Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange. We can trace our roots in the Lloyd’s market back to 1901 and our adaptability has meant we have evolved organically over time.
We are now a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow. Our values define our business, with a focus on quality, courage, excellence in execution and our people.
Reserve releases (£m) 213.0 205.9 *Additional performance measures are discussed on page 25.
Financial highlights Our 2016 result is a record profit of £354.5 million, reflecting a year of good underwriting, favourable foreign exchange gains and a strong investment return.
Why invest in Hiscox? Hiscox is a uniquely balanced insurer with a clear vision for the future. Our ambition is to be a respected specialist insurer valued by our customers, business partners and shareholders, with a diverse portfolio by product and geography.
Retail is smaller premium, less volatile business written through Hiscox Retail. Investment in our brand and specialist knowledge differentiates us here. We aim to grow this business between 5-15% per annum.
Our strategy A To use our underwriting expertise in Bermuda and London to write larger premium, volatile or complex risks.
A To protect and nurture our distinctive culture by recruiting the best people, and by focusing on organic growth.
USA Atlanta, Chicago, Dallas, Los Angeles, New York City, San Francisco, White Plains (New York)
Our operations span every continent and we are not overly reliant on any one of our divisions for the Group’s overall profits.
London Hiscox London Market delivers good growth in challenging markets, with new teams and products including product recall and cargo.
Europe Hiscox Europe delivers a record result. Hiscox Germany expands their classic car and cyber insurance offerings.
USA Hiscox USA is a stand-out performer with growth of over 30% as our investment in marketing and talent pays off.
We always underwrite for profit, not for market share, and we actively manage our business mix according to the conditions in each sector.
The Hiscox businesses maintain strong and stable credit ratings: A by A.M. Best and S&P and A+ by Fitch. The Group has an increasingly diversified capital base and is in a strong position to take advantage of future growth opportunities.
increased gross written premiums by 53.4% to £2.40bn delivered an average combined ratio of reported average return on equity of achieved compound dividend growth of returned capital to shareholders of £881m
In the UK, 96% of Hiscox home insurance customers who have made a claim would recommend us*.
#1 Our broker partners value our claims expertise, rating Hiscox number one in the Gracechurch London Claims Report for overall service quality.
A Hiscox London Market won Insurance Team of the Year and Marketing Team of the Year.
I am pleased to report a record profit of £354.5 million (2015: £216.1 million), over 60% more than last year. This year we maintained our underwriting discipline and benefited from a very favourable foreign exchange gain and good investment return.
The Group continues to use retained profits to capitalise on the opportunities for profitable growth which we have created. Despite our shifting profile towards retail, as in previous years our key capital constraint remains the view of rating agencies on our solvency.
Robert Childs Chairman remain given the higher coupons available. The outlook remains unclear, and we therefore expect another year of relatively modest investment returns.
Industry stress test Last year I talked about my desire to gain consensus on an industry-wide ‘dry run’ to test the London Market’s ability to withstand a mega-catastrophe. This year, I’m delighted to say we have accomplished that task. It is rare for such an initiative to be driven by the industry rather than the regulator, but we succeeded in bringing together insurers, brokers, Lloyd’s, rating agencies, regulators and Her Majesty’s Treasury.
The London Market is the world’s pre-eminent insurance market and our industry-led approach to this exercise is one of many reasons this market is so special. This exercise sets us apart from others at a time when there is greater fluidity of capital and a growing expertise in other territories to challenge us. We now have a blueprint for what the London insurance market needs to do to maintain its leadership position.
People We should never think that we know everything. For the Group to thrive, it needs to continually adapt to the changes in our industry, and to do that we must embrace new ideas and perspectives. That is why it is so important to us to attract and retain the brightest and best people from a range of backgrounds.
In 2017, our expectation is that yields are more likely to rise than fall. Our largely short-duration portfolio means we are well positioned to take advantage of such a move. Capital gains will be harder to come by in such an environment and income will play a more important role, so our preference for corporate credit is likely to
These very good results mask ongoing soft market challenges. Our London Market business continues to face pricing pressure in most lines. Despite this, it delivered a strong profit of £44.0 million (2015: £54.6 million) and growth in local currency of 14.2%. Our investment in new teams has offset the decline in some established lines. We expect the soft market conditions to continue in 2017, and that particularly tortured London Market lines will shrink.
Hiscox Re and ILS has spent the last three years evolving and adapting to market disruption, successfully navigating new capital and declining rates to become a premier league player in the reinsurance and ILS space. Through good underwriting and good fortune we have avoided significant losses in what has been the worst year for catastrophes since 2012, increasing profits to £115.5 million (2015: £97.5 million).
Our adaptability has meant we have evolved organically over the past decade. We are now a lot more than a Lloyd’s business with a retail play on the side. We are a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow. We are not afraid to take bets, make difficult decisions or shrink as we adapt to the markets around us.
Hiscox Retail Hiscox Retail continues to grow in significance and this year generated almost half of the Group’s gross written premiums at £1,181.4 million (2015: £989.8 million). It is the single biggest segment in the Group, a strong profit contributor, and it differentiates us from our peers. We continue to invest heavily in our brand and our significant investment in IT infrastructure in both the UK and USA will support our next phase of growth.
Hiscox Retail comprises Hiscox UK and Ireland, Hiscox Europe, and Hiscox International. I review them in turn below.
Hiscox UK and Europe This division provides commercial insurance for small- and medium-sized businesses, typically operating in white-collar industries, and personal lines cover – predominantly high-value household, fine art and collectibles, and luxury motor. These products are distributed via brokers, through a growing network of partnerships, and direct to consumers.
Our retail businesses in the UK and Europe doubled profits to £122.0 million (2015: £59.6 million) and experienced a benign year for claims, with minimal exposure to Storm Katie in the UK and Storm Elvira in France.
Hiscox UK and Ireland Our most mature retail operation, Hiscox UK and Ireland, increased gross written premiums by 12.5% to £498.6 million (2015: £443.3 million), with every region contributing.
The broker channel remains a key driver of growth, particularly in professions and specialty commercial lines where we have expanded our appetite for larger risks. Within our technology book, our cyber and data risks product continues to perform well, supported by a focused marketing campaign. Underwriting partnerships grew by over 60% and we have made good progress in motor following our acquisition of RH Classics in 2015. Our market-leading position in media, entertainment and events, and specialised claims handling team, continue to set us apart, achieving double-digit premium growth in the period.
In 2016 we successfully launched a number of new products. These included Hiscox Trader, an e-trading solution for commercial brokers to make it easier for them to quote and sell Hiscox products to their clients; a renovation and extension product that provides homeowners with additional protection when undertaking sizable building works; a liability product for tradespeople and contractors; and a crime product to protect small businesses from a broad range of fraudulent acts. All have performed well so far, particularly Hiscox Trader, which has helped us to streamline the way we quote and process small risks.
Our strong brand, established broker and partner relationships and award-winning claims service continue to deliver good opportunities in the UK market.
2 Strategic report Chief Executive’s report 35 Governance 73 Remuneration 101 Financial summary £400.0m Hiscox USA gross premiums written, an increase of 30% in constant currency.
Benelux, where our classic car product (available through brokers) is proving popular, and our cyber offering is gaining traction. Cyber is a growing area of focus for our business, and this year a refined cyber offering will be launched in both France and Iberia.
Hiscox France experienced a difficult year following the loss of a number of key underwriters in 2015 and the cancellation of a challenged home surveyors’ scheme. Our direct operations are performing well, helped by a move away from brand-building activity towards more focused acquisition marketing.
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 shrank to £13.0 million (2015: £18.2 million), following the sale of our business in Hong Kong.
Hiscox Special Risks This business underwrites special risks including kidnap and ransom, fine art and executive security from offices in Cologne, London, Los Angeles, Miami, Munich, New York, Paris and St Peter Port.
The business delivered gross written premiums of £95.2 million (2015: £99.3 million), a decrease of 4.2% or 11.6% in constant currency, due to intense competition and rate pressure
led to a conflict between underwriting discipline and marketplace relevance. This is the reality of the market, and our response is to remain disciplined and accept that we may need to shrink and even exit lines of business where we cannot see the opportunity for long-term profitability. We are growing very selectively in areas where we have introduced new lines – like US flood, where we believe we have an edge over our competitors – or where we have employed new teams, such as general liability, product recall and cargo.
The marine and energy liability and hull accounts are broadly flat, with some reductions in the upstream energy book. Due to rate reductions, a lack of new business, and the continuing depression in oil prices, we are actively managing our business in these lines. The cargo team we hired in 2016 is already bringing us new opportunities and we will cautiously grow in 2017. We have avoided some of the large cargo losses in the market.
Aerospace and specialty This division includes our aviation, space, contingency, terrorism, political risks, personal accident and product recall business. It has had a mixed year, with some lines under more pressure than others.
The current trading environment is reminiscent of the London Market in the 1990s. The ongoing abundance of capital and a lack of major loss events have resulted in pricing pressure and
our involvement in 2017. We will not be renewing the extended warranty business and will write a much reduced line on the physical damage portfolio.
The role of the alternative distribution division is to facilitate innovation in the use of technology and specialist data to serve different markets, but to succeed at this requires a degree of selection and discipline. We are expanding in our portfolio business, where we are supporting other expert underwriters with not only capacity but also claims, wordings and pricing expertise. We have a very strong pipeline of opportunities and this area is growing profitably.
Hiscox Re and ILS Hiscox Re and ILS comprises the Group’s reinsurance businesses across the world and ILS activity through our flagship Kiskadee funds.
Sandy in 2012. The Group set aside net US$35 million for the event, based on an insured market loss of US$8 billion, to cover claims and reduced profit commissions. This event was within our expected catastrophe loss budget for the year.
This year saw the successful activation of some new sponsorships, including the London to Brighton Veteran Car Run in the UK and the International Edelweiß Bergpreis in Germany, both of which helped to promote our classic car and high net worth business. In order to drive awareness of DirectAsia, we became the Official Club Partner of ratio (2015: 46.6%), an excellent result boosted by a material contribution from fees and profit commissions. This was down to good risk selection, which saw the business avoid significant losses in a year of high frequency, and lower severity catastrophe activity.
Kiskadee assets under management reached US$1.25 billion in 2016. Demand for participation in the funds continues to increase, with the only constraint to growth being access to adequately priced opportunities. Pleasingly, the Hiscox Re and ILS team were awarded Underwriting Team of the Year at the Insurance Day London Market Awards.
Gross premiums written 495.2 383.4 Net premiums earned 211.4 180.7 Underwriting profit 82.5 85.9 Investment result 11.7 4.7 Foreign exchange and other* 21.3 6.9 Profit before tax 115.5 97.5 Combined ratio 53.7% 46.6% Combined ratio excluding foreign exchange 65.6% 51.4% *Includes finance cost.
Retaining our capital efficiency is an important priority. We are proposing a 15% increase in our annual dividend and remain committed to progressive increases in the future whilst retaining the balance of our profits to fund our growth. Areas for capital deployment include our retail businesses in the UK, US and Europe. In our London Market business we do not expect an immediate capital release as this business shrinks and we have to manage the associated reserving risk as the business on our books matures.
For some time we have been communicating to rating agencies and regulators that Hiscox has a broad diversified business, both by product and geography, and we are no longer a London Market business with a retail operation on
Hiscox has been planning for a Brexit in which the UK will have regulatory equivalence with the EU-27, but no passporting or freedom of services. This means that to continue to conduct business in Europe we will have to incorporate a new carrier within the EU-27. Our European business employs 300 people, underwrites £174.7 million in premiums and has a combined ratio of 86.3%, so we have an incentive to retain and expand this business. We are in discussions with two regulators about domiciling our new legal entity in their country. We expect to begin the process of incorporation in the first half of this year, so that we are in a position to write new business into the new carrier before the end of 2018.
Investment Managers. Hiscox remains a material participant in the reinsurance market thanks to Jeremy’s leadership.
We talk a lot about the symbiotic relationship between our retail and bigticket businesses. This has never been more relevant than this business plan cycle as we proactively reduce the big-ticket insurance lines, but continue to grow the retail lines to drive growth and profits.
There are uncertainties, both from the insurance and the political environments, but Hiscox has the right talent, footprint and financial power to adapt to what lies ahead, taking advantage of trends for the benefit of shareholders, customers and staff.
People During 2016 we successfully managed a number of senior changes. In September we welcomed Aki Hussain as our new Group Chief Financial Officer. Aki is already proving to be an excellent addition to our senior team, bringing extensive financial services experience, strong regulatory exposure, and a fresh perspective. I would like to take this opportunity to thank John Worth, our interim CFO, for his great contribution over his tenure.
