Remuneration 49 Letter to shareholders 51 Remuneration policy report 59 Annual report on remuneration 2013 67 Directors’ report 68 Directors’ responsibilities statement
Financial summary 70 Independent auditors’ report 71 Consolidated income statement 71 Consolidated statement of comprehensive income 72 Consolidated balance sheet 73 Consolidated statement of changes in equity 74 Consolidated statement of cash flows 75 Notes to the consolidated financial statements 124 Five-year summary
Our ambition is to be a highly respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastropheexposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle.
Our strategy is: — to use our underwriting expertise in London and Bermuda to write high-margin volatile or complex risks; — to build distribution for our specialist retail products; — to protect and nurture our distinctive culture and ethos by recruiting the best people, and by focusing on organic growth.
Capital return of 50.0p per share, approximately £178 million, by way of C/D share scheme combined with share consolidation.
Hiscox London Market delivered excellent profit of £116.0 million (2012: £121.9 million).
Hiscox UK provides another solid performance, with profits of £45.4 million (2012: £45.2 million).
Formed Hiscox Re, our combined reinsurance teams in London, Paris and Bermuda.
— in France, 98% of small business customers found Hiscox service excellent or good; — in the USA, 96% of small business customers surveyed would recommend us; — small business customers gave Hiscox UK an average of 4.77 out of a possible rating of 5 for service satisfaction; — home insurance customers gave Hiscox UK an average of 4.5 out of a possible 5 for service satisfaction.
We are a leading specialist insurer with: — balance that creates opportunity throughout the cycle; — strong financial performance; — a transparent approach to risk; — specialist expertise that is valued by our customers.
Our business A balanced portfolio that creates opportunity throughout a cyclical market Hiscox’s strategy is to balance the more volatile catastrophe-exposed insurance and reinsurance with steady local specialty insurance. Our diversity by product and geography gives us great flexibility, particularly in a tough commercial environment. We are able to grow and shrink the catastrophe-exposed lines according to market conditions. Our local specialty insurance business tends to be steadier throughout the insurance cycle and we have successfully grown our retail lines by 9.3% year-on-year over the last five years.
Our expertise A transparent approach to risk The very business of insurance is managing risk. The understanding of risk is intrinsic to every level of decision-making in the Group. We devote a great deal of expertise to understanding the impact of global events and model these rigorously. We also draw on over 100 years of experience in insurance to assess these risks.
Hiscox’s reputation for innovation and dynamism is built in large part on the energy, professionalism, commitment and expertise of our employees. In September 2013, Hiscox conducted its sixth global employee engagement survey. Open to all permanent members of staff, it looks at how connected employees feel to Hiscox, their managers, their teams and their role. Hiscox continues to have high employee engagement, averaging in the top 75th percentile when compared with over 200 companies worldwide. Of particular note is that 92% of staff are proud to work for Hiscox. 95% of Hiscox employees also responded favourably to the question ‘I believe in the values at Hiscox’.
Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 25 February 2014.
We have organised the two reinsurance teams under a single leader to face the new challenges of today and we have also formed our own ILS fund to deploy both our own and others’ capital.
The plan has not changed with the passing of the baton from the previous Chairman to me. We aim to expand our regional businesses continuously, whilst growing the bigger ticket businesses when margins are high, or contracting when those margins reduce. We will maintain the same strategy of balance that has served us so well over time.
Dividend, balance sheet and capital management The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 36.0p per share (amounting to approximately £128 million), should be made. This represents two successive years where we have been able to share our success with shareholders with an additional capital return. We do not promise a third.
Following the distribution, the Group’s capital levels will be similar to those of the opening balance sheet, post the 2013 capital return, which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a C/D share scheme, which is a variation of the B share scheme used in 2013, and as in the previous year, will be combined with a share consolidation.
In Hiscox UK, Hiscox Europe and Hiscox USA, our market share in our chosen specialist lines is still small and we see many opportunities for growth. We are investing heavily in our direct-toconsumer businesses in the UK, Europe and USA as we aim to take advantage of the growing trend to purchase insurance direct, online and over the phone. In 2013, 50% of our customers in the UK and USA (160,000 householders and businesses) chose to buy cover directly from us. In 2013, the Group spent £30 million on marketing, and plan for the same this year. Under the leadership of Steve Langan, our investment in marketing has built a recognised and respected consumer brand in the UK and we are making good headway in other markets.
When we surveyed our employees this year about life at Hiscox, 95% said they believed in our values and 92% were proud to work here. When I first started at Hiscox in 1986 we employed 18 people in the London Market only. Today we employ over 1,600 skilled and determined people around the world and they are the future of this business. We have been setting our ambitions for the next ten years and believe it is essential that our employees continue to keep the Hiscox values at our core. To reach our ambitious targets, we are asking more of our employees; more courage and great entrepreneurship delivered with Hiscox’s characteristic spirit. I am very proud to work with such talented people and thank them for their sterling efforts this year.
A lack of natural catastrophes and a refocus of the business have delivered an excellent result for our big-ticket commercial and household property lines. We have grown our small binding authority business, which is still carrying rate increases, whilst maintaining our larger big-ticket business at reasonable rates.
The Costa Concordia market loss continues to deteriorate as leading-edge salvage operations go on at insurers’ expense. Thanks to astute reinsurance purchasing, our results were not affected by the continually increasing market loss. We have seen an improvement in terms and prices at the renewal of the International Group of P&I Clubs in February, as the market adjusts as a result of ever-growing salvage costs.
With these results, we have announced a capital return of 50p per share, equal to approximately £178 million in total. We are fortunate that our business is strong enough both to allow this return of capital whilst simultaneously investing in new opportunities.
Hiscox London Market Our London Market businesses delivered another excellent profit of £116.0 million (2012: £121.9 million), and increased gross written premiums by 4.4% to £668.2 million (2012: £640.0 million). It achieved a combined ratio of 75.4% (2012: 75.5%), driven by a relative lack of natural catastrophes and good underwriting.
During the year we separated our London Market business into insurance and reinsurance lines. Our aim has been to give these different product areas more dedicated leadership, providing greater focus on the changing market conditions and the opportunities they produce.
In April, Paul Lawrence was promoted to Chief Underwriting Officer of Hiscox London Market and, together with his more focused leadership team, he has brought new energy and a business development mindset which is already bearing fruit.
Business in the London Market has always been placed either on a stand-alone, risk-by-risk basis, or grouped together to facilitate placement. There has been a lot of controversy surrounding
Through our relationship with White Oak, a specialist automotive and equipment underwriting agency, we provide extended warranty cover against sudden and unforeseen mechanical breakdown for cars, trucks and other heavy machinery. Our business with White Oak has grown rapidly over recent years and now represents 24% of our London Market Insurance gross written premium. This type of indemnity does not include endemic failure or product recall. During the year White Oak launched a scheme in China (in conjunction with local Chinese carrier Ping An) which will become one of the largest Chinese deals in the London Market. We also cover fire, theft and collision (FTC) for heavy machinery used within agriculture, construction and forestry businesses globally, providing firstparty coverage to the client’s vehicle only.
We expect that the importance of this division will grow, bringing new opportunities to the other parts of the London Market team.
London Market reinsurance The reinsurance team trading in London has performed well. Premiums reduced slightly as the team exercised discipline in the face of price declines at the June and July renewals. Our marine, catastrophe, pro-rata and retro books performed well. Our risk excess book suffered from the Rio Tinto, YPF/La Plata, Dietz and Watson events. Aggregate profits remained strong. During the year we brought together the leadership of the London and Paris reinsurance teams which comprise the London Market reinsurance business with the teams in Bermuda, to underwrite as Hiscox Re from January 2014, giving us greater presence in an evolving market. This consolidates our expertise, capacity and market profile under the leadership of Jeremy Pinchin. The teams underwrote a combined £411.5 million of reinsurance premium during 2013, making Hiscox a top tier player.
Hiscox International Hiscox International comprises our activities in Bermuda, Guernsey and the United States.
Contingency continues to be a small jewel in our crown, delivering another good result. The personal accident team developed a new product which will cover top European football clubs for financial loss when star players suffer long-term injury or illness. This has already generated headlines and we hope will generate good incremental revenues.
Our long-term strategy of building locally traded specialist retail business to balance our internationally traded business continues to deliver.
20% and made a good profit. Our specialty business grew by 22% but profitability was mixed. Strong performance in kidnap and ransom, media, technology and terrorism was offset by more challenging performance in construction, and the still nascent D&O and entertainment businesses. We refocused our underwriting appetite in construction and adjusted our pricing in D&O, we expect this to drive better performance in 2014.
Our small business proposition, which we sell direct and through partnerships, grew by 140%; we now have over 50,000 small business customers, and are selling over 1,000 policies a week. We continue to explore new distribution opportunities and launched a portal to wholesale brokers during the year. Brand building continues, with campaigns in San Diego, Austin and Boston. In time these efforts will benefit the entire US business.
The rating environment in the US is mixed. Overall rates remain healthy, with slight upward pressure in some casualty lines, and downward pressure in property. We are very pleased with our fast-growing US business and expect that, absent significant catastrophe losses, it will make a small profit in 2014.
Hiscox UK and Hiscox Europe Our retail businesses in the UK and Europe delivered a record profit of £56.4 million (2012: £49.1 million). Gross written premiums grew by 10.2% to £559.1 million (2012: £507.5 million). The combined ratio improved to 92.6% (2012: 94.4%).
We have built our retail businesses by understanding local markets and bringing Lloyd’s-style flexible underwriting and thinking to local brokers. As part of the evolution of Hiscox, Steve Langan, previously Managing Director of Hiscox UK, became Managing Director of Hiscox UK and Europe. Pierre-Olivier Desaulle remains Managing Director of Hiscox Europe, reporting to Steve, and we created two new divisions in the UK, one for the broker channel and one for direct. The Managing Directors of these two divisions report to Steve. The restructure will allow customer insight, alternative distribution approaches, new products and good marketing practices to be shared more easily – all part of the ongoing ‘retailisation’ of our business.
Hiscox UK Hiscox UK had another excellent year and grew gross written premiums by 9.9% to £412.4 million (2012: £375.2 million). The business had profits of £45.4 million (2012: £45.2 million) with a combined ratio of 90.7% (2012: 92.1%).
