About the Hiscox Group 2 Corporate highlights 3 Why invest in Hiscox? 4 Chairman’s statement 6 Chief Executive’s report 14 Hiscox business structure 16 Actively managed business mix 17 Actively managed key underwriting exposures 18 Marketing at Hiscox 20 Capital
Strategic focus 100% = £1,924m Total Group controlled income for 2013
Hiscox Europe returns record profits of £10.9 million (2012: £3.9 million).
Our people Specialist expertise that is valued by our customers We are market leaders in many of our specialist areas and our customers value the expertise and cover we provide. What our customers have said about us:*
Hiscox was awarded ‘Best Small Business Insurer’ as voted for by Start Your Business Magazine for the fifth year in a row. Our claims service was recognised by Post Magazine and the Insurance Times, winning Personal Lines Team of the Year as well as the UK Claims Excellence Award. Hiscox London Market’s Terrorism team received Underwriting Team of the Year at the Insurance Day London Market Awards 2013.
Our performance Strong financial performance Hiscox has a strong record of top-line growth with a focus on ROE. Performance highlights between 2009 and 2013 include: — increased gross written premiums by 18.4% to £1.7 billion; — healthy combined ratio averaging 88.7%; — delivered average ROE of 16.9%; — maintained a progressive dividend policy with compound growth of 8.8%; — returned additional £278 million of capital.
Investments Traditionally many in our industry have relied on investment income for more than half their overall profits. However, the persistence of low interest rates has shifted the balance between underwriting and investment income. Our investment strategy remains cautious: we will not take undue risk, preferring modest investment returns alongside better underwriting results to fuel profits. Our investments delivered a return of 1.9% (2012: 3.1%) which is good, given the challenging year in bond markets, and was driven by our allocation to risk assets, principally equities. A return to higher interest rates will be welcome, but given the more likely long road to normality, it seems that bond investors will have the wind in their faces for another year, and we will remain patient.
In my first full-year statement as Chairman, it is pleasing to report an excellent underwriting result and the second highest profit for the Group. A benign hurricane season and sound underwriting contributed to the very good results, with every area performing well. Our reinsurance and London Market insurance benefited from the lack of US hurricanes, and also underwrote well to minimise losses from the European and Calgary storms. Our regional businesses in the UK, Europe, Guernsey and USA have also reaped the rewards of sustained investments in both infrastructure and marketing.
Results The results for the year ending 31 December 2013 were a profit before tax of £244.5 million (2012: £217.5 million). Gross written premium increased by 8.5% to £1,699.5 million (2012: £1,565.8 million) and net earned premium increased 7.1% to £1,283.3 million (2012: £1,198.6 million). The combined ratio was 83.0% (2012: 85.5%). Earnings per share increased by 24.9% to 66.3p (2012: 53.1p) and the tangible net asset value per share increased by 16.0% to 381.4p (2012: 328.7p). Return on equity increased to 19.3% (2012: 17.1%).
Finally We have underwritten and sold well. We continue to strive for world-class service and to delight our customers when they make a claim. We have also had good luck but we have taken our chances when they were presented. However we cannot presume that the elements in 2014 will be as kind to us as they were in 2013, already we have seen extreme weather events, freezes in the US and floods in the UK. We can rely on core skills to drive profitability. Opportunities abound across our retail businesses in UK, Europe and USA and we have great people taking advantage of them. We are not complacent and will continue to invest for the future, both in markets and in infrastructure, and we relish the challenges ahead.
People and future As I write this, the windows of my office are rattling in the wind, rivers are rising and the media are reporting the polar vortex freeze in the USA. Events such as these remind us of the importance of insurance and delivering on our promise to our customers. We issue a promise to pay, and it is only when a claim is made that we truly prove our worth.
A benign hurricane season and sound underwriting contributed to the very good results, with every area performing well.
Looking at each division in turn: — Property: Our property division includes US and international commercial property, power and mining risks, US catastrophe exposed personal lines as well as terrorism traded in the London Market.
Our terrorism business had a strong year, as a young energetic team took the reins. It was recognised by its peers with the accolade of ‘Underwriting Team of the Year’ at the Insurance Day London Market Awards. Drawing on new hires with global security and front-line counter terrorism experience, we created a counter terrorism advisory team which assists clients with risk management and prevention. This supplements our relationship with Control Risks and consolidates our market-leading position.
The insurance market is currently facing many challenges. Alternative sources of capital have entered the reinsurance market putting pressure on pricing, while central banks’ policies of financial repression are keeping investment returns low. Thanks to our long-term strategy we have choices – in product, distribution and geography – which should allow us to continue to deliver good results in a changing world.
London Market Insurance The London Market Insurance lines of property, marine and energy, casualty, aerospace and specialty have consistently delivered excellent profits over the last ten years and in 2013 they delivered another good result.
We launched an online product for marine employers’ liability, accessible to retail brokers in the US. It has already generated £1 million in premium, a good start, and developed technology which we expect to put to use in other London Market lines.
— Casualty: In casualty we have seen some firming of rates, but it is by no means a hard market. We continue to pick our way through, marrying good underwriting with our core appetite to deliver a strong result. We have ambitions to play a significant part in the London Market directors and officers’ (D&O) arena, writing US and some international business. We have bolstered our team with some senior hires during the year. We now have the ability to offer a full suite of products across a broad range of markets, professions and risks including lawyers, architects and engineers, healthcare, technology risks, miscellaneous errors and omissions (E&O), management liability, and privacy. We have also created a consortium with another Lloyd’s insurer, creating significant D&O capacity, and increasing the attractiveness of Lloyd’s to the US market.
— Aerospace and specialty: This division includes our aviation, space, contingency, kidnap and ransom, political risks and personal accident business.
The aviation market has seen significant downward pressure on major airline accounts. Our underwriters remain disciplined, walking away from poorly rated business, seeking growth by developing products which combine aviation with our terrorism capabilities. The space market has suffered around $700 million of satellite losses during the year, which we largely avoided. We expect this will have a positive impact on rates.
Hiscox Bermuda Hiscox Bermuda had another good year, with premiums growing by 5.6% to £211.9 million (2012: £200.7 million), with good growth in our healthcare business. Profits remained strong.
Third-party capital partners are very important to the Group and we have good support from quota share partners and Syndicate Names. In 2014 they are backing Hiscox Re at a record level. We continue to explore new opportunities in the insurance linked securities (ILS) space, and through Kiskadee we launched a number of collateralised reinsurance funds during the year. We have deployed $110 million of capital – less than we had expected as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers. We believe that over time, our record of prioritising profit over volume will win a following in this new investor base, and our support from them will grow.
Work continues to reduce expenses across Europe, with a simplified referral process, greater use of pre-priced proposal forms and an operating model which ensures that underwriters are able to focus on business development and underwriting larger risks, with smaller risks and renewals handled by office-based teams. We expect a continued steady improvement in expenses, maintaining our profit performance.
In Germany we launched direct-to-consumer small business insurance. Aimed at businesses in knowledge-based professions including IT, management and business consulting, it matches our existing offering in France and complements the German broker channel. As in the US and UK, we expect that in time the marketing expenditure required to build our French and German brands will benefit all distribution channels.
Claims 2013 was a relatively benign year for large-scale catastrophe losses. Despite the market increasing reserves for the Costa Concordia our net loss has reduced slightly to US$19 million. For the first 11 months we did not experience material losses as a result of extreme weather events, such as the Central European floods, the Calgary storm in Canada, the St Jude’s day storm which hit the UK and Europe, and typhoon Haiyan which battered the Philippines. This clearly changed in the UK with the period of sustained rain and flooding which began in mid-December. We reserved £11 million for UK flood claims in December. UK flood and storm losses have continued into January and February. We expect to reserve a further £5 million to cover these losses.
Whilst reserve releases of £140 million were down from £152 million last year, they continue to reflect Hiscox’s cautious reserving approach.
Our high net worth household business was tested by the floods and has performed well. Its market reputation meant that client retention remained strong and it had its best new business premium for ten years. Our professions and specialty commercial book also made good progress and a new technology insurance portfolio offering that responds to the growing prevalence of breach of contract claims was launched. Our underwriting relationship with Dual, an independent managing general agent, had a testing year and we have agreed changes to underwriting appetite which should see better performance in the future. Our partnerships business had a good year, retaining all of its existing partnerships as well as securing five new ones including the Royal Institute of British Architects and the Royal College of General Practitioners. Our new tied agency Hiscox Private Client is doing well.
Hiscox Europe Our European business had an outstanding year, generating a record profit of £10.9 million (2012: £3.9 million), despite £3 million investment in marketing to support our fledging direct businesses in France and Germany. It had solid growth of 10.9% to £146.7 million (2012: £132.3 million), with new business up by 14% driven by commercial lines in Germany and France. After shrinking for several years, our high net worth business in Europe also returned to growth.
Centre in York. This process went very smoothly and we are now considering its extension to other lines of business.
In the US our operations team have been working hard to support the 30% growth. This has seen further investment in our Atlanta and Virginia Beach service centres.