During the year Pierre-Olivier Desaulle stepped down as Managing Director of Hiscox Europe. When Pierre-Olivier assumed leadership of this business it had a premium income of €19.5 million and was loss making. It is now a €218.5 million business and a valuable profit contributor to the Group. I would like to thank Pierre-Olivier for his endeavours over his tenure. He is succeeded by Stéphane Flaquet, Group IT Director and formerly Chief Operating Officer of Hiscox Europe. His knowledge of our business and the European territories in which we operate is already having a positive effect and we look forward to continued growth and steadily increasing profits under his leadership.
Mean industry loss $bn 21Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm
bn m ar ke t l os s 7 ye ar re tu rn p er io d
bn m ar ke t l os s 15 y ea r r et ur n pe rio d
6b n m ar ke t l os s y ea r r et ur n pe rio d
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2017 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.
Capital management The Board monitors the capital strength of the Group and ensures its insurance carriers are suitably capitalised for regulatory and ratings purposes, taking into account future needs including growth where opportunities arise. Considering the financial performance in 2016 and the momentum of the business, the Group has proposed to increase the final dividend by 19% to 19p, resulting in a full year ordinary dividend of 27.5p (2015: 24.0p), up 15%. The Group will continue to maintain a progressive core dividend policy. No special dividend will be paid this year to allow the balance of earnings to be retained within the business to support growth in areas expected to be profitable.
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these sources comprised $500 million at 31 December 2016 (2015: $500 million), of which $10 million was utilised at 31 December 2016 (2015: $71.9 million).
Group regulators As a Bermudian-registered holding company, the Bermuda Monetary Authority (BMA) is the Group’s regulator under the Bermuda Group Supervisory Framework. The BMA requires the Group to monitor its Group solvency capital requirement under which the Group provides a solvency return in accordance with the Group Solvency Self Assessment framework (GSSA) including an assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR).
The ability of the Group to attract business, particularly reinsurance, is dependent upon the maintenance of appropriate financial strength ratings from the leading rating agencies. Rating agencies £1,970m Available capital as at 31 December 2016.
Internal capital requirements The Group sets risk limits and tolerances which reflect the amount of risk it is willing to accept as a business. As part of good risk management, our current exposure by the key risk types is monitored against these pre-defined measures throughout the year. 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. This underwriting risk limit definition has not changed since last year. A market loss at this remote return period would be very big indeed and would be expected to bring about increases to the pricing of risk. Our capital strength and financial flexibility following this scenario means the Group would be well positioned to take advantage of any opportunities that may arise. After the payment of the final dividend on 20 June 2017, the available capital will reduce to approximately £1.92 billion, comfortably meeting the current regulatory, rating agency and internal capital requirements. Our estimate of the year end 2016 BSCR is $1.2 billion, with available statutory capital of $2.6 billion and a solvency ratio of 214%. 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.
Net asset value per share increased by 19.2% to 649.9p (2015: 545.0p), with net tangible asset value at 605.7p (2015: 500.0p).
The net claims ratio has remained steady at 38.4% (2015: 37.9%), following another year of largely benign activity. The expense ratio is down slightly to 53.5% (2015: 54.1%) despite continued IT development. The net combined ratio reduced to 88.1% (2015: 92.9%) with foreign exchange contributing 3.8% of this improvement. Profit levels rose to their highest level at £158.0 million (2015: £78.6 million).
Hiscox London Market Gross premiums written increased by 27.1% to £726.0 million (2015: £571.0 million). This represents a 14.2% growth in local currency. The quota share arrangements with Syndicate 6104 remained in place.
The net claims ratio declined to 57.4% (2015: 49.0%). The combined ratio increased to 91.0% (2015: 86.6%) as a result, but also benefited from a foreign exchange impact of 8.7%. Profit before tax for the year was £44.0 million (2015: £54.6 million).
Hiscox Re and ILS Gross premiums written increased by 29.1% to £495.2 million (2015: £383.4 million), 16.1% in local currency. The claims ratio increased to 39.1% (2015: 26.0%), and with a slightly increased expense ratio to 26.5% (2015: 25.4%), the combined ratio increased to 53.7% (2015: 46.6%). The higher level of expense ratio was as a result of the deconsolidation of the Kiskadee Funds in the second half of 2015. Foreign exchange gain impact of 11.9%, compared to a 2015 gain of 4.8% helped drive profits to £115.5 million (2015: £97.5 million).
Hiscox Corporate Centre The central investment portfolio returned £18.6 million (2015: £6.5 million). This increase came from a mixture of equity and bond performance, and also from returns earned on the proceeds from the subordinated debt issue in 2015. Foreign exchange gains increased to £57.2 million compared to £8.3 million in 2015, as the Centre holds a significant portion of US Dollar assets supporting the underwriting activities of the managed Syndicates. Profit before tax was £37.0 million (2015: loss of £14.6 million).
2 Strategic report Group financial performance 35 Governance 73 Remuneration 101 Financial summary claims, expenses, reinsurance costs, dividends and taxes, and to invest in more assets.
Outflows for the year were £123.8 million (2015: inflow £71.0 million) as the Group invested the cash receipts for the bond issue in 2015. The Group paid £6.1 million of tax during the year compared to £27.8 million in 2015. The Group had net cash outflows from investing activities of £13.5 million (2015: outflow of £59.7 million), with the sale of DirectAsia Hong Kong offsetting the continued software development.
Financial assets and cash* (£m) 4,409.7 3,609.3 Other assets (£m) 2,232.1 1,694.7 Total assets (£m) 6,641.8 5,304.0 Net assets (£m) 1,818.4 1,528.8 Net asset value per share (p) 649.9 545.0 Net tangible asset value per share (p) 605.7 500.0 Adjusted number of shares in issue (m) 279.8 280.5 *Excluding derivative assets and insurance-linked securities funds.
The Group’s invested assets at 31 December 2016 totalled £4.41 billion (2015: £3.61 billion). Cash flow remained positive but much of the growth in assets under management is due to the weakness of Sterling over the period. The investment result, excluding derivatives, amounted to £74.8 million (2015: £33.7 million) equating to a return of 1.9% (2015: 1.0%). It is hard to think of a financial or political forecast at the beginning of the year that has turned out to be accurate and both bond and equity investors have had to endure some challenging moments. We are therefore pleased with our investment return which represented a significant increase over last year and exceeded our original expectations.
Whilst the trend in longer dated yields was upwards, shorter dated bonds, where we are mostly invested, were unaffected with the Bank of England and the European Central Bank continuing or enhancing their respective quantitative easing programmes. The 2.7% return from the Sterling bond portfolios is a marked improvement on that of recent years, boosted in part by an increased weighting to corporate bonds. The absolute numbers in Euros are smaller but a 0.8% return is certainly acceptable in a world where negative yields persist in the bond markets and banks generally charge for holding cash.
Very few foresaw the level of returns that the equity indices delivered in many of the developed markets in 2016 let alone the alarming rate at which various sectors went in and out of favour. It was a year where the index was hard to beat. Our allocation to a selection of actively managed funds therefore came up short relative to the benchmark but still made a useful overall contribution to the Group. Our largest weighting is to the UK market where the majority of our managers underperformed due to their low exposure to the commodity sector and a preference for stocks with more domestic earnings. Our global funds fared better, benefiting in particular from the strength of the Dollar. A selection of hedge funds has served us well in the past but had a disappointing year in line with much of the industry. Investing is a long-term business and requires patience and over the last five years our selection of funds has comfortably outperformed the benchmark returns.
Group invested assets £4,410m £3,609m Before fees, derivative positions and investments in insurance-linked securities funds.
Cyber threats can take many forms: the theft of data, the installation of ransomware (software that encrypts a system until a payment is made), the propagation of malware in its many and ever-changing incarnations. These threats also have many sources – from the deeply sinister to the embarrassingly mundane. At the leading edge of cyber-crime, businesses are falling foul of highly sophisticated, technically adept hackers with links to organised crime or government agencies. But at the other end of the scale, a data breach from the careless handling of a hard drive or the innocent misdirection of an email can be disproportionately damaging.
Inevitably, given the rich potential offered by this expanding marketplace, there are currently numerous carriers offering cyber insurance products, each with its own limitations. Hiscox was one of the first of these providers to enter the arena, having developed its first cyber offering as far back as 1999, when the landscape looked very different. The company now
We’re in the midst of the fourth industrial revolution, a world of hyper-connectivity, an explosion in the ‘Internet of Things’, an era of continual innovation and development. That all talks towards increased risk.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary to inform the data commissioner, and in some cases the data subjects as well. Where there is more liability on a company, there needs to be insurance to help you take that risk on.”
Threatened with large fines, and spooked by the financial losses and horrific headlines generated by major data breaches – TJ Maxx in 2007, Heartland Payment Systems in 2008, as well as the more widely reported Target, Home Depot and Anthem hacks in the past few years – large US corporations are now routinely buying cyber insurance. Smaller companies are slowly following suit as SMEs become increasingly conscious that cyber risk is not limited to the kind of newsworthy events experienced by multinationals. Databases relating to customers, suppliers and employees are vulnerable whatever the size of a business, and are even more likely to be inadequately protected at the smaller end of the scale. Add in the obvious threat posed by the viruses and phishing scams floating around on websites and through the floods of malicious emails that bombard our mail servers and it is clear that no business is free from the cyber risk.
We also created a cyber readiness maturity model, which graded firms as either ‘cyber experts’, ‘cyber opportunists’ or ‘cyber novices’. ‘Cyber experts’ accounted for just 30% of our survey group while ‘novices’ made up more than half (53%), suggesting the majority of companies have some way to go before they can truly claim to be cyber ready.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary grid caused substantial blackouts across the entire country. The explosive growth of the ‘Internet of Things’ – the networking of everything from energy management systems to televisions – is expected to result in around 40 billion devices being connected to the internet by 2020, each of which is a potential source of weakness. “Security hasn’t been built in to a lot of these things at the design phase,” warns Matthew. “It’s more: ‘We’ve got a kettle, let’s put a receiver in it or a wireless chip, now it’s a smart kettle and it can boil itself.’”
Even the seemingly simple concept of ‘business interruption’ – one of the main motivators for the purchase of cyber insurance – is evolving at pace. “Historically, ‘business interruption’ under a cyber policy has meant either you’ve been hacked and you can’t use your systems, you’ve suffered a ransom attack and all your systems are encrypted, or you’ve been the victim of a denial of service attack, so your IP address has been flooded and none of the valid traffic can get through. But now we live in this ‘Industry 4.0’, where if I’m a business, the infrastructure I use isn’t just my own. I’ll outsource a service over here, use a cloud provider over there, I’ll rely on them to give me the services I need to conduct my business, but I don’t have a lot of control over what they do. If they get hacked and I can’t do my business, that’s called contingent business interruption, and it’s an increasing problem.”
All of this means, says Matthew, that cyber insurance is a market blessed with great potential but still tempered with significant uncertainty: “Understanding systemic cyber risk is very underdeveloped, so we’ve got this big upside as an industry on the one hand, but a large exposure and aggregation and accumulation risk on the other. Getting the balance right between the two – and underwriting responsibly – is key to sustainable growth. There will always be growth in cyber, but getting sustainable profitable growth over the long haul: that’s what we’re all about.”
obligations? What needs to be done? – alongside the more operational aspects of the business: getting it back up and running. You’ve got the PR guys there to assist if you need to go public with the breach, either with the media or communicating your message out to the customers.”
While data breaches are currently by far the most commonplace consequences of a cyber-attack, property damage as a result of cyber-related incidents is a growing risk. In 2014, a blast furnace at German steel mill suffered massive damage after hackers took over its control system, while in 2016 an attack on the Ukrainian power
Already, says Matthew, the experience of selling in the European markets is moving closer to that of the US. “In the UK and Europe, the quote maturity period is shrinking, cyber protection is going into more and more budgets, and the specialist knowledge of brokers is growing. It’s still way behind the US market, but things are definitely changing.”
This response panel can offer a high level of very specific expertise, as well as the kind of independent perspective valued by regulators. “They can parachute in, find out what’s gone on, prevent any further data leak, produce the necessary reports, find out what data’s been affected, then offer legal advice about who you need to notify. They will start building a legal case if needed and guide the forensics people in accordance with the law – what are the
Risk management Our core business is to take risk, which is guided by a strategy to maximise return on equity within a defined risk appetite.
Risk management framework We have an enterprise-wide approach to managing risk. Exposures are monitored and evaluated within the business units and the Group to assess the overall level of risk being taken. 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.
Risk appetite This sets out the nature and degree of risk the Group is prepared to take to meet its strategic objectives and business plan. It forms the basis of our real-time exposure management, and is monitored throughout the year.
