Remuneration 49 Letter to shareholders 51 Remuneration policy report 60 Annual report on remuneration 2014 69 Directors’ report 71 Directors’ responsibilities statement
Our strategy is: – to use our underwriting expertise in London and Bermuda 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.
Capital return of 60.0p per share, approximately £192 million, by way of E/F Share Scheme and share consolidation.
This comprises a special distribution of 45.0p per share and final dividend equivalent of 15.0p per share, taking the total dividend for the year to 22.5p, an increase of 7.1% (2013: 21.0p).
Retail businesses now over half the Group’s gross premiums written, with retail profits now covering the standard dividend.
Why invest in Hiscox? Specialist expertise that is valued by our customers We are market leaders in many of the risks we underwrite and our customers value the expertise and innovative cover we provide*. – In France, 95% of small business customers are satisfied with our services.
– In the USA, 96% of small business customers surveyed would recommend us.
Hiscox UK was awarded Best Small Business Insurer by Start Your Business Magazine for the sixth year in a row. In the US, Hiscox was named a Top 100 Champion at the Small Business Influencer Awards. Fairer Finance awarded Hiscox UK Gold for home insurance, recognising our commitment to provide high-quality customer service. In IT, we were awarded Digital Insurance Project Team of the year at the Digital Insurance and Technology Awards, where Stéphane Flaquet was also named CIO of the year. Reactions Magazine awarded Hiscox Insurer of the Year. Stuart Bridges was presented with CFO of the year at the Insurance Insider Awards and Bronek Masojada was awarded Personality of the Year at the British Insurance Awards 2014. Our Hong Kong team for DirectAsia were awarded Silver for Inbound Contact Centre of the year where the Head of Customer Care, Gratiano Yeung, also received the Gold award for Inbound Contact Centre Manager of the Year. In Singapore, Loh Kaiyun Joey won Best Contact Centre Trainer of the Year (for offices between 20 and 100 seats). *Results from customer reviews collated and managed by independent third-parties.
We are one of the world’s leading specialist insurers. Our success is due to a long-term strategy that strives to build: – balance and diversity, generating opportunities throughout the cycle; –a strong financial performance; – underwriting discipline and a transparent approach to risk; – market-leading expertise that is valued by our customers; – teams of energetic, professional and well-respected people.
Our business Our Group comprises three counterbalancing divisions that give us options throughout the market cycle. For more than 30 years, Hiscox’s strategy has been to balance our more volatile catastrophe-exposed big-ticket insurance and reinsurance with smaller-ticket retail insurance. The diversity we have created within our overall business, both in product and geography, gives us great flexibility, particularly in a tough commercial environment. We are able to grow or shrink the catastrophe-exposed lines according to market conditions. Our local specialty insurance businesses, which tend to perform consistently across the insurance cycle, have grown by 9.1% year-on-year over the last five years.
Our expertise A transparent approach to risk The very business of insurance is managing risk. Understanding risk is intrinsic to every level of decision making in the Group. We devote a great deal of expertise to understanding the impact of major global disasters on our business. We have developed our own sophisticated risk model, which draws on our many years of experience as well as the leading industry forecasting tools. All of our underwriting decisions on catastrophe exposures are based on this bespoke model. Every six months, we update analysts and investors on what the Group’s potential exposure could be to major catastrophes, such as hurricanes or earthquakes.
Between 2010 and 2014 Hiscox returned £422m of extra capital to shareholders.
Our performance was improved by our risk assets, which produced a pleasing return of 7.6%. However, we do not believe it is appropriate to take excessive risks in search of higher yields, as our investments are mainly earmarked to pay claims and support our business, although we continue to look for appropriate opportunities in the equity markets. In 2015, we are planning for a continuation of the same market conditions that have produced low, but still positive, returns for us in recent years.
In the face of strong headwinds, one can see a clear divergence of strategy in the market, with some companies growing big-ticket business and some contracting. Our underwriting strategy combines underwriting rigour with an eye for opportunity and is designed to manage all stages of the insurance cycle: we plan for the soft market conditions we are experiencing. We believe that when margins reduce you take your foot off the accelerator and when they increase you push down hard. We also believe that our strategy of persistently investing and building the retail businesses as a counterweight to the more volatile lines continues to be the right one.
While the double whammy of burgeoning capital and fewer losses has put pressure on bigger ticket rates, we have continued to invest in the retail businesses in the UK, Europe, the US, Guernsey and more recently in Asia. Our London Market team has dug out nuggets of profitable business against tough competition. Hiscox Re, our reinsurance arm, has adapted swiftly, developing new products and opportunities to engage customers.
Results The results for the year ending 31 December 2014 were a profit before tax of £231.1 million (2013: £244.5 million). Gross written premium increased by 3.3% to £1,756.3 million (2013: £1,699.5 million). The combined ratio was 83.9% (2013: 83.0%). Earnings per share increased to 67.4p (2013: 66.3p) and the net asset value per share increased by 15% to 462.5p (2013: 402.2p). Return on equity was 17.1% (2013: 19.3%).
Dividend, balance sheet and capital management The Board has proposed that a special distribution be made of 60.0p per share (amounting to approximately £192.0 million) to include 15.0p per share instead of a final dividend. The total dividend for 2014 is equal to 22.5p per share (2013: 21.0p), an increase of 7.1%. The return of capital will be made using a similar scheme to last year and will again be accompanied by a share consolidation. Full details will be set out in a circular to be despatched to Hiscox shareholders on or around 3 March 2015. This is now the third successive year in which we have been able to return capital to shareholders and again I say that this is a tactic for the circumstances we are in, not a long-term strategy to return capital every year.
It is pleasing to see that Hiscox businesses, from Singapore to Atlanta and York all reflect the same values and determination to succeed.
In preparation for this we have conducted an external search to recruit two replacements and are recommending to shareholders the appointment of Lynn Carter and Anne MacDonald to our Board. Lynn Carter will bring 38 years’ experience in the banking industry, most recently as President of Capital One Bank, while Anne held the position of Chief Marketing Officer at four different Fortune 100 companies including Travelers and PepsiCo. These appointments support our focus on retail growth and brand building.
Finally We continue to recruit, train and motivate the best people. Their desire to do the right thing, however hard, is what makes our customers want to do business with us. I am thankful to everyone at Hiscox for their diligence and for the ongoing support of our customers.
I recently visited our York office, having the week before returned from visiting our new office in Singapore. I was inspired by the enthusiasm and drive of the young teams and the commitment and intellect of the leadership in both places. It is pleasing to see that Hiscox businesses, from Singapore to Atlanta and York all reflect the same values and determination to succeed.
Hiscox in the insurance marketplace. Hiscox Retail comprises Hiscox UK and Europe, and Hiscox International. I review them in turn below: Hiscox UK and Europe This division provides personal lines cover – from high-value households, fine art and collectibles to luxury motor – and commercial insurance for small- and medium-sized businesses, typically operating in white-collar industries. These products are distributed via brokers, through a growing network of partnerships, and direct to the consumer.
Hiscox UK and Ireland Hiscox UK and Ireland increased gross written premiums by 5.5% to £435.0 million (2013: £412.4 million) with strong growth in areas where margins are good and reductions in less profitable business. It achieved a combined ratio of 88.6%, at the better end of our normal expectations.
In the second half of the year we launched a series of new and refreshed products including data and cyber risks, and personal accident cover, which are showing positive early signs. These innovations have contributed to a particularly good year for the UK broker business.
We always look at opportunities to develop a market-leading position in our chosen areas of specialism and we have made a series of small acquisitions to this end. We acquired Event Assured in September, consolidating our position as market leaders in insurance for small events, conferences and exhibitions. Today we announce completion of our acquisition of R&Q Marine Services, a managing general agent specialising in yachts and general marine leisure which underwrites on behalf of other insurers. We will now combine their knowledge with our distribution and marketing capability to serve more customers in our target segments.
We are seeing some success with Hiscox Private Client, our tied agency through which we sell high net worth home insurance direct to customers. This complements our highly successful direct-to-consumer mid net worth
I am pleased to report a profit before tax of £231.1 million (2013: £244.5 million), a return on equity of 17.1% (2013: 19.3%) and revenue growth of 3.3% to £1,756 million (2013: £1,699 million) – a credible performance in current market conditions. This result reflects the continued good progress of our retail businesses which, for the first time account for over half of Hiscox Ltd’s gross written premiums. Our US business contributed materially to this, growing organically by 24.1% to over $360 million. Hiscox UK and Europe both delivered record profits. Our London Market business has made a good margin and grown in a difficult market. Our reinsurance business has had a tremendous year and acquitted itself well in challenging pricing circumstances, receiving ongoing support from our quota share partners and attracting new investors to our insurance linked funds which are now on track to reach $500 million in assets under management.
With these results, we have announced a capital return of 60.0p per share, comprising a special distribution of 45.0p per share and a further 15.0p per share instead of a final dividend. The total capital return is equal to approximately £192 million. I am pleased that for another year our business is strong enough to allow this return of capital and at the same time we are able to invest in talent, infrastructure, small acquisitions and new opportunities.
Market challenges remain – pricing pressure due to the absence of large losses, a flood of capital into reinsurance, technological change putting pressure on infrastructure, and low investment returns due to ongoing financial repression. Our long-term strategy is showing its mettle, and our options – in terms of products, distribution routes and geographies – allow us to adapt and continue to deliver good returns to shareholders.
Hiscox Retail We began growing our specialty retail business outside Lloyd’s in 1989, with an initial focus on high net worth homes. It reached £2 million in its first year. Since then we have broadened the product offering, entered new countries and built new distribution channels. Hiscox Retail now comprises over half of the Group’s gross written premium – £891.1 million in total (2013: £819.4 million). Over the last ten years it has grown at 12.8% compound, and yet we are still a small participant in most of the segments we target. In 2014 it contributed profits of £78.1 million (2013: £61.2 million), enough to cover the equivalent of the final dividend for the Group. The combined ratio improved slightly to 93.5% (2013: 94.3%). The scale, steady profits and brand value of this segment truly differentiate
Europe is benefiting from improving scale. We continue steadily to improve our expense ratio through our EuroFit project, which involves local process improvements and the concentration of functions in our shared service centre in Lisbon. A success during the year was the in-sourcing of our escape of water claims (a particular challenge in France) from a third-party to our team in Lisbon, resulting in lower costs and higher client satisfaction.
Our direct-to-consumer small business products in France and Germany are benefiting from more investment as they follow our direct strategy in the UK and USA. Although the French and German direct businesses are still relatively in their infancy, with a total premium of only €4 million, we think the market opportunity is there and that with the right sustained investment we will build good direct businesses.
Hiscox International This division comprises Hiscox Guernsey, Hiscox USA and DirectAsia. Its revenues grew by 15.7% to £301.1 million (2013: £260.3 million) and it achieved a combined ratio of 100.1% (2013: 98.5%). This good growth demonstrates there are still many opportunities for us across the world.