Gross written premiums grew by 12.9% to £472.1 million (2012: £418.3 million) driven by good growth in Hiscox USA. Profit before tax increased to £80.9 million (2012: £62.7 million) and the combined ratio improved to 81.0% from (2012: 89.2%).
As expected, reinsurance rates at the important 1 January renewals were down by approximately 16%. Given the aggressive nature of competition from both traditional and new sources of capital, our reinsurance business will shrink in 2014 as we continue to prioritise quality clients who value our underwriting, brand and balance sheet.
Hiscox Guernsey In Guernsey we underwrite fine art, kidnap and ransom (including piracy) and terrorism, supported by broking teams in London and Miami. Premium income reduced slightly to £70.8 million (2012: £73.0 million). Profits have grown strongly through a combination of disciplined underwriting and fewer claims. We have benefited from subrogation recoveries from other insurers on prior-year claims and the absence of large fine art losses. The team is not resting on its laurels and is investing in more talent in Miami and London to expand distribution on a stand-alone basis and in partnership with local insurers and brokers.
Hiscox USA Our US business had another year of strong growth. Gross written premiums grew by 31.1% to £189.5 million (2012: £144.5 million) with progress across all major areas. Losses reduced materially as we grew towards scale and benefited from a positive development of reserves.
Our wholesale business, which includes property and professional liability lines, grew by
Our market positions in mainland Europe are small compared with our UK position and the quality of our offering is reflected by strong growth despite tough economic conditions, so we expect continued profitable growth and development in mainland Europe.
Our commitment to pay claims fairly, fast and with a smile remains at the heart of our business. We have built claims teams that lead the market and it is gratifying to receive external recognition of this. Our London Market business was ranked in the top three for claims in a recent Gracechurch survey and our UK team was recognised with a number of industry awards; ‘UK Claims Excellence Awards’ at the Insurance Times Claims Excellence Awards and ‘Personal Lines Claims Team of the Year’ at Post Magazine’s Claims Awards.
The business benefited from our continued investment in marketing and a focus on solid underwriting. It had a charmed first 11 months, as the weather had been benign until midDecember while the few major weather events, such as the St Jude’s day storm in October, had little impact. The heavy rain and consequent flooding in December changed this. Our clients suffered extensive damage to their homes both from driving rain and flooding and we responded quickly. A post-bag of thank-you letters in January is testament to the fact that dealing with the Hiscox claims team is succour in troubled times.
We are also establishing a strong presence in York, where we are creating a purpose-built multi-function office. We now have 70 people based in our temporary office, working within our Customer Experience Centre, Hiscox Underwriting Centre and IT. In December we received planning consent for the permanent building, and construction will commence in the first half of 2014.
Hiscox Europe continues to lead the way in devising alternative distribution deals, in which we sell our specialist products through larger financial institutions. This year we added France’s Crédit Agricole to our list of partners.
We also began a project to replace the core underwriting, policy administration and claims systems supporting our retail businesses. The current core system is over 20 years old, so it has performed well, but its time is now up. We are working under the slogan ‘simplicity is the ultimate sophistication’ and we expect to complete the first phase of implementation, for our UK direct home system, this year. In time we expect to replace the entire UK retail infrastructure, and then that of our European businesses. The total cost of the project in the UK is expected to be £45 million spent over a period of four to five years.
In Europe our ‘Get Fit’ programme is gaining traction. This is based on a foundation of lean manufacturing principles and we are slowly seeing our European expense ratio reducing. This programme is continuing in 2014 and should help underpin growing profitability of our European broker channel business.
In our London Market activities we are very dependent on shared services which support Lloyd’s, the company market and the brokers. At the beginning of 2013 we took the decision to become more engaged in driving improvement across the market, and we now have representatives on several key committees. Involvement in market reform can at times be a frustrating process, but we feel that we can play a role in leading the market for the benefit of all.
Our marketing activity has been instrumental in building the Hiscox brand, communicating what we do to an ever-broader audience, building awareness of Hiscox and ultimately driving sales. Its benefits have been most felt in the UK where it has had a positive impact not only on the direct channel, but also in the retail broker channel, and even in our Lloyd’s activities. As we spend more in other geographies I believe we will see similar broad business benefits.
Operations and IT Efficient operations and sound IT form the backbone which supports the day-to-day activities of every part of our Group. During 2013 we made progress on a number of inter-related projects which will benefit different divisions within the Group.
During the year we successfully insourced the service centre dealing with our UK direct home insurance clients. This involved hiring 35 people to staff a newly formed Customer Experience
My colleagues and I remain restlessly ambitious to grow and develop Hiscox.
be candidates to assume the most senior leadership roles within Hiscox. In the broader organisation 39% of promotions were filled by internal candidates. We want Hiscox to be a great place to work and grow for the ambitious and talented – so I am delighted that we have filled so many roles from within.
The good news from a shareholder perspective is that the strategic work suggests that the insurance markets and customer segments we already serve are sufficiently large enough, and our current market shares small enough, to allow us to double the size of business we have today through organic growth. We also believe that we can create further growth opportunities through judicious hiring of talented people or teams, or through small acquisitions which serve as a base for further development.
Our exposure to risk assets made a significant contribution to the investment performance this year, and a number of our UK-focused funds produced particularly strong returns. We started 2013 with a weighting to risk assets of 6.2% and trimmed this slightly after the strong run in May, but this has now moved up to 7.1%.
Capital management We have announced today a capital return of 50p per share, equal to approximately £178 million. This is composed of a 36p per share capital return and a further amount of 14p in place of a final dividend. This will take total capital back to £1,231 million, slightly more than our level at the start of 2013, post the capital return in March of last year.
USA Atlanta Chicago Los Angeles New York City San Francisco White Plains (New York)
Hiscox locations/Building a balanced business Hiscox Ltd Report and Accounts 2013 13
Products include D&O, E&O, household, fine art, direct-toconsumer home and small business insurance.
Security Hiscox Insurance Company Limited has an A (Excellent) rating from A.M Best, an A (Strong) rating from Standard and Poor’s and an A+ (Strong) rating from Fitch.
In 1993, Hiscox opened its first overseas office in Paris, and now operates from ten regional centres across Europe. Hiscox Europe provides art and private client insurance as well as professional liability, specialty and property insurance for small- and medium-sized businesses. Hiscox France and Hiscox Germany provide small business insurance directly to consumers.
Products include D&O, E&O, household, fine art, kidnap and ransom, direct-toconsumer small business insurance, terrorism.
Hiscox has been insuring US customers for over 40 years, and opened a local insurance company in 2006. Hiscox USA operates from six locations, offering professional liability, specialty and property insurance. Hiscox USA also provides small business insurance direct to consumers.
Products include D&O, E&O, property, kidnap and ransom, media and entertainment, direct-to-consumer small business insurance.
Security Hiscox Insurance Company Inc. has an A (Excellent) rating from A.M Best.
Security Hiscox Insurance Company (Guernsey) Limited has an A (Excellent) rating from A.M Best and an A+ (Strong) rating from Fitch.
Security Hiscox Syndicate 33 has an A (Excellent) Syndicate rating from A.M Best. It also benefits from Lloyd’s own ratings, A (Excellent) from A.M Best, A+ (Strong) from Standard and Poor’s and A+ (Strong) from Fitch.
An international insurance group with a spread of global and regional businesses.
Total Group controlled premium December 2013: £1,924m (Year-on-year growth in local currency)
J $1 0b n m ar ke t lo ss y ea r re tu rn p er io d
Boxplot and whisker diagram of modeled Hiscox Ltd net loss ($m)
Our innovative and distinctive campaigns have also helped us to attract high-calibre recruits to our marketing team. We have recently made a number of hires in America who have decades of experience with some of the world’s most successful brands. We seek to hire world-class marketers and want them to apply the skills they have learnt in other sectors to our business. Just as our underwriters are encouraged to take calculated risks, so too are our marketers. A stand-out example of this is our award-winning Leap Year campaign, an internet TV series charting the lives of young American entrepreneurs.
Good marketing is essential to any retail business. It builds awareness of a company and its brands. It provides short- and longterm business benefits; smart campaigns that generate sales, and prolonged brand building work that helps build strong relationships or loyalty with customers. Great marketing also builds brand equity, which is the value the brand creates, over and above that provided by the product or service itself.
Customers find it easier to buy from a brand with which they identify and trust, and for us trust is the bedrock of our customer relationship.
Hiscox’s aim has been to build a strong brand in all the direct-to-consumer markets in which we operate, and we have succeeded in creating a name for ourselves that is recognised well beyond the financial services industry. It has already yielded results. In the eight years in which Hiscox has advertised in the UK, to build awareness of its direct insurance business, its gross written premium has more than doubled.
The Hiscox brand Our brand is very important to us because it embodies our promise to our customers. It’s as simple as that. Our brand lets them know what they can expect from us. Steve Langan, Managing Director of Hiscox’s UK and European operations and Group Marketing Director, says: “I think what really sets us apart from our competitors is how seriously we take our brand.”
Robert Hiscox was committed to marketing from the late 1960s and early 1970s. Back then it stemmed from asking himself: “why should the client choose us?” His answer, in the form of a set of core values and commitment to service, still guides the Group today.
When he joined Hiscox in 2005, Steve set about interviewing many of the company’s employees to understand what they thought the company stood for. The results surprised him because their responses were so similar. He says: “I told Robert that he had already done the hard part in creating the culture at Hiscox. All our marketing had to do was to tell people about it in an engaging and compelling way.”
Steve adds: “We haven’t just grafted a brand onto the company that bears little resemblance to its real nature. The people here not only identify with it, they feel a personal responsibility for it.”
He concludes: “I truly believe that Hiscox is a ‘conviction brand’ in an industry that isn’t always known for its conviction.”
Both A.M. Best and Standard & Poor’s have shared their capital models with management. These models calculate a capital adequacy score by measuring available capital, after making various balance sheet adjustments, as a proportion of required capital which incorporates charges for premium, reserve, investment and catastrophe risk. Management’s interpretation of A.M. Best’s ‘Best Capital Adequacy Ratio’ (BCAR) model indicates the Group has a healthy surplus above the minimum capital required to maintain the carriers’ A ratings. On a similar basis the Standard & Poor’s modeled result indicates a surplus in excess of the mid-point of the required A range with additional headroom above the minimum requirement. Projections indicate a reasonable level of flexibility would be maintained following the £128 million special distribution.