Our risk limits indicate the capital we are willing to risk and act as markers for monitoring actual exposure. If these limits are exceeded we will take corrective action. Our risk tolerance is the maximum threshold we do not want to exceed. Nearing it would be a red alert for the Group senior management and the Board.
2 Strategic report 35 Governance Risk management 73 Remuneration 101 Financial summary
The role of the Board in risk management The Board is at the heart of good risk governance, and is responsible for setting the Group’s risk strategy and appetite, and for overseeing risk management, including the risk management framework.
The Risk Committee of the Board advises on how best to manage the Group’s risk profile, by reviewing the effectiveness of its risk management activities, as well as monitoring the Group’s actual risk exposure, which would inform Board decisions. The Risk Committee relies on frequent updates from within the business and from independent risk experts.
During 2016, the Board looked at a number of risk-related matters. s The Group’s risk profile compared to its Board-approved risk appetite.
s Independent second line of defence model validation findings on the Group’s risk and capital models.
s Risk reporting focused on topical live issues with actions and mitigation plans.
s Stress and scenario testing performed to identify and measure the likelihood and impact of potential events. The Board considered and challenged findings and action plans to respond to scenarios. Scenarios are reviewed annually to test the resilience of the business plan in the face of minor and major shocks. A more extensive stress exercise was also conducted as part of an industry ‘dry run’, involving different business functions and members of the Executive.
s Specific risk reviews providing a deeper understanding of key risks and potential exposures to the business.
The third line of defence provides independent assurance to the Board that risk control is being managed appropriately, in line with approved policies, appetite, frameworks and processes. It also helps verify that the internal control framework in place is operating effectively.
s Updates to Group risk policies addressing the Group’s main risks.
The risk team is led by the Group Chief Risk Officer, who reports to the Group Chief Executive Officer and Chair of the Group Risk Committee.
The Group invests in growth areas that offer a good potential return on investment. The business plan is aligned to the Group risk appetite set by the Board, to ensure individual and aggregate exposure remains within set parameters.
Hiscox’s Own Risk and Solvency Assessment (ORSA) process focuses on the changes, opportunities and threats that may affect the business in the future.
40 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance Risk management 73 Remuneration 101 Financial summary
Our desire to write certain lines of business changes 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, so we quickly identify and control any problems created by deteriorating market conditions. We frequently act as the lead insurer in the co-insurance programmes needed to cover high-value assets, so we have some ability to set market rates.
We buy reinsurance to mitigate the effect of catastrophes and reduce our risk.
Inadequate reinsurance If our reinsurance protection is proven to be inadequate or inappropriate, it could significantly affect the Group’s financial condition.
Binding or delegated authorities give the Group access to a greater volume of business. They can contribute significantly to the Group’s profitability and increase market share.
Authorities we grant are closely controlled through strict underwriting guidelines, contractual restrictions and obligations. We have a Group-wide delegated authority policy which sets out the standards and principles in managing external third parties to whom authority is delegated. Contractual arrangements usually grant limited rights to bind us to risks, new or renewal. We vet all third parties prior to appointment and monitor and audit them regularly to ensure they meet our standards.
42 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance Risk management 73 Remuneration 101 Financial summary
When underwriting risks, we estimate the likelihood of them occurring and their cost. Our actual claims experience could exceed our loss reserves, or we may need to increase levels of loss reserves.
The provisions we make to pay claims reflect our own experience and the industry’s view of similar business; historical trends in reserving patterns; loss payments and pending levels of unpaid claims; and awards as well as potential change in historic rates arising from market or economic conditions. Provisions are set above the actuarial mid-point to reduce the risk that actual claims may exceed the amount we have set aside.
Our provision estimates are subject to rigorous review by senior management from all areas of the business, as well as from independent actuaries. The relevant boards will approve the amount of the final provision, on the recommendation of dedicated reserving committees.
Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out in note 26 to the consolidated financial statements.
Market risk – investment The risk of financial loss resulting from adverse movements in market prices, exposure from trading and global operations.
Asset value We invest the cash we receive from our clients in premiums and the capital on our balance sheet until it might be needed to pay claims. These funds are inevitably exposed to market investment risk.
Our investment portfolio is exposed to a number of risks related to changes in interest rates, credit spreads, and equity prices, among others.
If a catastrophe occurs, we may be faced with large, unplanned cash demands, which could be exacerbated if we have to fund a large portion of claims pending recovery from our reinsurers.
Although our investment policies stress conserving principal and liquidity, our investments are subject to market-wide risks and fluctuations.
Our cash requirements can normally be met through regular income streams: premiums, investment income, existing cash balances or by realising investments that have reached maturity. Our primary source of inflows is insurance premiums while our outflows are largely expenses and payments to policyholders through claims. We forecast our cash flow for the week, month, quarter, or up to two years ahead, depending on the source.
We maintain extensive borrowing facilities. These arrangements have been made with a range of major international banks to minimise the risk of one or more institutions being unable to honour commitments to us.
Insurance is a regulated industry. There may be times where the regulatory landscape undergoes a significant shift which directly impacts our business.
Credit risk The risk of loss or adverse financial impact due to counterparty default or failure to meet obligations with agreed terms.
Credit risk – reinsurance We buy reinsurance to protect us, but if our reinsurers are unable to meet their obligations to us it would put a strain on our earnings and capital, and could harm our financial condition and cash flows.
We buy reinsurance only from companies that we believe to be strong. A dedicated Group credit committee must approve every reinsurer we use, based on an assessment of their financial strength, trading record, payment history, outlook, organisational structure and external credit ratings.
We follow the same careful process for selecting and monitoring the brokers we work with as for our reinsurers. We also minimise the risk further by dealing with only the most credit-worthy brokers, taking into account market data and our experience.
Information security (including cyber security) Information security risk relates to not protecting information which could compromise the confidentiality, availability or integrity of our data.
We operate in a world where the volume of sensitive data and the number of connected devices and applications have increased exponentially. Also, 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 cyber security risk strategy.
We have dedicated IT security resources which provide advice on information security design and standards. We also have an information security group, including experts from around our business to assess and manage these threats. Our cyber strategy combines industry standard perimeter security with data-centric protection for specific highly confidential information.
We constantly deploy and evolve systems, policies and procedures to mitigate internal and external threats to the IT infrastructure. In 2016 we rolled out Group-wide mandatory training on information and cyber security which is also mandatory for all third parties and contractors.
Information technology and systems failure The risk from major IT, systems or service failure which can significantly impact our business.
We have dedicated IT resources which support the Group’s technology needs and oversee our critical systems and applications.
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 move the affected operations to alternative facilities quickly. The plan is tested regularly and includes simulation tests.
Corporate responsibility Our values underpin a reputation we have earned for integrity and decent behaviour in everything we do.
Hiscox remains a constituent of the FTSE4Good Index. The FTSE4Good Series is designed to help investors integrate environmental, social and governance (ESG) factors into their investment decisions. The indexes identify companies that better manage ESG risks and are used as a basis for tracker funds, structured products and as a performance benchmark. The ESG ratings are used by investors who wish to incorporate ESG factors into their investment decisionmaking processes, or as a framework for corporate engagement and stewardship.
Hiscox has made a full public response to the Carbon Disclosure Project (now CDP) since 2012. This international, investor-backed initiative enables companies to disclose their impacts on the environment and natural resources as well as the actions they are taking to reduce these impacts. Based on the responses each year, CDP publishes a number of reports, including a FTSE 250 report, in which it presents its overall findings and participants’ scores. In 2016 we scored a B, up from C+ in the previous year. More information on CDP is available at www.cdp.net.
In 2016, Hiscox continued to work towards a real-term reduction in carbon emissions of 20% Scope 1 and 2 per FTE by 2020, relative to 2014. This year we achieved a 4% reduction in Scope 1 and 2 emissions per FTE against the 2014 baseline, and we remain on track to meet our 2020 target. The table above depicts our global carbon emissions year-on-year since 2014.
2 Strategic report 35 Governance Corporate responsibility 73 Remuneration 101 Financial summary
The aim of this is to ensure Hiscox is identifying and controlling conduct risk across the lifecycle of our products and that all employees have fair conduct and treatment of customers embedded in what they do.
The workplace Culture The Hiscox culture is underpinned by a set of core values that determine a standard of behaviour that we expect all our employees to follow. We firmly believe that, through high standards of conduct, we are more likely to achieve business success and, therefore, create additional value for shareholders. We aim to have the highest standards of corporate governance while striving to remain, in essence, a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or a speedy response. We believe that we have the balance right and, furthermore, that this is one of our greatest strengths. We seek to follow best practices in managing our people and to be a fair and professional employer. Hiscox aims to maintain a culture that encourages employees to raise any concerns relating to malpractice or wrongdoing without threat of unfair treatment as a result. If an employee has a serious concern relating to the operation of the business, we have a whistleblowing policy and whistleblowing procedures that enable that person to confidentially raise their concern with senior management. Employees also have the option to raise their concern with the Chair of the Hiscox
Ltd Audit Committee. All Hiscox staff worldwide can access free, confidential advice from Public Concern at Work in relation to any concerns about possible malpractice or wrongdoing in the workplace.
Hiscox wants to employ the best people and to provide them with the means and the motivation to excel. This is achieved with fair rewards and by providing staff with an environment in which they can enjoy their work and reach their full potential. Hiscox recognises how important it is for employees to maintain a healthy work/life balance and gives them the option of flexible and home working wherever possible.
The community In 2016, Hiscox Bermuda provided funding for students aged 11-15 to pursue summer programmes including a Plastic Tides Conservation camp; studying the effects of plastic pollution; National Student Leadership Conference on Medicine and Healthcare at Harvard University; a cricket tour to the UK; an elite tennis camp; a Broadway dance intensive; an advanced
Hiscox Bermuda also continues its active involvement in the YouthNet reading programme at Northlands Primary School and the Eliza Dolittle Society.
In the UK, Colchester employees raised a record £30,900 for St Helena Hospice. This amount enabled the respite group to support post-diagnosis patients and their carers for over a year. The team also established a reading partnership programme with local schools, encouraging staff to take time in their day to assist children with their reading.
Hiscox York raised nearly £5,000 for Martin House Children’s Hospice, which cares for children and young people aged 0-19 with life-limiting conditions. In London, Hiscox launched a drive to find six candidates to fill level 3 insurance practitioner roles in partnership with the National Apprenticeship Service. Apprentices taken on by the business will be Cert CII qualified within 12-18 months. Staff in London also continue to support the reading partners scheme, spending half an hour each week listening to children from local schools read, helping with
Colchester employees raised a record £30,900 for St Helena Hospice, enabling the respite group to support post-diagnosis patients and their carers for over a year.
Supporting the arts, science and technology Hiscox continues to support the arts, science and technology. It does this through its work with the Royal Academy Schools, providing a bursary for two second-year students, and with the City of London’s Sculpture in the City project, designed to transform the local landscape with unique and well-known pieces of modern sculpture. Hiscox employees volunteered to work with students from the Bridge Academy, Hackney and other local schools to bring the sculptures to life. Hiscox is also insurance partner of the Whitechapel Gallery, a free to access gallery for the local community which champions contemporary art.
Hiscox remains title sponsor of the Sunday Times Hiscox Tech Track 100, charting the fastest growing private technology, telecoms and digital media companies. The Aesthetica Art Prize globally celebrates emerging artists and Hiscox supports the prize fund which allows the overall winner to receive £5,000 and the student prize winner £1,000. Hiscox Germany continues to support promising young artists, along with Hamburg’s renowned Academy of Fine Art, presenting a €7,500 prize to the best young artist selected by a jury of well-known art experts. Hiscox France works with FIAC, France’s premier Art Fair.
Insurance carriers We operate through different business entities according to local regulation.
Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, property and energy business, as well as a range of specialty lines including contingency and terrorism risks among others.
Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best, an A+ (Strong) from S&P, and an AA- (Very strong) rating from Fitch.
One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes.
Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s.
52 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance Insurance carriers 73 Remuneration 101 Financial summary
Hiscox Insurance Company Hiscox purchased Hiscox Insurance Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. Hiscox Insurance Company Limited has licences throughout Europe and its operations form the vast majority of the
The diversification of the Syndicate from both an exposure and a geographical perspective means the Syndicate is well balanced to grow in a controlled way. Total underwriting capacity of Syndicate 3624 has increased to £460 million for the 2017 year of account driven by the strength of the US Dollar.
Hiscox Insurance Company (Guernsey) Formed by Hiscox in 1998, Hiscox Insurance Company (Guernsey) Limited writes mainly kidnap and ransom and fine art insurance. Hiscox Guernsey has an A.M. Best rating of A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2016, net assets were $15 million (2015: $15 million).