Hiscox Guernsey During the year we formed the Hiscox Special Risks division, bringing together different teams from across the Group that focus on special risks, including kidnap and ransom, private client, fine art and executive security, in a structure designed to boost local and global collaboration. Led from Hiscox Guernsey, Hiscox Special Risks has additional teams in London, Munich, Paris, New York, Los Angeles and Miami. We also underwrite personal accident, terrorism and fine art risks from Guernsey. In December 2014, we expanded our Miami operation, recruiting additional staff and acquiring the renewal rights to a book of Latin American business.
Despite operating in highly competitive lines, Hiscox Special Risks has a well-earned reputation for expertise and service giving an element of stability to this business. Clients also benefit from our exclusive arrangement with security experts Control Risks.
Hiscox USA Our US business had another year of strong growth. Gross written premiums increased by 24.1% to $367.6 million (2013: $296.2 million) with the broker business making a profit for the second year in a row. The professional liability products were a growth engine and provide a counterweight to other areas still in the investment stage.
Commercial property is under pressure, with double-digit rate reductions, so we remain disciplined in this area. In all other lines, rates remain broadly flat. Media and entertainment is an area where we are investing, with IT
home and small commercial business products. Through these direct operations we serve over 124,000 customers and we still have plenty of room to grow.
In the autumn, after a two-year break, we returned to TV with a new home advertisement supported by cinema, print and poster campaigns. This has generated a great deal of new interest with calls, website visits and sales all increasing by over 30% during the campaign.
Each part of our European operation has performed well, benefiting from a focused business plan and improved expense management. Our partnerships with other financial services providers such as BBVA, Crédit Agricole, ABN AMRO and Generali who distribute our specialist products to their customers have helped our commercial business grow to almost €100 million. We have also invested in expertise, allowing us to develop products for software developers, radiologists, laboratories and equestrian centres.
Our London Market businesses delivered a profit of £62.6 million (2013: £63.1 million), and increased gross written premiums by 9.0% to £510.8 million (2013: £468.6 million). It achieved a combined ratio of 84.2% (2013: 81.4%), with good underwriting and a favourable claims environment combining to generate another strong result.
– Marine and energy: Against a backdrop of challenging trading conditions, the team has worked hard to maintain the account. Within upstream energy, ratings have been strained due to a lack of meaningful losses, while within marine lines our disciplined approach enabled us still to seek out reasonable margins despite rates being broadly flat. The Costa Concordia saga reflects the challenges of large claims. The cost to the industry grew above expectations during the claim, so we were pleased to make a small release at the year-end, vindicating our cautious initial reserving.
infrastructure and an enhanced suite of products. The small business direct and partnerships division continue to forge ahead, with year-on-year growth of 75% and over 80,000 policies now in force. It is approaching scale.
The team has also been busy bringing other new products to market. New financial services and general liability lines, a new cyber deception endorsement and the roll-out of Hiscox Pro – the overarching name for our suite of profession’s products – all give us opportunities. These have been welcomed by the market and are delivering promising early results.
Our investment in marketing and focus on differentiation in a crowded marketplace remain important to us, and during the year we launched a brand building campaign under the theme of ‘Encourage Courage’. Celebrating Hiscox as an insurer that understands the challenges of building a business and the value in taking risk, the campaign is already resonating well with staff, brokers and customers. We expect to make a multi-year investment in the brand to support and drive the growth of our business in the US.
Our key contribution to DirectAsia so far has been to bring our broader marketing knowledge. We have seconded staff and hired a new Chief Marketing Officer. We have also laid the groundwork for TV advertising for the first time in Thailand, part of a sustained campaign supported by print and social media marketing. It launched in January 2015 and initial results are encouraging.
communicating. The role of the alternative distribution division is to facilitate innovation, drawing on all the resources of the London Market business. Its biggest business is the underwriting of specialist automotive and equipment, including extended warranty. In this we support White Oak, a specialist in this area. This relationship has grown over time to now represent 25% of our London Market insurance revenues. Our acquisition of a 10% stake in White Oak and appointment of our Chief Underwriting Officer to its Board underscores the significance of this business to us.
Hiscox Re The Hiscox Re segment comprises the Group’s reinsurance businesses across the world. It has had a tremendous year, not only in terms of its contribution to the Group’s profits, but also in the way it has adapted to the changing dynamic in the global reinsurance industry. Profits were £105.6 million (2013: £129.0 million) despite our revenues declining by 13.9% to £354.3 million (2013: £411.5 million) as we continued our disciplined response to the challenging pricing environment. The combined ratio was 49.8% (2013: 58.9%). The last two years reflect an almost complete absence of large losses due not only to low industry-wide losses, but also good risk selection by our teams.
We formed the Hiscox Re division in mid-2013, bringing teams in London, Paris and Bermuda under common leadership. Since then they have forged a strong identity in the eyes of clients and brokers, reflecting the reality of a business which can commit over $200 million to the right risk. The team has developed innovative new products, setting them apart from the industry. Popular products have included risk aggregate protection, second event catastrophe aggregate trigger covers, quarterly aggregate protection and cyber aggregate excess of loss. These have created more opportunities for conversations with clients, brought in over $30 million in new premium and enhanced existing relationships. The team will continue to develop new products as it charts a course through a market where pricing is challenging.
It has also participated on the Willis Global 360 facility. This facility allows us to see a broader spread of business while maintaining underwriting integrity, and we aim to grow it in 2015.
An unprecedented number of claims – from the tragic losses of Malaysian Airlines flights MH17 and MH370 and AirAsia flight QZ8501, to the damage and destruction of 18 aircraft at Libya’s Tripoli airport – kept the aviation market in the headlines over the year, with industry losses exceeding $1 billion. A combination of good luck and careful underwriting meant that we avoided many of the non-war losses, though events at Tripoli airport did cost us £2.3 million. Despite industry expectations that the market would harden, the year concluded with rates in broadly the same place as they were at the start of 2014. In 2015, we expect to maintain the account, while being ready to explore any opportunities that may arise.
In the rest of the division, we achieved good margins, despite the rating environment being variable. In some lines this has been no mean feat. For example the political unrest surrounding Russia and the Ukraine and the subsequent impact of sanctions has been keenly felt within our political risks book. We have invested in people, expanding both our personal accident and contingency teams.
In terrorism, intense competition and a move towards facilities (bundling risks to facilitate placement) are having a negative effect. We were happy to step into the gap that was created by the US Congress’s failure to promptly renew its Terrorism Risk Insurance Programme Reauthorisation Act (TRIPRA), providing certainty to customers with material city-centre property exposures.
Marketing During 2014 we increased marketing spend across the Group by 3.9% to £31.8 million (2013: £30.6 million). The vast majority of our marketing efforts are focused on our direct-to-customer operations in the UK, the US and Europe. We have also invested significantly in marketing our newly acquired Asian operations, DirectAsia. Our investment in broker channel marketing continued, where we marketed direct to brokers, or we helped them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting art-related activities but also growing our presence in York.
Our marketing has been instrumental in building the Hiscox brand, communicating what we do to an ever-wider audience, building awareness of Hiscox and ultimately driving sales. We felt the benefits mostly in the UK where it has had a positive impact on the direct, retail broker and even our Lloyd’s activities. As we spend more in other locations I believe we will see similar broad business benefits.
Operations and IT Our operations and IT capability have benefited greatly from investment and effective leadership, and we have made good progress in several important areas. Our project to replace the core underwriting, policy administration and claims systems supporting our retail businesses continues. The first phase of implementation, for our UK direct home system, launched successfully on time and almost on budget in October and this has already doubled our online conversion rates and increased sales. The next stage is the migration of our direct commercial activities.
In the US our operations team has focused on building scalable infrastructure, streamlining operational processes and automating some simple underwriting. A major focus was smaller changing sources of capital. Our Kiskadee family of insurance linked funds will, in its second year of operation, attract $500 million in capital. We see opportunities to grow these funds, and other ILS products, further as investors become more comfortable with taking both insurance and reinsurance risks. Hiscox Re has also broadened its focus by continuing to invest in specialty, healthcare and casualty reinsurance. These three lines of business are growing steadily, with the right degree of caution. Combined, they exceeded $60 million premium income in 2014 and we expect this growth to continue.
Looking forward, the critical uncertainty is catastrophe reinsurance pricing. Rates fell at the important 1/1 renewals by approximately 12.5%, in line with our expectations. This marks the third consecutive year that prices have reduced. The great advantage that Hiscox Re has over its competitors is that the Hiscox Group is not overreliant on this piece of the pie. This means that our reinsurance team can remain disciplined, reducing volume if necessary, secure in the knowledge that as a Group we have many opportunities elsewhere. For instance, we have already re-allocated catastrophe aggregate from reinsurance to our small-ticket property insurance team where pricing is now more attractive. It also means that cedants see Hiscox as a secure partner that will pay claims in adverse circumstances. The reinsurance industry has had three years without any material claims, over six years since a major Gulf of Mexico windstorm, and almost ten years without a major Florida hurricane. This will inevitably change and when it does, Hiscox Re has a full team of talented people and diverse sources of capital to expand as the opportunity presents itself.
In 2014, for the first time, our aggregate specialist retail business will account for over 50% of Hiscox Ltd’s gross written premiums.
share with these results, approximately equal to £192 million in total. Including this amount, in the past ten years Hiscox has returned a net total of £857 million to shareholders through progressive dividends, share buy-backs and capital returns. At the same time we have grown shareholder’s funds from £369 million to £1,262 million, post this capital return. Over the same time period we have grown our top line by a compound 8.0% per annum.
We far prefer to invest in opportunities to support organic growth or make small acquisitions. Over the past 12 months we have made four acquisitions to support areas as diverse as contingency, yachts and kidnap and ransom. This includes our announcement today of the acquisition of R&Q Marine Services. We are always on the look-out for opportunities which strengthen our position in specialty areas.
At the same time, we have been successful at adapting to the changing market. The way capital is provided to reinsurance is changing. Our response to this change, the Kiskadee Funds, have grown to almost $500 million, from nothing two years ago. Our US business is on course to reach $500 million in revenues by 2016, making us a recognised contender in the US specialty market. The brand building we have done in the UK, which is now slowly extending to Europe and the US, means we have an identity few other insurers can match. We have taken the bold step (and delivered on phase one) of ripping out old technology to replace it with new, rather than papering over the cracks. We are not standing still.
Thanks to all these efforts we have the fire power to set our own course, and are not being blown around by industry headwinds. It means that we have credible opportunities to develop our business and make money even in the tough times that lie ahead for some parts of our business.
The wait for higher interest rates is proving to be longer than expected. However, to the extent that we have learned to live with low but positive returns of late, we are planning for the same in 2015. We remain unconvinced that now is the time to stretch for yield in the fixed income arena and, if anything, recent bouts of illiquidity have re-affirmed this view. The majority of our cash and bonds are there to pay claims and support our business and, although we are prepared to take investment risk, as in underwriting we seek to do so at the right price. We continue to see the best opportunities for this in the equity market from time to time.
