Governance 27 Risk management 35 Corporate responsibility 39 Insurance carriers 42 Board of Directors 44 Hiscox Partners 46 Corporate governance 51 Audit Committee report
Cover image: Ferrofluid from our ‘elements of risk’ series, challenging the opposing forces of nature and unseen threats in what we believe is a thought-provoking and beautiful way.
Our ambition is to be a respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastrophe-exposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle.
Strong premium growth of 10.7% from across the Group, with retail businesses now generating 50% of income.
Each division delivered good profits through careful risk selection, growth in profitable niches and an absence of natural catastrophes.
A second interim dividend of 32.0p per share comprised a special dividend of 16.0p and a final dividend equivalent of 16.0p, bringing the year’s total distribution to 40.0p. Going forward the Group will retain a greater proportion of earnings to fund the growth opportunities we see.
Hiscox is a uniquely diversified insurer with a clear vision for the future. Our success is due to a strategy of building balance (illustrated below) which we have held for decades and has been proven to deliver in the short, medium and long term.
Bermuda and London to write high-margin volatile or complex risks; – to build distribution for our specialist retail products; – to protect and nurture our distinctive culture and ethos by recruiting the best people, and by focusing on organic growth.
The Hiscox businesses maintain strong and stable credit ratings: A by A.M. Best and Standard & Poor’s and A+ by Fitch. The Group has an increasingly diversified capital base and is in a strong position to take advantage of future growth opportunities.
Specialist expertise that is valued by our customers – In France, 96% of small business customers are satisfied with our services.
This is the fourth successive year we have been able to return additional capital to shareholders. As previously communicated to the market however, returning capital to shareholders is not a long-term strategy and going forward the focus will be on pursuing opportunities for profitable growth. The Group continues to maintain a progressive core dividend policy.
In 2015 we raised £275 million via a subordinated debt issue. As Tier 2 capital it will support our ratings and also give us capital flexibility underpinning our 2016 business plans and beyond. As an inaugural issue it was competitively priced and the support was flattering.
Investments After another challenging year for both bond and equity investment, characterised by low yields and volatility in many asset classes, we view our investment return of £33.7 million (2014: £56.4 million) to be satisfactory. This equates to a return of 1.0% (2014: 1.8%) of total assets under management.
Our retail operations have grown profitably and now account for half the Group’s income, reaping the rewards of our longterm investment in the Hiscox brand.
have grown substantially. When I am travelling to any of these locations I am struck by the enthusiasm of our people and their desire to do a great job. Across the Group, we work hard to maintain our culture and also encourage employee ownership. I am proud and grateful for the talent and dedication our brand attracts.
Market stress test We are actively seeking a consensus amongst peers as well as our regulators to ensure an effective response to a disaster hitting the London market. Post-World Trade Center, we responded to clients’ needs, paying valid claims and writing more profitable business post-loss. We think it is necessary to organise a market stress test ‘dry run’ in 2016 to test the decision-making processes and speed of response of all relevant parties. This is essential if London is to maintain its pre-eminence in global specialty insurance.
The Board During 2015 a number of the original Hiscox Ltd Board retired; namely Dr James King, Andrea Rosen and Dan Healy, having each completed nine years’ service (the point at which the UK Corporate Governance Code deems them not independent). Richard Gillingwater, who joined the Board in 2010, stood down due to his new commitments at Scottish and Southern Energy as well as Henderson Global Investors. They have served the business well and I would like to thank them all for their wisdom and guidance.
Hiscox Retail Our specialist retail operations differentiate us from others in our sector who have grown out of London and Bermuda. The current competitive pressures have prompted many of them to try to replicate what we have achieved, but we have the considerable advantage of having begun this journey in 1989, with an initial focus on high net worth homes. Since then we have launched new lines of personal and commercial insurance, entered other countries, built great teams and invested heavily in our brand. Hiscox Retail now comprises half of the Group’s gross written premium: £975.6 million in total (2014: £891.1 million). We began investing in commercial insurances for small- and mediumsized businesses in 1994; at £580.7 million it is now the single biggest segment in the Group.
In aggregate our retail businesses generated substantial profits: £73.3 million in 2015, slightly down on 2014’s £78.1 million. This is due partly to our increased marketing expenditure which rose by £12.7 million to £44.5 million (2014: £31.8 million). These costs are taken to this year’s profit and loss account, but their benefit accrues over many years; supporting not just our retail businesses, but the Group as a whole.
It is pleasing to report a profit before tax of £216.1 million (2014: £231.1 million), a return on equity of 16.0% (2014: 17.1%) and premium growth of 10.7% to £1,944.2 million (2014: £1,756.3 million). Our good results are allowing us to pay a second interim dividend of 32.0p per share, which comprises a final dividend equivalent of 16.0p and a special dividend of 16.0p, bringing the year’s total distribution to 40.0p. We do not expect the capital washing around our industry to go away in 2016, but we feel confident that the differentiated products in our retail businesses around the world will allow us to grow where margins are attractive, and we will use our retained earnings to fund the solvency capital this expansion requires.
Hiscox UK and Ireland Hiscox UK and Ireland grew gross written premiums 1.9% to £443.3 million (2014: £435.0 million). Good growth across most lines offset a reduction of £23 million in income from commercial partnerships as we rebalanced the portfolio towards more profitable lines.
Brokers are our most important distribution channel, accounting for just under 80% of our UK business. We support them with disciplined, but creative, underwriting solutions and a focus on delivering good service via our network of offices in Birmingham, Colchester, Dublin, Glasgow, Leeds, London, Maidenhead, Manchester and York. The broker channel achieved good retention of 87% and grew by 7.6%.
During the year, we saw a six-fold increase in demand for our cyber and data insurance product for small businesses. We also acquired RH Classics, a leading classic car insurance specialist, which broadens our capabilities and gives us access to a new group of customers.
The atrium in the newly opened York office, featuring the ‘Kholod’ rocket; a product of post-Cold War co-operation between the United States and Russia.
Our European Service Centre in Lisbon is operating well. It now performs up to 90% of transactions, representing a key step to reducing our European expense base.
Hiscox USA Hiscox USA primarily underwrites small-tomiddle market commercial risks through brokers, other insurers and directly to businesses (either online or over the telephone). It delivered another stellar performance in 2015, with gross written premiums increasing by 21.5% in local currency to US$446.6 million (2014: US$367.6 million), and a strong profit. This result was helped by a stable claims environment, discipline on commissions and good expense management.
The cyber market in the US is experiencing rapid growth with many new market entrants. We believe the marketplace will ultimately favour those carriers that possess the most experience in servicing these risks. We have been underwriting US cyber for 15 years but will not rest on our laurels. In 2016 we will launch an updated, comprehensive but simply-designed cyber product that reinforces our market position as a leading specialist insurer.
able to get to the office on the worst affected day, and a cannily built overflow tank, we were able to provide uninterrupted service to all of our floodaffected customers.
We have for several years been progressively in-sourcing all of our direct customer sales and service functions and moving our direct business to a new IT platform. These projects are all now complete, and after such a sustained period of investing in infrastructure, the UK direct business will now focus on profitable growth, increasing scale and improving its expense ratio.
Hiscox Europe Hiscox Europe grew gross written premiums by 7.8% to €205.6 million (2014: €190.8 million) and achieved a combined ratio of 92.2% (2014: 94.1%), with a good performance in all product lines and from Spain, Germany and Benelux in particular.
in Singapore, Hong Kong and Thailand that sells predominantly motor insurance. The business is developing as expected.
DirectAsia has clear priorities, a strong plan, and a growing customer base. As anticipated, Hiscox’s disciplined approach to underwriting and focus on brand-building has complemented the existing expertise within the team.
Hiscox London Market Our London Market business delivered a strong profit of £59.9 million (2014: £62.6 million), and increased gross written premiums by 14.6% to £585.2 million (2014: £510.8 million). Much of this increase reflects exchange rate fluctuations, with premium growth being 8.5% on a constant currency basis. The business achieved a combined ratio of 85.7% (2014: 84.2%), a good result despite the impact of price reductions. Its biggest source of growth came through our partner White Oak, a specialist automotive and equipment underwriter. It contributed 5.0% of growth, while new products and teams delivered 4.2% and core London Market lines reduced by 0.7%.
The London Market remains competitive. Customers are getting used to lower prices and brokers are fighting to increase their declining margin. Our response is to continue improving our relationship with brokers, supporting facilities and quota-share agreements where we have the right degree of underwriting control and we see margin.
Across the globe, market conditions remain very competitive. Premiums decreased slightly by 1.9% to US$103.6 million (2014: US$105.6 million). A new team in Miami is driving growth, offsetting reductions elsewhere. An investment in IT is also paying off. Our business partners are increasingly looking for e-trading solutions, and our new platform delivers a more efficient process between producers, brokers and underwriters.
– Alternative distribution: adapting to changes in distribution is key in the current environment. The role of the alternative distribution division is to facilitate innovation in the use of technology and specialist data to serve different markets. Its biggest business is the underwriting of specialist automotive and equipment, including extended warranty through White Oak. This business now represents 28% of our London Market income. Given its importance we increased our equity stake in White Oak from 10% to 30% in 2015, and continue to have representation on its Board.
Looking at each division in turn: – Property: our property division includes US and international commercial property, power and mining risks, and US catastrophe exposed personal lines traded in the London Market.
Claims Claims are where all our promises to customers are tested. When faced with storms Desmond, Eva and Frank in the UK, our claims team responded with typical effectiveness. Staff from the new major and complex loss team visited those insureds who were most severely impacted by the storms, providing help with alternative accommodation and emergency payments. The October storms in the South of France proved to
Our London Market business remains a cornerstone of expertise, energy and profit within Hiscox, but it is one player among many and so at times depends on the broader market’s centrality and collaboration. We are supportive at a conceptual level of the London Market Group’s (LMG) efforts to promote London and modernise its infrastructure. We are not idle bystanders; several of our Senior Executives serve on various committees that help shape the LMG’s initiatives and in 2016 I will be joining a London Market Target Operating Model steering committee to drive a focus on implementing a few narrow priorities. I am delighted it will be chaired by Inga Beale, CEO of Lloyd’s, as we believe that Lloyd’s has the responsibility, financial resources, accountability and power to lead the London Market – not for its own benefit, but for the benefit of all.
Hiscox Re Hiscox Re largely comprises the Group’s reinsurance businesses across the world and insurance linked security (ILS) activity.
Hiscox Re had an impressive year, delivering a 46.6% combined ratio (2014: 49.8%) as the team avoided some of the larger losses that impacted the market. The business grew by 8.2% to £383.4 million (2014: £354.3 million), 2.9% in
We are also beginning the process of looking at system replacement in both the USA and mainland Europe, and we expect to make decisions on when and how to move to new operating platforms for these businesses during the course of 2016. In addition to these large projects, work has been undertaken to strengthen our cyber defences.
Keeping our existing IT estate functional and operational is the less visible part of our IT team’s work, but they have performed this task well.