Hiscox Insurance Company (Bermuda) Formed by Hiscox in late 2005, Hiscox Insurance Company (Bermuda) Limited was set up as an expansion of the reinsurance operations of Hiscox and as an internal reinsurer of the Group. Hiscox Bermuda has an A.M. Best rating of A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2016, net assets exceeded $834 million (2015: $848 million).
Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 11.6% from 1997 to 2016. Hiscox Insurance Company
DirectAsia In March 2014, the Group acquired Direct Asia Insurance (Holdings) Pte Ltd (‘DirectAsia’). Having disposed of its insurance business in Hong Kong, DirectAsia underwrites through a subsidiary in Singapore and an agency in Thailand. Its primary business is motor insurance, with ancillary lines in travel, personal accident and healthcare. At the end of 2016, the insurance company subsidiary has net assets exceeding SGD$15 million (2015: SGD$15 million).
Richard Colin Watson Chief Underwriting Officer (Aged 53) 16 May 2013*
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.
Robert Simon Childs Non Executive Chairman (Aged 65) 26 February 2013*
2 Strategic report 35 Governance Board of Directors 73 Remuneration 101 Financial summary
Anne MacDonald Independent Non Executive Director (Aged 61) 20 May 2015*
Robert McMillan Independent Non Executive Director (Aged 64) 1 December 2010*
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. Colin currently holds Non Executive Directorships at M&G Group Limited and London-listed Virgin Money Holdings (UK) plc. He is also Chairman of specialist financial services business Premium Credit Limited.
Colin Keogh Senior Independent Director and Chairman of the Remuneration Committee (Aged 63) 19 November 2015*
Steve Langan Chief Executive Officer, Hiscox Insurance Company Chief Marketing Officer
Aki 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.
2 Strategic report 35 Governance Executive Committee 73 Remuneration 101 Financial summary
Jeremy Pinchin Chief Executive Officer, Hiscox Re and ILS Chief Executive Officer, Hiscox Bermuda Group Company Secretary Group Claims Director
Ben is Chief Executive Officer for Hiscox USA. Ben joined Hiscox in early 2011 as US Chief Operating Officer and served in that post until April 2012 when he assumed his current role. He previously held the position of Managing Director at asset manager BlackRock, which he joined via its acquisition of Barclays Global Investors. Prior to that, he was a Director with Gap Inc. and a consultant for the Boston Consulting Group.
Justin Gott Head of Art and Private Client, Hiscox UK and Ireland
Gary Head Managing Director of Alternative Distribution, Hiscox UK and Ireland
Rob Caton Head of Underwriting Risk and Reinsurance Hiscox Re and ILS
Paul Lawrence Chief Underwriting Officer, Hiscox London Market Joint Active Underwriter Syndicate 33
Jeremy Pinchin Chief Executive Officer, Hiscox Re and ILS, Group Company Secretary, Group Claims Director, Chief Executive Officer, Hiscox Bermuda
Chairman’s letter to shareholders Key developments on corporate governance throughout the year.
s PwC were appointed as the Group’s new auditors at the 2016 AGM following a tender process which we began in 2014.
s The Nominations Committee led the search for a new Chief Financial Officer using an independent search firm and this culminated in the appointment of Aki Hussain in September – a strong addition to the Board.
s The Nominations Committee also undertook the search for two new Non Executive Directors to replace Ernst Jansen and Gunnar Stokholm who will be retiring from the Board during 2017.
In 2016 we carried out an internal Board evaluation using an independent facilitator, Lintstock. The balance of skills, experience, independence, knowledge and diversity was rated very highly. However, there are always ways we can improve, and in 2017 we will look at suggestions made in the report.
Overview and basis of reporting Hiscox Ltd (‘the Company’) is the Bermuda incorporated holding company for the Group. The Company has a premium listing on the London Stock Exchange. The corporate governance framework for the Company is derived from its constitution together with Bermuda Companies Act legislation. The Listing Rules require the Company to report against the UK Corporate Governance Code published in September 2014 (the Code). During 2016, 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 Board of Directors As at the date of this Report, the Board comprises the Non Executive Chairman, three Executive Directors, and seven independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 54 to 55. The Nominations Committee monitors the composition of the Board and considers its diversity, balance of skills, experience, independence and knowledge to ensure that it remains appropriate. The composition of the Board was also reviewed as part of the Board evaluation described on pages 62 and 64.
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 which the Non Executive Directors have to challenge and contribute to the development of strategy in the regular Board meetings, the Non Executive Directors also attended the annual Hiscox Partners’ meeting held during the year. The Board retains ultimate authority for high-level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of interim dividends and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus issues or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share awards. The Board has appointed an Executive Committee (described on page 64) and authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Board or Executive Committee approval is not required.
The Audit Committee The Audit Committee of Hiscox Ltd comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. 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 54 and 55. 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 external auditor’s fees. The Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The Audit Committee receives reports from the auditors who also attend meetings of the Committee to report on the status of their audit and any findings. This allows the Committee to monitor the effectiveness of the auditors during the year.
2 Strategic report 35 Governance Corporate governance 73 Remuneration 101 Financial summary case. In respect of the 2016 financial year the Committee reported to the Board on how it had discharged its responsibilities and 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. 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. Further information on the activities of the Committee is included in the Audit Committee report on page 66.
The Nominations Committee The Nominations Committee comprises Lynn Carter, Robert Childs, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. It is chaired by Robert Childs. It operates according to Terms of Reference published on the Group’s website and meets as and when the Chairman determines appropriate, but at least once a year.
The Committee’s role is to monitor the structure, size and composition of the Hiscox Ltd Board and, when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Group believes that opportunity should be limited only by an individual’s ability and drive. The Committee considers diversity, including gender diversity, when recommending appointments to the Board. The Committee has a policy in place to ensure that the candidate pool for each new appointment includes at least one female but does not consider it appropriate to set quotas for diversity. Two of the Non Executive Directors will reach nine years’ service in November 2017. With this in mind during 2016 the external search consultancy firm, JCA Group, was commissioned to identify suitable candidates for the role of Independent Non Executive Director. Other than undertaking search assignments, JCA has no connection to the Group. The search brief was aimed at balancing the existing skills, experience, independence and knowledge on the Board. Candidates are being interviewed initially by the Chairman and the Group Human Resources Director.
The Investment Committee The Investment Committee has oversight of the Group’s investments and comprises Lynn Carter, Robert Childs, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan, Gunnar Stokholm, the Chief Executive and the Chief Financial Officer and is chaired by Robert Childs.
The Conflicts Committee The Group has a Conflicts Committee which comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and
The Committee also has a role in considering the succession planning for Executive Directors and senior managers, and a remit to make recommendations on the succession planning for the Chairman and the Chief Executive and other members of the senior management group. The Nominations Committee
The Risk Committee The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Committee normally meets four times per year. The Committee comprises Lynn Carter, Robert Childs, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. It is chaired by Lynn Carter. The risk management framework is described in the risk management section on pages 36 to 45.
The Executive Committee The Executive Committee comprises Senior Executives, as listed on pages 56 to 57, and will normally meet every six weeks. It makes recommendations to the Board and approves various matters (some of which may also require Board approval). The Committee approves senior appointments and remuneration outside the scope of the Remuneration Committee or Nominations Committee, approves operational policy, takes decisions on annual budgets and business plans and mergers and acquisitions, considers significant issues raised by management and approves exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
Having consulted the Executive Directors, 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 Executives also periodically met without the Executive Directors to discuss a wide range of issues concerning the Company. The Chairman held one-to-one meetings with each of the Non Executive Directors to review their performance including their attendance, contribution and preparation for meetings and to discuss any training and development needs. 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 the renewal of the Company’s Share Plans. The views expressed by shareholders have been reported back to the Board through its committees. The Executive Directors communicate and meet 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 2016.
In addition, any specific items covered in letters received from major shareholders are reported to the Board. Major shareholders have been consulted on the renewal of the Company’s Remuneration Policy, approval of which will be considered at the next Annual General Meeting. Major shareholders are invited to request meetings with the Senior Independent Director and/or the other Non Executive Directors. An alert service is available on www.hiscoxgroup.com to notify any stakeholder of new stock exchange announcements.
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 which monitors the most significant exposures, including emerging risks to the business, such as Brexit.
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.
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. Taken together the risk and internal audit activities described here enable the Board to monitor the Group’s risk management and internal control systems.
2 Strategic report 35 Governance Audit Committee report 73 Remuneration 101 Financial summary iv) Accounting for the defined benefit scheme As explained in note 2.15, the Group recognises the present value of the defined benefit obligation less the fair value of plan assets at the balance sheet date. The Audit Committee has reviewed the report of the key judgements in the financial statements from the Chief Financial Officer and is satisfied that the assumptions used to measure the deficit are reasonable.
UK Corporate Governance Code In accordance with the 2014 UK Corporate Governance Code the Board requested that the Committee advise on whether it believes the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The Committee has provided such advice to the Board.
RS Childs 4/4 N/A N/A 4/4 BE Masojada 4/4 N/A N/A N/A HA Hussain* 1/1 N/A N/A N/A RC Watson 4/4 N/A N/A N/A LA Carter 4/4 4/4 4/4 4/4 C Foulger 4/4 4/4 4/4 4/4 ER Jansen 4/4 4/4 4/4 4/4 C Keogh 3/4 3/4 3/4 3/4 A MacDonald 4/4 4/4 4/4 4/4 R McMillan 4/4 4/4 4/4 4/4 G Stokholm 4/4 4/4 4/4 4/4 * Hamayou Akbar (Aki) Hussain was appointed as a Director with effect from 12 September 2016.
Internal audit The Group Head of Internal Audit is invited to attend all meetings of the Committee. It is the responsibility of the Audit Committee to monitor and review the effectiveness of the Group’s internal audit function and to consider reports prepared by Internal Audit on the effectiveness of systems of internal control. An internal Board and Committee evaluation was conducted during the year, the scope of which included the Audit Committee.
Therefore, we now have the benefit of fresh perspectives in both the internal and external audit functions.
Now, none of this actually made the news. Mercifully, rather than wreaking havoc and destroying lives, this calamitous sequence of events was simply a ‘dry run’ simulation carried out by a consortium of insurers and brokers from across the London insurance market, as well as Lloyd’s. Observers included A.M. Best, S&P Global Ratings, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and Her Majesty’s Treasury. Miami’s beachfront condominiums are still standing and, barring the odd wobble, global equity prices remain remarkably robust – but that’s not to say that events like this couldn’t happen in the blink of an eye.
With catastrophes, it’s not if, it’s when. They’re always going to happen. The question is, are we prepared for when they do?
to market-turning events were forged in the heat of those post-9/11 months, but the passage of time means that very few individuals who personally experienced the stresses of that catastrophic event are still in positions of operational responsibility today. “The people who were around in 2001, the people who were bloodied by that experience, are – like me – no longer on the front line,” says Robert. “The kind of people who really drive our operations are people in their late-30s and 40s, who were just coming out of college back then. They have never been through anything quite like it – and I hope they never do – but should the worst happen, preparation is critical.”
In all, 28 organisations chose to take part, either as observers or participants. Insurance and reinsurance carriers were joined by an impressive cast of underwriters, brokers, ratings agencies and regulators.
The exercise also forced participants to think about how they would communicate with brokers, regulators and customers.
Hurricane Guy Fawkes As the Halloween Blackout continues to grip the US, a powerful hurricane makes landfall in the Caribbean. On 6th November, it becomes the first Category 5 storm to hit Miami. As it passes through Florida, enters the Gulf of Mexico and crosses Louisiana and Texas, more than 100,000 homes are destroyed, while 1.8 million buildings and many offshore energy platforms are damaged. The resulting insurance industry loss is in the region of US$125-175 billion.
“I looked back at 9/11 and thought, what did we say to customers back then? I don’t remember a whole lot of comfort being issued,” says Robert. “We’re a sophisticated market, and we have all of these ways of communicating with people. If Cuthbert Heath were around now, he’d have repeated his famous instruction on Twitter.”
The narrative of the exercise was designed to result in an insured loss of approximately US$200 billion – almost double the combined losses caused in 2005 by Hurricanes Katrina, Wilma and Rita – and it deliberately incorporated a particularly unpalatable medley of ingredients: a non-modeled insurance loss, a modeled insurance loss, an asset stress, and a liquidity stress. Starting on 31 October 2016 – Halloween, fittingly given the horrors that would unfold – participants spent two weeks immersed in a rapidly escalating fictional crisis playing out across the USA: a crippling cyber-attack on the nation’s power infrastructure, causing a blackout across 15 states; a global stock market crash; Hurricane Guy Fawkes, which tracked a destructive course across the USA’s southern heartlands; and a major reinsurer default with consequent delays in reinsurance payments.
