Ten good reasons to work at Hiscox Recently, we have been thinking a lot about what makes Hiscox a great place to build a career. We have been talking to our people, newcomers and old-timers; reading our reviews, both good and bad; and seeing how we stack up against the competition. We have distilled this into ten points which we think uncover one of our best-kept secrets – what it’s really like to be part of our remarkable team.
Gross premiums written (£m)Ordinary dividend (p per share) Combined ratio excluding FX (%)
Reserve releases (£m) 251.5 213.0 *Additional performance measures are discussed on page 28.
Why invest in Hiscox? Hiscox is a diversified international insurance group with a consistent, long-held strategy that provides opportunity throughout the insurance cycle. We are a uniquely balanced insurer with a powerful brand, strong balance sheet and plenty of room to grow.
Big-ticket business A Larger premium, globally traded, catastrophe exposed business written mainly through Hiscox London Market and Hiscox Re & ILS.
Long-term shareholder value Hiscox has always had a focus on creating long-term shareholder value with a progressive dividend policy.
The Hiscox Group employs more than 2,700 people across 14 countries and 32 offices. Our operations span every continent and we are not overly reliant on any one of our divisions for the Group’s overall profits.
Hiscox London Market Focus on growth in investment lines such as cyber, product retail, general liability and flood – where our award-winning FloodPlus product differentiates us.
Hiscox Re & ILS Launch of new US flood product, FloodXtra, positions us well in a deregulating US flood market.
Hiscox Retail Now the single biggest segment in the Group, driving growth and profits and covering the dividend for the second year in a row.
7Hiscox Ltd Report and Accounts 2017 2 Strategic report Why invest in Hiscox?
8 Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report Why invest in Hiscox?
Award for Contribution to the Industry at the Reactions London Market Awards 2017.
A Bronek Masojada received the CEOs’ CEO award at the Insurance Times Awards 2017 and Insurance CEO of the Year at the Reactions London Market Awards 2017.
A One of Management Today’s Top 12 Most Admired Companies in Britain.
Retail business A UK Insurer of the Year, as voted for by Bluefin brokers. A Hiscox Spain was voted Top Specialist
A Hiscox USA was recognised as Best in Class for Audio Advertising at the Financial Communications Society’s 23rd Annual Portfolio Awards in New York for its six-part podcast series, Points of Courage.
A ILS Fund Manager of the Year at the Reactions London Market Awards 2017.
9Hiscox Ltd Report and Accounts 2017 2 Strategic report Why invest in Hiscox?
Hiscox delivered a profit before tax excluding foreign exchange of £93.6 million (2016: £202.1 million) in the most expensive year for natural catastrophes ever, as hurricanes, earthquakes and wildfires battered insurers’ balance sheets. A solid investment return and the balance in our business mix sustained us. Good underwriting and profits from the retail businesses countered the volatility of the big-ticket lines. Our strategy is working.
Our retail businesses had a great year and provided the lion’s share of profit at £109.9 million (2016: £158.0 million). Pleasingly, profits from Hiscox Retail have exceeded £100 million for the second consecutive year. Retail is also the current growth engine of the Group at 20.5%, with Hiscox USA the standout performer increasing gross written premiums by 29% in constant currency.
We were pleased with the responsiveness of Lloyd’s and other regulators.
People I am also pleased with the progress we have made at Board level in the past three years. In 2017, we saw a number of changes to both the Hiscox Ltd Board and our Executive Committee, and both were boosted by new skills and experience.
Our Executive Committee was also strengthened with two new members; Kate Markham, who has moved from our direct-to-consumer business into Hiscox London Market where she is CEO, and Mike Krefta, who began his career with us in reinsurance operations 15 years ago, and is now CEO of Hiscox Re & ILS. It was especially pleasing to recruit from within for these roles; people build careers here.
Financial performance The result for the year ending 31 December 2017 was a profit before tax excluding foreign exchange of £93.6 million (2016: £202.1 million). Gross written premium increased by 6.1% to £2,549.3 million (2016: £2,402.6 million). The combined ratio was 99.9% (2016: 84.2%). Earnings per share decreased to 9.3p (2016: 119.8p) and the net asset value per share decreased to 618.6p (2016: 649.9p). Return on equity was 1.5% (2016: 23.0%). We made a good investment return of £87.3 million (2016: £74.8 million), before derivatives and fees, which equates to a return of 2.0% (2016: 1.9%) on total assets under management.
I am pleased to announce a final dividend of 19.5p, a step up in the full year ordinary dividend to 29p, which is an increase of 5.5%. The record date for the dividend will be 11 May 2018 and the payment date will be 12 June 2018.
The Board proposes to offer a scrip alternative subject to the terms and conditions of Hiscox Ltd’s 2016 Scrip Dividend Scheme. The last date for receipt of scrip elections will be 18 May 2018 and the reference price will be announced on 29 May 2018.
Market Back in January 2017 we tested the London Market’s ability to withstand major catastrophes with an industry-wide ‘dry run’ exercise, which turned out to be timely. We learnt a number of valuable lessons, and at Hiscox we updated some of our large loss processes, which stood us in good stead for the events of the second half of the year. It is the speed and agility of the London Market to respond to major loss events that makes or breaks its reputation, and regulators are pivotal to that process.
8 Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report
Our big-ticket businesses have a renewed vigour, and our retail businesses continue to shine. The balanced business we have been building for over 20 years continues to give us options throughout the insurance cycle and there is significant headroom to increase market share across all our retail businesses. We see plenty of opportunity to deliver profitable growth and further value to shareholders.
2017 was another important lesson in the need for flexibility in business, and I have been proud of our resilience. The year turned out to be an historic one for natural catastrophes and it is at times like this that reputations are won or lost. Paying valid claims fast is what our business was built for; if there were no claims, there would be no need for insurance. Our teams around the world have served our customers well.
Looking forward, we have seen rate rises in big-ticket areas, though not as much as we might have liked, but which have allowed us to grow in areas such as flood and property. Our retail businesses will continue on their steady path. Across the business we will invest to modernise our infrastructure and offering for the digital era, continue to build our brand and make sure we adapt to a seemingly never-ending set of regulatory and politically driven changes. We have a zest for what lies ahead, and see opportunities for profitable growth in each of our business units.
of the Group’s gross written premiums at £1,423.9 million (2016: £1,181.4 million). Comprising of Hiscox UK & Ireland, Hiscox Europe and Hiscox International, it is the single biggest segment in the Group, a strong profit contributor, and differentiates us from our peers. We continue to invest heavily in our brand and our ongoing investment in IT infrastructure in both the UK and USA will support our ambitious growth plans.
Hiscox UK & Ireland Our most mature retail operation, Hiscox UK & Ireland, increased gross written premiums by 11.6% to £556.3 million (2016: £498.6 million), with every region contributing. The broker channel remains a key driver, with the professional risks and specialty commercial business performing particularly well. We still have plenty of room for growth in our existing product areas. We have attracted new business with our broadened appetite for larger risks, and have also expanded the range of professions we cover to include milliners and other specialist retailers.
In the direct-to-consumer channel, our investment in IT infrastructure and expanded underwriting appetite for bigger risks are having a positive effect. There is good organic growth in our core direct commercial business, where we are taking on more businesses at the ‘medium’ end of SME, and in direct home, where we are taking on larger properties. We established a new partnership with Barclays, where we are providing home insurance products to their Premier customers, and are pleased to be the insurance service provider for Plexal, the new technology innovation centre in London’s Queen Elizabeth Olympic Park.
I am pleased to say that the migration of our commercial broker channel business to a new IT platform is complete, with art and private client business scheduled for 2018. The commercial team is already benefiting from improved conversion, pricing and service, and our underwriters now have more time to spend with brokers and work on complex risks. We have also been able to insource our broker channel back-office functions to our shared service centre in Lisbon, which is already delivering benefits in terms of quality and control.
Hiscox Europe Hiscox Europe had its best year ever in both growth and profitability, delivering gross written premiums of €245.3 million (2016: €218.4 million), up 12.3% in constant currency. All countries contributed to the underwriting performance, with strong new business and retention. Cyber, specialty commercial and management liability products continue to be key drivers of growth and we continue to invest in them.
Hiscox International This division comprises Hiscox USA, Hiscox Special Risks and DirectAsia. Its revenues grew by 28.8% to £654.3 million (2016: £508.1 million), 24.8% at constant currency.
37 Governance 63 Remuneration 89 Financial summary2 Strategic report Chief Executive’s report £544.1m Hiscox USA gross premiums written, an increase of 29% in constant currency.
Growth in our broker channel business was driven predominantly by professional risks and general liability, where we are seeing continued success in selling it both as a stand-alone product and as additional cover to existing clients. New market participants in cyber have led to increased competition and some downward pressure on pricing, but we are staying relevant through our products and our expertise. We have walked away from unprofitable business in our programmes book, and will remain opportunistic when it comes to new business. Our entertainment business is now established and achieving scale, and our directors and officers’ line has benefited from a sharper focus on the most promising industries and geographies.
Competition is increasing, but we will be relentless in our investment in the brand, our systems, products and teams.
Hiscox USA withstood the impact of the Q3 hurricanes well, testament to the scale and resilience we have built into the business. Hiscox USA
DirectAsia DirectAsia is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance. Hiscox acquired the business in April 2014. Its premiums reduced to £11.4 million (2016: £13.0 million), in line with management expectations, following the sale of our business in Hong Kong in 2016. Our Thai business operates as an agency and therefore is not reflected in these figures.
In Thailand, where we see significant opportunity, we launched a new TV campaign to raise brand awareness among our target customers. We continue to focus on marketing, including a new social media campaign to leverage the fact that Thais are among the
37 Governance 63 Remuneration 89 Financial summary2 Strategic report Chief Executive’s report
Looking at each business area in turn: Property Our property division includes USA and international commercial property, power and mining risks, and USA catastrophe exposed personal and small commercial lines traded in the London Market.
Marine and energy Our marine and energy division includes upstream energy, marine and energy liability, cargo and hull risks.
Marine liability had a good year, with international performing particularly well and rates increasing slightly. We will look to increase our position in this line as the business renews throughout 2018.
The soft market prevailed, particularly in terrorism and personal accident, and we were selective in these lines. Terrorism remains a profitable class of business and our market-leading position continues to stand us in good stead.
The incremental gains we are making in this business are as we expected, and positive indicators of the direct and partnership business we are building in Asia.
Our original business plan for 2018 was to continue to shrink, but the accumulation of natural catastrophes caused a change of plan. Our revised plan called for an increase of Syndicate 33’s capacity from 2017 levels by £450 million to £1.6 billion. Rate increases to date, while good for loss-affected lines like US and Caribbean property and elements of casualty, have not been as strong as we anticipated, so we will expand and expect to see Hiscox
Gross premiums written 581.7 726.0 Net premiums earned 435.7 443.1 Underwriting loss (35.7) (2.3) Investment result 11.3 12.3 Foreign exchange and other* (11.8) 34.0 (Loss)/profit before tax (36.2) 44.0 Combined ratio 111.6% 90.7% Combined ratio excluding foreign exchange 108.7% 99.4% *Includes impairment.
37 Governance 63 Remuneration 89 Financial summary2 Strategic report Chief Executive’s report £53.6m Investment in marketing and brand building in 2017.
In 2018, we will focus on increasing our cross-sell opportunities, particularly in marine and energy.
Hiscox MGA Hiscox MGA underwrites and distributes products where customers’ requirements for capacity exceed Hiscox’s own risk appetite, or where the team’s distribution focus allows us to access business in local markets around the world. It operates out of London, Paris and Miami.
We focused on four core lines of business in 2017: yachts and mega yachts, South American-focused property facultative reinsurance, space (which moved into the MGA in 2017) and terrorism. The team is steadily developing the business and we think that this will become a material distribution arm for the Group.
Gross written premiums for Hiscox Re & ILS grew by 4.5% in local currency to US$700.2 million (2016: US$670.0 million). Net of cessions to supporting capital partners, premiums reduced to US$293.6 million (2016: US$306.2 million). The business delivered a profit of US$25.5 million (2016: US$155.9 million) and a 101.3% combined ratio (2016: 53.0%), a good result in the face of challenging trading conditions. We benefited from our non-catastrophe lines, fees on our management of third-party funds and some releases from catastrophes in prior years.
Hiscox Re expanded its product suite in 2017, with new cyber and flood offerings. FloodXtra, a new product developed using detailed topological and weather analytics, allows us to target the deregulating US flood market. We see real opportunity to partner with US personal lines carriers who wish to enter this market. The product has been in development for some time but Q3 weather events have enabled us to generate good, early interest. We will continue to focus on these growing lines of business in 2018.
Catastrophe reinsurance pricing into the key 1 January renewal season saw average prices increase by 9%. Hiscox Re & ILS
reinsurance makes up approximately 60% of gross written premium for Hiscox Re & ILS. The team’s gross underwriting performance was exceptional and as a result we were able to retain our quota share support from insurers and syndicates, and to replace those whose appetite changed.
Hiscox Re ILS, our manager of capital market funds which invest in insurance, had a good year. We were able to attract additional qualified investors and we entered 2018 with US$1.5 billion of assets under management. The professionalism of the team was recognised when they were awarded ILS Fund Manager of the Year at the Reactions London Market Awards 2017.
IT We are continuing on our path of replacing all our core retail systems. In 2017, our UK broker channel moved to the new system and in 2018 we expect the high net worth business to follow suit. The new system is allowing greater automation of the underwriting process, with attendant efficiency gains whose benefit will begin to be seen in 2018. We expect the programme to wind down in 2019 at which time core members of the team will switch focus to Hiscox Europe.
As if all of these core systems replacements were not enough, we are also readying Hiscox for the implementation of the General Data Protection Regulation (GDPR), the New York Insurance Department’s new cyber regulations, achieving the UK’s cyber essentials plus standard across the Group, adapting our systems to Brexit and supporting a finance transformation process. Like all businesses today, Hiscox cannot trade and grow profitably without robust modern infrastructure, so we are committed to completing these programmes and other linked initiatives even though, as previously stated, they are increasing our expense ratio by 1% in the short term.
Investments The main objectives of our investment portfolio, those of providing the liquidity to pay claims and capital to support the underwriting business, have come to the fore this year. Having a conservative approach has ensured that both these aims have been comfortably met. However, while we have steered a pretty steady course with the portfolio since the financial crisis, accepting the low returns that have been available in the safer part of the bond markets, we were always prepared to take some risk, mostly through an allocation to equities. Following this strategy our investments in 2017, before derivatives and fees, made £87.3 million (2016: £74.8 million) equating to a return of 2.0% (2016: 1.9%). Conventional wisdom always had it that a negative environment for bonds would be positive for equities and vice versa. This correlation held true last year. With our major government bond benchmarks producing negative or very low returns the contribution from fixed income was predictably unexciting. However, a strong year for equities saw our modest allocation to risk assets provide a significant portion of our overall investment performance. This is a good result that exceeded our expectations.