Investments We have accepted in recent years that the contribution of investment income to the Group’s profits is likely to be lower than that which prevailed before the financial crisis. As such we have set out our stall to accept what the market will reasonably give us from a conservative portfolio based around cash and short-term bonds with a small allocation to risk assets which over time should provide some extra growth. With the year now behind us it is clear that income from these asset classes was hard to come by and in that context our result for 2015 is acceptable. Our investments, before derivatives, made £33.7 million (2014: £56.4 million) equating to a return of 1.0% (2014: 1.8%). The outcome in recent years has been boosted by capital gains; from bonds in some years, equities in others and occasionally both. In 2015 there were few tailwinds and the bond returns of 0.9% were much closer to the yields on the underlying portfolios. Our risk assets portfolio delivered 4.0%, which is lower than of late but still represents a useful contribution to the overall result. It was another year where successful stock and sector selection made a difference and on the whole the funds that we are invested in avoided the energy, mining and mineral sectors which did most of the damage to the benchmark indices.
Marketing In 2015 we spent £44.5 million on marketing and brand-building activity across the Group (2014: £31.8 million). This was focused on our key retail businesses with incremental marketing investment accelerating the growth of our direct-to-consumer lines across the world. In the UK we have succeeded in establishing Hiscox as a retail brand. Our ongoing ‘the small and the brave’ small business campaign is maintaining brand awareness at a historic high of 76% and our home marketing has helped to deliver an 82% increase in new direct home customers. Our ambition is to replicate this in our other direct businesses. Our USA marketing campaign ‘encourage courage’ and our ‘where happier matters’ campaign in Asia are all steps towards this goal.
We continue to support the arts through corporate sponsorship such as Sculpture in the City, and on growing our presence in York to support wider activities that celebrate our new office and promote us as a major local employer.
In 2015 we spent £44.5 million on marketing and brand-building activity across the Group.
In 2015 we completed a subordinated debt issue which raised £275 million of debt. This counts towards Tier 2 capital for rating agency purposes. We have used the proceeds of the bond issue to reduce the drawn portion of our Group Letter of Credit from US$529.5 million to US$71.9 million. We have reduced our Group Letter of Credit to US$500 million and will regard it as a standby facility to be utilised in the event of a rapid hardening of the market following a large event or to provide short-term capital flexibility in response to other events such as exchange rate movements. In our experience, responding rapidly to market dislocations is key to success and the Letter of Credit will give us the flexibility to do so, whilst having a low cost when undrawn.
Solvency II came into effect on 1 January 2016. Hiscox’s Lloyd’s business received internal model approval as part of the Lloyd’s internal model approval process. Our UK carrier is operating using the standard formula. At a Group level we have both our own Hiscox economic capital model and, as a Bermudadomiciled and regulated Group, the Bermuda Solvency Capital Requirement. Our available Group capital resources remain comfortably above our regulatory requirement.
Our goal is to be a mid-point of the ‘A’ range on Standard & Poor’s or ‘A’ on A.M. Best. This gives us protection from the minimum level we need to trade in the most credit-sensitive parts of our business. The capital requirements for this level of rating are more conservative than the regulatory requirements, hence the comfortable buffer held.
Outlook In 2015 good sector selection, good underwriting and good fortune delivered good results for shareholders. We cannot count on good fortune at every turn, so in 2016 we will focus on sector selection, disciplined underwriting, marketing to drive profitable growth, and expense discipline. Our bigger-ticket businesses are more likely to retreat, with growth coming from our new teams and in specialty retail across the world. To this we will add a focus on efficiency as we reap the benefits of investments made in the UK, scale economies in the US, and expense discipline elsewhere. Our breadth of capability will set us apart in what will be a challenging environment.
In 2015 good sector selection, good underwriting and good fortune delivered good results for shareholders.
Hiscox Reinsurance Hiscox London Market – Volatile Hiscox London Market – Retail Hiscox UK Hiscox Europe Hiscox Guernsey Hiscox USA DirectAsia
Bronek joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007 and was Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is a past President of The Insurance Institute of London and a Past Master of The Worshipful Company of Insurers. He is currently a member of the Board of the Association of British Insurers and a Non Executive Director of Pool Re.
Jeremy joined in 2005 as Hiscox’s first Claims Director, responsible for co-ordinating and developing claims services across the Group. Jeremy came from Lloyd’s of London where he was the first Head of Claims following the creation of the Franchise Team, and was responsible for the market’s first co-ordinated claims strategy and Claims Management Principles. He joined Lloyd’s as a consultant in early 2002 to head up a team co-ordinating the market’s management of its exposure to the losses arising from September 11th. Jeremy trained as a solicitor, who served as General Counsel, and later, Board member of Sedgwick Group, the international insurance broker now part of Marsh. In 2012 Jeremy moved to Bermuda and became Chief Executive Officer of Hiscox Re and the Group Company Secretary.
Jeremy Pinchin Chief Executive Officer, Hiscox Re Group Company Secretary Group Claims Director
Steve Langan Chief Executive Officer, Hiscox Insurance Company Chief Marketing Officer Chief Executive Officer, DirectAsia Group
Since joining Hiscox in 1992, Paul has underwritten a broad range of business lines including fine art, high-value household, personal accident, contingency and property. Paul was appointed to the Hiscox Partnership in 2005, and was made Divisional Head of Property of Hiscox London Market in 2007. In April 2013, Paul was promoted to Chief Underwriting Officer, Hiscox London Market, and Joint Active Underwriter of Syndicate 33. Before joining Hiscox, Paul worked as an underwriting assistant for C P Attenborough Syndicate 144 at Lloyd’s and for broker E W Payne.
Paul Lawrence Chief Underwriting Officer, Hiscox London Market and Joint Active Underwriter Syndicate 33
Richard joined Hiscox in 1986, having previously worked for Sedgwick’s 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 for Hiscox USA for three years. He returned to London in 2012 to become Chief Underwriting Officer for the Hiscox Group.
John was previously Chief Financial Officer of a US-listed insurer/reinsurer. Prior to this, John held a number of senior financial roles within insurance and banking at Barclays, Ernst & Young, Prudential and Price Waterhouse, where he qualified as a chartered accountant. He has worked extensively in the US and the Far East, having previously been based in both the Caribbean and Japan.
This chart shows a modeled range of net loss the Group might expect from any one catastrophe event. The white line between the bars depicts the modeled mean loss.
Capital $441.5 million). The debt issued was hybrid in nature. This means while it does not count towards capital as measured by shareholders’ equity, it does count towards regulatory and rating agency capital requirements.
A.M. Best, Standard & Poor’s and Fitch have shared their capital models with management. These models calculate a capital adequacy score by measuring available capital, after making various balance sheet adjustments, as a proportion of required capital which incorporates charges for premium, reserve, investment and catastrophe risk. Management’s interpretation of A.M. Best’s ‘Best Capital Adequacy Ratio’ (BCAR) model indicates the Group has a healthy surplus above the minimum capital required to maintain the carriers’ A ratings. On a similar basis the Standard & Poor’s modeled result indicates a surplus in excess of the mid-point of the required A range with additional headroom above the minimum requirement. Finally, Hiscox’s own assessment of capital requirements arising from Fitch’s Prism Factor-Based Model places the Group’s capital in the ‘very strong’ range, comfortably above that necessary to maintain the current Fitch A rating. Projections indicate a reasonable level of flexibility would be maintained following the £91 million second interim dividend. The rating agency requirements shown in the chart on page 21 are consistent with our own internal projections of rating agency capital requirements based upon the Group’s 2015 consolidated financial statements.
Group regulators As a Bermudian-registered holding company, the Bermuda Monetary Authority (BMA) is the Group’s regulator under the Bermuda Group Supervisory Framework. The BMA requires the Group to monitor its Group solvency capital requirement under which the Group provides a solvency return in accordance the Group Solvency Self Assessment framework (GSSA) including an assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR).
The Group continues to identify opportunities for profitable growth and has made changes to its capital structure during 2015 accordingly. In particular, it issued £275 million of 30-year fixed to floating rate callable subordinated notes, which are publicly-traded debt instruments. This debt issue was performed in order to diversify the Group’s sources of capital and reduce the size of the Letter of Credit (LOC) facilities used to provide additional funding. The additional funding available at Group level from revolving credit and LOC facilities comprised $500 million at 31 December 2015 (2014: $875 million), of which $71.9 million was drawn at 31 December 2015 (2014: Strategic report Hiscox Ltd Report and Accounts 2015
Hiscox London Market Gross premiums written increased by 14.6% to £585.2 million (2014: £510.8 million) driven by strong growth in the alternative distribution, casualty and specialty divisions. The quota share arrangements with Syndicate 6104 remained in place.
The net claims ratio remained constant at 47.1% (2014: 47.4%), with minimal impact from catastrophes. The combined ratio increased slightly to 85.7% (2014: 84.2%) with a 0.9% increase in the expense ratio. Profit before tax for the year remained stable at £59.9 million (2014: £62.6 million).
Hiscox Re Gross premiums written increased by 8.2% to £383.4 million (2014: £354.3 million). Another year of minimal catastrophe activity, with the claims ratio remaining low at 26.0% (2014: 22.0%). A lower net expense ratio of 25.4% (2014: 29.6%) helped push the combined ratio down to 46.6% (2014: 49.8%).
Cash and liquidity The Group’s primary source of liquidity is from premium and investment income. These funds are used predominantly to pay claims, expenses, reinsurance costs, dividends and taxes, and to invest in more assets.
During 2015, the Group once again returned excess capital to its shareholders of
Net asset value per share increased by 17.8% to 545.0p (2014: 462.5p), with net tangible asset value at 500.0p (2014: 428.8p).
The Board has declared a second interim dividend of 32.0p per share (to be paid on 7 April 2016 to shareholders on the register at 11 March 2016), comprised of: a final dividend equivalent of 16.0p per share (2014: 15.0p), taking the total ordinary dividend per share for the year to 24.0p, an increase of 6.7% (2014: 22.5p) and; an additional return of capital of 16.0p per share (2014: 45.0p). This is the fourth successive year we have been able to return additional capital to shareholders. Our focus will continue to be on identifying opportunities for profitable growth; returning capital to shareholders is not a longterm strategy. The Group continues to maintain a progressive dividend policy. Above and beyond this, shareholders should expect capital to be invested in the business for future growth rather than returned to shareholders. Gross premiums written of £1.94 billion were up 10.7% year-onyear. Strong growth has continued for most areas of the business, with Hiscox Retail comprising over 50% of the total gross premiums written. The Group’s combined ratio including foreign exchange fluctuations was 85.0% (2014: 83.9%).
Hiscox Retail Hiscox Retail accounts for 50% of the Group’s gross premiums written at £975.6 million (2014: Strategic report Hiscox Ltd Report and Accounts 2015
The Group raised £275 million through its first long-term subordinated debt offering.
£142 million on top of a final dividend equivalent. The Employee Benefit Trust additionally purchased net £6.7 million of shares during the year into the Trust. In November, the Group raised £275 million through its first long-term debt offering, with part of these funds being utilised to set against Funds at Lloyd’s and reduce our Letter of Credit borrowing.
