Hiscox is a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow. We are listed on the London Stock Exchange, headquartered in Bermuda and currently have over 3,300 staff across 14 countries and 34 offices. We can trace our roots back to 1901 and have grown organically over time from our beginnings in the Lloyd’s market.
Financial highlights 41.9¢ Total ordinary dividend per share up by 5.2%.
Why invest in Hiscox? Hiscox is a diversified international insurance group with a consistent, long-held strategy that provides opportunities throughout the insurance cycle. We are a uniquely-balanced insurer with a powerful brand, strong balance sheet and plenty of room to grow.
Big-ticket business A Larger premium, globally traded, catastrophe-exposed business written mainly through Hiscox London Market and Hiscox Re & ILS.
The Hiscox Group employs more than 3,300 people across 14 countries and 34 offices. Our products and services reach every continent and we are not overly reliant on any one of our divisions for the Group’s overall profits.
Hiscox London Market Returned to good health after several years of taking tough action, and successfully replaced $400 million of challenged business with more attractive risks by the end of 2018.
Marketing Our commitment to building a differentiated brand continued in 2018, with award-winning campaigns such as CyberLive in the UK driving double-digit premium growth in our small business offering.
Hiscox Retail The single biggest segment in the Group wrote over $2 billion of income, served one million customers, and its profits cover the dividend for the third year in a row.
Over the last five years the Hiscox Group has: 4 Hiscox Ltd Report and Accounts 2018 1 Strategic report Why invest in Hiscox?
In our annual global employee engagement survey we looked at how connected employees feel to Hiscox, their managers, teams and roles. Hiscox enjoys very high employee engagement, which averages in the top quartile of over 200 companies worldwide. In 2018, 86% of our employees said they are proud to work for us, 94% said they believe in our corporate values and 80% said they would recommend Hiscox as a great place to work.
5Hiscox Ltd Report and Accounts 2018 41 Governance 67 Remuneration 97 Financial summary1 Strategic report Why invest in Hiscox?
A Hiscox received Insurance Company of the Year 2018 at UK newspaper City A.M.’s annual awards. A Bronek Masojada received Outstanding Contributor of the Year – Risk at the Insurance Insider Honours Awards 2018.
As we grow, we’ve always got one eye on making sure our values remain front and centre. In 2019 our Chief Executive is leading a project to refresh them once again.
41 Governance 67 Remuneration 97 Financial summary1 Strategic report Why invest in Hiscox?
Our reinsurance and ILS operations experienced a very active year for claims, with exposure to hurricanes and wildfires in the US, typhoons in Japan, hailstorms in Australia and large claims in cyber and marine hull.
Financial performance The result for the year ending 31 December 2018 was a profit before tax excluding foreign exchange of $151.1 million (2017: $120.6 million). Gross premiums written increased by 15.0% to $3,778.3 million (2017: $3,286.0 million). The combined ratio was 94.9% (2017: 99.9%). Earnings per share increased to 45.1¢ (2017: 12.0¢) and the net asset value per share decreased to 819.1¢ (2017: 835.1¢). Post-tax return on equity was 5.6% (2017: 1.5%). Our investment return of $42.5 million (2017: $112.5 million), before derivatives and fees, equates to a return of 0.7% (2017: 2.0%) on total assets under management.
I am pleased to announce a final dividend of 28.6¢, which is an increase of 5.2%. The record date for the dividend will be 10 May 2019 and the payment date will be 12 June 2019.
The Board has approved a scrip alternative subject to the terms and conditions of Hiscox Ltd’s 2016 Scrip Dividend Scheme. The last date for receipt of scrip elections will be 20 May 2019 and the reference price will be announced on 30 May 2019.
Hiscox delivered a good profit before tax of $137.4 million (2017: $39.7 million) despite another busy year for claims. After a relatively benign start, we saw a number of natural catastrophes and significant market losses in the second half which, combined with turbulent financial markets, have impacted our result.
$137.4m Hiscox delivered a good profit before tax of $137.4 million (2017: $39.7 million) despite another busy year for claims.
In the London Market, it has been a war of attrition but rates and terms are improving in many lines and the refinements we have already made to the portfolio mean we are well positioned as renewed discipline courses through the market. Similarly in reinsurance, we believe opportunities will present themselves in loss-affected accounts. We also expect to benefit from improved investment conditions.
2018 was a year of change and achievement in our operations, and more change is planned in 2019. Although we have completed our structural readiness for Brexit, our investment in infrastructure projects that will boost our abilities to serve customers and create efficiencies continues. This is all good, necessary work, but as we have mentioned previously it will have an impact on growth and expenses in the short term.
In London, the Lloyd’s Decile 10 work is making good progress to redress the balance when it comes to capacity and market discipline. We have been very supportive of Lloyd’s, which has put pressure on the market’s underwriters to take action in unprofitable areas. I feel it strange that it takes a regulator to tell businesses that it is a bad thing to lose money, but the process has certainly squeezed out some of the worst performing lines and that is a very good thing indeed.
Although the reinsurance market did not harden as many had hoped, the retrocession market – reinsurance of reinsurers – did become more sensibly priced. This has in the past led to sufficient increases all the way through to insurance pricing. It remains to be seen whether that particular tail still wags the dog.
In the London Market, it has been a war of attrition but rates and terms are improving in many lines and the refinements we have already made to the portfolio mean we are well positioned as renewed discipline courses through the market. Outlook 1 Strategic report Chairman’s statement 41 Governance 67 Remuneration 97 Financial summary
The standout performer in 2018 was Hiscox London Market, which returned to growth and profit after three years of tough action; withdrawing from poor-performing lines and navigating challenging markets. Having done much of the hard work, the team was in a good position to navigate the Lloyd’s Decile 10 profit remediation programme.
Hiscox Retail Generating profits and creating value; investment in brand and infrastructure continues Hiscox Retail comprises Hiscox UK & Europe and Hiscox International. In this division, our specialist knowledge and retail products differentiate us and our ongoing investment in brand helps us build a strong market position. Hiscox Retail is the single biggest segment in the Group and this year generated 55% of the Group’s gross premiums written at $2,087.1 million (2017: $1,835.4 million), up 13.7% year-on-year. Our ambition remains to grow our retail business between 5% and 15% per annum in the medium term. We reached the milestone of one million retail customers and $2 billion of premiums during the year, and the fact that our market shares remain small in most of our markets indicates the size of the opportunity still ahead of us. Building a retail business takes time, but persistence pays off. We continue to invest in building our brand across all markets and in multi-year IT infrastructure programmes that will support our growth plans.
Hiscox Retail delivered profits of $136.0 million (2017: $141.6 million), 2018 was another eventful year for insurers, with catastrophe activity at historic levels, financial market turmoil and geopolitical uncertainty. In this challenging environment, Hiscox grew gross premiums written by 15.0% to $3,778.3 million and more than tripled profits to $137.4 million (2017: $39.7 million). Our post-tax return on equity was 5.6%, an improvement on last year’s 1.5%, and a fair result in the circumstances.
Gross premiums written 2,087.1 1,835.4 Net premiums earned 1,821.9 1,585.3 Underwriting profit 125.4 114.7 Investment result 9.5 29.4 Foreign exchange and other* 1.1 (2.5) Profit before tax 136.0 141.6 Combined ratio 93.6 94.6 Combined ratio excluding foreign exchange 93.6 94.5 *Includes impairments and accelerated amortisation.
These products are distributed via brokers, through a growing network of partnerships and, for some simple risks in the UK, France and Germany, direct to customers. Our schemes business offers insurance solutions to customers with similar risk profiles, for example sports clubs, wedding cars and niche industry associations.
Hiscox UK & Ireland Hiscox UK & Ireland increased gross premiums written by 11.5% to $799.5 million (2017: $717.1 million), or 7.8% in constant currency, with every region contributing and good growth in most of our product areas.
Our direct offering is growing well and UK direct reached £100 million of premium this year, helped by a sustained marketing commitment. Building this business has taken time, but the brand we have established and expertise we have embedded is valuable not only to the UK, but also to our other retail operations. It is a model we seek to replicate in our other direct businesses.
The home insurance market remains competitive, with escape of water claims still prevalent and now some subsidence claims after a dry summer. As a result, premiums have increased, and while we try and mitigate the impact of price increases on our customers, we must be disciplined if we are to provide the service that they expect.
In the broker channel, IT change dominated the agenda this year and growth was lower than in previous years. Adapting to our new system with new ways of working has caused some indigestion and had a knock-on effect to our usual standards of service to our brokers and customers. We appreciate their support as we work to get things right. In 2019, our existing broker high net worth business will begin to transition to the new system. We expect growth in the broker channel will continue to be affected as these changes take place, until we reach full operational capability by mid-2019.
Hiscox Europe Hiscox Europe had another great year. Gross premiums written grew by 17.2% to $322.3 million (2017: $275.0 million), or 11.4% in constant currency, helped by both strong new business and retention. Cyber, classic car, management liability and technology products continue to perform well in Europe and we continue to invest in them.
In Spain our management liability, professional indemnity and cyber products are key growth drivers. We have also experienced strong new business through existing partnerships, by bringing new products to existing distribution channels.
We reached the milestone of one million retail customers and $2 billion of premiums during the year, and the fact that our market shares remain small in most of our markets indicates the size of the opportunity still ahead of us. Hiscox Retail and the combined ratio of 93.6% (2017: 94.6%) is within our 90%-95% target range. The improvement in combined ratio on the larger premium base was insufficient to offset lower investment returns, leading to lower profits from the division. The rating environment across retail also remained broadly flat throughout 2018.
1 Strategic report Chief Executive’s report 41 Governance 67 Remuneration 97 Financial summary
Our Benelux business has seen good growth in motor, fine art and high-value household where we have benefited from competitors retreating. We launched our cyber and professional indemnity products in Belgium during the year, with promising early signs.
In most markets, cyber has exceeded our expectations. Our investment in talent and marketing, and the consistency we have introduced in our CyberClear brand is paying off. We have developed a leadership position in Germany and Holland, and Spain has had a very promising response to the cyber product it launched at the start of the year. There is more to do in France, but in time we hope to replicate the success we have had elsewhere.
The shared service centre in Lisbon has grown over the 12 years since it was established, from five people in 2006 to a 400-strong team in 2018. It has created valuable efficiencies for Europe and other parts of our business including Hiscox UK, Hiscox MGA and Group IT now benefit from its support. The roll-out of our ‘My Hiscox’ broker extranet sites across Europe is progressing to plan, and provides brokers and partners with additional products and convenient self-service features.
Hiscox International Hiscox International comprises Hiscox USA, Hiscox Special Risks and Hiscox Asia. It grew by 14.5% to $965.3 million (2017: $843.3 million).
Hiscox USA Hiscox USA underwrites small- to mid-market commercial risks through brokers, other insurers and directly to businesses online and over the telephone. The business continues to achieve strong growth, with gross premiums written increasing by 15.4% to $809.6 million (2017: $701.4 million).
Growing partnership distribution and our commitment to building a direct-to-customer brand are impactful here, and the business will be the first beneficiary of the new policy administration system currently being implemented.
In the broker channel, growth was driven by professional risks and general liability and we benefited from good retention, though new business has been hard fought – especially in the architect and engineers market, where competition is heating up at the lower end of the market. We are maintaining our underwriting and pricing integrity in mid-market cyber, where a maturing US cyber market has led to falling prices and widening cover, and we continue to carefully manage our exposure. Like others in the market, we experienced an increased severity of claims and rate inadequacy for directors and officers’ (D&O) for private companies. We have responded with discipline and expect our D&O book to shrink in 2019.
Our new US MGA has now commenced trading, with an initial focus on commercial property. The MGA underwrites on behalf of Hiscox London Market and other Lloyd’s syndicates, allowing us to increase our line size and be a more material participant in the market. There is the potential to broaden the MGA’s scope over time.
Hiscox London Market Disciplined cycle management driving excellent results Hiscox London Market uses the global licences, distribution network and credit rating available through Lloyd’s to insure clients throughout the world.
The business has delivered a great result for 2018, increasing gross premiums written by 17.1% to $877.7 million (2017: $749.8 million), or 16.3% in constant currency, with particularly strong growth in property, general liability and cyber. It generated a profit of $78.2 million
The discipline our London Market business has shown over the last three years has paid dividends. Since the end of 2016, the team has walked away from $400 million of challenged business and by the end of 2018 they had succeeded in replacing it with stronger performing business.
The business had another good year and delivered gross premiums written of $136.2 million (2017: $127.2 million), an increase of 7.0%. Around half of the business written here are multi-year policies, which impacts on the top line and causes year-to-year volatility in revenues.
We have maintained our market-leading position in kidnap and ransom despite increased competition and ongoing challenges in the rating environment. The Special Risks Underwriting Centre is helping to boost retention and allows underwriters more time to work on complex risks and new business.
Our Security Incident Response product, which responds to a range of security issues such as criminal threats, workplace violence, corporate espionage, mysterious disappearance and cyber extortion, continues to be an important opportunity. It has created a market where none existed previously, and I regularly describe it as the product that every CEO needs. Who do you turn to for help when you face one of these remote, but sadly not unthinkable, events? The product is now available in the UK, USA, Japan, Spain and the Netherlands and we have deployed additional resources to support further growth. The product was recognised with the Innovation Award at Business Insurance magazine’s Innovation Awards 2018.
Hiscox Asia Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance. Hiscox acquired it in 2014.
and in hull and cargo we saw double-digit rate increases at 1 January. Elsewhere rates were flat or up slightly.
As a result of the hurricanes, our property division had another active year for claims but delivered a profit overall. US flood remains a significant opportunity and our FloodPlus products use proprietary technology and advanced analytics to provide better cover at a fairer price for customers, backed by capacity from the flood consortium we lead. FloodPlus performed well in another major US flood event, and during the year we broadened our offering with a FloodPlus Commercial product which has been well received.
We have maintained our market share in core lines including terrorism, where our market-leading position continues to stand us in good stead despite the competitive market.
The discipline and careful underwriting of our marine and energy team has driven an outstanding performance in these lines, helped too by a low loss experience. In cargo, we are refocusing the portfolio to reduce our overall exposure and lead on more of the business we write.
Our alternative risk team focuses on portfolio business, where we match our capacity and experience with the expertise of underwriters in niche lines that complement our core appetite. It has been a challenging year, with some exposure to the California wildfires albeit within our expected loss experience. The team received recognition for their work at the Reactions London Market Awards 2018, where they were awarded Insurance Team of the Year.
As previously announced, our 2019 business plan for Lloyd’s allows us to underwrite a maximum premium in the year ahead of £1.5 billion for Syndicate 33 (2018: £1.6 billion), a reduction year-on-year as market conditions in 2018 did not tally with our expectations. This gives us sufficient headroom in which to execute our 2019 plans, with some allowance for the unexpected.
Our London Market business is a top quartile performer in Lloyd’s and maintaining that position requires active cycle management. In 2019 we will retain our agility, with a particular focus on areas of opportunity within our investment lines.
We stopped writing Latin American property facultative reinsurance in the first half of the year, having not seen sufficient rating correction after the loss events of 2017. In space, launch delays have had some short-term top-line impact due to attaching premium moving over to 2019, however we are benefiting from our technical underwriting approach in this line of business and are recognised as a market leader.
$1.5bn Assets under management now exceed $1.5 billion after last year’s losses.
We continue to innovate in ILS and have launched a new fund which allows investors to access insurance lines for the first time. The Kiskadee Latitude fund is supported by a top-tier investor who will access a more diverse insurance and reinsurance portfolio with less focus on pure property catastrophe risk. The fund began underwriting on 1 January 2019, supported by over $100 million.