Capital management We have announced a capital return of 60.0p per
Established in Singapore in 2010 before opening in Hong Kong and Thailand, DirectAsia sells predominantly motor insurance with ancillary lines in travel, healthcare and life. It distributes business through online sales alongside its call centres.
Hiscox UK and Ireland (headed by Kate Markham and Ross Dingwall) and Hiscox Europe (headed by Pierre-Olivier Desaulle), are sub-divisions of Hiscox UK and Europe.
In 1993, Hiscox opened its first overseas office in Paris, and now operates from 11 regional centres across Europe. Hiscox Europe provides art and private client insurance as well as professional liability, specialty and property insurance for small- and medium-sized businesses. Hiscox France and Hiscox Germany provide small business insurance directly to consumers.
Products include D&O, E&O, household, fine art, kidnap and ransom, direct-to-consumer small business insurance.
Products include D&O, E&O, household, fine art, direct-to-consumer home and small business insurance.
Security Hiscox Insurance Company Limited has an A (Excellent) rating from A.M. Best, an A (Strong) rating from Standard & Poor’s and an A+ (Strong) rating from Fitch.
Capacity For 2015, Hiscox’s capacity for: – Syndicate 33 is £1bn – Syndicate 6104 is £65m – Syndicate 3624 is £350m.
Security Hiscox Syndicate 33 has an A (Excellent) Syndicate rating from A.M. Best. Hiscox Syndicates also benefit from Lloyd’s own ratings, A (Excellent) from A.M. Best, A+ (Strong) from Standard & Poor’s and AA- (Very strong) from Fitch.
Hiscox has been insuring US customers for over 40 years, and opened a local insurance company in 2006. Hiscox USA operates from six locations, offering professional liability, specialty and property insurance. Hiscox USA also provides small business insurance directly to consumers.
Security Hiscox Insurance Company Inc. has an A (Excellent) rating from A.M. Best. It also benefits from Lloyd’s own ratings, A (Excellent) from A.M. Best, A+ (Strong) from Standard & Poor’s and AA- (Very strong) from Fitch.
Since 1998 Hiscox has been providing specialist insurance and expertise for global risks through its Guernsey office. Led from Hiscox Guernsey, Hiscox Special Risks brings together teams from across the Group that focus on special risks including kidnap and ransom and executive security.
The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur. For example, an event with a return period of 20 years would be expected to occur on average five times in 100 years.
b n m ar ke t lo ss y ea r re tu rn p er io d
at rin a $5 0b n m ar ke t lo ss y ea r re tu rn p er io d
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2015 and industry data. Given the nature of the risks underwritten, the loss estimates may be materially different than those that arise depending on the size and nature of the event.
We have invested significantly in marketing, to develop a powerful, differentiated brand with which our target clients can identify. That brand is based on our values and customer service ethos, not on price.
We also want to offer superb service that exceeds clients’ expectations. Our claims commitment has won us awards as well as praise from our customers, which supports our belief that a policy’s value for money goes far beyond its cost. – Small business customers in the UK have rated service satisfaction 4.5 out of a possible 5.
– 96% of our small business customers in the US would recommend us.
London Market Insurance –Take measured bets with a long-term view. –Foster market-leading teams. –Adapt to new distribution challenges.
Every industry experiences cycles of fluctuating supply and demand. The insurance industry is no different; however, the supply of capital to the industry and the willingness to underwrite against it, can be very reactive to major natural catastrophes or other infrequent, large loss events, making it hard to forecast when the cycle will change. As well as covering major catastrophes, insurance also covers people from all walks of life and all industries, so even during the soft phase of the cycle, not all lines of business, in all geographies, experience difficult conditions.
Hiscox’s well-established strategy of balance and diversity was designed with the aim of providing opportunities and choices throughout the cycle that maximise shareholder returns. To that end, all the Group’s divisions follow three fundamental tenents: – always underwrite for profit, not market share; – actively manage the mix of business; –grow and shrink according to conditions; – focus on finding future opportunities and specialist lines.
Retail – Steady, disciplined growth and consistent pricing. –Investment in a differentiated brand. –Delivering superb service.
We are a specialist brand working in specific niches and in many areas we are acknowledged market experts. We work hard to differentiate ourselves from the competition and try to create products and services that customers value. In these specialist lines, our market penetration can be low and we believe there is considerable room for disciplined growth.
many strong relationships with select managing general agents, built across many years and difficult markets, which allow us to push for growth as we see incremental rate growth producing attractive margins.
We are always looking for ways to diversify, by using external performance data and our own experience to identify new sectors in markets that look attractive, but in which we are currently underweight. We will then hire the best available people working in those target areas to ensure we make an immediate impact. Those underwriters are expected to use their knowledge, business acumen and broker contacts to grow their business quickly, but responsibly. Our new casualty and personal accident teams are a good example of this.
The reinsurance business has changed profoundly in recent years and it is important that we evolve with it. In 2013, we amalgamated our reinsurance platforms in London, Bermuda and Paris to create Hiscox Re to deliver bigger capacity, faster decisions and more creative solutions. It can write lines of over $200 million, meeting clients’ growing desire for meaningful risk capacity from fewer carriers.
We do not view reinsurance to be a commodity and we believe that finding innovative solutions to clients’ changing needs is as important as price – if not more so. So we ask clients what challenges they face rather than simply trying to sell them a one-size-fits-all solution, where the only discussion is price.
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 new ‘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 £144 million special distribution. 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 2014 consolidated financial statements.
The BSCR model applies factors to premium, reserves and assets/liabilities to determine the minimum capital required to remain solvent throughout the year. The GSSA is based on Hiscox’s own internally assessed capital requirements and is informed by the Group’s Capital Model (GCM) which, together with the BSCR, forms part of the BMA’s annual solvency assessment. The GCM provides a holistic view of the Group capital requirements and draws upon the Group’s key underlying risk models.
The proposed return of capital will leave the Group with a comfortable surplus above Hiscox’s internal projections of both the BSCR and GSSA for the 2015 business plan.
However, the Group can source additional funding through a revolving credit and Letter of Credit facility. Additional funding from these sources comprised $875 million at 31 December 2014 (2013: $875 million), of which $441.5 million was drawn at 31 December 2014 (2013: $333 million).
Rating agency assessments shown are internal Hiscox projections of the agency capital requirements on the basis of 2014 year-end results. Hiscox uses the internally developed Group capital model to assess its own capital needs on both a trading (economic) and purely regulatory basis. All capital requirements have been normalised, with respect to variations in the allowable capital in each assessment for comparison to a consistent available capital figure.
Hiscox Retail Hiscox Retail now accounts for 51% of the Group’s gross premiums written at £891.1 million (2013: £819.4 million). Gross premiums written for the UK were up 5.5% at £435.0 million, driven primarily by the specialty commercial and global media, entertainment and events lines. Europe grew gross premiums written by 5.7% to £155.1 million with contributions from all countries. The US continued its strong year-onyear growth with a 17.7% improvement in top line, with the direct-to-consumer business growing by 75%. Guernsey’s premium income decreased by 8.9%, or 4.0% in local currency. Additional contributions in premiums were made from DirectAsia, which we acquired during the year, at £13.5 million.
Both the net claims ratio and expense ratio remained constant at 40.9% (2013: 41.6%) and 52.0% (2013: 52.1%) respectively. The net combined ratio improved slightly to 93.5% (2013: 94.3%). Both the UK and Europe divisions recorded their best ever result.
Net asset value per share increased by 15% to 462.5p (2013: 402.2p). The Group continues to maintain a progressive dividend policy and total dividend per share rose by 7.1% to 22.5p (2013: 21.0p), subject to shareholder approval of the final dividend equivalent. The Group is proposing, for the third consecutive year, to make a special distribution of 45.0p per share, subject to shareholder approval. Following the distribution, the Group’s capital levels will be similar to those of the opening balance sheet, post the 2014 capital return.
The Group maintains relationships with a limited number of banks, whose credit status and ability to meet day-to-day banking requirements are monitored by the Group. There was no cash drawn down on the banking facility during the year. At 31 December 2014, $441.5 million (2013: $333 million) had been drawn by way of Letter of Credit against this facility.
Profit before tax for the year remained constant at £62.6 million (2013: £63.1 million).
Despite some headwinds at the short end of the yield curve, the contribution from the bond portfolios was double that of 2013 but, at 1.5%, still low in absolute terms. This represented an outperformance to the short duration benchmarks which govern the majority of our segregated mandates. The excess returns in the Dollar bond portfolios were achieved largely through allocations to credit. The higher spreads and the benefits of a positive yield curve outweighed the increase in underlying yields. Successful duration management contributed more in the Sterling and Euro portfolios, but the exposure to credit there also added value. Yields in the Euro portfolio have declined to extremely low levels (they are negative on the underlying benchmarks) but fortunately represent less than 10% of our overall asset allocation. At the beginning of 2015 bond yields have declined further to levels that seemed improbable 12 months ago.
The Group’s invested assets at 31 December 2014 totaled £3.46 billion (2013: £3.13 billion). This includes £211 million of third-party assets held in our insurance linked strategies funds managed by Kiskadee Investment Managers, a wholly-owned subsidiary of the Group. These are consolidated for reporting purposes. Excluding this and allowing for the £197 million that was returned to shareholders by way of dividend and capital distribution, assets under management grew slightly during the year. The investment result, excluding derivatives, amounted to £56.4 million (2013: £58.9 million) equating to a return of 1.8% (2013: 1.9%). Whilst the outcome was similar to the previous year a more positive environment for bonds tilted the balance of the contribution towards the fixed income allocation.
Group invested assets* £3,245m £3,129m * Excluding derivative assets, investments in insurance linked funds and third-party assets managed by Kiskadee Investment Managers.
The outlook for investment markets in 2015 remains uncertain as the impact of the financial crisis in 2008 lingers on. There is some sign of recovery in the US but much of the rest of the world remains at risk of deflation and reliant on monetary stimulus. Quantitative easing in its various forms has resulted in most asset prices, particularly bonds, appearing to be overvalued and recent sharp movements in currencies, oil and various commodities are a reminder that plenty of imbalances exist. Very few of these were predicted last year and the implications and impact of such moves are far from clear.
The Group risk management framework The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. Our risk appetite is set by the Board and cascaded down to the Group’s operating entities, and the risk exposures are monitored both locally and centrally, by risk type and in the aggregate. In addition to the Hiscox Ltd Board and its Committees, the risk management framework includes several Group-wide and local forums focusing on specific risk types such as underwriting, reserving, investments, cash flow and reinsurance security. The framework is supported by a central risk team that reports to the Risk Committee.
This monitoring assesses the level of risk being taken by the Group in pursuing its objectives, and ensures that this level of risk remains within the parameters set by the Board. A dedicated team reports to the Risk Committee of the Board which monitors and reviews the risk profile and the effectiveness of our risk management activities. This team has a wide range of tools to measure risks and is organised centrally so we can share best practice on managing risks across the Group.