The Group’s invested assets at 31 December 2015 totaled £3.61 billion (2014: £3.25 billion). Allowing for the £209 million that was returned to shareholders by way of dividend and capital distribution and the proceeds of the £275 million bond issue raised towards the end of the year, assets under management grew by approximately £300 million during the year. The investment result, excluding derivatives, amounted to £33.7 million (2014: £56.4 million) equating to a return of 1.0% (2014: 1.8%). It has been a challenging year for both bond and equity investors and in that context we view the return as perfectly acceptable.
The Euro component generated a small positive result which was in fact better than forecast given the negative yields on offer from cash and sovereign bond markets at the outset of the year. For the year as a whole the allocation to credit has added some value and enabled our portfolios to beat the benchmark by a small margin with a return of 0.9%.
We have enjoyed good performance from our risk assets allocation in the previous three years and maintained our weighting there in 2015. Over the long term we believe that they will outperform bonds and, whilst not cheap, offer acceptable value relative to fixed income markets that have been boosted by central bank liquidity. We do not, however, expect the outsized gains that have been produced on occasion since the financial crisis to be repeated in the near term. Indeed bouts of volatility (such as that currently being experienced) will produce some periods of negative or very low return. At a benchmark level, this was the case in 2015 where most markets delivered relatively poor results (a small positive for the S&P 500 in the US and the UK’s FTSE All Share). The better gains, mainly in Europe and Japan, were partly offset by the weaker Euro and Yen. It is therefore very pleasing that the range of actively managed funds have contributed +4.0%, a significant outperformance to the benchmarks which in aggregate were negative. The main contribution to our risk assets performance lay within our UK equity fund allocation where the managers by and large avoided the mining and commodity sectors which clearly had an annus horribilis. Our UK funds delivered 6.8% whilst our global equity and hedge funds made more modest positive returns.
Last year produced a number of surprises, primarily in the currency and commodity sectors. Looking forward the impact of these developments is still being felt and worries now abound over the prospects for economic growth and corporate health. This is currently most apparent in equities, whilst in the bond markets a flight to safety has caused government bond yield to fall sharply and credit spreads to widen. However there are some grounds for optimism, as the US economy seems to have momentum, with the Federal Reserve still planning to raise interest rates, and the UK data is relatively robust. Additionally Europe and Japan will likely benefit from an ongoing supply of liquidity from their central banks.
Our primary investment objective is that of not losing money in a calendar year but we also seek to maximise our return, subject to a prudent risk appetite. In a world of low but potentially rising interest rates, skittish equity markets and with reduced liquidity in many asset classes, achieving this balance is increasingly challenging. A small positive is that we began the year with our bond portfolios on higher yields than of late. Duration is short with credit quality focused on the investment-grade market and we remain well positioned to take advantage of higher interest rates as and when they come. Volatility often produces opportunity, but we think that any allocations to less traditional asset classes such as emerging market bonds and high yield are premature at this stage. In the meantime we are planning for another year of investment return not dissimilar to that of the last three years. The majority of our risk appetite is reflected in our allocation to equity and hedge funds. We believe that this remains appropriate in the longer term although short-term performance is likely to be volatile. We have the capacity to take more risk in the investment portfolio but not at any price.
Cash balances at the end of the year were higher than normal.
The Board sets the Group’s risk strategy, appetite and framework. Each of the business units must operate within the limits set by the Board and these are monitored both locally and centrally, by risk type and in the aggregate.
The risk management framework includes several Group-wide and local forums focusing on specific risk types such as underwriting, reserving, investments, liquidity and credit. Hiscox’s risk management framework is illustrated in the diagram below.
The Risk Committee of the Board oversees the risk management framework, the development and operational implementation of Hiscox’s risk management policies and procedures and advises the Board on how best to manage the Group’s risk profile. The Risk Committee monitors and reviews the risk profile, the effectiveness of our risk management activities and our adherence to the agreed risk appetite and parameters.
Risk appetite Our risk appetite sets out the nature, type and degree of risk the Group is prepared to take to meet its overall objectives. It forms the basis of the real-time exposure management we undertake, and is monitored throughout the year, and might be increased or reduced according to a number of factors.
To assess and manage these exposures we have developed a risk management framework, which we regularly review and enhance in light of the changing risk environment and evolving best practice on risk management and governance. It is designed to enable innovative and disciplined underwriting, and operates as a continuous process that is embedded in the Group’s culture.
The third line of defence consists of independent assurance to the Board, ensuring that risks are being managed in line with the policies and processes in place, to the agreed limits set by the Board and that the stated controls are in place operating effectively.
The second line of defence provides oversight, challenge and support to the first line of defence. A dedicated risk team is responsible for this and reports to the Risk Committee of the Board and the Chief Executive Officer.
The Group’s exposures are monitored locally and centrally, by risk type and in the aggregate, to assess the level of risk being taken by the Group, and ensure that this remains within the parameters set by the Board.
(ORSA); – risk and capital models; – risk profiles; – risk dashboards; – specific risk reviews; – stress and scenario testing.
The information on risk management these tools provide is reported to the Risk Committee and to the Board where necessary.
Hiscox credit rating The external ratings assigned to the Group and its subsidiaries are essential to our profitability, particularly for our reinsurance business, and to manage our financing costs and access to capital. A reduction in these external ratings may impact the Group’s ability to generate business and/or access finance.
Emerging risks We are exposed to new and emerging risks, primarily through legal or political decisions. For example, a change in US legislation may result in exposures being included within our coverage that had not been intended by our underwriters, or may require us to cease business in certain US states.
– Risk appetite: our appetite for certain lines of business changes according to market conditions and the risk appetite of the Group.
– Monitoring: we regularly monitor pricing levels, producing detailed monthly reports grouping current prices with exposure and trends over the past 12 months. This ensures that we quickly identify and control any problems created by adverse changes in market conditions.
– Lead insurer: we frequently act as the lead insurer in the coinsurance programmes required to cover significant high-value assets, so we have some ability to set market rates rather than follow them.
– Risk assessment: identifying, planning for and controlling emerging risks is an important part of our risk management activity across all aspects of our business, including underwriting, operations and strategy. We make a significant effort to identify material emerging threats to the Group. It is a core responsibility of each of our risk committees and we believe we take all reasonable steps to minimise the likelihood and impact of emerging risks and to prepare for them in case they occur.
Catastrophic and systemic insurance losses We insure individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (e.g. hurricanes, earthquakes) and man-made (such as terrorism), which can cause heavy underwriting losses that could have a material impact on the Group’s earnings.
– Stress and scenario testing: we run stress and scenario tests for a range of specific events for each of our business units as well as the Group as a whole, so we can estimate our potential losses from a major catastrophe. – Reinsurance: we buy reinsurance for our business carriers and the Group as a whole, to mitigate the effect of catastrophes and unexpected concentrations in risk. The scope and type of protection we buy may change from year to year depending on the extent and competitiveness of cover available in the market. The Group is exposed to the risk that the reinsurance protection it has bought is inadequate or inappropriate, but this is monitored and managed using modeling techniques, supervised by a dedicated reinsurance purchase group.
– Vetting and auditing: all binding authorities we grant are closely controlled through tight underwriting guidelines. We vet all our agents prior to appointment and monitor and audit them regularly. Agents are frequently audited to ensure they meet our standards.
We make financial provisions for unpaid claims, defence costs and related expenses to cover our ultimate liability both from reported claims and from ‘incurred but not reported’ (IBNR) claims. There is the possibility that we do not make sufficient provision for our exposures, which could affect the Group’s earnings, capital and possibly even its survival.
Asset value The premiums and technical funds we hold for the payment of future claims are inevitably exposed to investment risk.
– Historical data and actuarial analysis: the provisions we make to pay claims reflect our own experience and the industry’s view of similar business; historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards as well as any potential changes in historic rates arising from market or economic conditions. Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out in note 26 to the consolidated financial statements. The provisions we make are set above the actuarial mid-point to reduce the risk that actual claims exceed the amount that has been set aside.
– Technical funds: those funds held for reserves are invested primarily in high-quality bonds and cash. The high quality and short duration of these funds allows the Group to meet its aim of paying valid claims quickly. – Currency matching: these funds, as far as possible, are maintained in the currency of the original premiums for which they are set aside to reduce foreign exchange risk.
– Risk management: we believe the likelihood that we may be unable to meet our liabilities, or that we incur excessive costs in doing so, is extremely remote, because of our risk management measures.
– Forecasting: most of our cash inflows and outflows are routine and can be forecast well in advance. Our primary source of inflows is insurance premiums while our outflows are largely expenses and payments to policyholders through claims. We forecast our cash flow for the week, month, quarter or up to two years ahead, depending on the source.
– Stress tests: we run tests to estimate the impact of a major catastrophe on our cash position in order to identify potential issues. We also run scenario analysis that considers the impact on our liquidity should a number of adverse events occur simultaneously, such as an economic downturn and declining investment returns combined with unusually high insurance losses. – Credit: we maintain extensive borrowing facilities. These arrangements have been made with a range of major international banks to minimise the risk of one or more of the institutions being unable to honour their commitments to us.
– Currency hedging: we closely monitor our net currency positions and will enter into currency hedges if we anticipate adverse movements in exchange rates. Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 19 to the consolidated financial statements.
Broker credit risk is the risk of loss due to exposure to intermediary brokers, i.e. the policyholder pays the broker but the broker fails to pass the premium to us, or we pay a claim to the broker but the broker fails to pass the payment to the policyholder.
Cyber security Cyber security risk specifically relates to threats from globally connected networks such as the internet. It differs from the exposure posed by underwriting cyber risks, which is considered an insurance risk and can result in derivative impacts including loss of profit and legal, regulatory and reputational consequences.
The vast majority of our business is written through brokers (i.e. premiums and claims, paid and received), though there are direct books of business in the UK, US, Europe and Asia. We face credit risk where we transfer money to, and receive money from brokers.
– Monitoring: our credit exposures to these companies are closely monitored. The companies are continuously monitored so that we are able to identify any potential problems. The committee considers public information, experience of the companies concerned, their behaviour in the marketplace and analysis from consultants and from rating agencies.
– Payments: for large losses, we pay the policyholders directly to remove broker credit risk on these material transactions.
– Monitoring: we constantly monitor new regulation and review our internal arrangements operating under the guidance of the Group CFO.
– Controls: we constantly deploy and evolve systems, policies and procedures to mitigate internal and external threats to the IT infrastructure.
– Stress testing and scenario analysis: our stress testing and scenario analysis considers the impact and likelihood of information security exposures, including cyber security risks, to assess the effect on the business and discuss management actions. – Disaster recovery planning: a formal disaster recovery plan is in place to deal with workspace recovery and the retrieval of communications, IT systems and data should a major problem occur. These procedures would enable us to move the affected operations to alternative facilities quickly. The plan is tested regularly and includes simulation tests.