The recovery from the crisis has taken much longer than we expected but it does seem that 2017 may prove to be a turning point and that a return to a more normal level of interest rates has started.
In retail lines, claims activity increased to a more normal level after a very benign 2016. In the UK, in line with others in the industry, we faced a veritable epidemic of escape of water claims. It seems that modern plumbing is not as robust as older methods. Across the world we are investing in retail claims capabilities. We received over 74,000 claims notifications (2016: over 63,000) and paid out £294 million (2016: £248 million). This ongoing increase is a welcome by-product of the success of our retail businesses.
Paying claims well is a core part of our value proposition, so we are pleased that our net promoter scores from those who have had claims remain very strong. In 2018, we are developing a claims 2.0 plan to ensure we can scale our claims and move to more digital processes, without losing the personal touch which is so important to our customers who are going through what is often a traumatic experience.
The first driver of atomisation and increased cost is Brexit. We continue to assume that freedom of services will not last beyond Brexit date, and were pleased that in January, Luxembourg’s Commissariat aux Assurances approved a licence for Hiscox S.A., our new EU-27 insurance company. We have begun preparations for a Part VII transfer of relevant policies and their associated liabilities to this new entity. We aim to have completed this by December 2018 to provide continuity of cover to our clients across Europe. This adaptation to Brexit will cost Hiscox approximately £12.5 million in one-off cost, and an expected ongoing €2 million per annum.
our capital team using our new capital model, and results in a lower capital requirement for an unchanged rating.
Most of these influencers on capital levels are not unique to Hiscox as they affect all firms. In the short term the gradual ratcheting up of capital requirements depresses returns, but as economic forces work through it is inevitable that consumers’ costs will increase. That may be a price worth paying for ever greater protection of the government and the taxpayer. At the macro level the taxpayer and consumer are the same person, so I hope that higher costs do not lead to lower insurance penetration, thereby causing other problems for the government and taxpayer.
It is testament to the strength and flexibility of our business that Hiscox is capable of paying the losses from the 2017 hurricanes, of providing the incremental capital driven by political decisions, and funding the planned increases in underwriting all from our own resources. In 2018, we will continue to review our capital and funding strategy to ensure we retain significant financial flexibility to react, adapt and take advantage of opportunities that arise from changing conditions.
The second driver of atomisation is the USA’s recent Base Erosion Anti-Abuse Tax (BEAT). The headline of this new law is tax, but the bigger implication is the difficulty Hiscox, and all other insurers not headquartered in the USA, will have in diversifying US risk with UK, European and Asian risks. This leads to higher USA capital requirements, and a longer term likely increase in cost to consumers. Hiscox will experience an increased US capital requirement of US$75 million as a result of BEAT. In addition Hiscox has written down its deferred tax asset by net US$4 million.
Alex Veys joined Hiscox in December as the new CIO for the Group. Alex brings a wealth of experience in managing large and complex asset management portfolios from 30 years in investment management.
Just as Hiscox grows and evolves, so do our people and our achievements this year are down to their combined efforts. I would like to thank all 2,700 of my colleagues for their endeavours throughout the year. They have delivered in challenging circumstances and their collective desire to go the extra mile is what drives Hiscox forward.
We have growth ambitions for all our business units, but will remain disciplined if prices are inadequate, as demonstrated by the reductions in Hiscox London Market in 2017. We continue to see great opportunities in retail, and our big-ticket businesses are expected to return to growth as they benefit from the current waves of market dislocation and improvement in the pricing environment. It is now more evident than ever that the balanced business we have been building for the last 20 years continues to give us opportunities throughout the insurance cycle.
Our investments in people, products, infrastructure and brand make a difference. We will continue to leverage the opportunities that come with a changing market and to serve more customers.
Officer for the Group will this year move to take up the role of CEO Hiscox USA, while retaining his Group marketing role. Our ambition is to build a brand equal in presence to what Hiscox has achieved in the UK, and with Steve’s background in consumer marketing and his experience of leading the creation of our UK brand, he is the best person to lead us to achieving this ambition.
David Astor has spent 15 years as our Chief Investment Officer and is retiring in March 2018. David’s steady nerve during the financial crisis helped us navigate turbulent markets and a low interest rate environment. His measured insight and expertise, dry humour and understatement will be missed.
Hiscox Special Risks Hiscox USA DirectAsia 19Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report Building a balanced business
Total Group controlled premium 2017: £2,833 million (Period-on-period in local currency)
Professional liabilities Errors and omissions Private directors and officers’ liability Cyber Commercial small package Small technology and media Healthcare related Media and entertainment
Home and contents Fine art Classic car Luxury motor Asian motor
Small commercial £972m £609m £367m £331m £273m £141m £140m 20 Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2018 and industry data. Given the nature of the risks underwritten, the loss estimates may be materially different from those that arise depending on the size and nature of the event.
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b n m ar ke t l os s y ea r r et ur n p er io d
5b n m ar ke t l os s y ea r r et ur n p er io d
6b n m ar ke t l os s y ea r r et ur n p er io d 21Hiscox Ltd Report and Accounts 2017 2 Strategic report
Actively managed key underwriting exposures 37 Governance 63 Remuneration 89 Financial summary
Boxplot and whisker diagram of Hiscox Ltd net loss (US$m) for certain modeled losses January 2018
Capital management The Board is responsible for monitoring the capital strength of the Hiscox Group and ensuring that its insurance carriers are suitably capitalised for regulatory and ratings purposes, taking into account future needs including growth where opportunities arise.
We will continue to maintain a progressive core dividend policy despite the significant event losses incurred during 2017. It is testament to the Group’s strategy of balance between the big-ticket and retail businesses that we are able to do this. The Group has proposed to increase the final dividend by 2.6% to 19.5p, resulting in a full year ordinary dividend of 29.0p (2016: 27.5p), up 5.5%. Our focus on efficient capital management means the business remains well-positioned to support growth in areas expected to be profitable.
The subordinated debt issued by the Group is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements. At 31 December 2017 available capital was £1,892 million (2016: £1,970 million), comprising net tangible asset value of £1,617 million (2016: £1,695 million) and subordinated debt of £275 million (2016: £275 million).
Rating agencies Our ability to attract business, particularly reinsurance, is dependent upon the maintenance of appropriate financial strength ratings from the leading rating agencies: A.M. Best, S&P and Fitch. These ratings are assigned based on a range of factors, including business model, risk management, framework and financial strength. They are assigned individually to the insurance carriers of the Group, but capital adequacy is also monitored by the rating agencies at the consolidated Group level.
The GSSA is based on the Group’s own internally assessed capital requirements and is informed by the newly introduced Group-wide Hiscox Integrated Capital Model (HICM), which, together with the BSCR, forms part of the BMA’s annual solvency assessment. The HICM provides a consistent view of capital requirements for all segments of the business and at Group level.
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of year-end 2017 results. Hiscox uses the internally developed Hiscox integrated 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. The available capital figure comprises net tangible assets and subordinated debt.
The largest driver of our capital is underwriting risk. The Group manages the underwriting portfolio so that in a 1-in-200 aggregate bad year it will lose no more than 12.5% of core capital plus 100% of buffer capital (£100 million) with an allowance for expected investment income. A market loss at this remote return period would be very large indeed and would be expected to bring about increases in the pricing of risk. Our capital strength and financial flexibility following this scenario mean the Group would be well positioned to take advantage of any opportunities that might arise. After the payment of the final dividend on 12 June 2018, the available capital will reduce to approximately £1,836 billion, comfortably meeting the current regulatory, rating agency and internal capital requirements. Our estimate of the year-end 2017 BSCR solvency ratio is to exceed 225%. The Group continues to operate with a strong solvency position. In addition, each of the subsequent insurance carriers hold appropriate capital positions on a local regulatory basis.
We will continue to maintain a progressive core dividend policy despite the significant loss events incurred during 2017. Capital management £1,892m Available capital as at 31 December 2017.
Group financial performance The strong performance of our retail businesses and solid investment returns helped to offset catastrophe claims of US$225 million and foreign exchange losses of £63 million.
The Hiscox Group delivered profit before tax for the year of £30.8 million (2016: £354.5 million), or £93.6 million (2016: £202.1 million) excluding foreign exchange gains/losses. This is a good result given the number of natural catastrophes that occurred in the second half of the year, including the first Category 5 storm to make US landfall in 25 years, with hurricanes Harvey, Irma and Maria generating net losses for the Group of US$225 million. The Group will be reporting in US Dollars from 1 January 2018, following a change in functional currency of subsidiary entities, which will reduce impact of the volatility in the foreign exchange movement in future periods. The investment return improved slightly at 2.0% (2016: 1.9%). The Group recorded a post-tax return on equity of 1.5% (2016: 23.0%) and earnings per share of 9.3p (2016: 119.8p).
Hiscox Corporate Centre The central investment portfolio returned £25.5 million (2016: £17.9 million) during the year. Foreign exchange movements resulted in a loss of £46.5 million (2016: profit of £57.2 million), due to the Corporate Centre holding a significant proportion of US Dollar assets to support the underwriting activities of the managed syndicates. As a result, the loss before tax was £62.6 million (2016: profit of £37.0 million).
25Hiscox Ltd Report and Accounts 2017 2 Strategic report Group financial performance
Non-financial reporting statement The details that relate to our non-financial reporting statement can be found in the corporate responsibility section on pages 48 to 51.
During 2017, the Group returned capital to its shareholders of £76 million (2016: £113 million).
Strong growth continued in Hiscox Retail, up 20.5% for the year, and now accounts for 56% of the Group’s gross premiums written.
Group invested assets £4,413m £4,410m Before fees, derivative positions and investments in insurance-linked securities funds.
Group investments Insurance events in 2017 have served as a reminder that the priority for the investment portfolio is to provide liquidity to pay claims and capital to support the business.
The Group’s invested assets at 31 December 2017 totalled £4.41 billion (2016: £4.41 billion). A weaker US Dollar and an increased level of claims payments following the active storm season left the assets under management largely unchanged over the year. The investment result, excluding derivatives and fees, amounted to £87.3 million (2016: £74.8 million) equating to a return of 2.0% (2016: 1.9%). Investors took the variety of political outcomes and heightened geopolitical tensions during the year in their stride focusing instead on the positive development of global growth which was generated without any real signs of inflation. While a prolonged absence of volatility provided a supportive background for equity markets, further moves by Central Banks towards normalising monetary policy led to a more challenging environment for bond investors. Given that bonds always form a large part of our portfolio, we are pleased with the eventual outcome which, boosted by a strong return from our risk assets, exceeded our original expectations.
Insurance events in 2017 have served as a reminder that the priority for the investment portfolio is to provide liquidity to pay claims and capital to support the business. Our conservative stance ensures that it has been in a good position to fulfil both roles. Our secondary objective is to maximise our investment result in the prevailing market conditions subject to a prudent risk appetite. Meeting this objective has been increasingly challenging in a world where asset prices have been inflated by the extraordinary levels of monetary support provided by central banks. In recent years we have resisted the temptation to stretch for yield in the lower quality tranches of the fixed income world but have retained an allocation to equities which has served us well in enhancing our investment income. In bonds we have also approached duration with caution to protect us against the effect of rising yields. It is easy to forget that two-year US yields have been rising steadily over the last five years from a low of 0.18% to 1.9% at the end of December 2017. Our US Dollar bond portfolios have made positive annual returns throughout this period and are now well positioned to earn higher yields in 2018. Results from Sterling and Euro portfolios are likely to remain muted though. Overall, however, with the tailwinds of liquidity beginning to disappear, our current focus on quality will remain. There will be better chances ahead to take more investment risk.
A Reserve releases Reserve releases are a measure of favourable development on claims reserves that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast our performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The release is calculated as the movement in ultimate losses on prior accident years between the current and prior-year balance sheet date, as shown in note 25, as the result of better than expected outcomes of the estimates booked at the prior period close.
Ten good reasons to work at Hiscox Through talking to our people (newcomers and old-timers), reading our reviews (both good and bad), and seeing how we stack up against the competition, we have created our very own ten good reasons to work at Hiscox. Here’s what it’s really like to be part of our remarkable team.
#2. Be part of a strong culture that challenges the status quo.
#1. Work with smart people Let’s start with a common perception of insurance: that it’s dull; a career for men with university degrees, grey suits and the lifelong ambition to sell insurance policies; that you’ll go to lots of meetings and if you aren’t in one of those, you’ll be glued to a desk nine-to-five, all day. Every. Single. Day.
While we admit there can be a fair bit of desk time for many of us, that’s where the accuracy of this insurance stereotype ends. If we do have a ‘type’, it’s one that’s based on attitude: Hiscox people genuinely care for customers, for the business and for each other. To thrive here, you have to do the right thing no matter how hard it might feel at the time, and have the courage to challenge each other and the status quo. We work hard and are proudly high-achieving, and we care about what Hiscox stands for. While we all work in insurance now, we have arrived from many different walks of life and brought with us ideas and influences from far beyond the industry.
#2. Be part of a strong culture that challenges the status quo That distinctive Hiscox attitude stems directly from our long-held and practised values: courage, quality, integrity, excellence in execution and human. In our most recent employee survey, 94% of employees said that they believe in these values. That first one – courage – is at the heart of our corporate culture: a restless urge to challenge convention and push for continuous improvement, however high the hurdles.
“You’ll love it if you enjoy being empowered, want accountability, are able to take ideas and make them happen, and have passion for what you do. You’ll hate it if you like to be told what to do and don’t have passion for your work.” 21 years with Hiscox
We work hard and are proudly high-achieving, and we care about what Hiscox stands for.
#5. Drive your own learning and development We’re a growing company, and our employees need to grow with us. The onus is on them to drive their own learning and development, but we make sure they’re well-supported, with two formal opportunities each year to discuss their development needs and potential – whether that’s in their current role, taking the next step up or moving across the organisation to try something new. There’s a lot of learning ‘on the job’, but we also offer people the chance to gain 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary professional qualifications such as CII, CIPD and CIMA. We also provide in-house courses with specialist external facilitators on topics such as people management, personal impact and presentation skills.
Our early careers programme includes opportunities for graduates, apprentices and interns. Our two-year graduate programme offers immediate hands-on exposure and includes three secondments, including a spell abroad in one of our offices in the USA, Bermuda, Singapore, the UK or Europe. We also offer a small number of apprenticeships for school leavers and summer internships to those returning to study.