The rating agency requirements shown in the chart on page 21 are consistent with assessments of the Group’s capital requirements, received in November 2013, forming part of the latest A.M. Best and Standard & Poor’s rating processes.
Group regulators As a Bermudian-registered holding company, the Bermuda Monetary Authority (BMA) has been assessed as the Group’s regulator under the Bermuda Group Supervisory Framework. The BMA requires the Group to monitor its Group solvency capital requirement under which the Group provides a solvency return in accordance the Group Solvency Self Assessment framework (GSSA) including an assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR).
The proposed return of capital will leave the Group with a comfortable surplus above Hiscox’s internal projections of both the BSCR and GSSA for the 2014 business plan.
Internal capital requirements The Group manages the underwriting portfolio so that in a 1 in 250 aggregate bad year it would lose no more than 15% of the Group’s core capital plus assigned buffer capital (currently
Capital management Hiscox believes in managing its capital. 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. As discussed in the Chairman’s statement, once again as a result of our strong performance in 2013, the Board has reviewed the Group’s capital level and proposed that a special distribution of 36.0p per share (approximately £128 million), should be made. A further amount of 14.0p per share is proposed instead of payment of a final dividend. This return of capital will align the Group’s available capital with the rating agencies’ minimum capital requirements to remain in the A range.
The impact of this distribution and how it compares to the Group’s capital requirements is presented in the chart on page 21.
However, the Group can source additional funding through a revolving credit and Letter of Credit facility. Additional funding from these sources comprised $875 million at 31 December 2013 (2012: $875 million), of which $333 million was drawn at 31 December 2013 (2012: $308 million).
Rating agencies 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, Standard & Poor’s, A.M. Best and Fitch. These ratings are assigned individually to the insurance carriers of the Group, but capital adequacy is also monitored by the rating agencies at the consolidated Group level.
The Board believes that this level of capital gives sufficient flexibility to achieve its desired business growth whilst maintaining the Group’s current capital strength.
Reinsurance purchased was at a similar level to the prior year at 28.9% of gross premiums written (2012: 27.8%). The quota share arrangements with Syndicate 6104 and others remained in place.
Net asset value per share increased by 16.1% to 402.2p (2012: 346.4p). The Group continues to maintain a progressive dividend policy and total dividend per share rose by 16.7% to 21.0p (2012: 18.0p), subject to shareholder approval of the final dividend equivalent. The Group is proposing to once again make a special distribution of 36.0p per share, subject to shareholder approval. Following the distribution, the Group’s capital levels will be similar to those of the opening balance sheet, post the 2013 capital return.
The Group paid £39.7 million of tax during the year compared to rebates of £56.4 million in 2012. The Group generated cash from investing activities of £7.4 million (2012: outflow of £13.7 million), including the sale of a US surplus lines shell company which was not required by the business.
The Group has continued its investment in IT infrastructure during the year, in particular for the UK, as we seek to strengthen our delivery of products to market. Marketing expenses increased to £30.6 million in the year (2012: £26.3 million).
There were no impairments recorded against cash or cash equivalents and no issues regarding recoverability have been identified on these assets. The Group had a £3.8 million exposure to Italian sovereign debt, £1.9 million to an Italian bank and £3.7 million to Spanish sovereign and government supported debt at the end of the year, but continued to have none in Portugal, Ireland or Greece.
The net claims ratio was flat in the year at 39.8% (2012: 40.3%), with minimal impact from catastrophes. The combined ratio was also flat at 75.4% (2012: 75.5%). Profit before tax for the year was £116.0 million (2012: £121.9 million), the decline being driven by the lower return from the investment portfolio.
Hiscox Corporate Centre Investments performed well during the year with a return of £20.0 million (2012: £18.5 million). This was offset by operational expenses increasing to £23.6 million (2012: £17.0 million). The loss before tax was £8.8 million (2012: loss £16.2 million), with swings in foreign exchange rates contributing.
Group invested assets* £3,129.5m £3,055.8m * excludes derivatives and investment in insurance linked funds.
The risks from our core business of insurance and reinsurance represent many of our most significant exposures. We are also exposed to a number of other risks: investment, credit, operational, liquidity, and strategic. To identify and manage these we have developed a risk management framework, which we regularly review and improve in the light of the changing risk environment and evolving best practice on risk management. Our risk management framework is designed to oversee a culture of innovative and prudent underwriting.
One of our Executive Directors – either the Chief Executive Officer, Chief Financial Officer or Chief Underwriting Officer – chairs each of these forums.
This monitoring assesses the level of risk being taken by the Group in pursuing its objectives, and ensures that this level of risk remains within the parameters set by the Board.
Hiscox competes against major international insurance and reinsurance groups. At times, some of these groups may choose to underwrite risks at prices that fall below the breakeven technical price. Prolonged periods when premium levels are low or when competition is intense are likely to have a negative impact on the Group’s financial performance.
— Pricing discipline: We are firmly resolved to reject business that is unlikely to generate underwriting profits. Accepting risks below their technical price is detrimental to the industry as it can drive market rates down to a point where underwriting losses mount, insurers’ capital is destroyed causing some businesses to fail, customers to receive poor service and the industry to suffer negative publicity. — Remuneration: Hiscox incentivises underwriters on return on equity, rewarding staff for profit not revenue. — Risk appetite: Our appetite for certain lines of business changes according to market conditions and the risk appetite of the Group. — Monitoring: We regularly monitor pricing levels, producing detailed monthly reports grouping current prices with exposure and trends over the past 12 months. This ensures that we quickly identify and control any problems created by adverse changes in market conditions.
— Lead insurer: We frequently act as the lead insurer in the coinsurance programmes required to cover significant high-value assets, so we have some ability to set market rates rather than follow them.
— Historical data and actuarial analysis: The provisions we make to pay claims reflect our own experience and the industry’s view of similar business; historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions. Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out on note 26 to the consolidated financial statements. The provisions we make are set above the actuarial mid-point to reduce the risk that actual claims exceed the amount that has been set aside. — Senior management and Board approval: Our provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
The insurance industry is undergoing a period of unprecedented regulatory change, which may impact the capital we are required to hold.
—Risk management: We believe the likelihood that we may be unable to meet our liabilities, or that we incur excessive costs in doing so, is extremely remote, because of our risk management measures. — Forecasting: Most of our cash inflows and outflows are routine and can be forecast well in advance. Our primary source of inflows is insurance premiums while our outflows are largely expenses and payments to policyholders through claims. We forecast our cash flow for the week, month, quarter or up to two years ahead, depending on the source. — Cash: Available cash is invested according to the Group’s investment policy and our cash requirements can normally be met through our regular income streams: premiums, investment income, existing cash balances or by realising investments that have reached maturity. — Stress tests: We run tests to estimate the impact of a major catastrophe on our cash position in order to identify potential issues. We also run scenario analysis that considers the impact on our liquidity should a number of adverse events occur simultaneously, such as an economic downturn and declining investment returns combined with unusually high insurance losses. — Credit: We maintain extensive borrowing facilities. These arrangements have been made with a range of major international banks to minimise the risk of one or more of the institutions being unable to honour their commitments to us. — Liquid assets: Our investment policy recognises the demands created by our underwriting strategy, so that some investments may need to be realised before maturity or at short notice. Hence a high proportion of our investments are in liquid assets, which reduces our risk of making losses because we may have to sell assets quickly.
Our reporting currency is Sterling, but a significant proportion of our underwriting activitity is located in the US and Europe. In addition the capital bases of our insurance companies in Bermuda, Guernsey and US are in US Dollars. Therefore, movements in foreign exchange rates may have a material adverse effect on our financial performance and position.
— Currency matching: As the US Dollar is the Group’s largest underwriting currency, our policy is to match our US Dollar insurance liabilities with investments held in that currency to minimise any losses from currency fluctuations. We will hold a percentage of our capital in the matching currency of that part of our underlying business, where it is deemed appropriate. — Currency hedging: We closely monitor our net currency positions and will enter into currency hedges if we anticipate adverse movements in exchange rates. Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 19 to the consolidated financial statements.
— Careful management: We have identified the key aspects of our business that are critical to maintaining our ratings. These are closely managed to minimise the risk of an event, or change in strategy, that might jeopardise our ratings. — Communication: Regular and open communication with the major credit rating agencies helps to ensure we continue to meet their expectations.
The Hiscox London office was awarded Platinum (with special commendation), in the Clean City Award scheme, for the second year in a row. Hiscox also remains a member of the Carbon Disclosure Project (CDP) an initiative that provides a global system for companies to measure, disclose, manage and share vital environmental information.
At Hiscox several core values guide our business. These are: to challenge convention, to have courage, to provide quality products, to excel in the service we provide and be human in our approach. These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
Total tonnes CO2e per FTE (scope 1 and 2) 1.42 1.20 1.29
Following Defra’s latest environmental reporting guidance, we have updated historical GHG emissions data in order to ensure comparability of year-on-year reporting based on 2013 GHG conversion factors. 1 Historical emissions data for 2011 and 2012 relate to UK operations only with 2013 figures covering global operations. 2 Global emissions data have been collated and reported for the first time in line with the requirements of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 and UK Government conversion factors for Company Reporting 2013.
We seek to follow the 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 that enables that person to confidentially raise their misgivings with the Group Compliance and Audit Director, Chief Executive or Chairman. Employees also have the option to raise a concern with the Chairman of the Audit Committee. Hiscox also subscribes to Public Concern at Work, which provides free legal advice to any employee with a concern about possible danger or malpractice in the workplace.
Rewards and benefits We encourage our employees to share in the Group’s success through performance-related pay: bonus, savings-related share option schemes and executive share option schemes. We also offer competitive benefits packages, which contain health and fitness perks and opportunities for flexible working and career breaks. We benchmark our salary packages against the financial services industry as a whole and against the Lloyd’s market specifically (where applicable) and our salaries are also considered on a country-by-country basis.
The marketplace In 2013, Hiscox was presented with the Post Magazine Claims Award for Personal Lines Team of the Year and the UK Claims Excellence Award by the Insurance Times, which also named Bronek Masojada as the Insurance CEOs’ CEO. The Hiscox London Market, War, Terrorism and Political Violence team received Underwriting Team of the Year at the Insurance Day London Market Awards.