The exercise was designed to result in an insured loss of approximately US$200 billion – almost double that caused in 2005 by Hurricanes Katrina, Wilma and Rita.
While the overall picture is relatively clear, there are variations within it. For example, expectations of gross losses varied from as low as 30% of net capital base to as high as 120% and there were significant differences in patterns of liquidity and expectations of the extent to which rates would rise in the aftermath of a crisis. “There is a fair bit of divergence in some of the results, but in a way I see that as a positive – I hope it will make people look even harder at things,” says Robert. “I hope it will make us all question some of our assumptions.”
Perhaps most importantly, the paper outlines a set of recommendations for the industry. This includes ensuring customers are well served in the aftermath of a catastrophe, by establishing training programmes, building and continuously refining crisis management plans, and maintaining clear strategies for quickly raising capital. It also means working with Lloyd’s to strengthen the global position of the London Market and deepen its pool of underwriting and management expertise, and collaborating with the PRA to ensure an effective post-catastrophe response.
Testing times continued To view the report online visit: hiscoxgroup.com/ london-market-looksahead
Renewal of the Hiscox Directors’ remuneration policy This remuneration approach is reflected in our remuneration policy which is due to be renewed at the upcoming AGM. The current policy was approved by shareholders in April 2014, however, following shareholder consultation,
Dear Shareholder At Hiscox we believe that having a clear strategy, underpinned by a simple and relevant remuneration policy, is key to incentivising and retaining senior talent. Our goal is to motivate a management team to build a strong business and make consistent returns over the long term.
Linking our remuneration approach to business outcomes We aim to make strong shareholder returns across the cycle and consistently grow dividends and net asset value per share. Our core business is to take risk and our strategy is to maximise return on equity within a defined risk appetite. Our straightforward and consistent remuneration approach is aligned to these business objectives and we believe plays an important role in achieving sustainable strong performance. p Annual incentive: in order for
As we are a Bermuda incorporated company we are not subject to the UK Companies Act and related UK secondary legislation. However, our intention has always been to provide transparent remuneration disclosure and to engage with shareholders on the topic. We will, therefore, be submitting the policy to an advisory vote at the 2017 AGM as part of the regular three-year renewal process.
Overall, the Remuneration Committee is satisfied that our remuneration practices are properly aligned with the interests of shareholders and incentivise Directors appropriately over the short and long term.
Remuneration policy report Hiscox has a forward-looking remuneration policy for its Board members.
The Company’s intended forward-looking remuneration policy for Board members is set out on pages 77 to 84.
We are a Bermuda-incorporated company and therefore are not subject to the UK Companies Act and related UK secondary legislation. Our intention, however, has always been to provide transparent remuneration disclosure and to engage with shareholders on the topic therefore our remuneration reporting is consistent with the UK regulations and we will be submitting the policy and remuneration report for an advisory vote at the Annual General Meeting on 18 May 2017.
Changes to the policy The Remuneration Committee is of the view that the current remuneration structure continues to support the strategic ambitions of the Group and is aligned with shareholders’ interests. No major changes to remuneration arrangements are proposed under the new policy.
The key changes previously adopted as restrictions include: p maximum incentive levels –
Maximum potential value The salaries for current Executive Directors are set out on page 85.
Performance metrics Individual and business performance is taken into account when setting salary levels.
For new hires and changes in role, the Committee may provide reasonable additional benefits based on the circumstances (e.g. travel allowance and relocation expenses)
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results. For 2017, 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 86.
Amounts are paid in accordance with the bonus deferral mechanism described opposite.
Maximum potential value The maximum bonus opportunity for the Executive Directors will be as follows: p CEO and CFO – 400% of salary; p Chief Underwriting Officer – up to 500% of salary.
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 86 of this report for further details. Where performance is deemed to be below a pre-determined hurdle, payouts will be nil.
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, $100,000, and below
50% of bonus paid shortly after the end of the financial year.
Deferred awards are subject to malus and clawback provisions as described in the notes to the policy table on page 82.
Detailed provisions The Committee may make minor changes to this remuneration policy to aid in its operation or implementation without seeking shareholder approval (e.g. for regulatory or administrative purposes), provided that any such change is not to the material advantage of Directors. For the avoidance of doubt the Committee may continue to operate the share awards under the 2006 and 2016 Performance Share Plan in accordance with the rules (e.g. the treatment of awards in the context of a change of control or other forms of corporate restructure).
The annual bonus and share plan awards to Executive Directors are intended to be closely aligned with the Company’s short-term and long-term objectives. Performance measure targets and target setting
Following the adoption of the previous policy in 2014, the Committee undertook an in-depth shareholder consultation exercise and subsequently adopted restrictions to remuneration practices in 2015. These restrictions are summarised on page 76. Shareholder consultation has taken place in relation to the proposed 2017 policy. Further engagement with shareholders was also undertaken prior to the implementation of the replacement Performance Share Plan in 2016. Following these discussions the Committee took into account shareholder views. The Committee has been pleased with the level of shareholder support in respect of the remuneration report at the 2015 and 2016 AGM.
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 77 to 81. Within these limits and where appropriate the Committee may tailor the award (e.g. timeframe, 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.
Fixed remuneration Fixed reward (i.e. base salary, benefits and retirement benefit). p Salary with effect from 1 April 2016.
p Benefits as received during 2016, as disclosed in the Executive Director remuneration table on page 85.
p Retirement benefit as received during 2016, as disclosed in the Executive Director remuneration table on page 85.
Maximum performance Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and CFO and 500%
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2016 and how it will be applied for the 2017 financial year. PwC has been engaged to audit the sections in the annual report on remuneration 2016 below entitled ‘Executive Director remuneration’, ‘details of pension entitlements’, ‘Non Executive Director remuneration’, ‘payments for loss of office and payments to past Directors’ and ‘Directors’ shareholding and share interest’ to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
5 HA Hussain was appointed as an Executive Director on 12 September 2016. The 2016 amounts show payments made from that date. Refer to page 88 for full details of his joining arrangements.
Additional notes to the Executive Director remuneration table Salary Salary reviews take place in the first quarter of the year and are effective from 1 April. The annual base salaries for Executive Directors are as follows: April 2016 April 2017 % change 6 HA Hussain’s starting salary effective 12 September 2016.
BE Masojada’s salary increased by 1.7% as part of the April 2016 review. This was less than the overall UK-based employee salary increase of 3%. HA Hussain was recruited from Prudential on a salary of £450,000. RC Watson received a 4.7% (£20,000) increase which is slightly above the average overall UK-based increase. This is an individual minor correction and does not represent a change in our disciplined salary management.
The April 2017 salaries reflect an increase of 2.5%, which is in line with the average UK-based employee salary increase of 2.6%.
Junior and mid-level employees also participated in a Personal Performance Bonus Scheme. Awards under this scheme are based entirely on individual performance ratings. It is designed to ensure that employees in these roles continue to be motivated to perform their roles well, irrespective of overall Group performance. The benefit is up to 10% of relevant salaries. For the avoidance of doubt, Executive Directors did not participate in the Personal Performance Bonus Scheme.
The profit share approach for bonuses to Executive Directors means that the Remuneration Committee can ensure the total incentives paid to employees are in line with profit performance. Although the approach is not completely formulaic, the outcomes are underpinned by a disciplined and objective decision making process.
The table below shows the ROE performance compared with average Executive Director bonus payments over the past ten years. This table is included to demonstrate to shareholders that appropriate bonus decisions are being made reflecting the varying shareholder outcomes. As can be seen from the table, the bonuses vary significantly with performance from year to year. In addition, where the Hurdle Rate is not met, bonuses are not paid.
*HA Hussain’s figures have been annualised and his bonus ‘buy-out’ included. See page 88 for full details of his joining arrangements.
Considering the above factors, the Committee determined bonus outcomes for 2016 as follows: BE Masojada £1,500,000 (256% of salary), RC Watson £1,350,000 (300% of salary) and HA Hussain £800,000 (178% of salary). The Committee noted that these incentives represented less than 8% of the total bonus pool across the Group and considered this to be a reasonable share in the context of a strong 2016 profit performance.
Long-term incentives Performance Share Plan (PSP) awards where the performance period ends with the 2016 financial year BE Masojada and RC Watson were granted awards under the PSP in 2014 for the three-year performance period 1 January 2014 to 31 December 2016. HA Hussain was granted a buy-out award as outlined on page 88. The performance conditions for this award were set at the start of the performance period and are as follows: Required average post-tax ROE
PSP awards granted during the 2016 financial year On 8 April 2016 BE Masojada and RC Watson were granted awards under the PSP. HA Hussain was granted an award on 12 September 2016 as part of the same grant cycle (see page 88 for further details).
As noted in last year’s remuneration report, 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 (i.e. five years post the start of the performance period).
HA Hussain’s joining package All terms and conditions of HA Hussain’s remuneration are in line with the Company’s remuneration policy. In lieu of forfeited long-term incentive plan awards from Prudential, HA Hussain was compensated with awards of an equivalent face value. These awards will vest in line with the timing of Prudential awards and will be subject to the Hiscox Performance Share Plan (PSP) performance conditions. These awards will be subject to malus, mirroring the Prudential long-term incentive plan.
HA Hussain was eligible for a bonus in respect of the 2016 financial year. In lieu of the forfeited 2016 bonus from Prudential, he will be compensated with a bonus award of an equivalent value for the period up to commencement of his Hiscox employment on 12 September 2016. For the remainder of the 2016 financial year he was eligible for a bonus based on the criteria outlined on page 86.
In line with the remuneration policy, the Committee has suitably limited the above buy outs to the commercial value forfeited by the individual.
Non Executive Director fees were reviewed in January 2016 and no increases were made.
R McMillan – – G Stokholm – – *Appointed 12 September 2016.
The Hiscox Ltd share price at 31 December 2016 was £10.17. The highest and lowest share prices during 2016 were £10.970 and £9.005 respectively.
Market price at date of exercise £ Date from which exercisable Expiry date
RC Watson 3,299 – – – 3,299 5.456 – 01-Jun-17 30-Nov-17
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 and was a Board Member of Lloyd’s Members Association. He was not remunerated for his services.
Dec 90 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration Annual report on remuneration 2016 101 Financial summary
2 Strategic report 35 Governance 73 Remuneration Annual report on remuneration 2016 101 Financial summary
Membership of the Remuneration Committee The Committee members at 31 December 2016 were C Foulger, ER Jansen, R McMillan, G Stokholm, LA Carter, A MacDonald, C Keogh (Chairman).
Statement of shareholder voting At the last AGM, the Directors’ annual report on remuneration received the following votes from shareholders: Annual report on renumeration
Directors’ report The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2016.
The key performance indicators are shown on page 2. Details of the use of financial instruments are set out in note 21 to the consolidated financial statements. An analysis of the development and performance of the business during the financial year, its position at the end of the year, any important events since the end of the year and the likely future development can be found within the Chief Executive’s report on pages 10 to 17. The Chief Executive’s report also describes the main trends and factors likely to affect the future development, performance and position of the Company’s business and includes a description of the Company’s strategy and business model. The Company’s strategy is also described on page 3. A description of the principal risks and uncertainties and how they are managed or mitigated can be found in the risk management section on pages 36 to 45. In addition, note 3 to the consolidated financial statements provides a detailed explanation of the principal risks which are inherent to the Group’s business and how those risks are managed.
The confirmation required by C.2.1 of the UK Corporate Governance Code can be found on page 65.
Corporate responsibility Information on environmental, employee and community issues including details of the Company’s policies are set out in the corporate responsibility statement on pages 46 to 49. This also includes disclosure of greenhouse gas emissions.
Diversity The composition of the Board and the Senior Executive structure are described on pages 54 and 55 and pages 56 and 57 respectively. The role of a Hiscox Partner is described on page 58. 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 opposite. Hiscox’s approach to inclusion and diversity is outlined on page 48.
Financial results The Group achieved a pre-tax profit for the year of £354.5 million (2015: £216.1 million). Detailed results for the year are shown in the consolidated income statement on page 108, and also within the Group financial performance section on pages 26 to 27.
Going concern A review of the financial performance of the Group is set out on pages 26 to 27. The financial position of the Group, its cash flows and borrowing facilities are included therein. The Group has considerable financial resources and a well-balanced book of business.
After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, a period of at least 12 months from the date of this report. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.
Viability The statement required to be included in the Annual Report under C.2.2 of the UK Corporate Governance Code can be found on page 65.
