Claims reported and claim adjustment expenses 2,688.0 (976.7) 1,711.3 2,259.0 (814.6) 1,444.4 Claims incurred but not reported 4,571.9 (2,227.7) 2,344.2 4,017.0 (2,106.4) 1,910.6 Unexpired risk reserve 31.5 (8.6) 22.9 – – – Total at end of year 7,291.4 (3,213.0) 4,078.4 6,276.0 (2,921.0) 3,355.0
Current year claims and claim adjustment expenses 2,422.0 (490.2) 1,931.8 3,584.6 (1,982.6) 1,602.0 Over-provision in respect of prior year claims and claim adjustment expenses 513.0 (545.0) (32.0) (377.9) 352.0 (25.9) Unexpired risk reserve 31.5 (8.6) 22.9 – – – Total at end of year 2,966.5 (1,043.8) 1,922.7 3,206.7 (1,630.6) 1,576.1
Premiums earned through the income statement (4,071.2) 1,319.0 (2,752.2) (3,931.9) 1,296.3 (2,635.6) Foreign exchange and other adjustments 41.6 (2.0) 39.6 10.4 (0.8) 9.6
Gross premium written 4,033.1 4,030.7 Outward reinsurance premium (1,282.7) (1,351.9) Net premium written 2,750.4 2,678.8 Change in gross unearned premium reserves 38.1 (98.8) Change in reinsurers’ share of unearned premium reserves (36.3) 55.6 Change in net unearned premium reserves 1.8 (43.2) Net premiums earned 2,752.2 2,635.6
Lloyd’s Part VII transfer On 30 December 2020, the members and former members of the Syndicate, as comprised for each of the relevant years of account between 1993 and April 2019, transferred all relevant policies (and related liabilities) underwritten by them for those years of account to Lloyd’s Insurance Company S.A. (‘Lloyd’s Brussels’), in accordance with Part VII of the Financial Services and Markets Act 2000. On the same date, the members of the Syndicate entered into a 100% quota share reinsurance agreement whereby Lloyd’s Brussels reinsured all risks on the same policies back to the relevant open years of account of the Syndicate, which wrote the transferring policies and/or inherited liabilities on transferring policies through reinsurance to close of earlier years of account.
Current year underwriting results for the transferred policies have been reported in the same classes of business as in prior years, as the effective date of the transfer was 30 December 2020, and in line with Society of Lloyd’s guidance no movements were processed on these policies on 31 December 2020. In future years, results relating to these risks will be reported under the inwards reinsurance class of business, reflecting the new contractual arrangement with Lloyd’s Brussels.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 24 Trade and other payables
Share of Syndicates’ other creditors’ balances 1.8 2.9 Social security and other taxes payable 51.7 39.7 Lease liabilities 59.7 71.4 Other creditors 30.1 74.1
The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
The cost relating to variable lease payments that do not depend on an index or a rate amounted to $nil in the year ended 31 December 2020 (2019: $nil).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 25 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 32. The amounts charged in the consolidated income statement comprise the following: $m $m
Adjustment for share-based payments (0.2) 0.4 Non-taxable income – (5.2) Prior year tax adjustments 28.1 (3.2) Tax charge for the year 25.2 4.2
Included within the current tax, a provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The Group companies’ tax filings include transactions which are subject to transfer pricing legislation and the taxation authorities may challenge the tax treatment of those transactions. The Directors are proactively engaged in discussions with the tax authorities regarding these tax positions. The Group determines, based on tax and transfer pricing advice provided by external specialist tax advisors, that: it is probable that the tax authorities will assess additional taxes certain of these filings, for which provisions have been made; the amount recognised at the balance sheet date represents the best estimate of the amount expected to be settled, taking into account the range of potential outcomes and the current progression of discussions with tax authorities.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 26 Deferred tax
UK capital losses – – – – – – Trade and other payables 4.0 – (2.3) – – 1.7 Intangible assets – Syndicate capacity 1.5 – – – – 1.5 Retirement benefit obligations 8.8 – (1.5) 8.9 0.3 16.5 Open years of account 40.4 – 37.6 – 2.2 80.2 Unearned premium 8.3 – 1.4 – – 9.7 Loss reserve discounting 5.7 – 1.2 – – 6.9 Other items 6.5 0.3 (4.5) (6.8) – (4.5)
Net total deferred tax assets/(liabilities) 25.4 (1.6) 12.2 2.1 1.1 39.2
Trading losses in overseas entities 51.5 – (20.2) – 0.5 31.8 Net total deferred tax assets/(liabilities) 25.4 (1.6) 12.2 2.1 0.8 38.9 Net deferred tax position asset/(liability) 76.9 (1.6) (8.0) 2.1 1.3 70.7
Other (0.4) (0.3) 0.8 – – 0.1 Net total deferred tax position (liabilities)/assets (0.4) 1.6 (4.0) – 0.1 (2.7) Net Group deferred tax asset/(liability) 76.5 – (12.0) 2.1 1.4 68.0