Claims We experienced a relatively benign first six months of the year for claims; February’s Beast from the East was well within our expected range for a UK weather event, and elsewhere our claims experience was unremarkable. As is the nature of insurance though, anything can happen and it did in the second half of the year, when we experienced a more active environment for both natural catastrophes and large claims.
In addition, we had some exposure to a number of notable individual claims in cyber, media and marine (including a large marine loss of $13 million). In D&O we experienced a higher severity of claims both in the USA and London Market. The claims trends that I have talked about in Hiscox UK & Ireland – escape of water and subsidence – have also had some effect.
During his time at Hiscox, Jeremy also served as the first Chief Executive of Hiscox Re; drove the creation of our ILS capability, including naming our funds Kiskadee, a noisy Bermudian bird; served as Chief Executive of Hiscox Bermuda, and as Hiscox Group Company Secretary and General Counsel. I am thankful for his huge and varied contribution to our business during his time at Hiscox.
There was an initial surge of prices in the first quarter following the 2017 hurricane losses, and we were able to write a disproportionate amount of business at that time, but as rate increases tapered off during the course of the year, our growth became more subdued. Overall, we achieved rate increases of 5% for the year.
Information technology and major projects A robust modern infrastructure is essential, not only for the business we are today but also the business we want to be. The volume of work taking place around the Group to transform some of our underlying infrastructure is not insignificant, and we are making good progress. As previously stated, cumulatively these projects are increasing our expense ratio by 1%-1.5% in the short term.
We completed the replacement of our HR systems across the Group in 2018 and our multi-year programme of finance change initiatives is progressing well. We have also taken positive steps regarding robotics and machine learning, for example, by automating some routine IT service desk tasks. In 2019 we will continue to move forward with our digitisation efforts, $69.7m In 2018 we spent $69.7 million on acquisition and brand-building activity (2017: $69.1 million) with award-winning campaigns such as CyberLive in the UK driving double-digit premium growth in our small business offering.
Marketing looking at broader use of technologies like application programming interfaces (APIs) and robotics that support our push towards portfolio underwriting in the UK, as well as personal lines and claims innovations that benefit our customers.
We have created Hiscox SA, a new Luxembourg insurer to carry our retail risks, and will utilise Lloyd’s Brussels to insure European Economic Area risks which were previously placed with Lloyd’s of London. Adapting to Brexit cost Hiscox approximately $15 million in one-off costs, the majority of which were incurred during 2018, and an expected ongoing cost of $2.4 million per annum. It has also led to an increase in required capital of 1 Strategic report Chief Executive’s report 41 Governance 67 Remuneration 97 Financial summary
promoted to the FTSE 100 at the end of 2018, the consequence of our past endeavours. It was a moment of quiet satisfaction, but more of trepidation. More people will have more opinions on what we should or shouldn’t do. We are alive to the responsibilities, but will seek to live up to our ethos of challenging convention. We are fortunate that in many of our chosen areas, we are still small players with plenty of opportunity ahead of us. People, brand, products and strategic ambition differentiate us and we will continue to nurture them in the year ahead to the benefit of customers, staff and shareholders.
While our investment returns were below our initial expectations, we outperformed our indices through a careful selection of active bond, equity and hedge fund managers.
2019 presents yet more uncertainty, with ongoing political instability in Europe and the potential for recession in the USA. While acknowledging the uncertainty, there are reasons to be optimistic; we have seen a material improvement in yields available and are now investing our US bond portfolio at rates in excess of 3%, something we have not been able to do for nearly a decade. We continue to hold a higher than normal allocation to cash and remain well-placed to invest as opportunities emerge.
Outlook Our ambition for 2019 is to continue to grow premiums, albeit at a slightly slower pace than 2018. We expect that improving pricing as a result of Lloyd’s Decile 10 and our ongoing portfolio optimisation will lead to more insurance profit, with higher interest rates driving better investment returns. We will continue to invest in our underlying infrastructure and our brand. All of this will help propel our business forward.
We are maturing into a larger and more prominent company, but we strive to retain our entrepreneurial spirit. Outlook 1 Strategic report Chief Executive’s report 41 Governance 67 Remuneration 97 Financial summary
Hiscox Re & ILS Hiscox UK & Ireland Hiscox London Market Hiscox Europe
19Hiscox Ltd Report and Accounts 2018 41 Governance 67 Remuneration 97 Financial summary1 Strategic report Building a balanced business
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2019 and industry data. Given the nature of the risks underwritten, the loss estimates may be materially different from those that arise depending on the size and nature of the event.
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm, JP WS – Japanese windstorm 41 Governance 67 Remuneration 97 Financial summary1 Strategic report
Given our capital strength and balance sheet resilience, we continue to maintain a progressive core dividend policy. The Group has proposed to increase the final dividend by 5.1% to 28.6¢, resulting in a full-year ordinary dividend of 41.9¢ (2017: 39.8¢), up 5.2%. Our focus on efficient capital management means the business remains well positioned to support growth in areas expected to be profitable.
Capital requirements Monitoring of the Group’s capital requirements is based on both external risk measures, set by regulators and rating agencies, and our own internal guidelines for risk appetite. A full description of the requirements set by the regulators for the most significant insurance carriers is included in note 3.3 to the financial statements. A brief explanation of the primary internal and external capital constraints at Group level is given below, and presented in the chart on page 23.
A.M. Best, S&P and Fitch capital models calculate capital adequacy by measuring available capital, after making various balance sheet adjustments, and comparing it with required capital, which incorporates charges for premium, reserve, investment and catastrophe risk. Our interpretation of the results of each of these models indicates we are comfortably able to maintain our current ratings as set out in note 3.3 to the financial statements. The rating agency requirements shown in the chart on page 23 are consistent with the Group’s own internal projections of rating agency capital requirements.
Internal capital requirements The Group sets risk limits and tolerances that reflect the amount of risk it is willing to accept. To ensure good risk management, our current exposure by key risk type is 41 Governance 67 Remuneration 97 Financial summary1 Strategic report
Bermuda enhanced solvency capital requirement $2.38 billion available capital (post-�nal dividend)
Estimated BSCR post new formula 23Hiscox Ltd Report and Accounts 2018 monitored against these predefined measures throughout the year.
This is a good result considering the Group reserved $165 million for natural catastrophes and large losses in the second half of the year. The Group’s change in functional currency to US Dollars at the beginning of 2018 had the desired effect, significantly reducing the impact of foreign exchange movements during the period. The investment return of 0.7% (2017: 2.0%) was materially impacted by mark-to-market adjustments on the bond portfolio due to rising interest rates in the USA, as well as volatility in investment markets. The Group recorded a post-tax return on equity of 5.6% (2017: 1.5%) and earnings per share of 45.1¢ (2017: 12.0¢).
Gross premiums written of $3.8 billion grew 14.9% year-on-year, or 13.2% in constant currency. Hiscox Retail continued its strong growth trajectory, up 13.7% for the year, and accounting for 55% of the Group’s gross premiums written. Hiscox London Market returned to growth in 2018, up 17.1%, and Hiscox Re & ILS grew by 15.9%. The Group’s combined ratio was 94.9% (2017: 99.9%), or 94.4% (2017: 98.8%) excluding the impact of foreign exchange.
Hiscox Re & ILS Gross premiums written increased by 15.9% to $812.0 million (2017: $700.8 million), or 15.0% in constant currency. The claims ratio increased to 83.8% (2017: 71.0%) as the business was impacted by significant catastrophes and large losses in the specialty book. The quota share arrangements with Syndicate 6104 remained in place. As a result, the net combined ratio excluding foreign exchange movements increased to 112.5% (2017: 98.9%). The expense ratio increased to 28.7% (2017: 27.9%), again due to Group project expenditure. The result for the division was a loss of $23.2 million (2017: profit of $25.5 million).
Financial assets and cash* ($m) 6,261.9 5,957.1 Other assets ($m) 4,584.4 3,772.7 Total assets ($m) 10,846.3 9,729.8 Net assets ($m) 2,317.1 2,368.4 Net asset value per share (¢) 819.1 835.1 Net tangible asset value per share (¢) 746.8 769.5 Adjusted number of shares in issue (m) 282.9 283.6 *Excluding derivative assets and insurance-linked securities funds.
During the year, the Group completed a $380 million bond issuance. This further optimised the Group’s liquidity position, giving us the strategic flexibility to react to changing market conditions and seize profitable growth opportunities as they arise.
The Group returned $107.2 million of capital to its shareholders in 2018 (2017: $97.9 million). Inflows for the year were $442.9 million (2017: inflow of $3.0 million).
41 Governance 67 Remuneration 97 Financial summary1 Strategic report Group financial performance
Group investments Turbulent investment markets in 2018 have rewarded our cautious approach to risk and asset allocation.
The Group’s invested assets at 31 December 2018 totalled $6.3 billion (2017: $6.0 billion). The increase was largely as a result of the $380 million bond issuance in the first quarter, which is discussed in more detail in the Group financial performance section on page 25. The size of the portfolio was otherwise broadly unchanged over the period. The investment result, excluding derivatives and fees, was $38.0 million (2017: $104.8 million), a return of 0.7% (2017: 2.0%).
2018 also saw the fortunes of US and European bond markets diverge. The US economy benefited from the long-term impacts of its quick and decisive action following the ‘credit crunch’ and the short-term impacts of the President’s recent fiscal injection. As a result, USA one-month interest rates increased by almost 1% to reach 2.5%, while two-year government rates ultimately rose by 0.6% to 2.5% after a strong end to the year. By contrast, UK and European economies were constrained by widespread political uncertainty including Brexit and Italy’s budgetary brinkmanship with the EU. UK two-year government bond yields rose by only 0.3% and German two-year bund yields were unchanged.
The overall return on our bond portfolio was 0.7%, with our 70% holding of US Dollar bonds returning 0.9%. Given our underwriting mix, we are required to hold Sterling and Euro bonds, which underperformed our US Dollar holdings, generating returns of 0.4% and 0.2% respectively. Over the year, we reduced the maturity of our portfolios which limited our mark-to-market losses. This had no material adverse impact on our expected income. We therefore see our bond return as quite strong in the circumstances.
The Group uses, throughout its financial publications, additional performance measures (APMs) in addition to the figures that are prepared in accordance with International Financial Reporting Standards (IFRS). The Group believes that these measures provide useful information to enhance the understanding of its financial performance. These APMs are: profit excluding foreign exchange gains/(losses), premium growth in local currency, combined claims and expense ratios, return on equity, net asset value per share and reserve releases. These are common measures used across the industry, and allow the reader of our Annual Report and Accounts to compare across peer companies. The APMs should be viewed as complementary to, rather than a substitute for, the figures prepared in accordance with IFRS.
p Profit excluding foreign exchange gains/(losses) This represents the profit for the period after deducting foreign exchange gains or adding back foreign exchange losses in the relevant period. This enables the reader of these financial statements, and the Group, to measure the comparability of underlying profitability without the foreign exchange volatility. To obtain the value, the reader of these financial statements should remove the foreign exchange gains/(losses), as identified in the income statement, from the profit for the period.
p Combined claims and expense ratios The combined claims and expense ratios are common measures enabling comparability across the insurance industry that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if we owned all of the business, including the 27.4% of Syndicate 33 that the Group does not own (Group controlled income). The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables the Group to measure all of its underwriting businesses on an equal measure. The calculation is discussed further in note 4, operating segments. The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.
p Return on equity (ROE) As is common within the financial services industry, the Group uses ROE as one of its key performance metrics. While the measure enables the Company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance-related pay and shared-based payment structures, as discussed within the remuneration policy on pages 84-93. The ROE is shown in note 6, along with an explanation of the calculation.
p Net asset value (NAV) per share The Group uses NAV per share as one of its key performance metrics, including using the movement of NAV per share in the calculation of the options vesting of awards granted under PSP from 2018 onwards. This is a widely used key measure for management and also for users of the financial statements to provide comparability across peers in the market. NAV per share is shown in note 5, along with an explanation of the calculation.
p Reserve releases Reserve releases are a measure of favourable development on claims reserves that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast the Group’s performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The release is calculated as the movement in ultimate losses on prior accident years between the current and prior-year balance sheet date, as shown in note 23, as the result of better than expected outcomes of the estimates booked at the prior period close.
A specialist approach Taking the easiest and most obvious route is always tempting. The problem is that easy, obvious routes tend, by their very nature, to be extremely crowded. In the insurance industry, as in so much of life, the greatest rewards are often to be gained by heading off along paths that are less well trodden and less clearly signposted.
Fine art, flood, small business, security incident response, cyber. These areas, in which Hiscox currently seeks to excel, are all either highly specialist, rapidly developing or else prone to fluctuations in character and scale. In some, such as fine art, we have deep foundations to build on; in others we are still relative newcomers. But to be successful in any of these complex or fast-moving marketplaces, it is essential that we invest in people, infrastructure and digital solutions.
The challenging character of this terrain requires us to be as agile as possible, with a flexibility and fleetness of foot that allows us to quickly enter new markets or respond rapidly to changes in more established ones. Our culture has to be one that encourages innovation, personal development and thoughtful risk-taking, that embraces new ideas while understanding that bringing them to fruition takes time, patience and careful analysis.
29Hiscox Ltd Report and Accounts 2018 41 Governance 67 Remuneration 97 Financial summary
30 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary
Fine art For several decades, our understanding of art has gone beyond writing policies: we promote it, we invest in it and we display it in our offices. By maintaining such an intimate knowledge of this ever-evolving and highly-specialised marketplace, and developing the skills and relationships required to successfully navigate it, we are able to offer clients the protection they demand for their artworks, every one of which is as unique as the people who create or collect them. Hiscox works closely with galleries, auction houses and museums around the world, as well as major private collectors, but we also understand that an enthusiasm for art is not restricted to large institutions and wealthy investors. So, while the majority of this business is transacted through brokers, we have also developed a simple direct-to-consumer offering to allow individuals to insure smaller collections effortlessly online.
Cyber The market for cyber insurance is still a relatively immature one, complicated by the fast-moving nature of the threat, but as the world becomes more connected, it is also a rapidly expanding line of business. The risks associated with cyber attacks are multiplying in both diversity and scale, and the financial and reputational consequences of failing to prepare for them can be catastrophic. As a result, Hiscox – which has been underwriting cyber insurance for 20 years and now has over 80 cyber experts across the Group – has shifted the focus of its coverage from recovery to prevention, a step that demands a genuine depth of expertise. Our CyberClear products are currently sold to businesses of all sizes – from individual entrepreneurs to multinationals – through our European, US, London Market and reinsurance operations, as well as direct-to-consumers through our UK and German retail businesses. In the past year, we have dealt with over 1,000 cyber-related claims, a number which is only going to grow.
38 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary
To the extent that we have included additional disclosures over and above these requirements, it is because we believe that doing so enhances our reporting for the benefit of our shareholders, but it is done so on a voluntary basis.
67 Remuneration 97 Financial summary 42 Hiscox Ltd Report and Accounts 2018 1 Strategic report
67 Remuneration 97 Financial summary 43Hiscox Ltd Report and Accounts 2018 1 Strategic report
The risk management framework is underpinned by the system of internal control, which provides a proportionate and consistent system for designing, implementing, operating and assessing the internal controls that manage our key risks. The risk management framework is regularly reviewed and enhanced to reflect evolving practice on risk management and governance. During 2018, we continued the refresh of our system of internal control.
Risk appetite Risk appetite sets out the nature and degree of risk the Group is prepared to take to meet its strategic objectives and business plan. It forms the basis of our exposure management and is monitored throughout the year.
Our risk appetite is set out in terms of risk appetite statements, which outline the level of risk we are willing to assume by risk type and overall, risk limits and tolerances, which act as boundaries where actual risk exposure is more actively monitored. Risk tolerance is the maximum threshold we do not want to exceed; nearing it would represent a ‘red alert’ for senior management and the Board.