Hiscox global scope 1 and 2 GHG (greenhouse gas) emissions per full-time employee decreased from 1.20 in 2014 to 1.17 in 2015, reflecting a rise in occupied floor space. Global scope 3 GHG emissions per full-time employee also decreased, due largely to an 8% reduction in business travel since 2014.
The chart below depicts our global carbon emissions year-on-year since 2013.
Hiscox’s commitment to responsible business practice is reflected in: The environment In the last year we have further strengthened structures to ensure climate change issues are integrated in our risk management governance. Climate change is factored into our business decisions in order to ensure we are responding effectively and appropriately to the challenges it poses.
Hiscox is a founding member of ClimateWise, which aims to leverage the insurance industry’s expertise to understand, communicate and act *Year 2013 Global *Year 2014 Global
Tonnes CO2e per FTE (all scopes 1, 2 and 3) 3.44 3.68 3.18 * The 2014 baseline has been re-stated. This is as a result of more accurate actual data available where estimates were previously used. This was for the following locations: Guernsey (Electricity and Gas), Hong Kong (Electricity), Glasgow (Gas), Dublin (Gas).
The marketplace In 2015, Hiscox UK was awarded Insurance Company of the Year at the City A.M. Awards, Hiscox London Market’s directors and officers’ team was awarded Underwriting Team of the Year at the Insurance Day London Market Awards, and Hiscox USA was recognised in the Top 100 Small Business Influencer Awards.
Dealing with investors We have a policy of open and transparent communication with our shareholders. Hiscox reports both its half- and full-year results to investors via a series of presentations,
Rewards and benefits We encourage our employees to share in the Group’s success through performancerelated pay: bonus, savings-related share option schemes and executive share option schemes. We also offer competitive benefits packages, which contain health and fitness perks and opportunities for flexible working and career breaks. We benchmark our salary packages against the financial services industry as a whole and against the Lloyd’s market specifically (where applicable) and our salaries are also considered on a country-bycountry basis.
Hiscox USA is dedicated to serving those charities local to its offices that aid and improve education, medical science, advancement of the arts and culture, and provide services to disadvantaged and vulnerable members of society. The Hiscox Foundation USA matched donations and pledged money for hours volunteered by Hiscox employees with partner charities throughout the US – The Children’s Restoration Network in Atlanta, Friends of Karen in New York, Word of Honor in Chesapeake, VA, the Greater Chicago Food Depository, the LA Children’s Hospital and Mission Graduates in San Francisco. The Hiscox Foundation USA continues to support the Parris Foundation, an organisation dedicated to helping disenfranchised communities by teaching children about science, technology, engineering and mathematics.
The Hiscox Foundation The Hiscox Foundation is a charity, funded by an annual contribution from the Group, which gives priority to any charity in which an employee is involved. The Foundation contributed over £29,000 during the year to the fundraising totals of Hiscox employees and continues to support the Humanitarian Aid Relief Trust (HART) and Richard House Children’s Hospice. HART helps some of the poorest and most abused people in the world. Richard House Children’s Hospice provides care and support to children and young people who have a lifelimiting or life-threatening health condition.
At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by third-party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 20% of profit on the element it does not own. For the 2016 year of account, Syndicate 33’s capacity has remained at £1 billion.
The chart below shows the gross premiums written of Syndicate 33 for the last ten years.
Syndicate 33 Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, property and energy business, as well as a range of specialty lines including contingency and terrorism risks among others.
Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best, an A+ (Strong) from Standard & Poor’s, and an AA- (Very strong) rating from Fitch.
Hiscox Insurance Company Hiscox purchased Hiscox Insurance Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. The Group has reshaped the Company’s original portfolio to concentrate on high-value household and smaller premium commercial business. Hiscox Insurance Company Limited has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the portfolio can be seen in the chart below. Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 11.6% from 1997 to 2015, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
& Poor’s rating of A (Strong) and an A+ (Strong) rating from Fitch. At the end of 2015, net assets exceeded £269 million (2014: £243 million).
Richard Watson joined Hiscox in 1986, having previously worked for Sedgwick’s 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 for Hiscox USA for three years. He returned to London in 2012 and became Chief Underwriting Officer for the Hiscox Group. He is a Non Executive Director of White Oak Underwriting Agency Limited.
Anne MacDonald Independent Non Executive Director (Aged 60) 20 May 2015*
Robert McMillan Independent Non Executive Director (Aged 63) 01 December 2010*
Gunnar Stokholm Independent Non Executive Director (Aged 67) 20 November 2008*
Ernst Robert Jansen Independent Non Executive Director and Chairman of the Conflicts Committee (Aged 67) 20 November 2008*
Caroline Foulger Independent Non Executive Director and Chairman of the Audit Committee (Aged 55) 01 January 2013*
Lynn Carter joined Hiscox in May 2015. Lynn has 38 years’ experience in the banking industry, most recently as President of Capital One Bank. Prior to Capital One, Lynn was President of Bank of America’s Small Business Banking division, a $2.1 billion revenue business, with oversight of 110,000 business clients and 2,000 employees. Dividing her time between California and Connecticut, Lynn currently serves on the private board of American Express Centurion Bank, Phoenix House Foundation and Bankwork$ Advisory Board.
James Pilgrim-Morris Head of Professional Indemnity Claims, Hiscox UK and Hiscox London Market
Jeremy Pinchin* Chief Executive Officer – Hiscox Re, Group Company Secretary, Group Claims Director, Chief Executive Officer – Hiscox Bermuda
Daniel Healy, Dr James King and Andrea Rosen all left the Board during the year, having been appointed in 2006 when the Group re-domiciled in Bermuda. In accordance with the criteria set out in the Code these Directors would potentially have ceased to be independent had they continued to serve beyond nine years. Dr King retired from the Board and did not seek re-appointment at the 2015 Annual General Meeting. Andrea Rosen and Daniel Healy both left the Board on reaching nine years’ service in October 2015. In addition, Richard Gillingwater decided to step down from the Board in order to pursue other commitments and did not seek re-appointment at the 2015 Annual General Meeting. Pending the appointment of a new permanent Senior Independent Director and Chair of the Remuneration Committee, Mr Healy, and later Mr Stokholm, assumed these roles on an interim basis. Details of the severance terms for each of the departing Non Executive Directors were posted on the Company’s website from the day following their departure. Lynn Carter, Anne MacDonald and Colin Keogh, whose profiles are set out on page 43 of the Annual Report, all joined the Board during the year. Details of the Board succession planning arrangements are set out below in the section describing the Nominations Committee.
All Directors are entitled to seek independent professional advice at the Company’s expense.
The Board of Directors As at the date of this Report, the Board comprises the Non Executive Chairman, two Executive Directors, and seven independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 42 to 43. 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. The composition of the Board was also reviewed as part of the Board evaluation described on pages 47 and 49.
and Gunnar Stokholm. Caroline Foulger is considered by the Board to have recent and relevant financial experience and was appointed Chair of the Audit Committee with effect from 1 January 2016. At that date more than three years had elapsed since her retirement as a partner of PwC. The Committee operates according to Terms of Reference published on the Group’s website and meets at least three times a year to assist the Board on matters of financial reporting, risk management 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 audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The Audit Committee receives reports from the auditors who also attend meetings of the Committee to report on the status of their audit and any findings. This allows the Committee to monitor the effectiveness of the auditors during the year.
The Remuneration Committee The Remuneration Committee comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. It is chaired by Colin Keogh. The Committee operates according to Terms of Reference published on the Group’s website and generally meets three times a 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 policy report on page 55. The remuneration policy applicable to the Executive Directors is described on pages 56 to 59. The overall aim is to attract and retain highcalibre 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 61.
The Conflicts Committee The Group has a Conflicts Committee which comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm and is chaired by Ernst Jansen. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and Syndicate 6104 are managed by a Hiscox-owned Lloyd’s Managing Agency. 27.5% of the Names on Syndicate 33 are third parties and 72.5% of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third parties. The Committee serves to protect the interests of the third-party Syndicate Names. There is also potential for similar conflicts to arise as a result of the Group’s insurance linked securities (ILS) activity and the Committee serves to protect the interests of the external investors in the Kiskadee Select and Kiskadee Diversified funds.
In addition, any specific items covered in letters received from major shareholders are reported to the Board. The then acting Senior Independent Director, Daniel Healy, wrote
The Directors are responsible for maintaining a sound system of internal control to safeguard the investment made by shareholders and the Company’s assets, and for reviewing its effectiveness. The Board confirms there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company, which has been in place throughout the year and up to the date of approval of the Annual Report and Accounts.
ii) The carrying value of deferred tax arising from losses in foreign subsidiaries As fully explained in note 2.21, a deferred tax asset has been established relating to operating losses arising in foreign subsidiaries. The recoverability of this asset is dependent upon the future profitability of these subsidiaries. The Committee has 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.
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 has reviewed the report of the key judgements in the financial statements from the Chief Financial Officer and is satisfied that the assumptions used to measure the deficit are reasonable.
Financial reporting The primary role of the Audit Committee in relation to financial reporting is to monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and review significant financial reporting judgements contained in them. In carrying out its role the Committee reviewed with both management and the external auditor the appropriateness of the half-year and annual financial statements, concentrating on, amongst other matters: – the quality and acceptability of accounting policies and practices; – the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; – material areas in which significant judgements have been applied or there has been discussion with the external auditor; and – any correspondence from third parties in relation to our financial reporting.
The external auditors provide reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. The Committee also received a comprehensive presentation from the auditors demonstrating to its satisfaction how their independence and objectivity is maintained when providing non-audit services. Any contracts with the auditors, KPMG, for non-audit services in excess of £50,000 must be approved by the Committee in advance. Approval will not be given for any contract which may impair the auditor’s independence or objectivity. During the year the value of non-audit services provided by KPMG amounted to £144,000 (2014: £88,000). There were no circumstances where KPMG was engaged to provide services which might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditors. During the year the Non Executive Directors met with the external and internal auditors without the Executive Directors present so as to provide a forum to raise any matters of concern in confidence.
– The Committee agreed a list of attributes required in the prospective auditors. – A request for proposal (RFP) was prepared, specifying the areas to be covered in the tenders.
– The Committee then met to discuss the presentations and arrive at a recommendation.
In addition to the scheduled meetings referred to above separate Audit Committee meetings were held on 26 February and 19 May 2015 to facilitate the audit tender process. Those members of the Audit Committee listed above attended the meetings with the exception of C Foulger who absented herself. See above for details of the audit tender process. LA Carter and A MacDonald were appointed as Directors on 20 May 2015. C Keogh was appointed by the Board at its final meeting of 2015 and has therefore not been included in the above table.
In the following pages the Hiscox remuneration policy report and the annual remuneration report are presented. Although the remuneration policy is not being changed, it has been re-produced for ease of reference.
At Hiscox our aim is to make strong shareholder returns across the cycle and consistently grow dividends and net asset value per share. Our core business is to take risk and our strategy is to maximise return on equity within a defined risk appetite. We believe that a simple and consistent remuneration approach with strong, transparent alignment to these business objectives is an important part of achieving sustainable strong performance.