Deferred tax assets of $31.8 million (2019: $51.5 million), relating to losses arising in overseas entities, which depend on the availability of future taxable profits, have been recognised. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. $20.6 million (2019: $12.3 million) of the tax losses to which these assets relate will expire within ten years; a further $11.2 million (2019: $39.2 million) will expire after ten years or will be available indefinitely. The Group has not provided for deferred tax assets totalling $44.0 million (2019: $18.5 million) in relation to losses in overseas companies of $224.7 million (2019: $102.9 million). The deterioration in the economic environment together with significant Covid-19-related claims in 2020 has affected the results of the Group and its subsidiaries for the period, and changed assumptions around the timing of when carried forward losses could be utilised. Therefore, there is an adjustment to derecognise $20 million of carried forward losses. Net deferred tax assets of $35.4 million relating to UK entities, which depend on the availability of future taxable profits, have been recognised. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within six years. In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax assets expected to be recovered after more than 12 months is $68.0 million (2019 (restated): $76.5 million). Following a review, the 2019 comparative has been corrected on the grounds that all of the recognised deferred tax asset is non-current and expected to reverse after 12 months.
The impact of these changes in future periods will be dependent on the level of taxable profits in those periods.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 27 Employee retirement benefit obligations continued The scheme assets are invested are as follows: At 31 December 2020 $m $m
The movement in liability recognised in the Group’s balance sheet is as follows: $m $m
Chapter 6 113 Financial summary Notes to the consolidated financial statements 27 Employee retirement benefit obligations continued A reconciliation of the fair value of scheme assets is as follows: $m $m
Opening fair value of scheme assets 311.6 266.2 Interest income 6.5 7.6 Cash flows Contribution by the employer 30.4 3.6 Benefit payments (21.4) (10.4) Remeasurements Return on plan assets (excluding interest income) 6.5 32.8 Foreign exchange movements 10.8 11.8 Closing fair value of scheme assets 344.4 311.6
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: The weighted average duration of the defined benefit obligation at 31 December 2020 was 20.1 years (2019: 20.5 years).
The triennial valuation carried out as at 31 December 2017 resulted in a deficit position of £26.5 million ($35.8 million) on a funding basis. The Group and the scheme’s trustees have agreed a recovery plan to reduce the deficit and to eliminate the deficit by 2024. A funding contribution of £22.8 million ($30.4 million) was paid during 2020, including an advance payment for contributions due in 2021. No further contributions are expected until the statutory funding valuation as at 31 December 2020 has completed and a new schedule of contributions is agreed between the Company and the Trustees.
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 £14.1 million ($19.3 million) at 31 December 2020 (2019: £11.8 million ($15.6 million)), and would increase the recorded net deficit on the balance sheet by the same amounts.
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2020 as follows: Present value of unfunded obligations before change in assumption $m
Effect of a change in inflation Use of RPI inflation assumption of 3.15% 73.5 80.1 (6.6) Use of RPI inflation assumption of 2.65% 73.5 67.3 6.2
Diluted Diluted (loss)/earnings per share is calculated by adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares: share options and awards. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
(Loss)/profit for the year attributable to the owners of the Company ($m) (293.7) 48.9 Weighted average number of ordinary shares in issue (thousands) 320,562 284,015 Adjustments for share options (thousands) 3,498 4,361 Weighted average number of ordinary shares for diluted (loss)/earnings per share (thousands) 324,060 288,376 Diluted (loss)/earnings per share (cents per share) (90.6)¢ 16.9¢ Diluted (loss)/earnings per share (pence per share) (70.7)p 13.3p
Diluted (loss)/earnings per share has been calculated after taking account of 3,431,623 (2019: 4,067,881) Performance Share Plan awards and 66,010 (2019: 293,028) options under SAYE schemes.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 29 Dividends paid to owners of the Company $m $m
As announced on 8 April 2020, in order to help the Group serve the needs of businesses through the extraordinary challenges presented by Covid-19, and with the support of the regulators, the Hiscox Ltd Board took the decision that the resolution to approve the 2019 final dividend of 29.6 cents per share, which was scheduled for payment on 10 June 2020, would not be put to shareholders at the Annual General Meeting (AGM).