Directors The names and details of all Directors of the Company who served during the year and up to the date of this report are set out on pages 54 to 55. Details of the Chairman’s professional commitments are included in his biography on page 54 and there were no changes during the year. The Bye-laws of the Company govern the appointment and replacement of Directors. Mr Hamayou Akbar (‘Aki’) Hussain was appointed by the Board with effect from 12 September 2016 and he will submit himself for appointment as a Director by shareholders at the Annual General Meeting. In accordance with the UK Corporate Governance Code, all other Directors will submit themselves for re-appointment at the Annual General Meeting.
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 below. Diversity 27.5p Total dividend payment for the year ended 31 December 2016.
2 Strategic report 35 Governance 73 Remuneration Directors’ report 101 Financial summary
Major interests in shares As at the year end, the Company had been notified of the above interests of 5% or more of voting rights in its ordinary shares.
Power of Directors The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2016 the Directors were granted authorities to allot and issue shares and to make market purchases of shares and intend to seek renewal of these authorities in 2017.
Annual General Meeting The notice of the Annual General Meeting, to be held on 18 May 2017, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
HOOKED ON CLASSICS In 2016, Hiscox began a three-year partnership with the world’s longest running motoring event, the London to Brighton Veteran Car Run – the latest step in its developing relationship with the world of classic cars.
In building its classic car business, Hiscox has been able to draw on its decades of experience in the fine art world, with which there are some clear parallels. “The classic car collector is often similar to a fine art collector in that they get into the detail, they understand the nuances of what they collect, and they’re very focused on certain marques in much the same way as you might be with a
This sponsorship arrangement, which included the hosting of a special event for the drivers at the RAC Club and the strong presence of the Hiscox brand throughout the run, was the latest step in what has been a concerted effort by the company to increase its visibility among classic car collectors both in the UK and Europe. This is a large and dynamic community of serious investors and committed enthusiasts, whose obsessions range from the ‘horseless carriages’ of the London to Brighton crowd to the rather different appeal of ‘emerging classics’ from the 1990s.
To meet these varied needs, Hiscox has evolved in both product and distribution, building its foothold in the UK market and expanding its classic car proposition elsewhere in Europe. “If you are involved in classic cars, we want you to be able to buy what we sell through a broker, directly on the internet, through a partnership, or through a specialist agent,” says Justin.
The classic car world is highly active and sociable, enlivened by a large number of well-attended events and races. As Jan Willem van Es – the Head of Marketing at Hiscox Benelux and a keen classic car collector and racer – points out, “there’s not really an event you can go to where you bring your painting”.
The power of clubs is particularly strong in Germany. “There are 1,500 classic car clubs in Germany,” explains Rainer, “and we have built partnerships with just a few of them. Every club has its own special interests, and because we are so flexible, we can hear their interests and work out the best way of insuring them. The opportunity is significant.”
In building its classic car business, Hiscox has been able to draw on its decades of experience in the fine art world, with which there are some clear parallels.
100 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
Jan – who owns an Austin A35, a Triumph TR3 and a Jaguar E-Type – is also a familiar face on the European classic car circuit. “To understand this world, you need to have a passion for it,” he says, and he certainly has no shortage of that. He has arranged for Hiscox to sponsor the Tulpenrallye (‘Tulip Rally’), the Netherlands’ oldest and most famous classic car race: a 2,000-mile dash across the continent by hundreds of obsessives in pre-1971 cars. “It’s a group of fanatical people,” says Jan. “It’s more than a game – it’s something you want to win.” It was through this tie-up that his office “made connections with two big brokers in the Dutch market, one of whom was actually driving in the rally”.
That passion is hard to overstate. While some collectors are motivated at least in part by the prospect of a return on investment, for the vast majority it is a passion play. Besides, some of that investment potential can be illusory. “Prices do rise – values are increasing for very rare cars, and for cars from the 1970s that people in their 30s feel nostalgic for – but for most collectors, the cost of keeping them running probably wipes out any increase in value,” explains Jan. Rainer, who understands the zeal of collectors only too well, sums it up succinctly: “I think you have to be a bit mad to do this stuff.”
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 2016, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.
Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the ethical requirements of the Chartered Professional Accountants of Bermuda Rules of Professional Conduct (CPA Bermuda Rules) that are relevant to our audit of the financial statements in Bermuda. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the ethical requirements of the CPA Bermuda Rules.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Independent auditor’s report 103Hiscox Ltd Report and Accounts 2016 103
We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose 5% which is within the range of acceptable quantitative materiality thresholds in auditing standards. We have applied an average to the benchmark in order to take into account the volatility in earnings driven by catastrophe loss events and foreign exchange fluctuations.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
We focused on this area as the underlying methods include a number of explicit and implicit assumptions relating to the expected settlement amounts and settlement patterns of claims and are subject to complex calculations which include application of management’s judgement.
We evaluated whether the Group’s actuarial methodologies were consistent with those used in the industry and with prior periods. No inconsistencies were noted.
As part of our risk assessment, we stratified the loss reserves based on the inherent nature of the business class, the size of the class relative to the total reserves, exposure to adverse market development, sensitivity to significant assumptions and the degree of prior year reserve movement.
For the remaining classes we performed targeted testing of key indicators and diagnostics to identify and follow up any anomalies and assessed whether there was any audit evidence that was inconsistent with conclusions based on our knowledge from the independent projections noted above. No material differences were identified in our procedures performed.
Hiscox Ltd is the parent of a Group of entities. The financial information of this Group is included in the consolidated financial statements of Hiscox Ltd. The Group is structured into four segments (see Note 4 to the consolidated financial statements) and is a consolidation of over 50 separate legal entities.
The Group’s operations primarily consist of the legal entity operations in the United Kingdom and Bermuda. A full scope audit was performed for five components as these components are individually significant to the group and gave us over 90% coverage of operations as measured by revenue and total assets and liabilities. The five components are: (i) Hiscox Dedicated Corporate Member Syndicate No. 33, (ii) Hiscox Dedicated Corporate Member Syndicate No. 3624, (iii) Hiscox Insurance Company Limited, (iv) Hiscox Insurance Company (Bermuda) Limited and (v) Hiscox Underwriting Group Services Limited. Based on our professional judgment, certain audit procedures were conducted by the Group team, the United Kingdom or the United States component teams over certain balances within other legal entities in Bermuda, the United Kingdom and the United States. Analytical procedures over the remaining components that were not inconsequential were performed by the Group engagement team.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
Corporate governance statement Under the United Kingdom’s Listing Rules we are required to review the part of the Corporate Governance Statement on pages 61 to 65 relating to eleven provisions of the UK Corporate Governance Code and the Directors have requested that we also review their statements on going concern and the longer-term viability of the Company as required for UK registered companies with a premium listing on the London Stock Exchange. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Income Gross premiums written 4 2,402,579 1,944,220 Outward reinsurance premiums (614,636) (372,376) Net premiums written 4 1,787,943 1,571,844
Gross premiums earned 2,220,853 1,828,334 Premiums ceded to reinsurers (545,840) (393,318) Net premiums earned 4 1,675,013 1,435,016
Total income 1,787,598 1,487,553 Expenses Claims and claim adjustment expenses 26.2 (1,004,601) (685,897)
Claims and claim adjustment expenses, net of reinsurance 26.2 (739,772) (572,453) Expenses for the acquisition of insurance contracts 17 (538,467) (441,376) Reinsurance commission income 17 128,627 97,093
Other comprehensive income net of tax 74,065 55,952 Total comprehensive income for the year (all attributable to owners of the Company) 411,051 265,847
Assets Goodwill and intangible assets 14 123,724 126,222 Property, plant and equipment 15 48,425 46,509 Investments in associates 16 13,835 13,525
Loans and receivables including insurance receivables 20 802,906 619,563 Current tax asset 2,406 3,243 Cash and cash equivalents 23 664,816 727,880 Total assets 6,641,778 5,304,001
Equity attributable to owners of the Company 1,817,537 1,527,963 Non-controlling interest 866 866 Total equity 1,818,403 1,528,829 Employee retirement benefit obligations 30 56,139 75
The consolidated financial statements were approved by the Board of Directors on 27 February 2017 and signed on its behalf by: HA Hussain Chief Financial Officer
Profit for the year (all attributable to owners of the Company) – – – – 209,895 209,895 – 209,895 Other comprehensive income net of tax (all attributable to owners of the Company) – – – 34,478 21,474 55,952 – 55,952 Employee share options: Equity settled share-based
Deferred and current tax on employee share options 29 – – – – 5,761 5,761 – 5,761 E/F Share Scheme: Return of capital, special distribution 32 – (32
Deferred and current tax on employee share options 29 – – – – 1,907 1,907 – 1,907 Shares purchased by Trust – – – – (38,558) (38,558) – (38,558) Shares issued in relation to Scrip Dividend 24, 32 8 1,270 – – – 1,278 – 1,278 Dividends paid to owners of the Company 32 – – – – (113,934) (113,934) – (113,934)
Profit before tax 354,543 216,100 Adjustments for: Net foreign exchange gains (152,408) (15,153) Interest and equity dividend income (54,789) (40,951) Interest expense 20,266 9,662 Net fair value (gains)/losses on financial assets (13,786) 8,538
Cash flows from the purchase of subsidiaries – (7,375) Cash flows from the sale of subsidiaries 13,596 – Cash flows from the purchase of associates 16 (450) (2,089) Cash flows from sale of associates 2 – Cash flows from the purchase of property, plant and equipment (5,770) (19,272) Cash flows from the purchase of intangible assets (20,909) (30,952) Net cash flows from investing activities (13,531) (59,688)
Included within cash and cash equivalents held by the Group are balances totalling £136 million (2015: £126 million) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally £38 million (2015: £172 million) is pledged cash held against Funds at Lloyd’s, and £13 million held within trust funds against reinsurance arrangements.
The presentation of the cash flow statement has been reformatted to extract the foreign exchange movements on to one line to better represent the movements in the other lines. The prior year has been adjusted for comparison.
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the US with over 2,300 staff.
The consolidated financial statements for the year ended 31 December 2016 include all of the Group’s subsidiary companies and the Group’s equity interest in associates. All amounts relate to continuing operations.
The financial statements were approved for issue by the Board of Directors on 27 February 2017.
2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.
Since 2002, the standards adopted by the International Accounting Standards Board (IASB) have been referred to as IFRS. The standards from prior years continue to bear the title ‘International Accounting Standards’ (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the IFRS Interpretations Committee (IFRIC).
The amendments included minor changes to the following standards: – IAS 1: Presentation of Financial
Notes to the consolidated financial statements 112 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial Summary
Below is a table disclosing the impact to the consolidated financial statements following the sale.
Total assets no longer recognised in the consolidated balance sheet (20,662) Total liabilities no longer recognised in the consolidated balance sheet 9,941 Total currency translation reserve no longer recognised in the consolidated balance sheet 221 Cash received on disposal, net of expenses 11,327 Profit recognised in other income in the consolidated income statement 827 113Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two Group entities that have different functional currencies. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses transaction dates, in which case income and expenses are translated at the date of the transactions); and – all resulting exchange differences are recognised as a separate component of equity.
Land is not depreciated as it is deemed to have an indefinite useful economic life. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives.
The rates applied are as follows: –buildings 20–50 years –vehicles 3 years – leasehold improvements including fixtures and fittings 10–15 years – furniture, fittings and equipment 3–15 years
2.4 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 2 Significant accounting policies 2.3 Basis of consolidation (a) Subsidiaries continued 114 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The Group has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial assets at initial recognition. The decision by the Group to designate debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade. Financial assets and liabilities are initially recognised at fair value. Subsequent to initial recognition financial assets and liabilities are measured as described below.
Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 22.
A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with a documented strategy, if acquired principally for the purpose of selling in the short term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be ten years and are carried at cost less accumulated amortisation and impairment losses.
2.6 Intangible assets (a) Goodwill Goodwill represents amounts arising on acquisition of subsidiaries and associates.
2.13 Insurance contracts (a) Classification The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk. Such contracts may also transfer a limited level of financial risk.
– significant reported financial difficulties of investment issuers, reinsurers and debtors; – actual breaches of credit terms such as persistent late payments or actual default; – the disintegration of the active market(s) in which a particular asset is traded or deployed; – adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and – the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their 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 2 Significant accounting policies 2.7 Financial assets and liabilities including loans and receivables continued 116 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
(g) Reinsurance commission income Prior to the current year, the Group presented its expenses for the acquisition of insurance contracts net of reinsurance commission income on the face of the consolidated income statement and presented the gross amounts within note 17. Due to the increasing size of these positions in 2016, the Group has decided to disclose its reinsurance commission income as a separate line item within the consolidated income statement and is presenting the prior year in line with the current years’ presentation. The Group continues to disclose the written and earned positions within note 17.