Hiscox competes against major international insurance and reinsurance groups. At times, some of these groups may choose to underwrite risks at prices that fall below the break-even technical price. Prolonged periods when premium levels are low or when competition is intense are likely to have a negative impact on the Group’s financial performance.
Though volatile and potentially costly, this business is compelling for us, as it is capable of earning good margins over the medium- to long-term.
– Underwriting discipline: Underwriters are incentivised to make sound decisions that are aligned with Group’s overall strategic objectives and risk appetite. Clear limits are placed on their underwriting authority. Policy wordings are regularly reviewed in the light of legal developments to ensure the Group’s exposure is restricted, as far as possible, to those risks identified in the policy at the time of issue.
– 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.
– Pricing discipline: We are firmly resolved to reject business that is unlikely to generate underwriting profits. Accepting risks below their technical price is detrimental to the industry as it can drive market rates down to a point where underwriting losses mount, insurers’ capital is destroyed causing some businesses to fail, customers to receive poor service and the industry to suffer negative publicity.
– Risk appetite: Our appetite for certain lines of business changes according to market conditions and the risk appetite of the Group.
– 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.
– Senior management and Board approval: Our provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
– Conservative policy: Our overriding concern is to not lose money or to put at risk the Group’s capacity to underwrite. Our policy is designed to maximise returns within an overall risk appetite.
– 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.
– Cash: Available cash is invested according to the Group’s investment policy and our cash requirements can normally be met through our regular income streams: premiums, investment income, existing cash balances or by realising investments that have reached maturity.
– 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.
– Liquid assets: Our investment policy recognises the demands created by our underwriting strategy, so that some investments may need to be realised before maturity or at short notice. Hence a high proportion of our investments are in liquid assets, which reduces our risk of making losses because we may have to sell assets quickly.
– We constantly monitor new regulation and review our internal arrangements, operating under the guidance of the Group CFO.
– Guidelines: We set guidelines for exposure to each of our approved reinsurers.
– 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.
– 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.
Scope 1 – company car use, onsite gas, combustion and refrigerant loss
Tonnes CO2e per FTE (all scopes 1, 2 and 3) 3.39 3.33 3.44 3.65
In 2014, Hiscox Group operations became carbon neutral, offsetting the emissions we could not reduce through award-winning climate and sustainable development experts, ClimateCare. LifeStraw Carbon for Water project provides simple gravity-fed water filters for 4.5 million people in Western Kenya, minimising exposure to waterborne diseases. This project also cuts carbon emissions by reducing the need to boil water to make it safe to drink. For more information, please go to www.hiscoxgroup.com.
Governance Hiscox Ltd Report and Accounts 2014 encourages employees to raise any concerns relating to malpractice or wrongdoing without threat of unfair treatment as a result. If an employee has a serious concern relating to the operation of the business, we have a whistleblowing policy that enables that person to confidentially raise their misgivings with Group Compliance and Audit Director, Chief Executive or Chairman. Employees also have the option to raise a concern with the Chairman of the Audit Committee. Hiscox also subscribes to Public Concern at Work, which provides free legal advice to any employee with a concern about possible danger or malpractice in the workplace.
Equal opportunities Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment, regardless of disability, sex, race, religion, sexual inclination or background.
Insurance brokers are important stakeholders in our business, and we wish to build strong relationships with them to create a competitive advantage in the marketplace. Hiscox UK has instigated a ‘superb service’ ethos, developing a greater understanding of individual brokers’ needs. Hiscox UK and Hiscox London Market have Chartered Insurer status from the Chartered Insurance Institute, which recognises the professionalism and expertise of staff and helps to attract business partners looking to work with high-quality insurers.
Dealing with customers Our ethos of outstanding customer service has earned Hiscox a reputation as an insurer whose word can be trusted, which sets us apart in our industry. Our belief is that insurance is a promise to pay, so should a loss occur we aim to fully support our customers, and to pay every valid claim as soon as possible. In 2014, for the sixth year in a row, Hiscox UK was awarded Best Insurer by Start Your Business Magazine. Our Hong Kong team for DirectAsia were awarded Silver for Inbound Contact Centre for the Year.
Hiscox USA is dedicated to serving charities that aid and improve education, medical science, advancement of the arts and culture, and provide services to disadvantaged and vulnerable members of society. In 2014, the Hiscox USA Foundation matched donations and pledged money for hours volunteered by Hiscox employees with partner charities throughout the US – The Drake House in Atlanta, Friends of Karen in New York, the Ronald McDonald House in Chicago, Project Angel Food in LA and Food Runners in San Francisco. The Foundation continues to support the Parris foundation, an organisation dedicated to helping disenfranchised communities by teaching children about science, technology, engineering and mathematics.
In the summer of 2014, Hiscox worked with The Brokerage Citylink, participating for the first time in The City of London Business Traineeship Programme, which offered two young students from inner London the chance to work in the business for eight weeks. The scheme helps inner-city school leavers gain experience of working in a big City firm, as well as to learn extra social and professional skills to help them get a job at the end.
Supporting the arts, science and technology Hiscox continues to support the arts, science and technology, through its work with the Royal Academy Schools, providing a bursary for two second-year students; sponsorship of the Collections exhibitions at the Whitechapel Gallery and the Smiljan Radić design at the Serpentine Gallery Pavilion. Hiscox supports the City of London’s Sculpture in the City project, designed to transform the local landscape with unique and well-known pieces of modern sculpture. Hiscox employees volunteered to work with students from St Paul’s Way Trust and other local schools to bring the sculptures to life. Hiscox supports the Royal Institution (RI) with a loan and corporate sponsorship. The RI is the oldest independent research body in the world, dedicated to connecting people with the world of science for over 200 years. For the fourth year running, Hiscox is title sponsor of the Sunday Times Hiscox Tech Track 100, charting the fastest growing private technology, telecoms and digital media companies.
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 a member of staff is involved. In 2014, Hiscox supported a group of employees in raising £50,000 for MIND. The Foundation contributed £27,500 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.
Syndicate 3624 Syndicate 3624 is a wholly-owned Syndicate which began underwriting for the 2009 year of account. The Syndicate has a diversified portfolio of worldwide risks including FTC (fire, theft and collision), auto extended warranty, E&O, property, construction, technology and media, healthcare and aviation. The diversification of the Syndicate from both an exposure and geographical perspective means the Syndicate is well balanced to grow in a controlled way. Total underwriting capacity of Syndicate 3624 has increased to £350 million for the 2015 year of account.
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
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.
* Quota share reinsurance policies, which Lloyd’s allows in certain circumstances, that enable a syndicate to write gross premium in excess of its capacity.
Hiscox Insurance Company (Bermuda) Limited Gross premiums written ($m) external business 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 right. Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 11.9% from 1997 to 2014, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
Hiscox Bermuda has an A.M. Best rating of A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2014, net assets exceeded $895 million (2013: $945 million).
Caroline Foulger Independent Non Executive Director and Chairman of the Risk Committee (Aged 54) 01 January 2013*
Stuart Bridges joined Hiscox in 1999. He is a Chartered Accountant and has held posts in various financial service companies in the UK and US, including Henderson Global Investors. During the year he was a member of the Prudential Financial and Taxation Committee of the Association of British Insurers and a member of the audit committee of the Institute of Chartered Accountants in England and Wales. He is a Non Executive Director of Caledonia Investments plc.
Richard Colin Watson Chief Underwriting Officer (Aged 51) 16 May 2013*
Daniel Maurice Healy Independent Non Executive Director and Chairman of the Audit Committee (Aged 72) 11 October 2006*
Gunnar Stokholm Independent Non Executive Director (Aged 65) 20 November 2008*
Robert (Bob) McMillan joined the Hiscox Ltd Board in December 2010. He spent 24 years with the Progressive Insurance Corporation where he served in various positions including National Director of Product Development, then Claims before becoming National Director of Marketing. He led Progressive’s initiatives in multichannel distribution, financial responsibility- based rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured on business innovation at the University of Virginia’s Darden School of Business and at the Harvard Business School. He has been a Non Executive Director of Hiscox Inc. since March 2007.
Richard Gillingwater joined Hiscox in December 2010. He is the Chairman of Henderson Group plc. He spent a decade at Kleinwort Benson, before moving to and eventually becoming joint Head of Corporate Finance for BZW, a division of Barclays Bank. When that became Credit Suisse First Boston, he became Chairman of European Investment Banking. In 2003 he became Chief Executive and later Chairman of the Shareholder Executive. In 2007 he became Dean of Cass Business School, retiring at the end of 2012. Richard is Deputy Chairman of SSE plc and a Non Executive Director of Helical Bar plc, and Wm Morrison Supermarkets PLC.
Richard Gillingwater Senior Independent Director and Chairman of the Remuneration Committee (Aged 58) 18 November 2010*
The Board’s Terms of Reference include a Schedule of Matters Reserved for Board
Overview and basis of reporting Hiscox Ltd (‘the Company’) is the Bermuda incorporated holding company for the Group. The Company has a premium listing on the London Stock Exchange. The corporate governance framework for the Company is derived from its constitution together with Bermuda Companies Act legislation.
The Listing Rules require the Company to report against the UK Corporate Governance Code published in September 2012 (the Code). During 2014, and up to the date of this report and accounts, the Group has complied with the provisions of the Code in all material respects. A revised 2014 UK Corporate Governance Code was published in September 2014 and the Group intends to report against this version for the year ending 31 December 2015.
The Board of Directors As at the date of this Report, the Board comprises the Non Executive Chairman, three Executive Directors, and eight independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 40 to 41. The Nominations Committee monitors the composition of the Board and considers the diversity, balance of skills, experience, independence and knowledge of the Board to ensure that it remains appropriate. The composition of the Board was also reviewed as part of the external Board evaluation described on page 45.
The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and overall strategy and meets periodically with the Senior Independent Director. The Chief Executive has responsibility for running the Group’s business.
In accordance with the Code those Directors who are not retiring submit themselves for reappointment, at the Annual General Meeting of the Company. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 40. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their
The Nominations Committee The Nominations Committee comprises Robert Childs, Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. It is chaired by Robert Childs. It operates according to Terms of Reference published on the Group’s website and meets as and when the Chairman determines appropriate but at least once a year.
Aside from the opportunity which the Non Executive Directors have to challenge and contribute to the development of strategy in the regular Board meetings, the Non Executive Directors also attended the annual Hiscox Partners’ meeting. The Board retains ultimate authority for high-level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividend and recommendation for the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus issues or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share options. The Board has appointed an Executive Committee (described on page 45) and authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Board or Executive Committee approval is not required.
The Board’s Committees The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs including financial reporting, internal control and risk management. Each committee operates within established written terms of reference and each committee Chairman reports directly to the Board.