– Long-term Performance Share Plan (PSP): the vesting of share grants is also linked to achieving a pre-established Hurdle Rate. This ensures that all shares granted under the plan vest only to the extent that Hiscox has delivered the minimum three-year post-tax return on equity reflected in the agreed hurdle.
– Executive shareholdings at Hiscox are extensive and meaningful. Hiscox encourages all employees to have a stake in the business and shareholding guidelines apply to senior managers. We are pleased that the personal Hiscox shareholdings of the Executive Directors far exceed these guidelines. With such a considerable amount of their personal wealth invested in Hiscox shares, we believe the Directors are indeed aligned with our shareholders and thus focused on net asset growth, total shareholder return and risk management. As at the year end, the Chief Executive had a holding equivalent to over 55 times his base salary.
of 16p per share and an additional return of capital of 16p per share. These are good results in a competitive market and the remuneration of Executive Directors reflects this performance.
– Salary review: the Executive Directors’ salaries will be reviewed in April 2016 and are expected to be in line with the overall UK-based employee increases.
Bronek Masojada’s bonus for 2015 reflects a strong set of results but has been decreased to reflect the year-on-year movement in profit.
Renewal of the Hiscox Performance Share Plan Since the current PSP was adopted in December 2006, it has been a highly effective means of driving both performance and behaviours consistent with our strategic goals. This plan will expire during 2016, at the end of its ten-year term.
During the year the Company has engaged with its major shareholders concerning the renewal of the Plan and a resolution will be put to shareholders at the forthcoming Annual General Meeting. The key features of how the Plan will be operated will remain unchanged. The Remuneration Committee is confident that the renewed Plan will continue to align management rewards with the delivery of strong returns within a defined risk appetite and I hope that shareholders will therefore support this approach.
The Company’s intended forward-looking remuneration policy for Board members is set out on pages 56 to 63. The remuneration policy set out in this report took effect from 15 May 2014.
The policy is unchanged from that approved by shareholders in 2014, however, as disclosed in last year’s remuneration report, certain additional restrictions have been applied to how the policy will be operated in practice.
– Regular variable pay on recruitment to be capped The maximum level of regular variable pay on recruitment of an Executive Director will be in line with the maximum for the annual bonus and the maximum for the current Performance Share Plan (PSP) (which is limited to 200% of salary in respect of any one financial year). As announced to shareholders prior to the AGM in 2014, our intention will always be to put externally hired Executive Directors on a remuneration package which is consistent with our overall remuneration policy. Discretion may be exercised under the policy to transition an individual into our structure, however the maximum level of variable pay (excluding buy-outs) would now be subject to the cap set out above.
Benefits are set within agreed principles but reflect normal practice for each country. Hiscox benefits include, but are not limited to, health insurance, life insurance, long-term disability schemes and participation in all-employee share plans such as the Sharesave Scheme.
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results.
For 2016, the bonus pool will be funded by a set percentage of profits on achievement of a Hurdle Rate of ROE. The bonus for 2015 was determined on a similar basis. Further detail is set out on page 65.
The salaries for current Executive Directors are set out on page 64.
Increases above this level may be considered in other circumstances as appropriate (e.g. address market competitiveness, development in the role, or a change in role size, scope or responsibility).
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 65 of this report for further details. Where performance is deemed to be below a pre-determined hurdle, payouts will be nil.
The total of individual bonuses paid to Executive Directors for a year will not normally exceed 15% of the total pool.
If the number of Executive Directors increased in the future, this percentage would be adjusted as required.
To motivate and reward for the delivery of long-term objectives in line with business strategy.
Participants are able (subject to any local tax/legal/regulatory restrictions) to draw deferred bonuses early for the following reasons: –payment of the exercise price on the exercise of employee share options; – payment of tax on share awards (e.g. on exercise of performance shares); – purchase of shares; and –payment of debt due on share purchases.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. Details of targets for awards to be granted in 2016 are set out on page 67.
Approach is consistent for all employees across the Group who are awarded a sizeable bonus.
The Committee may make minor changes to this remuneration policy to aid in its operation or implementation without seeking shareholder approval (e.g. for regulatory or administrative purposes), provided that any such change is not to the material advantage of Directors. For the avoidance of doubt, the Committee may continue to operate the PSP in accordance with the rules (e.g. the treatment of awards in the context of a change of control or other forms of corporate restructure).
The current fees payable to Non Executive Directors are set out on page 67.
Notes to the policy table Performance measure targets and target setting The performance targets for the annual bonus and share plan awards to Executive Directors are intended to be closely aligned with the Company’s short-term and long-term objectives. The intention is to provide a direct link between reward levels and performance. 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 56 to 59) to ensure that outcomes for Executive Directors are based on performance in-theround rather than based 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.
The charts on page 61 have been compiled using the following assumptions.
Fixed reward (i.e. base salary, benefits and retirement benefit). –Salary with effect from 1 April 2015.
Assumptions have been made in respect of the annual incentive and the PSP for the purpose of these illustrations. – Annual incentive: the amounts shown in the scenarios are for illustration only. In practice the award would be determined based on a range of performance factors, and therefore vary depending on the circumstances. The maximum award reflects the incentive caps described at the beginning of this report. – PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 59. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
Recruitment policy A new hire will ordinarily be remunerated in accordance with the policy described in the table on the previous pages. In order to define the remuneration for an incoming Executive Director, the Committee will take account of: – prevailing competitive pay levels for the role; – experience and skills of the candidate; – awards (shares or earned bonuses) and other elements which will be forfeited by the candidate; –transition implications on initial appointment.
Non Executive Directors are appointed for a threeyear term, which is renewable, with three months’
Executive Director remuneration The table below sets out the remuneration received by current and past Executive Directors for the financial years ending 31 December 2015 and 31 December 2014.
Additional notes to the Executive Director remuneration table Salary The annual base salaries for current and past Executive Directors are as follows: Executive Director salaries increased by 2% as part of the annual April 2015 review. This was less than the overall UK-based employee salary increase of 3%. Salaries will next be reviewed as part of the annual April 2016 review and are expected to be in line with the overall UK-based employee salary increases.
In line with the remuneration policy, the Executive Directors, along with other employees across the Group, participated in the 2015 profit-related bonus pools. These pools were calculated at a business unit level and for the Group as a whole on the basis of a set percentage of profits on achievement of a return on allocated equity hurdle (‘Hurdle Rate’). The Hurdle Rate is set annually by using an investment benchmark rate which takes account of one-to-three year gilt and treasury yields, cash returns and the general investment environment. The return on equity Hurdle Rate for the 2015 financial year was set at 7%, which was 5% above the investment benchmark rate.
Bonus awards for the 2016 financial year The bonus return on equity Hurdle Rate has been reviewed as described above and will remain unchanged for the 2016 financial year at 7%.
Based on the three-year average return on equity of 17.5%, the awards ending with the 2015 performance year will vest at 100% on 2 April 2016. 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 64.
PSP awards to be granted during 2016 In the coming year, the Committee intends to grant awards to Executive Directors and the performance conditions and targets will be unchanged from the 2015 awards.
2015 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.529. 2014 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.648. 1The 2015 amounts are pro-rated in relation to remuneration paid for service in these roles.
Non Executive Director fees were reviewed in January 2015. RS Childs’ fee increased by 1.8% and the other Non Executive Director fees increased by an average of 2.3% due to an increase in the Ltd Board and Ltd Remuneration Committee membership fee.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2015 and 31 December 2014.
Directors 6.5p* ordinary shares number of shares beneficial 6p* ordinary shares number of shares beneficial
BE Masojada 1,744 – – – 1,744 5.160 – 01-Dec-16 31-May-17
RC Watson 3,299 – – – 3,299 5.456 – 01-Jun-17 30-Nov-17 SJ Bridges 2,017 – (2,017) – – 4.460 – 01-May-16 31-Oct-16
Performance graph and table 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 reference points from the general market and industry peers.
Annual bonus as % of salary1 286 114 – 186 204 177 157
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past seven years.
No Director or Committee member was involved in determining their own remuneration during the year.
Statement of shareholder voting At the last AGM, the Directors’ annual report on remuneration received the following votes from shareholders: Annual report on remuneration
Directors’ report responsibility statement on pages 35 to 38. This also includes disclosure of greenhouse gas emissions.
Diversity The composition of the Board and the Senior Executive structure are described on pages 42 and 43 and page 17 respectively. The role of a Hiscox Partner is described on page 44. 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 following table.
Financial results The Group achieved a pre-tax profit for the year of £216.1 million (2014: £231.1 million). Detailed results for the year are shown in the consolidated income statement on page 79, and also within the Group financial performance section on pages 22 and 23.
Dividends An interim dividend of 8.0p (net) per ordinary 6.5p share (2014: 7.5p (net), per ordinary 6p share) was paid on 16 September 2015 in respect of the year ended 31 December 2015. The Company has declared a second interim dividend of 32.0p which will be paid on 7 April 2016 to shareholders on the register at 11 March 2016. This includes a special dividend of 16p per share as well as an amount in place of a final dividend of 16p (2015: 15p). As the dividend includes a special distribution the Directors have decided not to offer a scrip alternative.
The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2015.
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the US, the UK, Guernsey, Europe and Asia. The information that fulfils the requirements of the management report as referred to in Disclosure and Transparency Rule 4, including additional explanation of amounts included in the financial statements and the branches of the Group in different countries, can be found on pages 8 to 15, 27 to 34 and 83 to 131. The key performance indicators are shown on page 2. Details of the use of financial instruments are set out in note 21 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 8 to 15. 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 1. 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 27 to 34. 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. The confirmation required by C.2.1 of the UK Corporate Governance Code can be found on page 50.
Bye-laws The Company’s Bye-laws contain no specific provisions relating to their amendment and any such amendments are governed by Bermuda Company Law and subject to the approval of shareholders in a general meeting. A copy of the Company’s Bye-laws is available for inspection at the Company’s registered office.
Directors’ report continued on 19 November 2015 will submit himself for appointment by shareholders at the Annual General Meeting. In accordance with the UK Corporate Governance Code, all other Directors will submit themselves for re-appointment at the Annual General Meeting.
Political and charitable contributions The Group made no political contributions during the year (2014: £nil). Information concerning the Group’s charitable activities is contained in the report on corporate responsibility on page 37.
Massachusetts Financial Services Company1 27,742,612 9.75 *Per RNS announcement there were 284,677,469 shares in issue (excluding Treasury shares) as at 31 December 2015. †Adjusted for consolidation on 26 March 2015. 1Indirect holdings.
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 2015 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 2016.
The Board is responsible for ensuring the maintenance of proper accounting records which disclose with reasonable accuracy the financial position of the Company. It is required to ensure that the financial statements present a fair view for each financial period.
We confirm that to the best of our knowledge: – the financial statements, prepared in accordance with the applicable set of accounting standards, present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and – the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman and the Chief Executive. The statements were approved for issue on 29 February 2016.