“The encouragement to develop and grow is not just evident, but expected, and I really respect that.” One year with Hiscox
We have recently launched new employee network guidelines and are encouraging employees to start their own networks within Hiscox. We believe this is one way we can encourage the growth of a truly inclusive workplace culture.
“We’re treated like adults here; we’re given responsibility to run our lives.” Eight years with Hiscox
#7. Work in an environment that inspires A giant rocket in York. A café and meeting area overlooking a spacious atrium in Lisbon. Scenic views of Manhattan skyscrapers from Madison Avenue. The iconic Lloyd’s of London building. With 32 offices across 14 countries (plus the box at Lloyd’s), our workspaces are inviting and designed to spark discussion.
Each location provides a home to part of our extensive art collection, which includes unusual contemporary works by renowned international artists such as David Hockney, Candida Hofer and Vik Muniz. Every piece demands you take a second look. Rather than being shut away, they are on display in the areas where we meet and work, providing visual stimulation and breaking the conventions of a typical office space in the same way that we’re expected to challenge those of the insurance industry. As well as all the art, there are places to break out and think, or to catch up with colleagues and guests. Each office has its own distinct personality and features: our London art café, the bees we keep on the roof in York, on-site massage therapy in Bermuda, weekly pilates classes in Colchester or working treadmills in offices throughout the USA.
“I have had a brilliant time and I have laughed.” 27 years with Hiscox
We’re not a business that feels the need to say thank you for every little thing, but when people excel at their jobs, their efforts are rewarded.
Risk management Our core business is to take risk where it is adequately rewarded, guided by a strategy that aims to maximise return on equity within a defined risk appetite.
Exposures are monitored and evaluated both within the business units and at Group level to assess the overall level of risk being taken and risk mitigation approaches. We consider how different exposures and risk types interact, and whether they may result in correlations, concentrations or dependencies. The overall objective is to optimise risk-return decision-making while ensuring total exposure remains within the parameters set by the Board.
First line of defence Owns risk The first line of defence is responsible for ownership and management of risks on a day-to-day basis, and consists of everyone at every level in the organisation, as all have responsibility for risk management at an operational level.
Third line of defence Provides independent assurance of risk control The third line of defence provides independent assurance to the Board that risk control is being managed in line with approved policies, appetite, frameworks and processes. It also helps verify that the system of internal control is operating effectively.
The risk management framework is underpinned by the system of internal control, which provides a consistent approach for the design and operation of internal controls to manage our key risks.
The risk management framework is regularly reviewed and enhanced to reflect changes to the Group’s risk profile, the external environment and evolving practice on risk management and governance. During 2017, we have commenced a refresh of our system of internal control in light of recent growth.
Risk appetite, which is set for each of our insurance carriers and for the Group as a whole, is reviewed annually. It is flexed to respond to internal and external factors such as the growth or shrinkage of an area of the business, or changes in the underwriting cycle impacting upon capacity and rates.
The role of the Board in risk management The Board is at the heart of risk governance and is responsible for setting the Group’s risk strategy and appetite, and for overseeing risk management (including the risk management framework).
During 2017, the Board looked at a number of risk-related matters. s The Group’s risk profile, compared with its Board-approved risk appetite. s Independent second line of defence model validation findings on the Group’s risk and capital models.
s Regular reporting on the risks determined by the Board to be critical to the Group.
B o ar d o ve rs ig ht 40 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance Risk management 63 Remuneration 89 Financial summary s Updates to the risk and control register, which summarises the Group’s material risk exposures and the key controls in place to mitigate them, as agreed with risk owners.
s Updates to Group risk policies, addressing the Group’s main risks.
The ORSA reports have been further refined in 2017 to streamline the documents and strengthen the narrative relating to conclusions, with procedure-related supporting documentation maintained in an ORSA record. ORSA process
Strategic risk The risks associated with strategic decisions and objectives taken or not taken by the Group, including uncertainties and opportunities in the internal and external environments.
The Group invests in growth areas that offer the potential of a good return on investment. To ensure individual and aggregate exposure remains within set parameters, the business plan is aligned to the Group risk appetite set by the Board.
Hiscox’s ORSA process focuses on the changes, opportunities and threats that may affect the business in the future.
Insurance risk – underwriting The risks related to our core business of providing insurance products and services to clients, and to the management of our net exposure to losses.
Pricing Hiscox competes against major international insurance and reinsurance groups. At times, competitors may choose to underwrite risk at prices below the break-even technical price. Prolonged periods in which premium levels are low or competition is intense are likely to have a negative impact on the Group’s financial performance.
We adapt our desire to write certain lines of business according to market conditions and the Group’s overall risk appetite. We reject business unlikely to generate underwriting profits and regularly monitor pricing levels, producing detailed monthly reports on how pricing and exposures are developing. This allows us to quickly identify and control any problems created by deteriorating market conditions. Hiscox frequently acts as the lead insurer in the co-insurance programmes needed to cover high-value assets, so we have some ability to set market rates.
The Group rewards its staff for producing profit not revenue. This helps to maintain underwriting discipline in soft markets.
Insurance risk – underwriting The risk related to our core business of providing insurance products and services to clients, and to the management of our net exposure to losses.
Underwriting exposure management Hiscox insures individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (for example, hurricanes or earthquakes) and man-made (for example, terrorism), which can cause heavy underwriting losses that materially impact upon the Group’s earnings and financial condition if the insured event materialises.
We buy reinsurance to reduce our risk exposure and mitigate the impact of catastrophes based upon a clear outwards reinsurance strategy and centralised reinsurance programme that enables us to minimise gaps in coverage across the business and get the right deal by leveraging our size. Decisions about the type and amount of reinsurance we buy are supervised by a dedicated reinsurance purchasing team using modeling techniques.
Binding authorities Hiscox generates considerable premium income through third parties authorised to underwrite insurance policies on the Group’s behalf.
Third parties may accept risk outside of agreed parameters or normal guidelines, exposing us to financial and operational risks.
Authorities granted by Hiscox are closely controlled through strict underwriting guidelines, contractual restrictions and obligations. A Group-wide delegated authority policy sets out clear standards and principles for managing the delegation of authority to external third parties. We vet all third parties prior to appointment and monitor and audit them regularly to ensure they meet our standards.
2 Strategic report 37 Governance Risk management 63 Remuneration 89 Financial summary
Market risk – investment The risk of financial loss or adverse movements in the value of Hiscox’s assets resulting from adverse movements in market prices and our exposure from trading and/or the risk of exposure to inappropriate assets/asset classes.
Asset value Money received from our clients in premiums and the capital on our balance sheet is invested until it is needed to pay claims. These funds are inevitably exposed to investment risk.
Investment risk also encompasses the risk of default of investment counterparties, who are primarily the issuers of bonds in which we invest.
The investment of Hiscox’s assets generates an investment return. Our investment portfolio is exposed to a number of risks related to changes in interest rates, credit spreads and equity prices, among others.
Our objective is to maximise investment returns in the prevailing financial, economic and market conditions, without creating undue risk to the Group’s capacity to underwrite. Funds held for reserves are invested primarily in high-quality bonds and cash. To reduce foreign exchange risk, these are usually maintained in the currency of the original premiums for which they were set aside. As many of our insurance and reinsurance liabilities have short timespans, we do not aim to match exactly the duration of our assets and liabilities.
The Group’s fixed-income fund managers operate within clear guidelines as to the type and nature of bonds in which they can invest. These prioritise the need to pay claims while providing sufficient flexibility to enhance returns.
A proportion of funds is allocated to riskier assets, principally equities. By taking a long-term view on these assets, we seek to achieve the best possible risk-adjusted returns. Within our risk assets, we make an allocation to less volatile, absolute return strategies, which balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets.
Such a failure could have a material adverse effect on the Group’s financial condition and cash flows.
We buy reinsurance only from companies we believe to be strong. A dedicated Group Credit Committee must approve the use of every reinsurer, based on an assessment of their financial strength, trading record, payment history, outlook, organisational structure and external credit ratings.
Our credit exposures to these companies are closely monitored, as are the companies themselves, so we can quickly identify any potential problems. We consider public information, our experience of the companies, their behaviour in the marketplace and consultants’ and rating agencies’ analysis.
Credit risk – brokers If a broker fails to pass premiums to us or fails to pass the claims payment on to a policyholder, this can result in us losing money.
In the case of some large losses, we pay policyholders directly to reduce broker credit risk on material transactions.
46 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance Risk management 63 Remuneration 89 Financial summary
Information security (including cyber security) A failure to properly protect information could compromise the confidentiality, availability or integrity of our data.
Cyber security risk is the threat to the Group from globally connected networks such as the internet. It differs from the exposure posed by underwriting cyber risks, which is considered an insurance risk.
Our business is based on trust from customers and partners, and that trust depends on our ability to keep their information secure. We operate in a world in which the volume of sensitive data and the number of connected devices and applications have increased exponentially, while cyber attacks are increasingly frequent and sophisticated. Our business depends on the integrity and timeliness of the information and data we maintain, own and use.
Information security risk is managed as a business risk, not an IT responsibility. We employ an information security policy and a cyber security risk strategy.
The Group employs information security resources, which provide advice on information security design and standards. We also have an information security group, including experts from around the business who assess and manage these threats in line with risk appetite. Our cyber strategy combines industry standard perimeter security with protection for specific, highly confidential information.
Operational risk The risks of direct or indirect losses involving people, processes, systems and external events, resulting from the running of the business.
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 incident occur. These procedures would enable us to quickly move the affected operations to alternative facilities. The plan is tested regularly and includes simulation tests.
All major programmes have dedicated project governance structures to oversee the delivery of the programme, including risk management aspects. Programme sponsors also provide updates to the Board and Risk Committee as appropriate.
The newly-formed Programme Assurance Office provides oversight across all major programmes. It provides senior management with an independent view of the progress, risks and issues within the programmes as well as the linkages between them.
Regulatory change The insurance industry is exposed to continuous regulatory change, which may affect the level of capital we are required to hold or require changes to how we are set up operationally from time to time.
47Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance Risk management 63 Remuneration 89 Financial summary
While achieving the highest standards of corporate governance, we strive to remain, in essence, a non-bureaucratic organisation. An effective system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or speed of response. Our ability to strike this balance is one of the Group’s greatest strengths.
Diversity and inclusion Diversity and inclusion (D&I) was a Group-wide priority in 2017, and we made important progress in this area. We appointed a D&I expert to lead on this work, agreed a set of KPIs for each of our business units, and established a nine-point plan to address the gender imbalance at senior levels. Our flexible working and maternity leave policies were enhanced, and we completed a comprehensive pay gap analysis in preparation for the new requirements to publish a gender pay gap report from 2018. We also sponsored the Dive In Festival for the third consecutive year,
Dealing with brokers Insurance brokers are important stakeholders in our business. For us to create a competitive advantage in the marketplace, it is essential that we build strong and lasting relationships with brokers that share our values. To these ends, the Group has instigated a ‘superb service’ ethos, designed to develop a greater understanding of brokers’ needs, and also runs annual broker summit events for our broker partners and the rising stars in their businesses.
Dealing with customers Hiscox has built its reputation upon outstanding customer service. Our belief is that insurance is a promise to pay: should a loss occur, we aim to fully support our customers and pay every valid claim as quickly as possible.
Scope 1 – company car use, on-site gas combustion and refrigerant loss 446 590 612 742
Tonnes CO2e per FTE (Scope 1 and 2) 1.20 1.20 1.14 0.97
Scope 3 – air, rail and personal car business travel 4,905 4,538 4,596 5,151
49Hiscox Ltd Report and Accounts 2017 4.6%� Carbon footprint per FTE has fallen for the fourth consecutive year, down 4.6% year-on-year.
2 Strategic report 37 Governance Corporate responsibility 63 Remuneration 89 Financial summary more specific and targeted action, and ensure D&I is firmly on the management agenda of each of our business units. We will also complete important analysis work to better understand the extent to which we are supporting and retaining women returning to work from maternity leave.
Communication and participation We listen to the views of our people and encourage them to contribute new ideas. Employees are kept informed of business developments through formal briefings, town hall events, team meetings, intranet bulletins, video conferences and other more informal routes. Once settled into their job at Hiscox, staff at all levels of the business are also invited to lunch with members of the Executive
Building on the success of the Women in Leadership training programme in 2016, the programme’s reach was extended to include more employees in lower bands. We continue to reap the benefits of our Women at Hiscox employee network, which since March 2016 has completed a range of networking events and established a number of successful mentoring relationships. We have also launched employee network guidelines to empower our people to create additional employee networks, with initial interest in parents and carers, mental health and well-being, LGBT and millennials networks.
2 Strategic report 37 Governance Corporate responsibility 63 Remuneration 89 Financial summary
Some examples of our support for the communities in which we operate, clockwise from left: the Hiscox Under-11 Cricket League in Bermuda; a member of staff in York attends to the Hiscox bees; some of our York team take part in the city’s annual dragon boat race; our London team enjoy some dodge ball; table tennis tournaments in our Atlanta office.
fund of the Aesthetica Art Prize, which celebrates emerging artists. Hiscox Germany continued to support promising young artists, presenting a €7,500 prize to the best young artist selected by a jury at Hamburg’s renowned university of fine art, HFBK, and supporting another artist with an artist-in-residence scholarship. Hiscox France worked with FIAC, France’s premier art fair.
The Hiscox Foundation The Hiscox Foundation is a charity, funded by an annual contribution from the Group, which makes grants to social and humanitarian initiatives and contributes to the fundraising activities of Hiscox employees. In total, the Hiscox Foundation in the UK and USA donated £182,000 during 2017.
Supporting the arts, science and technology The Group is a passionate supporter of the arts, science and technology. In 2017, Hiscox supported the City of London’s Sculpture in the City project for the seventh consecutive year, and continued to be the insurance partner of the Whitechapel Gallery, a free-to-access gallery close to its London office that champions contemporary art. Hiscox also became The National Gallery’s first Contemporary Art Partner as part of an exciting multi-year partnership, and supported Art Night – a free contemporary arts festival that puts art into extraordinary locations around London for one night a year, encouraging the public to experience art and their city through fresh eyes.
Anti-bribery and anti-corruption* Our anti-bribery and anti-corruption policy applies to all employees and entities in the Hiscox Group. It outlines that all employees, entities and associated firms of the Hiscox Group shall not make any payment or provide anything of value, to any person, with the intention to improperly influence that person to create a business advantage for Hiscox. The policy is reviewed on an annual basis.
As part of our induction process, individuals are requested to complete six regulatory assignments within three months of joining: Hiscox conduct risk and treating customers fairly; Hiscox introduction to the FCA; Hiscox money laundering and how you can prevent it; what whistleblowing is and why we need it; Hiscox data protection training and business ethics.