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 £0.9m donated to charities
The community Hiscox Bermuda continues to sponsor the Women’s Resource Centre’s 24-hour crisis hotline, where woman and children in the community can receive education, counselling and support. Hiscox continues to support the Friends of Agape House Day Hospice programme, a palliative care centre and day hospice. It sponsors Kaleidoscope Arts Centre’s Creative Minds Bursary programme for weekly art programmes for students at Elliot Primary school. It has also donated two wheelchairs to the Windreach Adaptive Sports programme, and continues to work with the Centre Against Abuse, the Eliza Dolittle Society, and Big Brothers Big Sister of Bermuda. Together with Hiscox Ltd, it made a substantial donation to the Bermuda Hospitals Charitable Trust, supporting efforts to pay for the new Acute Care wing at the King Edward VII Memorial Hospital.
The Hiscox Foundation The Hiscox Foundation is a charity, funded by an annual contribution from the Group. It gives priority to any charity in which a member of staff is involved, with the aim of encouraging employees to become involved in charitable work. In 2013, Hiscox supported one employee in raising £60,000 for Cancer Research UK. The Foundation contributed £20,000 in 2013 to the fundraising totals of Hiscox employees and continues to support the Humanitarian Aid Relief Trust (HART). HART helps some of the poorest and most abused people in the world.
Syndicate 3624 Syndicate 3624 is a wholly-owned Syndicate which began underwriting for the 2009 year of account with an underwriting capacity of £150 million. The Syndicate has a diversified portfolio of worldwide risks including E&O, property, construction, technology and media, healthcare, aviation and events. The diversification of the Syndicate from both an exposure and geographical perspective means the Syndicate is well balanced to grow in a controlled way. The Syndicate is primarily exposed to short-tail liability risks. Total underwriting capacity of Syndicate 3624 has increased to £300 million for the 2014 year of account.
Syndicate 6104 Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account with an initial capacity of £34 million. It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s international property catastrophe reinsurance account. The arrangement has been extended through to the 2014 year of account and Syndicate 6104’s capacity was increased to £72 million, from £66 million. Syndicate 6104 pays an overrider and profit commission to Syndicate 33.
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 2013, net assets exceeded $944 million (2012: $1,019 million).
Hiscox Insurance Company Inc. Hiscox Insurance Company Inc. was acquired by the Group in 2007 through the purchase of the then parent holding company ALTOHA, Inc. Hiscox Insurance Company Inc. is based in Chicago, Illinois and is an admitted insurance company with licences in all 50 US states and the District of Columbia. Its main business is property and liability cover sold through insurance brokers. In November 2010, the Company launched a direct commercial business.
Hiscox Insurance Company Hiscox purchased Hiscox Insurance Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. The Group has reshaped the Company’s original portfolio to concentrate on high-value household and smaller premium commercial business. Hiscox Insurance Company Limited has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the portfolio can be seen in the chart below right. Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 12.1% from 1997 to 2013, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
Hiscox Insurance Company Limited has an A.M. Best rating of A (Excellent), a Standard & Poor’s rating of A (Strong) and an A+ (Strong) rating from Fitch. At the end of 2013, net assets exceeded £249 million (2012: £240 million).
Stuart John Bridges Chief Financial Officer (Aged 53) 12 December 2006*
Caroline Foulger joined Hiscox in January 2013 having retired from a partnership at PwC on December 31, 2012. Until May 2012, Caroline led PwC’s insurance and reinsurance practice in Bermuda, and was also Head of the PwC Bermuda government and public sector practice. Caroline is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Directors. Caroline is a Non Executive Director of the Bank of N.T.Butterfield & Son Limited.
Richard Watson joined Hiscox in 1986, having previously worked for Sedgwick’s and Hogg Robinson. In 2005, he was appointed Managing Director of Hiscox Global Markets, the largest division of Hiscox by premium income, and was the Underwriter of Syndicate 33 from 2006 to 2009. In 2009, Richard moved to New York and served as the Chief Executive Officer for Hiscox USA for three years. He returned to London in 2012 and became Chief Underwriting Officer for the Hiscox Group.
Daniel Maurice Healy Independent Non Executive Director and Chairman of the Audit Committee (Aged 71) 11 October 2006*
Andrea Sarah Rosen Independent Non Executive Director and Chairman of the Remuneration Committee (Aged 59) 11 October 2006*
Richard Gillingwater joined Hiscox in December 2010. He is the Chairman of Henderson Group plc. He spent a decade at Kleinwort Benson, before moving to and eventually becoming joint Head of Corporate Finance for BZW, a division of Barclays Bank. When that became Credit Suisse First Boston, he became Chairman of European Investment Banking. In 2003 he became Chief Executive and later Chairman of the Shareholder Executive. In 2007 he became Dean of Cass Business School, retiring at the end of 2012. Richard is a Non Executive Director of SSE plc and Helical Bar plc, and Wm Morrison Supermarkets PLC.
Paul Lawrence Chief Underwriting Officer, Hiscox London Market and Joint Active Underwriter, Syndicate 33
‘Hiscox Partner’ is an honorary title given to employees who make significant contributions to the development and profitability of the Group.
In accordance with the UK Corporate Governance Code one Director submits himself for appointment, and the remaining Directors submit themselves for re-appointment, at the Annual General Meeting of the Company. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 40. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting. A review of the remuneration of the Non Executive Directors, which does not include performance-related elements, was carried out in respect of the 2013 financial year and no changes were required or anticipated.
The appointment and removal of the Company Secretary is a matter for the Board as a whole. Whilst the Board acknowledges the value that knowledge and experience of the organisation can bring it also recognises the need to progressively refresh its membership over time. Non Executive Directors will normally be expected to serve for six years. They may be invited to serve for longer, but service beyond nine years is unlikely. Any service beyond six years is subject to a particularly rigorous review. All Directors are entitled to seek independent professional advice at the Company’s expense. A copy of any such advice would be provided to the Company Secretary who would then circulate it to all Directors.
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.
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 companies registered in Bermuda is established by the Company’s constitution together with Companies Act legislation. The Listing Rules require the Company to report against the UK Corporate Governance Code published in June 2010 whereas the most recent edition of the Code was published in September 2012. During 2013, and up to the date of this report and accounts, the Group has complied with the provisions of both the 2010 and 2012 editions of the Code in all material respects, subject to one exception.
Robert Childs was appointed as Non Executive Chairman with effect from 26 February 2013. Mr Childs did not meet the independence criteria set out in the Code on appointment. The Company’s intention to appoint Mr Childs notwithstanding his non-independence was disclosed in this report last year. The reasons behind the decision are explained again in the Nominations Committee section of the report on page 44.
The Remuneration Committee The Remuneration Committee comprises Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. The Committee operates according to Terms of Reference published on the Group’s website and generally meets three times a year.
The Committee’s role in remuneration is described in the remuneration policy report on page 51.
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 Company believes that opportunity should be limited only by an individual’s ability and drive. The Nominations 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
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.
one female but does not consider it appropriate to set quotas for diversity.
The Committee also has a role to consider the succession planning for Executive Directors and senior managers, and has a particular remit to make recommendations on the succession planning for the Chairman and the Chief Executive. When considering candidates for Board roles, the Committee will ensure that an appropriate process is followed to ensure that an objective review of the skills, background and time available is undertaken. The Committee will take external advice as appropriate.
Robert Childs was appointed as Non Executive Chairman from 26 February 2013. A job and person specification was prepared for the Chairman’s role, and a thorough search of both internal and external candidates was conducted by the search consultancy Egon Zehnder under the direction of the Committee. The successful candidate was already a Director of the Company, having previously held the position of Chief Underwriting Officer. Robert Childs did not meet the independence criteria required by the UK Corporate Governance Code when appointed as Non Executive Chairman. Notwithstanding this it was felt that Robert Childs had the strength of character, the commercial experience and the detailed knowledge of the Group’s business to make him an excellent Chairman. The Senior Independent Director represented the Committee throughout the selection process and consulted the Company’s major shareholders prior to any decision being made. As well as Egon Zehnder, the Senior Independent Director, the Chairman of the Remuneration and Nominations Committee and the Chief Executive interviewed all shortlisted internal and external candidates. Other than acting as a search consultancy, Egon Zehnder has no connection to the Group.
Richard Watson had previously been identified in succession planning as the most suitable individual to take over the role of Chief Underwriting Officer (the position previously held by Robert Childs). Subsequently, Richard was nominated for appointment to the Board by the Remuneration and Nominations Committee, and was elected as a Director on 16 May 2013.
During the year an external evaluation of the performance of the new Chairman was carried out. This included interviews with a selection of Non Executive Directors, the Executive Directors and other Executives. The Senior Independent Director met with the other Non Executives 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 during the year to review their performance including their attendance, contribution and preparation for meetings and to discuss any training and development requirements. 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 communications 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 2013.
The Company commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research, together with the analysts’ research notes, are copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders as well as speaking at the analysts’ presentations. In addition, any specific items covered in letters received from major shareholders are reported to the Board. 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 Board has reviewed the effectiveness of its risk management and internal controls during 2013, including financial, operational and compliance controls. The Board confirms there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, which has been in place throughout the year and up to the date of approval of the Annual Report and Accounts and accords with the guidance in the document ‘Internal Control: Revised Guidance for Directors on the Combined Code’. The head of each business area is responsible for implementing the risk management programme in their area of operations. The Risk function collates risk management information and works with the risk committees to monitor significant risks and movements, and review the relevant internal controls.
The Group also has an internal audit function which has direct access to the Audit Committee and reports to each meeting.
Financial reporting The primary role of the Audit Committee in relation to financial reporting is to monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and review significant financial reporting judgements contained in them. In carrying out its role the Committee reviewed with both management and the external auditor the appropriateness of the half-year and annual financial statements, concentrating on, amongst other matters: — the quality and acceptability of accounting policies and practices; — the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; — material areas in which significant judgements have been applied or there has been discussion with the external auditor; and — any correspondence from third-parties in relation to our financial reporting.
To aid the review, the Committee considered the report of the key judgements in the financial statements from the Chief Financial Officer as well as reports from the external auditor on the outcomes of their annual audit. The Committee is supportive of KPMG in displaying the necessary professional scepticism their role requires.
ii) The carrying value of deferred tax arising from losses in foreign subsidiaries As fully explained in note 29, a deferred tax asset has been established relating to operating losses arising in foreign subsidiaries. The recoverability of this asset is dependent upon the future profitability of these subsidiaries. The Committee has reviewed the methodology used by management to assess the projected profitability and the carrying amount of the deferred tax asset.