2019 interim dividends were declared in US Dollars, aligning shareholder returns with the primary currency in which the Group generates cash flow. The foreign exchange rates for dividends declared in US Dollars have been calculated based on the average exchange rate in the five business days prior to the scrip dividend price being determined. Historically, dividends have been paid in Sterling unless shareholders elect to be paid in US Dollars.
The following guarantees have also been issued: (a) Hiscox Dedicated Corporate Member Limited (HDCM) and Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) provide assets under a Security and Trust Deed charged to Lloyd’s of London, to meet any liabilities that occur from their interest in Syndicates 33 and 3624. At 31 December 2020, HDCM held $316.1 million of investments (2019: $433.4 million), $8.8 million of cash (2019: $40.7 million) and a $241.0 million LOC (2019: $25.0 million) in favour of Lloyd’s of London under this arrangement. At 31 December 2020, Hiscox Bermuda held $884.6 million of investments (2019: $622.4 million), $25.9 million of cash (2019: $38.6 million) and a $25.0 million LOC (2019: $25.0 million) in favour of Lloyd’s of London under this arrangement.
(g) Hiscox SA has arranged bank guarantees with respect to their various office deposits for a total of €433,336 (2019: €412,000). These guarantees are held with ING Bank (Belgium) €23,000 (2019: €23,000), ABN Amro (Holland) €45,000 (2019: €45,000), HypoVereinsbank – UniCredit (Germany) €156,336 (2019: €135,000), ING Bank (Luxembourg) $42,000 (2019: €42,000) and HSBC (Spain) €167,000 (2019: €167,000). As a consequence of the cross-border merger with Hiscox Europe Underwriting Limited effective 1 January 2019, Hiscox SA have the obligations under guarantees that were previously held by Hiscox Europe Underwriting Limited during 2018.
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: $m $m
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. Holding company USA (Delaware) ALTOHA, Inc. Insurance holding company USA (Delaware) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox Inc. Insurance intermediary 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 Underwriting Ltd Underwriting agent Great Britain Hiscox Société Anonyme* General insurance Luxembourg Hiscox Assure SAS Insurance intermediary France Direct Asia Insurance (Holdings) Pte Ltd Holding company Singapore Direct Asia Insurance (Singapore) Pte Limited General insurance Singapore *Held directly.
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2020 (2019: 38,030).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 33 Related-party transactions Details of the remuneration of the Group’s key personnel, presented in Sterling, are shown in the annual report on remuneration 2020 on pages 80 to 87. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
The following transactions were conducted with related parties during the year.
(a) Syndicate 33 at Lloyd’s Related-party balances between Group companies and Syndicate 33 reflect the 27.4% interest (2019: 27.4%) that the Group does not own, and are as follows.
Gross premium income achieved through associates 12.1 13.7 Commission expense charged by associates 3.0 3.6 Amounts payable to associates at 31 December – – Amounts receivable through associates at 31 December 55.4 51.5
34 Post balance sheet event Changes to segmental reporting Hiscox Special Risks, which is a business reported under the Hiscox Retail segment, ceased to exist from 1 January 2021. To better reflect a distribution-led geographic view, kidnap and ransom businesses locally written in Europe and the USA is now managed by the respective Hiscox retail businesses and continues to be reported under the Hiscox Retail segment. Other Special Risks businesses are managed by the London Market business unit and reported under that operating segment. The segmental reporting will be represented accordingly in 2021. There is no impact to the Group’s income statement, balance sheet or cash flow statements.
To align to the financial information presented in operating segment, note 4 to the consolidated financial statements and management information, the Directors decided to stop disclosing premium growth in local currency as key performance measure. The Group reports the premium growth in US Dollars, the presentation currency of the consolidated financial statements.
Chapter 6 113 Financial summary 188 Hiscox Ltd Report and Accounts 2020
Disclaimer This document contains forward-looking statements regarding plans, goals and expectations relating to the Group’s future financial condition, performance, results, strategy or objectives, which by their very nature involve risk and uncertainty. Statements that are not historical facts are based on Hiscox’s beliefs and expectations. These include but are not limited to statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and words of similar meaning. These statements are based on current plans, estimates and projections as at the time they are made and therefore undue reliance should not be placed on them.
A number of factors could cause Hiscox’s actual future financial condition, performance or other key performance indicators to differ materially from those discussed in any forward-looking statement. These factors include but are not limited to future market conditions; the policies and actions of regulatory authorities; the impact of competition, economic growth, inflation, and deflation; the impact and other uncertainties of future acquisitions or combinations within the insurance sector; the impact of changes in capital, solvency standards or accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Hiscox operates; and the impact of legal actions and disputes. These and other important factors could result in changes to assumptions used for determining Hiscox results and other key performance indicators.