Lynn Carter joined Hiscox in May 2015. Lynn has 38 years’ experience in the banking industry, most recently as President of Capital One Bank. Prior to Capital One, Lynn was President of Bank of America’s Small Business Banking division, a US$2.1 billion revenue business, with oversight of 110,000 business clients and 2,000 employees. Dividing her time between California and Connecticut, Lynn currently serves on the private Board of American Express Centurion Bank and Phoenix House Foundation, and on Bankwork$ Advisory Board.
Caroline Foulger joined Hiscox in January 2013 having retired from a partnership at PwC on 31 December 2012. Until May 2012, Caroline led PwC’s Insurance and Reinsurance practice in Bermuda. Caroline is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Directors. Caroline is a Non Executive Director of the Bank of N.T. Butterfield & Son Limited and Oakley Capital Investments Limited.
Aki Hussain joined Hiscox in 2016 from Prudential plc, where he spent seven years; latterly as Chief Financial Officer of Prudential UK and Europe. Prior to his time with Prudential, Aki held a number of senior roles in the financial services, telecoms and media sectors. He was Finance Director for the Consumer Bank division at Lloyds Banking Group until 2009, before which he was Finance Director for the Consumer division of ntl (now Virgin Media). Aki is a Chartered Accountant, having trained with KPMG.
Bronek Masojada joined Hiscox in 1993 as Group MD and he became CEO in 2000. From 1989 to 1993 he was employed by McKinsey & Company. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007 and was Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is currently a member of the Board of the Association of British Insurers and a Director of Pool Reinsurance Company Limited.
Caroline Foulger Independent Non Executive Director (Aged 57) 1 January 2013*
Registrars Link Market Services (Jersey) Limited PO Box 532 St Helier Jersey JE4 5UW
Anne MacDonald joined Hiscox in May 2015. Anne has held the position of Chief Marketing Officer at four different Fortune 100 companies, marketing some of the most recognisable corporate names in the world – from Citigroup and Travelers to Macy’s and PepsiCo. With an MBA from Bath University, Anne was formerly a Director of NASDAQ-listed Rentrak Corporation, stepping down from the Board on completion of its merger with comScore, Inc.
Colin Keogh joined Hiscox in November 2015. Colin has spent his career in financial services, principally at Close Brothers Group plc, where he worked for 24 years and was CEO from 2002 until 2009. He is a Non Executive Director of Virgin Money Holdings (UK) plc and certain of its subsidiaries. He is also a Non Executive Director of M&G Group Limited and Chairman of specialist financial services business Premium Credit Limited.
Costas Miranthis joined Hiscox in November 2017. He was President and CEO of PartnerRe a position from which he stepped down in 2015. Prior to joining PartnerRe in 2002 he was a Principal of Tillinghast-Towers Perrin in its London office with responsibility for the European non-life practice. He is a Fellow of the Institute and Faculty of Actuaries and a member of the American Academy of Actuaries. He is also a past Chair of the European Reinsurance Association Board.
Michael Goodwin Independent Non Executive Director (Aged 59) 16 November 2017*
Dear Shareholder The Hiscox Group continues to grow and, in turn, the robust governance framework which underpins our business model continues to evolve. We focus on more than simply compliance with codes, ensuring we have the right culture, a balanced Board with independent Non Executives and a well-defined network of committees.
During the year the Financial Reporting Council (FRC) issued its substantial revision to the UK Corporate Governance Code, reflecting the FRC’s aim to make the code shorter and sharper. We are currently reviewing this and may submit comments on the proposed revisions in due course.
The arrangements we have in place are described in detail within this corporate governance statement but it is worth highlighting a few notable events from this year. s Ernst Jansen and Gunnar Stokholm stepped down from the Hiscox Ltd Board in November 2017, following nine years of service, at which point the UK Corporate Governance Code deems them not independent.
s The Nominations Committee led the search for three new Non Executive Directors for the Hiscox Ltd Board, culminating in the appointment of Michael Goodwin, Costas Miranthis and Thomas Hürlimann in November 2017.
In 2017 we carried out an external Board evaluation using an independent facilitator, Lintstock. The recommendations in the report were characterised as potential refinements to existing practices and the overall composition of the Board was rated very highly. One of the findings of the report was that Non Executive Directors could maximise the value of their time spent outside of formal meetings by visiting the Group’s sites to gain exposure to second- and third-tier management with a view to identifying leadership talent, providing written reports back to the Board on their insights. We are currently putting in place a timetable to incorporate these meetings throughout the year.
In accordance with the Company’s Bye-Laws, Michael Goodwin, Thomas Hürlimann and Costas Miranthis will seek re-appointment at the 2018 Annual General Meeting. In accordance with the Code, the remaining Directors will also submit themselves for re-appointment.
The Board have set voluntary restrictions on the number of other Directorships a Non Executive Director is permitted to hold. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 52. The remuneration of the Non Executive Directors does not include performance-related elements and is reviewed annually.
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 April 2016 (the Code). During 2017, and up to the date of this Report and Accounts, the Group has complied with the provisions of the Code in all material respects. The FRC has published a revised UK Corporate Governance Code, which is expected to apply to accounting periods beginning on or after 1 January 2019.
All Directors are entitled to seek independent professional advice at the Company’s expense. A copy of any such advice would be provided to the Company Secretary who would then circulate it to all Directors. As part of the Board evaluation conducted during the year, Directors were asked to assess the quality of the support they receive from the Company Secretary and the responses were all positive. The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. The Board of Hiscox Ltd held four scheduled meetings during 2017.
PwC was appointed as the Company’s auditor at the 2016 Annual General Meeting. There are currently no plans to re-tender the audit. The internal and external auditors have unrestricted access to the Committee. All non-audit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Committee. PwC has confirmed to the Committee that in its opinion it remains independent. The Committee is satisfied that this is the case. In respect of the 2017 financial year, the Committee reported to the Board on how it had discharged its responsibilities, provided advice to the Board on how the Annual Report and Accounts were fair, balanced and understandable, and provided the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Further information on the activities of the Committee is included in the Audit Committee report on pages 60 and 61. The arrangements by which staff may, in confidence, raise concerns about possible improprieties are described in the corporate responsibility statement on page 48. The arrangements were reviewed and updated and reissued to all employees across the Group in September 2016.
sessions. During the year Directors also received briefings on the new Group-wide Hiscox Integrated Capital Model (HICM) and attended a number of in-focus sessions on specific areas of the business.
Prior to the Board and Committee meetings taking place, the Board and the Executive Committee together hold in-focus sessions exploring specific aspects of the Hiscox Group. These presentations are sometimes made by members of the Executive Committee, or other members of the management team, or in some cases by individuals with particular expertise in certain markets. During these sessions the Board has explored matters including a major IT programme for the USA, portfolio underwriting, cyber underwriting, the US business and ILS strategic options. In addition, the Board and Executive Committee received a presentation on developments in the FinTech and InsureTech markets from external experts in this field.
The Board’s Terms of Reference include a Schedule of Matters Reserved for Board Decision, a copy of which can be found on the Group’s website: www.hiscoxgroup.com. Aside from the opportunity that Non Executive Directors have to challenge and contribute to the development of strategy in regular Board meetings, Non Executive Directors also attended the annual Hiscox Partners’ meeting held during the year.
The Audit Committee The Audit Committee of Hiscox Ltd comprises Lynn Carter, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan and Costas Miranthis. Caroline Foulger is considered by the Board to have recent and relevant financial experience and is Chair of the Committee. The Committee as a whole is considered to have competence relevant to the sector in which the Company operates. Further information on the background and experience of the Committee members is included in their profiles on pages 52 and 53. The Committee operates according to Terms of Reference published on the Group’s website and met four times during the year to assist the Board on matters of financial reporting, risk management and internal control, and to determine the
More information on the Group’s diversity polices and work during the year can be found in the corporate responsibility report on page 48.
The Investment Committee The Investment Committee has oversight of the Group’s investments and comprises Lynn Carter, Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis, the Chief Executive and the Chief Financial Officer and is chaired by Robert Childs. At each meeting the Committee receives an update from the Chief Investment Officer on the performance of the Company’s investment portfolio. It operates according to Terms of Reference and meets as and when the Chairman determines appropriate, but at least once a year.
The Risk Committee The Risk Committee oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Committee normally meets four times a year. The Committee comprises Lynn Carter, Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan and Costas Miranthis. It is chaired by Lynn Carter. The risk management framework is described in the risk management section on pages 38 to 47.
The Group has a dedicated risk team led by the Chief Risk Officer, which reports to both the Risk Committee of the main Board and to those of the relevant subsidiary boards. At each of its meetings during the year the Risk Committee reviews and discusses a risk dashboard and critical risk tracker that monitor the most significant exposures to the business, including emerging risks and risks that have emerged but are evolving. The Risk Committee also engages in focused reviews, a recent topic being information cyber security. Stress tests and reverse stress tests (scenarios which could potentially give rise to business failure as a result of a lack of viability or capital depletion) are also performed and reported on to the Risk Committee. In light of these arrangements the Directors are satisfied that a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity, has been carried out during the year.
An alert service is available on hiscoxgroup.com to notify any stakeholder of new stock exchange announcements. Shareholder communications
The top priorities for the Board in 2018 were identified as supporting the Company in a changing environment, managing succession and transition, maximising the contribution of the Non Executive Directors and continuing with the in-focus session on certain areas of the business.
A written report of the evaluation was produced by the independent evaluator and circulated to all Directors. The key themes and the areas for further development were then discussed at a Board meeting in February 2018.
In addition to the external evaluation of the Board, the Senior Independent Director, Colin Keogh, met with the other Non Executive Directors without the Chairman present to appraise the performance of the Chairman. During the year, the Non Executive Directors also periodically met without the Executive Directors to discuss a wide range of issues concerning the Company.
No issues arose which would prevent the Chairman from recommending the re-appointment of a Non Executive Director. The Chairman met with the Chief Executive and the Chief Executive met with each of the Executive Directors, to discuss their performance over the year and to set targets for the year ahead.
Shareholder engagement During the year the Company has engaged with its largest shareholders on proposed changes to the implementation of the remuneration policy as outlined on pages 76 to 84.
The views expressed by shareholders have been reported back to the Board through its committees. The Executive Directors communicate and meet www.hiscoxgroup.com
2 Strategic report 37 Governance Corporate governance 63 Remuneration 89 Financial summary
The three new Non Executive Directors bring additional international experience and diversity to the Board. The Nominations Committee or exposures which materially threaten financial strength, severely impact business operations or significantly affect strategy. Critical risks often develop over a short time, or offer limited time to react, respond or recover, thereby requiring continuous focus. The Group is subject to regulatory requirements aimed at ensuring its continuing solvency and has established arrangements to assess and manage its principal risks continually. Risk and solvency assessments are conducted and the Group is required to assess the capital resources necessary to achieve its strategic business objectives over the coming year while remaining solvent, given its risk profile. This includes a forward-looking assessment which considers the business plan over a three-year period.
Notwithstanding the uncertainties arising from the risks summarised on pages 38 to 47 there is a statement at page 85 which confirms that for the 2017 financial year the Directors considered it appropriate to adopt the going concern basis of accounting. For the reasons explained above, the prospects of the Company are assessed over a longer period than the 12 months required by the Code. The Group calculates and projects forward the capital requirements of its regulators and those of the rating agencies to ensure that it will continue to meet any applicable solvency requirements and achieve the ratings it feels are necessary to conduct its business profitably. While the Board has no reason to believe the Group’s business model will not be viable over a longer period, the period over which the Board considers it possible to form reasonable expectations as to its position is the three years to 31 December 2020. This corresponds to the forward-looking element of the Group’s regulatory solvency assessments and allows reliance to be placed on the output from those assessments as well as the other arrangements described above. On the basis of its robust assessment of the principal risks, and on the assumption that they can continue to be managed or mitigated as described (and taking account of the most recent solvency assessments, together with the results of the stress tests and focused risk reviews), the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2020.
As part of our internal controls, the internal audit function provides objective and independent assurance and advice to the Audit Committee and the Board over the processes and systems of internal control and risk management operating in the Group. It achieves this through carrying out an annual risk-based programme of reviews, the scope of which considers an independent view of the risks facing the Group, as well as other factors such as strategic initiatives, emerging risks and change. It includes an annual review of the Group’s compliance with the governance requirements emanating from its regulators and the Code. The findings of these internal audit reviews are reported to the Audit Committee.
directly with shareholders and analysts throughout each year, and do not limit this to the period following the release of financial results or other significant announcements. All Directors attended the Annual General Meeting in 2017.
Accountability and internal control Risk is at the heart of any insurance organisation and the management of risk is fundamental to the success of its business model. The principal risks facing this organisation are described on pages 41 to 47 together with an explanation of how they are managed or mitigated. These risks are managed dynamically in response to changing circumstances. For example, since last year, regulatory and legal risks has been separated from operational risk in recognition of its increasing pertinence across the Group. Emerging risks often influence our strategic approach, and are considered holistically as part of the wider risk landscape. These principal risks comprise the Group’s ‘critical risks’,
Financial reporting In relation to financial reporting, the primary role of the Audit Committee 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 within them. Working with both management and the external auditor, the Committee reviewed the appropriateness of the half-year and annual financial statements, concentrating on, among other matters: s the quality and acceptability of accounting policies and practices; s the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; s material areas in which significant judgements have been applied or there has been discussion with the external auditor; s any correspondence from third parties in relation to our financial reporting.
To aid the review, the Committee considered the key judgements found in the financial statements by the Chief Financial Officer, as well as reports from the external auditor on the outcomes of its annual audit and half-year review. The Committee supported the auditor, PwC, in displaying the necessary professional scepticism its role requires. The primary areas of judgement considered by the Committee in relation to the 2017 Annual Report and Accounts were: i) The reserving for insurance losses As set out in our significant accounting policies on page 107, the reserving for insurance losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet.
During the year, a number of natural catastrophes occurred, with hurricanes Harvey, Irma and Maria (HIM) in particular causing devastation and significantly contributing to the largest annual catastrophe losses in history. The Committee received an update on the large loss processes that the Company conducts when significant events such as these arise. It is imperative that the Company can quickly, and to a reasonable degree of accuracy, estimate the gross and net losses arising from such events. The Committee is satisfied with the way that the process was conducted.
The Committee was briefed on the US Tax Bill H.R.1 and the introduction of a Base Erosion Anti-Abuse Tax. The Committee is satisfied of the approach being undertaken by the Group.
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
v) The recoverability of reinsurance assets As as result of the hurricane activity in the year, the level of exposure to reinsurers has increased. The Committee received an update on the process to monitor the levels of recoverability and the regular contact with counterparties. The Committee is satisfied with the approach taken and the recoverability of those assets.