Risk management across the business The Group coordinates risk management roles and responsibilities across three lines of defence. These are set out in the table to the right.
The Risk Committee of the Board advises on how best to manage the Group’s risk profile by reviewing the effectiveness of risk management activities and monitoring the Group’s risk exposures, to inform Board decisions. The Risk Committee relies on frequent updates from within the business and from independent risk experts.
s Independent second line of defence model validation findings on the Group’s capital model.
s Updates to the risk and control register, which summarises the Group’s material risk exposures and the key controls in place to mitigate them, as agreed with risk owners.
s The Group Solvency Self-Assessment (GSSA) report, which builds on many of the components described above to summarise the Group’s Own Risk and Solvency Assessment (ORSA), which is described further in the following section.
Role of the Group risk team The Group risk team is responsible for designing and overseeing the implementation of the risk management framework and continually improving it. The team works with the business units to understand how they manage the risks in the first line and whether they need to make changes in their approach. The team is also responsible for monitoring that the business meets regulatory expectations around enterprise risk management and reporting on risk to the Board and the Risk Committee.
The Group risk team is led by the Chief Risk Officer, who reports to the Chief Executive and the Chair of the Hiscox Ltd Board Risk Committee.
Capital and solvency assessment 67 Remuneration 97 Financial summary1 Strategic report
A key strategic principle for the evolution of Hiscox is to balance the underwriting of high-margin, volatile, complex global risks with comparatively stable, local specialist retail products.
Each of the businesses pursues its strategic objectives as set out by the business unit leadership teams and approved by the relevant Board through the operating plan process. In addition, the Executive Committee sets out a common set of strategic objectives for the Group that cut across businesses and functions. These are based on the collective understanding of internal challenges and priorities, as well as external factors.
Stress testing and scenario analysis help identify possible dependencies and correlations between risks, which could impact on the Group’s strategy.
Insurance risk – underwriting The risk that insurance premiums will not be sufficient to cover future insurance claims and associated expenses. It also encompasses people, process and system risks directly related to underwriting, such as human error in paying invalid claims or misquoting premium prices.
We adapt our desire to write certain lines of business according to market conditions and the Group’s overall risk appetite. We reject business unlikely to generate underwriting profits and regularly monitor pricing levels, producing detailed monthly reports on how pricing and exposures are developing.
This allows us to quickly identify and control any problems created by deteriorating market conditions. Hiscox frequently acts as the lead insurer in the co-insurance programmes needed to cover high-value assets, so we have some ability to set market rates.
Delegated authorities give the Group access to a greater volume of business and can contribute significantly to our profitability and market share.
All underwriters and classes of business are also subject to independent review. In addition, the Group Chief Underwriting Officer commissions a series of independent portfolio reviews, including file reviews, providing a formal critique of the underwriting approach and strategy for classes of business or products that are typically either new, unproven or have recently missed budget.
Underwriting large, volatile and complex risks can be potentially costly, but can also create strong returns over the medium to long term.
The Group’s business plan is underpinned by a clearly-defined appetite for underwriting risk. We closely monitor our risk exposure to maximise the expected risk-return profile of our entire portfolio and offset any potential losses from more volatile accounts. Peer review assesses whether or not risks are in line with underwriting appetite.
Underwriters are incentivised to make sound decisions that are aligned with the Group’s strategic objectives and risk appetite, and clear limits are placed on their underwriting authority. In response to legal developments, policy wordings are regularly reviewed to ensure that, as far as possible, exposure to those risks identified in the policy at the time of issue is maintained.
Our modelling resources are tailored to support insurance and reinsurance plans and ensure that exposure matches expectations. Risk aggregation and modelling resources are shared across the Group.
Comprehensive stress and scenario testing is performed to assess our potential exposure to certain catastrophes.
We buy reinsurance to reduce our risk exposure and mitigate the impact of catastrophes based on a clear outwards reinsurance strategy and centralised reinsurance programme that enables us to minimise gaps in coverage across the business and get the right deal by leveraging our size. Decisions about the type and amount of reinsurance we buy are supervised by a dedicated reinsurance purchasing team using modelling techniques. Oversight is provided by a number of key committees, including the reinsurance purchase group.
Authority breach This is the risk of accepting underwriting risks outside of agreed underwriting parameters or where authority limits have been breached.
Accepting risks outside of agreed underwriting appetite, regardless of source, can result in unplanned or misunderstood underwriting exposures.
With respect to parties with delegated underwriting authority, authorities granted by Hiscox are closely controlled through strict underwriting guidelines, contractual restrictions and obligations. A Group-wide delegated authority policy sets out clear standards and principles for managing the delegation of authority to external third parties. We vet all third parties prior to appointment and monitor and audit them regularly.
41 Governance Risk management 67 Remuneration 97 Financial summary1 Strategic report
When underwriting risks, we estimate both the likelihood of claims occurring and their cost. Our actual claims experience could exceed our expectations, requiring us to increase our levels of reserves held.
Credit risk – reinsurance The Group buys reinsurance to protect us, but if our reinsurers were unable to meet their obligations to us it could put a strain on our earnings and capital, and harm our financial condition and cash flows.
Investment risk also includes the risk of default of investment counterparties, who are primarily the issuers of bonds in which we invest.
The investment of the Group’s assets generates an investment return. Our investment portfolio is exposed to a number of risks including, but not limited to, changes in interest rates, credit spreads and equity prices.
Our objective is to maximise risk-adjusted investment returns in the prevailing financial, economic and market conditions, without creating undue risk to the Group’s capacity to underwrite. Funds held for reserves are invested primarily in high-quality bonds and cash. To reduce foreign exchange risk, these are usually maintained in the currency of the original premiums for which they were set aside. 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.
A proportion of funds is allocated to riskier assets, principally equities and hedge funds. By taking a long-term view on these assets, we seek to achieve the best possible risk-adjusted returns. Within our risk assets, we make an allocation to less volatile, absolute return strategies, which balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets.
If a catastrophe occurs, the Group may be faced with large, unplanned cash demands. This could be exacerbated by having to fund a large number of claims pending recovery from our reinsurers.
Operational risk The risk of direct or indirect loss resulting from internal processes, people or systems, or external events.
As well as causing financial losses, information and cyber security risks can have legal, regulatory and reputational consequences.
The Group employs dedicated information security resources to advise on information security design and standards, and conduct assurance activities. Our defensive capabilities include industry standard monitoring with additional protection for specific, highly confidential information.
The Group invests in a rolling programme that deploys and evolves systems, policies and procedures to mitigate internal and external threats to our IT infrastructure. We conduct Group-wide mandatory training on information and cyber security, which is also mandatory for all third parties and contractors.
We operate in an ever-changing environment, with technological advancements, customer behaviour and external expectations evolving rapidly in recent years. To remain relevant, we must continue to evolve how we conduct our business.
The programme assurance office is a second line function that provides oversight across all major programmes. It provides senior management with an independent view of the progress, risks and issues within the programmes, as well as the linkages between them.
We operate in a global environment and insurance is a highly-regulated financial industry. There may be times when the regulatory, legal or tax landscapes undergo significant change that directly impacts our business. For example, local country tax authorities are evolving their approach and expectations with regards to the transparency and nature of the tax base.
Responsibility Our values underpin a reputation we have earned for integrity and decency in everything we do. We understand we are part of something beyond our bottom line and we take our role in the world seriously.
products, we are now protecting more homeowners at risk of flooding who otherwise would have had no cover or not enough cover. We are also piloting schemes such as Leakbot, which monitors water pressure and can alert a homeowner through an app if there is a drop in pressure (an early-warning indicator of a possible leak).
At the heart of our business is claims. In 2018, we paid out a total of $1.2 billion in claims worldwide, helping to get individuals and businesses back on their feet after the worst happened. This is exactly what we are here for. When we get this right, a by-product is the good feedback we get from our customers and the awards we receive, which are listed on page 6.
We aim to complete a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per full-time equivalent (FTE) by 2020, relative to 2014, and are already ahead of target. The table on page 53, which depicts the Group’s global carbon emissions year-on-year since 2015, shows that travel is currently the biggest contributor. We will commence work on our new targets for beyond 2020 in 2019.
Hiscox is a founding member of ClimateWise, a global network of more than 20 leading insurance companies which aims to leverage insurers’ collective expertise to better understand, communicate and act on the risks associated with climate change. We also work closely with Lloyd’s and the Association of British Insurers (ABI) on these issues. Since the network’s launch in 2008, our progress in meeting a set of principles outlined by ClimateWise has been subject to annual independent review. In 2018, we were given a score of 74%, our highest score from ClimateWise to date, ranking us eighth among the participants. A full copy of the Hiscox Climate Report is available at www.hiscoxgroup.com/responsibility.
Hiscox is a constituent of indexes including CDP and the FTSE4Good Index, a series of benchmark and tradable indices designed to help investors integrate environmental, social and governance (ESG) factors into their investment decisions.
We adapt the products we sell as traditional risks evolve and new risks emerge – both climate-related and otherwise. More information on how we manage our underwriting exposure to risks including natural catastrophes can be found in the risk management section on pages 42 to 51. In particular, we have done a lot of work recently around flood risk in the UK and USA. Through our participation in the UK’s Flood Re scheme and our US FloodPlus and FloodXtra 67 Remuneration 97 Financial summary1 Strategic report 41 Governance
Scope 3 – air, rail and personal car business travel 4,538 4,596 5,151 6,865
We are only human though, and sometimes we get it wrong. When this happens, and our customers are not as satisfied as we would want, we do our best to remedy this.
We also communicate openly and transparently with our shareholders, reporting both our half-year and full-year results to investors via a series of presentations, and sharing all relevant financial information on the corporate website, www.hiscoxgroup.com. Executives meet regularly with investors and analysts to discuss the Group’s strategy and performance and to answer any questions. More information on shareholder engagement can be found in the corporate governance section on pages 61 to 64.
Attracting and retaining good people We employ over 3,300 people across 14 countries and in some cities, such as York in the UK, we are a major local employer. No matter where they are based, we require all our staff to behave according to the core values of the Group. By doing so, we believe we are more likely to achieve business success, create value for shareholders, and attract and retain staff.
s Specifically in the UK, we offer a small number of places on our three-and-a-half-year degree-qualified apprenticeship scheme. The scheme provides those who have not gone to university or college with the opportunity to complete a degree at the same time as gaining valuable business experience, and is available for a wide variety of roles – from underwriting and claims to operations, marketing and finance.
When it comes to retaining talent, we aim to provide all of our staff with both the means and the motivation to succeed in their career at Hiscox, and recognise that different things motivate different people.
s We encourage employees to share in the Group’s success through competitive pay, profit and performance-related bonuses, Save As You Earn (SAYE) schemes, executive performance share plans, and a contributory pension scheme. Salary packages are benchmarked against the financial services industry as a whole and against the Lloyd’s market specifically (where applicable), and are also considered on a country-by-country basis. These benefits are appealing to our employees and in 2018, 73% of employees paid into one of our SAYE schemes.
Carbon Neutral Organisation 67 Remuneration 97 Financial summary1 Strategic report 41 Governance Responsibility
s We provide opportunities for our staff to work flexibly to suit their personal circumstances. These include revised start or finish times, remote working or reduced days. In 2018, we received 113 formal flexible working requests from employees across the Group, 93% of which were approved in full.
s We promote health and well-being by providing private medical cover, bi-annual health checks and subsidised health club membership.
In 2018, we received 113 formal flexible working requests from employees across the Group, 93% of which were approved in full. Attracting and retaining good people 67 Remuneration 97 Financial summary1 Strategic report
Employee engagement We listen to the views of our people and encourage them to contribute to the progress of the business by sharing feedback and new ideas. Employees are kept informed of business developments through formal briefings, town hall events, team meetings, intranet bulletins, video conferences and other more informal routes, and we work hard to ensure this is a two-way dialogue. For example, once employees have settled into their job at Hiscox, staff at all levels of the business are invited to lunch with members of the Executive Committee, to share their ideas for improvement and innovation and views on Hiscox as a place to work.
Financial crime policy and framework We updated our financial crime policy this year. It provides consistent standards and guidelines for the Group and sets out our position in relation to matters including sanctions, counter-terrorist financing, anti-money laundering, anti-bribery and corruption, fraud and anti-facilitation of tax evasion. It reflects the values of our business, one of which is integrity, and our commitment to honest and fair dealing in all activities. Preserving our culture of transparency and accountability at the same time as ensuring compliance with applicable financial crime laws and regulations is important to us, and we will not tolerate breaches of these rules. The revised financial crime policy and framework consolidates and supersedes a number of previous policies for the Group.
Respect for human rights Maintaining a positive, open and inclusive culture that respects our colleagues’ human rights is fundamental to the Group’s strategy. We do not maintain a stand-alone human rights policy, but are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards.
Policies We have a range of policies in place that guide our business, some of which are set out below.
The interest in employee networks that we saw in 2017 is bearing fruit, with new employee networks focused on parents, mental health and well-being, generations, the pan-African and Latino communities and LGBT proving popular. Over 740 employees have already signed up as employee network members and over 25 events have taken place, including talks on topics such as managing stress, insuring women’s futures, and navigating difficult conversations. These networks not only provide people with a forum for focused discussion, they have also led to practical initiatives such as lunchtime ‘walk and talk’ events in our London office and well-being lunches in our art cafés. We are especially pleased that, in our three largest UK offices, we have established a network of mental health first-aiders. These trained individuals are publicised throughout each building in the same way as physical first-aiders, and are on-hand to support colleagues with their mental health and well-being and direct them to expert resources as required.
For the fourth consecutive year, we supported the Dive In Festival – an annual series of events around D&I that takes place across 26 countries and 50 cities. Our teams attended a number of these events, and our Group Head of Claims Supplier Management, Andrew Sellers, delivered a keynote address on creating an open, empowering and inclusive workplace.
41 Governance Responsibility community. These groups included The Family Centre, The Duke of Edinburgh Award Programme, The Bermuda Housing Trust, The Bermuda Education Network, Meals on Wheels and Habitat Bermuda. We also continued our sponsorship of the Caines Brothers Back2School event by providing 350 backpacks and lunch boxes so that all children, no matter their circumstances, could return to school well-equipped for the new school year. We maintained our support for various environmental groups including Greenrock, Keep Bermuda Beautiful and Friends of the Bermuda Railway Trail and this year supported the Bermuda Zoological Society’s Kids on the Reef programme. We provided scholarship opportunities for Bermuda students through donations to the Association of Bermuda International Companies and the Alpha Phi Alpha Beautillion. We continue to sponsor the Bermuda Cricket Board’s under 11 cricket league and the ever-popular Hiscox Cricket Festival.
s Hiscox USA supported charities local to its offices that focus on education, medical science, advancement of the arts and culture or provision of services to disadvantaged and vulnerable communities.
s Hiscox Iberia continued to participate in the annual 1kg of Help campaign, working with brokers and other business partners to donate food to those in need during the festive season.
s Hiscox Benelux supported two new charities this year with donations to help those diagnosed with cancer and Alzheimer’s disease.
The Hiscox Foundation supported a number of these efforts. The Foundation is funded by an annual contribution from the Group, which makes grants to social and humanitarian initiatives and contributes to the fundraising activities of Hiscox employees. In total, the Hiscox Foundation in the UK and USA donated over $480,000 during 2018.
Hiscox was title sponsor of The Sunday Times Hiscox Tech Track 100 for the sixth consecutive year. It charts the fastest-growing private technology, telecoms and digital media companies in the UK, many of which we are proud to support as customers.