During the year the Non Executive Directors met with the external and internal auditors without the Executive Directors present so as to provide a forum to raise any matters of concern in confidence. The Group intends to comply with the new requirement in the UK Corporate Governance Code for FTSE 350 Companies to put their external audit out to tender at least every ten years. KPMG have been auditors to the Group since it was admitted to the main market of the London Stock Exchange in 1997. The auditors are required to rotate the audit partner responsible for the Group every five years and the rotation cycle of the current partner will end following the conclusion of the 2015 audit. With this in mind it is expected that an audit tender process will be aligned with the rotation of the current audit partner. However, the Audit Committee intends to keep this under review, given the ongoing legal and regulatory developments in this area including the proposed European legislation.
Notes 1RRS Hiscox stood down as Chairman and Director on 25 February 2013 and did not attend any meetings during the year. 2 The Remuneration and Nominations Committee was divided into two committees, meeting separately for the first time in July 2013. Consequently the combined committee met twice and the Remuneration Committee and Nominations Committee each met twice during the year. 3RS Childs was appointed Chairman of the Nominations Committee at its inception.
— The remuneration policy limits the aggregate size of the bonus pool through measures described in the policy report. While we do not cap the amount of any individual bonus, we have introduced a cap on the proportion of the bonus pool which can be allocated to the Executive Directors. As I have already noted, we have clear policies linking our bonus payments to target returns. In the past 15 years Executive Directors have four times received zero bonuses because the target Hurdle Rate was not met. Conversely, we believe that if Hiscox creates significant returns for shareholders, then Executive Directors should benefit accordingly. We do not, however, believe they should take an excessive proportion of the rewards and thus have introduced the cap noted. —We are introducing a formal policy on the payments to be made to Executive Directors in the event of loss of office. We have increased the notice the Company is required to give to the Executive Director from six months to 12 months alongside a disclosed approach to calculating severance. The notice the Executive Director is required to give to the Company remains at six months. —We have included a recruitment policy. Although we have not recruited an Executive Director externally for 15 years, the policy describes how we would intend to approach reward packages in the event we were to hire from outside Hiscox. —We have introduced a malus clause which will apply to future unvested shares and deferred bonuses.
Dear Shareholder The Hiscox remuneration policy report and the 2013 annual remuneration report are presented in the following pages. In this letter, I would like to explain the context in which the Remuneration Committee approaches its responsibilities and which have guided our decisions.
At Hiscox, our objective is to deliver strong shareholder returns across the cycle and consistently grow dividends and net asset value per share. In order to do this we need not only to make profits today but also to invest for growth tomorrow; managing risk effectively and continuing to build our balanced business. Our reward practices for all employees (including Executive Directors) are intended to reflect these imperatives. We aim to keep our reward schemes transparent, simple and consistent.
The 2011 PSP is subject to performance conditions for the 2011, 2012 and 2013 financial results. 52.7% of the grant vested, reflecting the combined ROE performance for those three years. Annual grants of just under 180% of salary were made to the three Executive Directors in 2013 which will vest in 2016 subject to the normal performance conditions. In order for these grants to vest in full, Hiscox would have earned in excess of £500 million post-tax profit over the three years.
The Company’s intended forward-looking remuneration policy for Board members is set out on pages 52 to 58. The remuneration policy set out in this report is intended to take effect from 15 May 2014.
For Executive Directors, individual allocations from the pool are determined by the Remuneration Committee based on a judgement of various factors including: — size of the Group bonus pool; — results of business area (where relevant); and — individual performance.
By exception an individual’s salary may be amended outside of the annual review process.
Larger bonuses are deferred over a three-year period and paid subject to continuing service as explained in the table below.
Awards normally vest after a three-year period subject to the achievement of performance conditions.
Dividends (or equivalents) may accrue on vested shares prior to release. Further details on this are set out on page 56. Unvested awards are subject to a malus provision. Further details on the malus provision are set out on pages 56 to 57 of this report. The PSP rules also enable the Company to grant market value options, however there are currently no plans to use this for regular awards.
Deferred awards are subject to a malus provision. Further details on the malus provision are set out on pages 56 to 57 of this report.
Share awards (typically structured as either contingent awards or nil cost options) are made to Executive Directors and other senior employees at the discretion of the Remuneration Committee.
Legacy arrangements The Committee may continue to satisfy remuneration payments and payments for loss of office (including the exercise of any discretions available to the Committee in connection with such payments) where the terms of the payment were agreed before the policy came into effect or at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company. For these purposes, such payments include the Committee satisfying awards of variable remuneration.
The current fees payable to Non Executive Directors are set out on page 62.
Fixed reward (i.e. base salary, benefits and retirement benefit). — Salary with effect from 1 April 2013 — Benefits as received during 2013, as disclosed in the Executive Director remuneration table on page 59. — Retirement benefit is shown as 10% of salary (i.e. the cash allowance provided to current Executive Directors).
Assumptions have been made in respect of the annual incentive and the PSP for the purpose of these illustrations. — Annual incentive: the amounts shown in the scenarios are for illustration only. In practice the award would be determined based on a range of performance factors, and therefore vary depending on the circumstances. — PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table above. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
Fixed reward plus variable pay for the purpose of illustration as follows. — Annual incentive: assume a bonus equivalent to 417% of salary. This is broadly the highest payout level to an Executive Director over the past ten years. — PSP: assumes vesting of 100% of the maximum award.
The charts above have been compiled using the following assumptions: deferred bonuses and unvested performance share awards, granted following the introduction of this policy report, the Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, cancel or impose further conditions in the following circumstances: — a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; — actions of gross misconduct, including fraud, by the participant or their team leading to the Company suffering significant reputational or financial damage.
This provision has been introduced in 2014, and will apply to future grants.
Recruitment policy A new hire will ordinarily be remunerated in accordance with the policy described in the table on the previous pages. In order to define the remuneration for an incoming Executive Director, the Committee will take account of: — prevailing competitive pay levels for the role; — experience and skills of the candidate; — awards (shares or earned bonuses) and other elements which will be forfeited by the candidate; — transition implications on initial appointment.
On the appointment of a new Chairman or Non Executive Director, the fees will normally be consistent with the policy set out above. Fees to Non Executives will not include share options or other performance-related elements.
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2013 and how it will be applied for the 2014 financial year. KPMG has audited the report to the extent required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013, being the sections in the annual report on remuneration 2013 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’.
Additional notes to the Executive Director remuneration table Salary The current salaries for the Executive Directors are as follows: £
As disclosed in last year’s Directors’ remuneration report, SJ Bridges and BE Masojada received exceptional salary increases of 14% and 18% respectively as part of the April 2013 salary review. These one-off adjustments were made to address a range of factors including changes in the role and increases in the scale and complexity of the Company. The basis and rationale for these increases were set out in further detail in last year’s Directors’ remuneration report. The Remuneration Committee acknowledged at the time that these were unusual and significant increases which did not reflect past increases and were not intended to form a pattern for future increases. Executive Director salaries will next be reviewed as part of the annual April 2014 review and will be consistent with the overall UK-based employee salary increases.
Annual report on remuneration 2013 1 Benefits for Executive Directors include cover under the Company healthcare scheme, life insurance, income protection insurance and critical illness policies as well as gym membership and a Christmas gift hamper.
2 A proportion of the bonus amount is deferred as set out on page 54 of the policy report. 3 2013 long-term incentives relate to performance share awards granted in 2011 where the performance period ends on 31 December 2013. The award is due to vest on 7 April 2014. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2013 of 670.00p. The 2012 long-term incentive award relates to performance share awards granted in 2010 where the performance period ended on 31 December 2012. The award vested on 7 April 2013. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued on the actual share price on the date of vest which was 542.00p. 4 RS Childs’ employment with Hiscox and his appointment as an Executive Director ceased on 25 February 2013 and the amounts shown above are on a pro-rata basis with the exception of the long-term incentive which is shown in full. His appointment as Non Executive Chairman commenced on 26 February 2013 and his remuneration for this role is shown in the Non Executive Director table on page 62. 5 RRS Hiscox ceased to be an Executive Director on 25 February 2013 and the amounts shown above are on a pro-rata basis with the exception of the long-term incentive which is shown in full. He now has the role of Honorary President with the Company.
6 RC Watson’s appointment as Executive Director commenced on 16 May 2013. The amounts shown are pro-rata based on qualifying services with the exception of bonus and long-term incentive which are shown in full.
Individual employee profit bonuses were determined based on the results of the relevant business area, individual performance and the size of the relevant bonus pool. The Remuneration Committee determined the profit bonuses to be paid to the Executive Directors based on judgement regarding the performance of the Group and an assessment of individual performance.
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 do not participate in the Personal Performance Bonus Scheme.
Long-term incentives Performance Share Plan (PSP) awards where the performance period ends with the 2013 financial year Executive Directors were granted awards under the PSP in 2011 for the three-year performance period 1 January 2011 to 31 December 2013. The performance conditions for this award were set at the start of the performance period and are as follows: Required average post-tax ROE over the three-year performance period
PSP awards granted during the 2013 financial year On 2 April 2013 the Executive Directors were granted awards under the PSP as follows: Number of awards granted
The performance period for this award is 1 January 2013 to 31 December 2015. As disclosed in last year’s Directors’ Remuneration report, the Committee made the decision to align the approach to setting the PSP performance conditions with the method of setting the Bonus Hurdle. As such the performance conditions for this award are as follows: Required average post-tax ROE over the three-year performance period
Any fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.60. 1RS Childs was appointed Non Executive Chairman of Hiscox Ltd, Hiscox Syndicates Ltd and Hiscox Insurance Company Ltd on 26 February 2013. The amounts shown relate to remuneration paid for qualifying services in these roles. 2RS Childs remains covered under the Company healthcare and life insurance schemes.
Payments for loss of office and payments to past Directors As detailed in last year’s Directors’ remuneration report, on assuming the role of Non Executive Chairman, RS Childs will no longer be entitled to participate in the annual bonus or long-term incentive scheme. His outstanding performance share awards from 2011 and 2012 will vest in line with the scheme rules following the end of the three-year performance period ending 2013 and 2014 respectively. Mr Childs received no payment for loss of office when transitioning from his previous role as Chief Underwriting Officer.