Functional currency reporting The Company previously announced that the functional currency of Syndicate 33, Hiscox Dedicated Corporate Member Limited, Hiscox Syndicates Limited and Hiscox Capital Ltd and the reporting currency of the Group would change to US Dollars with effect from 1 January 2018. The Committee reviewed the proposed change to functional currency which will significantly reduce the volatility of the Group’s earnings due to foreign exchange movements, in particular due to translation of foreign currency balances (noting that a significant majority of Group earnings are denominated in US Dollars). The proposed change will give investors and stakeholders a clearer understanding of Hiscox’s performance over time, and The Committee was comfortable in recommending it to the Board.
External auditors are invited to attend all meetings of the Committee and it is the responsibility of the Committee to monitor their performance, objectivity and independence. The Committee discusses and agrees with the auditors the scope of the audit plan for the full year and the review plan for the interim statement. The Audit Committee receives reports from external auditors at regular intervals during the audit process, including those relating to the judgements outlined above. The external auditors provide reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. Any contracts with PwC for non-audit services in excess of £50,000 must be approved by the Committee in advance. Approval will not be given for any contract that may impair the auditor’s independence or objectivity. During the year, the value of non-audit services provided by PwC amounted to £200,000 (2016: £315,000). There were no circumstances in which PwC was engaged to provide services that might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditors. To provide a forum in which any matters of concern could be raised in confidence, the Non Executive Directors met with the external and internal auditors throughout the year without the Executive Directors present.
Group Risk Officer The Group Risk Officer is also invited to attend all meetings of the Committee. The Company has in place a Risk Committee and the items discussed by the two Committees can overlap, therefore the attendance of the Group Risk Officer aids in facilitating discussions relating to risk.
During the year an external evaluation of the Audit Committee was conducted by Lintstock. The performance of the Audit Committee was rated highly. External committee evaluation
The following principles define our approach to remuneration. — Simple, and strictly results driven, with variable rewards only if Hiscox delivers profits in excess of a specified return threshold.
— Align Executive Directors’ interests with those of our shareholders, focusing on effective risk management, ROE, and net asset value growth which drives total shareholder return over time.
2. Additional metrics for the Performance Share Plan (PSP) In relation to the long-term PSP award, some shareholders requested alternative financial metrics be considered in addition to ROE, to avoid an overlap with the annual bonus scheme. Recognising that growth in net asset value is a key strategic goal, and is clearly linked to the delivery of long-term shareholder returns, we have replaced ROE with growth in net asset value plus dividends measured on a per share basis as the performance target for 2018 PSP awards. This approach provides a simple measure of growth which complements the ROE measure used for the short-term incentive and adds further diversity to the overall performance assessment. We have also reduced the vesting level for achievement of threshold performance from 25% of award to 20% of the maximum award.
3. Increased shareholding guidelines for senior executives Hiscox has a long-standing culture of share ownership among senior executives, with the CEO and CUO currently owning shares valued at more than 7,000% and 2,000% of salary respectively. Whilst acknowledging this, some shareholders noted that the current minimum shareholding guidelines of 150% of salary could be increased in line with evolving market practice. Accordingly, we have increased this to 200%. The CFO was appointed in September 2016 and will continue to build his shareholding in Hiscox shares.
Hiscox also made good progress on a number of operational initiatives during 2017, including setting up a European carrier in response to Brexit, rolling out a core IT system in the UK, and investing over £50 million in marketing across the Group. Notwithstanding the excellent contributions made by a number of senior executives across the business, the Committee has once again stuck to the principles of rewarding for outputs and not inputs. ROE for the year was 1.5%, which was below the minimum threshold set. Therefore for 2017, no bonus will be payable to the three Executive Directors and for a significant number of senior staff. At a junior level we paid bonuses relative to personal performance.
Directors are significantly lower than in recent years. In 2017, the CEO’s single figure reduced by 42% to £2.3 million.
Our remuneration approach seeks to encourage management to build a business over the long term, whilst delivering shareholder results in the short term. This is demonstrated by the value of vested PSPs being the material element of the CEO’s remuneration, as illustrated on page 71.
We value the views of our shareholders and we will seek to maintain dialogue to ensure there is clarity regarding the decision-making of the Committee. We have refreshed our approach to disclosure this year and I trust that this expanded report provides you with a helpful summary of our approach to remuneration at Hiscox. I look forward to receiving your approval and hearing your feedback at our 2018 AGM.
Colin Keogh Chairman of the Remuneration Committee 2 Strategic report 37 Governance 63 Remuneration Letter from Chairman of the Remuneration Committee 89 Financial summary
Strong long-term performance with three-year average ROE of 13%. PSP awards granted in 2015 vested at 85% of maximum.
A summary of the remuneration arrangements for Executive Directors is provided opposite, the full remuneration policy approved by shareholders at the 2017 AGM is detailed on pages 76 to 84.
2 Strategic report 37 Governance 63 Remuneration Remuneration summary 89 Financial summary
Salaries for 2017: — BE Masojada: £599,625 — HA Hussain: £461,250 — RC Watson: £461,250 Salary increase of 2.5%, in line with average UK employee increase of 2.6%.
Vesting subject to: ROE performance hurdle. 25% vests for achievement of threshold performance, 100% for maximum.
2017 actual as percentage of salary: — BE Masojada: 200% — HA Hussain: 186% — RC Watson: 186%
2017 actual: — BE Masojada: 7,000% — HA Hussain: 60%* — RC Watson: 2,000% *HA Hussain was appointed in September 2016.
Salaries for 2018: — BE Masojada: £620,000 — HA Hussain: £477,000 — RC Watson: £477,000 Salary increase of 3.4%, the same as the average UK employee increase.
Vesting subject to: net asset value per share growth plus dividends. 20% vests for achievement of threshold performance, 100% for maximum.
Additional notes to the Executive Director remuneration table Salary Salary reviews take place in the first quarter of the year, effective from 1 April. As noted in last year’s remuneration report, Executive Directors’ salaries were increased by 2.5% from April 2017, which was in line with the average UK-based employee salary increase of 2.6%. Base salaries for Executive Directors from 1 April 2017 were as follows: April 2017
Annual bonus In response to shareholder feedback the Committee has sought to improve the transparency around the process for determining bonuses.
Bonus as a percentage of salary 69Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017 89 Financial summary
The Executive Directors, along with other employees across the Group, participate in profit-related bonus pools. These pools are calculated at a business unit level, and for the Group as a whole, on the basis of a set percentage of profits on achievement of a return on allocated equity.
Less than RFR* +<5% Nil RFR +5% to RFR +12.5% 0-15% RFR +10% to RFR +17.5% 15-40% RFR +15% to RFR +22.5% 30-60% RFR +20% to RFR +25% 50-70% Greater than RFR +22.5% 60-100% *Risk-free rate.
These ranges enable the Committee to exercise judgement and flex payments (including downwards) based on the delivery of specific objectives and context in which performance has been delivered.
Outcomes for 2017 In assessing outcomes for 2017, the Remuneration Committee reviewed a number of objectives in areas of individual performance including: — for CEO, BE Masojada: delivering the strategic plan (which in 2017 meant growing Hiscox Retail and Hiscox Re & ILS, while pulling back in the London Market), and embedding a culture of risk management across the organisation; — for CUO, RC Watson: driving product innovation in key markets as well as ensuring risk limits and controls are followed; — for CFO, HA Hussain: improving capital management and driving cost efficiencies across the business to realise economies.
Hiscox is committed to providing clear disclosure regarding bonus outcomes. To the extent that bonuses are paid in future years, the Committee intends to provide suitable disclosure in future reports regarding the individual performance factors taken into account when determining individual annual bonus outcomes.
Performance outcome Based on the three-year average post-tax return on equity of 13.5%, the awards ending with the 2017 performance year will vest at 85% on 13 April 2018. Executive Directors will also receive dividend equivalents in the form of additional awards based on dividends paid during the three-year performance period. The estimated value of these awards is covered in the Executive Director remuneration table on page 68.
BE Masojada 105,000 11.19 1,174,950 RC Watson 75,000 11.19 839,250 HA Hussain 75,000 11.19 839,250
Executive Directors will be required to retain any shares vesting (net of tax charges) at the end of the performance periods for a further two years (five years post the start of the performance period).
Balance between pay elements The chart above shows the balance between fixed pay, annual variable pay and long-term variable pay for the CEO over the past four years. The value of vested PSPs has been the material element of the CEO’s remuneration. Good performance and share price appreciation has increased the value of PSPs over time. For example, the PSP award with a performance period ending in 2016 had a value at grant of £1,082,640 and at vesting was £1,826,470.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2017 and 31 December 2016.
Directors 31 December 2017 6.5p ordinary shares number of shares beneficial 6.5p ordinary shares number of shares beneficial
Executive Directors BE Masojada 3,064,702 3,212,777* RC Watson 691,973 700,000 HA Hussain 19,700 – Non Executive Directors L Carter – – RS Childs 1,379,610 1,511,866
HA Hussain 50,787 – – – 50,787 10.46† 17-Mar-17 * Accrued dividends. †Grants made on 12 September 2016. Details of HA Hussain’s joining package are in the 2016 remuneration report.
RC Watson 3,299 – (3,299) – – 5.456 1-Jun-17 30-Nov-17 * The Scheme offers a three-year savings contract where the excise price of the options are calculated based on an average share price over five days prior to the invitation date, with a 20% discount.
External Non Executive Directorships No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest. The consent of the Chairman is required in any event. During the year BE Masojada held Directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd, Heptagon Assets Ltd, Heptagon BIR Ltd and Pool Reinsurance Company Limited. He was not remunerated for his services. RC Watson held a Directorship at White Oak Underwriting Agency Limited. He was not remunerated for his services.
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past nine years.
PSP vesting as percentage of maximum opportunity 100 100 85 39 53 100 100 100 85 *Prior to 2015 annual bonus was operated on an uncapped basis. In order to facilitate comparison, the current 400% salary cap has been applied retrospectively.
Benefits (including retirement benefits) 3.4 8.0 1.3 2.9 89 Financial summary
74 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017
Relative importance of the spend on pay The charts above show the relative movement in profit, shareholder returns and employee remuneration for the 2017 and prior financial year. Shareholder return for the year incorporates the distribution made in respect of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits. Profit is the ultimate driver behind the performance metrics of the bonus and long-term incentive schemes. Profit before tax can be located on page 96.
To support the Committee’s deliberations, these updates include reference to a range of metrics including forecast and actual bonus pool analysis, levels of share plan participation and pay ratios between Executives and average employees. The Committee recognises that this is an area where new legislation or regulation may be published in the coming months which may impact reporting in future years. The Committee intends to comply with any new requirements applicable to UK companies in future years.
BE Masojada 620,000 RC Watson 477,000 HA Hussain 477,000 89 Financial summary
These ranges enable the Committee to exercise judgement and flex payments (including downwards) based on the delivery achievement of specific objectives and context in which performance has been delivered. Individual bonuses are determined based on the results of the relevant business area, individual performance and the size of the relevant bonus pool. The Remuneration Committee determines the bonuses to be paid to the Executive Directors based on judgement regarding the performance of the Group and a robust assessment of individual performance. In our 2018 Directors remuneration report, we will provide further disclosure of the individual performance factors considered for the determination of outcomes.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee in 2013, following a competitive tender process. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct 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 on the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £57,150. The Committee regularly reviews advice received and is satisfied it has been objective and independent. During the year Deloitte also provided the Company with other tax and consulting services.
Maximum potential value The salaries for current Executive Directors are set out on page 68.
Operation Retirement benefits These vary by local country practice but all open Hiscox retirement schemes are based on defined contributions or an equivalent cash allowance. This approach will be generally maintained for any new appointments other than in specific scenarios (for example, local market practice dictates other terms). For current Executive Directors, a cash allowance of up to 10% of salary is paid in lieu of the standard employer pension contribution.
Other benefits Benefits are set within agreed principles but reflect normal practice for each country. Hiscox benefits include, but are not limited to: health insurance, life insurance, long-term disability schemes and participation in all-employee share plans such as the Sharesave Scheme.
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results. For 2018, the bonus pool will be funded by a set percentage of profits on achievement of a hurdle rate of ROE. The bonus for prior years was determined on a similar basis. Further detail is set out on page 69.
For Executive Directors, individual allocations from the pool are determined by the Remuneration Committee based on a judgement of various factors including: p size of the Group bonus pool; p results of business area (where relevant); and p individual performance.
Deferral points are determined based on the currency in which the Executive Director’s salary is paid and are normally as follows: Bonus of £50,000, €75,000, US$100,000, and below
£50,000, €75,000, US$100,000, paid shortly after the end of the financial year in which the bonus was achieved.
Maximum potential value Maximum annual grant of up to 200% of salary in respect of any one financial year.
The Committee reviews the targets prior to each grant to ensure that they remain appropriate.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. The 2018 PSP awards will be measured against growth in net asset value plus dividends measured on a per share basis. Further details are set out on page 75.
For delivery of the threshold hurdle up to 25% of the relevant award will vest. For full vesting, the stretch hurdle needs to be met in full. Usually, there will be straight-line vesting for performance between the threshold and stretch hurdle. The minimum threshold vesting will be 20%, rather than 25%, for 2018 PSP awards.
Operation Within five years of becoming an Executive Director, individuals will normally be expected to own Hiscox shares valued at 150% of salary. In 2018 this is increasing to 200%.
Detailed provisions The Committee may make minor changes to this remuneration policy to aid in its operation or implementation without seeking shareholder approval (for example, for regulatory or administrative purposes), provided that any such change is not to the material advantage of Directors. For the avoidance of doubt the Committee may continue to operate the share awards under the 2006 and 2016 Performance Share Plan in accordance with the rules (for example, the treatment of awards in the context of a change of control or other forms of corporate restructure).
Malus and clawback provisions In respect of unvested compensation, specifically deferred bonuses and unvested Performance Share Plan (PSP) awards, the Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, cancel or impose further conditions in the following circumstances: p a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; p actions of gross misconduct, including fraud, by the participant or their team leading to the Company suffering significant reputational or financial damage.
4. Unvested Performance Share Plan awards Treatment would be in accordance with the plan rules and relevant grant documentation. The intended approach is summarised below. p Awards will vest in line with the normal scheme vesting date (unless the Committee determines otherwise). Awards vest to the extent that the relevant performance target is considered to have been met.
On initial appointment (including interim Director appointments) the maximum level of variable remuneration (excluding any buy-outs) is capped at the maximum level set out in the policy table on pages 76 to 81. Within these limits and where appropriate the Committee may tailor the award (for example, time frame, form, performance criteria) based on the commercial circumstances. Shareholders would be informed of the terms for any such arrangements. Ordinarily, it would be expected that the package on recruitment would be consistent with the usual ongoing Hiscox incentive arrangements.
p Benefits as received during 2017, as disclosed in the Executive Director remuneration table on page 68. p Retirement benefit as received during 2017, as disclosed in the Executive Director remuneration table on page 68.