The Directors consider that 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 and the Group’s position and performance, business model and strategy.
Annual General Meeting The notice of the Annual General Meeting, to be held on 19 May 2016, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and, under the terms of our engagement letter, to audit the part of the annual report on remuneration 2015 that is described as having been audited.
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements and the part of the annual report on remuneration 2015 to be audited are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the annual report on remuneration 2015 to be audited. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements and the part of the annual report on remuneration 2015 to be audited, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements and the part of the annual report on remuneration 2015 to be audited in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the part of the annual report on remuneration 2015 to be audited.
Kingdom’s Companies Act 2006 as if those requirements were to apply to the Company.
Report on other legal and regulatory requirements Under the United Kingdom’s Listing Rules we are required to review the part of the corporate governance statement on pages 46 to 50 relating to the Company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code. We have nothing to report in respect to this responsibility.
Claims and claim adjustment expenses, net of reinsurance 26.2 (572,453) (531,668) Expenses for the acquisition of insurance contracts 17 (344,283) (318,616)
Profit for the year (all attributable to owners of the Company) 209,895 216,152
Profit for the year 209,895 216,152 Other comprehensive income Items never reclassified to profit or loss: Remeasurements of the net defined benefit obligation 28,236 (22,759) Income tax relating to components of other comprehensive income (6,762) 5,470
Deferred acquisition costs 17 271,517 230,373 Financial assets carried at fair value 19 2,921,585 2,828,847
The consolidated financial statements were approved by the Board of Directors on 29 February 2016 and signed on its behalf by: RS Childs Chairman
Other comprehensive income/ (expense) net of tax (all attributable to owners of the Company)
Share consolidation and sub-division (1,032) 1,032 – – – – – – Shares purchased by Trust 24 – – – – (10,593) (10,593) – (10,593) Acquisition of DirectAsia – – – – – – 866 866 Shares issued in relation to Scrip Dividend
Proceeds from long-term debt issue, net of fees 273,909 – Distributions made to owners of the Company 24, 32 (209,428) (197,466)
Included within cash and cash equivalents held by the Group are balances totaling £125,626,000 (2014: £142,617,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally £172,000,000 (2014: £nil) is pledged cash against Funds at Lloyd’s. At December 2014 cash and cash equivalents included £169,928,000 for subscriptions received in advance by the Kiskadee Diversified and Select Funds that remained uninvested at that time.
The notes on pages 83 to 131 are an integral part of these consolidated financial statements.
Consolidated statement of cash flows Hiscox Ltd Report and Accounts 201582
The consolidated financial statements for the year ended 31 December 2015 include all of the Group’s subsidiary companies and the Group’s interest in associates. All amounts relate to continuing operations.
International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.
– IFRS 4 Phase II will replace IFRS Phase I and is expected to include a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard will likely have a significant impact on the results of the Group. In addition,
In addition to the return on the financial asset, the Group also receives fee income through Kiskadee Investment Managers Ltd and Hiscox Insurance Company (Bermuda) Ltd, both wholly owned subsidiaries, under normal commercial terms.
the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2020 is likely to be the earliest date for the adoption of a new standard. – IFRS 9: Financial Instruments; Classification and Measurement. The new standard is effective for annual periods beginning on or after 1 January 2018, although it is likely to be deferred for insurers to better align with the implementation date of IFRS 4 Phase II. A full impact analysis is expected to be completed at least 12 months prior to the effective date of the standard.
Following a significant inflow of capital from third-party investors during 2015, the Group has determined that it no longer meets the criteria for consolidation of the Kiskadee Funds and SPIs from 1 July 2015 as defined in IFRS 10. Significant judgements and assumptions made in determining this are disclosed in Note 2.21.
In accordance with IFRS 12 the Group is disclosing its interest in the unconsolidated Kiskadee Funds and SPIs.
2.6 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.
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated 2 Significant accounting policies continued
(a) Non-financial assets Objective factors that are considered when determining whether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: – adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; – the likelihood of accelerated obsolescence arising from the development of new technologies and products; and – the disintegration of the active market(s)
(b) Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: – negative rating agency announcements in respect of investment issuers, reinsurers and debtors; – significant reported financial difficulties of investment issuers, reinsurers and debtors; – actual breaches of credit terms such as persistent late payments or actual default; – the disintegration of the active market(s)
(c) Impairment loss An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). For financial assets, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate.
Where an impairment loss subsequently reverses, the carrying amount of the asset of investments are accounted for at the date of trade. Financial assets and liabilities are initially recognised at fair value. Subsequent to initial recognition financial assets and liabilities are measured as described below.
(e) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of between three and ten years on a straight-line basis.
is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
2.12 Revenue Revenue comprises insurance and reinsurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of fair 2 Significant accounting policies continued 2.9 Impairment of assets continued (c) Impairment loss continued
(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: terminating the employment of current employees according to a detailed formal plan without possibility of scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. Plan assets exclude any insurance contracts issued by the Group. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income.
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 2 Significant accounting policies continued 2.13 Insurance contracts continued
Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
2.19 Leases (a) Hiscox as lessee Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total gross estimate as at 31 December 2015 is £1,214 million (2014: £1,143 million) and is included within total insurance liabilities on the balance sheet.
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
2.16 Net investment hedge accounting In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at each period end to ensure that the hedge remains highly effective. The Group hedged elements of its net investment in certain foreign entities through foreign currency borrowings that qualified for hedge accounting from 3 January 2007 until their replacement on 6 May 2008; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship was effective during this period. Accumulated gains or losses will be recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedge is recognised immediately in the income statement.
2.18 Provisions The Group is subject to various insurancerelated assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event 2 Significant accounting policies continued 2.15 Employee benefits continued (d) Termination benefits continued
strategy and risk appetite seeking to exploit identified opportunities in the light of other relevant anticipated market conditions.
Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: – regularly updating the Group’s risk models; – documenting, monitoring and reporting on the Group’s strategy to manage risk; – developing systems that facilitate the identification of emerging issues promptly; – utilising sophisticated computer modeling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; – monitoring legal developments and amending the wording of policies when necessary; – regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; – examining the aggregated exposures in advance of underwriting further large risks; and – developing processes that continually factor market intelligence into the pricing process.
3.1 Insurance risk The predominant risk to which the Group is exposed is insurance risk which is assumed through the underwriting process. Insurance risk can be sub-categorised into i) underwriting risk including the risk of catastrophe and systemic insurance losses and the insurance competition and cycle, and ii) reserving risk.
i) Underwriting risk The Board sets the Group’s underwriting 2 Significant accounting policies continued 2.21 Use of critical estimates, judgements and assumptions continued
As a result of this analysis the Group determined, from 1 July 2015 its exposure to variability of returns together with its decision-making authority within restricted parameters indicates that the Group is acting as an agent and will no longer consolidate the Kiskadee Funds and SPIs.
2.22 Reporting of additional performance measures The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at 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 decisionmaker. However, these three 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
The Group compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters. These require significant management judgement. Realistic disaster scenarios, shown on page 19, are extreme hypothetical events selected to represent major events occurring in areas with large insured values.
UK and Ireland Gross 1,062 19,258 138,727 361,541 5,030 19,808 545,426 Net 597 12,984 117,505 347,246 4,911 13,459 496,702
Multiple territory coverage Gross 278,842 219,939 94,604 41,639 141,497 86,150 862,671 Net 218,032 177,820 61,043 41,089 120,861 63,073 681,918 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures.
The provision of insurance to cover allegations made against individuals acting in the course of fiduciary or managerial responsibilities, including directors and
3 Management of risk continued 3.1 Insurance risk continued i) Underwriting risk continued Casualty insurance risks continued using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
Geographic focus Specific UK mandates 42 47 Global mandates 58 53 subsea and other energy assets and the related business interruption risks, can also take longer than normal to settle. This is because of the length of time required for detailed subsea surveys to be carried out and damage assessments agreed together with difficulties in predicting when the assets can be brought back into full production.
3.2 Financial risk Overview The Group is exposed to financial risk through its ownership of financial instruments including financial liabilities. These items collectively represent a significant element of the Group’s net shareholder funds. The Group invests in financial assets in order to fund obligations arising from its insurance contracts and financial liabilities.
(a) Reliability of fair values The Group has elected to carry all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments and the insurance linked funds, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented officers’ insurance, is one example of a casualty insurance risk. However the Group’s specific exposure to this specific risk category is relatively limited. The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than the other categories of business.
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a durationconvexity -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 £42 million (2014: £36 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.
At 31 December 2015, no amounts were outstanding on the Group’s borrowing facility (2014: £nil). At 31 December 2015, the Group had long-term debt of £275 million (2014: £nil) being fixed-to-floating rate notes, as explained in note 19. The floating rate becomes effective from November 2025. The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 34.
The Group may also, from time to time, enter into interest rate future contracts in order to minimise the interest rate risk on specific longer duration portfolios. The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2015 was £2,615 million (2014: £2,526 million). These may be analysed below as follows: 3 Management of risk continued 3.2 Financial risk continued (b) Equity price risk continued
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below: As at 31 December 2015 Note AAA
At 31 December 2015 and 2014 the Group held no material debt or fixed income assets that were past due or impaired beyond their reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities.
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2015 and 2014.
Less than one year 517,306 – 727,880 1,245,186 1,170,663 Between one and two years 832,087 4,713 – 836,800 534,990 Between two and five years 920,271 1,971 – 922,242 1,073,685 Over five years 345,350 – – 345,350 423,877
The following is an analysis by liability type of the estimated timing of net cash flows based on the gross claims liabilities held. The Group does not discount claims liabilities. The estimated phasing of settlement is based on current estimates and historical trends and the actual timing of future settlement cash flows may differ materially from that disclosure below.
Reinsurance inwards 191,910 97,723 100,567 34,388 424,588 Property – marine and major assets 107,393 66,886 82,311 31,201 287,791 Property – other assets 112,656 69,626 30,995 8,005 221,282 Casualty – professional indemnity 174,795 183,608 230,863 97,287 686,553 Casualty – other risks 52,043 42,786 77,173 38,224 210,226 Other* 68,528 23,630 25,389 19,877 137,424 *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.
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities, intended to produce a natural hedge. Due attention is paid to local regulatory solvency and risk-based capital requirements.
Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables on pages 98 and 99 are net non-monetary liabilities of £218 million (2014: £197 million) which are denominated in foreign currencies.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2015 Sterling
Intangible assets 118,408 7,220 – 594 126,222 Property, plant and equipment 39,278 4,787 1,250 1,194 46,509 Investments in associates 13,019 – 506 – 13,525 Deferred tax – 34,224 923 – 35,147 Deferred acquisition costs 63,972 171,023 29,873 6,649 271,517 Financial assets carried at fair value 579,508 2,013,688 287,284 41,105 2,921,585 Reinsurance assets 61,527 420,967 31,869 24,447 538,810 Loans and receivables including insurance receivables 203,551 355,008 40,425 20,579 619,563 Current tax asset – – 3,194 49 3,243 Cash and cash equivalents 378,126 204,419 80,088 65,247 727,880
Intangible assets 95,542 7,259 – 3,145 105,946 Property, plant and equipment 23,145 4,456 886 1,010 29,497 Investments in associates 10,125 – 545 – 10,670 Deferred tax – 32,250 1,240 – 33,490 Deferred acquisition costs 62,792 132,742 29,467 5,372 230,373 Financial assets carried at fair value 653,160 1,846,260 295,219 34,208 2,828,847 Reinsurance assets 55,790 406,073 40,534 22,948 525,345 Loans and receivables including insurance receivables 179,638 311,111 40,802 24,708 556,259 Current tax asset – – 7,981 50 8,031 Cash and cash equivalents 130,829 355,229 87,500 77,093 650,651
Employee retirement benefit obligations 32,166 – – – 32,166 Deferred tax 26,390 – – – 26,390 Insurance liabilities 675,086 1,695,425 356,092 108,596 2,835,199 Financial liabilities – 7,033 – 76 7,109 Current tax 31,455 – 924 – 32,379 Trade and other payables 143,528 409,741 14,342 24,049 591,660
Sensitivity analysis As at 31 December 2015, the Group used closing rates of exchange of £1:€1.36 and £1:$1.47 (2014: £1:€1.28 and £1:$1.56). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
as Tier 2 debt. This was raised in November 2015 and matures in 2045. The debt is rated BBB- by Standard & Poor’s and Fitch; – external Names – 27.5% of Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 20%; – Syndicate 6104 at Lloyd’s – with a capacity of £65 million for the 2015 year of account (2014 year of account: £72 million). This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s international property catastrophe reinsurance account; – gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and – qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes.
insurance written by Syndicate 3624. 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.
– 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. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage, auto extended warranty and aviation business.
– Hiscox Re is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are included. The segment also captures the performance and fee income of the Kiskadee Funds as described in note 2.3. – Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings. Further details of these can be found in note 13. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.
4 Operating segments The Group’s operating segment reporting follows the organisational structure and management’s internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. The Group’s four primary business segments are identified as follows: – Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the USA, Guernsey and Asia retail business divisions. Hiscox UK and Europe underwrite 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, the UK includes elements of specialty and international employees and officers’
The Solvency II regime came into force in the UK on 1 January 2016. This requires insurance companies to calculate their capital requirements using either an internal model or a standard formula. Hiscox Insurance Company Limited uses the standard formula to calculate its regulatory capital requirement. Its risk profile is sufficiently well represented by the standard formula not to warrant going through the internal model approval process. Hiscox’s Lloyd’s operations use the internal model that has been built to meet the requirements of the Solvency II regime which came into force on 1 January 2016. The model is concentrated specifically on the particular product lines, market conditions and risk appetite of each risk carrier.
Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio. The impact on profit before tax of a 1% change in each component of the segmental combined ratios is: Hiscox Retail
Gross premiums written 998,088 729,175 437,777 – 2,165,040 914,372 647,094 421,599 – 1,983,065 Net premiums written 938,255 535,986 249,680 – 1,723,921 844,471 434,133 215,534 – 1,494,138 Net premiums earned 889,128 485,232 206,669 – 1,581,029 808,876 427,342 229,343 – 1,465,561
Investment result 17,420 9,338 5,465 6,515 38,738 26,191 11,722 10,364 12,211 60,488 Other revenues 3,873 1,421 (3,993) 781 2,082 2,618 – 1,136 253 4,007 Claims and claim adjustment
Intangible assets 72,383 34,402 6,349 13,088 126,222 Deferred acquisition costs 160,105 87,726 23,686 – 271,517 Financial assets 720,742 773,134 1,108,327 332,907 2,935,110 Reinsurance assets 112,731 255,719 170,360 – 538,810 Other assets 608,139 182,842 285,330 356,031 1,432,342
(d) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US, Guernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal, Singapore, Hong Kong and Thailand.
The net asset value per share is based on 280,516,658 shares (2014: 314,419,567 shares), being the shares in issue at 31 December, less those held in treasury and those held by the Group Employee Benefit Trust.
Profit for the year (all attributable to owners of the Company) 209,895 216,152 Opening shareholders’ equity 1,454,206 1,409,461 Adjusted for the time-weighted impact of capital distributions and issuance of shares (146,028) (142,812)
Investment income including interest receivable 40,951 45,146 Net realised gains/(losses) on financial investments at fair value through profit or loss 2,968 (1,055) Net fair value (losses)/gains on financial investments at fair value through profit or loss (10,239) 12,264
Debt and fixed income securities 21,585 0.9 36,714 1.5 Equities and units in unit trusts 10,410 4.0 17,604 7.6 Deposits with credit institutions/cash and cash equivalents 1,685 0.4 2,037 0.4 9 Other revenues and operational expenses
Agency-related income 9,117 8,060 Profit commission 10,000 9,965 Other underwriting income (4,196) 1,136 Other income 2,235 795
Amounts receivable by the auditor and associates in respect of: The auditing of the accounts of any associate of the Group 1,241 1,201 All audit-related assurance services 98 189 All non-audit-related assurance services 144 88
Overall impact of foreign exchange-related items on net assets 49,631 38,993
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment. £5,480,000 (2014: £5,480,000) is allocated to the Lloyd’s corporate member entity CGU and £2,255,000 (2014: £4,409,000) is allocated to 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.
All intangible assets have a finite useful life except for the Syndicate capacity, goodwill and US state authorisation licences.
In 2015, the £2,633,000 impairment recognised in the year for goodwill and other intangible assets is included in operational expenses in the consolidated income statement and relates to Hiscox Retail as a CGU. There was no impairment for 2014.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value less costs to sell or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2015 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset has been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting businesses.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships. These intangible assets are amortised on a straight-line basis over their useful economic life. At the end of each reporting period we assess whether there is any indication that customer contractual relationships may be impaired. Where indications of impairment are identified, the carrying value of customer contractual relationships 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 for customer contractual relationships in the same manner as described above for goodwill and the same discount rate used. The results of this testing showed that £479,000 was due to be impaired (2014: £nil).
During 2014, £7,795,000 was recognised in the carrying line of land and buildings that were under construction. The Group moved into these premises in December 2015. There were no assets under construction at December 2015.
Total at the end of 2015 76,850 51,490 43,928 4,941 100% results
Acquisition costs incurred in relation to insurance contracts written 474,534 (94,021) 380,513 425,773 (87,328) 338,445 Acquisition costs expensed to the income statement (441,376) 97,093 (344,283) (399,658) 81,042 (318,616) Foreign exchange and other adjustments 7,986 (6,068) 1,918 6,630 (450) 6,180
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £33,211,000 (2014: £30,215,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
Due to the deconsolidation of the Kiskadee Funds, note 2.3(a), the impact on reinsurance deferred acquisition costs is included in other adjustments.
Reinsurers’ share of insurance liabilities 539,540 526,085 Provision for non-recovery and impairment (730) (740)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 20). The Group recognised a gain during the year of £10,000 (2014: gain of £41,000) in respect of previously impaired balances.
Debt and fixed income securities 2,615,014 2,526,179 Equities and units in unit trusts 259,705 252,916 Deposits with credit institutions 6,684 26,385
All of the financial liabilities carried at fair value are due within one year. All of the financial liabilities carried at amortised cost are due after one year.
This investment is classified as insurance linked funds in the table above. The investment in the Funds was recognised at fair value on the date of deconsolidation at £35.4 million (refer to note 22). The Group recognised a gain of £2.2 million for the period from 1 July 2015 related to the Kiskadee Funds. No further subscriptions or redemptions were made into these funds by the Group in 2015.
The fair value of the long-term debt is estimated as £275.7 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 London Stock Exchange.
Due from contract holders, brokers, agents and intermediaries 405,284 349,955 Due from reinsurance operations 131,193 130,555
Prepayments and accrued income 8,130 9,068 Other loans and receivables: Net profit commission receivable 26,139 25,116 Accrued interest 8,637 9,448 Share of Syndicates’ other debtors’ balances 13,173 12,952 Other debtors including related party amounts 27,007 19,165
21 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2015. 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 2015 all mature within one year of the balance sheet date and are detailed below: 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 12,765 367 13,132 Gross fair value of liabilities (12,684) (383) (13,067)
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies’ denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £239,000 (2014: loss of £2,078,000) as included in note 7.
Equity index options The Group did not purchase equity options during 2015 or 2014.
Financial assets Debt and fixed income securities 836,950 1,778,064 – 2,615,014 Equities and shares in unit trusts – 246,065 13,640 259,705 Deposits with credit institutions 6,684 – – 6,684 Insurance linked fund – – 40,045 40,045 Derivative instrument assets – 137 – 137
The levels of the fair value hierarchy are defined by the standard as follows: –Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; – Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on market observable data; –Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, long-term debt and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at amortised cost, is estimated at £275.7 million and is considered as Level 1 in fair value hierarchy.
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 Fund 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.
Fair value gains or losses through profit or loss* 2,920 1,725 4,645 589 Foreign exchange gains and losses 284 1,246 1,530 408
Unrealised gains and losses in the year on securities held at the end of the year *Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance linked fund.
The cash held by special purpose vehicles consists of underlying interests held by the Kiskadee Funds which were consolidated by the Group at 31 December 2014, but in which the Group had an interest of less than 100%.
Subscriptions received in advance consist of cash received as at 31 December 2014 by the two Kiskadee Funds and not invested at the balance sheet date.
On 28 March 2013 the Company passed a special resolution to increase the authorised share capital by £200,000,000 (400,000,000 shares at a par value of 50.0p per share) to facilitate the capital distribution of the B Shares in 2013. There are no B Shares outstanding at 31 December 2014 or 2015 as all shares have been redeemed or cancelled.
In an effort to ensure that the net tangible asset value per share remained the same, pre and post the return of capital, a 88 for 100 share consolidation was also undertaken. This was accompanied by a separate issue of deferred shares which were subsequently cancelled in order to arrive at a new par value for the ordinary shares of 6.5p each. No deferred shares were in issue at 31 December 2015 as all shares had been redeemed and cancelled by that date.
Up until 26 March 2015, the Group issued 6p ordinary shares. From this date, new ordinary shares of 6.5p each exist. All issued shares are fully paid.
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and Performance Share Plan award instruments issued to employees, over their vesting period through the income statement. The expense recognised in the consolidated income statement during the year was £17,726,000 (2014: £14,439,000). This comprises charges of £17,136,000 (2014: £13,968,000) in respect of Performance Share Plan awards and £590,000 (2014: £471,000) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument, and discounted cash flow methodology in respect of Performance Share Plan awards.
24 Share capital continued Share options and Performance Share Plan awards continued
The weighted average fair value of each share option granted during the year was 156.7p (2014: 122.0p). The weighted average fair value of each Performance Share Plan award granted during the year was 885.0p (2014: 688.5p).
The implied volatility assumption is based on historical data for periods of between five and ten years immediately preceding grant date.