Directors’ shareholding and share interests We strongly believe that senior managers within Hiscox should be aligned with Hiscox shareholders by owning a minimum number of Hiscox shares. Formal shareholding guidelines are in place which mean that within five years of becoming an Executive Director, the Director will be expected to own Hiscox shares valued at 150% of salary. The holdings of our Executive Directors far exceed the shareholding guidelines.
BE Masojada 206,104 – – (206,104) – 1.465 5.110 02-Apr-06 01-Apr-13
RC Watson 128,815 – – (128,815) – 1.465 5.100 02-Apr-06 01-Apr-13
RRS Hiscox 2,764 – – – 2,764 3.255 – 01-May-15 31-Oct-15 RS Childs 3,210 – – (3,210) – 2.826 5.610 01-May-13 31-Oct-13 BE Masojada 3,107 – – (3,107) – 2.896 6.550 01-Dec-13 31-May-14
RC Watson 2,933 – – – 2,933 3.077 – 01-May-14 31-Oct-14
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past five years.
CEO Employee CEO Employee CEO Employee *The Chief Executive did not receive a bonus for the 2011 financial year as performance was below the return on equity hurdle. In contrast, his 2012 bonus increased from zero to £850,000 which reflected the strong performance of the 2012 financial year. Based on profit performance, an award of £1,100,000 has been made for the 2013 financial year. Further disclosure on the CEO salary increase between the 2012 and 2013 year is covered in the salary section of this report.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct in relation to executive remuneration consulting in the UK. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views and in the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £21,450. The Committee is satisfied that the advice they have received has been objective and independent. During the year Deloitte also provided other HR consulting services.
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. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.
Dividends An interim dividend of 7p (net) per ordinary 5 55/89p share (2012: 6p, per ordinary 5p share (net)) was paid on 18 September 2013 in respect of the year ended 31 December 2013. The Directors are recommending the return of capital to shareholders through an issue of C/D shares and this will be considered at an Extraordinary General Meeting to be held on 18 March 2014. It is proposed that in place of a final dividend a sum equal to 14.0p per ordinary share will be payable to shareholders as part of the return of capital. An amount equivalent to 12.0p per ordinary share was paid in lieu of a final dividend as part of the previous return of capital, the details of which were set out in the circular to shareholders issued on 26 February 2013.
Directors The names and details of the individuals who served as Directors of the Company during the year are set out on pages 40 to 41. In addition, Robert Hiscox served as Chairman and Director until 25 February 2013. Robert Childs, who was already a Director, was appointed Chairman with effect from 26 February 2013. Details of the Chairman’s professional commitments are included in his biography on page 40 and there were no changes during the year. The Byelaws of the Company govern the appointment
The Company is a holding company for subsidiaries involved in the business of insurance in Bermuda, the US, the UK, Guernsey and Europe. An analysis of the development and performance of the business during the financial year, its position at the end of the year, any important events since the end of the year and the likely future development can be found within the Chief Executive’s report on pages 6 to 11. The Chief Executive’s report also describes the main trends and factors likely to affect the future development, performance and position of the Company’s business and includes a description of the Company’s strategy and business model. The Company’s strategy is also described on page 1. A description of the principal risks and uncertainties can be found in the risk management section on pages 27 to 32. In addition, note 3 to the consolidated financial statements provides a detailed explanation of the principal risks which are inherent to the Group’s business and how those risks are managed. Details of the key financial performance indicators are given on page 2.
and replacement of Directors. Richard Watson will submit himself for appointment at the Annual General Meeting and, in accordance with the UK Corporate Governance Code, all other Directors will submit themselves for re-appointment. The Bye-laws may only be amended with the approval of shareholders in general meeting in accordance with relevant legislation.
Massachusetts Financial Services Company1 35,422,130 9.98 *Per RNS announcement there were 355,069,601 shares in issue (excluding Treasury shares) as at 31 December 2013. †Adjusted for consolidation on 2 April 2013. 1Indirect holdings.
We confirm that to the best of our knowledge: — the financial statements, prepared in accordance with the applicable set of accounting standards, present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and — the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman and the Chief Financial Officer. The statements were approved for issue on 24 February 2014.
Any acquisitions or disposals of major shareholdings notified to the Company in accordance with Disclosure and Transparency Rule 5.1 are announced and those announcements are available on the Company’s website, www.hiscoxgroup.com.
A copy of the Company’s Bye-laws is available for inspection at the Company’s registered office. The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstance (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2013 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 2014.
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements and the part of the annual report on remuneration 2013 to be audited are free from material misstatement.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2010 UK Corporate Governance Code specified for our review by those rules, and we report if it does not. We are not required by the terms of our engagement to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Gross premiums earned 1,598,879 1,487,859 Premiums ceded to reinsurers (315,568) (289,238)
Profit for the year 237,758 208,026 Other comprehensive income Items never reclassified to profit or loss: Remeasurements of the net defined benefit liability 9,775 (2,069) Income tax relating to components of other comprehensive income (2,865) 173
Total comprehensive income for the year (all attributable to owners of the Company) 242,638 170,324 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
The notes on pages 75 to 123 are an integral part of these consolidated financial statements.
Property, plant and equipment 15 20,219 18,055 Investments in associates 16 7,754 9,054
Deferred acquisition costs 17 197,628 166,041 Financial assets carried at fair value 19 2,585,054 2,406,269
Total equity and liabilities 4,435,644 4,386,272 *The comparative information has been restated for the adoption of IAS 19 (2011) See note 2.2 for details.
Balance at 1 January 2012, as previously reported 20,563 32,086 245,005 60,517 897,728 1,255,899 Impact of changes in accounting policy – – – – (11,376) (11,376)
Total recognised comprehensive income for the year (all attributable to owners of the Company)
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Profit before tax 244,538 217,454 Adjustments for: Interest and equity dividend income (42,571) (45,699) Interest expense 7,176 8,605 Net fair value gains on financial assets (14,847) (37,654) Depreciation, amortisation and impairment 14, 15 9,650 7,833 Charges in respect of share based payments 9, 24 12,523 6,135 Profit from sale of subsidiaries (1,536) – Other non-cash movements 925 1,963 Effect of exchange rate fluctuations on cash presented separately 491 9,481
Cash flows from the sale of a subsidiary 20,940 – Cash flows from the sale and purchase of associates 34 600 (3,104) Cash flows from the purchase of property, plant and equipment (4,545) (3,103) Cash flows from the purchase of intangible assets (9,594) (7,505)
Proceeds from the issue of ordinary shares 24 4,123 1,701 Distributions made to owners of the Company 24, 32 (220,219) (62,507)
Cash and cash equivalents at 1 January 657,662 516,547 Net (decrease)/increase in cash and cash equivalents (92,796) 150,596 Effect of exchange rate fluctuations on cash and cash equivalents (491) (9,481)
Cash and cash equivalents at 31 December 23 564,375 657,662 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Included within cash and cash equivalents held by the Group are balances totaling £113,312,000 (2012: £86,168,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held.
Consolidated statement of cash flows Hiscox Ltd Report and Accounts 2013
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 38 in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.
The financial statements were approved for issue by the Board of Directors on 24 February 2014.
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 International Financial Reporting Interpretations Committee (IFRIC).
A review of the financial performance of the Group is set out on pages 22 to 23. The financial position of the Group, its cash flows and borrowing facilities are included therein. In addition, note 3 to the financial statements provides a detailed discussion on the risks which are inherent to the Group’s business and how those risks are managed.
A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on or after 1 January 2013, and have been applied in preparing these consolidated financial statements.
this assessment the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangement and other facts and circumstances. Previously the structure of the arrangement was the sole focus of classification.
The Group has re-evaluated its involvement in the only arrangement which could be considered joint, the participation in Syndicate 33, and concluded that it is outside the scope of both IFRS 10 and IFRS 11. The Group will therefore continue to only consolidate its 72.5% share of Syndicate 33.
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2014 and have not been applied in preparing these financial statements.
IFRIC 21: Levies Charged by Public Authorities on Entities that Operate in a
(e) Joint arrangements As a result of the adoption of IFRS 11, the Group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operating or joint ventures depending on the Group’s rights to the assets and obligations for the liabilities of the arrangements. When making based on their long-term rate of expected return.
(b) Fair value measurements IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.
In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively. The change had no significant impact on the measurements of the Group’s assets and liabilities.
(c) Presentation of items of other comprehensive income As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its consolidated statement of comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be.
2 Significant accounting policies continued 2.2 Basis of preparation continued (a) Defined benefit plans continued
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: — assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; — income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and — all resulting exchange differences are recognised as a separate component of equity.
Specific Market, provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. The adoption of the Interpretation will not have a material impact on the financial statements.
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 20 years and are carried at cost less accumulated amortisation and impairment losses.
(d) Rights to customer contractual relationships 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 impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance items are charged to the income statement during the financial period in which they are incurred.
Land and artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. 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 50 years — vehicles 3 years — leasehold improvements including fixtures and fittings 10–15 years — furniture, fittings and equipment 3–15 years
(b) Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: — negative rating agency announcements in respect of investment issuers, reinsurers and debtors; — significant reported financial difficulties of investment issuers, reinsurers and debtors; — actual breaches of credit terms such as persistent late payments or actual default; — the disintegration of the active market(s) 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.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
(a) Non-financial assets Objective factors that are considered when determining whether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: — adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; — the likelihood of accelerated obsolescence arising from the development of new technologies and products; and — the disintegration of the active market(s) to which the asset is related.
2 Significant accounting policies continued 2.7 Financial assets including loans and receivables continued
2.15 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review. The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007.
Claims and associated expenses are charged to profit or loss as incurred, based on the estimated liability for compensation owed to contract holders or third-parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions.
remuneration report together with the Group’s Save as You Earn (SAYE) schemes.
(e) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where a contractual obligation
The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.
(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’
2.23 Reporting of additional performance measures The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group’s businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decisionmaker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total estimate as at 31 December 2013 is £1,024 million (2012: £1,000 million) and is included within total insurance liabilities on the balance sheet.
statistical models alongside input from its underwriters. These require significant management judgement. Realistic disaster scenarios, shown on page 15, are extreme hypothetical events selected to represent major events occurring in areas with large insured values. They also reflect the areas that represent significant exposures for Hiscox. The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and as yet untested, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodeled risks. This means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates modeled by management.
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross premiums written and maximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief Underwriting Officer and a specialist central analysis and review team in order to monitor claim development patterns and discuss individual underwriting issues as they arise. The Chief Underwriting Officer also holds weekly video conference meetings with this team to discuss interim underwriting matters.
The Group compiles estimates of losses arising from realistic disaster events using premium collections and the timing of such premium inflows is reasonably predictable. In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events non-correlated to financial markets, and not by the inclination or will of policyholders.
Other £000 * Total *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
Reinsurance inwards The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the high-frequency, low-severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or manmade occurrence. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short-term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
trust investments. This is limited to a small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are well diversified over a number of companies and industries. The fair value of equity assets in the Group’s balance sheet at 31 December 2013 was £223 million (2012: £190 million). These may be analysed as follows: Nature of equity and unit trust holdings
(c) Interest rate risk Fixed income investments represent a significant proportion of the Group’s assets and the Board continually monitors investment strategy to minimise the risk of a fall in the portfolio’s market value which could affect the amount of business that the Group is able to underwrite or its ability to settle claims as they fall due. The fair value of the Group’s investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates rise, the fair value of the Group’s debt and fixed income investments would tend to fall and vice versa if credit spreads remained constant.
Debt and fixed income assets are predominantly invested in high-quality corporate, government and asset-backed bonds. The investments typically have relatively short durations and terms to maturity. The portfolio is managed to minimise the impact of interest rate risk on anticipated Group cash flows.
The Group may also, from time-to-time, enter into interest rate future contracts in order to minimise the interest rate risk on specific longer duration portfolios. The fair value of debt and fixed income 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.
At 31 December 2013, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio, but has minimal direct exposure to subprime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group has no direct exposure to sovereign debt in Portugal, Ireland or Greece. Note 3.2(d) shows the Group’s positions at 31 December 2013 for government issued, government supported and bank debt exposures. The Group did not experience any material defaults on debt securities during the year.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and unit
(a) Reliability of fair values The Group has elected to carry all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments and the insurance linked fund, 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 3 Management of risk continued 3.1 Insurance risk continued ii) Reserving risk continued
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. 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.
The Group Reinsurance Security Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other assets in the Group’s balance sheet at 31 December 2013 was £2,336 million (2012: £2,195 million). These may be analysed as follows: Nature of debt and fixed income holdings
At 31 December 2013, no amounts were outstanding on the Group’s borrowing facility (2012: £nil). The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, 3 Management of risk continued 3.2 Financial risk continued (c) Interest rate risk continued
The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in highly liquid instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union, excluding those from Portugal, Ireland or Greece.
Debt and fixed income securities 19 654,602 1,143,308 310,642 227,277 2,335,829
Debt and fixed income securities 19 816,153 834,671 369,528 174,514 2,194,866 Deposits with credit institutions 19 900 – 12,303 – 13,203
The largest counterparty exposure within the AAA rating at 31 December 2013 is the German Government and at 31 December 2012 it was with the UK Treasury. For the AA rating it is with the US Treasury at both 31 December 2013 and 2012. A significant proportion of other/nonrated assets are rated BBB and BB at both 31 December 2013 and 2012.
At 31 December 2013 and 2012 the Group held no material debt or fixed income assets that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not experience any material defaults on debt securities.
Included above are £1,180 million (2012: £1,012 million) in relation to holdings in debt securities, none (2012: £10 million) are held as deposits with credit institutions and £2 million (2012: £111 million) held as cash equivalents, having a maturity of less than three months at the time of purchase. Of the amount held as cash equivalents, £1 million (2012: £75 million) is held with the US Treasury, £1 million (2012: £nil) is held with the French Government and there is no holding (2012: £35 million) with the UK Government.
The main focus of the investment portfolio is on high-quality short-duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows: Fair values at balance sheet date analysed by contractual maturity
Employee retirement benefit obligations 16,907 – – – 16,907 Deferred tax 134,473 – – – 134,473 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
As at 31 December 2013 Effect on equity after tax £m
Strengthening of US Dollar 112.0 45.5 Weakening of US Dollar (93.0) (38.7) Strengthening of Euro 10.4 11.0 Weakening of Euro (8.5) (9.0)
Financial strength The financial strength ratings of the Group’s insurance company subsidiaries are outlined below: A.M. Best Fitch Standard & Poor’s
Capital performance The Group’s main capital performance measure is the achieved return on equity (ROE). This marker best aligns the aspirations of employees and shareholders. As variable remuneration, the vesting of options and longer-term investment plans all relate directly to ROE, this concept is embedded in the workings and culture assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded sophisticated capital modeling tools within its business. These join together short-term and long-term business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
Gearing The Group currently utilises short- to medium-term gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: — Letter of Credit and revolving credit facility – the Group’s main facility of $875 million may be drawn as cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed $400 million. This facility was secured during 2012 by the Company’s subsidiary Hiscox plc. The Letter of Credit availability period ends on 31 December 2013. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2012, 2013 and 2014 years of account. The revolving credit facility has a maximum threeyear contractual period for repayment.
All amounts reported on the following page 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.
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The BMA’s new regulatory capital requirements became effective on 1 January 2013. The Group had sufficient capital to meet requirements.
Share of (loss)/profit of associates *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Combined ratio excluding non-monetary foreign exchange impact (%) 74.9 92.7 81.0 – 82.8 74.6 94.7 89.2 – 85.1 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
At Group level 1% change in claims or expense ratio 4,335 5,084 3,414 – 4,190 4,769 3,027 –
4 Operating segments continued (c) Segmental analysis of assets and liabilities The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows: London Market
Capital expenditure comprises expenditure on intangible assets (note 14) other than goodwill, and additions to property, plant and equipment (note 15), but excluding assets acquired on business combinations.
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties: Gross premium revenues earned from external parties
Profit for the year (all attributable to owners of the Company) 237,758 208,026 Opening shareholders’ equity 1,365,366 1,244,523 Adjusted for the time-weighted impact of capital distributions and issuance of shares (134,580) (28,095)
Annualised return on equity (%) 19.3 17.1 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Investment result – financial assets 8 58,924 92,690 Fair value gains/(losses) on derivative financial instruments 21 885 (266)
Debt and fixed income securities 8,326 0.9 3,192 0.7 2,748 0.3 2,839 1.3 17,105 0.7 Equities and shares in unit trusts – – 14,246 20.9 7,882 10.9 17,161 23.2 39,289 18.3 Deposits with credit institutions/
Agency-related income 7,100 5,866 Profit commission 9,161 5,532 Other underwriting income – insurance linked fund 1,832 1,123 Other income 2,812 1,409
Wages and salaries 101,780 88,294 Social security cost 20,498 15,299 Pension cost – defined contribution 6,593 6,117 Pension cost – defined benefit 1,000 1,054 Share-based payments 12,523 6,135 Marketing expenses 30,550 26,251 Investment expenses 3,833 3,543 Depreciation, amortisation and impairment 9,650 7,833 Other expenses 90,538 81,346
Operational expenses 276,965 235,872 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Amounts receivable by the auditor and associates in respect of: The auditing of the accounts of any associate of the Group 966 911 All audit-related assurance services 80 129 Taxation compliance services – – All non-audit-related assurance services 88 21
The full audit fee payable for the Syndicate audit has been included above, although an element of this is borne by the third-party participants in the Syndicate.
12 Net foreign exchange losses The net foreign exchange gains for the year include the following amounts: Exchange losses recognised in the consolidated income statement (9,890) (20,173) Exchange losses classified as a separate component of equity (2,030) (35,806)
As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset has been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting businesses. The carrying value of this asset is tested for impairment based on its value in use to the Group’s US insurer. The value in use is calculated using a discounted projected cash flow based on business plans approved by management, and discounted at an appropriate rate. Key assumptions include new business growth, retention rates, market cycle and claims inflation. The results of that test show no impairment is due.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships, with additions in the current and prior year relating to software licence and development costs. These intangible assets are amortised on a straight-line basis over their useful economic life.
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. No impairment is due as at 31 December 2013.
The amortisation charge for the year includes £6,434,000 (2012: £4,302,000) relating to capitalised internally generated software costs and is included in operational expenses in the consolidated income statement.
The net book value of capitalised internally generated software costs at 31 December 2013 was £26,961,000 (2012: £23,293,000). There are no charges for impairment during the current or prior financial year.
During the year £848,000 was recognised in the carrying value of property that is under the course of construction (2012: £nil).
Total at the end of 2013 69,592 49,785 31,165 2,846 100% results
During 2012, the Group acquired a 25% holding in Lark (2012) Ltd, for total consideration of £3,104,000 as referred to in note 33.
During 2013, the Group disposed of its holding in Senior Wright Indemnity Ltd. During 2012 the Group sold its holding in InsuranceBee, Inc.. There were no acquisitions during the current year.
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £23,479,000 (2012: £18,340,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 153,286 137,754 After one year 20,863 9,947
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2013104
Reinsurers’ share of insurance liabilities 459,603 541,387 Provision for non-recovery and impairment (781) (998)
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 229,060 286,532 After one year 229,762 253,857
The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund (‘the Fund’), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.9 million. The Fund is subject to a one year lock up from the balance sheet date. The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund.
The Group participates in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. During the year contracts with a premium of $3.3 million were ceded to the entity.
Gross receivables arising from insurance and reinsurance contracts 422,405 425,720 Provision for impairment (1,282) (986)
Due from contract holders, brokers, agents and intermediaries 302,820 295,892 Due from reinsurance operations 118,303 128,842
Prepayments and accrued income 6,754 10,345 Other loans and receivables: Net profit commission receivable 18,905 7,295 Accrued interest 9,463 9,120 Share of Syndicates’ other debtors’ balances 12,192 13,138 Other debtors including related party amounts 24,982 27,432
21 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2013. 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 2013 all mature within one year of the balance sheet date and are detailed below: Derivative financial instrument included on balance sheet
31 December 2012 Derivative financial instrument assets included on balance sheet
Financial assets Debt and fixed income securities 875,882 1,459,947 – 2,335,829 Equities and shares in unit trusts – 208,960 14,064 223,024 Deposits with credit institutions 6,240 – – 6,240 Insurance linked fund – – 19,917 19,917 Derivative instrument assets – 44 – 44
Financial assets Debt and fixed income securities 718,393 1,476,473 – 2,194,866 Equities and shares in unit trusts – 176,494 13,535 190,029 Deposits with credit institutions 13,203 – – 13,203 Insurance linked fund – – 8,098 8,098 Derivative instrument assets – 73 – 73
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 cost, which is deemed to be comparable to fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. The Group invested into the insurance linked fund in December 2012, which is subject to a two-year initial lock-up period. The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have a material impact on the valuation of the fund.