Hiscox Partners* 77.6 22.4 * Hiscox Partner is an honorary title given to employees who make significant contributions to the development and profitability of the Group. The Partnerships encourages a proprietorial attitude, and up to 5% of the total workforce are Hiscox Partners.
Directors’ report The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2017.
Diversity The composition of the Board is described on pages 52 and 53. The percentage of persons of each gender who were i) Hiscox Partners and ii) employees of the Hiscox Group, excluding the Board, is set out in the table to the right. Hiscox’s approach to inclusion and diversity is outlined on pages 48 and 49.
Invesco Limited1 37,662,240 13.12 Massachusetts Financial Services Company1 27,742,612 9.67 FMR LLC1 15,157,829 5.28 BlackRock, Inc.1,2 14,535,256 5.07 * Per RNS announcement there were 286,961,264 shares in issue (excluding Treasury shares) as at 31 December 2017.
Annual General Meeting The notice of the Annual General Meeting, to be held on 17 May 2018, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
Dividends An interim dividend of 9.5p (net) per ordinary 6.5p share (2016: 8.5p (net), per ordinary 6.5p share) was paid on 13 September 2017 in respect of the year ended 31 December 2017. The Directors are proposing payment of a final dividend in respect of the year ended 31 December 2017 of 19.5p which will be paid on 12 June 2018 to shareholders on the register at 11 May 2018. In the previous year a final dividend of 19p was paid. The Directors have decided to offer a scrip alternative.
Biographical details of the Directors are set out on pages 52 and 53 and the reasons why the Board believes they should be appointed or re-appointed will be set out in the circular which will accompany the notice of Annual General Meeting.
Political and charitable contributions The Group made no political contributions during the year (2016: £nil). Information concerning the Group’s charitable activities is contained in the report on corporate responsibility on page 48 to 51.
We confirm that to the best of our knowledge: p the financial statements, prepared in accordance with the applicable set of accounting standards, present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and p the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Hiscox Ltd (the Company) and its subsidiaries (together ‘the Group’) as at 31 December 2017, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
Audit scope As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Overview A Overall group materiality: £19 million, which represents 0.75% of the gross earned premium for the year ended 31 December 2017. A The Group is a global specialist insurer and reinsurer. The Group’s financial reporting is based on financial information from subsidiary entities which we treat as ‘components’. A We performed full scope audit procedures over four financially significant components based in the United Kingdom and the United States. A For other components, we identified certain account balances which were considered to be significant in size or audit risk at the financial statement line item level in relation to the Group’s consolidated financial statements, and scoped the audit of these by performing specified procedures. A For the remaining components that were not inconsequential analytical procedures were performed by the Group engagement team. A Valuation of incurred but not reported (IBNR) loss reserves and the associated reinsurers share of IBNR loss reserves.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £959,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Valuation of incurred but not reported (IBNR) loss reserves and the associated reinsurers share of IBNR loss reserves
Total gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves are material estimates in the Group’s consolidated financial statements and as at 31 December 2017 amount to £2,018 million and £744 million respectively as set out in note 25. The methodologies and assumptions used to develop gross IBNR loss reserves and the reinsurers’ share of IBNR loss reserves involves a significant degree of judgement. The valuation can be materially impacted by numerous factors including: A the underlying volatility attached to estimates for the larger classes of business, such as errors and omissions, upstream energy and professional indemnity, where small changes in assumptions can lead to large changes in the levels of the estimate held and the reported profit; A the risk of inappropriate assumptions used in determining current year estimates. Given that limited data is available, especially for ‘long-tailed’ classes of business, there is greater reliance on expert judgement in their estimation; A the judgements made in significant areas of uncertainty, for example, liability and casualty classes of business; A the risk that IBNR loss reserve estimates in respect of natural catastrophes and other large claims losses are inappropriate. There is significant judgement involved in the estimation of such loss estimates, particularly as they are often estimated based on limited data.
In performing our detailed audit work over the valuation of gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves we used actuarial specialists. Our procedures included the following. A Developing independent point estimates for classes of business considered to be higher risk, particularly focusing on the largest and most uncertain estimates, as at 30 September 2017 and performing roll-forward testing to 31 December 2017. For these classes, we compared our re-projected estimates to those booked by management to form part of our determination as to whether the overall estimate of gross IBNR loss reserves represented a reasonable estimate. A Testing for the other classes of business (including those impacted by natural catastrophes and other large claims), the methodology and assumptions used by management to derive the gross IBNR loss reserve estimates and assessing whether these produced reasonable estimates based on underlying facts and circumstances. A Performing analytical review procedures over the remaining classes of business to ascertain the reasonableness of the gross IBNR loss reserves. A Applying gross to net ratios against the estimated gross IBNR loss reserves to calculate the estimated reinsurer’s share of IBNR loss reserves.
Based on the work performed, we found that the IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves were supported by the evidence we obtained.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or component audit teams within the PwC United Kingdom, PwC United States and PwC Bermuda firms operating under our instruction. Where the work was performed by component audit teams, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained. The Group engagement team had regular interaction with the component teams, and the engagement leader visited the United Kingdom and Bermuda during the audit process. The engagement leader and senior members of the Group engagement team reviewed all reports with regards to the audit approach and findings of the component auditors in detail. This together with additional procedures performed at the Group level, as described above, gave us the evidence we needed for our opinion on the Group’s consolidated financial statements as a whole.
Other information Management is responsible for the other information. The other information comprises the Annual Report (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
Directors’ remuneration The Company voluntarily prepares a report on Directors’ remuneration in accordance with the provisions of the UK Companies Act 2006. The Directors have requested that we audit the part of the report on Directors’ remuneration specified by the UK Companies Act 2006 to be audited as if the Company were a UK registered company.
In our opinion, the part of the report on Directors’ remuneration to be audited has been properly prepared in accordance with the UK Companies Act 2006.
Gross premiums earned 2,556,993 2,220,853 Premiums ceded to reinsurers (682,512) (545,840) Net premiums earned 4 1,874,481 1,675,013
Total income 1,997,699 1,783,237 Expenses Claims and claim adjustment expenses 25.2 (1,931,417) (1,004,601)
Other comprehensive (expense)/income net of tax (46,590) 74,065 Total comprehensive (expense)/income for the year (all attributable to owners of the Company) (20,280) 411,051
96 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
Assets Goodwill and intangible assets 13 137,814 123,724 Property, plant and equipment 14 48,614 48,425 Investments in associates 15 7,943 13,835
Loans and receivables including insurance receivables 19 830,704 802,906 Current tax asset 4,235 2,406 Cash and cash equivalents 22 642,789 664,816 Total assets 7,207,276 6,641,778
Equity attributable to owners of the Company 1,753,561 1,817,537 Non-controlling interest 866 866 Total equity 1,754,427 1,818,403 Employee retirement benefit obligations 29 47,492 56,139 Deferred tax 28 – 17,030
Current tax 7,004 21,735 Trade and other payables 26 658,457 599,202 Total liabilities 5,452,849 4,823,375 Total equity and liabilities 7,207,276 6,641,778
The consolidated financial statements were approved by the Board of Directors on 26 February 2018 and signed on its behalf by: HA Hussain Chief Financial Officer
Consolidated balance sheet 97Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
Deferred and current tax on employee share options 28 – – – – 1,907 1,907 – 1,907 Shares purchased by Trust – – – – (38,558) (38,558) – (38,558) Shares issued in relation to Scrip Dividend 23, 31 8 1,270 – – – 1,278 – 1,278 Dividends paid to owners of the Company 31 – – – – (113,934) (113,934) – (113,934)
Profit for the year (all attributable to owners of the Company) – – – – 26,310 26,310 – 26,310 Other comprehensive income net of tax (all attributable to owners of the Company) – – – (53,483) 6,893 (46,590) – (46,590) Employee share options: Equity settled share-based
Deferred and current tax on employee share options 28 – – – – 5,300 5,300 – 5,300 Net movements of treasury shares held by Trust – – – – (2,900) (2,900) – (2,900) Shares issued in relation to Scrip Dividend 23, 31 23 4,412 – – – 4,435 – 4,435 Dividends paid to owners of the Company 31 – – – – (80,456) (80,456) – (80,456)
Cash flows from the sale of subsidiaries 14,571 (3,881) Cash flows from the purchase of associates 15 – (450) Cash flows from sale of associates 23,770 2 Cash flows from the purchase of property, plant and equipment (6,721) (5,770) Cash flows from the purchase of intangible assets (28,575) (20,909) Net cash flows from investing activities 3,045 (31,008)
Distributions made to owners of the Company 23, 31 (76,021) (112,656) Net cash flows from financing activities (74,182) (149,658) Net decrease in cash and cash equivalents (2,408) (123,773)
Included within cash and cash equivalents held by the Group are balances totalling £132 million (2016: £136 million) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, £11 million (2016: £38 million) is pledged cash held against Funds at Lloyd’s, and £5 million (2016: £13 million) held within trust funds against reinsurance arrangements.
In accordance with IFRS 4 Insurance Contracts, the Group continues to apply the existing accounting policies that were applied prior to the adoption of IFRS (‘grandfathered’) or the date of the acquisition of the entity. IFRS accounting for insurance contracts in UK companies was grandfathered at the date of transition to IFRS and determined in accordance with accounting principles generally accepted in the UK.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated.
The balance sheet of the Group is presented in order of increasing liquidity. All amounts presented in the income statements and statement of comprehensive income relate to continuing operations.
The financial statements were approved for issue by the Board of Directors on 26 February 2018.
Taxes: Recognition of Deferred Tax Assets for Unrealised Losses. The amendments clarify the accounting for deferred tax assets on unrealised losses and state that deferred tax assets should be recognised when an asset is measured at fair value and that fair value is below the asset’s tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition of deferred tax assets. The adoption of this amendment has no impact on the consolidated financial statements as the clarifications are consistent with our existing interpretation.
The following new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2018 and have not been applied in preparing these financial statements. – IFRS 15 Revenue from Contracts with Customers replaces IAS 18 and establishes principles for revenue recognition that apply to all contracts with customers except for insurance contracts, financial instruments, and lease contracts. It requires an entity to recognise revenue when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. In particular, it specifies that variable consideration is only recognised to the extent that it is highly probable that a significant reversal will not occur. The Group will adopt this standard on 1 January 2018 and expects no significant impact on the Group’s financial statements. IFRS 15 has been endorsed by the EU. – IFRS 9 Financial Instruments incorporates new classification and measurements requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39 and new hedge accounting requirements. Under IFRS 9, all financial assets will be measured at either amortised cost or fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The hedge accounting requirements
are more closely aligned with risk management practices and follow a more principle-based approach. The amendments to IFRS 4 Insurance Contracts issued in 2016 address the accounting consequences of applying IFRS 9 to insurers prior to the adoption of IFRS 17 Insurance Contracts. The amendments include an optional temporary exemption from applying IFRS 9 that is available to companies whose predominant activity is to issue insurance contracts until the earlier of the effective date of IFRS 17 or 2021. The Group meets the eligibility criteria and will adopt this approach. Based on a high-level impact assessment using currently available information, the Group expects no significant impact on its balance sheet and equity, except for the effect of applying the new impairment requirements. The Group expects a recognition of an earlier and higher loss allowance resulting in a slightly lower equity and will perform a detailed assessment in the future to determine the extent. IFRS 9 has been endorsed by the EU. – IFRS 16 Leases replaces IAS 17
Leases and addresses the definition of a lease, recognition and measurement of leases. Leasee will be required to account for all operating leases in a similar manner to the current financial lease accounting recognising lease assets and liabilities on balance sheet. In addition, the current rental charge in the income statement will be replaced with a depreciation charge for the lease assets and the interest expense for the lease liabilities. The Group is currently assessing the impact of adopting the standard and will adopt it on 1 January 2019. IFRS 16 has been endorsed by the EU. – IFRS 17 will replace IFRS 4 and sets out requirements relating to the measurement, presentation and disclosure of insurance contracts. It prescribes a general measurement model based on the discounted current estimates of future cash flows including an explicit risk adjustment and a contractual service margin which represents the unearned profit of the contracts. Application of a simplified premium allocation approach, which is similar 2 Basis of preparation 2.1 Significant accounting policies Changes in accounting policies continued to the current unearned premium approach, is permitted if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. IFRS 17 requires any expected losses arising from loss-making contracts to be accounted for in income statement when the entity determines that losses are expected. The Group plans to adopt the new standard on the required effective date of 1 January 2021. The Group is evaluating the impact of adopting IFRS 17 on the Group’s financial statements. IFRS 17 has not been endorsed by the EU.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisitionby -acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets.
2.3 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). Entities operating in France, Germany, The Netherlands, Spain, Portugal, Ireland and Belgium have functional currency of Euros; those subsidiary entities operating from the US, Bermuda, Guernsey and Syndicate 3624 have functional currency of US Dollars. Functional currencies of entities operating in Asia include US Dollars, Singapore Dollars and Thai Baht. All other entities have functional currency of Sterling.
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as the acquiring entity’s assets and liabilities and are translated at the rate at acquisition. 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.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable 2 Basis of preparation continued 102 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
These intangible assets with finite lives will be assessed for indicators of impairment at each reporting date. Where there is an indication of impairment then a full impairment test is performed. An impairment loss recognised for an intangible asset in prior years should be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised.
The fair value of a non-financial asset is determined based on its highest and 2 Basis of preparation 2.5 Intangible assets (b) Other intangible assets continued 103Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are determined based on the best estimate of the cost of future claim payments plus an allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes using, as inputs, the assessments for individual cases reported to the Group, statistical analysis for the claims incurred but not reported, an estimate of the expected ultimate cost of more complex claims that may be affected by external factors, for example, court decisions and an allowance for quantitive uncertanties not otherwise approved.
derivative contract is entered into and are subsequently valued at fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether 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.
(f) Retroactive reinsurance transactions Reinsurance transactions that transfer risk but are retroactive are included in reinsurance assets. The excess of estimated liabilities for claims and claim expenses over the consideration paid is established as a deferred credit at inception. The deferred amounts are subsequently amortised using the recovery method over the settlement period of the reserves and reflected through the claims and claim adjustment expenses line. In transactions where the consideration paid exceeds the estimated liabilities for claims and claim adjustment expenses a loss is recognised immediately. If the adverse development exceeds the original loss, deferred gains are recorded. The deferred gains are subsequently recognised into earnings over the settlement period of the reserves.