For more detail on corporate responsibility see hiscoxgroup.com 67 Remuneration 97 Financial summary1 Strategic report
Lynn Pike joined Hiscox in May 2015. Lynn has 38 years’ experience in the banking industry, most recently as President of Capital One Bank. Prior to joining Capital One, Lynn was President of Bank of America’s small business banking division, a $2.1 billion revenue business, with oversight of 110,000 business clients and 2,000 employees. Dividing her time between California and Connecticut, Lynn currently serves on the private Board of American Express National Bank, California State University Channel Islands Foundation Board, Phoenix House Foundation, and on Bankwork$’ Advisory Board.
Richard Watson joined Hiscox in 1986, having previously worked for Sedgwick and Hogg Robinson. In 2005, he was appointed Managing Director of Hiscox Global Markets, the largest division of Hiscox by premium income, and was the Underwriter of Syndicate 33 from 2006 to 2009. In 2009, Richard moved to New York and served as the Chief Executive Officer of Hiscox USA for three years. He returned to London in 2012 and became Chief Underwriting Officer for the Hiscox Group.
Aki Hussain joined Hiscox in 2016 from Prudential plc, where he spent seven years; latterly as Chief Financial Officer of Prudential UK and Europe. Prior to his time with Prudential, Aki held a number of senior roles in the financial services, telecoms and media sectors. He was Finance Director for the consumer bank division at Lloyds Banking Group until 2009, before which he was Finance Director for the consumer division of ntl (now Virgin Media). Aki is a Chartered Accountant, having trained with KPMG.
Hamayou Akbar Hussain Chief Financial Officer (Aged 46) 12 September 2016*
Auditors PricewaterhouseCoopers Ltd. Washington House 4th Floor, 16 Church Street Hamilton HM 11 Bermuda
Colin Keogh joined Hiscox in November 2015. Colin has spent his career in financial services, principally at Close Brothers Group plc, where he worked for 24 years and was Chief Executive Officer from 2002 until 2009. He is a Non Executive Director of M&G Group Limited and Chairman of specialist financial services business Premium Credit Limited.
Robert McMillan Independent Non Executive Director (Aged 66) 18 November 2010*
Thomas Hürlimann Independent Non Executive Director (Aged 55) 16 November 2017*
Michael Goodwin joined Hiscox in November 2017. He has over 25 years’ experience in the insurance industry having worked for QBE Insurance between 1992 and 2012. He held a number of roles for QBE in the Australian and Asia Pacific markets and was Chief Executive Officer of QBE Asia Pacific from 2007 to 2012. Michael is a Fellow of the Institute of Actuaries of Australia.
Dear Shareholder The robust governance framework which underpins our business model continues to evolve in line with our operations and as our business grows. For Hiscox, good governance is much more than compliance with codes, and we work hard to ensure we have the right culture, a balanced Board with diversity among our independent Non Executives and a well-defined network of committees.
s As part of the continued evolution of our risk management approach, Group risk owners across our business completed the Risk and Control Self-Attestation process – a formal declaration of adherence to over 40 principles.
s The Nominations and Governance Committee has assumed responsibility for the review of potential conflicts, therefore a specific Conflicts Committee is no longer required.
Robert Childs Chairman 41 Governance 67 Remuneration 97 Financial summary1 Strategic report
Non Executive Directors are subject to annual appointment. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms of appointment also state that appropriate preparation time is required ahead of each meeting. The remuneration of the Non Executive Directors does not include performance-related elements and is reviewed periodically.
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 58 to 59. The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and strategy. The Chief Executive has responsibility for running the Group’s business.
The Nominations and Governance Committee (formerly the Nominations Committee) monitors the composition of the Board and considers its diversity, balance of skills, experience, independence and knowledge to ensure that it remains appropriate.
In accordance with the Company’s Bye-Laws, all Directors, with the exception of Bob McMillan, will seek re-appointment at the 2019 Annual General Meeting.
The Chairman, Robert Childs, did not meet the independence criteria set out in the Code on appointment. Nevertheless, the Chairman acts in an independent manner, and the Board is satisfied that the Chairman performs an independent function, and continues to demonstrate objective independent judgement. The Board also believes that the Chairman’s experience and expertise in underwriting and risk management is a valuable asset in the performance of its functions, including the oversight of the Group’s risk strategy and appetite and risk management framework. The Board considers all other Non Executive Directors to be independent within the meaning of the Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
Corporate governance As the size and shape of the Hiscox Group continues to grow and develop it is vital that we have in place a robust governance framework which underpins our business model.
of their audit and any findings. This allows the Committee to monitor the effectiveness of the external auditor during the year.
PwC was appointed as the Company’s external auditor at the 2016 Annual General Meeting. There are currently no plans to re-tender the audit. The internal and external auditors have unrestricted access to the Committee. All non-audit work undertaken by the Group’s external auditor with fees greater than £50,000 must be approved in advance by the Committee. PwC has confirmed to the Committee that in its opinion it remains independent and the Committee is satisfied that this is the case. In respect of the 2018 financial year, the Committee reported to the Board on how it had discharged its responsibilities, provided advice to the Board on how the Annual Report and Accounts were fair, balanced and understandable, and provided the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Further information on the activities of the Committee is included in the Audit Committee report on pages 65 and 66. The arrangements by which staff may, in confidence, raise concerns about potential improprieties are described in the responsibility section on pages 52 to 57. The arrangements were reviewed, updated and reissued to all employees across the Group in July 2018.
The Remuneration Committee The Remuneration Committee comprises, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis and Lynn Pike. It is chaired by Colin Keogh and met four times during the year. The Remuneration Committee takes care to recognise and manage conflicts of interest when receiving views from Executive Directors or senior management, or consulting the Chief Executive about its proposals. No Executive is permitted to be present when the Committee discusses his or her remuneration. The Committee’s role in remuneration is described in the remuneration section on page 69. The overall aim is to attract and retain high-calibre individuals and incentivise them to deliver long-term success for the Company. Executive Directors are subject to malus and clawback provisions in relation to their remuneration and the circumstances in which these would apply are described on page 90.
There is a formal induction process for new Directors. The needs of a new Director joining the Board are assessed and appropriate training arranged. No new Directors joined the Board in 2018. Directors’ training requirements were assessed as part of the Board evaluation process and existing Directors were provided with the opportunity to attend training sessions. During the year, Directors received briefings on areas including Hiscox marketing initiatives, major transformation programmes, regulatory updates and data strategy, as well as in-focus sessions on specific business units and business unit initiatives.
The Board’s Terms of Reference include a Schedule of Matters Reserved for Board Decision, a copy of which can be found on the Group’s website, www.hiscoxgroup.com. Aside from the opportunity that Non Executive Directors have to challenge and contribute to the development of strategy in regular Board meetings, Non Executive Directors also attended the annual Hiscox Partners’ meeting held during the year.
The Board retains ultimate authority for high-level strategic and management decisions such as setting Group strategy and Group investment strategy, as well as approving matters including: significant mergers or acquisitions; the Group financial statements, declaration of interim dividends and recommending the final dividend; Group business plans and budgets; major new areas of business; capital raising; bonus issues or rights issues of share capital; Directors’ remuneration; significant expenditure or projects; and the issue of share awards.
The Board and Committee meetings usually take place over two days when all of the Directors convene in Bermuda. Prior to the Board and Committee meetings taking place, the Board and the Executive Committee together hold in-focus sessions exploring specific aspects of the Hiscox Group. These presentations are sometimes made by members of the Executive Committee, or other members of the management team, or in some cases by individuals with particular expertise in certain markets.
The Audit Committee The Audit Committee of Hiscox Ltd comprises Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis and Lynn Pike. Caroline Foulger is considered by the Board to have recent and relevant financial experience and is Chair of the Committee. The Audit Committee as a whole is considered to have competence relevant to the sector in which the Company operates. Further information on the background and experience of the Committee members is included in their profiles on pages 58 and 59. The Audit Committee operates according to the Terms of Reference published on the Group’s website and met four times during the year to assist the Board on matters of financial reporting and internal control, and to determine the external auditor’s fees. The Committee monitors the scope, results and cost effectiveness of the internal and external audits, the independence and objectivity of the external auditor, and the nature and extent of non-audit work undertaken by the external auditor together with the level of related fees. The Audit Committee receives reports from the external auditor who also attend meetings of the Committee to report on the status
During the year, Directors received briefings on areas including Hiscox marketing initiatives, major transformation programmes, regulatory updates and data strategy. The Board of Directors 41 Governance Corporate governance 67 Remuneration 97 Financial summary1 Strategic report
The Nominations and Governance Committee has a role in considering the succession planning for Executive Directors and senior managers, and a remit to make recommendations on the succession planning for the Chairman and the Chief Executive and other members of the senior management group.
The Nominations and Governance Committee is also responsible for reviewing the Company’s compliance with the Code, making any recommendation regarding changes to the Company’s corporate governance. During the year, the Committee received a briefing on the 2018 Code.
The Nominations and Governance Committee has assumed responsibility for the review of potential conflicts, therefore a specific Conflicts Committee is no longer required.
The Investment Committee The Investment Committee has oversight of the Group’s investments and comprises Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis, Lynn Pike, the Chief Executive and the Chief Financial Officer and is chaired by Robert Childs. At each meeting the Committee receives an update from the Chief Investment Officer on the performance of the Company’s and the Group’s investment portfolios. The Investment Committee normally meets four times a year.
The Risk Committee The Risk Committee oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Committee comprises Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis and Lynn Pike. It is chaired by Lynn Pike and normally meets four times a year. The risk management framework is described in the risk management section on pages 42 to 51.
The Executive Committee The Executive Committee comprises Senior Executives and normally meets every six weeks. It makes recommendations to the Board and approves various matters. The Committee approves senior appointments and remuneration outside the scope of the Nominations and Governance Committee, approves operational policy, takes decisions on annual budgets, business plans, mergers and acquisitions, considers significant issues raised by management and approves exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
No issues arose that would prevent the Chairman from recommending the re-appointment of a Non Executive Director. The Chairman met with the Chief Executive, and the Chief Executive met with each of the Executive Directors, to discuss their performance over the year and to set targets for the year ahead.
On a regular basis, following the Group’s results announcements, Hiscox commissions independent research on feedback from shareholders and analysts. This research, together with the analysts’ research notes, is shared with the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders and investors.
Going concern and viability Notwithstanding the uncertainties arising from the risks summarised on pages 42 to 51, there is a statement on page 94 which confirms that for the 2018 financial year the Directors considered it appropriate to adopt the going concern basis of accounting. For the reasons explained above, the prospects of the Company are assessed over a longer period than the 12 months required by the Code. The Group calculates and projects forward the capital requirements of its regulators and those of the rating agencies to ensure that it will continue to meet any applicable solvency requirements and achieve the ratings it feels are necessary to conduct its business profitably. While the Board has no reason to believe the Group’s business model will not be viable over a longer
Taken together, the risk and internal control activities described here enable the Board to monitor the Group’s risk management and internal control systems. The Board has concluded that the Group’s risk management and internal control systems are effective.
41 Governance Corporate governance 67 Remuneration 97 Financial summary1 Strategic report
Robert Childs 4/4 N/A N/A 4/4 Bronek Masojada 4/4 N/A N/A N/A Aki Hussain 4/4 N/A N/A N/A Richard Watson 4/4 N/A N/A N/A Caroline Foulger 4/4 4/4 4/4 4/4 Michael Goodwin 4/4 4/4 4/4 4/4 Thomas Hürlimann 4/4 4/4 4/4 4/4 Colin Keogh 4/4 4/4 4/4 4/4 Anne MacDonald 3/4 3/4 3/4 3/4 Bob McMillan 4/4 4/4 4/4 4/4 Costas Miranthis 4/4 4/4 4/4 4/4 Lynn Pike 4/4 4/4 4/4 4/4 65Hiscox Ltd Report and Accounts 2018 41 Governance
Financial reporting In relation to financial reporting, the primary role of the Audit Committee (the Committee) is to monitor the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance, and review significant financial reporting judgements contained within them. Working with both management and the external auditor, the Committee reviewed the appropriateness of the half-year and annual financial statements, concentrating on, among other matters: s the quality and acceptability of accounting policies and practices; s the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; s material areas in which significant judgements and estimates have been applied or there has been discussion with the external auditor; s any correspondence from third parties in relation to our financial reporting.
During the year, a number of natural catastrophes occurred, including Hurricanes Florence and Michael, Typhoons Jebi and Trami, and unprecedented wildfires in California. The Committee received an update on the processes that the Company conducts when significant events, such as the California wildfires, arise. It is imperative that the Company can quickly, and to a reasonable degree of accuracy, estimate the gross and net losses arising from such events. The Committee is satisfied with the way that the process was conducted.
ii) The carrying value of deferred tax As explained in note 2.21, a deferred tax asset has been established relating to operating losses arising in foreign subsidiaries. The recoverability of these assets is dependent upon the future profitability of these subsidiaries. The Committee reviewed the methodology used by management to assess the projected profitability and the carrying amount of the deferred tax asset and is satisfied with the methodology.
iii) The valuation of the investment portfolio The Group reports its assets at fair value. As discussed in note 2.21, during periods of economic stress, the resulting diminished liquidity means that estimating fair value involves a higher level of judgement. The Committee has evaluated the process used by management to estimate the fair value of the investment portfolio and is satisfied with their conclusions.
iv) Accounting for the defined benefit scheme As explained in note 2.15, the Group recognises the present value of the defined benefit obligation, less the fair value of plan assets at the balance sheet date. The Audit Committee reviewed the report of the key judgements and estimates in the financial statements from the Chief Financial Officer, and the results of the independent pension valuation, and is satisfied that the assumptions used to measure the deficit are reasonable.
v) The recoverability of reinsurance assets As a result of the large loss activity in the year, the level of exposure to reinsurers has increased. The Committee received an update on the process to monitor the levels of recoverability, including the level of collateral held, and the regular contact with counterparties. The Committee is satisfied with the approach taken and the recoverability of those assets.
The Committee reviewed the key accounting and disclosure impacts in relation to both changes and received reports from the external auditors with their assessment of the accounting treatment and disclosures in the financial statements.
After having reviewed these reports and the disclosures in the financial statements, the Committee concluded that it was satisfied with the accounting treatment and disclosure for each of these matters.
UK Corporate Governance Code In accordance with the 2016 UK Corporate Governance Code, 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 position and performance, business model and strategy. The Committee has provided such advice to the Board.
External auditor PwC was appointed as the Group’s auditor at the 2016 Annual General Meeting following a tender exercise that commenced in 2014 and was reported on in the 2015 Annual Report and Accounts.
The external auditor is invited to attend all meetings of the Committee and it is the responsibility of the Committee to monitor their performance, objectivity and independence. The Committee discusses and agrees with the auditor the scope of the audit plan for the full-year and the review plan for the interim statement.
The following principles define our approach to remuneration — Simple and strictly results-driven, with variable rewards only if Hiscox delivers profits in excess of a specified return threshold. — Incentivise Executive Directors appropriately, over the short and long term.
— Align Executive Directors’ interests with those of our shareholders, focusing on effective risk management, ROE and net asset value growth, which drive total shareholder return over time.
Performance and remuneration outcomes Hiscox delivered an underwriting profit of $170.5 million (2017: $71.3 million), a total dividend of 41.85¢ and pre-tax ROE of 6.0% amid a second year of significant natural catastrophes, financial market turmoil and geopolitical uncertainty. The business also made good progress on a number of operational initiatives during 2018, including completing preparations for Brexit, adapting to GDPR, upgrading major IT infrastructure and modernising our finance function. This result demonstrates the resilience of Hiscox and the success of our long-held strategy.
