company and subsidiaries may become involved in legal proceedings, claims and litigation in the normal course of business. The Group reviews and, in opinion of the Directors, maintains sufficient provision, capital and reserves in respect of such claims.
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, at $800.0 million (2018: $800.0 million) which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof. The terms also provide that upon request the facility may be drawn in a currency other than US Dollar. At 31 December 2019 $50.0 million (2018: $50.0 million) was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2018: $nil).
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2018: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s; the arrangement is collateralised with cash of £50,000 (2018: £50,000).
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2019 (2018: 38,030).
33 Related-party transactions Details of the remuneration of the Group’s key personnel, presented in Sterling, are shown in the annual report on remuneration 2019 on pages 68 to 81. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
(a) Syndicate 33 at Lloyd’s Related-party balances between Group companies and Syndicate 33 reflect the 27.4% interest (2018: 27.4%) that the Group does not own, and are as follows.
34 Post balance sheet event There are no material events that have occurred after the reporting period.
segments. The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.
Profit for the year after tax 48.9 117.9 22.7 447.2 312.5 Assets employed
Financial assets carried at fair value 5,539.0 5,029.7 5,139.6 4,702.1 4,294.7
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