The UK Government and the insurance industry are currently working on the creation of Flood Re to provide mutualised insurance cover. Hiscox support the overall initiative but feel that current plans are unfair and unworkable. At the moment rented properties, leasehold properties, homes built after 2009 and H/I band council tax homes are being excluded from the mutual. The excluded will also have to pay a levy to fund Flood Re, but would be unable to purchase subsidised insurance from Flood Re, even though their neighbours and other bands would be able to. It has been widely reported that the levy would be £10.50 per residential property. This is highly misleading; it will actually be 2.2% of premium paid and we estimate that Band H homes will pay 20 times more than the average home in Britain. We are calling on the Government to work with us to find a solution to ensure that either these groups are included in Flood Re, or that they are excluded fully – both in payment and benefit. Floods are one of the most traumatic claims we see, a flood doesn’t discriminate and neither should the Government.
Marketing During 2013 we spent £30.6 million on marketing across the Group, an increase from £26.3 million in 2012. Most of this was spent promoting our direct-to-customer operations in the UK, the US, France and Germany. The balance was spent on broker channel marketing; either marketing to brokers, or helping them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting artrelated activities.
Outlook During 2013 we used the change of Chairman to initiate a process to define our ambitions for the years ahead. This process considered the more conventional strategic questions of products, markets and customers, as well as the type of firm we aspire to be in the future.
The conversation with our staff showed them to have the ambition to capture this strategic opportunity whilst wanting to retain the values that have guided Hiscox to date. However, we realise that we all need to grow personally if we are to develop Hiscox in this way. We have therefore committed Hiscox to living our values of courage, quality, integrity, excellence in execution and humanity. We have also challenged each member of staff to acknowledge that ‘what got us here, won’t get us there’ and to accept that delivering on each of our personal growth agendas is the key to unlocking the business growth opportunities.
For me personally, after 20 years at Hiscox, this process has been hugely energising. My colleagues and I remain restlessly ambitious to grow and develop Hiscox.
Our overall asset allocation did not change very much during the year. We built up our cash levels towards the end of 2013 and we are happy to have money in the bank ahead of a year where bonds markets face headwinds and equities are unlikely to maintain their recent performance. Central bankers’ reaffirmation that short-term interest rates were set to stay low for some time has meant our return expectations from our bond portfolios remain modest. Our overall investment income in 2014 is expected to be dependent on the performance of our risk asset portfolio. Although short-dated bonds may be similarly valued to a year ago, the same cannot be said of equities. Current valuations and an uncertain outlook for corporate earnings means we will continue to closely monitor our exposure. Patience and prudence still lie at the heart of our investment strategy but with some appetite for risk in asset classes where valuation seems more reasonable.
Our people 2013 was a year that saw substantial changes in Hiscox’s leadership and structure. Robert Hiscox retired as Chairman in February 2013 and was succeeded by Robert Childs, who was previously our Chief Underwriter. Richard Watson, Rob’s successor as Chief Underwriter, was appointed to the Board in May.
Hiscox Bermuda Hiscox London Market – Volatile Hiscox London Market – Retail Hiscox UK Hiscox Europe Hiscox Guernsey Hiscox USA
Since 1998 Hiscox has been providing specialist insurance and expertise for global risks through its Guernsey office. Hiscox also has staff introducing Latin American business to Guernsey from offices in London and Miami.
Capacity For 2014, Hiscox’s capacity for: – Syndicate 33 is £1bn – Syndicate 6104 is £72m – Syndicate 3624 is £300m.
Our long-established reinsurance teams in London, Bermuda and Paris commenced trading as Hiscox Re in January 2014. Hiscox Re provides marketleading expertise and a wide range of reinsurance products to high-quality insurers around the world. It has a combined line size of up to $200m.
Hiscox Re includes the Group’s insurance linked securities (ILS) activity under the Kiskadee brand. Additional capacity is available through Kiskadee.
Products include Property reinsurance and retrocession; specialty including: marine, aviation, crop and terrorism; casualty.
Security Hiscox Re is supported by two carriers – Hiscox Insurance Company (Bermuda) Limited and Syndicate 33 at Lloyd’s. Both of these are rated A (Excellent) by A.M. Best.
Actively managed key underwriting exposures Hiscox Ltd Report and Accounts 2013
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm 10–25 year 25–50 year 50–100 year 100–250 year5–10 year
– $2 0b n m ar ke t lo ss ye ar r et ur n p er io d
We also conducted our first econometrics study to measure the relative cost/success ratio of each of the main marketing channels: TV, outdoor advertising, press, internet and direct mail. It provided us with valuable information on our return on investment from each channel, which has helped to shape our media strategy.
We set ourselves high benchmarks; we do not measure our work or service against others in our industry, but against the world’s leading brands. That we were shortlisted along with household names, John Lewis, British Airways, Help for Heroes and Foster’s, for The Marketing Society’s 2011 Brand of the Year award, is testament to the success of our marketing strategy.
In 2013 we spent around £30 million on marketing across the Group; we expect to spend roughly the same amount in 2014. We believe marketing is a science, which can be measured and managed through consistent qualitative and quantitative research. Monitoring our return on investment informs the decisions we take about our future marketing strategy and plans.
The success of our marketing lies not only in the quality of what we are selling, but also in our understanding of our target consumers’ needs in each of our local markets. We use this information to create unique and striking campaigns that resonate with our audience. All our advertising communicates Hiscox’s core values, but the individual campaigns are tailored to the local market. For example, in Germany last year we launched a magazine advertising campaign, while in America our efforts were focused on building brand awareness in the key cities of Boston, San Diego and Austin.
Reflecting our desire to go to where our customers are, our marketing spend has inevitably taken account of the internet’s rapid rise. We are spending proportionally more on digital marketing, so we have invested in new technology to help us measure, and boost, its effectiveness. In 2013, we also entered into a Group-wide deal with Maxymiser, an e-marketing consultancy, which has already had positive results, significantly increasing the proportion of consumers who request quotes from us and who buy our products.
Our brand is very important to us because it embodies our promise to our customers.
The GSSA is based on Hiscox’s own internally assessed capital requirements and is informed by the Group’s Capital Model (GCM), which together with the BSCR forms part of the BMA’s annual solvency assessment. The GCM provides a holistic view of the Group capital requirements and draws upon the Group’s key underlying risk models.
Capital Hiscox Ltd Report and Accounts 2013 £100 million). A market loss at this remote return period would be very big indeed and would certainly bring about positive market changes. The Group would be well positioned in the resulting strong market with capital in the order of £1 billion in addition to its LOC facilities and its now well-developed reinsurance partnerships.
If the return of capital is approved by the shareholders on 18 March, the available capital will reduce to approximately £1,281 million, comfortably meeting the current regulatory, rating agency and internal capital requirements.
Rating agency requirements are in line with the latest 2014 requirements as defined by the agency capital models. The Hiscox’s internal risk appetite reflects Hiscox’s goal of maximising its return on capital within accepted levels of risk. 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.
Gross premiums written of £1.70 billion were up 8.5% year-on-year. Strong growth in the insurance lines was offset in part by a decline in reinsurance. The Group’s combined ratio including foreign exchange was 83.0% (2012: 85.5%). The current investment market is challenging meaning a return of 1.9% (2012: 3.1%) was a good result. All asset classes outstripped their benchmarks.
Profit before tax for the year was £244.5 million (2012: £217.5 million) being the second highest result in the Group’s history. This was achieved in part due to the lack of major catastrophe activity only tempered by the decline in the investment return to 1.9% (2012: 3.1%), a respectable achievement given the current investment market. Foreign exchange losses in 2013 were £9.9 million (2012: £20.2 million). The Group recorded a post-tax return on equity of 19.3% (2012: 17.1%) and earnings per share were 66.3p (2012: 53.1p).
† excluding derivative assets and insurance linked funds. * The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
are used predominantly to pay claims, expenses, reinsurance costs, dividends and taxes, and to invest in more assets. In addition, during 2013 the Group decided to return excess capital to its shareholders of £150.2 million, which, along with the Group holding a greater proportion of its assets in fixed income securities versus shorter dated cash equivalents at year end, resulted in total net cash outflows for the year of £92.8 million (2012: inflow £150.6 million).
The Group maintains relationships with a limited number of banks, whose credit status and ability to meet day-to-day banking requirements are monitored by the Group. There was no cash drawn down on the banking facility during the year. At 31 December 2013, $333 million (2012: $308 million) had been drawn by way of Letter of Credit against this facility.
Hiscox UK and Europe Gross premiums written rose by 10.2% to £559.1 million (2012: £507.5 million). Gross premiums written for the UK increased by 9.9% with growth coming from all lines. Europe achieved double digit growth of 10.9% with gross premiums written reaching £146.7 million (2012: £132.3 million).
Hiscox International Gross premiums written increased by 12.9% to £472.2 million (2012: £418.3 million), driven by the US business. The US increased premiums by 31.1%, with the specialty lines and the Direct division making the most significant contribution but all lines showed growth. Bermuda had more modest growth of 5.6% with gross premiums written of £211.9 million (2012: £200.7 million) which was achieved in spite of the challenging pricing environment at mid year for catastrophe reinsurance. Growth in healthcare and proportional business contributed to this. Gross premiums written in Guernsey decreased slightly as fewer piracy and multi-year policies were written.