The Audit Committee The Audit Committee of Hiscox Ltd is chaired by Daniel Healy and in addition comprises Caroline Foulger, Richard Gillingwater, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. The Chairman of the Committee and Caroline Foulger are considered by the Board to have recent and relevant financial experience. The Committee operates according to Terms of Reference published on the Group’s website. The Committee meets at least three times a year to assist the Board on matters of financial reporting, risk management and internal control. 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 Board has accepted the advice of the Committee with regard to the requirement for FTSE 350 companies to put the external audit
Committee in the search briefs were aimed at balancing the existing skills, experience, independence and knowledge on the Board. Each candidate was interviewed by the Chairman, the Chief Executive and the Group Human Resources Director. As a result of the search a shortlist was produced and from that shortlist two candidates, Anne MacDonald and Lynn Carter, were nominated by the Committee. In February 2015 the Board agreed to recommend their appointment to shareholders and a separate resolution for the appointment of each of them will be put to the 2015 Annual General Meeting. Biographical details of both prospective Non Executive Directors and the reasons why the Board believe they should be appointed will be set out in the circular which will accompany the notice of Annual General Meeting. The appointment of both candidates would increase the level of gender diversity on the Board.
The Risk Committee The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Committee normally meets three times per year. The Committee comprises Robert Childs, Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. It is chaired by Caroline Foulger. The risk management framework is described in the risk management section on pages 27 to 32.
In addition to the external evaluation of the Board, the Senior Independent Director met
The risk management systems are set out in detail in the risk management report on pages 27 to 32.
The Board has reviewed the effectiveness of its risk management and internal controls during 2014, including financial, operational and compliance controls. The Board confirms there is an ongoing process for identifying, evaluating and managing the significant 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 and accords with the guidance in the document ‘Internal Control’: Revised Guidance for Directors on the Combined Code.
The Company is reviewing the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council in September 2014, and considering whether any enhancements can be made to its present processes.
The head of each business area is responsible for implementing the risk management programme in their area of operations. The Risk function collates risk management information and works with the risk committees to monitor significant risks and movements, and review the relevant internal controls. The Group also has an internal audit function which has direct access to the Audit Committee and reports to each meeting.
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.
To aid the review, the Committee considered the report of the key judgements in the financial statements from the Chief Financial Officer as well as reports from the external auditor on the outcomes of their annual audit. The Committee is supportive of KPMG in displaying the necessary professional scepticism their role requires. The primary areas of judgement considered by the Committee in relation to the 2014 Annual Report and Accounts were: i) Reserving for insurance losses As set out in our significant accounting policies on page 85, the reserving for losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet. The Chief Actuary presented a Group reserving report to the Committee and the Committee reviewed the approach taken by management when making their selection of reserving estimates and is satisfied with the judgements taken and the reporting and disclosure of the estimate.
ii) The carrying value of deferred tax arising from losses in foreign subsidiaries As fully explained in note 29, 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.
iii) The valuation of the investment portfolio The Group reports its assets at fair value. As discussed in note 2.22, during periods of economic stress, the resulting diminished liquidity means estimating fair value involves a higher level of judgement. The Committee has evaluated the process which management has used to estimate the fair value of the investment portfolio and is satisfied with their conclusions.
UK Corporate Governance Code In accordance with the 2012 UK Corporate Governance Code the Board requested that the Committee advise on whether it believes the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. The Committee has provided such advice to the Board.
Internal audit The Group Compliance and Audit Director is invited to attend all meetings of the Committee. It is the responsibility of the Audit Committee to monitor and review the effectiveness of the Group’s internal audit function and to consider reports prepared by internal audit on the effectiveness of systems of internal control.
Audit tender KPMG have been auditors to the Group since it was admitted to the main market of the London Stock Exchange in 1997. The auditors are required to rotate the audit partner responsible for the Group every five years and the rotation cycle of the current partner will end following the conclusion of the 2015 audit. In this report last year it was stated that we expected an audit tender process to be aligned with the rotation of the current audit partner but intended to keep this under review, given the ongoing legal and regulatory developments in this area including the proposed European legislation.
The Committee agreed that in light of the longevity of KPMG’s appointment, they would not be invited to tender for the audit. The Committee thanked KPMG for their many years of service as auditors to the Group and for the consistent high quality of their work. A list of attributes required in the successful firm were drawn up and agreed by the Committee. These included experience, quality, innovation and judgement. In particular, global coverage and presence in Bermuda were identified as key attributes. A number of firms were approached including a mid tier firm. I was joined by the Chief Financial Officer for initial meetings with the potential candidates. It became apparent that it would not be possible to identify a suitable mid tier firm with sufficient global coverage and experience.
At Hiscox our objective is to deliver strong shareholder returns across the cycle and consistently grow dividends and net asset value per share. We aim to achieve this by building a diversified business which gives us flexibility throughout the cycle. Our reward practices reflect this strategy and aim to give clear and transparent alignment with shareholders.
Linking executive pay with business objectives and shareholder returns We align executive incentives with the creation of value for our shareholders in three ways. – Annual incentive payments for Executive
Directors are paid only when the Company has achieved a Return on Equity for the year in excess of a pre-established Hurdle Rate. If the Hurdle Rate is not met, we simply do not pay bonuses to the Directors. In other words, like shareholders, we are focused on results, not inputs or effort or other measures often used to justify bonus payments. Once the Hurdle Rate is achieved the aggregate size of the bonus pool relates to the level of profits delivered. – Our long-term incentive Performance
Share Plan (PSP) is also linked to achieving a pre-established annual Hurdle Rate. This ensures that all shares granted under the plan vest only to the extent that Hiscox has delivered the minimum three-year returns 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 Hiscox 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 44 times his base salary.
Following extensive consultation with our shareholders we have listened to their concerns and responded by making the following four changes to our approach for future years. These changes include adoption of features from evolving best practice.
Regular variable pay on recruitment to be capped The theoretical maximum level of regular variable pay awards under the recruitment policy for Executive Directors will be capped to be in line with the maximum for the bonus and performance share plan.
New clawback arrangements For future bonus awards to Executive Directors a clawback provision will be introduced. This will complement the existing malus provisions.
Directors reflects this strong performance but also takes account of the absolute profit and ROE performance.
The salary increases for the three Executive Directors which will take effect on 1 April 2015 will be consistent with the overall UK-based employee salary increases.
Performance Share Plan: The 2012 PSP grant was subject to performance conditions for the 2012, 2013 and 2014 financial results. I am delighted to say that as a result of a combined three-year average ROE of 17.7%, earning in excess of £660 million post-tax profit, the 2012 awards will vest in full. Annual grants of 194% of salary were made to the three Executive Directors in 2014 which will vest in 2017 subject to the normal performance conditions.
The policy is unchanged from 2014 with the exception of some minor amendments to reflect the restrictions defined below.
– 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 maximum for the annual bonus and the maximum for the current Performance Share Plan (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.
– Addition of holding period for PSP For PSP awards granted from 2015 onwards, any shares which vest based on performance at the end of the three-year performance period will have to be retained (net of any taxes) by Executive Directors for a further two years.
To reward for performance against key objectives and achievement of financial results over the financial year.
Individual salaries are set by taking into account the above information as well as the individual’s experience, performance and skills, increases to salary levels across the wider Group and overall business performance.
The salaries for current Executive Directors are set out on page 60.
Executive Directors’ salary increases will normally be in line with overall employee salary increases in the relevant location.
Set at an appropriate level by reference to the local market practice.
Individual and business performance is taken into account when setting salary levels.
Amounts are paid in accordance with the bonus deferral mechanism described below.
The operation of the annual incentive is consistent for employees across the Group.
Bonuses for more junior employees are calculated using a more formulaic approach.
Within five years of becoming an Executive Director, individuals will normally be expected to own Hiscox shares valued at 150% of salary.
Maximum annual grant of up to 200% of salary in respect of any one financial year.
Malus provision In respect of unvested compensation, specifically deferred bonuses and unvested performance share awards, granted following the introduction of this policy report, the Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, cancel or impose further conditions in the following circumstances: – a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; – actions of gross misconduct, including fraud, by the participant or their team leading to the Company suffering significant reputational or financial damage.
This provision was introduced in 2014, and will apply to future grants.
The charts on page 57 have been compiled using the following assumptions: Remuneration policy report continued
– Retirement benefit as received during 2014, as disclosed in the Executive Director remuneration table on page 60.
On target performance Fixed reward plus variable pay for the purpose of illustration as follows. –Annual incentive: assume a bonus equivalent to 150% of salary. –PSP: assume vesting of 50% of the maximum award.
On the appointment of a new Chairman or Non Executive Director, the fees will normally be consistent with the policy. Fees to Non Executives will not include share options or other performance-related elements.
Policy on payment for loss of office Subject to the execution of an appropriate general release of claims, an Executive Director may receive on termination of employment by the Company: 1. Notice period of 12 months Executive to remain on the payroll but may be placed on gardening leave for the duration of the notice period (or until they leave early by mutual agreement, whichever is sooner). During this period they will be paid as normal, therefore this will include base pay, pension contributions (or benefits allowance as appropriate) and other benefits (e.g. healthcare).
Consideration of shareholder views Hiscox regularly discusses remuneration policy matters with major shareholders.
Annual report on remuneration 2014 1 Salaries are reviewed from 1 April, further detail on April 2014 increase can be found below. 2 Benefits for Executive Directors include cover under the Company healthcare scheme, life insurance, income protection insurance and critical illness policies as well as gym membership and a Christmas gift hamper. 3 A proportion of the bonus amount is deferred as set out on page 54 of the policy report. 4 2014 long-term incentives relate to performance share awards granted in 2012 where the performance period ends on 31 December 2014. The award is due to vest on 19 March 2015. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2014 of 671.84p. The 2013 long-term incentive award relates to performance share awards granted in 2011 where the performance period ends on 31 December 2013. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2013 of 670.00p. 5RC Watson appointment as Executive Director commenced on 16 May 2013. The 2013 amounts shown are pro-rata based on qualifying services with the exception of bonus and long-term incentive which are shown in full.
Executive Director remuneration The table below sets out the remuneration received by current Executive Directors for the financial years ending 31 December 2014 and 31 December 2013.
PSP awards granted during the 2014 financial year On 17 March 2014 the Executive Directors were granted awards under the PSP as follows: Number of awards granted
PSP awards to be granted during 2015 In the coming year, the Committee intends to grant awards to Executive Directors and the performance conditions and targets will be unchanged from the 2014 awards.
Long-term incentives Performance Share Plan (PSP) awards where the performance period ends with the 2014 financial year Executive Directors were granted awards under the PSP in 2012 for the three-year performance period 1 January 2012 to 31 December 2014. The performance conditions for this award were set at the start of the performance period and are as follows: Required average post-tax ROE over the three-year performance period
The table below details the legacy entitlements from the Defined Benefit Pension Plan. There are no further accruals under this plan.
Remuneration Hiscox Ltd Report and Accounts 2014 2014 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.648. 2013 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.60. 1RS Childs was appointed Non Executive Chairman of Hiscox Ltd, Hiscox Syndicates Ltd and Hiscox Insurance Company Ltd on 26 February 2013. The 2013 amounts are pro rata in relation to remuneration paid for qualifying services in these roles. 2RS Childs remains covered under the Company healthcare and life insurance schemes. 3Ltd Committee fee changes reflect changes in Chairmanship responsibility during 2014.