At 31 December 2015 Hiscox Ltd held 8,098,190 shares in treasury (2014: 12,645,632). Additional details are shown in note 37 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Gross Claims reported and claim adjustment expenses 824,397 825,017 Claims incurred but not reported 1,213,699 1,142,847 Unearned premiums 1,010,266 867,335
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2015 and 2014 are not material.
26.1 Insurance contracts assumptions (a) Process used to decide on assumptions The risks associated with insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis. Uncertainty over the timing and amount of future claim payments necessitates the holding of significant reserves for liabilities that may only emerge a number of accounting periods later.
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,330,074 1,222,114 After one year 1,179,478 1,087,740
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 511,115 630,485 – – – – – – – – 1,141,600 nine years later 509,517 – – – – – – – – – 509,517 Current estimate of cumulative claims
Liability for 2006 to 2015 accident years recognised on Group’s balance sheet
Liability for accident years before 2006 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 471,817 546,300 – – – – – – – – 1,018,117 nine years later 470,004 – – – – – – – – – 470,004 Current estimate of cumulative claims
Liability recognised in respect of prior accident years at 100% level *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2015.
Liability for accident years before 2006 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Total at beginning of year (1,967,864) 368,319 (1,599,545) (1,853,062) 359,946 (1,493,116) Claims and claim adjustment expenses for year (685,897) 113,444 (572,453) (645,145) 113,477 (531,668) Cash paid for claims settled in the year 673,083 (129,606) 543,477 591,796 (124,194) 467,602 Exchange differences and other movements (57,418) 13,320 (44,098) (61,453) 19,090 (42,363)
Claims reported and claim adjustment expenses (824,397) 118,322 (706,075) (825,017) 129,134 (695,883) Claims incurred but not reported (1,213,699) 247,155 (966,544) (1,142,847) 239,185 (903,662)
Current year claims and claim adjustment expenses (943,824) 165,507 (778,317) (845,086) 141,189 (703,897) Over-provision in respect of prior year claims and claim adjustment expenses 257,927 (52,063) 205,864 199,941 (27,712) 172,229
Total claims and claim adjustment expenses (685,897) 113,444 (572,453) (645,145) 113,477 (531,668)
Premiums earned through the income statement (1,828,334) 393,318 (1,435,016) (1,674,982) 358,723 (1,316,259) Foreign exchange and other adjustments 27,045 (37,249) (10,204) 29,998 (4,023) 25,975
Creditors arising out of direct insurance operations 20,208 11,969 Creditors arising out of reinsurance operations 210,654 248,267
Share of Syndicates’ other creditors’ balances 11,095 3,212 Social security and other taxes payable 12,266 9,782 Subscriptions received in advance – 169,928 Other creditors 11,654 11,968
27 Trade and other payables continued The amounts expected to be settled before and after one year are estimated as follows: Within one year 381,246 563,663 After one year 35,112 27,997
Subscriptions received in advance consisted of cash received as at 31 December 2014 by the two Kiskadee Funds and not yet invested at the balance sheet date, see note 23.
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 9,906 65,537 Adjustments in respect of prior years (264) (3,365)
Deferred tax Credit for the year (1,849) (45,633) Adjustments in respect of prior years (490) (811) Effect of rate change (1,098) (805)
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 2.9% (2014: 6.5%). A reconciliation of the difference is provided below: Profit before tax 216,100 231,075 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2014: 0%) – – Effects of Group entities subject to overseas tax at different rates 2,688 14,703 Impact of overseas tax rates on: Effect of rate change (1,098) (805) Expenses not deductible for tax purposes 1,999 2,911 Tax losses for which no deferred tax asset is recognised 6,936 4,218
Adjustment for share-based payments 260 (64) Non-taxable income (3,313) (892) Prior year tax adjustments (754) (4,176)
Deferred tax assets and deferred tax liabilities relating to the same tax authority are presented net in the Group’s balance sheet.
† The solvency regulations in the UK require certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. The regulations prescribe that the provision is adjusted each year based on a percentage of net premiums written for those lines of business during the financial year, subject to a maximum percentage. The amount of each annual increase is a deductible expense for UK tax purposes, and the equalisation provision is taxed when released. Equalisation provisions are not permitted under IFRS which therefore results in the temporary difference for tax purposes. From 2008, Lloyd’s Corporate Members are also entitled to a tax deduction for claims equalisation losses although this is not a solvency requirement for Lloyd’s. Finance Act 2012 repealed the legislation treating the equalisation provision as a tax deductible expense, and treats the existing equalisation provision as a receipt taxable over six years with effect from January 2016, when the current solvency regulations are replaced by Solvency II which does not require an equalisation provision. The Group has provided for the deferred tax liability on its claims equalisation provisions during the year.
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of changes in equity to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of changes in equity is £1,001,000, comprising £5,204,000 deferred tax and £(4,203,000) current tax (2014: £3,668,000 deferred tax and £3,676,000 current tax).
The majority of the scheme’s debt and fixed income assets are held through the ownership of units in managed credit funds issued by Standard Life Assurance Limited which invest in a broad spread of high-quality corporate bonds with derivatives used in controlled conditions to extend durations in some cases.
Net interest cost 1,202 216 Administrative expenses and taxes 623 444
Remeasurements Effect of change in demographic assumptions (4,324) – Effect of change in financial assumptions (13,374) 44,976 Effect of experience adjustments (13,836) – Return on plan asset (excluding interest income) (2,382) (6,587) Changes in asset ceiling/onerous liability (excluding interest income) – (11,049) Remeasurement of third-party Names share of defined benefit obligation 5,680 (4,581)
Net defined benefit liability at beginning of year 26,744 3,635 Defined benefit cost included in net income 1,825 660 Charge from third-party Names (271) (110) Total remeasurement included in other comprehensive income (28,236) 22,759 Employer contributions by Hiscox Group – (200) Less contributions received by Hiscox Group from third-party Names – –
Net defined benefit liability at end of year 62 26,744 Third-party Names’ share of liability 13 5,422
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 227,375 179,479 Interest expense 8,320 8,309 Cash flows Benefit payments (5,041) (5,389) Remeasurements Changes in demographic assumptions (4,324) – Changes in financial assumptions (13,374) 44,976 Impact of experience adjustments (13,836) –
Effect of asset ceiling/onerous liability – – 10,553 – – – –
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: years 2014 years
The weighted average duration of the defined benefit obligation at 31 December 2015 was 20.5 years.
Discount rate 4.0 3.7 Inflation assumption (RPI) 3.1 3.0 Inflation assumption (CPI) 2.1 2.0 Pension increases 3.1 3.0
The triennial valuation carried out as at 31 December 2014 resulted in a surplus position of £8.6 million. The Group is therefore not required to currently make any contributions to the pension scheme.
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and income statement. For example, an additional one year of life expectancy for all scheme members would increase the scheme obligations by £5,712,000 at 31 December 2015 (2014: £6,987,000), and would increase the recorded net deficit on the balance sheet by £5,712,000 (2014: £6,987,000).
Effect of a change in discount rate Use of discount rate of 4.25% 75 – 75 Use of discount rate of 3.75% 75 10,561 (10,486)
Effect of an increase in inflation Use of RPI inflation assumption of 3.35% 75 4,341 (4,266) Use of RPI inflation assumption of 2.85% 75 – 75 31 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares held by the Group and held in Treasury as own shares.
Weighted average number of ordinary shares for diluted earnings per share (thousands) 297,812 334,869
The final dividend equivalent for the year ended 31 December 2014 was paid as part of the E/F Share Scheme (2013: C/D Share Scheme), see note 24. 243,449,661 E and 77,251,864 F Shares of 60p each were issued, of which 15p per share was in lieu of a final dividend for 2014 of a cash value of £48,105,000. During 2014, the final dividend equivalent for the year ended 31 December 2013 was settled as 261,555,693 C and 93,647,894 D Shares of 50p each, of which 14p per share was issued in lieu of a final cash dividend of £49,728,000.
The interim dividends for 2015 and 2014 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim dividend for the year ended 31 December 2015 was paid in cash of £20,202,000 (2014: £22,049,000) and 274,455 shares for the scrip dividend (2014: 270,917).
The Board has declared a second interim dividend of 32p per share to be paid on 7 April 2016 to shareholders on the register at 11 March 2016, comprised of a final dividend equivalent of 16p per share (2014: 15p), taking the total ordinary dividend per share for the year to 24p (2014: 22.5p), and a special dividend of a further 16p per share (2014: special distribution of 45p).
The contingent consideration reflected above of £1,875,000 represents the current fair value estimate of the expected additional consideration that may be payable to the seller. The contingent consideration is payable based on Hiscox MGA Ltd exceeding certain revenue targets during the first year post the acquisition.
The assets and liabilities arising from the acquisition are as follows: Acquiree’s carrying amount
Net client account creditors 1,295 – 1,295 Other creditors 143 – 143
The intangible assets shown above is primarily from acquiring the rights to renew the existing book of business and the underwriter teams contacts and experience in the marine leisure field. The Group incurred acquisition-related costs of £72,000 on legal fees and due diligence costs. These costs have been included in administrative expenses. Hiscox MGA Ltd contributed a loss of £74,000 to the Group’s profit before tax for the period between 27 February 2015 and 31 December 2015.
Total purchase consideration 14,804 Net asset acquired (13,591) Non-controlling interest 866
Associates During 2015, the Group increased its holding in White Oak Underwriting Agency Limited to 29.8% for £2,089,000. During 2014 the Group acquired a 10.6% stake in White Oak Underwriting Agency Limited (White Oak) for £1,700,000. White Oak specialises in auto extended warranty and auto physical damage business. Additionally, on 28 May 2014, the Group acquired a 10% stake in Carl Rieck GmbH, a German intermediary, for €500,000. Carl Rieck underwrites high net worth private clients, professional indemnity and specialist commercial business.
On 14 February 2014 the Group disposed of its 25% holding in Barta & Partner – Versicherungsmakler G.m.b.H, for €500,000. The investment previously had been fully impaired.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance contracts. There are no contingencies associated with the Group’s compliance or lack of compliance with these regulations.
35 Capital and lease commitments Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was £2,168,000 (2014: £1,976,000).
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 149 191 Later than one year and no later than five years 746 – Later than five years – –
Finance lease interest expense for the year was £nil (2014: £nil).
36 Principal subsidiary companies of Hiscox Ltd at 31 December 2015
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Holdings Inc. Insurance holding company USA (Delaware) ALTOHA, Inc. Holding company USA (Delaware) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox Inc. Underwriting agent USA (Delaware) Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox ASM Ltd Insurance intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox Capital Ltd* Reinsurance Bermuda Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox Europe Underwriting Limited Insurance intermediary Great Britain Direct Asia Insurance (Holdings) Pte Ltd Holding company Singapore Direct Asia Insurance (Singapore) Pte Limited General insurance Singapore Direct Asia Insurance (Hong Kong) Limited General insurance Hong Kong *Held directly.
Financial assets carried at fair value 2,921,585 2,828,847 2,585,054 2,406,269 2,368,636