Fair value gains or losses through profit or loss* 575 1,832 2,407 Foreign exchange losses (91) (762) (853)
Unrealised gains and losses in the year on securities held at the end of the year *Fair value gains/(losses) are included within the investment result in the income statement.
*Fair value gains/(losses) are included within the investment result in the income statement.
Employee share option scheme – proceeds from shares issued 133 3,990 – – Issue of B Shares – (42,453) (155,141) 197,594 Redemption of B Shares – – – (197,594) Scrip dividends to owners of the Company 32 18 2,103 – –
On 25 February 2013, the Group announced its intention to return approximately £200 million of capital, which included a final dividend equivalent for the year ended 31 December 2012 of 12.0p per share, being £47,423,000 to shareholders, by way of a B Share issue. This was also combined with a consolidation of Hiscox’s existing shares on the basis of 89 new ordinary shares of 5 55/89p each for 100 existing ordinary shares of 5p each. This was subsequently approved by the shareholders at an Extraordinary General Meeting held on 28 March 2013.
B Shares were issued on 2 April 2013 to existing shareholders on the basis of one B Share for each ordinary share held on 28 March 2013. Each B Share enabled the shareholder to redeem the share at 50p per share at either 4 April 2013 or 12 April 2013. Alternatively the B Share holder could elect to receive a B Share dividend on 12 April 2013 of 50p per share. Following such dividend receipt, the relevant B Shares were converted into deferred shares which were themselves redeemed on 16 May 2013 for a total redemption value of one pence in total. There were no B Shares outstanding at 31 December 2013 as all shares have been redeemed or cancelled.
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.
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 £12,523,000 (2012: £6,135,000). This comprises charges of £12,158,000 (2012: £5,793,000) in respect of performance share plan awards and £365,000 (2012: £342,000) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument, and discounted cash flow methodology in respect of performance share plan awards.
For options issued after 1 January 2006 the assumptions regarding long-term dividend yield have been aligned to the progressive dividend policy announced during the 2005 Rights Issue.
At 31 December 2013 Hiscox Ltd held 16,145,888 shares in Treasury (2012: 19,682,214). Additional details are shown in note 37 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Recoverable from reinsurers Claims reported and claim adjustment expenses 146,946 192,311 Claims incurred but not reported 213,000 261,128 Unearned premiums 98,876 86,950
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,123,849 1,190,613 After one year 1,026,450 865,610
that different techniques or combinations of techniques have been selected for individual accident years or groups of accident years within the same class of business. Estimates of ultimate claims are adjusted each reporting period to reflect emerging claims experience. Changes in expected claims may result in a reduction or an increase in the ultimate claim costs and a release or an increase in reserves in the period in which the change occurs.
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available. This methodology produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years are stable. Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in relation to more recent underwriting years or years of account). In these instances the Group’s actuaries make reference to the Bornhuetter-Ferguson method.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. This often means 26 Insurance liabilities and reinsurance assets continued
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 630,910 1,164,824 – – – – – – – – 1,795,734 nine years later 623,578 – – – – – – – – – 623,578 Current estimate of cumulative claims
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 514,753 677,940 – – – – – – – – 1,192,693 nine years later 508,214 – – – – – – – – – 508,214 Current estimate of cumulative claims
Liability recognised in respect of prior accident years at 100% level *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2013.
Current estimate of cumulative claims 508,214 677,940 449,521 535,782 596,807 544,501 652,239 885,364 697,198 753,417 6,300,983 Less: attributable to external Names (119,054
Liability for 2004 to 2013 accident years recognised on Group’s balance sheet
Liability for accident years before 2004 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2013114
Current year claims and claim adjustment expenses (761,179) 101,561 (659,618) (930,635) 239,912 (690,723) Over-provision in respect of prior year claims and claim adjustment expenses 188,739 (48,400) 140,339 210,843 (58,946) 151,897
Total claims and claim adjustment expenses (572,440) 53,161 (519,279) (719,792) 180,966 (538,826)
Share of Syndicates’ other creditors’ balances 8,230 10,239 Social security and other taxes payable 14,764 8,649 Other creditors 12,900 9,037
Current tax Expense for the year 65,950 15,751 Adjustments in respect of prior years 6,475 2,973
Deferred tax (Credit)/expense for the year (49,865) 676 Adjustments in respect of prior years (7,500) 2,912 Effect of rate change (8,280) (12,884)
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 2.8% (2012: 4.3%). A reconciliation of the difference is provided below: 2012 restated *
Profit before tax 244,538 217,454 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2012: 0%) – – Effects of Group entities subject to overseas tax at different rates 8,729 31,675 Impact of overseas tax rates on: Effect of rate change (8,280) (12,884) Expenses not deductible for tax purposes 4,460 1,734 Tax losses for which no deferred tax asset is recognised 3,532 6,752
Net total deferred tax liabilities (134,473) 75,946 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details. † 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 increased every year by an amount that is calculated as 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 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. Following a change in the legislation at the end of 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. The Group has provided for the deferred tax liability on its Corporate Members’ claims equalisation reserve during the year.
Deferred tax assets of £32,123,000 (2012: £25,608,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits in excess of profits arising from the reversal of other temporary differences, are recognised above. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. £30,526,000 (2012: £23,809,000) of the tax losses to which these assets relate will expire after 15 years or later; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling £10,087,000 (2012: £13,931,000) including £10,087,000 (2012: £13,841,000) in relation to losses in overseas companies of £28,821,000 (2012: £39,545,000). 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 £32,123,000 (2012: £25,608,000).
Interest cost on defined benefit obligation 7,700 7,548 Interest income on plan assets (6,934) (6,841)
Net interest cost 766 707 Administrative expenses and taxes 234 347
Group defined benefit liabilities at beginning of the year 16,907 15,168 Third-party Names’ share of liability (3,083) (3,076)
Opening fair value of scheme assets 156,513 140,517 Interest income 6,934 6,841 Cash flows Contribution by the employer 1,800 1,800 Benefit payments (4,634) (3,280) Administration expenses (234) (347) Remeasurements Return on plan assets (excluding interest income) 25,287 10,982
Closing present value of scheme obligations 179,479 173,420 *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Discount rate 4.7 4.5 Inflation assumption (RPI) 3.4 2.9 Inflation assumption (CPI) 2.4 2.1 Pension increases 3.4 2.9
The triennial valuation carried out as at 31 December 2011 resulted in a deficit position of £19.7 million. The Group agreed to fund the £19.7 million deficit paying instalments over five years. During the year the Group made its second instalment of £1.8 million to the defined benefit scheme (2012: £1.8 million) which included £0.2 million for the expenses of the pension fund (2012: £0.2 million). For 2014, the Group is required to fund an additional £1.8 million.
The scheme is currently in an overall surplus position, at the balance sheet date. The Group is therefore only required to book a liability for its commitment to contributions for the next three years, making the balance sheet position less sensitive to changes in assumptions as the scheme assets are sufficient to compensate for a certain amount of deterioration.
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 2013 as follows: Present value of unfunded obligations before change in assumption
Effect of a change in discount rate Use of discount rate of 4.95% 4,366 4,344 22
Effect of an increase in inflation Use of RPI inflation assumption of 3.65% 4,366 4,366 –
Profit for the year attributable to the owners of the Company (£000) 237,758 208,026 Weighted average number of ordinary shares (thousands) 358,652 391,592 Basic earnings per share (pence per share) 66.3p 53.1p
Diluted earnings per share has been calculated after taking account of 15,131,711 (2012: 15,915,875) options and awards under employee share option and performance plan schemes and 728,284 (2012: 510,925) options under SAYE schemes.
Interim dividend for the year ended: 31 December 2013 of 7.0p (net) per share 24,746 – 31 December 2012 of 6.0p (net) per share – 23,567 Final dividend for the year ended: 31 December 2011 of 11.9p (net) per share – 46,606
The final dividend for 2011 and interim dividends for 2012 and 2013 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The final dividend for the year ended 31 December 2011 was paid in cash of £44,301,000 and 562,194 shares for the scrip dividend. The interim dividend for the year ended 31 December 2013 was paid in cash of £22,625,000 (2012: £18,206,000) and 324,261 shares for the scrip dividend (2012: 1,196,214).
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £25 million (2012: £15 million) in respect of Hiscox Ltd supported by £28 million of investment securities and US$258 million (2012: US$350 million) in respect of Hiscox Capital Ltd supported by US$271 million of investment securities. 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.
(d) The Council of Lloyd’s has the discretion to call a contribution of up to 3% of capacity if required from the managed syndicates.
Operating lease commitments The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totaled £8,677,000 (2012: £7,233,000). Operating lease rental income for the year totaled £547,000 (2012: £615,000).
Obligations under finance leases There were no finance lease arrangements in place at 31 December 2013 or 31 December 2012.
Finance lease interest expense for the year was £nil (2012: £nil).
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Holdings Inc. Insurance holding company USA (Delaware) ALTOHA, Inc. Holding company USA (Delaware) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox Inc. Underwriting agent USA (Delaware) Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox ASM Ltd Insurance intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox Capital Ltd* Reinsurance Bermuda Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox Europe Underwriting Limited Insurance intermediary Great Britain Kiskadee Re Ltd Special purpose insurer Bermuda *Held directly.
Hiscox Group insurance carriers 25,924 6,313 23,654 1,836 Hiscox Group insurance intermediaries 11,246 12,550 (7,646) (7,874) Other Hiscox Group companies – – (7,893) (8,321)
Profit for the year after tax 237,758 208,026 21,272 178,800 280,497
Financial assets carried at fair value 2,585,054 2,406,269 2,368,636 2,459,107 2,413,300