Payments for loss of office and payments to past Directors There were no payments made to past Directors during 2014.
Directors 6p* Ordinary Shares number of shares beneficial 5 55/89p* Ordinary Shares number of shares beneficial
Share options The interests of current Executive Directors under the Sharesave Schemes are set out below: Number of options at 1 January
SJ Bridges 2,017 – – – 2,017 4.460 – 01-May-16 31-Oct-16
RC Watson 2,933 – – (2,933) – 3.077 6.995 01-May-14 31-Oct-14
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits, pension and annual bonus of the Chief Executive between the 2013 and 2014 financial years compared with the average UK-based employee. We have chosen UK-based employees rather than Group-wide employees as the comparator group as this is where the Chief Executive is based and this allows for the closest comparison in terms of salary increases which take into account country inflation and the benefits package provided. The change is based on UK employees who were employed and eligible for a salary review and bonus in both financial years.
CEO Single figure of remuneration (£) 2,536,943 1,759,123 1,509,248 1,938,759 2,341,737 2,895,699
Annual bonus as % of salary 286 114 – 186 204 177
PSP vesting as % of maximum opportunity 100 100 85 39 53 100
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past six years.
Membership of the Remuneration Committee The Committee members for 2014 were, C Foulger, R Gillingwater (Chairman), DM Healy, ER Jansen, Dr J King, R McMillan, AS Rosen and G Stokholm.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct in relation to executive remuneration consulting in the UK. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views and in the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £23,150. The Committee is satisfied that the advice they have received has been objective and independent. During the year, Deloitte also provided other consulting and tax services.
Statement of shareholder voting At the last AGM, the Directors’ remuneration policy and annual report on remuneration received the following votes from shareholders: Remuneration policy Annual report on remuneration
Going concern A review of the financial performance of the Group is set out on pages 22 and 23. The financial position of the Group, its cash flows and borrowing facilities are included therein. The Group has considerable financial resources and a well-balanced book of business.
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 can be found on pages 6 to 11 and 27 to 32. 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 6 to 11. 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 can be found in the risk management section on pages 27 to 32. 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.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in Disclosure and Transparency Rule 7.2 can be found on pages 43 to 46 and in this report.
Diversity The composition of the Board and the Senior Executive structure are described on pages 14, 15, 40, 41 and 42. The role of a Hiscox Partner is described on page 42. The percentage of persons of each gender who were (i) Hiscox Partners and (ii) employees of the Hiscox Group, excluding the Board, is set out in the following table.
Directors The names and details of the individuals who served as Directors of the Company during the year are set out on pages 40 to 41. Details of the Chairman’s professional commitments are included in his biography on page 40 and there were no changes during the year. The Bye-laws of the Company govern the appointment and replacement of Directors. Richard Gillingwater and Dr James King will not be submitting themselves for re-appointment at the Annual General Meeting and will retire as Directors with effect from the close of the 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 (2013: £nil). Information concerning the Group’s charitable activities is contained in the report on corporate responsibility on page 35.
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 circumstance (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 2014 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 2015.
Disclosure under LR 9.8.4 The information that fulfils the reporting requirements relating to the following matters can be found at the pages identified below.
Note 24 to the consolidated financial statements on employee share schemes (page 113)
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman and the Chief Financial Officer. The statements were approved for issue on 2 March 2015.
Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and, under the terms of our engagement letter, to audit the part of the annual report on remuneration 2014 that is described as having been audited.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the annual report on remuneration 2014 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 2014 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 2014 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 2014 to be audited.
Opinion In our opinion: – the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at 31 December 2014, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU; and – the part of the annual report on remuneration 2014 which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the Companies Act 2006 as if those requirements were to apply to the Company.
Consolidated statement of comprehensive income For the year ended 31 December 2014, after tax
Claims and claim adjustment expenses, net of reinsurance 26.2 (531,668) (519,279) Expenses for the acquisition of insurance contracts 17 (318,616) (305,777)
Profit for the year (all attributable to owners of the Company) 216,152 237,758
Deferred acquisition costs 17 230,373 197,628 Financial assets carried at fair value 19 2,828,847 2,585,054
Total equity (all attributable to owners of the Company) 1,453,340 1,409,461
Current tax 32,379 32,383 Trade and other payables 27 591,660 304,138
Cash flows from operations 195,784 115,509 Cash paid to the defined benefit pension scheme (200) (1,800) Interest received 43,292 41,494 Equity dividends received 1,702 789 Interest paid (5,990) (5,229) Current tax paid (62,563) (39,712) Cash flows from subscriptions received in advance 169,928 4,848
Cash flows from the acquisition and sale of subsidiaries (2,627) 20,940 Cash flows from the sale and purchase of associates 16 (1,687) 600 Cash flows from the purchase of property, plant and equipment (11,727) (4,545) Cash flows from the purchase of intangible assets (27,580) (9,594)
Included within cash and cash equivalents held by the Group are balances totaling £142,617,000 (2013: £113,312,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, cash and cash equivalents includes £169,928,000 (2013: £4,848,000) for subscriptions received in advance by the Kiskadee Diversified and Select Funds that remain uninvested at 31 December 2014.
The notes on pages 79 to 127 are an integral part of these consolidated financial statements.
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 38 in accordance with a recognised set of Generally Accepted Accounting Principles (GAAP).
The consolidated financial statements for the year ended 31 December 2014 include all of the Group’s subsidiary companies and the Group’s interest in associates. All amounts relate to continuing operations.
As explained in note 4, during 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines. The results of 2013 have been restated in the appropriate notes to the consolidated financial statements.
Changes in accounting policies IFRS 7: Offsetting Financial Assets and Financial Liabilities (amendments to IAS 32) The amendments clarify that the rights of set-off must not only be legally enforceable
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2015 and have not been applied in preparing these financial statements.
Instruments, regarding general hedge accounting – IFRS 15: Revenue from contracts with customers – IAS 16: Amendment: Property, plant and equipment, regarding depreciation and amortisation – IAS 19: Amendment: Employee benefits, regarding defined benefit plans – IAS 27: Amendment: Separate financial statement, regarding the equity method – IAS 38: Amendment: Intangible assets, regarding depreciation and amortisation – Annual Improvements to IFRSs
Kiskadee Diversified Fund and Kiskadee Select Fund (‘Kiskadee Funds’) provide investment opportunities in property catastrophe reinsurance and insurancelinked strategies. All of the Kiskadee Funds exposures to reinsurance risk are obtained through investments in two Special Purpose Insurers (‘SPI’), Kiskadee Reinsurance 1 Ltd and Kiskadee Reinsurance 2 Ltd. The Group has determined in accordance with IFRS 10 that control exists and as a result the financial statements of the Kiskadee Funds as well as the two SPIs have been included in the consolidated financial statements of the Group. The third-party investment in the Funds is recognised as a financial liability in accordance with IAS 32.
The Group uses the acquisition method of accounting to account for the acquisition of subsidiaries. At the date of acquisition, the Group recognises the identifiable assets acquired and liabilities assumed as part of the overall business combination transaction at their acquisition date fair value. Recognition of these items is subject
For each business combination, the Group measures any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as the foreign entity’s assets and liabilities and are translated at the closing rate.
(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.
(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are included in this category and are reviewed for impairment as part of the impairment review of loans and receivables. Loans and receivables are carried at amortised cost less any provision for impairment in value.
(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
2.7 Financial assets including loans and receivables The Group has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by the Group to designate all financial investments, comprising debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade. Financial assets are initially recognised at fair value. Subsequent to initial recognition financial assets are measured as described below.
Financial assets are derecognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership.
is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.
(e) Outwards reinsurance contracts held Contracts entered into by the Group, with reinsurers, under which the Group the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
2.11 Own shares Where any Group company purchases the Parent Company’s equity share capital (own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s owners on consolidation. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company’s owners, net of any directly attributable incremental transaction costs and the related tax effects.
The fair value of the employee services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense, with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions (e.g. profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest.
It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period. When the terms and conditions of an equity settled share-based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the premodification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss through operating expenses.
With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element. As shown in 2014, official UK interest rates are replicated with lower yields emerging in UK corporate bond indices, a significant uplift has occurred in the reported net scheme deficit through the reduced effect of discounting outweighing any expected appreciation in asset values, as described along with a sensitivity analysis in note 30.
that an outflow of economic benefits will be required to settle that obligation.
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 2014 is £1,143 million (2013: £1,024 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 Group’s
2.18 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own account for any one potential catastrophe event or disaster. The Group’s underwriting risk appetite seeks to ensure that it should not lose more than 12.5% of core capital plus 100% of buffer capital (£100 million) with an allowance for expected investment income, as a result of a 1 in 200 bad underwriting year.
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 17, are extreme hypothetical events selected to represent major events occurring in areas with large insured values.
premium inflows is reasonably predictable. In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events non-correlated to financial markets, and not by the inclination or will of policyholders.
The principal sources of risk relevant to the Group’s operations and its financial statements fall into two broad categories: insurance risk and financial risk, both of which are described in notes 3.1 and 3.2 below. The Group also actively manages its capital risks as detailed in note 3.3. Additional unaudited information is also provided in the corporate governance, risk management and capital sections of this Report and Accounts.
3 Management of risk The Group’s overall appetite for accepting and managing varying classes of risk is defined by the Group’s Board. The Board has developed a governance framework and has set Group-wide risk management policies and procedures which include risk identification, risk management and mitigation and risk reporting. The objective of these policies and procedures is to protect the Group’s shareholders, policyholders and other stakeholders from negative events that could hinder the Group’s delivery of its contractual obligations and its achievement of sustainable profitable economic and social performance.
They also reflect the areas that represent significant exposures for Hiscox. The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and as yet untested, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodeled risks. This means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates modeled by management.
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
Casualty insurance risks The casualty underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of potential hazard, industry and geography. However, the Group’s exposure is more focused towards marine and professional and technological liability risks rather than human bodily injury risks, which are only accepted under limited circumstances. Claims typically arise from incidents such as errors and omissions attributed to the insured, professional negligence and specific losses suffered as a result of electronic or technological failure of software products and websites.
Marine and major property contracts are normally underwritten by reference to the commercial replacement value of the property covered. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and time taken to restart or resume operations to original levels for business interruption losses are the key factors that influence the level of claims under these policies. The Group’s exposure to commodity price risk in relation to these types of insurance contracts is very limited, given the controlled extent of business interruption cover offered in the areas prone to losses of asset production.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events. The Group agrees to reimburse the cedant once their losses exceed a minimum level. Consequently the frequency and severity of reinsurance inwards claims are related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year, but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
Property risks – marine and major assets The Group directly underwrites a diverse range of property risks. The risk profile of the property covered under marine
3 Management of risk continued 3.1 Insurance risk continued strategy, but its ability to mitigate its risk by selling or hedging its exposures may be limited by the market environment. The Group’s future results may be impacted, both positively and negatively, by the valuation adjustments applied to these securities.