For 2018, the pre-tax ROE bonus hurdle rate of 6% was achieved therefore a bonus pool was created and, in line with the pre-disclosed bonus ranges, this level of performance enabled Executive Directors to be considered for bonus awards.
Dear fellow Shareholder At Hiscox, our aim is to deliver strong returns across the insurance cycle and create sustainable long-term value for our shareholders. This requires us to attract and retain good people and provide them with the means and motivation to excel. To achieve this, our philosophy is a simple one: to reward performance. For over a decade, the foundation of the Group’s remuneration strategy has been the belief that the best way to foster a high-performance culture across the Group is to ensure that pay reflects our results, not just effort.
The Remuneration Committee believes that base remuneration should be competitive but not excessive, with outperformance rewarded through variable pay.
What we demand of our executives also goes beyond financial performance. We expect all employees to meet or exceed a series of non-financial targets, consistent with our strategy and values. These include delivering great service to customers, complying with regulation and managing risk, all of which are core to the business operations and reputation of Hiscox.
We believe that our remuneration principles work well for our employees and shareholders. Over the last three years, the total return on Hiscox shares was 67%, three times that of the FTSE All-Share Index.
Improved disclosure The latest version of Hiscox’s remuneration policy on pages 84 to 93 was approved at the 2017 Annual General Meeting. In last year’s report we noted that following discussions with shareholders and in direct response to feedback from prior years, a number of improvements were to be made to how the policy would be implemented and reported in 2018.
This approach was positively received by our shareholders at the 2018 AGM and therefore no major changes are proposed in this year’s report. We intend to largely maintain this approach for the coming year.
Looking ahead The Remuneration Committee is satisfied that our practices are aligned with the interests of shareholders and incentivise Directors appropriately over the short and long term, and we remain committed to the principles that have underpinned our remuneration strategy for over a decade. Under the normal three-year renewal cycle, the remuneration policy is next due for approval by our shareholders at the 2020 AGM, and we will review our approach against evolving market and best practice in advance of this.
Remuneration Committee responsibilities The responsibilities of the Remuneration Committee include: — ensuring the remuneration policy of the Company encourages enhanced performance and in a fair and responsible way, rewards individuals for their contribution to the Company’s success; — ensuring workforce remuneration, incentives and rewards are aligned with culture; — setting, and agreeing with the
Summary of remuneration arrangements for 2019 Key principles underpinning remuneration at Hiscox The Hiscox remuneration policy is designed to drive a culture of high performance and create sustainable long-term value for shareholders. The policy follows three clear principles: — Simple and strictly results-driven, with variable rewards only if Hiscox delivers profits in excess of a specified return threshold.
— Align Executive Directors’ interests with those of our shareholders, focusing on effective risk management, ROE and net asset value growth, which drives total shareholder return over time.
As detailed in the 2017 Remuneration Committee Chairman’s letter, certain changes were made last year to the implementation of the policy approved at the 2017 AGM in response to shareholder feedback. The remuneration policy is due for renewal at the 2020 AGM.
Maximum opportunity: — up to 400% of salary for CEO and CFO; — up to 500% of salary for CUO. Over the past ten years, the average bonus to the CEO has been equivalent to c.35% of the current maximum opportunity.
2018 actual as percentage of salary (9% of maximum opportunity): — Bronek Masojada: 36% — Aki Hussain: 36% — Richard Watson: 45%
2018 actual as percentage of salary: — Bronek Masojada: 200% — Aki Hussain: 181% — Richard Watson: 181%
2018 actual: — Bronek Masojada: 7,300% — Aki Hussain*: 200% — Richard Watson: 1,900% *Aki Hussain was appointed in September 2016.
Salaries for 2019: — Bronek Masojada: £636,500 — Aki Hussain: £490,000 — Richard Watson: £490,000 Salary increase of 2.7%, in line with the average UK employee increase.
1 Strategic report 41 Governance 97 Financial Summary67 Remuneration Remuneration summary
Bronek Masojada 595,969 9,720 0 1,736,369 52,370 2,394,428 Richard Watson 458,438 9,367 0 1,298,263 41,674 1,807,742 Aki Hussain3 458,438 7,128 0 512,900 41,674 1,020,140 1 A proportion of the bonus amount is deferred as set out on page 87 of the policy report. 2 2018 long-term incentives relate to performance share awards granted in 2016, or on joining in the case of Aki Hussain, where the performance period ends on 31 December 2018. The award is due to vest on 8 April 2019. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2018 of 1,621.30p. Of the vested amount, over 75% relates to share price appreciation over the performance period (60% for Aki Hussain). The 2017 long-term incentive award relates to performance share awards granted in 2015 where the performance period ended on 31 December 2017. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the share price on 13 April 2018 of 1484.00p resulting in an increase of £218,031 to the previously reported amount based on the Q4 2017 average share price.
3 Aki Hussain was appointed 12 September 2016. Details of his joining package are in the 2016 remuneration report. 4 In addition to these benefits there is an inherent gain at grant under the Sharesave Scheme. The interests of Executive Directors under the Sharesave Schemes are set out on page 79.
Additional notes to the Executive Director remuneration table Salary Salary reviews take place in the first quarter of the year, effective from 1 April. As noted in last year’s remuneration report, Executive Directors’ salaries were increased by 3.4% from April 2018, the same as the average UK-based employee salary increase. Base salaries for Executive Directors from 1 April 2018 were as follows: April 2018
Variable pay To ensure that remuneration is aligned with Company performance and the shareholder experience, a significant proportion of pay is delivered through incentive awards, consisting of an annual bonus and share awards under the Performance Share Plan, which can vary significantly based on the level of performance achieved. Variable pay awards are only paid if results exceed a specified threshold and are not used as a reward for effort alone – an approach that has helped reinforce a strong performance culture across the business.
When setting targets, the Committee seeks to motivate strong performance while also encouraging sustainable behaviours, in line with the defined risk appetite of the business. In determining the size of the Executive Director bonuses, the Committee uses the following framework: Pre-tax return on equity Indicative bonus range (% of max)
Junior and mid-level employees also participate in a personal performance bonus scheme. Awards under this scheme are based entirely on individual performance ratings. It is designed to ensure that junior and mid-level employees continue to be motivated to perform well, irrespective of overall Group performance. The benefit is up to 10% of salary.
Bonus as a percentage of salary 74 Hiscox Ltd Report and Accounts 2018
Pay for performance – track record The chart below shows the relationship between the Group ROE performance and bonus awards for Executive Directors over an extended period. It demonstrates the strong link between Company performance and bonus outcomes.
Performance outcomes for 2018 2018 was another challenging year for insurers. After a relatively benign start, a number of natural catastrophes and significant large losses in the second half, combined with turbulent financial markets, impacted the industry. In these circumstances, the Group delivered a good profit before tax of $137.4 million and showed strong growth in gross premiums written of 15.0%.
As outlined earlier, bonuses are only paid when pre-tax ROE reaches 5% plus the risk-free rate, irrespective of outstanding individual performance. If the threshold is met, the Committee awards individual bonuses guided by the framework set out on page 73.
Executive Directors are set stretching individual objectives that are aligned to the strategy and long-term goals of the business.
All of the Executive Directors performed strongly against these objectives in 2018.
Some key objectives and individual achievements by the Executive Directors are outlined below.
Richard has successfully hedged the underwriting portfolio through the purchase of a reinsurance program that delivers the net risk profile agreed by the Board. The reinsurance spend of circa $1 billion encompasses the traditional reinsurance market, and newer ILS and non-traditional partners. The Group maintained core reinsurer partnerships, matched its defined credit risk profile, and developed an efficient transfer of risk.
Data Richard has developed a centre of excellence at a Group level to accelerate better use of data. Consequently, the business units are investing in new capabilities and driving genuine competitive advantage in areas as diverse as UK direct to US flood risks.
Aki Hussain Optimising liquidity Aki has improved liquidity management processes. In addition during the year, the Group completed a $380 million bond issuance. This further optimised the Group’s liquidity position, giving it the strategic flexibility to react to changing market conditions and seize profitable growth opportunities as they arise.
1 Strategic report 41 Governance 97 Financial Summary67 Remuneration Annual report on remuneration 2018
Long-term incentives Performance Share Plan awards (PSP) where the performance period ends with the 2018 financial year Bronek Masojada and Richard Watson were granted nil cost options under the PSP in 2016 for the three-year performance period 1 January 2016 to 31 December 2018. As outlined in the 2016 Directors’ remuneration report, Aki Hussain was granted a buy-out award under his appointment terms, which is based on the same performance criteria.
The performance conditions for these awards were as follows: Required average post-tax ROE over three-year performance period
Performance outcome Our three-year average post-tax ROE of 9.24%, the key metric for determining this award under the Performance Share Plan, has been impacted by the natural catastrophe activity of the last two years. The LTIP award granted in 2016 will vest at 47% of maximum. The vesting outcomes are lower than in recent years, however the Committee believes that the vesting outcomes are aligned with the experience of shareholders. Executive Directors will also receive dividend equivalents in the form of additional awards based on dividends paid during the three-year performance period. The estimated value of these awards is covered in the Executive Director remuneration table on page 72.
The net asset value targets, which are reviewed annually, are designed to outperform the risk-free rate (RFR) and motivate the management team while driving the right behaviours.
Details of pension entitlements All open Hiscox retirement schemes are based on defined contributions. Bronek Masojada, Richard Watson and Aki Hussain 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 72. As noted above, and consistent with the 2018 UK Corporate Governance Code, the retirement benefits are consistent with those offered to the majority of UK employees. This has been the policy at Hiscox for a number of years.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2018 and 31 December 2017. Non Executive Director fees were reviewed in 2018 and some were subsequently increased. There are no further increases currently proposed to Non Executive Director fees for 2019.
Directors’ shareholding and share interests To align their interests with those of Hiscox shareholders, senior managers are expected to own a minimum number of Hiscox shares. Executive Directors are required to hold Hiscox shares valued at 200% of salary within five years of becoming an Executive Director. Bronek Masojada and Richard Watson have over 20 and 30 years’ service respectively, so their shareholdings far exceed the guidelines. Aki Hussain was appointed to the Board in September 2016 and will be expected to a build a shareholding in the Company over the course of his tenure.
Richard Watson – 1,557 – – 1,557 11.556 01-Jun-21 30-Nov-21 Aki Hussain 2,081 – – – 2,081 8.648 01-Jun-20 30-Nov-20
Hiscox FTSE All-Share FTSE Non-Life Insurance 80 Hiscox Ltd Report and Accounts 2018
Total shareholder return performance The graph below shows the total shareholder return of the Group against the FTSE All-Share and FTSE Non-Life Insurance indices. These reference points have been shown to assess performance against the general market and industry peers. Between December 2008 and 2018, Hiscox delivered total shareholder return of 464.3% – well above the FTSE All-Share and FTSE Non-Life Insurance indices.
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2017 and 2018 financial years. As the Chief Executive is based in the UK, UK-based employees have been used as the comparator group for base salary – this ensures that any comparison takes into account inflation and country-specific benefits package. For the bonus, we have used Group employees as the comparator. The percentage change is based on employees who were employed and eligible for a salary review and bonus in both financial years.
Dividend and return of capital to shareholders ($m) +5.4 (% change)
Relative importance of the spend on pay The charts below show the relative movement in profit, shareholder returns and employee remuneration for the 2018 and 2017 financial years. Shareholder return for the year incorporates the distribution made in respect of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits. Profit is the ultimate driver behind the performance metrics of the bonus and long-term incentive schemes. Profit before tax can be located on page 104.
CEO pay ratio 75th percentile 1:15 50th percentile 1:30 25th percentile 1:36
Payments for loss of office and payments to past Directors There were no payments made for loss of office or payments to past Directors during 2018.
Salaries from April 2019 will be as follows: April 2019 £
Annual bonus The maximum opportunity and overall bonus structure for the year ending 31 December 2019 will remain unchanged.
Long-term incentives The maximum opportunity and overall PSP structure for 2019 will remain unchanged. For 2019, Performance Share Plan awards will continue to be measured against growth in net asset value (NAV) plus dividends, measured on a per share basis. The Committee deems growth in NAV to be the most appropriate metric for the PSP given that our strategy is built around the objective of generating long-term shareholder value and NAV is aligned with shareholder value creation.
The maximum opportunity for all Executive Directors will be 200% of salary. The risk-free rate (RFR) will be 1.5% for 2019.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee in 2013, following a competitive tender process. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views, and on the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £27,500 based on a time and materials basis. The Committee regularly reviews the advice it receives and is satisfied that this has been objective and independent. During the year Deloitte also provided the Company with other tax and consulting services.
Statement of shareholder voting At the AGM on 17 May 2018, the Directors’ annual report on remuneration received the following votes from shareholders: Remuneration policy Annual report on remuneration
The remuneration policy was last voted on at the 2017 AGM.
By exception, an individual’s salary may be amended outside of the annual review process.
Performance metrics Individual and business performance are taken into account when setting salary levels.
Purpose and link to strategy Employee benefits enable the Company to be competitive in the recruitment market when looking to employ individuals of the calibre required by the business.
For Executive Directors, individual allocations from the pool are determined by the Remuneration Committee based on a judgement of various factors including: p size of the Group bonus pool; p results of business area (where relevant); p individual performance.
Bonus awards are subject to malus and clawback provisions as described in the notes to the policy table on page 90.
Maximum potential value The maximum bonus opportunity for the Executive Directors will be as follows: p CEO and CFO – 400% of salary; p CUO – up to 500% of salary.
Deferred awards are subject to malus and clawback provisions as described in the notes to the policy table on page 90.
Purpose and link to strategy To motivate and reward for the delivery of long-term objectives in line with business strategy.
Operation Awards are granted under the PSP approved by shareholders in 2016 (with previous awards granted under the equivalent plan implemented in 2006). All awards are governed by the rules of the relevant plan under which they are granted.
Awards are generally subject to continued employment, however awards may vest to leavers in certain scenarios (for example, ‘good’ leaver circumstances).
For delivery of the threshold hurdle, up to 25% of the relevant award will vest. For full vesting, the stretch hurdle needs to be met in full. Usually, there will be straight-line vesting for performance between the threshold and stretch hurdle. The minimum threshold vesting will be 20%, rather than 25%, for PSP awards granted from 2018 onwards.
Purpose and link to strategy To ensure Executive Directors are aligned with shareholder interests.
Operation Within five years of becoming an Executive Director, individuals will normally be expected to own Hiscox shares valued at 150% of salary. From 2018 this increased to 200%.
The Company operates a bonus pool approach for the annual incentive. This ensures that both individual bonus levels and overall spend are commensurate with the performance of the Company. The Committee applies judgement based on a range of factors (as described in the table on pages 84 to 89) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than on a formulaic outcome. The profit pool approach currently used ensures that overall bonus amounts are aligned to the performance of the Company and remain appropriate and affordable.
Malus and clawback provisions In respect of unvested compensation, specifically deferred bonuses and unvested PSP awards, the Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, cancel or impose further conditions in the following circumstances: p a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; p actions of gross misconduct, including fraud, by the participant or their team leading to the Company suffering significant reputational or financial damage.
A ‘buy-out’ payment/award may be necessary in respect of arrangements forfeited on joining the Company. The size and structure of any such buy-out arrangement will take account of relevant factors in respect of the forfeited terms
Service contracts It is the Company’s policy that Executive Directors should have service contracts with an indefinite term which can be terminated by the Company by giving notice not exceeding 12 months or the Director by giving notice of six months. 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.
1 Strategic report 41 Governance 97 Financial Summary67 Remuneration Remuneration policy
Fixed remuneration Fixed reward (base salary, benefits and retirement benefit). p Salary with effect from 1 April 2018.
p Benefits as received during 2018, as disclosed in the Executive Director remuneration table on page 72.
Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum basis equivalent to 400% of salary for the CEO and CFO and 500% of salary for the CUO.
Hiscox Partners* 77.8 22.2 * Hiscox Partner is an honorary title given to employees who make significant contributions to the development and profitability of the Group. The Partnership encourages a proprietorial attitude, and up to 5% of the total workforce are Hiscox Partners.
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the USA, the UK, Guernsey, Europe and Asia. The information found on pages 10 to 17, 42 to 51 and 104 to 160 fulfils the requirements of the management report as referred to in Chapter 4 of the Disclosure Guidance and Transparency Rules (DTR). This includes additional explanation of the figures detailed in the financial statements and the office locations of the Group in different countries.
The key performance indicators are shown on page 2. Details of the use of financial instruments are set out in note 19 to the consolidated financial statements. An analysis of the development and performance of the business during the financial year, its position at the end of the year, any important events since the end of the year and the likely future development can be found within the Chief Executive’s report on pages 10 to 17. The Chief Executive’s report also describes the main trends and factors likely to affect the future development, performance and position of the Company’s business and includes a description of the Company’s strategy and business model. The Company’s strategy is also described on page 3. A description of the principal risks and uncertainties and how they are managed or mitigated can be found in the risk management section on pages 42 to 51. In addition, note 3 to the consolidated financial statements provides a detailed explanation of the principal risks which are inherent to the Group’s business and how those risks are managed.
Diversity The composition of the Board is described on pages 58 and 59. The percentage of persons of each gender who were i) Hiscox Partners and ii) employees of the Hiscox Group, excluding the Board, is set out in the table to the right. Hiscox’s approach to diversity and inclusion is outlined on page 56.
Major interests in shares As at the year end, the Company had been notified of the following interests of 5% or more of voting rights in its ordinary shares: Number of shares
As at 22 February 2019, no changes have been notified to the Company.
Power of Directors The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2018, the Directors were granted authorities to allot and issue shares and to make market purchases of shares and intend to seek renewal of these authorities in 2019.
Note 22 to the consolidated financial statements on employee share schemes (page 143)
Annual General Meeting The notice of the Annual General Meeting, to be held on 16 May 2019, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
Dividends An interim dividend of 13.25¢ was paid on 11 September 2018 in respect of the year ended 31 December 2018. As in previous years a scrip dividend alternative was offered. The Directors are proposing payment of a final dividend in respect of the year ended 31 December 2018 of 28.6¢ which will be paid on 12 June 2019 to shareholders on the register at 10 May 2019.
Biographical details of the Directors are set out on pages 58 and 59 and the reasons why the Board believes they should be appointed or re-appointed will be set out in the circular which will accompany the notice of Annual General Meeting.
Directors’ responsibilities statement The Board is responsible for ensuring the maintenance of proper accounting records which disclose with reasonable accuracy the financial position of the Group. It is required to ensure that the financial statements present a fair view for each financial period. The Directors explain in the Annual Report their responsibility for preparing the Annual Report and Accounts.
Financial summary 41 Governance 67 Remuneration 97 Financial summary1 Strategic report 2 Financial highlights 3 Why invest in Hiscox? 8 Chairman’s statement 10 Chief Executive’s report 18 Building a balanced business 20 Actively managed business mix 21 Actively managed key underwriting exposures 22 Capital 24 Group financial performance 26 Group investments 28 Additional performance measures 29 A specialist approach 42 Risk management 52 Responsibility 58 Board of Directors 60 Chairman’s letter to shareholders 61 Corporate governance 65 Audit Committee report 68 Letter from Chairman of the Remuneration Committee 70 Remuneration summary 72 Annual report on remuneration 2018 84 Remuneration policy 94 Directors’ report 96 Directors’ responsibilities statement 98 Independent auditor’s report 104 Consolidated income statement 104 Consolidated statement of comprehensive income 105 Consolidated balance sheet 106 Consolidated statement of changes in equity 107 Consolidated statement of cash flows 108 Notes to the consolidated financial statements 160 Five-year summary
What we have audited Hiscox Ltd’s consolidated financial statements comprise: A the consolidated income statement for the year ended 31 December 2018; A the consolidated statement of comprehensive income for the year ended 31 December 2018; A the consolidated balance sheet as at 31 December 2018; A the consolidated statement of changes in equity for the year then ended; A the consolidated statement of cash flows for the year then ended; and
A the notes to the consolidated financial statements, which include significant accounting policies.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities for the audit of the consolidated financial statements’ section of our report.
A We performed full scope audit procedures over five individually financially significant components.
A For other components, we scoped the audit of these by performing audits over specified financial statement line item balances.
A For the remaining components that were not inconsequential, analytical procedures were performed by the Group engagement team.
A Change in functional currency of certain trading subsidiaries and Hiscox Ltd’s presentation currency.
In determining our materiality, we have considered financial metrics which we believe to be relevant to the primary users of the consolidated financial statements. We concluded gross earned premium was the most relevant benchmark to these users.
Refer to notes 2.13 (b) and 23 to the consolidated financial statements for disclosures of related accounting policies and balances.
Total gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves are material estimates in the consolidated financial statements and as at 31 December 2018 amount to $3.035 billion and $1.357 billion respectively. The methodologies and assumptions used to develop IBNR loss reserves and the reinsurers’ share of IBNR loss reserves involves a significant degree of judgement. As a result, we focused on this area as the valuation can be materially impacted by numerous factors including: A the underlying volatility attached to estimates for certain classes of business, where small changes in assumptions can lead to large changes in the levels of the estimate held and the reported profit; A the risk of inappropriate assumptions used in determining current year estimates. Given that limited data is available, especially for ‘long-tailed’ classes of business, there is greater reliance on expert judgement in management’s estimation; A the judgements made in significant areas of uncertainty, for example, liability and casualty classes of business; and
This work, supplemented with tests of detail, included (i) reviewing and testing the reconciliation of data from the underlying policy administration systems to the data used in the actuarial projections, (ii) testing the completeness and accuracy of premiums and claims data used in the actuarial projections, and (iii) testing to ensure IBNR loss reserves, as a component of insurance liabilities, and the associated reinsurers’ share of IBNR loss reserves were reviewed, approved and reconciled to the consolidated financial statements.
In performing our detailed audit work over the valuation of IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves we used PwC actuarial specialists. Our procedures included: A developing independent point estimates for classes of business considered to be higher risk, particularly focusing on the largest and most uncertain estimates, as at 30 September 2018 and performing roll-forward testing to 31 December 2018. For these classes, we compared our re-projected estimates to those booked by management; A testing, for the other classes of business, (including those impacted by natural catastrophes and other large claims), the methodology and assumptions used by management to derive the IBNR loss reserve estimates; A performing analytical review procedures over the remaining classes of business to evaluate IBNR loss reserves; and
Based on the work performed we found that the IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves were supported by the evidence we obtained.
Change in functional currency of certain trading subsidiaries and Hiscox Ltd’s presentation currency.
Management elected to change the presentation currency at the Hiscox Ltd level as a result of the change in functional currency of these trading subsidiaries.
A we re-performed management’s calculations to test that (i) all balance sheet financial statement line items had been converted to the new functional currency at the spot rate at the date of change, and (ii) from 1 January 2018 foreign currency income statement transactions were accurately translated to US Dollars including testing the system changes to maintain underlying US Dollar ledgers. We agreed the rates of exchange applied to an independent source.
Hiscox Ltd is the parent of a group of entities. The financial information of this Group is included in the consolidated financial statements of Hiscox Ltd. The Group is structured into four segments (see Note 4 to the consolidated financial statements) and is a consolidation of over 50 separate legal entities.
The Group is a global specialist insurer and reinsurer. The Group’s operations primarily consist of the legal entity operations in the United Kingdom, Europe, the United States and Bermuda. A full scope audit was performed for five components located in the United Kingdom and Europe, the United States and Bermuda. Financial statement line item audit procedures were also performed over components in the United Kingdom and Bermuda. Taken together, this work gave us over 90% coverage of the Group’s gross earned premium and over 85% of the Group’s total assets.
The five full scope audit components are: (i) Hiscox Dedicated Corporate
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or component audit teams within the PwC United Kingdom, PwC United States and PwC Bermuda firms operating under our instruction. Where the work was performed by component audit teams, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained. The Group engagement team had regular interaction with the component teams, and senior engagement team members visited the United Kingdom, the United States and Bermuda during the audit process. Senior members of the Group engagement team reviewed all reports with regards to the audit approach and findings of the component auditors in detail. This together with additional procedures performed at the Group level, as described above, gave us the evidence we needed for our opinion on the Group’s consolidated financial statements as a whole.
Except as noted in the ‘Report on other legal and regulatory requirements’ section, our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: A identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; A obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Independent auditor’s report
Report on other legal and regulatory requirements Going concern The Directors have concluded that it is appropriate to adopt the going concern basis in preparing the consolidated financial statements, as explained on page 94. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the balance sheet date. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
Corporate governance statement Under the United Kingdom’s Listing Rules we are required to review the part of the Corporate Governance Statement on pages 61 to 64 relating to eleven provisions of the UK Corporate Governance Code and the Directors have requested that we also review their statements on going concern and the longer-term viability of the Company as required for UK registered companies with a premium listing on the London Stock Exchange. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Total income 2,658,525 2,575,037 Expenses Claims and claim adjustment expenses 23.2 (2,326,632) (2,489,598)
Claims and claim adjustment expenses, net of reinsurance 23.2 (1,225,829) (1,310,916) Expenses for the acquisition of insurance contracts 15 (881,974) (798,809) Reinsurance commission income 15 240,303 210,879
Share of profit of associates after tax 14 429 259 Profit before tax 137,375 39,692
Profit for the year (all attributable to owners of the Company) 127,999 33,904
Profit for the year 127,999 33,904 Other comprehensive income Items that will not be reclassified to the income statement: Remeasurements of the net defined benefit obligation 20,249 11,173 Income tax effect (4,135) (2,279)
Items that may be reclassified subsequently to the income statement: Exchange (losses)/gains on translating foreign operations (17,906) 126,987 Income tax effect – –
Other comprehensive income net of tax (1,792) 135,881 Total comprehensive income for the year (all attributable to owners of the Company) 126,207 169,785 *See note 2.1 for further details.
104 Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
Assets Goodwill and intangible assets 12 204,600 186,038 153,418 Property, plant and equipment 13 61,458 65,628 60,047
Loans and receivables including insurance receivables 18 1,265,110 1,121,452 995,592 Current tax asset 13,578 5,716 2,985 Cash and cash equivalents 21 1,288,851 867,767 824,373
Equity attributable to owners of the Company 2,316,044 2,367,307 2,253,746 Non-controlling interest 1,074 1,074 1,074
Employee retirement benefit obligations 27 35,776 64,114 69,612 Deferred tax 26 – – 21,116
The consolidated financial statements were approved by the Board of Directors on 25 February 2019 and signed on its behalf by: Aki Hussain Chief Financial Officer
Profit for the year (all attributable to owners of the Company) – – – – 33,904 33,904 – 33,904 Other comprehensive income net of tax (all attributable to owners of the Company) – – – 126,987 8,894 135,881 – 135,881 Employee share options: Equity settled share-based
Profit for the year (all attributable to owners of the Company) – – – – 127,999 127,999 – 127,999 Other comprehensive income net of tax (all attributable to owners of the Company) – – – (17,906) 16,114 (1,792) – (1,792) Employee share options: Equity settled share-based
Profit before tax 137,375 39,692 Adjustments for: Net foreign exchange losses 13,688 80,890 Interest and equity dividend income (102,955) (81,590) Interest expense 34,673 26,895 Net fair value losses/(gains) on financial assets 33,790 (34,360)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 136,338 326,046 Financial assets carried at fair value 2,978 (249,137) Financial liabilities carried at fair value (18,301) 18,022 Financial liabilities carried at amortised cost (53,241) 30,430 Other assets and liabilities 56,721 (108,808) Cash paid to the pension fund (3,733) – Interest received 90,830 64,468 Equity dividends received 827 716 Interest paid (33,876) (25,664) Current tax paid (24,193) (43,387) Cash flows from subscriptions paid in advance – (9,339) Net cash flows from operating activities 300,467 95,247
Distributions made to owners of the Company† 22, 29 (105,698) (97,944) Proceeds from long-term debt issue, net of fees 380,265 – Net cash flows from financing activities 202,147 (95,521) Net increase in cash and cash equivalents 442,983 2,997
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the US with over 3,300 staff.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in US Dollars and are rounded to the nearest thousand, unless otherwise stated.
The financial statements were approved for issue by the Board of Directors on 25 February 2019.
Following this change in accounting policy, the comparatives in the consolidated financial statements are represented in US Dollars using the procedures outlined below. –Assets and liabilities are translated into US Dollars at closing rates of exchange. Trading results are translated into US Dollars at the rates of exchange prevailing at the dates of transaction or average rates where these are a suitable proxy. Differences resulting from the retranslation on the opening net assets and the results for the period have been presented in the currency translation reserve, a component within shareholders’ equity.
–Share capital, share premiums and other reserves are translated at historic rates prevailing at the dates of transactions. –The currency translation reserve was set to zero as of 1 January 2004, the transition date to IFRS. Cumulative currency translation adjustments are presented as if the Group had used US Dollars as the presentation currency of its consolidated financial statements since that date.
Notes to the consolidated financial statements 108 Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
The following new standards, and amendments to standards, are effective for annual periods beginning after 1 January 2018 and have not been applied in preparing these financial statements: –IFRS 9 Financial Instruments incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39 and new hedge accounting requirements. The Group satisfies the criteria set out in IFRS 4 Insurance Contracts for the temporary exemption from IFRS 9. At 31 December 2015 (the date specified by IFRS 4), the carrying value of the Group’s liabilities connected with insurance comprised over 90% of the total liabilities. These include significant insurance liabilities; the subordinated debt ($0.4 billion) as this debt counts towards the Group’s regulatory and rating agency capital requirements; and creditors arising from insurance operations ($0.3 billion). The activities of the Group remain predominately connected with insurance. Based on a high-level impact assessment using currently available information, the Group expects no significant impact on its balance sheet and equity, except for the effect of applying the new impairment requirements. The Group expects a recognition of an earlier and higher loss allowance resulting in a negative impact on equity and will perform a detailed assessment in the future to determine the extent. IFRS 9 has been endorsed by the EU. –IFRS 16 Leases replaces IAS 17 Leases and addresses the definition of a lease, recognition and measurement of leases. The adoption of this standard will affect primarily the accounting for the Group’s operating leases.
(b) Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50% of an entity’s voting rights. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity-accounted basis from the date that significant influence commences until the date that significant influence ceases. The Group’s share of its associates’ post-acquisition profits or losses after tax is recognised in the income statement for each period, and its share of the movement in the associates’ net assets is reflected in the investments’ carrying values in the balance sheet. When the Group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.
2.3 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). Entities operating in France, Germany, The Netherlands, Spain, Portugal, Ireland and Belgium have functional currency of Euros; those subsidiary entities operating from the USA, Bermuda, Guernsey and Syndicates have functional currency of US Dollars. Functional currencies of entities operating in Asia include US Dollars, Singapore Dollars and Thai Baht. All other entities have functional currency of Sterling.
2.5 Intangible assets (a) Goodwill Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the fair value of consideration of an acquisition over the fair value of the Group’s share of the net identifiable assets and contingent liabilities assumed of the acquired subsidiary or associate at the acquisition date.
Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates.
Goodwill is allocated to the Group’s cash-generating units identified according to the smallest identifiable unit to which cash flows are generated.