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.
(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
(b) Recognition and measurement Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (premiums earned) proportionally over the period of coverage. The portion of premium received on inforce contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each segment of the Group 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 immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision 2 Significant accounting policies 2.13 Insurance contracts continued 117Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense, with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions (e.g. profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest.
(c) Share-based compensation The Group operates a number of equity settled share-based employee compensation plans. These include both the approved and unapproved share option schemes, and the Group’s Performance Share Plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes. The fair value of the employee initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group’s financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice, as shown in note 29. To the extent that taxable losses carried forward by the Group exceed taxable temporary differences relating to the same taxation authority and taxable entity, which will result in amounts against which the losses can be utilised, the Group uses estimates of probable future taxable profits available to determine whether recognition of a deferred tax asset is appropriate. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
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
(f) Accumulating compensation benefits The Group recognises a liability and an expense for accumulating compensation benefits (e.g. holiday entitlement), based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date.
2.18 Provisions The Group is subject to various insurance-related assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
2.19 Leases (a) Hiscox as lessee Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are 2 Significant accounting policies 2.15 Employee benefits continued 119Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
i) Underwriting risk The Board sets the Group’s underwriting strategy and risk appetite seeking to exploit identified opportunities in the light of other relevant anticipated market conditions.
Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting 2.22 Reporting of additional performance measures
The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall 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 three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed in notes 5 and 6, are likewise considered to be additional performance measures.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures through the Risk Committee and ongoing compliance therewith, through dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in common with the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such premium inflows is reasonably predictable. In addition, the majority of material cash 2 Significant accounting policies year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: – regularly updating the Group’s risk models; – documenting, monitoring and reporting on the Group’s strategy to manage risk; – developing systems that facilitate the identification of emerging issues promptly; – utilising sophisticated computer modeling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; – monitoring legal developments and amending the wording of policies when necessary; – regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; – examining the aggregated exposures in advance of underwriting further large risks; and – developing processes that continually factor market intelligence into the pricing process.
The Group compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters.
120 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
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.
Other £000 * Total *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.
3 Management of risk 3.1 Insurance risk i) Underwriting risk continued 121Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
to commodity price risk in relation to these types of insurance contracts is very limited, given the controlled extent of business interruption cover offered in the areas prone to losses of asset production.
The Group writes reinsurance risks for periods of mainly one year so that contracts can be assessed for pricing and terms and adjusted to reflect any changes in market conditions.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events. The Group agrees to reimburse the cedant once their losses exceed a minimum level. Consequently the frequency and severity of reinsurance inwards claims are related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year, but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such 3 Management of risk 3.1 Insurance risk i) Underwriting risk continued 122 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
investments and the insurance-linked funds shown in note 22, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
Certain marine and property insurance contracts, such as those relating to subsea and other energy assets and the related business interruption risks, can also take longer than normal to settle. This is because of the length of time required for detailed subsea surveys to be carried out and damage assessments agreed together with difficulties in predicting when the assets can be brought back into full production.
The provision of insurance to cover allegations made against individuals acting in the course of fiduciary or managerial responsibilities, including directors and officers’ insurance, is one example of a casualty insurance risk. The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than the other categories of business.
changes in the yield to maturity. Using these three concepts, scenario modeling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
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 2016 was £3,415 million (2015: £2,615 million). These may be analysed below as follows: Nature of debt and fixed income holdings 2016
Duration is the weighted average length of time required for an instrument’s cash flow stream to be recovered, where the weightings involved are based on the discounted present values of each cash flow. A closely related concept, modified duration, measures the sensitivity of the instrument’s price to a change in its yield to maturity. Convexity measures the sensitivity of modified duration to
Directly held equity securities 3 3 Units held in funds – traditional long only 66 68 Units held in funds – long and short and special strategies 31 29 Geographic focus Specific UK mandates 41 42 Global mandates 59 58
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 2016 would have been expected to reduce Group equity and profit after tax for the year by approximately £28.0 million (2015: £23.8 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
The Committee considers the reputation of its reinsurance partners and also receives details of recent payment history and the status of any ongoing negotiations between Group companies and these third parties. This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets, but collateral may be requested to be held against these assets. The Group structures the levels of credit risk accepted by placing limits on their 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.
3 Management of risk 3.2 Financial risk (d) Credit risk continued
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2016 and 2015.
The Group’s equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.
Average contractual maturity analysed by denominational currency of investments as at 31 December 2016 Years
Reinsurance inwards 155,994 85,991 90,317 38,090 370,392 Property – marine and major assets 114,808 70,342 76,013 26,668 287,831 Property – other assets 135,034 68,120 26,522 7,193 236,869 Casualty – professional indemnity 184,651 197,953 236,258 103,787 722,649 Casualty – other risks 65,715 55,198 105,009 48,427 274,349 Other* 82,253 24,953 24,113 14,687 146,006 Total 738,455 502,557 558,232 238,852 2,038,096 *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.
3 Management of risk 3.2 Financial risk continued 126 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Financial assets carried at fair value 786,614 2,618,118 323,460 63,841 3,792,033
Employee retirement benefit obligations 75 – – – 75 Deferred tax 29,814 – – – 29,814 Insurance liabilities 719,518 1,904,441 325,508 98,895 3,048,362 Financial liabilities 275,679 – – – 275,679 Current tax 4,582 – 302 – 4,884 Trade and other payables 166,723 221,704 2,275 25,656 416,358 Total liabilities 1,196,391 2,126,145 328,085 124,551 3,775,172 Total equity 260,998 1,085,191 147,327 35,313 1,528,829
Sensitivity analysis As at 31 December 2016, the Group used closing rates of exchange of £1:€1.17 and £1:$1.24 (2015: £1:€1.36 and £1:$1.47). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
Strengthening of US Dollar 149.8 88.4 114.8 47.5 Weakening of US Dollar (122.6) (72.3) (93.3) (38.3)
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2016 year of account for Syndicates 33 and 3624 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
Hiscox Insurance Company Limited A (Excellent) A+ A (Strong) Hiscox Insurance Company (Bermuda) Limited A (Excellent) A+ A (Strong) Hiscox Insurance Company (Guernsey) Limited A (Excellent) A+ – Hiscox Insurance Company Inc. A (Excellent) – –
Capital modeling and regulation The capital requirements of an insurance group are determined by its exposure to risk and the solvency criteria established by management and statutory regulations.
It is intended to provide the public with certain information to be able to make informed assessments about the Group.
It also includes the European kidnap and ransom business written by Hiscox Insurance Company Limited and Syndicate 33. – Hiscox London Market comprises the internationally traded insurance business written by the Group’s London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage, auto extended warranty and aviation business. – Hiscox Re and ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are included. The segment also includes the performance and fee income from the ILS funds, along with the gains or losses made as a result of our investment in the funds. More details can be seen in note 2.3.
3 Management of risk 3.3 Capital risk management Capital modeling and regulation continued 130 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
All amounts reported opposite represent transactions with external parties only. In the normal course of trade, the Group’s entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision-maker when evaluating the results of the Group. Performance is measured based on each reportable segment’s profit before tax.
Impairment of intangible assets 6,346 – – – 6,346 2,633 – – – 2,633 4 Operating segments continued 131Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
At 100% level (note 4b) 1% change in claims or expense ratio 10,468 5,502 2,425 – 9,133 4,611 2,067 – At Group level 1% change in claims or expense ratio 10,205 4,431 2,114 – 8,880 3,664 1,807 –
Claims and claim adjustment expenses, net of reinsurance (402,508) (315,951) (94,819) – (813,278) (346,251) (225,740) (53,787) – (625,778) Expenses for the acquisition of insurance contracts (270,986) (165,131) (10,337) – (446,454) (242,703) (126,262) (6,322) – (375,287)
(c) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US, Guernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal, Singapore and Thailand.
Investment income including interest receivable 54,789 40,951 Net realised gains on financial investments at fair value through profit or loss 6,416 2,968 Net fair value gains/(losses) on financial investments at fair value through profit or loss 13,631 (10,239) Investment result – financial assets 8 74,836 33,680 Net fair value gains on derivative financial instruments 21 155 1,701 Total result 74,991 35,381
Agency-related income 11,743 9,117 Profit commission 11,720 10,000 Other underwriting income 3,666 (4,196) Other income 10,465 2,235 Other income 37,594 17,156 Wages and salaries 145,997 124,466 Social security cost 23,288 21,884 Pension cost – defined contribution 8,243 8,432 Pension cost – defined benefit 172 1,825 Share-based payments 26,274 17,726 Marketing expenses 42,051 44,499 Investment expenses 4,361 4,267 Depreciation, amortisation and impairment 28,162 22,734 Other expenses 137,171 115,382 Operational expenses 415,719 361,215
Amounts receivable by the auditor and associates in respect of: The auditing of the accounts of any associate of the Group 1,545 1,241 All audit-related assurance services – 98 All non-audit-related assurance services 315 144
The full audit fee payable for the Syndicate 33 audit has been included above, although an element of this is borne by the third-party participants in the Syndicate.
135Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date, whereas resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
Unrealised translation (losses)/gains on intragroup borrowings (1,888) 1,888 – Total (losses)/gains recognised (1,888) 1,888 –
136 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Acquisitions on purchase of subsidiary – – – – 9,185 9,185
In 2016, the £163,000 impairment recognised in the year for goodwill and is included in operational expenses in the consolidated income statement and relates to Hiscox UK as a CGU (2015: £2,154,000 relating to DirectAsia as a CGU).
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value less costs to sell or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2016 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset has been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting business.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships. These intangible assets are amortised on a straight-line basis over their useful economic life. At the end of each reporting period we assess whether there is any indication that customer contractual relationships may be impaired. Where indications of impairment are identified, the carrying value of customer contractual relationships is tested for impairment based on the recoverable amount which is considered to be the higher of the fair value less costs to sell or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated for customer contractual relationships in the same manner as described above for goodwill and the same discount rate used. The results of this test led to £4,282,000 of impairment (2015: £479,000) being recognised.
Capitalised software and development costs are amortised when the assets become available for use on a straight-line basis over the expected useful life of the asset. 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 impaired a value of £1,901,000 relating to the DirectAsia CGU and is included in operational expenses in the consolidated income statement.
At beginning of year 13,525 10,670 Additions during the year 450 2,089 Disposals during the year (2) – Distributions received (272) (241) Net profit from investments in associates 134 1,007 At end of year 13,835 13,525
Associates incorporated in the UK and US from 17 to 35% 53,731 30,456 43,037 3,905 Associates incorporated in Europe from 10% to 26% 2,323 1,821 2,060 727 Total at the end of 2016 56,054 32,277 45,097 4,632 139Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 466,041 301,022 After one year 339,608 237,788
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 20). The Group recognised a gain during the year of £134,000 (2015: gain of £10,000) in respect of previously impaired balances.
The effective maturity of the debt and fixed income securities due within and after one year are as follows: Within one year 706,700 607,968 After one year 2,708,249 2,007,046
Derivative financial liabilities 21 474 16 Total financial liabilities carried at fair value 474 16
The fair value of the long-term debt is estimated as £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.
141Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Gross receivables arising from insurance and reinsurance contracts 699,768 538,652 Provision for impairment (1,276) (2,175) Net receivables arising from insurance and reinsurance contracts 698,492 536,477
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 720,509 546,109 After one year 82,397 73,454
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a gain of £899,000 (2015: loss of £44,000) for the impairment of receivables during the year ended 31 December 2016. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
21 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2016. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2016 all mature within one year of the balance sheet date and are detailed below: 31 December 2016 Derivative financial instruments included on balance sheet
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £664,000 (2015: gain of £1,940,000) as included in note 7. There was no initial purchase cost associated with these instruments.
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 funds – – 46,821 46,821 Derivative instrument assets – 329 – 329
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, long-term debt and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at amortised cost, is estimated at £292.3 million and is considered as Level 1 in fair value hierarchy.
Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance-linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant. At 31 December 2016, the insurance-linked funds of £46,821,000 represents the Group’s investment in the Kiskadee Funds (2015: £40,045,000).
Unrealised gains and losses in the year on securities held at the end of the year (1,397) 2,305 908 –
Unrealised gains and losses in the year on securities held at the end of the year (257) 2,201 1,944 –
* Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance-linked fund.