(h) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in the income statement.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each business unit to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk provision’). Any DAC written-off as a result of this test cannot subsequently be reinstated.
normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(d) Termination benefits Termination benefits are payable when employment is terminated before the
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. Plan assets include insurance contracts issued by the Group. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income.
2 Basis of preparation 2.16 Employee benefits (a) Pension obligations continued 106 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
2.23 Reporting of additional performance measures The Directors consider that the profit excluding foreign exchange gains/ (losses), the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall in note 4 provide useful information regarding the underlying performance of the Group’s businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision-maker. However, these four measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed in notes 5 and 6, are likewise considered to be additional performance measures.
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 and liabilities as being most critical to an understanding of the Group’s result and position.
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 25.
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 note 29.
2.22 Use of significant estimates, judgements and assumptions The preparation of financial statements requires the use of significant estimates, judgements and assumptions. The Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of deferred tax assets 2 Basis of preparation continued 107Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
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 aggregate 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 21, are extreme hypothetical events selected to represent major events occurring in areas with large insured values. 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 unprecedented, 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. The Group’s insurance contracts include provisions to contain losses, such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
108 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2017
3 Management of risk 3.1 Insurance risk i) Underwriting risk continued
109Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
ii) Reserving risk The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 25.
The majority of the Group’s casualty exposures are written on a claims-made basis. However the final quantum of these claims may not be established for a number of years after the event. Consequently a significant proportion of the casualty insurance amounts reserved on the balance sheet may not be expected to settle within 24 months of the balance sheet date.
Certain marine and property insurance contracts, such as those relating to subsea and other energy assets and the
Typical property covered by marine and other major property contracts includes fixed and moveable assets such as ships and other vessels, cargo in transit, energy platforms and installations, pipelines, other subsea assets, satellites, commercial buildings and industrial plants and machinery. These assets are typically exposed to a blend of catastrophic and other large loss events and attritional claims arising from conventional hazards such as collision, flooding, fire and theft. Climatic changes may give rise to more frequent and severe extreme weather events (for example earthquakes, windstorms and river flooding) and it may be expected that their frequency will increase over time.
3 Management of risk 3.1 Insurance risk i) Underwriting risk continued 110 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Directly held equity securities 3 3 Units held in funds – traditional long only 67 66 Units held in funds – long and short and special strategies 30 31 Geographic focus Specific UK mandates 43 41 Global mandates 57 59
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets. A 10% downward correction in equity prices at 31 December 2017 would have been expected to reduce Group equity and profit after tax for the year by approximately £30.5 million (2016: £28.0 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
At 31 December 2017, 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.
Note 21 provides an analysis of the measurement attributes of the Group’s financial instruments.
(a) Reliability of fair values The Group has elected to carry loans and receivables at amortised cost and all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments and the insurance-linked funds shown in note 21, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their 3 Management of risk 3.1 Insurance risk ii) Reserving risk continued 111Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review. 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 with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
At 31 December 2017, no amounts were outstanding on the Group’s borrowing facility (2016: £nil). At 31 December 2017, the Group had long-term debt of £275 million (2016: £275 million) being fixed-to-floating rate notes, as explained in note 18. The floating rate becomes effective from November 2025. The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 32.
The Group may also, from time to time, enter into interest rate future contracts in order to reduce interest rate risk on specific portfolios. The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2017 was £3,430 million (2016: £3,415 million). These may be analysed below as follows: Nature of debt and fixed income holdings weighting weighting
Government issued bonds and instruments 34 30 Agency and government supported debt 14 13 Asset-backed securities 3 5 Mortgage-backed instruments – agency 4 5 Mortgage-backed instruments – non-agency 1 2 Mortgage-backed instruments – commercial 1 1 Corporate bonds 40 41 Lloyd’s deposits and bond funds 3 3
3 Management of risk 3.2 Financial risk (c) Interest rate risk continued 112 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
3 Management of risk 3.2 Financial risk (d) Credit risk continued The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in high-quality instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union.
Between one and two years 1,065,768 1,290 – 1,067,058 1,007,139 Between two and five years 1,174,164 – – 1,174,164 1,183,179 Over five years 393,724 – – 393,724 521,484
Reinsurance inwards 434,435 270,428 205,379 46,879 957,121 Property – marine and major assets 85,099 52,171 43,371 11,385 192,026 Property – other assets 264,684 154,113 70,514 8,251 497,562 Casualty – professional indemnity 299,922 287,940 266,957 101,673 956,492 Casualty – other risks 115,755 86,990 140,687 54,471 397,903 Other* 149,488 38,322 27,333 6,393 221,536 Total 1,349,383 889,964 754,241 229,052 3,222,640
Reinsurance inwards 227,438 117,669 123,975 42,663 511,745 Property – marine and major assets 119,114 73,272 78,464 27,488 298,338 Property – other assets 202,617 84,902 41,573 11,223 340,315 Casualty – professional indemnity 231,754 243,872 279,303 117,541 872,470 Casualty – other risks 86,609 72,901 138,789 63,555 361,854 Other* 103,556 31,794 29,051 16,701 181,102 Total 971,088 624,410 691,155 279,171 2,565,824 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures.
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 20 and 26.
At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between Group companies where one party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to relate to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain a fuller understanding of the Group’s financial performance (note 12).
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities, intended to produce a natural hedge. Due attention is paid to local regulatory solvency and risk-based capital requirements. Details of all foreign currency derivative contracts entered into with external parties are given in note 20. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £205 million (2016: £249 million) which are denominated in foreign currencies.
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statement.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2017 Sterling
Intangible assets 123,762 12,328 – 1,724 137,814 Property, plant and equipment 40,445 4,136 3,035 998 48,614 Investments in associates 7,387 153 403 – 7,943 Deferred income tax 5,084 33,917 601 – 39,602 Deferred acquisition costs 98,557 179,461 45,766 6,682 330,466 Financial assets carried at fair value 797,714 2,610,476 331,724 67,229 3,807,143 Reinsurance assets 120,261 1,172,615 41,853 23,237 1,357,966 Loans and receivables including insurance receivables 267,667 466,335 67,392 29,310 830,704 Current tax asset 4,210 – 25 – 4,235 Cash and cash equivalents 157,697 329,065 110,987 45,040 642,789 Total assets 1,622,784 4,808,486 601,786 174,220 7,207,276
3.3 Capital risk management The Group’s primary objectives when managing its capital position are: – to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; – to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; – to maintain an efficient cost of capital; – to comply with all regulatory requirements by a significant margin; – to maintain financial strength ratings of A in each of its insurance entities; and – to settle policyholders' claims as they arise.
The Group sets the amount of capital required in its funding structure in proportion to risk. The Group then manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The BMA’s new regulatory capital requirements became effective on 1 January 2013. The Group had sufficient capital at all times throughout the year to meet these requirements. The BMA is currently trialling changes to its capital requirements. These are expected to be phased in between the 2019 and 2021 year-ends. We are actively monitoring these changes and will take any action necessary to deal with those changes.
The Solvency II regime came into force in the UK on 1 January 2016. This requires insurance companies to calculate their capital requirements using either an internal model or a standard formula. Hiscox Insurance Company Limited uses the standard formula to calculate its regulatory capital requirement. Its risk profile is sufficiently well represented by the standard formula not to warrant going through the internal model approval process. Hiscox’s Lloyd’s operations use the internal model that has been built to meet the requirements of the Solvency II regime. The model is concentrated specifically on the particular product lines, market conditions and risk appetite of each risk carrier.
3.4 Tax risk The Group is subject to income taxes levied by the various jurisdictions in which the Group operates, and the division of taxing rights between these jurisdictions results in the Group tax expense and effective rate of income tax disclosed in these financial statements. Due to the Group’s operating model, there is an unquantifiable risk that this division of taxing rights could be altered materially, either by a change to the tax residence, or permanent establishment profile, of Hiscox Ltd or its principal subsidiaries; or due to the re-pricing or re-characterisation for tax purposes of transactions between members of the Group, under local transfer pricing or related tax legislation. The Group seeks to manage this risk by: – maintaining appropriate internal policies and controls over its operations worldwide; – monitoring compliance with these policies on an ongoing basis; – adhering to internationally recognised best practice in determining the appropriate division of profits between taxing jurisdictions.
4 Operating segments The Group’s operating segment reporting follows the organisational structure and management’s internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. The Group’s four primary business segments are identified as follows: – Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the USA, Special Risks 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 and Hiscox Europe excludes the 3 Management of risk 3.3 Capital risk management Capital modeling and regulation continued 118 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Claims and claim adjustment expenses, net of reinsurance (560,008) (310,495) (146,498) – (1,017,001) (396,137) (260,468) (83,167) – (739,772) Expenses for the acquisition of insurance contracts (311,143) (123,987) (20,975) – (456,105) (262,545) (137,177) (10,118) – (409,840)
The following charges are included within the consolidated income statement: Year to 31 December 2017 Year to 31 December 2016
Impairment of intangible assets 1,519 – – – 1,519 6,346 – – – 6,346 4 Operating segments continued 119Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Combined ratio excluding foreign exchange impact (%) 94.5 108.7 98.9 – 98.8 91.8 99.4 64.9 – 90.6 * Investment fees have been reclassified from operational expenses to investment return, to record investment return on a net basis.
Claims and claim adjustment expenses, net of reinsurance (569,558) (382,623) (172,966) – (1,125,147) (402,508) (315,951) (94,819) – (813,278) Expenses for the acquisition of insurance contracts (320,516) (153,320) (22,101) – (495,937) (270,986) (165,131) (10,337) – (446,454)
* Investment fees have been reclassified from operational expenses to investment return, to record investment return on a net basis.
The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US, Guernsey, France, Germany, Belgium, The Netherlands, Spain, Portugal, Singapore and Thailand.
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties: Year to 31 December 2017 Year to 31 December 2016
The net asset value per share is based on 283,600,709 shares (2016: 279,805,393 shares), being the shares in issue at 31 December, less those held in treasury and those held by the Group Employee Benefit Trust.
The return on equity is calculated by using profit for the period divided by the adjusted opening total equity. The adjusted opening total equity represents the equity on 1 January of the relevant year as adjusted for time weighted aspects of capital distributions and issuing of shares or treasury share purchases during the period. The time weighted positions are calculated on a daily basis with reference to the proportion of time from the transaction to the end of the period.
4 Operating segments continued (c) Geographical information 121Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The total result for the Group before taxation comprises: Note *
Debt and fixed income securities 42,079 1.2 55,709 1.9 Equities and units in unit trusts 41,453 12.9 17,246 6.2 Deposits with credit institutions/cash and cash equivalents 3,755 0.5 1,881 0.3 Investment result – financial assets 87,287 2.0 74,836 1.9 9 Other income and operational expenses *
12 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses/(gains) arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
Unrealised translation (losses)/gains on intragroup borrowings (37) 37 – Total (losses)/gains recognised (37) 37 –
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 6.7% (2016: 6.6%), has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is written down to this amount.
(b) US state authorisation licences US state authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Board considers that economic benefits will accrue to the Group over an indefinite number of future periods due to the stability of the US insurance market. The licences are tested annually for impairment, and any accumulated impairment losses recognised are deducted from the historical cost amount to produce the net balance sheet carrying amount. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
The carrying value of software and development costs is reviewed for impairment on an ongoing basis by reference to the stage and expectation of a project. Additionally, at the end of each reporting period, the Group reviews the positions for any indication of impairment, and as a result of this no impairment was provided for (2016: £1,901,000 relating to the DirectAsia CGU).
At 31 December 2017 there were £18,322,000 of assets under development on which amortisation has yet to be charged (2016: £24,797,000).
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships. 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 test led to £274,000 of impairment (2016: £4,282,000) being recognised.
The Group’s land and buildings assets relate to freehold property in the UK. There was no impairment charge during the year (2016: £nil). Assets with a net book value of £nil were held under finance leases (2016: £nil).
This note provides details of the Syndicates and Special Purpose Insurers (SPI) managed by the Group, the acquisition and disposal of subsidiaries and associates during the year, investments in associates, together with details of business held for sale at the year-end.
(a) Subsidiaries Hiscox Dedicated Corporate Member Limited (‘HDCM’) underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and 3624).
15 Subsidiaries, associates and interests in other entities 127Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Associates incorporated in the UK and USA from 17 to 35% 13,102 9,651 15,049 1,103 Associates incorporated in Europe from 10% to 26% 2,688 1,803 2,116 666 Total at the end of 2017 15,790 11,454 17,165 1,769 100% results
As a result of the disposals, the Group has derecognised the assets and liabilities relating to the companies. Below is a table disclosing the impact to the consolidated financial statement following the disposal.
Acquisition costs incurred in relation to insurance contracts written 618,176 (168,419) 449,757 586,115 (157,738) 428,377 Acquisition costs expensed to the income statement (619,704) 163,599 (456,105) (538,467) 128,627 (409,840) Foreign exchange and other adjustments (14,598) 3,497 (11,101) 27,427 (4,359) 23,068
Amounts owed to credit institutions 13,664 – Derivative financial liabilities 20 121 474 Total financial liabilities carried at fair value 13,785 474
The fair value of the long-term debt is estimated at £317.4 million (2016: £292.3 million). The fair value measurement is classified within Level 1 of the fair value hierarchy. The fair value is estimated by reference to the actively traded value on the London Stock Exchange.
18 Financial assets and liabilities 130 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Gross receivables arising from insurance and reinsurance contracts 743,727 699,768 Provision for impairment (1,644) (1,276) Net receivables arising from insurance and reinsurance contracts 742,083 698,492
Due from contract holders, brokers, agents and intermediaries 481,888 524,958 Due from reinsurance operations 260,195 173,534
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 726,415 720,509 After one year 104,289 82,397
Foreign exchange forward contracts 30,196 138 (121) 17 Interest rate futures contracts 122,122 166 – 166 Equity index futures – – – –
Equity index options During the year, the Group purchased a number of equity index futures in order to economically hedge equity market exposure. All contracts were exchange traded and the Group made a loss on these future contracts of £144,000 (2016: loss of £398,000) as included in investment result in note 7.
In accordance with IFRS 13: Fair Value Measurement, the financial instruments carried at fair value, based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value, are provided below.
Financial assets Debt and fixed income securities 1,005,111 2,409,838 – 3,414,949 Equities and shares in unit trusts – 293,187 12,155 305,342 Deposits with credit institutions 24,592 – – 24,592 Insurance-linked fund – – 46,821 46,821 Derivative financial assets – 329 – 329
21 Fair value measurements continued 134 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The presentation of the comparative in the cash flow statement in relation to cash derecognised on loss of control has been reclassified to cash inflows from the sale of subsidiaries.