(c) Interest rate risk Fixed income investments represent a significant proportion of the Group’s assets and the Board continually monitors investment strategy to minimise the risk of a fall in the portfolio’s market value which could affect the amount of business that the Group is able to underwrite or its ability to settle claims as they fall due. The fair value of the Group’s investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates rise, the fair value of the Group’s debt and fixed income investments would tend and investment result generated thereon are not sufficient to fund the obligations. The most important entity and economic variables that could result in such an outcome relate to the reliability of fair value measures, equity price risk, interest rate risk, credit risk, liquidity risk and currency risk. The Group’s policies and procedures for managing exposure to these specific categories of risk are detailed below.
At 31 December 2014, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio, but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group did not experience any material defaults on debt securities during the year.
The Group Reinsurance Security Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance. The financial analysis of reinsurers produces an assessment categorised by Standard & Poor’s (S&P) rating (or equivalent when not available from S&P).
The Committee considers the reputation of its reinsurance partners and also receives details of recent payment history and the status of any ongoing negotiations between Group companies and these third-parties. This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset, where counterparties are both debtors and creditors of the Group, and obtaining collateral from unrated counterparties. Management information reports detail provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
At 31 December 2014, no amounts were outstanding on the Group’s borrowing facility (2013: £nil). 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.
Duration is the weighted average length of time required for an instrument’s cash 3 Management of risk continued 3.2 Financial risk continued (c) Interest rate risk continued
The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in highly liquid instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union. The Group has a £9.2 million exposure to sovereign debt in Spain and Italy.
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 2014 Note AAA
The largest counterparty exposure within the AAA rating at 31 December 2014 and 2013 is the German Government. For the AA rating it is with the US Treasury at both 31 December 2014 and 2013. A significant proportion of other/non-rated assets are rated BBB and BB at both 31 December 2014 and 2013.
At 31 December 2014 and 2013 the Group held no material debt or fixed income assets that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not experience any material defaults on debt securities.
Notes to the consolidated financial statements continued 3 Management of risk continued 3.2 Financial risk continued
Between one and two years 529,526 – – 529,526 517,064 Between two and five years 1,052,013 878 – 1,052,891 846,583 Over five years 421,616 – – 421,616 332,822
Property – marine and major assets 58,849 33,052 40,302 13,657 145,860 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
(f) Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: 1) Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and 2) Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity’s functional currency.
The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operations in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net investments made in European operations. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. Exchange rate derivatives are used when appropriate to shield the Group against significant movements outside of a defined range.
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 94 and 95 are net non-monetary liabilities of £197 million (2013: £196 million) which are denominated in foreign currencies.
The Group sets the amount of capital required in its funding structure in proportion to risk. The Group then manages the capital structure and makes adjustments to it in the 3 Management of risk continued 3.2 Financial risk continued
The Group’s four revised primary business segments are identified as follows: – Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the US, 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’ 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 also included. The segment also captures the performance of Kiskadee, the Hiscox Group’s Insurance Linked Securities business. – 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.
the EU Insurance Groups Directive of 1998, as amended by the Financial Groups Directive (FGD), compels insurance companies that are members of a group to consider the solvency margin of their ultimate parent company. This consideration must refer to the surplus assets of the ultimate parent’s related insurers, reinsurers, intermediate holding companies and other regulated entities.
The changes from the 2013 structure comprised: – separating the London Market business unit into insurance and reinsurance lines, forming the London Market Insurance division and combining the reinsurance business with Hiscox Bermuda to make Hiscox Re; – bringing together Hiscox UK and Europe with Hiscox Guernsey, Hiscox US and the newly acquired DirectAsia business to form Hiscox Retail; – the Corporate Centre division has remained unchanged.
As a consequence of the change in reportable segments, the corresponding operating results and combined ratios for earlier periods presented have been restated on a comparable basis. There is no impact to the overall profit before tax or the net asset value of the Group for prior periods.
The current capital regime in the UK requires insurance companies to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company Limited and Hiscox’s Lloyd’s operations maintain models in accordance with this regime. Hiscox’s Lloyd’s operations now use the internal model that has been built to meet the requirements of the forthcoming Solvency II regime to carry out the ICA as part of Lloyd’s transition towards Solvency II. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. The Group uses its own integrated modeling expertise to produce the ICA calculations. The results mirror those driving the existing internal capital setting process.
For Syndicate 33 and Syndicate 3624, the ICA process produces a result that is uplifted by Lloyd’s to identify the capital required to hold the A rating. The strong control and risk management environment, together with the sophistication of the modeling, have produced a capital ratio below that suggested under the previous risk-based capital regime. Another key area of capital modeling for Hiscox is to identify which insurance vehicle produces the best return on capital employed for the Group, given certain restraints from licences, reinsurance and the regulatory environment. This modeling takes into account transactional costs and tax, in addition to the necessary capital ratios. It proves the capital efficiency of Lloyd’s, despite a tax disadvantage against offshore entities, and the cost advantage of processing smaller premium business outside of Lloyd’s. In addition to the ICA modeling process, 3 Management of risk continued 3.3 Capital risk management continued
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014
Gross premiums written 914,372 647,094 421,599 – 1,983,065 841,251 595,932 486,938 – 1,924,121 Net premiums written 844,471 434,133 215,534 – 1,494,138 768,518 447,819 303,520 – 1,519,857 Net premiums earned 808,876 427,342 229,343 – 1,465,561 728,361 388,867 318,086 – 1,435,314
Investment result 26,191 11,722 10,364 12,211 60,488 19,290 8,575 15,180 20,032 63,077 Other revenues 2,618 – 1,136 253 4,007 5,418 – 1,832 1,153 8,403 Claims and claim adjustment
(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 and Hong Kong.
The net asset value per share is based on 314,419,567 shares (2013: 350,460,458 shares), being the adjusted number of shares in issue at 31 December.
7 Investment result The total result for the Group before taxation comprises: Note
Agency-related income 8,060 7,100 Profit commission 9,965 9,161 Other underwriting income 1,136 1,832 Other income 795 2,812
Wages and salaries 108,622 101,780 Social security cost 19,551 20,498 Pension cost – defined contribution 8,112 6,593 Pension cost – defined benefit 660 1,000 Share-based payments 14,439 12,523 Marketing expenses 31,829 30,550 Investment expenses 4,192 3,833 Depreciation, amortisation and impairment 12,857 9,650 Other expenses 110,591 90,538
12 Net foreign exchange gains/(losses) The net foreign exchange gains/(losses) for the year include the following amounts: Exchange gains/(losses) recognised in the consolidated income statement 4,974 (9,890) Exchange gains/(losses) classified as a separate component of equity 34,019 (2,030)
Overall impact of foreign exchange-related items on net assets 38,993 (11,920)
Opening balance sheet impact of non-retranslation of non-monetary items (4,790) (2,674) Gain/(loss) included within profit representing the non-retranslation of non-monetary items 6,398 (2,116)
Acquisitions on purchase of subsidiary (note 33) 2,079 – – 6,390 6,666 15,135
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2014 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
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 show that no impairment is due.
Impairment – – – – – Foreign exchange movements – 121 – 156 277
During the year, £7,795,000 was recognised in the carrying value of land and buildings that is under the course of construction (2013: £848,000).
Associates incorporated in the UK from 10% to 35% 76,176 52,281 38,089 4,086 Associates incorporated in Europe from 10% to 49% 1,965 1,627 2,752 242
As at 31 December 2014, the Group had an amount receivable from Lark Ltd of £6,896,000 (2013: £6,896,000), and reported this within other debtors.
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £30,215,000 (2013: £23,479,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 287,528 229,060 After one year 237,817 229,762
Debt and fixed income securities 2,526,179 2,335,829 Equities and shares in unit trusts 252,916 223,024 Deposits with credit institutions 26,385 6,240
Total investments 2,805,480 2,565,093 Insurance linked fund 22,888 19,917 Derivative financial instruments 21 479 44
Third-party investment in Kiskadee Funds 7,033 – Derivative financial instruments 21 76 229
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £849,000 (2013: loss of £296,000) for the impairment of receivables during the year ended 31 December 2014.
21 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2014. 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 2014 all mature within one year of the balance sheet date and are detailed below: Derivative financial instruments included on balance sheet
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 £2,078,000 (2013: gain of £1,175,000) as included in note 7.
Equity index options The Group did not purchase equity options during 2014. During 2013 the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of £213,000 on this contract.
Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts is based on the net asset value of the fund as reported by independent pricing sources or the fund manager.
Included within Level 1 of the fair value hierarchy are certain Government bonds, Treasury bills and exchange-traded equities which are measured based on quoted prices in active markets.
Level 2 of the hierarchy contains certain Government bonds, US Government agencies, corporate securities, asset backed securities and mortgage-backed securities. The fair value of these assets is based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over-the-counter derivatives.
Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. The Group invested into the insurance linked fund in December 2012, and it was subject to a two-year initial lock-up period. The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have had a material impact on the valuation of the fund. The fund was partially redeemed in January 2015 with remaining redemption shares issued which will pay out when the underwriting contracts expire at 30 June 2015.
The third-party investment in the Kiskadee Funds consists of the third-party interest of investors in the Kiskadee Funds that is classified as a financial liability in the Group consolidated financial statements in accordance with IAS 32. The fair value of the Kiskadee Funds is estimated to be the net asset value reported to investors as at the balance sheet date by the external fund administrator. The net asset value is based on the fair value of the underlying reinsurance contracts in the fund. Significant inputs and assumptions in calculating the fair value of the underlying reinsurance contracts include the fair value of cash and cash equivalents as well as estimates of insurance assets and liabilities. 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* 575 1,832 2,407 – Foreign exchange losses (91) (762) (853) –
Cash at bank and in hand 400,245 384,925 Short-term deposits 39,220 174,602 Cash held by special purpose vehicle 41,258 – Subscriptions received in advance 169,928 4,848
Subscriptions received in advance consist of cash received as at 31 December by the two Kiskadee Funds and not yet invested at the balance sheet date. As a result the Group has recognised a liability under trade and other payables for the same amount.
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 as all shares have been redeemed or cancelled.
Employee share option scheme – proceeds from shares issued 133 3,990 – – – – Issue of B Shares – (42,453) (155,141) 197,594 – – Redemption of B Shares – – – (197,594) – – Scrip dividends to owners of the Company 18 2,103 – – – –
C/D Shares were issued on 19 March 2014 to existing shareholders on the basis of one C/D Share (at the choice of the shareholder) for each ordinary share held on 18 March 2014. Each C Share enabled the shareholder to receive a dividend of 50p per share at 9 April 2014. Alternatively the shareholder could elect to receive a D Share which were sold for 50 pence each to UBS Limited, pursuant to the purchase offer on 7 April 2014. Following the purchase of the D Shares by UBS Limited from shareholders, UBS exercised its put option and the Group was required to purchase the D Shares for 50p per share.