22 Fair value measurements continued 145Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Employee share option scheme – proceeds from shares issued 22 1,534 – – – Scrip dividends to owners of the Company 8 1,270 – – –
Share repurchase The Trustees of the Group’s Employee Benefit Trust purchased Hiscox Ltd shares through the market during the period for £38,558,000 (2015: £6,712,000) to facilitate the settlement of vesting awards under the Group’s Performance Share Plan. As the trust is consolidated into the Group financial results, these purchases have been accounted for in the same way as treasury shares and have been charged against retained earnings. The shares are held by the Trustees for the beneficiaries of the Trust.
Share options and Performance Share Plan awards Performance Share Plan awards are granted to Directors and to senior employees. Up until 2005, share options were also granted. The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant. 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.
24 Share capital 146 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and Performance Share Plan award instruments issued to employees, over their vesting period through the income statement. The expense recognised in the consolidated income statement during the year was £26,274,000 (2015: £17,726,000). This comprises charges of £25,585,000 (2015: £17,136,000) in respect of Performance Share Plan awards and £689,000 (2015: £590,000) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument.
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2016 2015
Currency translation reserve at 31 December 202,272 91,178 Retained earnings at 31 December 1,488,306 1,312,660
The Group purchased its own shares during 2016 for a net amount of £38,558,000 and placed them in the Trust for future utilisation on vesting of Performance Share Plan awards (2015: £6,712,000).
24 Share capital Share options and Performance Share Plan awards continued 147Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
148 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
26.1 Insurance contracts assumptions (a) Process used to decide on assumptions There are many risks associated with insurance contracts, and this means that there is a considerable amount of uncertainty in estimating the future settlement cost of claims. There is uncertainty in both the amounts and the timing of future claim payment cash flows.
Claims paid are claims transactions settled up to the reporting date including settlement expenses allocated to those transactions.
26 Insurance liabilities and reinsurance assets continued 149Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 940,241 1,347,174 996,948 1,201,724 1,543,152 1,300,193 1,034,567 1,137,696 1,226,108 1,528,757 12,256,560 eight years later 724,389 940,974 – – – – – – – – 1,665,363 nine years later 720,172 – – – – – – – – – 720,172
Current estimate of cumulative claims 720,172 940,974 724,057 870,930 1,307,009 1,059,662 752,789 895,765 1,094,579 1,528,757 9,894,694 Less: attributable to external Names (144,291) (182,237) (128,204) (138,535) (198,495) (141,369) (84,465) (102,594) (124,604) (179,099) (1,423,893) Group’s share of current ultimate claims estimate 575,881 758,737 595,853 732,395 1,108,514 918,293 668,324 793,171 969,975 1,349,658 8,470,801
26 Insurance liabilities and reinsurance assets 26.1 Insurance contracts assumptions (b) Claims development tables continued 150 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 804,386 923,701 810,574 951,373 1,189,412 943,564 894,286 929,576 989,143 1,159,340 9,595,355 eight years later 617,337 687,151 – – – – – – – – 1,304,488 nine years later 612,481 – – – – – – – – – 612,481
Current estimate of cumulative claims 612,481 687,151 610,192 706,861 1,003,706 734,139 655,427 736,572 910,852 1,159,340 7,816,721
Liability recognised in respect of prior accident years at 100% level 109,328 Total net liability to external parties at 100% level 2,326,415 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2016.
Current estimate of cumulative claims 612,481 687,151 610,192 706,861 1,003,706 734,139 655,427 736,572 910,852 1,159,340 7,816,721 Less: attributable to external Names (124,662) (125,656) (102,043) (102,294) (139,327) (81,499) (69,026) (79,824) (99,137) (118,809) (1,042,277) Group’s share of current ultimate claims estimate 487,819 561,495 508,149 604,567 864,379 652,640 586,401 656,748 811,715 1,040,531 6,774,444
Less: attributable to external Names 118,571 122,635 91,082 90,422 117,833 59,999 54,445 52,763 35,865 23,375 766,990 Group’s share of cumulative payments (468,539) (543,916) (456,818) (554,550) (765,924) (523,988) (475,507) (440,551) (363,561) (239,290) (4,832,644) Liability for 2007 to 2016 accident years recognised on Group’s balance sheet 19,280 17,579 51,331 50,017 98,455 128,652 110,894 216,197 448,154 801,241 1,941,800 Liability for accident years before 2007 recognised on Group’s balance sheet 80,909 Total Group liability to external parties included in the balance sheet – net** 2,022,709 **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Premiums earned through the income statement (2,220,853) 545,840 (1,675,013)(1,828,334) 393,318 (1,435,016) Foreign exchange and other adjustments 95,160 (20,405) 74,755 27,045 (37,249) (10,204)
Reinsurers’ share of deferred acquisition costs 17 66,681 33,211 Accruals and deferred income 153,107 117,270
Included within accruals and deferred income is £9.6 million (2015: £nil) of deferred gain on retroactive reinsurance contracts.
26 Insurance liabilities and reinsurance assets continued 152 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 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 474,023 322,123 After one year 125,179 94,235
The amounts expected to be settled after one year of the balance sheet date primarily relate to deferred bonuses and the Group’s provision of sabbatical leave employee benefits.
£59,123,000 of trade and other payables previously reported as within one year in the prior year, has been correctly presented under positions due after one year.
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 35. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 32,240 9,906 Adjustments in respect of prior years (5,010) (264) Total current tax expense 27,230 9,642
The UK Finance Act 2015 introduced a new tax with effect from 1 April 2015, the Diverted Profits Tax (DPT), which in certain situations applies a tax of 25% on income which would not otherwise be chargeable to UK tax. The Group is currently in discussions with HMRC as to the scope of the new tax in the context of the Group’s operations. No provision for DPT has been made in 2016 or 2015.
27 Trade and other payables continued 153Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Deferred tax assets 34,388 29,193 Deferred tax liabilities (51,418) (59,007) Total net deferred tax liability (17,030) (29,814)
The income statement credit is mainly as a result of the revaluation of positions to exchange rates applicable at year end.
Trade and other payables 3,780 256 – 4,036 Intangible assets – Syndicate capacity 1,784 (246) – 1,538
* The solvency regulations in the UK require certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. The regulations prescribe that the provision is adjusted each year based on a percentage of net premiums written for those lines of business during the financial year, subject to a maximum percentage. The amount of each annual increase is a deductible expense for UK tax purposes, and the equalisation provision is taxed when released. Equalisation provisions are not permitted under IFRS which therefore results in the temporary difference for tax purposes. From 2008, Lloyd’s Corporate Members are also entitled to a tax deduction for claims equalisation losses although this is not a solvency requirement for Lloyd’s. Finance Act 2012 repealed the legislation treating the equalisation provision as a tax deductible expense, and treats the existing equalisation provision as a receipt taxable over six years with effect from January 2016, when the current solvency regulations are replaced by Solvency II which does not require an equalisation provision. The Group has provided for the deferred tax liability on its claims equalisation provisions during the year.
154 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Deferred tax assets of £41,392,000 (2015: £35,147,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits in excess of profits arising from the reversal of other timing differences, are recognised above. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within six years. £40,572,000 (2015: £34,224,000) of the tax losses to which these assets relate will expire after ten years or later; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling £29,988,000 (2015: £20,474,000) including £26,843,000 (2015: £20,474,000) in relation to losses in overseas companies of £88,185,000 (2015: £72,016,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax asset expected to be recovered after more than 12 months is £41,392,000 (2015: £35,147,000).
30 Employee retirement benefit obligations The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the Trustee and are held separately from those of the Group. 61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme is recorded and the recovery from the third-party Names for their share of the Syndicate 33 recharge is shown as a separate asset.
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 271,072 199,120 Fair value of scheme assets (214,933) (199,045) Deficit for funded plans 56,139 75 Net amount recognised as a defined benefit obligation 56,139 75
As the fair value of scheme obligations exceeds the present value of the scheme assets, the scheme reports a deficit.
The scheme assets are invested are as follows: At 31 December 2016
156 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Interest cost on defined benefit obligation 7,916 8,320 Interest income on plan assets (7,910) (7,118) Net interest cost 6 1,202 Administrative expenses and taxes 166 623 Total expense recognised in operational expenses in the income statement 9 172 1,825 Remeasurements Effect of change in demographic assumptions – (4,324) Effect of change in financial assumptions 68,094 (13,374) Effect of experience adjustments – (13,836) Return on plan asset (excluding interest income) (12,202) (2,382) Changes in asset ceiling/onerous liability (excluding interest income) – – Remeasurement of third-party Names share of defined benefit obligation (9,361) 5,680 Total remeasurement included in other comprehensive income 46,531 (28,236) Total defined benefit charge/(credit) recognised in comprehensive income 46,703 (26,411)
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 199,045 195,209 Interest income 7,910 7,118 Cash flows Contribution by the employer – – Benefit payments (5,671) (5,041) Administration expenses (166) (623) Increase due to plan combinations 1,613 – Remeasurements Return on plan assets (excluding interest income) 12,202 2,382 Closing fair value of scheme assets 214,933 199,045 30 Employee retirement benefit obligations continued 157Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 199,120 227,375 Interest expense 7,916 8,320 Cash flows Benefit payments (5,671) (5,041) Increase due to plan combinations 1,613 – Remeasurements Changes in demographic assumptions – (4,324) Changes in financial assumptions 68,094 (13,374) Impact of experience adjustments – (13,836) Closing present value of scheme obligations 271,072 199,120
Discount rate 2.7 4.0 Inflation assumption (RPI) 3.2 3.1 Inflation assumption (CPI) 2.2 2.1 Pension increases 3.2 3.1
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and income statement. For example, an additional one year of life expectancy for all scheme members would increase the scheme obligations by £9,281,000 at 31 December 2016 (2015: £5,712,000), and would increase the recorded net deficit on the balance sheet by £9,281,000 (2015: £5,712,000).
CPI revaluation in deferment is used for contracted-out members. Contracted-in members are linked to RPI as well as for all pension in payment increase.
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 2016 as follows: Present value of unfunded obligations before change in assumption
Effect of a change in discount rate Use of discount rate of 2.95% 56,139 41,375 14,764 Use of discount rate of 2.45% 56,139 72,099 (15,960)
Profit for the year attributable to the owners of the Company (£000) 336,986 209,895 Weighted average number of ordinary shares (thousands) 281,175 288,209 Basic earnings per share (pence per share) 119.8p 72.8p
Second interim dividend for the year ended: 31 December 2015 of 32.0p (net) per share 89,674 –
The second interim dividend for the year ended 31 December 2015 was comprised of a final dividend equivalent of 16p per share, and an additional return of capital of 16p per share. No scrip dividend alternative was offered.
The interim dividends for 2016 and 2015 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim dividend for the year ended 31 December 2016 was paid in cash of £22,983,000 (2015: £20,202,000) and 119,302 shares for the scrip dividend (2015: 274,455).
The Board has declared a final dividend of 19p per share to be paid on 20 June 2017 to shareholders on the register at 12 May 2017, taking the total ordinary dividend per share for the year to 27.5p (2015: 40.0p).
33 Contingencies and guarantees The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
The following guarantees have also been issued: (a) Hiscox Ltd and Hiscox Capital Ltd have entered into deeds of covenant in respect of a subsidiary, Hiscox Dedicated
Corporate Member Limited (HDCM), to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £29 million (2015: £29 million) in respect of Hiscox Ltd supported by £34 million of investment securities (2015: £30 million) and US$486 million (2015: US$423 million) in respect of Hiscox Capital Ltd supported by US$369 million of investment securities (2015: US$401 million). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called. Additionally, HDCM held £221 million of investment securities and £38 million of cash in favour of Lloyd’s (2015: £172 million in cash).
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, at US$500 million (2015: US$500 million) which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed US$300 million. In addition, the terms also provide that upon request the facility may be drawn in a currency other than US Dollar. At 31 December 2016 US$10.0 million (2015: US$71.9 million) was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2015: £nil).
(f) Hiscox Europe Underwriting Limited has arranged bank guarantees with respect to their various office deposits for a total of €207,000. These guarantees are held with ING Bank (Belgium) for €14,000, ABN Amro (Netherlands) for €33,000 and HypoVereinsbank-UniCredit (Germany) for €160,000.
161Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 10,045 8,951 Office equipment and other 573 356
Later than one year and no later than five years Land and buildings 34,141 29,801 Office equipment and other 547 557
Gross premium income achieved through associates 234,201 185,588 Commission expense charged by associates 21,318 15,538 Amounts payable to associates at 31 December – – Amounts receivable through associates at 31 December 58,536 67,455
163Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Net asset value per share (p) 649.9 545.0 462.5 402.2 346.4 Key statistics *The 2012 results have been restated to reflect the revised pension accounting standard. †Closing mid-market prices.