The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash-generating units exceeds its recoverable amount. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment. Any impairment charges are presented as part of operational expenses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
(c) Long-term debt All borrowings are initially recognised at fair value. Subsequent to initial recognition, borrowings are measured at amortised cost. Any difference between the value recognised at initial recognition and the ultimate redemption amount is recognised in the income statement over the period to redemption using the effective interest method.
2.7 Financial assets and liabilities including loans and receivables The Group classifies its financial assets as a) financial assets at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial assets based on the purpose for which the financial assets are held at initial recognition. The decision by the Group to designate debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis.
Intangible assets with finite useful lives are consequently carried at cost, less accumulated amortisation and impairment. The useful life of the asset is reviewed annually. Any changes in estimated useful lives are accounted for prospectively with the effect of the change being recognised in the current and future periods, if relevant.
2.6 Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.
2 Basis of preparation 2.5 Intangible assets (b) Other intangible assets continued 111Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
(b) Recognition and measurement Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (premiums earned) proportionally over the period of coverage. The portion of premium received on in-force contracts that relate to unexpired risks at the balance sheet date is reported as the unearned premium liability.
2.15 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review. The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis.
assesses its reinsurance assets on a regular basis and, if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
(g) Reinsurance commission income Reinsurance commission income represents commission earned from ceding companies which is earned over the terms of the underlying reinsurance contracts and presented separately in the consolidated income statement.
2.17 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
(d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
To the extent that a surplus emerges on the defined benefit obligation, it is only recognisable as an asset when it is probable that future economic benefits will be recovered by the Group in the form of refunds.
(b) Other long-term employee benefits The Group provides sabbatical leave to employees on completion of a minimum 2 Basis of preparation 2.15 Employee benefits (a) Pension obligations continued 114 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
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 23.
The Group carries its financial investments at fair value through profit or loss, with fair values determined using published price quotations in the most active financial markets in which the assets trade, where available. Where quoted market prices are not available, valuation techniques are used to value financial instruments. These include broker quotes and models utilising broker quotes and models using both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuation for financial investments. Note 3.2(a) discusses the reliability of the Group’s fair values.
Estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. 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 2.18 Provisions Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
The Audit Committee reviews the reasonableness of critical judgements, estimates and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee report on pages 65 to 66.
2 Basis of preparation continued 115Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
the majority of material cash outflows are typically triggered by the occurrence of insured events non-correlated to financial markets, and not by the inclination or will of policyholders.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own account for any one potential catastrophe event or disaster. The Group’s underwriting risk appetite seeks to ensure that it should not lose more than 12.5% of core capital, defined as NAV plus subordinated debt less expected dividend less buffer capital, plus 100% of buffer capital ($135 million) with an allowance for expected investment income, as a result of a 1 in 200 aggregate bad underwriting year.
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 2.22 Reporting of additional performance measures The Directors consider that the profit excluding foreign exchange gains/(losses), the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall in note 4 provide useful information regarding the underlying performance of the Group’s businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision-maker. However, these four measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed in notes 5 and 6, are likewise considered to be additional performance measures.
The Group compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters. These require significant management judgement.
The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and unprecedented, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodelled risks. This means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates modelled by management. The Group’s insurance contracts include provisions to contain losses, such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
117Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
policyholders when named insureds or insured assets are seized for kidnap and a ransom demand is subsequently met. Events which can generate claims on these contracts include burglary, kidnap, seizure of assets, acts of vandalism, fires, flooding and storm damage. Losses on most classes can be predicted with a greater degree of certainty as there is a rich history of actual loss experience data and the locations of the assets covered, and the individual levels of security taken by owners, are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
Other property risks The Group provides home and contents insurance, together with cover for artwork, antiques, classic cars, jewellery, collectables and other assets. The Group also extends cover to reimburse certain 3 Management of risk 3.1 Insurance risk i) Underwriting risk continued 118 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
At 31 December 2018, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio, but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group did not experience any material defaults on debt securities during the year.
The Group Credit Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance as well as detailed analysis from the Group's internal credit analysis team. The financial analysis of reinsurers produces an assessment categorised by S&P rating (or equivalent when not available from S&P).
Government issued bonds and instruments 33 34 Agency and government supported debt 10 14 Asset-backed securities 2 3 Mortgage-backed instruments – agency 3 4 Mortgage-backed instruments – non-agency 1 1 Mortgage-backed instruments – commercial – 1 Corporate bonds 49 40 Lloyd’s deposits and bond funds 2 3
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 $69 million (2017: $68 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets. Duration is the weighted average length of time required for an instrument’s cash flow stream to be recovered, where the weightings involved are based on the discounted present values of each cash flow. A closely related concept, modified duration, measures the sensitivity of the instrument’s price to a change in its yield to maturity. Convexity measures the sensitivity of modified duration to changes in the yield to maturity. Using these three concepts, scenario modelling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. The Group’s debt and fixed income assets are further detailed at note 17.
3 Management of risk 3.2 Financial risk (d) Credit risk continued The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in high-quality instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union. The Group has no direct exposure to sovereign debt in Spain, Italy, Ireland, Greece or Portugal.
The largest aggregated counterparty exposure related to debt and fixed income securities holdings at 31 December 2018 of $1,214 million is to the US Treasury (2017: $1,254 million).
The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The largest counterparty exposure included in reinsurance assets at 31 December 2018 is to Kiskadee. The fully collateralised recoverable from Kiskadee represents 17% (2017: 12%) of this category of assets.
The main focus of the investment portfolio is on high-quality, short-duration debt and fixed income securities and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December is as follows on page 122.
121Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Debt and fixed income securities 1,298,230 1,538,745 1,419,801 317,853 4,574,629 4,630,828 Deposits with credit institutions 364 – – – 364 7,182 Cash and cash equivalents 1,288,851 – – – 1,288,851 867,767 *See note 2.1 for further details.
Property – marine and major assets 114,883 70,431 58,551 15,370 259,235 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures. †See note 2.1 for further details.
3 Management of risk 3.2 Financial risk (e) Liquidity risk continued 122 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Structural currency risk Following the change in the Group’s presentation currency detailed in note 2.1, the Group’s exposure to structural currency risks relates to the Pound Sterling and Euro net investments in businesses operating in the UK and Europe. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. However, the Group does not ordinarily seek to use derivatives to mitigate the structural risk because: – the currency translation gains and losses are accounted for in the currency translation reserve (a component of equity)
Investments in associates – 9,409 513 – 9,922 Deferred income tax 47,540 13,133 – – 60,673
Financial assets carried at fair value 3,454,113 1,055,888 419,815 99,865 5,029,681
Loans and receivables including insurance receivables 689,598 464,378 71,342 39,792 1,265,110
3 Management of risk 3.2 Financial risk (f) Currency risk continued 123Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Financial assets carried at fair value 3,524,143 1,076,914 447,827 90,759 5,139,643
Loans and receivables including insurance receivables 629,554 361,350 90,979 39,569 1,121,452 Current tax asset – 5,682 34 – 5,716
Sensitivity analysis As at 31 December 2018, the Group used closing rates of exchange of $1:£0.79 and $1:€0.87 (2017: $1:£0.74 and $1:€0.84). The Group performs sensitivity analysis based on a 10% strengthening or weakening of US Dollar against the Pound Sterling and Euro.
Strengthening of Pound Sterling 52.2 9.0 192.8 115.2 Weakening of Pound Sterling (42.7) (7.4) (157.7) (94.2)
3 Management of risk 3.2 Financial risk (f) Currency risk continued 124 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Financial strength The financial strength ratings of the Group’s significant insurance company subsidiaries are outlined below: A.M. Best Fitch S&P
Capital modelling and regulation The capital requirements of an insurance group are determined by its exposure
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded capital modelling tools within its business. These join together short-term and long-term business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through Hiscox Insurance Company Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company Inc. and Hiscox Société Anonyme is driven by the level of resources necessary to maintain regulatory requirements.
performance and allocate resources. It now considers that run-off portfolios where the Group has ceded all insurance risks to a third party should no longer be presented as part of the underwriting operations as these will not form part of the Group’s assessment of the performance of the segment going forward and also will no longer generate returns for the Group. These run-off portfolios together with the reinsurance ceded are presented as part of the Corporate Centre segment. In line with the change in management’s internal reporting, the segmental reporting has been updated accordingly. This change would also provide more meaningful views and trends of the underwriting performance of the business.
The Group’s four primary business segments are identified as follows: – Hiscox Retail brings together the results of Hiscox UK & Europe and Hiscox International being the USA, Special Risks and Asia retail business divisions. Hiscox UK & Europe underwrites European personal and commercial lines of business through Hiscox Insurance Company Limited, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, Hiscox UK includes elements of specialty and international employees and officers’ insurance written by Syndicate 3624 and Hiscox Europe excludes the kidnap and ransom business written by Hiscox Insurance Company Limited. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division. It also includes the European kidnap and ransom business written by Hiscox Insurance Company Limited and Syndicate 33. – Hiscox London Market comprises the internationally traded insurance business written by the Group’s London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage and aviation business.
It is intended to provide the public with certain information to be able to make informed assessments about the Group. In the Group’s other geographical territories, including the USA and Asia, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
3.4 Tax risk The Group is subject to income taxes levied by the various jurisdictions in which the Group operates, and the division of taxing rights between these jurisdictions results in the Group tax expense and effective rate of income tax disclosed in these financial statements. Due to the Group’s operating model, there is an unquantifiable risk that this division of taxing rights could be altered materially, either by a change to the tax residence, or permanent establishment profile, of Hiscox Ltd or its principal subsidiaries; or due to the re-pricing or re-characterisation for tax purposes of transactions between members of the Group, under local transfer pricing or related tax legislation. The Group seeks to manage this risk by: – maintaining appropriate internal policies and controls over its operations worldwide; – monitoring compliance with these policies on an ongoing basis; – adhering to internationally recognised best practice in determining the appropriate division of profits between taxing jurisdictions. – taking additional advice and obtaining legal opinions from local third-party professionals with the necessary experience in the particular area.
Impairment of intangible assets – – – – – 1,958 – – – 1,958 *See note 2.1 for further details.
(c) 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, Portugal, Singapore and Thailand.
The following table provides an analysis of the Group's non-current assets by material geographical location excluding financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts: Non-current assets 2018 total
4 Operating segments continued 129Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Net tangible asset value 2,112,518 746.8 2,182,343 769.5 *See note 2.1 for further details.
The net asset value per share is based on 282,886,319 shares (2017: 283,600,709 shares), being the shares in issue at 31 December 2018, less those held in treasury and those held by the Group Employee Benefit Trust.
Net tangible assets comprise total equity excluding intangible assets. The net asset value per share expressed in pence is 643.1p (31 December 2017: 618.6p).
Profit for the year (all attributable to owners of the Company) 127,999 33,904 Opening total equity 2,368,381 2,254,820 Adjusted for the time-weighted impact of capital distributions and issuance of shares (83,664) (43,525) Adjusted opening total equity 2,284,717 2,211,295 Return on equity (%) 5.6 1.5 *See note 2.1 for further details.
Agency-related income 27,061 16,176 Profit commission 6,959 11,746 Other underwriting loss (3,362) (7,360) Other income† 16,127 33,517 Other income 46,785 54,079 Wages and salaries 212,377 168,234 Social security cost 32,689 30,022 Pension cost – defined contribution 14,640 12,765 Pension cost – defined benefit 2,188 2,263 Share-based payments (3,638) 32,465 Marketing expenses 69,711 69,097 Depreciation, amortisation and impairment 33,184 27,908 Other expenses 244,567 186,219 Operational expenses 605,718 528,973 *See note 2.1 for further details. †Comparative includes results of the sale of a subsidiary and an associate in 2017.
Wages and salaries have been shown net of transfers to acquisition and claims expenses.
Other expenses include, but are not limited to, legal and professional costs, computer costs, contractor-based costs and property costs. None of the items are individually material.
11 Auditor’s remuneration Fees payable to the Group’s main external auditor, PwC, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group 2018 2017 (restated)
Goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to the smallest identifiable unit to which cash flows are generated. $7,398,000 (2017: $7,398,000) is allocated to the Lloyd’s corporate member entity CGU and $1,028,000 (2017: $1,143,000) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use.
132 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
12 Goodwill and intangible assets Goodwill continued Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 7.0% (2017: 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.
d) Rights to customer contractual relationships (included in other) Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be ten years and are carried at cost less accumulated amortisation and impairment losses.
At the end of each reporting period an assessment is made on whether there is any indication that customer contractual relationships may be impaired. Where indications of impairment are identified, the carrying value is tested for impairment based on the recoverable amount which is considered to be the higher of the fair value less costs to sell or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated using the same method as described above for goodwill and the same discount rate used. The results of this test led to no impairment being recognised (2017: $353,000).
Year ended 31 December 2018 *See note 2.1 for further details.
The Group’s land and buildings assets relate to freehold property in the UK. There was no impairment charge during the year (2017: $nil). Assets with a net book value of $nil were held under finance leases (2017: $nil).
12 Goodwill and intangible assets continued 134 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
This note provides details of the Syndicates and Special Purpose Insurers (SPI) managed by the Group, the acquisition and disposal of subsidiaries and associates during the year and investments in associates.
As at 31 December 2018, the Group recognised a financial asset at fair value of $55.2 million (2017: $49.9 million) in relation to its investment in the Funds (note 17). In assessing the maximum exposure to loss from its interest in the Funds and SPIs, the Group has determined it is no greater than the fair value recognised as at the balance sheet date. The total size of the funds were $951 million at 31 December 2018 (2017: $818 million). In addition to the return on the financial asset, the Group also receives fee income through Hiscox Re Insurance Linked Strategies Ltd and Hiscox Insurance Company (Bermuda) Ltd, both wholly owned subsidiaries, under normal commercial terms.
14 Subsidiaries, associates and interests in other entities 135Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
At beginning of year 10,723 17,155 Disposals during the year – (7,549) Distributions received (356) (646) Net profit from investments in associates 429 259 Foreign exchange movements (874) 1,504 At end of year 9,922 10,723 *See note 2.1 for further details.
14 Subsidiaries, associates and interests in other entities continued 136 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Reinsurers’ share of insurance liabilities 2,457,349 1,834,039 Provision for non-recovery and impairment (774) (784)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 18). The Group recognised a gain during the year of $10,000 (2017: gain of $19,000) in respect of previously impaired balances.
Within one year 1,298,228 1,075,393 After one year 3,276,401 3,555,435 *See note 2.1 for further details.
Amounts owed to credit institutions – 18,446 Derivative financial instruments 19 1,079 163 Total financial liabilities carried at fair value 1,079 18,609 2017 (restated)
On 14 March 2018, the notes were admitted for trading on the Luxembourg Stock Exchange's Euro MTF. The notes were rated BBB+ by S&P, as well as by Fitch.
17 Financial assets and liabilities 138 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
17 Financial assets and liabilities continued The fair value of the long-term debt is estimated at $706.3 million (2017: $428.5 million). The fair value measurement is classified within Level 1 of the fair value hierarchy. The fair value is estimated by reference to the actively traded value on the stock exchanges.
The increase in the carrying value of the long-term debt and accrued interest during the year comprises new debt issued at $380.3 million, the amortisation of the difference between the net proceeds received and the redemption amounts of $0.6 million (2017: $0.1 million) less exchange movements of $53.9 million (2017: plus exchange movements of $30.4 million).
Investments at 31 December are denominated in the following currencies at their fair value: 2017 (restated)
Gross receivables arising from insurance and reinsurance contracts 1,143,886 1,004,032 Provision for impairment (2,132) (2,219) Net receivables arising from insurance and reinsurance contracts 1,141,754 1,001,813
Due from contract holders, brokers, agents and intermediaries 751,008 650,549 Due from reinsurance operations 390,746 351,264
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 1,138,873 980,660 After one year 126,237 140,792 *See note 2.1 for further details.