The net claims ratio was particularly low for 2013 at 34.3% (2012: 46.0%) with no major catastrophe losses suffered due to the benign loss year. The impact on the combined ratio was an improvement to 81.0% (2012: 89.2%) resulting in an excellent profit before tax for the segment of £80.9 million (2012: £62.6 million).
Cash and liquidity The Group’s primary source of liquidity is from premium and investment income. These funds 83.0% combined ratio.
yields, particularly longer dated ones, finished near their highest levels of the year. Equity investors eventually took the news more calmly, reassured by improving economic data in the developed world and verbal commitments from the main Central Banks that short-terms rates would be kept low for an extended period. Equities rallied further in the second half, and with the notable exception of emerging markets, enjoyed another strongly positive year. Set in the context of what was available and the risks that we are prepared to take, we view the result for 2013 as perfectly satisfactory.
The return from the bond portfolios was much reduced from those achieved in 2012, but this was as forecast. Indeed 2013 has turned out to be one of the more volatile years in fixed income markets, with yields doubling or trebling depending on currency and duration. It has been a challenging time for most fixed income investors. Overall this has been a good year to be short duration and the price of caution has been a low but positive contribution. What little extra return there has been from the bond portfolios has come from the allocation to non-government bonds. They benefited mainly from their positive carry relative to government bond yields as well as a small further narrowing of credit spreads. Relative, and absolute, success in managing the bond portfolios will likely depend to a greater degree on nimble interest rate management in
The Group’s invested assets at 31 December 2013 totalled £3.13 billion (2012: £3.06 billion). Assets under management grew slightly during the year in which £220 million was returned to shareholders by way of dividend and capital distribution. The investment result, excluding derivatives, amounted to £58.9 million (2012: £92.7 million) equating to a return of 1.9% (2012: 3.1%).
We had budgeted for a more modest return compared to 2012 and it is only in the world of financial repression in which we are investing that 1.9% can qualify as better than expected. Once again the investment markets were dominated for much of the year by the level of Central Bank support that was or was expected to be provided and, more than five years after the depths of the financial crisis, monetary policy in the developed world remained highly stimulative and unrewarding for conservative savers awaiting a return to more normal interest rates. Quantitative easing, in its various forms, was designed amongst other things to boost asset prices and in this it succeeded for much of the first half of the year. However the mere mention, towards the end of May, by Ben Bernanke, Chairman of the Federal Reserve, that he was beginning to think about reducing the level of monthly bond purchases sparked a sell off in all asset classes. After one false start, the reality of tapering was eventually announced in December and bond
Group investments Hiscox Ltd Report and Accounts 2013 2014. Emerging market bonds suffered the most when threatened with a change in liquidity conditions. Whilst we don’t have an allocation to that asset class, other investors found that the exit door was quite narrow during the summer which reinforces our caution to higher yielding, less liquid securities in general.
The exposure to risk assets made a significant contribution to the investment performance this year, gaining 18.3%. A number of our equity funds focusing on the UK market have produced particularly strong returns whilst those with more global orientation lagged their benchmark mainly due to some exposure to emerging markets. Approximately one-third of our risk assets are invested in a small selection of equitybased hedge funds. They are expected to reduce the volatility of the overall portfolio, providing some protection in negative markets and capturing a reasonable proportion of any upside. This worked well in practice in the past year with gains well above the hedge fund benchmark. We started 2013 with a weighting to risk assets of 6.2% and trimmed this slightly after the strong run in May. However, with further progress being made in the second half this has now moved up to 7.1%. In terms of overall asset allocation we therefore have not changed course much during the year. We still expect that our bond managers will outperform cash albeit taking little risk on duration at the moment and being uncompromising on credit quality. Cash levels were built up slightly towards the end of the period and we are happy to have more dry powder ahead of a year where bonds markets are set to be facing headwinds and equities are unlikely to maintain the rate of progress we have seen in the recent past.
The economic outlook in the developed world appears to be on an improving trend with the US and the UK clearly further along the recovery path than much of Europe. It remains to be seen to what extent this can become self sustaining or remain reliant on continuing levels of extraordinary monetary support. There is little certainty as to how this experiment will end and a good degree of scepticism as to how successful Central Banks will be in managing the return to normality.
The Group risk management framework The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. Our risk appetite is set by the Board and cascaded down to the Group’s operating entities, and the risk exposures are monitored both locally and centrally, by risk type and in the aggregate. The risk management framework includes several Group-wide and local forums focusing on specific risk types such as underwriting, reserving, investments, cash flow and reinsurance security. The framework is supported by a central risk team that reports to the Risk Committee.
— Diversified portfolio: Hiscox has a well-diversified portfolio by product and geography to help balance any catastrophe exposure. — Risk appetite: We clearly define our risk appetite for underwriting risk, which dictates our business plan. To ensure that we do not exceed our risk appetite, we monitor our exposures closely and take mitigating actions to maintain business plan. This enables us to maximise the expected risk return profile on the whole portfolio and offset the potential losses on more volatile accounts. — Underwriting discipline: Underwriters are incentivised to make sound decisions that are aligned with Group’s overall strategic objectives and risk appetite. Clear limits are placed on their underwriting authority. Policy wordings are regularly reviewed in the light of legal developments to ensure the Group’s exposure is restricted, as far as possible, to those risks identified in the policy at the time of issue. — Modeling: We have tailored our modeling resources to assist insurance and reinsurance plans and ensure that the exposure we write matches expectations. The risk aggregation and modeling resources are shared across the Group to ensure everyone uses the same modeling tools.
— Stress and scenario testing: We run stress and scenario tests for a range of specific events for each of our business units as well as the Group as a whole, so we can estimate our potential losses from a major catastrophe. — Reinsurance: We buy reinsurance for our business carriers and the Group as a whole, to mitigate the effect of catastrophes and unexpected concentrations in risk. The scope and type of protection we buy may change from year-to-year depending on the extent and competitiveness of cover available in the market. The Group is exposed to the risk that the reinsurance protection it has bought is inadequate or inappropriate, but this is monitored and managed using modeling techniques, supervised by a dedicated Reinsurance Purchase Group.
— Conservative policy: Our overriding concern is to not lose money or to put at risk the Group’s capacity to underwrite. Our policy is designed to maximise returns within an overall risk appetite. — Technical funds: Those funds held for reserves are invested primarily in high-quality bonds and cash. The high quality and short duration of these funds allows the Group to meet its aim of paying valid claims quickly. — Currency matching: These funds, as far as possible, are maintained in the currency of the original premiums for which they are set aside to reduce foreign exchange risk. — Duration: As many of our insurance and reinsurance liabilities have short time spans, we do not aim to match exactly the duration of our assets and liabilities. — Benchmarks: Our fixed income fund managers are set benchmarks that approximate the payment profile of our claims while still providing them with some flexibility to enhance returns. — Equities: A proportion of the Group’s assets is allocated to riskier assets, principally equities. For these assets we take a longterm view so we can achieve the best risk-adjusted returns. The proportion of funds we invest in risk assets will depend on the outlook for investment and underwriting markets. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets. — Guidelines: Investment risk also encompasses the risk of default of counterparties, which is primarily with issuers of bonds in which we invest. Our third-party investment managers are issued guidelines as to the type and nature of bonds in which to invest.
— Careful selection: We buy reinsurance only from companies that we believe to be strong. Every reinsurer we use must be approved by a dedicated Reinsurance Security Committee, based on an assessment of financial strength, trading record, payment history, outlook, organisational structure, plus its external credit ratings. — Monitoring: Our credit exposures to these companies are closely monitored. The companies are continuously monitored so that we are able to identify any potential problems. The committee considers public information, experience of the companies concerned, their behaviour in the marketplace and analysis from external consultants and from rating agencies. — Guidelines: We set guidelines for exposure to each of our approved reinsurers.
We are unable to transact with intermediaries and customers due to an IT failure.
Like every other business we are reliant on data and computer systems in order to go about our everyday business.
— Disaster recovery planning: A formal disaster recovery plan is in place to deal with workspace recovery and the retrieval of communications, IT systems and data should a major problem occur. These procedures would enable us to move the affected operations to alternative facilities quickly. The plan is tested regularly and includes simulation tests.
— Risk assessment: Identifying, planning for and controlling emerging risks is an important part of our risk management activity across all aspects of our business, including underwriting, operations and strategy. We make a significant effort to identify material emerging threats to the Group. It is a core responsibility of each of our risk committees and we believe we take all reasonable steps to minimise the likelihood and impact of emerging risks and to prepare for them in case they occur.
In 2013, Hiscox UK was carbon neutral, for the fourth year in a row. The balance of our UK carbon emissions has been offset through an African Energy Efficient Stove Project in Kenya, whose aim is to replace open fires with energyefficient stoves, bringing significant social and health benefits to local communities. For more information, including the Hiscox 2013 report, please go to www.hiscoxgroup.com.
Hiscox’s commitment to responsible business practices is reflected in: The environment We believe in identifying, then minimising the environmental impacts of our business activities, including the direct impact of our own business operations. We seek to reduce the amount of waste our activities produce, and the amount of resources we consume. We are committed to reducing our carbon footprint, and for the business to operate more sustainably by: measuring our use of water, energy and other products in order to reduce consumption over time; buying sustainably-sourced or energyefficient products where we can; and minimising waste by recycling products where we can. We have, as a result, also generated significant cost and energy savings. Our scope 1 & 2 carbon footprint for the UK has reduced, relative to full time equivalent employees (FTE), every year since 2008.
This activity has been extended in 2013 to cover Hiscox Group-wide activities.
Total tonnes CO2e per FTE (scope 1, 2 and 3) 3.48 3.39 3.49
3 Hiscox has a small number of leased fleet vehicles. Fuel use for these vehicles is claimed for via expenses. These, along with other expense-claimed business travel, have been excluded from the scope of reporting.
Training and development Hiscox is committed to training and developing our employees to help them maximise their potential. Each permanent member of staff is provided with a tailored personal development
Dealing with customers Our ethos of outstanding customer service has earned Hiscox a reputation as an insurer whose word can be trusted, which sets us apart in our industry. Our belief is that insurance is a promise to pay, so should a loss occur, we aim to fully support our customers, and to pay every valid claim as soon as possible. As well as the claims accolades mentioned above, in 2013, for the fifth year in a row, Hiscox UK was awarded ‘Best Insurer’ at the Start Your Business – Best Service Provider Awards 2013.
For more detail on corporate responsibility see hiscoxgroup.com programme. Their training and development needs are reviewed twice a year, as well as their performance against clearly set objectives.
Hiscox USA staff volunteer for charities that aid and improve education, medical science, advancement of the arts and culture, and provide services to disadvantaged and vulnerable members of society. The San Francisco office volunteered for Mission Graduates to read to inner city kids who are in an early intervention tutoring programme starting their journey toward college. In Chicago, staff competed in the St Jude’s Warrior dash. The LA office supported the Lamp Community to combat homelessness. The New York and White Plains office competed at the J.P. Morgan Corporate Challenge in support of the Parris foundation, an organisation dedicated to helping disenfranchised communities by teaching children about science, technology, engineering and maths. Hiscox donated $1 for every US Direct sale to The Word of Honor Fund, which provides money to families of fallen soldiers. In 2013, the Hiscox Foundation USA made donations worth over $27,000.
In London, staff members support pupils at the Elizabeth Selby Infants School in Tower Hamlets through the Reading Partners’ Scheme. They also volunteered in the gardens of Richard House Children’s Hospice. In Colchester, staff raised £23,000 for Headway and also supported the Essex & Herts Air Ambulance Trust, East
Anglia Children’s Hospice, MS-UK and Alzheimer’s Society. Hiscox UK also supports Action for AT, helping speed the process of identifying cures for Ataxia-Telangiectasia and treatments that delay or prevent the disabling effects of childhood conditions. In July 2013, a team of 34 Hiscox employees and brokers undertook the ambitious task of completing the Hiscox Mont Ventoux challenge in aid of Leukaemia and Lymphoma Research. So far, the team has raised £48,000.
Syndicate 33 Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, major property and energy business, as well as a range of specialty lines including contingency and terrorism risks among others. The business is mainly property-related short-tail business. Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best, an A+ (Strong) from Standard & Poor’s, and an A+ (Strong) rating from Fitch.
The geographical and currency splits are shown on page 37. One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by third-party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 20% of profit on the element it does not own. For the 2014 year of account, Syndicate 33’s capacity has increased to £1 billion.
A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2013, net assets exceeded $10 million (2012: $12 million).
Hiscox Insurance Company Inc. is rated A (Excellent) by A.M. Best. At the end of 2013, net assets exceeded $59 million (2012: $56 million).
Caroline Foulger Independent Non Executive Director (Aged 53) 01 January 2013*
Robert Simon Childs Non Executive Chairman (Aged 62) 26 February 2013*
Robert Childs joined Hiscox in 1986, served as the Active Underwriter of the Hiscox Lloyd’s Syndicate 33 between 1993 and 2005, and was the Group’s Chief Underwriting Officer until February 2013. In 2012 Robert joined the Council of Lloyd’s. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005. He is a Trustee of Enham (a charity for the disabled), former Chairman of the Advisory Board of the School of Management of Royal Holloway University of London, and Chairman of The Bermuda Society.
Bronek Masojada joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007. He was a Non Executive Director of Ins-sure Holdings Limited from 2002 to 2006 and is a past President of The Insurance Institute of London. He is a member of the Board of the Association of British Insurers and the Master of the Worshipful Company of Insurers. Bronek is Chairman of the Lloyd’s Tercentenary Research Foundation, a charity which supports research in areas of interest to the insurance industry.
Ernst Robert Jansen Independent Non Executive Director (Aged 65) 20 November 2008*
Dr James Austin Charles King Independent Non Executive Director and Chairman of the Conflicts Committee (Aged 75) 11 October 2006*
Gunnar Stokholm Independent Non Executive Director (Aged 64) 20 November 2008*
Robert (Bob) McMillan joined the Hiscox Ltd Board in December 2010. He spent 24 years with the Progressive Insurance Corporation where he served in various positions including National Director of Product Development, then Claims before becoming National Director of Marketing. He led Progressive’s initiatives in multichannel distribution, financial responsibility based rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured on business innovation at the University of Virginia’s Darden School of Business and at the Harvard Business School. He has been a Non Executive Director of Hiscox Inc. since March 2007.
Daniel Healy joined Hiscox in 2006. He was appointed Executive Vice President and Chief Financial Officer of North Fork Bancorporation in 1992 and a member of its Board of Directors in 2000. He was a partner with KPMG LLP before joining North Fork. He was the Managing Partner of the San José, California and Long Island, New York offices and held other positions in that firm during his tenure. He holds a Board position at Bond Street Holdings.
Dr James King joined Hiscox in 2006. He was Chairman of the Bank of N.T. Butterfield & Son Limited until April 2007 and the Establishment Investment Trust, a UK listed company, until August 2011. Dr King retired as Chairman of Keytech Limited and The Bermuda Telephone Company Ltd in July 2013. He currently chairs Grotto Bay Properties Ltd and is a Director of Castle Harbour Limited. Dr King is a fellow of the Royal College of Surgeons, Canada and the American College of Surgeons.
Ernst Jansen joined Hiscox in 2008. He held several Managing Director positions in the European chemical industry between 1980 and 1990. He was an Executive Director then Vice Chairman of Eureko B.V. (now Achmea BV) between 1992 and 2007 and following retirement he became an adviser to the Executive Board and is director of two investment vehicles of Achmea.
Solicitors Appleby Canon’s Court 22 Victoria Street PO Box HM 1179 Hamilton HMEX Bermuda
Jeremy Pinchin Chief Executive Officer, Hiscox Re, Group Company Secretary, Group Claims Director
Bevis Tetlow Head of North American Underwriting – Bermuda, Hiscox Re
periodically with the Senior Independent Director. The Chief Executive has responsibility for running the Group’s business.
The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. The Board of Hiscox Ltd met four times during 2013. The UK Corporate Governance Code does not require the independence or otherwise of a Non Executive Chairman to be considered subsequent to their appointment. The Board considers all other Non Executive Directors to be independent within the meaning of the UK Corporate Governance Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board of Directors As at the date of this Report, the Board comprises the Non Executive Chairman, three Executive Directors, and eight independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 40 to 41. The Nominations Committee monitors the composition of the Board and considers the diversity, balance of skills, experience, independence and knowledge of the Board to ensure that it remains appropriate. The composition of the Board is also reviewed as part of the Board evaluation process as described on page 45. There is a formal induction process for new Directors. The needs of a new Director joining the Board are assessed and appropriate training arranged.
Existing Directors were provided with the opportunity to attend training sessions. Directors received briefings on the new Directors’ remuneration regime and other developments in corporate governance during the year. Directors’ training requirements were also assessed as part of the Board evaluation described on page 45.
Corporate governance Hiscox Ltd Report and Accounts 2013 by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Audit Committee. KPMG has confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case. In respect of the 2013 financial year the Audit Committee reported to the Board on how it had discharged its responsibilities and provided advice to the Board on how the Annual Report and Accounts is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s business model and strategy. Further information on the activities of the Audit Committee is included in the Audit Committee report on page 47.
During the year the decision was taken to split the Remuneration and Nominations Committee into two separate committees. Robert Childs was appointed Chairman of the Nominations Committee and Andrea Rosen chairs the Remuneration Committee. The Remuneration Committee and the Nominations Committee met separately for the first time in July 2013.
The Board retains ultimate authority for high-level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividend and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share options. The Board has, however, authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Company Board level approval is not required.