Share repurchase The Trustees of the Group’s Employee Benefit Trust purchased Hiscox Ltd shares through the market during the period for £10,593,000 to facilitate the settlement of vesting awards under the Group’s performance share plan. As the trust is consolidated into the Group financial results, these purchases have been accounted for in the same way as treasury shares and have been charged against retained earnings. The shares are held by the Trustees for the beneficiaries of the trust.
Up until 9 April 2014, the Group issued 5 55/89p ordinary shares. From this date, new ordinary shares of 6p each exist. All issued shares are fully paid.
Movements in the number of share options and performance share plan awards during the year and details of the balances outstanding at 31 December 2014 for the Executive Directors are shown in the Directors’ remuneration report. The total number of options and performance share plan awards outstanding is 12,460,938 (2013: 14,260,162) of which 3,723,170 are exercisable (2013: 4,702,962). The total number of SAYE options outstanding is 2,013,508 (2013: 1,604,065).
At 31 December 2014 Hiscox Ltd held 12,645,632 shares in Treasury (2013: 16,145,888). 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 825,017 829,548 Claims incurred but not reported 1,142,847 1,023,514 Unearned premiums 867,335 756,059
Recoverable from reinsurers Claims reported and claim adjustment expenses 129,134 146,946 Claims incurred but not reported 239,185 213,000 Unearned premiums 157,026 98,876
Net Claims reported and claim adjustment expenses 695,883 682,602 Claims incurred but not reported 903,662 810,514 Unearned premiums 710,309 657,183
(b) Claims development tables The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group’s actual level of ownership, which has increased significantly over the last ten years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group’s share of ultimate claims for each accident year, three years after the end of that accident year.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014 26 Insurance liabilities and reinsurance assets continued
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,222,114 1,123,849 After one year 1,087,740 1,026,450
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 2014.
Liability for 2005 to 2014 accident years recognised on Group’s balance sheet
Liability for accident years before 2005 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities.
Total Group liability to external parties included in balance sheet – gross**
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 705,063 460,028 – – – – – – – – 1,165,091 nine years later 690,705 – – – – – – – – – 690,705 Current estimate of cumulative claims
Liability for accident years before 2005 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 (1,853,062) 359,946 (1,493,116) (1,932,904) 453,439 (1,479,465) Claims and claim adjustment expenses for year (645,145) 113,477 (531,668) (572,440) 53,161 (519,279) Cash paid for claims settled in the year 591,796 (124,194) 467,602 640,505 (147,926) 492,579 Exchange differences and other movements (61,453) 19,090 (42,363) 11,777 1,272 13,049
Total at end of year (1,967,864) 368,319 (1,599,545) (1,853,062) 359,946 (1,493,116)
Current year claims and claim adjustment expenses (845,086) 141,189 (703,897) (761,179) 101,561 (659,618) Over-provision in respect of prior year claims and claim adjustment expenses 199,941 (27,712) 172,229 188,739 (48,400) 140,339
Creditors arising out of direct insurance operations 11,969 15,364 Creditors arising out of reinsurance operations 248,267 130,814
Reinsurers’ share of deferred acquisition costs 17 30,215 23,479 Accruals and deferred income 106,319 98,587
Subscriptions received in advance consist of cash received as at 31 December by the two Kiskadee Funds and not yet invested at the balance sheet date.
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 6.5% (2013: 2.8%). A reconciliation of the difference is provided below: Profit before tax 231,075 244,538 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2013: 0%) – – Effects of Group entities subject to overseas tax at different rates 14,703 8,729 Impact of overseas tax rates on: Effect of rate change (805) (8,280) Expenses not deductible for tax purposes 2,911 4,460 Tax losses for which no deferred tax asset is recognised 4,218 3,532
UK deferred income tax assets and liabilities are calculated at 20% for the year ended 31 December 2014 (2013: 20%).
Deferred tax assets of £33,490,000 (2013: £32,123,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits in excess of profits arising from the reversal of other temporary differences, are recognised above. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within seven years. £32,250,000 (2013: £30,526,000) of the tax losses to which these assets relate will expire after ten years or later; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling £12,926,000 (2013: £10,087,000) including £12,926,000 (2013: £10,087,000) in relation to losses in overseas companies of £40,359,000 (2013: £28,821,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax asset expected to be recovered after more than 12 months is £33,490,000 (2013: £32,123,000).
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: Present value of scheme obligations 227,375 179,479 Fair value of scheme assets (195,209) (185,666)
Deficit/(surplus) for funded plans 32,166 (6,187) Effect of asset ceiling/onerous liability – 10,553
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal full actuarial valuation is performed on a triennial basis, most recently at 31 December 2011, and updated at each intervening balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the related pension liability.
Managed fund pooled investment vehicles UK equity funds 81,163 74,959 Emerging market equity funds 8,340 7,996 Global equity funds 43,974 37,258 Bond funds 43,542 39,048 US equities 14,770 13,173
The movement in liability recognised in the Group’s balance sheet is as follows: Group defined benefit liabilities at beginning of the year 4,366 16,907 Third-party Names’ share of liability (731) (3,083)
Effect of asset ceiling/onerous liability – 10,553 – – – – –
Gross liability recognised on balance sheet 32,166 4,366 16,907 – – – –
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 £6,987,000 at 31 December 2014 (2013: £4,892,000), and would increase the recorded net deficit on the balance sheet by £6,987,000 (2013: no impact).
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 2014 as follows: Present value of unfunded obligations before change in assumption
Effect of a change in discount rate Use of discount rate of 3.95% 32,166 17,987 14,179 Use of discount rate of 3.45% 32,166 47,564 (15,398)
Effect of an increase in inflation Use of RPI inflation assumption of 3.25% 32,166 36,783 (4,617) Use of RPI inflation assumption of 2.75% 32,166 27,805 4,361 31 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares held by the Group and held in Treasury as own shares.
Profit for the year attributable to the owners of the Company (£000) 216,152 237,758 Weighted average number of ordinary shares (thousands) 320,554 358,652 Basic earnings per share (pence per share) 67.4p 66.3p
Weighted average number of ordinary shares in issue (thousands) 320,554 358,652 Adjustments for share options (thousands) 14,315 15,860
The final dividend equivalent for the year ended 31 December 2013 was paid as part of the C/D Share Scheme (2012: B Share Scheme), see note 24. 261,555,693 C and 93,647,894 D Shares were issued, of which 14p per share was in lieu of a final dividend for 2013 of a cash value of £49,728,000. During 2013, the final dividend equivalent for the year ended 31 December 2012 was settled as 395,188,526 B Shares of 50p each, of which 12p per share was issued in lieu of a final cash dividend of £47,423,000.
The interim dividends for 2014 and 2013 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 2014 was paid in cash of £22,049,000 (2013: £22,625,000) and 270,917 shares for the scrip dividend (2013: 324,261).
33 Business combinations DirectAsia On 31 March 2014, the Group acquired 100% of the share capital and voting rights of Direct Asia Insurance (Holdings) Pte Ltd (DirectAsia) for US$24,575,000 (£14,804,000). In addition the Group purchased the outstanding debt of the company totalling US$31,750,000 (£19,127,000) from the previous owners. DirectAsia’s primary business is motor insurance, with ancillary lines in travel, personal accident, healthcare and term life products sold as an agent. This acquisition provides the Group with a distribution platform in Asia providing opportunities for future growth.
Total purchase consideration 14,804 Fair value of net assets acquired (13,591) Non-controlling interest 866
Whilst the Group acquired 100% of the share capital and voting rights of the parent company Direct Asia Insurance (Holdings) Pte Ltd, within the DirectAsia Group there exists an equity interest by a third-party. This has been accounted for as a non-controlling interest in accordance with IFRS 3. The value of the interest is calculated on identifiable assets.
Insurance liabilities 17,437 – 17,437 Trade and other payables 5,546 – 5,546 Long-term loans 19,127 – 19,127
DirectAsia contributed a loss of £11.4 million to the Group’s profit before tax for the period between 31 March 2014 and 31 December 2014. If the acquisition of DirectAsia had been completed on the first day of the financial year, the Group result for the period would have been a profit before tax of £229.2 million and the gross written premium would have been £1,760.7 million.
Applewell Ltd On 8 August 2014 the Group acquired 100% of Applewell Ltd, an insurance broker specialising in events business for an amount that is not considered to be material to the financial statements.
Associates On 11 June 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 – Versicherungsmaklergesellschaft m.b.H, for €500,000. The investment previously had been fully impaired.
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £29 million (2013: £25 million) in respect of Hiscox Ltd supported by £29 million of investment securities (2013: £28 million) and US$274 million (2013: US$258 million) in respect of Hiscox Capital Ltd supported by US$262 million of investment securities (2013: US$271 million). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called.
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, for a total US$875 million which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed US$400 million. In addition, the terms also provide that upon request the facility may
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide Letters of Credit or other terms of collateral to clients. In 2012, Hiscox Bermuda renegotiated its Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies and other jurisdictions, and entered into new Letter of Credit facility agreements with the Royal Bank of Scotland and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to US$350 million in Letters of Credit (2013: US$400 million). Letters of Credit issued under these facilities are collateralised by US Government and Corporate Securities of Hiscox Insurance Company (Bermuda) Limited. Letters of Credit under this facility totaling US$98.7 million were issued with an effective date of 31 December 2014 (2013: US$112.7 million on a US$400 million facility) and these were collateralised by US Government and Corporate Securities with a fair value of US$115.6 million (2013: US$131.4 million).
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 £1,976,000 (2013: £1,902,000).
Operating lease commitments The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totaled £9,031,000 (2013: £8,677,000). Operating lease rental income for the year totaled £595,000 (2013: £547,000).
Later than one year and no later than five years Land and buildings 30,080 25,734 Office equipment 432 347
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2014
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 Kiskadee Capital Ltd* Holding company Bermuda Kiskadee Reinsurance 1 Ltd Special purpose insurer Bermuda Kiskadee Reinsurance 2 Ltd Special purpose insurer Bermuda 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.
Hiscox Group insurance carriers 33,576 25,924 55,070 23,654 Hiscox Group insurance intermediaries 5,365 11,246 (13,920) (7,646) Other Hiscox Group companies – – (9,381) (7,893)
Profit for the year after tax 216,152 237,758 208,026 21,272 178,800
Net asset value per share (p) 462.5 402.2 346.4 323.5 332.7
Strategic report 2 Corporate highlights 3 Why invest in Hiscox? 4 Chairman’s statement 6 Chief Executive’s report 14 Hiscox business structure 16 Actively managed business mix 17 Actively managed key underwriting exposures 18 Managing the insurance cycle 20 Capital 22 Group financial performance 24 Group investments
Financial summary 74 Independent auditors’ report 75 Consolidated income statement 75 Consolidated statement of comprehensive income 76 Consolidated balance sheet 77 Consolidated statement of changes in equity 78 Consolidated statement of cash flows 79 Notes to the consolidated financial statements 128 Five-year summary