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a gain of $87,000 (2017: loss of $474,000) for the impairment of receivables during the year ended 31 December 2018. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2018. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2018 all mature within one year of the balance sheet date and are detailed below: 31 December 2018 Derivative financial instruments included on balance sheet
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 72,568 32,913 105,481 Gross fair value of liabilities (71,117) (33,512) (104,629)
31 December 2017 (restated)* Derivative financial instruments included on balance sheet
Foreign exchange forward contracts 40,765 186 (163) 23 Interest rate futures contracts 164,865 224 – 224
Financial assets Debt and fixed income securities 1,610,461 3,020,367 – 4,630,828 Equities and shares in unit trusts – 435,934 15,371 451,305 Deposits with credit institutions 7,182 – – 7,182 Insurance-linked funds – – 49,918 49,918 Derivative financial instruments – 410 – 410
Investments in mutual funds, which are included in equities and shares in unit trusts, comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts is based on the net asset value of the fund as reported by independent pricing sources or the fund manager.
The fair value of the Kiskadee Funds is estimated to be the net asset value as at the balance sheet date. The net asset value is based on the fair value of the assets and liabilities in the Fund. The majority of the assets of the Funds are cash and cash equivalents. Significant inputs and assumptions in calculating the fair value of the assets and liabilities associated with reinsurance contracts written by the Kiskadee Funds include the amount and timing of claims payable in respect of claims incurred and periods of unexpired risk. The Group has considered changes in the net asset valuation of the Kiskadee Funds if reasonably different inputs and assumptions were used and has found no significant changes in the valuation.
During the year, there were no transfers made between Level 1, Level 2 or Level 3 of the fair value hierarchy.
Fair value gains or losses through profit or loss* (381) (3,140) (3,521) Foreign exchange losses (708) – (708)
Financial assets 31 December 2017 (restated)† Equities and shares in unit trusts
20 Fair value measurements continued 142 Hiscox Ltd Report and Accounts 2018 97 Financial summary Notes to the consolidated financial statements 1 Strategic report 41 Governance 67 Remuneration
Cash at bank and in hand 1,124,346 708,753 Short-term deposits 164,505 159,014 *See note 2.1 for further details.
Share repurchase The Trustees of the Group’s Employee Benefit Trust purchased $76,474,000 of shares (2017: $nil) to facilitate the settlement of vesting awards under the Group’s Performance Share Plan. As the trust is consolidated into the Group financial results, these purchases have been accounted for in the same way as treasury shares and have been charged against retained earnings. The shares are held by the trustees for the beneficiaries of the Trust.
Employee share option scheme – ordinary shares issued 460 897 Scrip dividends to owners of the Company 29 371 360
21 Cash and cash equivalents 143Hiscox Ltd Report and Accounts 2018 97 Financial summary Notes to the consolidated financial statements 1 Strategic report 41 Governance 67 Remuneration
22 Share capital continued Share options and Performance Share Plan awards Performance Share Plan awards are granted to Directors and to senior employees. No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’ service (the vesting period) and the Group achieving targeted levels of returns on equity. Share options are also conditional on the employees completing three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
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 2018 2017
Annual risk-free rates of return and discount rates (%) 0.83-0.89 0.19-0.26 Long-term dividend yield (%) 3.05 3.09 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 22.0 22.0 Weighted average share price (p) 1,497.8 1,139.3
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2018 for the Executive Directors are shown in the annual report on remuneration 2018. The total number of options and Performance Share Plan awards outstanding is 9,804,430 (2017: 10,009,723) of which 3,032,437 are exercisable (2017: 2,966,870). The total number of SAYE options outstanding is 1,528,496 (2017: 1,580,570).
Gross Claims reported and claim adjustment expenses 1,957,222 1,626,087 Claims incurred but not reported 3,034,981 2,724,479 Unearned premiums 1,709,272 1,657,184 Total insurance liabilities, gross 6,701,475 6,007,750 Recoverable from reinsurers Claims reported and claim adjustment expenses 690,569 488,237 Claims incurred but not reported 1,356,530 1,004,061 Unearned premiums 409,476 340,957 Total reinsurers’ share of insurance liabilities 16 2,456,575 1,833,255 Net Claims reported and claim adjustment expenses 1,266,653 1,137,850 Claims incurred but not reported 1,678,451 1,720,418 Unearned premiums 1,299,796 1,316,227 Total insurance liabilities, net 4,244,900 4,174,495
The net amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: (restated)
Within one year 2,422,679 2,400,924 After one year 1,822,221 1,773,571 *See note 2.1 for further details.
Current estimate of cumulative claims 894,574 1,082,618 1,533,346 1,312,011 925,591 1,056,275 1,263,033 1,609,341 3,058,051 3,129,834 15,864,674 Less: attributable to external Names (152,292 ) (172,037 ) (222,595 ) (170,889 ) (100,990 ) (114,988 ) (133,332 ) (176,949 ) (415,375 ) (393,572 ) (2,053,019 ) Group’s share of current ultimate claims estimate 742,282 910,581 1,310,751 1,141,122 824,601 941,287 1,129,701 1,432,392 2,642,676 2,736,262 13,811,655 Cumulative payments to date (842,797 ) (1,004,617 ) (1,471,251 ) (1,130,716 ) (844,354 ) (894,830 ) (932,960 ) (1,115,170 ) (1,485,290 ) (538,004 ) (10,259,989 ) Less: attributable to external Names 147,319 154,918 211,456 149,961 89,715 96,600 96,597 124,138 199,542 62,894 1,333,140 Group’s share of cumulative payments (695,478 ) (849,699 ) (1,259,795 ) (980,755) (754,639 ) (798,230 ) (836,363 ) (991,032 ) (1,285,748 ) (475,110 ) (8,926,849 ) Liability for 2009 to 2017 accident years recognised on Group’s balance sheet 46,804 60,882 50,956 160,367 69,962 143,057 293,338 441,360 1,356,928 2,261,152 4,884,806 Liability for accident years before 2009 recognised on Group’s balance sheet 107,397 Total Group liability to external parties included in balance sheet – gross** 4,992,203 **This represents the claims element of the Group’s insurance liabilities.
Current estimate of cumulative claims 744,878 874,749 1,178,552 919,205 792,666 842,898 1,042,224 1,241,805 1,612,635 1,788,472 11,038,084 Less: attributable to external Names (124,850) (131,534) (166,805) (104,417) (85,490) (89,395) (108,754) (129,538) (176,805) (182,260) (1,299,848) Group’s share of current ultimate claims estimate 620,028 743,215 1,011,747 814,788 707,176 753,503 933,470 1,112,267 1,435,830 1,606,212 9,738,236
Less: attributable to external Names 120,237 121,142 157,600 87,455 75,164 73,447 75,132 90,132 115,294 44,945 960,548 Group’s share of cumulative payments (584,824) (705,813) (974,080) (695,164) (648,956) (611,294) (668,043) (763,320) (832,791) (378,977)(6,863,262) Liability for 2009 to 2018 accident years recognised on Group’s balance sheet 35,204 37,402 37,667 119,624 58,220 142,209 265,427 348,947 603,039 1,227,235 2,874,974 Liability for accident years before 2009 recognised on Group’s balance sheet 70,130 Total Group liability to external parties included in balance sheet – net** 2,945,104 **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
23 Insurance liabilities and reinsurance assets 23.1 Insurance contracts assumptions (b) Claims development tables continued 148 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
23.2 Movements in insurance claims liabilities and reinsurance claims assets A reconciliation of the insurance claims liabilities is as follows: (restated)*
Total at beginning of year 4,350,566 (1,492,298)2,858,268 3,181,622 (673,463) 2,508,159 Claims and claim adjustment expenses for year 2,326,632 (1,100,803) 1,225,829 2,489,598 (1,178,682) 1,310,916 Cash paid for claims settled in the year (1,567,242) 531,815 (1,035,427) (1,427,543) 370,484 (1,057,059) Foreign exchange and other adjustments (117,753) 14,187 (103,566) 106,889 (10,637) 96,252 Total at end of year 4,992,203 (2,047,099) 2,945,104 4,350,566 (1,492,298) 2,858,268
The insurance claims expense reported in the consolidated income statement is comprised as follows: (restated)*
Premiums earned through the income statement (3,699,802) 1,126,163 (2,573,639) (3,295,965) 879,757 (2,416,208) Foreign exchange and other adjustments (26,451) 2,173 (24,278) 71,057 (12,150) 58,907 *See note 2.1 for further details.
The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this note 23.
Share of Syndicates’ other creditors’ balances 5,770 8,597 Social security and other taxes payable 31,066 27,122 Other creditors 21,999 14,334
Reinsurers’ share of deferred acquisition costs 15 106,758 91,805 Accruals and deferred income 176,605 160,464 *See note 2.1 for further details.
The amounts expected to be settled before and after one year are estimated as follows: (restated)
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 6.82% (2017: 14.6%).
Profit before tax 137,375 39,692 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2017: 0%) – – Effects of Group entities subject to overseas tax at different rates 4,411 (4,391) Impact of overseas tax rates on: Effect of rate change 497 1,429 Expenses not deductible for tax purposes 1,425 2,159 Tax losses for which no deferred tax asset is recognised 5,303 6,673
The UK Finance Act 2015 introduced a new tax with effect from April 2015, the Diverted Profits Tax (DPT), which in certain situations applies a tax of 25% to income which would not otherwise be chargeable to UK tax. The Group has been proactively engaged in ongoing discussions with the UK’s tax authority regarding taxing rights in respect to one long-standing intra-group arrangement. If this transaction is found to be subject to DPT, it would result in a material adverse effect on the Group results. We consider the probability of this outcome to be low, and accordingly no provision is made for DPT in the Group’s accounts at 31 December 2018. As the discussion with the UK’s tax authority is ongoing, the Group expects disclosure of the potential exposure to prejudice seriously its position with the other party in the matter.
24 Trade and other payables continued 150 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Deferred tax assets – – Deferred tax liabilities – – Total net deferred tax liability – –
Total deferred tax liabilities (38,332) 1,323 – 2,106 (34,903) Net total deferred tax assets/(liabilities) 6,861 10,869 (3,898) (699) 13,133
The scheme assets are invested are as follows: At 31 December 2018
Managed fund pooled investment vehicles UK equity funds 87,538 103,868 Emerging market equity funds 11,355 16,536 Global equity funds 46,271 52,180 Bond funds 72,958 81,632 US equities 28,464 30,252 *See note 2.1 for further details.
Interest cost on defined benefit obligation 9,292 9,291 Interest income on plan assets (7,648) (7,333) Net interest cost 1,644 1,958 Administrative expenses and taxes 459 305 Total expense recognised in operational expenses in the income statement 9 2,188 2,263 Remeasurements Effect of changes in actuarial assumptions (46,314) 4,816 Return on plan assets (excluding interest income) 21,990 (18,234) Remeasurement of third-party Names share of defined benefit obligation 4,075 2,245 Total remeasurement included in other comprehensive income (20,249) (11,173) Total defined benefit credit recognised in comprehensive income (18,061) (8,910)
The movement in liability recognised in the Group’s balance sheet is as follows: *
27 Employee retirement benefit obligations continued 153Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
A reconciliation of the present value of obligations of the scheme is as follows: (restated)
The scheme operates under UK trust law and the Trust is a separate legal entity from the Group. The scheme is governed by a board of trustees, comprised of member nominated and employer appointed trustees. The trustees are required by law to act in the best interests of scheme members and are responsible for setting certain policies together with the principal employer. The scheme is funded by the Group when required. Funding of the scheme is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions above. Funding requirements are formally set out in the statement of funding principles, schedule of contributions and recovery plan agreed between the trustees and the Group.
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 £8,764,000 ($11,163,000) at 31 December 2018 (2017: £9,420,000 ($12,717,000)), and would increase the recorded net deficit on the balance sheet by the same amounts.
27 Employee retirement benefit obligations continued 154 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Effect of a change in discount rate Use of discount rate of 3.15% 35,776 21,834 13,942 Use of discount rate of 2.65% 35,776 50,723 (14,947)
Diluted earnings per share has been calculated after taking account of 5,103,924 (2017: 8,292,818) Performance Share Plan awards and 546,186 (2017: 772,427) options under SAYE schemes.
Final dividend for the year ended: 31 December 2017 of 19.5p or 27.2¢ (net) per share 76,009 – 31 December 2016 of 19.0p or 23.6¢ (net) per share – 67,664 Interim dividend for the year ended: 31 December 2018 of 13.25¢ (net) per share 37,539 – 31 December 2017 of 9.5p or 12.6¢ (net) per share – 36,044 *See note 2.1 for further details.
From the 2018 interim dividend, dividends have been and will continue to be declared in US Dollars, aligning shareholder returns with the primary currency in which the Group generates cash flow.
30 Contingencies and guarantees The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2017: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s; the arrangement is collateralised with cash of £50,000 (2017: £50,000).
(f) Hiscox Europe Underwriting Limited has arranged bank guarantees with respect to their various office deposits for a total of €207,000 (2017: €207,000). These guarantees are held with ING Bank (Belgium) for €14,000 (2017: €14,000), ABN Amro (Netherlands) for €33,000 (2017: €33,000) and HypoVereinsbank-UniCredit (Germany) for €160,000 (2017: €160,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: (restated)
No later than one year Land and buildings 16,512 13,054 Office equipment and other 712 777
Later than one year and no later than five years Land and buildings* 48,875 44,645 Office equipment and other 999 617
No later than one year 675 464 Later than one year and no later than five years 1,126 –
32 Principal subsidiary companies of Hiscox Ltd at 31 December 2018
158 Hiscox Ltd Report and Accounts 2018 97 Financial summary Notes to the consolidated financial statements 1 Strategic report 41 Governance 67 Remuneration
33 Related-party transactions Details of the remuneration of the Group’s key personnel, presented in Sterling, are shown in the annual report on remuneration 2018 on pages 72 to 83. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
(a) Syndicate 33 at Lloyd’s Related-party balances between Group companies and Syndicate 33 reflect the 27.4% interest (2017: 27.4%) that the Group does not own, and are as follows.
Hiscox Group insurance carriers (14,337) (24,797) (67,404) (40,864) Hiscox Group insurance intermediaries 3,515 2,806 (6,856) (9,389) Other Hiscox Group companies – – 10,520 1,125 *See note 2.1 for further details. In addition, the 2017 comparatives have been restated to reflect the 27.4% interest that the Group does not own, previously disclosed as the 72.6% the Group does own. There is no impact on the reported Group’s balance sheet, income statement and cash flow statement.
Gross premium income achieved through associates 1,453 83,773 Commission expense charged by associates 5,073 22,806 Amounts payable to associates at 31 December – – Amounts receivable through associates at 31 December 41,119 44,434 *See note 2.1 for further details.
These intra-group transactions will not have an impact on the Group’s consolidated financial statements, except for a potential tax charge due to the Part VII transfer. The potential tax charge of this Part VII transfer has yet to be fully assessed by the Group and will be fully disclosed in 2019. In respect to the CBM transaction, the professional tax advice obtained indicates that the transaction should take place on a tax neutral basis. However, the Group is seeking tax clearances in certain territories to confirm the tax neutrality. As at the date of these accounts, the Group does not believe any tax charge will arise on the CBM.
Net asset value per share (¢) 819.1 835.1 805.9 801.2 721.5 Key statistics *See note 2.1 for further details. †Closing mid-market prices.
Five-year summary 160 Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
Photography by Spencer Lowell (Bermuda cricket image p54) Lee Mawdsley (Other images p5 and p54) Suki Dhanda (Board images p8, p10, p58 and p59)