The Audit Committee The Audit Committee of Hiscox Ltd is chaired by Daniel Healy and comprises Caroline Foulger, Richard Gillingwater, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. The Chairman of the Committee and Caroline Foulger are considered by the Board to have recent and relevant financial experience. The Committee operates according to Terms of Reference published on the Group’s website. The Audit Committee meets at least three times a year to assist the Board on matters of financial reporting, risk management and internal control. The Audit Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The Board has accepted the advice of the Audit Committee with regard to the new requirement for FTSE 350 companies to put the external audit out to tender at least every ten years and details are set out in the Audit Committee report on page 48. The internal and external auditors have unrestricted access to the Audit Committee. All non-audit work undertaken
The Investment Committee The Investment Committee is chaired by Robert Childs and comprises the independent Non Executive Directors, the Chief Executive and the Chief Financial Officer. The Investment Committee has oversight of the Group’s investments.
The Conflicts Committee The Group has a Conflicts Committee which comprises independent Non Executive Directors and is chaired by Dr James King. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and Syndicate 6104 are managed by a Hiscox-owned Lloyd’s Managing Agency. 27.5% of the Names on Syndicate 33 are third-parties and 72.5% of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third-parties. The Conflicts Committee serves to protect the interests of the third-party Syndicate Names. Should such a potential conflict of interest arise, there is a formal procedure to refer the matter to this Committee.
Risk Committee The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Risk Committee normally meets three times per year. The risk management framework is described in the risk management section on pages 27 to 32.
The Chairman’s Advisory Group A Chairman’s Advisory Group was established during the year to provide a regular forum for the exchange of information and discussion between the Executive Directors and the Non Executive Chairman.
The primary areas of judgement considered by the Committee in relation to the 2013 Annual Report and Accounts were: i) Reserving for insurance losses As set out in our significant accounting policies on page 82, the reserving for losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s Consolidated Balance Sheet. The Chief Actuary presented a Group Reserving Report to the Committee and the Committee reviewed the approach taken by management when making their selection of reserving estimates and is satisfied with the judgements taken and the reporting and disclosure of the estimate.
iv) Accounting for the defined benefit scheme under the revised accounting standards During the year, the Group adopted the revised IAS 19 accounting standard for defined benefit schemes. The Audit Committee has reviewed the report of the key judgements in the financial statements from the Chief Financial Officer, and how the revised standard has been adopted and the recognition of a £4.4 million liability at 31 December 2013, and is satisfied with the approach taken.
UK Corporate Governance Code Following the changes to the UK Corporate Governance Code, which apply to financial years commencing on or after 1 October 2012, the Board requested that the Committee advise on whether it believes the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. The Committee has provided such advice to the Board.
The external auditors provide reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. The Committee also received a comprehensive presentation from the auditors demonstrating to its satisfaction how their independence and objectivity is maintained when providing nonaudit services. Any contracts with the auditors, KPMG, for non-audit services in excess of £50,000 must be approved by the Committee in advance. Approval will not be given for any contract which may impair the auditors’ independence or objectivity. During the year the
Audit Committee report continued value of non-audit services provided by KPMG amounted to £88,000 (2012: £21,000). There were no circumstances where KPMG was engaged to provide services which might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditors.
Comments on the Hiscox remuneration policy report Although this is the first time we have reported under the new disclosure regulations, our remuneration policy is largely unchanged from 2012. I would like to highlight a few areas as follows.
Linking executive pay with business objectives and shareholder returns The guiding principle behind our remuneration policies is to align executive incentives with the creation of value for our shareholders. We do this in three ways.
Thanks to these strong results, we have announced that for a second consecutive year we will be making an additional return of capital to shareholders.
Comments on 2013 Executive Director remuneration Payments to the three Executive Directors under the annual incentive scheme reflect the excellent 2013 results. Aggregate bonuses for the 2013 year are 209% of salary.
I am sure that you will agree that in 2013 Hiscox has delivered excellent results and continues to deliver superior shareholder returns. I believe that the rewards to all employees, including Executive Directors, reflect this appropriately.
A core function of the Remuneration Committee’s role is to determine: — the overall remuneration strategy, policy and cost for the Group; — the levels and make-up of remuneration for the Executive Directors; — the award of sizeable bonuses to individuals other than the Executive Directors; and — the awards and operation of the Company’s share plans, including the Performance Share Plan.
Explanatory context Hiscox intends to put both the remuneration policy report and the annual report on remuneration to shareholders for approval on an advisory basis at the Annual General Meeting on 15 May 2014.
Base salary is normally reviewed annually taking into account a range of factors including inflation rate movements by country, relevant market data and the competitive position of Hiscox salaries by role.
For 2014, the bonus pool will be funded by a set percentage of profits on achievement of a Hurdle Rate of ROE. The bonus for 2013 was determined on a similar basis. Further detail is set out on page 60.
The salaries for current Executive Directors are set out on page 59.
Individual bonus caps are not set – this has been the Company’s policy for many years.
Facilitate and encourage share ownership in order to align senior employees with Hiscox shareholders.
Deferral points are determined based on the currency in which the Executive Director’s salary is paid and are normally as follows: Bonus of £50,000, €75,000, $100,000 and below
Participants are able to (subject to any local tax/legal/regulatory restrictions) draw deferred bonuses early for the following reasons: — payment of the exercise price on the exercise of employee share options; — payment of tax on share awards (e.g. on exercise of performance shares); — purchase of shares; and — payment of debt due on share purchases.
Awards are granted under the Performance Share Plan, originally implemented in 2006. Awards are governed by the rules of this plan.
Awards are generally subject to continued employment, however awards may vest to leavers in certain scenarios (e.g. ‘good’ leaver circumstances).
50% of bonus paid shortly after the end of the financial year. Balance of bonus split 50% to be paid after year two, and 50% after year three.
The PSP performance measures are intended to motivate and reward to deliver long-term Company success. The Committee considers performance metrics and targets prior to the grant of each to ensure that these remain suitable and relevant. Recent awards have been based on ROE performance – a key indicator of the Company’s long-term success.
Dividend equivalents As part of our objective to align senior managers with total shareholder return, the recipient of the PSP award is provided with the equivalent of the dividend either in shares or cash. Dividends (or amounts equal to dividends) on shares granted under the PSP roll up in the form of shares between the grant and vesting.
Where awards are granted in the form of nil-cost options, at the end of the performance period the employee would have an option over the proportion of the share grant which vests by reference to the satisfaction of the applicable performance target as well as over the number of shares representing the ‘rolled up’ dividends on those shares. Participants in selected jurisdictions (subject to tax/legal/regulatory restrictions) after vesting but before exercise, may receive amounts equal to dividends paid on the total number of shares that have vested.
Fixed reward plus variable pay for the purpose of illustration as follows. — Annual incentive: assume a bonus equivalent to 150% of salary. — PSP: assume vesting of 50% of the maximum award.
2. Bonus payment for the financial year of exit The Committee may pay a bonus calculated in line with the normal bonus scheme timings and performance metrics. The bonus amount would normally be pro-rated depending on the proportion of the financial year which has been completed by the time of the termination date.
4. Unvested Performance Share Plan (PSP) awards Treatment would be in accordance with the plan rules and relevant grant documentation. The intended approach is summarised below: — awards will vest in line with the normal scheme vesting date (unless the Committee determines otherwise). Awards vest to the extent that the relevant performance target is considered to have been met; — the award will normally be pro-rated to reflect the period which has elapsed from the commencement of the award to the date of termination unless the Committee determines otherwise.
In compiling this 2013/14 policy report, a draft version was sent to major shareholders plus the ABI and ISS for comments. These comments were discussed at the Remuneration Committee meeting prior to finalising the document.
On initial appointment (including interim Director appointments) the Committee recognises that there may be a need to offer more bespoke arrangements in order to facilitate recruitment. In such circumstances, the Committee may opt to vary the approach set out in the policy table above as it considers appropriate and necessary at the time. The exact structure of any such awards, including the mode of delivery (e.g. cash or shares), the timeframe for payment or vesting, and the detail of performance measures and targets (if any) would be tailored as appropriate but would remain consistent with the overall Hiscox approach to pay. In all circumstances, any movement from the ongoing policy would only be considered where there is a strong commercial rationale to do so and where the Committee felt this was in the best interests of the Company and shareholders. The Company would seek to clearly disclose and explain any such arrangements to shareholders as appropriate.
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 retirement 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.
Executive Director remuneration The table below sets out the remuneration received by current and former Executive Directors for the financial years ending 31 December 2013 and 31 December 2012.
In line with the remuneration policy, the Executive Directors, along with other employees across the Group, participated in the 2013 profit-related bonus pools. These pools were calculated at a business unit level and for the Group as a whole on the basis of a set percentage of profits in excess of a return on allocated equity hurdle (‘Hurdle Rate’). The Hurdle Rate is set annually by using an investment benchmark rate which takes account of 1-3 year gilt and treasury yields, cash returns and the general investment environment. The return on equity Hurdle Rate for the 2013 financial year was set at 7%, which was 5% above the investment benchmark rate.
In 2013, the Group achieved a pre-tax profit of £244.5 million compared with £217.5 million in 2012. This resulted in a pre-tax return on equity of 19.9% and as such the bonuses awarded to the Executive Directors reflect an above-target performance and an increase over 2012 bonuses awarded.
The following table shows the average Executive Director bonus as percentage of salary versus return on equity performance and demonstrates how we have applied our policy of paying bonuses which are proportionate to results. As can be seen from the table, the bonuses vary significantly with performance from year-to-year.
In line with the remuneration policy, 50% of the 2013 bonus will be deferred over a period of two years. Receipt of these deferred amounts is normally subject to continued service.
Bonus awards for the 2014 financial year The bonus return on equity Hurdle Rate has been reviewed as described above and will remain unchanged for the 2014 financial year at 7%.
PSP awards to be granted during 2014 In the coming year, the Committee intends to grant awards to Executive Directors and the performance conditions and targets will be unchanged from the 2013 awards.
SJ Bridges, BE Masojada and RC Watson hold lifetime allowance protection certificates and have therefore opted out of the Company 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 59.
The table below details the legacy entitlements from the Defined Benefit Pension Plan. There are no further accruals under this plan. RS Childs and RRS Hiscox are in receipt of pensions from the closed defined benefit scheme and are entitled to no further pension provision.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2013 and 31 December 2012.
Non Executive Directors receive an annual fee in respect of their Hiscox Ltd and subsidiary board appointments. Fees were reviewed for the 2013 financial year but were not increased. Having recently conducted a review of fees, we do not anticipate any fee increases for the 2014 financial year. Non Executive Director fees will next be reviewed in January 2015.
Payments made to RRS Hiscox for his Executive Director role during 2013 are covered under the single figure of remuneration table. There were no payments for loss of office on stepping down from the Board. After 48 years with the Company, RRS Hiscox was also presented with a gift of artwork to the value of £128,000 when he stepped down as Chairman in February 2013.
*Following the share capital consolidation on 2 April 2013, the nominal value of the Ordinary Shares changed from 5p to 5 55/89p. RRS Hiscox held 5,135,534 Ordinary Shares of 5p each when he stood down as Chairman and Director on 25 February 2013.
Share options The interests of current and former Executive Directors under the approved and unapproved share option scheme are set out below: Number of options at 1 January
Performance Share Plan The interests of current and former Executive Directors under the Performance Share Plan are set out below: Number of awards at
External Non Executive Directorships No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest. The consent of the Chairman is required in any event. During the year BE Masojada held directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd and Heptagon Assets Ltd. He was not remunerated for his services. SJ Bridges held directorships on the Board of Caledonia Investments plc and does not retain the annual fee of £41,350 for his services. He also sits on the Audit Committee of the Institute of Chartered Accountants in England and Wales and is not remunerated for his services. RC Watson did not hold any Non Executive Directorships during the year.
Share options The interests of current and former Executive Directors under the Sharesave Schemes are set out below: Number of options at 1 January
SJ Bridges 3,210 – – (3,210) – 2.826 5.610 01-May-13 31-Oct-13
Annual bonus as % of salary 286 114 – 186 204
PSP vesting as % of maximum opportunity 100 100 85 39 53
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits, pension and annual bonus of the Chief Executive between 2010 and 2013 financial years compared with the average UK-based employee. We have chosen UK-based employees rather than Group-wide employees as the comparator group as this is where the Chief Executive is based and this allows for the closest comparison in terms of salary increases which take into account country inflation and the benefits package provided. The change is based on UK employees who were employed and eligible for a salary review and bonus in all financial years.
Annual report on remuneration 2013 Hiscox Ltd Report and Accounts 2013
Statement of shareholder voting At the last AGM, the Directors’ remuneration report received the following votes from shareholders: For %
Relative importance of the spend on pay The graph below shows the relative movement in profit, shareholder returns and employee remuneration for the current and prior financial year. Shareholder return for the year incorporates the distribution made on behalf of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits.
Financial results The Group achieved a pre-tax profit for the year of £244.5 million (2012: £217.5 million). Detailed results for the year are shown in the consolidated income statement on page 71, and also within the Group financial performance section on pages 22 and 23.
The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2013.
Information on environmental, employee and community issues including details of the Company’s policies are set out in the corporate responsibility statement on pages 33 to 35. This also includes disclosure of greenhouse gas emissions. The information that fulfils the requirements of the corporate governance statement as referred to in Disclosure and Transparency Rule 7.2 can be found on pages 43 to 46 and in this report.
Diversity The composition of the Board and the Senior Executive structure are described on pages 14, 15, 40 and 41. The role of a Hiscox Partner is described on page 42. The percentage of persons of each gender who were (i) Hiscox Partners and (ii) employees of the Hiscox Group, excluding the Board, are set out below: Male %
The information that fulfils the requirements of the management report as referred to in Disclosure and Transparency Rule 4 can be found on pages 6 to 11 and 27 to 32.
Political and charitable contributions The Group made no political contributions during the year (2012: £nil). Information concerning the Group’s charitable activities is contained in the report on corporate responsibility on page 35.
Annual General Meeting The notice of the Annual General Meeting, to be held on 15 May 2014, will be contained in a separate circular to be sent to shareholders. This will be despatched following the Extraordinary General Meeting to be held on 18 March 2014.
By order of the Board Jeremy Pinchin, Secretary, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda
We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 71 to 123 which comprise the consolidated balance sheet as at 31 December 2013, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the annual report on remuneration 2013 that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the Companies Act 2006.
Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and, under the terms of our engagement letter, to audit the part of the annual report on remuneration 2013 that is described as having been audited.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the annual report on remuneration 2013 to be audited. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements and the part of the annual report on remuneration 2013 to be audited, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements and the part of the annual report on remuneration 2013 to be audited 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the part of the annual report on remuneration 2013 to be audited.
Consolidated statement of comprehensive income For the year ended 31 December 2013, after tax
Income Gross premiums written 4 1,699,478 1,565,819 Outward reinsurance premiums (328,364) (297,679)
Claims and claim adjustment expenses, net of reinsurance 26.2 (519,279) (538,826) Expenses for the acquisition of insurance contracts 17 (305,777) (283,615)
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations (2,030) (35,806) Income tax relating to components of other comprehensive income – –
Current tax 32,383 6,998 Trade and other payables 27 304,138 265,615
The consolidated Group financial statements were approved by the Board of Directors on 24 February 2014 and signed on its behalf by: RS Childs Chairman
Employee share options: Equity settled share-based payments – – – – 6,135 6,135 Proceeds from shares issued 24 52 1,649 – – – 1,701 Deferred and current tax on employee share options 29 – – – – 5,190 5,190 Shares issued in relation to Scrip Dividend 24, 32 88 7,578 – – – 7,666 Dividends paid to owners of the Company 32 – – – – (70,173) (70,173)
Employee share options: Equity settled share-based payments – – – – 12,523 12,523 Proceeds from shares issued 24 133 3,990 – – – 4,123 Deferred and current tax on employee share options 29 – – – – 5,030 5,030 B Share Scheme: Return of capital, special distribution 32 – (42,453) (107,718) – – (150,171) Final dividend equivalent 32 – – (47,423) – – (47,423) Shares issued in relation to Scrip Dividend 24, 32 18 2,103 – – – 2,121 Dividends paid to owners of the Company 32 – – – – (24,746) (24,746)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 70,576 (8,245) Financial assets carried at fair value (170,817) (49,377) Financial liabilities carried at fair value (72) 301 Other assets and liabilities 4,321 13,596
Cash flows from operations 120,357 124,393 Cash paid to the defined benefit pension scheme (1,800) (1,800) Interest received 41,494 51,743 Equity dividends received 789 1,631 Interest paid (5,229) (7,256) Current tax (paid)/received (39,712) 56,403
The consolidated financial statements for the year ended 31 December 2013 include all of the Group’s subsidiary companies and the Group’s interest in associates. All amounts relate to continuing operations.
2 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 at note 2.22.
2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.
The Group has financial assets and cash of over £3.1 billion. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
Except as described below, the accounting policies adopted are consistent with those of the previous financial year.
Changes in accounting policies (a) Defined benefit plans As a result of the adoption of IAS 19 (2011), the Group has changed its accounting policy with respect to the recognition of defined benefit obligations on the balance sheet and the basis for determining the income or expense relating to it.
Under IAS 19 (2011), the option to apply the corridor method has been removed and the Group must recognise the full unfunded obligation/(surplus scheme assets) on the balance sheet. In addition, the Group is now required to calculate the net interest expense/(income) for the period on the net defined benefit liability/(asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period. Previously the Group determined interest income on plan assets
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2013
IFRS 9: Financial Instruments (2009) and Financial Instruments (2010) have been issued but are currently not subject to a mandatory effective date. IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 (2010) introduces additional changes relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting. The adoption of IFRS 9 will have an effect on the classification of the Group’s financial assets.
Exchange differences on translating foreign operations have been classified as an item that may be subsequently reclassified. This reclassification would arise if the operation was sold, although this does not necessarily reflect management’s current intention. Comparative information has also been re-presented accordingly.
The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the Group.
(d) Subsidiaries As a result of the adoption of IFRS 10, the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns.
Impact to the current and previously reported financial statements arising from the adoption of IAS 19 (2011)
the Netherlands, Spain, Portugal, Ireland and Belgium whose functional currency is Euros, those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars, Hiscox Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars.
2.5 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any in the Framework for the Preparation and Presentation of Financial Statements. The Group may also recognise intangible items not previously recognised by the acquired entity such as customer relationships.
(c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two Group entities that have different functional currencies. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised gains arising from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
2.4 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany,
2.3 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled by the Group. Control exists when the Group has power over an entity, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases.
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 2013, HDCM owned 72.5% of Syndicate 33 (2012: 72.5%). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements.
The Group uses the acquisition method of accounting to account for the acquisition of subsidiaries. At the date of acquisition, the Group recognises the identifiable assets acquired and liabilities assumed as part of the overall business combination transaction at their acquisition date fair value. Recognition of these items is subject to the definitions of assets and liabilities 2 Significant accounting policies continued 2.2 Basis of preparation continued (e) Joint arrangements continued
Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately deemed cost, which represents the amount recorded under previous generally accepted accounting principles.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.
In respect of acquisitions prior to this date, goodwill is included on the basis of its 2 Significant accounting policies continued 2.5 Property, plant and equipment continued
they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses. Plan assets exclude any insurance contracts issued by the Group.
2 Significant accounting policies continued 2.13 Insurance contracts continued (b) Recognition and measurement continued
to employees exists or where there is a past practice that has created a constructive obligation.
When the terms and conditions of an equity settled share-based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the premodification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
In accordance with the transitional arrangements of IFRS 2, only share-based awards granted or modified after 7 November 2002, but not yet vested at the date of adoption of IFRS, are included in the calculations.
2 Significant accounting policies continued 2.15 Employee benefits continued (a) Pension obligations continued
estimates of probable future taxable profits available to determine whether recognition of a deferred tax asset is appropriate. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures, and ongoing compliance therewith, partially through its own enquiries but primarily 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 also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
The Group carries its financial investments at fair value through profit or loss with fair value determined using published price quotations in the most active financial markets in which the assets trade. During periods of economic distress and diminished liquidity, the ability to obtain quoted bid prices may be reduced and as such a greater degree of judgement is required in obtaining the most reliable source of valuation. Note 3.2 to the financial statements discusses the reliability of the Group’s fair values.
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group’s financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice. To the extent that taxable losses carried forward by the Group exceed taxable temporary differences relating to the same taxation authority and taxable entity, which will result in amounts against which the losses can be utilised, the Group uses 2.20 Leases (a) Hiscox as lessee Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are 2 Significant accounting policies continued
— developing systems that facilitate the identification of emerging issues promptly; — utilising sophisticated computer modeling 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 — developing processes that continually factor market intelligence into the pricing process.
i) Underwriting risk The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk, seeking to exploit identified opportunities in the light of other relevant anticipated market conditions. Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. 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; 3 Management of risk continued
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 marine and professional and technological liability risks rather than human bodily injury risks, which are only
Units held in funds – long and short and special strategies
Geographic focus Specific UK mandates 42 44 Global mandates 58 56
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2013 would have been expected to reduce Group equity and profit after tax for the year by approximately £19.9 million (2012: £16.7 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
publicly available financial information detailing their financial strength and performance. The financial analysis of reinsurers produces an assessment categorised by Standard & Poor’s (S&P) rating (or equivalent when not available from S&P).
other than the facilities and Letters of Credit outlined in note 35.
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 risen by 100 basis points at the balance sheet date, the Group equity and profit after tax for the year might have been expected to decrease by approximately £31 million (2012: £33 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets.
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2013 and 2012.
An analysis of the Group’s positions in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Ireland or Greece.
Included in the bank debt table above, is £213 million in relation to holdings in debt securities and £6 million held as deposits with credit institutions.
Included in the table above, is £192 million in relation to holdings in debt securities and £3 million held as cash equivalents.
The available headroom of working capital is monitored through the use of a detailed Group cash flow forecast which is reviewed by management monthly or more frequently as required.
Property – marine and major assets 58,849 33,052 40,302 13,657 145,860
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 19 and 27.
Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £196 million (2012: £181 million) which are denominated in foreign currencies.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2013 Sterling
Sensitivity analysis As at 31 December 2013, the Group used closing rates of exchange of £1:€1.20 and £1:$1.65 (2012: £1:€1.23 and £1:$1.63). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
(g) Limitations of sensitivity analysis The sensitivity information given in notes (a) to (f) above demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented at note 30 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
The sensitivity analysis do not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action.
The Group sets the amount of capital required in its funding structure in proportion to risk. The Group then manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying 3 Management of risk continued 3.2 Financial risk continued
In the Group’s other geographical territories, including the US, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
4 Operating segments The Group’s operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas. Financial information is used in this format by the chief operating decisionmaker in deciding how to allocate resources and in assessing performance. The format is representative of the management structure of the segments.
The Group’s four operating segments are: — London Market comprises the results of Syndicate 33, excluding the results of the fine art and non-US household business which is included within the results of UK and Europe. It also includes the auto physical damage and warranty and aviation businesses from Syndicate 3624. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe. —UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s fine art and non-US household business, together with the income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe. In addition, it includes the European errors and omissions business and specialty UK from Syndicate 3624. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33. — International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance of the Group. The Group maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
The current capital regime in the UK requires insurance companies to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company Limited and Hiscox’s Lloyd’s operations maintain ICA models in accordance with this regime. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. The Group uses its own integrated modeling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
For Syndicate 33 and Syndicate 3624, the ICA process produces a result that is uplifted by Lloyd’s to identify the capital required to hold the A rating. The strong control and risk management environment, together with the sophistication of the modeling, have produced a capital ratio below that suggested under the previous risk-based capital regime. Another key area of capital modeling for Hiscox is to identify which insurance vehicle produces the best return on capital employed for the Group, given certain restraints from licences, reinsurance and the regulatory environment. This modeling takes into account transactional costs and tax, in addition to the necessary capital ratios. It proves the capital efficiency of Lloyd’s, despite a tax disadvantage against offshore entities, and the cost advantage of processing smaller premium business outside of Lloyd’s.
At 100% level (note 4b) 1% change in claims or expense ratio 5,683 5,203 3,467 – 5,496 4,895 3,072 –
Total *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
(d) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US, Guernsey, France, Germany, Belgium, the Netherlands, Spain and Portugal.
Net tangible asset value 1,336,741 381.4 1,295,749 328.7 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
The net asset value per share is based on 350,460,458 shares (2012: 394,200,249 shares), being the adjusted number of shares in issue at 31 December.
Investment income including interest receivable 42,571 45,699 Net realised gains on financial investments at fair value through profit or loss 2,391 9,071 Net fair value gains on financial investments at fair value through profit or loss 13,962 37,920
Interest and expenses associated with bank borrowings 2,457 2,703 Interest and charges associated with Letters of Credit 35 4,050 5,032 Interest charges on experience account 669 870 11 Auditors’ remuneration Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group
Overall impact of foreign exchange-related items on net assets (11,920) (55,979)
Closing balance sheet impact of non-retranslation of non-monetary items (4,790) (2,674)
13 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange (gains)/losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value or value in use.
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 of 6.8% (2012: 6.7%) 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 £65,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement (2012: £100,000).
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 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 2013 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
At 31 December 2013 there were £9,647,000 of assets under development on which no amortisation has been charged (2012: £13,505,000).
Assets with a net book value of £nil were held under finance leases (2012: £nil).
Additions during the year – 3,104 Disposals during the year (900) – Net loss from investments in associates (400) (430)
Associates incorporated in the UK from 25% to 35% 67,773 52,720 14,987 661 Associates incorporated in Europe from 25% to 49% 1,806 1,097 2,523 254
As at 31 December 2013, the Group had an amount receivable from Lark Ltd of £6,896,000 (2012: £6,896,000).
Acquisition costs expensed to the income statement (371,663) 65,886 (305,777) (333,758) 50,143 (283,615)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 20). The Group recognised a gain during the year of £217,000 (2012: loss of £91,000) in respect of previously impaired balances.
Debt and fixed income securities 2,335,829 2,194,866 Equities and shares in unit trusts 223,024 190,029 Deposits with credit institutions 6,240 13,203
Total investments 2,565,093 2,398,098 Insurance linked fund 19,917 8,098 Derivative financial instruments 21 44 73
Total investments 2,565,093 2,398,098 20 Loans and receivables including insurance receivables
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 474,316 476,930 After one year 19,103 15,134
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £77,000 (2012: gain of £71,000) as included in note 7. The opposite exchange gain is included within financial investments.
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures and sovereign 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 gain on these futures contracts of £1,175,000 (2012: loss of £337,000) as included in note 7.
Equity index options During the year the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of £213,000 on this contract. No such instruments were purchased in 2012.
22 Fair value measurements In accordance with IFRS 13: Fair Value Measurement, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
The levels of the fair value hierarchy are defined by the standard as follows: — Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; — Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on market observable data; — Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
Included within Level 1 of the fair value hierarchy are Government bonds, Treasury bills and exchange-traded equities which are measured based on quoted prices.
Cash at bank and in hand 389,773 428,454 Short-term deposits 174,602 229,208
Employee share option scheme – proceeds from shares issued 52 1,649 – – Scrip dividends to owners of the Company 32 88 7,578 – –
Total capital of £197,594,000 has been returned to shareholders, of which £42,453,000 has been charged against share premium and the remaining £155,141,000 has been charged against contributed surplus.
Employee share option scheme – ordinary shares issued 2,458 1,054 Scrip dividends to owners of the Company 32 324 1,758 Share consolidation as a result of the special capital distribution (45,636) –
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2013 2012
Annual risk-free rates of return and discount rates (%) 0.32-0.78 0.27-0.55 Long-term dividend yield (%) 4.67 3.95-4.31 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 27 28 Weighted average share price (p) 570.5 416.0
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2013 are shown in the Directors’ remuneration report.
Retained earnings at 31 December 1,271,109 1,033,634 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Gross Claims reported and claim adjustment expenses 829,548 932,604 Claims incurred but not reported 1,023,514 1,000,300 Unearned premiums 756,059 663,708
Net Claims reported and claim adjustment expenses 682,602 740,293 Claims incurred but not reported 810,514 739,172 Unearned premiums 657,183 576,758
(b) Claims development tables The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group’s actual level of ownership, which has increased significantly over the last nine years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group’s share of ultimate claims for each accident year, three years after the end of that accident year.
The Bornhuetter-Ferguson method is based on the Chain Ladder approach but utilises estimated ultimate loss ratios. This method uses a combination of a benchmark or market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique has been used in situations in which developed claims experience was not available for the projection (recent accident years or new classes of business).
Catastrophe events which are expected to impact multiple business units in the Group are analysed by the central analysis team. They combine information from underwriters, the claims team and past experience of similar events to produce gross and net estimates of the ultimate loss cost to each part of the Group. These figures are then incorporated by the actuarial team into the quarterly reserving exercise. This process ensures that a consistent approach is taken across the Group.
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2013 and 2012 are not material.
Liability for accident years before 2004 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities.
Total net liability to external parties at 100% level 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – net at 100%
Total at beginning of year (1,932,904) 453,439 (1,479,465) (1,902,571) 412,828 (1,489,743) Claims and claim adjustment expenses for year (572,440) 53,161 (519,279) (719,792) 180,966 (538,826) Cash paid for claims settled in the year 640,505 (147,926) 492,579 614,723 (124,685) 490,038 Exchange differences and other movements 11,777 1,272 13,049 74,736 (15,670) 59,066
Claims reported and claim adjustment expenses (829,548) 146,946 (682,602) (932,604) 192,311 (740,293) Claims incurred but not reported (1,023,514) 213,000 (810,514) (1,000,300) 261,128 (739,172)
Total at end of year (1,853,062) 359,946 (1,493,116) (1,932,904) 453,439 (1,479,465)
Creditors arising out of direct insurance operations 15,364 15,606 Creditors arising out of reinsurance operations 130,814 130,605
The amounts expected to be settled before and after one year are estimated as follows: Within one year 277,386 248,155 After one year 26,752 17,460
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the consolidated income statement comprise the following: 2012 restated *
S1013 CTA 2009 deduction and share-based payments 3 (727) Non-taxable income (1,360) (23,723) Overseas tax – – Prior year tax adjustments (1,025) 5,885
Tax charge for the period 6,780 9,428 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Trading losses in UK entities – 789 – 789 Trade and other payables 1,035 3,328 – 4,363 Intangible assets – Syndicate capacity 2,876 (548) – 2,328
UK deferred income tax assets and liabilities are calculated at 20% for the year ended 31 December 2013 (2012: 23%).
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of changes in equity to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of changes in equity is £2,165,000, comprising £603,000 deferred tax and £2,768,000 current tax (2012: £4,746,000 deferred tax and £616,000 current tax).
30 Employee retirement benefit obligations The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the Trustee and are held separately from those of the Group. 61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme is recorded and the recovery from the third-party names for their share of the Syndicate 33 recharge is shown as a separate asset. From 1 January 2013, the Group adopted IAS 19 (11) which resulted in the full recognition of the defined benefit surplus/deficit on the balance sheet. The pension retirement benefit obligations for 2012 have also been restated for this change. See note 2 for more detail.
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: Present value of scheme obligations 179,479 173,420 Fair value of scheme assets (185,666) (156,513)
(Surplus)/deficit for funded plans (6,187) 16,907 Effect of asset ceiling/onerous liability 10,553 –
Managed fund pooled investment vehicles UK equity funds 7,996 8,025 Emerging market equity funds 74,959 59,658 Global equity funds 37,258 28,069 Bond funds 39,048 47,417 US equities 13,173 9,892
Total expense recognised in operational expenses in the income statement 9 1,000 1,054
Remeasurements Effect of change in demographic assumptions 6,975 3,114 Effect of change in financial assumptions (3,982) 14,725 Effect of experience adjustments – (4,372) Return on plan asset (excluding interest income) (25,287) (10,982) Changes in asset ceiling/onerous liability (excluding interest income) 10,553 – Remeasurement of third-party Names share of defined benefit obligation 1,966 (416)
Total defined benefit (credit)/charge recognised in comprehensive income (8,775) 3,123 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
The movement in liability recognised in the Group’s balance sheet is as follows: 2012 restated *
Net defined benefit liability at end of year 3,635 13,824 Third-party Names’ share of liability 731 3,083
A reconciliation of the fair value of scheme assets is as follows: 2012 restated *
A reconciliation of the present value of scheme obligations of the scheme is as follows: 2012 restated *
Opening present value of scheme obligations 173,420 155,685 Interest expense 7,700 7,548 Cash flows Benefit payments (4,634) (3,280) Remeasurements Changes in demographic assumptions 6,975 3,114 Changes in financial assumptions (3,982) 14,725 Impact of experience adjustments – (4,372)
Additional memorandum information at the end of the current and previous six accounting periods is presented below: Present value of scheme obligations 179,479 173,420 155,685 146,737 140,676 101,615 106,793 Fair value of scheme assets (185,666) (156,513) (140,517) (144,056) (118,391) (115,166) (127,576)
Effect of asset ceiling/onerous liability 10,553 – – – – – –
Gross liability recognised on balance sheet 4,366 16,907 – – – – –
The weighted average duration of the defined benefit obligation at 31 December 2013 was 24.6 years.
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. 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 £4,892,000 at 31 December 2013 (2012: £4,650,000), but this would have no impact on the recorded net deficit on the balance sheet (2012: £4,650,000).
31 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares held by the Group and held in Treasury as own shares.
Profit for the year attributable to the owners of the Company (£000) 237,758 208,026
Weighted average number of ordinary shares in issue (thousands) 358,652 391,592 Adjustments for share options (thousands) 15,860 16,427
Weighted average number of ordinary shares for diluted earnings per share (thousands) 374,512 408,019
The final dividend for the year ended 31 December 2012 was paid as part of the B Share Scheme (see note 24) 395,188,526 B Shares of 50p each were issued, of which 12p per share was in lieu of a final dividend for a cash value of £47,423,400.
Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 18 March 2014, the Board proposes to pay 14.0p per ordinary share instead of a final dividend for the year ended 31 December 2013. Together with the interim dividend of 7.0p per ordinary share, this represents a total dividend for 2013 of 21.0p per ordinary share. In addition, the Board proposes to pay a special distribution of 36.0p per ordinary share. Such amounts will be paid by way of a C/D share scheme. A scrip dividend alternative will not be offered to shareholders.
33 Acquisitions During the prior year, the Group acquired a 25% holding in Lark (2012) Ltd, (‘Lark’), for total consideration of £3,104,000. Lark is a specialist UK insurance broker. The Company is treated as an associate of the Group from this date. No goodwill arose on acquisition. There were no acquisitions during 2013.
34 Disposals During 2013, the Group disposed of its holding in Bracken Hill Specialty Insurance Company Inc. for $32.8 million, realising a gain of $2.4 million. In addition, the Group sold its interest in Senior Wright Indemnity Limited, an associate of the Group for £900,000, £300,000 of which was receivable at 31 December 2013. The sale realised a loss of £1.1 million on disposal.
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, for a total US$875 million which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed US$400 million. In addition, the terms also provide that upon request the facility may be drawn in a currency other than US Dollar. At 31 December 2013 US$333 million (2012: US$308 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2012 £nil).
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide Letters of Credit or other terms of collateral to clients. In 2012, Hiscox Bermuda renegotiated its Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies and other jurisdictions, and entered into new Letter of Credit facility agreements with the Royal Bank of Scotland and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to US$400 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by US Government and Corporate Securities of Hiscox Insurance Company (Bermuda) Limited. Letters of Credit under this facility totaling US$112,670,681 were issued with an effective date of 31 December 2013 (2012: US$126,579,000 on a US$400 million facility) and these were collateralised by US Government and Corporate Securities with a fair value of US$131,385,000 (2012: US$149,120,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 7,883 7,482 Office equipment 330 194
Later than one year and no later than five years Land and buildings 25,734 25,967 Office equipment 347 72
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 395 584 Later than one year and no later than five years 180 613 Later than five years – –
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2013
**Hiscox Holdings Limited held 48,558 shares in Hiscox Ltd at 31 December 2013 (2012: 54,560).
38 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2013 on pages 59 to 66. 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 to Syndicate 33 are as follows.