Employee share option scheme – proceeds from shares issued 22 1,534 – Scrip dividends to owners of the Company 8 1,270 –
Employee share option scheme – proceeds from shares issued 58 4,681 – Scrip dividends to owners of the Company 23 4,412 –
During the year, the Group offered its shareholders the option of receiving a scrip dividend alternative to the interim cash dividend. This resulted in the Company paying the shareholders, who opted for a scrip dividend, in shares of equal value to the cash dividend at a specified date. The full dividend was distributed from retained earnings, and the new shares issued for the scrip dividend were reflected in share capital and share premium.
22 Cash and cash equivalents 135Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
23 Share capital continued Share options and Performance Share Plan awards Performance Share Plan awards are granted to Directors and to senior employees. No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’ service (the vesting period) and the Group achieving targeted levels of returns on equity. Share options are also conditional on the employees completing three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2017 for the Executive Directors are shown in the annual report on remuneration. The total number of options and Performance Share Plan awards outstanding is 10,009,723 (2016: 10,848,727) of which 2,966,870 are exercisable (2016: 2,528,736). The total number of SAYE options outstanding is 1,580,570 (2016: 1,971,842).
Currency translation reserve at 31 December 148,789 202,272 Retained earnings at 31 December 1,468,639 1,488,306
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2017 and 2016 are not material.
25 Insurance liabilities and reinsurance assets continued 25.1 Insurance contracts assumptions 138 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Liability recognised in respect of prior accident years at 100% level 145,810 Total gross liability to external parties at 100% level 3,733,188 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2017.
Less: attributable to external Names 167,206 109,944 115,793 158,677 109,232 66,774 72,675 67,167 72,099 64,815 1,004,382 Group’s share of cumulative payments (699,294) (522,999) (644,013) (954,993) (734,785) (551,836) (595,285) (572,498) (585,898) (416,584) (6,278,185) Liability for 2008 to 2017 accident years recognised on Group’s balance sheet 18,788 32,861 46,378 64,046 134,031 88,963 131,432 281,489 553,030 1,758,446 3,109,464 Liability for accident years before 2008 recognised on Group’s balance sheet 113,176 Total Group liability to external parties included in balance sheet – gross** 3,222,640 **This represents the claims element of the Group’s insurance liabilities.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 874,319 770,050 909,622 1,134,891 898,706 853,422 884,251 941,762 1,100,293 1,387,895 9,755,211 eight years later 650,361 566,952 – – – – – – – – 1,217,313 nine years later 652,969 – – – – – – – – – 652,969
Current estimate of cumulative claims 652,969 566,952 667,599 929,696 703,822 624,512 656,820 792,593 992,943 1,387,895 7,975,801
Current estimate of cumulative claims 652,969 566,952 667,599 929,696 703,822 624,512 656,820 792,593 992,943 1,387,895 7,975,801 Less: attributable to external Names (117,941) (92,225) (95,349) (125,164) (74,881) (64,029) (68,368) (82,307) (101,243) (151,590) (973,097) Group’s share of current ultimate claims estimate 535,028 474,727 572,250 804,532 628,941 560,483 588,452 710,286 891,700 1,236,305 7,002,704
Less: attributable to external Names 115,138 86,597 86,995 113,555 58,819 53,760 54,316 51,937 51,257 46,906 719,280 Group’s share of cumulative payments (518,696) (445,632) (540,641) (749,578) (515,121) (482,383) (463,533) (459,395) (466,347) (322,199) (4,963,525) Liability for 2008 to 2017 accident years recognised on Group’s balance sheet 16,332 29,095 31,609 54,954 113,820 78,100 124,919 250,891 425,353 914,106 2,039,179 Liability for accident years before 2008 recognised on Group’s balance sheet 78,056 Total Group liability to external parties included in balance sheet – net** 2,117,235 **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Total at beginning of year (2,565,824) 543,115 (2,022,709) (2,038,096) 365,477 (1,672,619) Claims and claim adjustment expenses for year (1,931,417) 914,416 (1,017,001) (1,004,601) 264,829 (739,772) Cash paid for claims settled in the year 1,107,481 (287,420) 820,061 776,722 (149,465) 627,257 Exchange differences and other movements 167,120 (64,706) 102,414 (299,849) 62,274 (237,575) Total at end of year (3,222,640) 1,105,405 (2,117,235) (2,565,824) 543,115 (2,022,709)
Claims reported and claim adjustment expenses (1,204,509) 361,657 (842,852) (977,664) 159,141 (818,523) Claims incurred but not reported (2,018,131) 743,748 (1,274,383) (1,588,160) 383,974 (1,204,186) Total at end of year (3,222,640) 1,105,405 (2,117,235) (2,565,824) 543,115 (2,022,709)
*The net movement in 2017 and 2016 relates to a retroactive reinsurance arrangement that transferred the benefits and risks of some of the Group’s insurance portfolio.
A reconciliation of the unearned premium reserves is as follows: Gross
Premiums earned through the income statement (2,556,993) 682,512 (1,874,481) (2,220,853) 545,840 (1,675,013) Foreign exchange and other adjustments (51,896) 12,507 (39,389) 95,160 (20,405) 74,755
Creditors arising out of direct insurance operations 60,931 27,997 Creditors arising out of reinsurance operations 373,647 319,494
Share of Syndicates’ other creditors’ balances 6,368 9,844 Social security and other taxes payable 20,090 16,429 Other creditors 10,555 5,650
25 Insurance liabilities and reinsurance assets continued 141Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The amounts expected to be settled before and after one year are estimated as follows: Within one year 550,457 474,023 After one year 108,000 125,179
The amounts expected to be settled after one year of the balance sheet date primarily relate to reinsurance creditors.
Trading losses in overseas entities 34,520 41,392 Deferred tax assets 15,142 – Deferred tax liabilities (10,060) – Total deferred tax asset 39,602 41,392
Deferred tax assets – 34,388 Deferred tax liabilities – (51,418) Total net deferred tax liability – (17,030)
Insurance contracts – equalisation provision* (24,457) 5,132 – (19,325) Open years of account (26,208) 36,301 – 10,093 Total deferred tax liabilities (51,418) 41,358 – (10,060) Net total deferred tax liabilities (17,030) 21,295 817 5,082
Trading losses in overseas entities 41,392 (6,872) – 34,520 Net total deferred tax assets/(liabilities) (17,030) 21,295 817 5,082 Net deferred tax position asset/(liability) 24,362 14,423 817 39,602 * Prior to January 2016, the solvency regulations in the UK required certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. Under these regulations, the provision was adjusted each year based on a percentage of net premiums written for those lines for business during the financial year, subject to a maximum percentage. Any annual increase in the provision was a deductible expense for tax purposes, and any release was taxable income. From 2008, Lloyd’s Corporate Members were entitled to a tax deduction for claims equalisation provisions although this was not a solvency requirement for Lloyd’s. Equalisation provisions are not permitted under IFRS, which therefore resulted in a temporary difference for tax purposes. Finance Act 2012 repealed the legislation which treated the equalisation provision as a tax deductible expense, and treats the existing equalisation provision as a receipt taxable over six years with effect from January 2016, when the former solvency regulations were replaced by Solvency II, which does not require an equalisation provision. The Group has provided for the deferred tax liability on its claims equalisation provisions during the year.
Following changes to the future UK main rate of corporation tax introduced in the Finance Act 2016, the deferred tax on the Syndicates’ open years of account is calculated with reference to the tax rate expected to be in force when those years close. Equally, the deferred tax liability on equalisation provision is calculated at the tax rate expected to be applicable as it unwinds. All other UK deferred income tax assets and liabilities are calculated at 17% for the year ended 31 December 2017 (2016: 17%). The Tax Cuts and Jobs Act, which entered into US law in December 2017, reduces the US Federal corporate tax rate from 35% to 21% with effect from 1 January 2018. Deferred tax assets and liabilities arising from the Group’s US operations have therefore been calculated at 21% for the year ended 31 December 2017 (2016: 35%).
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of changes in equity to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of changes in equity is £3,532,000, comprising £817,000 deferred tax and £2,714,000 current tax (2016: £9,356,000 deferred tax and £2,053,000 current tax).
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 273,803 271,072 Fair value of scheme assets (226,311) (214,933) Deficit for funded plans 47,492 56,139 Net amount recognised as a defined benefit obligation 47,492 56,139
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 2014, and updated at each intervening balance sheet date by the actuaries. The valuation work for 31 December 2017 is ongoing as at the date of this report. 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.
The amounts recognised in total comprehensive income are as follows: Note
Interest cost on defined benefit obligation 7,208 7,916 Interest income on plan assets (5,689) (7,910) Net interest cost 1,519 6 Administrative expenses and taxes 237 166 Total expense recognised in operational expenses in the income statement 9 1,756 172 Remeasurements Effect of change in financial assumptions 3,736 68,094 Return on plan asset (excluding interest income) (14,139) (12,202) Changes in asset ceiling/onerous liability (excluding interest income) – – Remeasurement of third-party Names share of defined benefit obligation 1,742 (9,361) Total remeasurement included in other comprehensive income (8,661) 46,531 Total defined benefit charge/(credit) recognised in comprehensive income (6,905) 46,703
The movement in liability recognised in the Group’s balance sheet is as follows: Group defined benefit liabilities at beginning of the year 56,139 75 Third-party Names’ share of liability (9,402) (13) Net defined benefit liability at beginning of year 46,737 62 Defined benefit cost included in net income 1,756 172 Credit from third-party Names (294) (28) Total remeasurement included in other comprehensive income (8,661) 46,531 Net defined benefit liability at end of year 39,538 46,737 Third-party Names’ share of liability 7,954 9,402 Group defined benefit liability at end of year 47,492 56,139
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 271,072 199,120 Interest expense 7,208 7,916 Cash flows Benefit payments (8,213) (5,671) Increase due to plan combinations – 1,613 Remeasurements Changes in financial assumptions 3,736 68,094 Closing present value of scheme obligations 273,803 271,072
Effect of asset ceiling/onerous liability – – – – 10,553 – – Gross liability recognised on balance sheet 47,492 56,139 75 32,166 4,366 16,907 –
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: 2017 years 2016 years
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: 2017 years 2016 years
Discount rate 2.6 2.7 Inflation assumption (RPI) 3.1 3.2 Inflation assumption (CPI) 2.1 2.2 Pension increases 3.1 3.2
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 2017 as follows: Present value of unfunded obligations before change in assumption
Effect of a change in discount rate Use of discount rate of 2.85% 47,492 32,480 15,012 Use of discount rate of 2.35% 47,492 63,719 (16,227)
Effect of an increase in inflation Use of RPI inflation assumption of 3.35% 47,492 54,075 (6,583) Use of RPI inflation assumption of 2.85% 47,492 41,288 6,204 29 Employee retirement benefit obligations continued 147Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
30 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) 26,310 336,986 Weighted average number of ordinary shares (thousands) 281,964 281,175 Basic earnings per share (pence per share) 9.3p 119.8p
Profit for the year attributable to the owners of the Company (£000) 26,310 336,986 Weighted average number of ordinary shares in issue (thousands) 281,964 281,175 Adjustments for share options (thousands) 9,065 9,402 Weighted average number of ordinary shares for diluted earnings per share (thousands) 291,029 290,577 Diluted earnings per share (pence per share) 9.0p 116.0p
Final dividend for the year ended: 31 December 2016 of 19.0p (net) per share 53,578 – Second interim dividend for the year ended: 31 December 2015 of 32.0p (net) per share – 89,674 Interim dividend for the year ended: 31 December 2017 of 9.5p (net) per share 26,878 – 31 December 2016 of 8.5p (net) per share – 24,260
The final dividend for the year ended 31 December 2016 was either paid in cash or issued as a scrip dividend equivalent of 19p per share. The final dividend for the year ended 31 December 2016 was paid in cash of £51,246,000 and 251,000 shares for the scrip dividend.
The Board has declared a final dividend of 19.5p per share to be paid on 12 June 2018 to shareholders on the register at 11 May 2018, taking the total ordinary dividend per share for the year to 29.0p (2016: 27.5p).
Trust Deed charged to Lloyd’s of London, to meet any liabilities they occur from their interest in Syndicates 33 and 3624. At 31 December 2017, HDCM held £323 million of investments, £5 million of cash and a $5 million letter of credit in favour of Lloyd’s of London under this arrangement. At 31 December 2017, HCL held £485 million of investments, £6 million of cash and a $5 million Letter of Credit in favour of Lloyd’s of London under this arrangement.
Security and Trust Deeds were established for HCL on 25 April 2017 to replace the existing HCL and Hiscox Ltd Deeds of covenant which previously were used to meet HDCM obligations at Lloyd’s. The obligations in respect of these Deed of covenants were secured by a fixed and floating charge over investments and other assets of the company in favour of Lloyd’s. The total guarantee given under these Deeds of covenant (subject to limitations) at 31 December 2016 amounted to £29 million in respect of Hiscox Ltd supported by £34 million of investments and US$486 million in respect of HCL supported by US$369 million of investments. Additionally at 31 December 2016, HDCM held £221 million of investment securities and £38 million of cash in favour of Lloyd’s.
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2016: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s the arrangement is collateralised with cash of £50,000 (2016: £50,000).
(f) Hiscox Europe Underwriting Limited has arranged bank guarantees with respect to their various office deposits for a total of €207,000 (2016: €207,000). These guarantees are held with ING Bank (Belgium) for €14,000 (2016: €14,000), ABN Amro (Netherlands) for €33,000 (2016: €33,000) and HypoVereinsbank-UniCredit (Germany) for €160,000 (2016: €160,000).
(g) Hiscox S.A. has arranged a bank guarantee with respect to the office in Luxembourg with a value of €42,000 (2016: €nil). This guarantee is held with ING Bank (Luxembourg).
149Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Later than one year and no later than five years Land and buildings 34,635 34,141 Office equipment and other 479 547
(a) Syndicate 33 at Lloyd’s Related-party balances between Group companies and Syndicate 33 are as follows.
Gross premium income achieved through associates 64,991 234,201 Commission expense charged by associates 17,693 21,318 Amounts payable to associates at 31 December – – Amounts receivable through associates at 31 December 32,914 58,536
36 Subsequent events The functional currency of Hiscox Syndicate 33, Hiscox Dedicated Corporate Member Limited, Hiscox Syndicates Limited and Hiscox Capital Ltd and the reporting currency of the Group has changed to US Dollars effective 1 January 2018. This change will significantly reduce the volatility of the Group’s earnings due to foreign exchange movements, in particular due to translation of foreign currency balances. Given that a significant majority of Group earnings are denominated in US Dollars, we believe that this change will give investors and other stakeholders a clearer understanding of Hiscox’s performance over time.
Financial assets carried at fair value 3,807,143 3,792,033 2,921,585 2,828,847 2,585,054
Five-year summary 152 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary