Governance 27 Risk management 33 Corporate responsibility 36 Insurance carriers 40 Board of Directors 42 Hiscox Partners 43 Corporate governance 47 Audit Committee report
Strong premium growth in insurance of 8.8%, including 24.1% for Hiscox USA.
Record profits in Hiscox UK and Europe of £73.3 million (2013: £56.4 million).
Hiscox London Market profit before tax of £62.6 million (2013: £63.1 million), growing with consistent profitability.
Hiscox Re reducing premiums as planned by 13.9% and delivered good profits, with new products and Kiskadee ILS funds on track to reach $500 million by mid-year.
Long-term investment in brand, product and distribution provides opportunities for profitable growth throughout the cycle.
Insurance customers who have made a claim would recommend us. Overall, we were awarded the ‘Gold Trusted Merchant’ status for achieving a 95% service rating by Feefo.
Our people The excellence of our people has been a key ingredient in our success. Our reputation for innovation and dynamism is built on the energy, professionalism, commitment and expertise of our employees. In return we strive to provide them with a working environment in which they can flourish. In September 2014, Hiscox conducted its seventh 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 enjoys very high employee engagement, which averages in the top quartile of over 200 companies worldwide. Of our employees, 91% said they are proud to work for us, while 95% said they believed in our corporate values.
The changing market The ongoing low interest rates and benign claims experience continues to attract new capital to our markets, putting pressure on brokers and insurers. In my opinion, the new sources of capital are here to stay. They have become accustomed to operating in our business, so I think they are unlikely to move on (as perhaps some hope they will) when rewards improve in other parts of the capital markets.
Squeezed margins and consolidation have put pressure on old relationships. Our response has been to support brokers through collaborative product innovation and improved processes, focusing on expertise and service to help their clients. We also continue to explore and support new distribution channels. Over many years we have built a powerful direct-to-consumer business, which we are replicating in different countries. Alongside this, our broker e-trading capabilities, our involvement in specialist underwriting agency White Oak, our support of new facilities and our recent bolt-on acquisitions, all give us access to a broader portfolio of risks.
The Board It has been nearly nine years since we created the Hiscox Ltd Board, and according to UK corporate governance directors potentially cease to be independent after nine years’ service. As such, a number of our original Board members will be stepping down during the year. These include Dr James King, Andrea Rosen and Dan Healy. I am particularly pleased our businesses in Bermuda and the US will continue to benefit from James and Dan’s sage counsel as they continue to serve the Group on our subsidiary Boards. I would also like to express my deep gratitude to Andrea for the many valuable contributions she has made to the Company over the last nine years.
I am able to report another strong result for the Hiscox Group, a pre-tax profit of £231.1 million (2013: £244.5 million). We have done well in difficult markets by maintaining discipline in both our underwriting and investment portfolio, and pursuing our strategy of building balance through diversity of product, geography and distribution.
In addition, Senior Independent Director Richard Gillingwater, who joined the Board in 2010, will step down after the AGM due to his new commitments at Scottish and Southern Energy as well as Henderson Global Investors. The Group has benefited greatly from Richard’s acumen and measured approach and I wish him all the best in his new role at SSE.
During my time at Hiscox I have seen our strategy, those same values and that determination tested in battle – and prevail. In turbulent times we have delivered profitable organic growth and returned extra capital to shareholders. I expect the strong headwinds to continue but our course will not change; it has already brought the business, our staff and our shareholders success, and I believe will bring greater rewards in the future.
The first half of the year was dominated by floods in south-east England where we have a concentration of customers. As always, our claims team delivered an exceptional service, meaning we were able to close 92% of claims on average within eight weeks of being reported. The floods highlighted issues with the Government’s Flood Re scheme, which was particularly unfavourable for many of our insureds. We led an active campaign throughout the year to change this and were pleased that some of our concerns have been addressed.
A major achievement in the year was the delivery (on time and relatively close to budget) of the first phase of our £50 million programme to renew the IT infrastructure that underpins our retail operations. We are already seeing benefits in improved customer experience and higher sales for phase one which supports our direct home business. We are now working on phase two which will renew the infrastructure for our direct commercial business. This should be completed by the end of 2015. At the same time we have in-sourced our home and commercial customer experience centres – all of which will improve service and customer retention, accelerating our growth. We now have over 120 staff in York, and by the end of 2015 they will be housed in a new office which has room to cater for further expansion.
Hiscox Europe Our European business had an excellent year, growing gross written premiums by 8.5% to €190.8 million (2013: €175.8 million). It delivered a combined ratio of 94.1%, including marketing costs of €4 million (or 2% on the combined ratio) as we begin the process of building a direct business in Europe. This is a good performance in the toughest economy in which we operate.
Germany performed especially well, reflecting the benefits of a consistent strategy, stable team and established broker relationships. Spain also had a good year, despite its ongoing economic difficulties thanks to committed, ambitious leadership.
Looking at each division in turn: – Property: Our property division includes US and international commercial property, power and mining risks and US catastrophe exposed personal lines traded in the London Market.
Growth in property was led by small-ticket household and commercial business which is written through binding authorities with long-standing US partners. It benefited from the allocation of additional catastrophe aggregate as we reduced our exposure in our reinsurance business. It is not without risk however, and we paid a number of claims on homes affected by Hurricane Odile which hit the Mexican Baja Peninsula in September. Big-ticket property business remains challenging, with a competitive renewal season, and we expect these conditions to worsen over time. As a result we will remain selective in the risks we write.
London is the global centre for marine and energy risks, but we cannot assume this will continue forever. The team has taken important steps towards realising new opportunities in emerging markets including hiring an on-the-ground agent in Brazil to build a local Hiscox marketing presence.
DirectAsia Early in the year, Hiscox completed the acquisition of DirectAsia, a direct-to-consumer operation in Singapore, Hong Kong and Thailand. DirectAsia sells predominantly motor insurance with ancillary lines in travel. The business was acquired for $55 million, plus an earn-out we would be happy to achieve, and brought with it net assets of $23 million. DirectAsia uses the same IT platform that we are installing elsewhere in the Group and has good underwriting capabilities and customer service ability. We recognised a challenger business similar to Hiscox in a geography we are keen to explore.
The business is progressing as expected. Gross written premiums for the year were US$29.5 million, a 15.2% increase year-on-year (2013: US$25.6 million). The premium income for the period of our ownership was US$22 million.
Hiscox London Market This segment uses the global licenses, distribution network and credit rating available through Lloyd’s to insure clients throughout the world.
We are also grasping new opportunities, including multi-lines Lloyd’s consortia, quota-share treaties and binding authorities. Such arrangements give partners access to our capital and expertise in exchange for access to business we might not have otherwise seen. We remain open to other non-traditional ways of distributing products underwritten by our teams in London.
The way capital is deployed in the reinsurance industry is changing. For many years we have used quota share support from industry partners to increase our ability to commit material sums to support clients within traditional structures. We expect this to continue for many years as clients value the stability the traditional approach brings. At the same time we are adapting to
– Casualty: The casualty division continues to be a bright spot, performing well and growing, albeit from a small base. We bolstered the team during the year with some hires within directors and officers’ and casualty reinsurance, and they are now producing a steady stream of business. It has also been pleasing to see stable rates in errors and omissions, a core part of the casualty account after many years of deterioration. We expect this area to become a significant pillar of the portfolio in time, so it is encouraging to see our investment in talent paying off.
– Alternative distribution: The ways in which business reaches our London teams continue to change and evolve as brokers seek greater efficiency and technology allows different, more effective means of
We are here to pay claims when the worst happens, so it is always pleasing to receive external recognition for the quality of our teams and the fair and fast treatment that our customers experience. Nine out of ten people that insure their property with us in the UK say they would recommend us to their friends and family, and in the London Market Gracechurch survey we achieved the second highest ranking for overall customer satisfaction. We do not rest on our laurels however and continue to strive for ways to work better, faster and even more effectively for our customers.
Reserve releases of £172 million were up from £140 million last year, as we maintain a cautious approach.
Claims 2014 is a year that will be remembered for its devastating aviation losses. Our exposure to these events – from the loss of Malaysia Airlines MH370 and MH17, AirAsia flight QZ8501 and the Air Algérie flight to Mali, to the destruction at Libya’s Tripoli airport – was limited, reserved at net $6.8 million. We also reserved $6.8 million for the passenger ferry that caught fire in the Adriatic Sea, resulting in tragic loss of life.
It was a relatively benign year for large-scale natural catastrophes, and a quiet hurricane season resulted in no material losses outside of the $12.5 million reserved for Hurricane Odile which hit the Mexican peninsula in September. In Europe, severe floods, windstorms and hailstone events during the first half of the year affected our customers in the UK, Belgium and the Netherlands. Our reserving for these events stands at £8.8 million for the UK and €5.3 million for Belgium and the Netherlands. We also reserved $7.2m for February’s severe snowstorms in Japan.
Outlook At Hiscox we have pursued a strategy of diversification for over 20 years. Our mantra of steadily building our retail business (through product innovation, geographic expansion and occasional small acquisition) – to allow our bigticket businesses to expand and shrink in line with their market opportunities – has worked and we believe will continue to work. In 2014, for the first time, our aggregate specialist retail business will account for over 50% of Hiscox Ltd’s gross written premium. Its growth, combined with growth in the London Market insurance business, has offset the declining income in our reinsurance business. As a result, our Group profits, while heavily influenced by big-ticket insurance and reinsurance results (and we love it that they can do so well) are not wholly dependent on these areas as the only source of profits. Our retail businesses make material profits as well.
Bronek Masojada directors and officers’ risks, where we halved the question set, and in 2015 we will be rolling this out to other areas.
In the London Market, we have become more engaged in driving market-wide improvements. The most notable success was our involvement in the London Market Group’s London Matters report which quantified the market’s position, its opportunities and threats in a way that had not been done before. The report garnered government interest and gave new direction to the market modernisation programme. We are also seeing value in our participation on several key project boards, focused on the delivery of a single electronic trading platform for the market and an overhaul of back office functions for improved efficiency.
At the Digital Insurance and Technology Awards, our IT team was recognised with four awards – Digital Project Team of the Year, Outsourcing Partner of the Year, Green Insurance IT Initiative and CIO of the Year for Stéphane Flaquet. This is well-deserved recognition of a team which has done well.
Investments As in 2013 the expectations for the year’s investment result were relatively modest and, given a cautious approach, we are content with the performance for 2014. Our investments before derivatives made £56.4 million (2013: £58.9 million) equating to a return of 1.8% (2013: 1.9%). A bias to short duration bond portfolios, driven by a desire not to lose money when yields rise as well as the short tail nature of our liabilities, meant that at 1.5% the return from the bond allocation was quite low. Once again the Dollar and Sterling bond markets, where the majority of our assets are invested, confounded expectation and, with the benefit of hindsight, it would have been a good year to own longer dated securities. Our returns were boosted however by the performance of our risk assets. In the context of volatile and challenging markets they produced a more than acceptable return of 7.6%. 2014 saw very divergent performance within stock markets and sectors and it is gratifying that on average the funds that we supported avoided many of the pitfalls and beat their benchmarks by a good margin.
Europe Amsterdam Bordeaux Brussels Cologne Dublin Hamburg Lisbon Lyon Madrid Munich Paris
Hiscox UK and Europe is led by Steve Langan, previous UK and Ireland Managing Director. As a combined unit, the two markets will benefit from greater sharing of knowledge, expertise and resource as Hiscox focuses on its stretching ambitions and continued drive for profitable growth next year and beyond.
Hiscox has operated in the Lloyd’s Market since 1901. It provides insurance for customers around the world, using Lloyd’s portfolio of licences and its network of brokers. Hiscox London Market covers a large range of hazards and leads many of the risks it underwrites.
Our long-established reinsurance teams in London, Bermuda and Paris commenced trading as Hiscox Re in January 2014. Hiscox Re provides marketleading expertise and a wide range of reinsurance products to high-quality insurers around the world. It has a combined line size of over US$200m.
Security Hiscox Insurance Company (Bermuda) Limited and Syndicate 33 at Lloyd’s are both rated A (Excellent) by A.M. Best.
Products include Executive security, household, fine art, kidnap and ransom, personal accident, terrorism.
6b n m ar ke t lo ss y ea r re tu rn p er io d
Strategic report Hiscox Ltd Report and Accounts 2014 at renewals), backed by a commitment to pay all legitimate claims quickly and fairly.
Our commitment to underwriting, marketing and service has been a powerful magnet for new clients, as well as our existing customers, helping to protect us from the prevailing competitive conditions.
We seek to create diversity across our retail businesses to give us choices should markets prove challenging. Our UK and European units balance commercial and private client risks. We cover many small- and medium-sized businesses, as well as a number of larger businesses. We also insure the property risks of a wide range of individuals, from middle-income professionals to the extremely wealthy. Following Hiscox UK’s direct-to-consumer small business insurance success, we launched a similar offering in the US in 2010, and Europe in 2013. This rapidly growing business balances our specialty insurance products sold through brokers including professional liability, privacy/data breach, executive risks coverage and other products. In 2014 we invested further in the direct model, with the purchase of DirectAsia.
Although there is rating pressure in a number of our big-ticket lines, like energy or large industrial property risks, we can still find profitable opportunities to grow elsewhere. For example, our property binder business, which comprises small US commercial and personal lines risks, remains an attractively rated book. We have
Every risk we underwrite is priced to make an underwriting profit, no matter what the prevailing competitive conditions or investment climate. We do not bet the business on any single event and are not overly reliant on any one of our divisions for the Group to make a profit. We have three separate divisions that complement each other well – big-ticket insurance, reinsurance, and retail insurance – and which have provided an effective hedge to protect the Group balance sheet against large catastrophe losses and market fluctuations.
We explain below how we execute the Group’s cycle-management strategy across each of our individual divisions.
What is the insurance cycle? The insurance market witnesses periodic ‘soft’ and ‘hard’ phases. The market softens when an increase in capital and competition – often coupled with a period of lower claims – causes premiums and therefore profits to fall. Eventually the market will reach a turning point, when capital declines – often as a result of a catastrophe – and underwriters push up prices and tighten terms and conditions. Thus a hard market ensues, in which profits improve.
Brokers are seeking to make the risk-transfer process more efficient, in part by focusing on developing deeper trading relationships with fewer insurers. To ensure we are one of those few we need to be responsive, to offer significant capacity in emerging risks and to work as a partner with our brokers. Hiscox’s name and underwriting reputation give us an invaluable advantage.
Much has been said about underwriting facilities, but we believe they offer us the prospect of a broader portfolio of risks than we would otherwise have had, which makes our business better balanced. They also enable us to take a fixed share of every risk, with the opportunity to take a bigger portion of the most attractive risks through the open market. We are not afraid of the trend towards facilities. Lloyd’s has thrived for more than 300 years on the system where an acknowledged market leader sets the rate, terms and conditions for a risk, to which other underwriters pledge their support once satisfied the leader has done a competent job. Facilities are simply an evolution in the subscription market.
– Opportunity through multiple capital bases and a diversified portfolio. – Innovate and build creative partnerships with insurers and investors.
This approach has produced new products, such as risk aggregate protection, which provides an effective way for clients to manage their attritional losses, and second event catastrophe aggregate trigger (SECAT) which cost effectively reduces the client’s catastrophe trigger after a series of retained losses. These have generated a lot of interest, as has our ability to help our clients develop their own businesses by sharing our knowledge and experience.
Our reinsurance underwriting performance has consistently surpassed our peer group, across the cycle. In reinsurance, Syndicate 33 has outperformed the Lloyd’s Market every year since 2001 in underwriting losses. For the 2013 underwriting year, for example, the average reinsurance loss ratio among Lloyd’s syndicates was 25.4%; by contrast, Hiscox’s was just over 9.3%.
Along with exercising discipline, we also have a strategy of finding balance and diversity. Our healthcare team, created several years ago in Bermuda, has rapidly developed a growing book of business. We intend to repeat this success in casualty and specialty reinsurance, where we have recently invested in new teams.
The final element of our cycle-management strategy is Kiskadee Re, our special purpose vehicle formed in 2013 to write collateralised reinsurance. Kiskadee provides our clients with broader solutions and complementary products, while enabling us to deploy extra capacity on risks we favour, and providing another stable and attractive source of fee income. Kiskadee enables outside investors to leverage our underwriting expertise and exploit their lower cost of capital to satisfy their appetite for uncorrelated reinsurance risk. Kiskadee is the latest milestone in our lengthy history of innovation in working with third-party capital – we were the first Lloyd’s business to set up a sidecar and have long worked with quota share partners.
ILS is impacting the shape of the cycle due to cost of capital and speed of deployment. Kiskadee enables us to tap into that capability alongside other forms of capital. Whichever way the pendulum swings in terms of client preference over product, pricing etc. we can respond.
Internal capital requirements The Group sets risk limits and tolerances which reflect the amount of risk it is willing to accept as a business. As part of good risk management, our current exposure by the key risk types is monitored against these pre-defined measures throughout the year. The largest driver of our capital is underwriting risk; the Group manages the underwriting portfolio so that in a 1 in 200 aggregate bad year it will lose no more than
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 2014 the Board has reviewed the Group’s capital level and proposed that a special distribution of 45.0p per share (approximately £144 million), should be made.
Strategic report Hiscox Ltd Report and Accounts 2014 12.5% of core capital plus 100% of buffer capital (£100 million) with an allowance for expected investment income. This underwriting risk limit reflects a slight redefinition in how the underwriting risk preference is expressed compared to previous years but is not materially different quantitatively. A market loss at this remote return period would be very big indeed and would certainly bring about positive market changes. The Group would be well positioned in the resulting strong market with capital in the order of £1 billion in addition to its LOC facilities and its now well-developed reinsurance partnerships. If the return of capital is approved by the shareholders on 25 March, the available capital will reduce to approximately £1,262 million, comfortably meeting the current regulatory, rating agency and internal capital requirements. 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.
The Group’s combined ratio including foreign exchange was 83.9% (2013: 83.0%). An investment return of 1.8% (2013: 1.9%) was a good result given the ongoing challenging conditions in the market. All asset classes outstripped their benchmarks for a consecutive second year.
Gross premiums written of £1.76 billion were up 3.3% year-on-year. Strong growth in insurance lines was offset by a decline in reinsurance.
† Excluding derivative assets, investments in insurance linked funds and third-party assets managed by Kiskadee Investment Managers.
of products to market. Marketing expenses remained similar at £31.8 million in the year (2013: £30.6 million).
Hiscox London Market Gross premiums written increased by 9.0% to £510.9 million (2013: £468.6 million) driven by strong growth in the alternative distribution and casualty divisions. Reinsurance purchased was at a higher level than the prior year at 34.0% of gross premiums written (2013: 23.2%), as a result of a new quota share arrangement on the alternative distribution business. The quota share arrangements with Syndicate 6104 and others remained in place.
The net claims ratio was up in the year to 47.4% (2013: 43.5%), with minimal impact from catastrophes. The combined ratio increased to 84.2% (2013: 81.4%) driven from the increase in claims ratio and an increase in the expense ratio to 39.8% (2013: 36.8%).
Hiscox Corporate Centre The centrally held investment portfolio had a lower, but still respectable, return in 2014 of £12.2 million (2013: £20.0 million) following an excellent 2013. This was offset by operational expenses of £21.4 million (2013: £23.6 million). The loss before tax was £15.2 million (2013: loss £8.8 million), with £0.8 million additional foreign exchange losses.
The Group has continued its investment in IT infrastructure during the year, in particular for the UK, as we seek to strengthen our delivery
Strategic report Hiscox Ltd Report and Accounts 2014 into doubt but was not completely discounted in the US whose economic performance proved to be more robust than elsewhere in the world. As a result US short dated bond yields in the two-three-year maturity actually rose during the year, in notable contrast to those in the UK and the Eurozone. Given the duration and currency of our liabilities, short dated Dollar bonds constitute a large proportion of our fixed income portfolios which, whilst earning more than 2013, did not benefit from the fall in yields of longer dated bonds. Whilst our returns in 2013 relied heavily on the performance of the risk assets portfolio, in 2014 we expected more modest returns from this source accompanied by bouts of volatility, both of which occured. It was however a year of divergent performance between various markets and sectors and in that context our risk assets made a useful contribution.
Whilst down on 2013, the 7.6% return from our risk assets was a very satisfactory outcome. By most accounts 2014 was a tough year for active equity fund managers trying to beat an index. It is therefore pleasing that our allocation to UK and global equity funds and equity based hedge funds all beat their respective benchmarks. Successful sector and geographic allocations lay behind much of the outperformance, with healthcare and other defensive sectors being favoured and mining and commodity stocks being underrepresented. In the global equity funds there was a bias to the US with managers tending to underweight Europe, Japan and emerging markets. Hedge funds have generally performed poorly of late but our allocation there posted good returns. Our risk assets portfolio at the end of the year comprised 7.8% of the overall portfolio, up from last year due to appreciation and a modest addition during the volatile period in October.
There is still an expectation that the US economy will continue to decouple from other areas and that the Fed will begin to increase interest rates at some stage during the year. This prospect leads us to remain cautious on duration in the US bond markets in particular. Given the prevailing low level of yields in our bond portfolios more generally we expect another year of low returns from them. Any yield from cash is increasingly hard to come by with negative yields on offer in many European bond and cash markets. We have allocated to less traditional areas of the bond market in the past when we could see attractive valuations but retaining a strong liquid balance sheet is currently preferred. Many areas of fixed income have recently suffered from bouts of volatility including even the US treasury market last October, and with liquidity becoming an increasingly fickle friend we are restricting any additional credit exposure to investment grade securities. We have learnt to live with low but positive returns in recent years and that remains the plan in 2015. Whilst our priority remains to avoid losing money, we do have some appetite for risk within the investment portfolios and of late this has been mostly expressed in the allocation to equities. This is an area where we still see opportunities from time-to-time.
Asset allocation High-quality, conservative portfolio Investment portfolio: £3.245 billion as at 31 December 2014
One of our Executive Directors – either the Chief Executive Officer, Chief Financial Officer or Chief Underwriting Officer – chairs each of these forums. The responsibilities of our senior management are clearly defined, as are our reporting lines, and where responsibilities are delegated the Board and its committees closely monitor their activity, aided by financial and non-financial management information.
We operate in open, aggressively competitive markets in which barriers to entry for new players are low and where competitors may choose to differentiate themselves by undercutting their rivals. As a result, capacity levels in these markets will rise and fall, causing prices to go up and down, creating volatile market cycles.
– Diversified portfolio: Hiscox has a well-diversified portfolio by product and geography to help balance any catastrophe exposure.
– Risk appetite: We clearly define our risk appetite for underwriting risk, which dictates our business plan. To ensure that we do not exceed our risk appetite, we monitor our exposures closely and take mitigating actions to maintain business plan. This enables us to maximise the expected risk return profile on the whole portfolio and offset the potential losses on more volatile accounts.
– Stress and scenario testing: We run stress and scenario tests for a range of specific events for each of our business units as well as the Group as a whole, so we can estimate our potential losses from a major catastrophe.
– 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.
– 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.
– Technical funds: Those funds held for reserves are invested primarily in high-quality bonds and cash. The high quality and short duration of these funds allows the Group to meet its aim of paying valid claims quickly.
– Benchmarks: Our fixed income fund managers are set benchmarks that approximate the payment profile of our claims while still providing them with some flexibility to enhance returns.
– Equities: A proportion of the Group’s assets is allocated to riskier assets, principally equities. For these assets we take a long-term view so we can achieve the best risk-adjusted returns. The proportion of funds we invest in risk assets will depend on the outlook for investment and underwriting markets. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets.
Insurance is a regulated industry. While regulations typically evolve on an ongoing basis, there may be times where the regulatory landscape undergoes a significant shift.
– 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.
– 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.
Our reporting currency is Sterling, but a significant proportion of our underwriting activity 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.
– Careful selection: We buy reinsurance only from companies that we believe to be strong. Every reinsurer we use must be approved by a dedicated Reinsurance Security Committee, based on an assessment of financial strength, trading record, payment history, outlook, organisational structure, plus its external credit ratings.
– Monitoring: Our credit exposures to these companies are closely monitored. The companies are continuously monitored so that we are able to identify any potential problems. The committee considers public information, experience of the companies concerned, their behaviour in the marketplace and analysis from external consultants and from rating agencies.
– 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.
– 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.
– Risk assessment: Identifying, planning for and controlling emerging risks is an important part of our risk management activity across all aspects of our business, including underwriting, operations and strategy. We make a significant effort to identify material emerging threats to the Group. It is a core responsibility of each of our risk committees and we believe we take all reasonable steps to minimise the likelihood and impact of emerging risks and to prepare for them in case they occur.
Total tonnes CO2e per FTE (Scope 1 and 2) 1.20 1.17 1.27 1.16
in headcount, a rise in occupied floor space and more travel due to increased business activity.
The Hiscox London office was awarded Platinum at the Clean City Awards for the third year in a row. Hiscox 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. In November 2014, Hiscox IT was awarded Green Insurance IT Initiative at the Digital Insurance and Technology awards 2014, for transforming the London Market business with a new paperless system.
The marketplace In 2014, Hiscox UK was awarded Investing in the Profession at the British Insurance Awards, Hiscox London Market was awarded Insurer
Hiscox’s commitment to responsible business practices is reflected in: The environment In the last year we have increased our support for climate change research and analysis both with educational bodies and through collaborations within the business community. We also continue to factor climate change into our business decisions in order to ensure we are responding effectively and appropriately to the challenges it poses.
We believe in identifying, then minimising the environmental impacts of our business activities, including the direct impact of our own business operations. We seek to reduce the amount of waste our activities produce, and the amount of resources we consume. We are committed to reducing our carbon footprint, and for the business to operate more sustainably by: measuring our use of water, energy and other products in order to reduce consumption over time; buying sustainably-sourced or energyefficient products where we can; and minimising waste by recycling products where we can. We have, as a result, also generated significant cost and energy savings. Our Global scope 1 and 2 per full-time employee has gone from 1.27 in 2013 to 1.16 in 2014, which is an overall decrease of 9%. During the year there has been growth
* Global emissions data have been collated and reported in line with Defra’s environmental reporting guidelines and the requirements of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 on mandatory GHG reporting. This is the second year Hiscox is reporting its global GHG data. Historical emissions data for 2012 relate to UK operations with 2013 and 2014 figures covering global operations (including figures for DirectAsia in 2014 only). The data has been collected from all offices under Hiscox’s direct operational control and the global GHG data has been independently verified.
Hiscox wants to employ the best people and to provide them with the means and the motivation to excel. This is achieved with fair rewards and by providing staff with an environment in which they can enjoy their work and reach their full potential. Hiscox recognises how important it is for employees to maintain a healthy work/life balance and it gives them the option of flexible and home working wherever possible.
The community Hiscox Bermuda continues to sponsor the Women’s Resource Centre, providing support, education and counselling for women and children in the community, as well as the Kaleidoscope Arts Foundation enrichment of the Year at the Reactions Awards and Hiscox USA was named A Top 100 Champion at the Small Business Influencer Awards 2014.
Dealing with investors We have a policy of open and transparent communication with our shareholders. Hiscox reports both its half- and full-year results to investors via a series of presentations, as well as ensuring all relevant Group financial information is available on the corporate website. Senior management and key employees also regularly meet investors and analysts throughout the year to explain and answer questions on our financial performance and business strategy.
The workplace Culture The Hiscox culture is underpinned by a set of core values that determine a standard of behaviour that we expect all our employees to follow. We firmly believe that, through high standards of conduct, we are more likely to achieve business success and, therefore, create additional value for shareholders. We aim to have the highest standards of corporate governance while striving to remain, in essence, a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or a speedy response. We believe that we have the balance right and, furthermore, that this is one of our greatest strengths. We seek to follow the best practices in managing our people and to be a fair and professional employer. Hiscox aims to maintain a culture that £0.9m donated to charities.
programme for students at Prospect Primary School. In 2014, Hiscox staff provided the funding necessary for weekly riding lessons for one young student through the Riding for the Disabled programme at Windreach, and the Education and Recreation programme for sufferers of Alzheimer’s and Dementia. Hiscox Bermuda continues to support SCARS (Saving Children and Revealing Secrets) which trains people who work with children at risk to prevent, recognise and react responsively to those who suffer from sexual abuse. Donations have been made to the Women’s Resource Centre for food vouchers for women and families in need, and to the Eliza Dolittle Society and the Lady Cubitt Compassionate Association for their Medipendent programme for seniors.
In London, staff members continue to support pupils at the Elizabeth Selby Infants School in Tower Hamlets through the Reading Partners’ Scheme via the Lloyd’s Community Programme. Staff regularly volunteer in the gardens of Richard House Children’s Hospice and in 2014 raised just under £2,000 by racing the 21.6 miles of the Thames as part of the Great London River race. In Colchester, staff raised over £25,000 for charities such as the Essex & Herts Air Ambulance Trust, East Anglia Children’s Hospice, MS-UK and the Alzheimer’s Society. Staff raised over £6,000 through their participation in the London Marathon and a cycle ride from Colchester to the York office. Hiscox UK supports Action for AT, helping speed the process of identifying cures for AtaxiaTelangiectasia as well as treatments that delay or prevent the disabling effects of childhood conditions. Since opening the office in York, staff have helped raise around £5,000 for St Leonards Hospital via numerous activities such as the Yorkshire Marathon and the annual Dragon Boat Race.
In the summer of 2014, Hiscox Germany was awarded the Goldener Bulle by the publishing house Finanzen Verlag. The team received special mention for their contribution to art and culture. Projects included ‘Add art’, a scheme based in Hamburg, which encourages companies to open their office doors to the general public to present their corporate collection, as well as ‘Kunstresidenz Bad Gastein’ which encourages 14 young contemporary artists to show their work during a four-week public festival in Bad Gastein.
The chart below shows the gross premiums written of Syndicate 33 for the last 13 years.
The geographical and currency splits are shown on page 37. One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by third-party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 20% of profit on the element it does not own. For the 2015 year of account, Syndicate 33’s capacity has remained at £1 billion.
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 2014, net assets exceeded £243 million (2013: £250 million).
Hiscox Insurance Company (Guernsey) Formed by Hiscox in 1998, Hiscox Insurance Company (Guernsey) Limited writes mainly kidnap and ransom and fine art insurance. Hiscox Guernsey has an A.M. Best rating of A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2014, net assets exceeded $8 million (2013: $9 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 Inc. is rated A (Excellent) by A.M. Best. At the end of 2014, net assets exceeded $60 million (2012: $59 million).
DirectAsia In March 2014, the Group acquired Direct Asia Insurance (Holdings) Pte Ltd (‘DirectAsia’). DirectAsia underwrites through subsidiaries in Singapore and Hong Kong, and an agency in Thailand. Its primary business is motor insurance, with ancillary lines in travel, personal accident and healthcare. At the end of 2014, the insurance company subsidiaries have net assets exceeding SGD$16 million and HK$134 million.
Stuart John Bridges Chief Financial Officer (Aged 54) 12 December 2006*
Robert Simon Childs Non Executive Chairman (Aged 63) 26 February 2013*
Bronek Masojada joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007, was a Non Executive Director of Ins-sure Holdings Limited from 2002 to 2006 and Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is a past President of The Insurance Institute of London and immediate Past Master of The Worshipful Company of Insurers. He is currently a member of the Board of the Association of British Insurers.
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. 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.
Ernst Robert Jansen Independent Non Executive Director (Aged 66) 20 November 2008*
Andrea Sarah Rosen Independent Non Executive Director (Aged 60) 11 October 2006*
Michael Krefta Chief Underwriting Officer, Hiscox Re and Joint Active Underwriter, Syndicate 33
Steve Langan* CEO Hiscox Insurance Company, Chief Marketing Officer and CEO DirectAsia Group
Paul Lawrence* Chief Underwriting Officer, Hiscox London Market and Joint Active Underwriter, Syndicate 33
Jeremy Pinchin* Chief Executive Officer, Hiscox Re, Group Company Secretary and Group Claims Director
Simon Williams Head of Marine and Energy, Hiscox London Market * Hiscox Executive Committee
Corporate governance 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 2014 financial year and no changes were required.
Whilst the Board acknowledges the value that knowledge and experience of the organisation can bring, it also recognises the need to progressively refresh Board 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. Daniel Healy, Dr James King and Andrea Rosen were all appointed to the Board in 2006. In accordance with the criteria set out in the Code these Directors potentially cease to be independent if they continue to serve beyond nine years. Accordingly, Dr King will retire from the Board and not seek re-appointment at the 2015 Annual General Meeting. Andrea Rosen and Daniel Healy will both leave the Board on reaching nine years’ service in October 2015. In addition, Richard Gillingwater, who joined the Board in 2010, will not seek re-appointment at the 2015 Annual General Meeting. Details of the Board succession planning arrangements are set out below in the section describing the Nominations Committee.
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 appointment and removal of the Company Secretary is a matter for the Board as a whole.
The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. As part of the external Board evaluation Directors were asked about the information provided to the Board and the conclusions are referred to in the section headed ‘performance evaluation’ on page 45.
The Board of Hiscox Ltd met four times during 2014. The Code does not require the independence or otherwise of a Non Executive Chairman to be considered subsequent to their appointment. The Board considers all other Non Executive Directors to be independent within the meaning of the Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
There is a formal induction process for new Directors. The needs of a new Director joining the Board are assessed and appropriate training arranged. Existing Directors are provided with the opportunity to attend training sessions. Directors received briefings on solvency requirements during the year. Directors’ training requirements were also assessed as part of the external Board evaluation described on page 45.
Corporate governance continued out to tender and details are set out in the Audit Committee report on page 48.
The internal and external auditors have unrestricted access to the Committee. All nonaudit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Committee. KPMG has confirmed to the Committee that in its opinion it remains independent. The Committee is satisfied that this is the case. In respect of the 2014 financial year the Committee reported to the Board on how it had discharged its responsibilities and provided advice to the Board on how the Annual Report and Accounts were fair, balanced and understandable and provided the information necessary for shareholders to assess the Company’s business model and strategy. Further information on the activities of the Committee is included in the Audit Committee report on page 47.
Decision, a copy of which can be found on the Group’s website: www.hiscoxgroup.com.
The Investment Committee The Investment Committee comprises Robert Childs, Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen, Gunnar Stokholm, the Chief Executive and the Chief Financial Officer and is chaired by Robert Childs. The Investment Committee has oversight of the Group’s investments.
The Executive Committee The Executive Committee was established as a committee of the Board in February 2015. It is comprised of senior executives as listed on page 42 and will normally meet every six weeks. It will make recommendations to the Board on those matters referred to it, and approve various matters (some of which may also require Board approval). The Commitee will approve senior appointments and remuneration outside the scope of the Remuneration Committee or Nominations Committee, approve operational policy for the Group, take decisions on annual budgets and business plans, mergers and acquisitions, consider significant issues raised by management and approve exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
Performance evaluation During the year, in line with the Code requirement, the Company undertook an evaluation of the Board and its Committees which was externally facilitated by Mr Geoffrey Shepheard of ICSA Board Evaluation, a division of the Institute of Chartered Secretaries and Administrators. The last external evaluation was carried out in 2011. Mr Shepheard has no other connection to the Group. The areas covered by the evaluation were Board responsibilities, oversight, Board meetings, support for the Board, Board composition, the Board working together (as a unit) and the outcomes and achievements.
The external evaluation involved one-to-one interviews with the Chairman and individual Directors.
The results of the evaluation were positive and it was concluded that the Board and its Committees continue to be effective. It was found that the Board has a clear understanding of its role, discussion at meetings is open and rigorous and there is enough time to discuss strategic issues. A written report of the evaluation was produced by the independent evaluator and circulated to all Directors. The key themes and the areas for further development were then discussed at a Board meeting in February 2015.
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 needs. No issues arose which would prevent the Chairman from recommending the reappointment 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 During the year Richard Gillingwater, Chairman of the Remuneration Committee and Senior Independent Director, led an engagement process with the largest shareholders on proposed changes to the Company’s remuneration practices in relation to its Executive Directors. This had led to restrictions being applied to the Company’s remuneration policy. Further details are set out on page 49.
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. The Executive Director most recently appointed to the Board, Richard Watson, attended meetings with shareholders during the year. All Directors attended the Annual General Meeting in 2014. 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.
Accountability and internal control The Directors are responsible for maintaining a sound system of internal control to safeguard the investment made by shareholders and
Corporate governance continued the Company’s assets, and for reviewing its effectiveness.
External auditor The external auditors are invited to attend all meetings of the Committee. It is the responsibility of the Committee to monitor the performance, objectivity and independence of the external auditors. The Committee discusses and agrees the scope of the audit plan for the full year and the review plan for the interim statement with the auditors. The Audit Committee receives reports from external auditors at regular intervals during the audit process including in relation to the judgements outlined above.
Audit Committee report continued without the Executive Directors present so as to provide a forum to raise any matters of concern in confidence.
At a meeting in November 2014, the Committee took the decision to begin a tender process with the aim of having the successful firm in place for the year ending 31 December 2016. One of the members of the Committee, Caroline Foulger, is a former partner of PwC and therefore took no part in that meeting and has absented herself from the tender process.
At the date of the Report, invitations to tender have been issued to two candidate firms and dates scheduled for them to have access to senior management and finance teams. The views of the Group’s major shareholders will be sought during the course of the process. It is planned that a decision will be taken in time for a shareholder vote on the Auditor appointment at the 2016 AGM.
The Hiscox remuneration policy report and the 2014 annual remuneration report are presented in the following pages. In this letter I would like to explain the remuneration decisions which have been made by the Remuneration Committee and how we have taken account of both our remuneration policy and the business context.
Comments on the Hiscox remuneration policy report In the 2013 Report and Accounts we published
Letter to shareholders our remuneration policy report as part of the new disclosure regulations. Our annual report on remuneration attracted a vote for of 97%, reflecting shareholder approval that what we paid to our Executive Directors was appropriate. The remuneration policy report was approved by the majority of shareholders however concerns were raised by many shareholders over certain structural elements.
Addition of holding period for PSP For future PSP awards, Executive Directors will be required to retain (net of tax charges) any shares vesting at the end of the performance period for a further two years (i.e. five years post the date of the start of the performance period).
We have disclosed these changes in the opening page of the attached remuneration policy. Following feedback from shareholders, we have treated the changes as restrictions to our current remuneration policy and the next time we will put our remuneration policy forward for a shareholder vote is expected to be at the 2017 Annual General Meeting.
Bonus awards: Bonus awards for the Executive Directors were set as described in the policy. Aggregate bonuses have reduced from last year’s awards by 9% which reflects a profit and ROE performance which is extremely strong but below 2013.
The Executive Directors continue to execute a business strategy which has delivered a strong set of results in 2014. This, combined with the changes made in our approach to our remuneration policy will, I hope, give shareholders the confidence that we continue to operate remuneration practices which reward superior performance but are also disciplined and aligned with delivery of absolute results.
The Company’s intended forward-looking remuneration policy for Board members is set out on pages 52 to 59. The remuneration policy set out in this report took effect on 15 May 2014.
From January 2015 we intend to operate the following restrictions to our remuneration policy: – Annual bonuses will be capped From the year ended 31 December 2015 the cap on the annual bonus which can be earned by the CEO and CFO for any one year will be 400% of salary. The cap for the Chief Underwriting Officer will be 500% of salary, reflecting the commercial nature of the role.
Base salary, benefits and retirement benefits represent fixed payments for undertaking the role.
Fixed pay elements enable the Company to be competitive in the recruitment market when looking to employ individuals of the calibre required by the business.
For current Executive Directors, a cash allowance (which is currently 10% of salary, less an offset for the employer’s National Insurance contribution) is provided in lieu of the standard employer pension contribution.
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.
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 61 of this report for further details. Where performance is deemed to be below a pre-determined hurdle, payouts will be nil.
Bonus pools are determined based on financial performance, therefore this is the main determinant of overall bonus payouts.
For new hires and changes in role, the Committee may provide reasonable additional benefits based on the circumstances (e.g. travel allowance and relocation expenses).
Bonus above £50,000 and below £100,000 Bonus above €75,000 and below €150,000 Bonus above $100,000 and below $200,000 £50,000, €75,000, $100,000 paid shortly after the end of the financial year in which the bonus was achieved. Balance of bonus split 50% to be paid after year two (i.e. 24 months after the start of the bonus year), and 50% after year three (i.e. 36 months after the start of the bonus year).
Dividends (or equivalents) may accrue on vested shares prior to release. Further details on this are set out on page 57. Unvested awards are subject to a malus provision. Further details on the malus provision are set out on page 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.
The performance conditions for awards are set to align with the long-term objectives of the Company.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. Details of targets for awards to be granted in 2015 are set out on page 62.
For delivery of the threshold hurdle up to 25% of the relevant award will vest. For full vesting, the stretch hurdle needs to be met in full. Usually, there will be straight-line vesting for performance between the threshold and stretch hurdle.
Under the plan rules the Committee is able to modify performance criteria for outstanding awards on the occurrence of certain events (e.g. major disposal), provided that such adjustment is fair and reasonable and the adjusted condition is no more difficult to satisfy.
Participants are able to (subject to any local tax/legal/regulatory restrictions) draw deferred bonuses early for the following reasons: –payment of the exercise price on the exercise of employee share options; – payment of tax on share awards (e.g. on exercise of performance shares); – purchase of shares; and –payment of debt due on share purchases.
Deferred awards are subject to a malus provision. Further details on the malus provision are set out on page 57 of this report.
The total aggregate fees payable are set within the limit specified by the Company’s Bye-laws. The fees paid are determined by reference to the skills and experience required by the Company as well as the time commitment associated with the role. The decision-making process is informed by appropriate market data. Non Executive Directors are not eligible for participation in the Company’s incentive plans. Travel and other reasonable expenses incurred in the course of performing their duties are reimbursed to Non Executive Directors. Non Executive Directors are included on the directors and officers’ indemnity insurance.
The current fees payable to Non Executive Directors are set out on page 63.
Min On target Maximum Min On target Maximum Min On target Maximum 25%2,985
Fixed reward (i.e. base salary, benefits and retirement benefit). –Salary with effect from 1 April 2014 – Benefits as received during 2014, as disclosed in the Executive Director remuneration table on page 60.
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. The maximum award reflects the incentive caps described at the beginning of this report. – PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 54. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
Above target performance Fixed reward plus variable pay for the purpose of illustration as follows. – Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and CFO
and 500% of salary for the CUO. –PSP: assumes vesting of 100% of the maximum award.
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.
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2014 and how it will be applied for the 2015 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 2014 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: Executive Director salaries increased by 5% as part of the annual April 2014 review. This was consistent with overall UK-based employee salary increase. Salaries will next be reviewed as part of the annual April 2015 review and will be in line with the overall UK-based employee salary increases.
Junior and mid-level employees also participated in a Personal Performance Bonus scheme. Awards under this scheme are based entirely on individual performance ratings. It is designed to ensure that employees in these roles continue to be motivated to perform their roles well, irrespective of overall Group performance. The benefit is up to 10% of relevant salaries. For the avoidance of doubt, Executive Directors did not participate in the Personal Performance Bonus Scheme.
In 2014 the Group achieved a pre-tax profit of £231.1 million compared with £244.5 million in 2013. This resulted in a pre-tax return on equity of 18.2% and as such aggregate bonuses awarded to the Executive Directors have reduced from last year’s awards by 9% which reflects a profit and ROE performance which is extremely strong but below 2013.
The following table shows the average Executive Director bonus as a percentage of salary versus return on equity performance and demonstrates how we have applied our policy of paying bonuses which are proportionate to results. As can be seen from the table, the bonuses vary significantly with performance from year-to-year.
The performance conditions for this award are as follows: Required average post-tax ROE over the three-year performance period
In line with the remuneration policy, 50% of the 2014 bonus will be deferred over a period of two years. Receipt of these deferred amounts is normally subject to continued service.
Bonus awards for the 2015 financial year The bonus return on equity Hurdle Rate has been reviewed as described above and will remain unchanged for the 2015 financial year at 7%.
SJ Bridges, BE Masojada and RC Watson hold lifetime allowance protection certificates and have therefore opted out of the Company pension scheme. They receive a 10% cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. The value of this benefit is shown in the Executive Director remuneration table on page 60.
Non Executive Directors receive an annual fee in respect of their Hiscox Ltd and subsidiary board appointments. Fees were reviewed for the 2014 financial year but were not increased. Where 2014 fees differ from 2013 it is due to either an exchange rate conversion or a change in role as described in the notes section above. Fees are currently being reviewed for the 2015 financial year and any changes will be disclosed in the 2015 annual report on remuneration.
As detailed in last year’s Director’s remuneration report, the outstanding performance share awards for RS Childs from 2012 will vest in line with the scheme rules following the end of the three-year performance period ending 31 December 2014. This award relates to the period when RS Childs served as an Executive Director and Chief Underwriting Officer.
*Following the share capital consolidation on 19 March 2014, the nominal value of the Ordinary Shares changed from 5 55/89p to 6p.
Share options The interests of current Executive Directors under the approved and unapproved share option scheme are set out below: Number of options at 1 January
Performance Share Plan The interests of current Directors under the Performance Share Plan are set out below: Number of awards at
External Non Executive Directorships No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest. The consent of the Chairman is required in any event. During the year BE Masojada held directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd and Heptagon Assets Ltd. He was not remunerated for his services. SJ Bridges held directorships on the Board of Caledonia Investments plc, he does not retain the annual fee of £45,500 for his services. He also sits on the Audit Committee of the Institute of Chartered Accountants in England and Wales and is not remunerated for his services. RC Watson was appointed as a Director of White Oak Underwriting Agency Limited on 11 June 2014. He is not remunerated for his services.
Total shareholder return (%) Hiscox FTSE Non Life Insurance FTSE All Share
Relative importance of the spend on pay The chart below shows the relative movement in profit, shareholder returns and employee remuneration for the current and prior financial year. Shareholder return for the year incorporates the distribution made on behalf of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits.
Financial results The Group achieved a pre-tax profit for the year of £231.1 million (2013: £244.5 million). Detailed results for the year are shown in the consolidated income statement on page 75, and also within the Group financial performance section on pages 22 and 23.
Dividends An interim dividend of 7.5p (net) per ordinary 6p share (2013: 7p, per ordinary 5 55/89p share (net)) was paid on 17 September 2014 in respect of the year ended 31 December 2014. The Directors are recommending the return of capital to shareholders through an issue of E/F Shares and this will be considered at an Extraordinary General Meeting to be held on 25 March 2015. It is proposed that in place of a final dividend a sum equal to 15.0p per ordinary share will be payable to shareholders as part of the return of capital. An amount equivalent to 14.0p 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 25 February 2014.
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 24 to the consolidated financial statements. The ordinary shares of 6p each are the only class of shares presently in issue and carry voting rights. There is power under Bye-law 45 of the Company’s Bye-laws for voting rights to be suspended if calls on shares are unpaid. However, there are no nil or partly paid shares in issue on which calls could be made. The Bye-laws also allow the
The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2014.
Corporate responsibility Information on environmental, employee and community issues including details of the Company’s policies are set out in the corporate responsibility statement on pages 33 to 35. This also includes disclosure of greenhouse gas emissions.
Company to investigate interests in its shares and apply restrictions including suspending voting rights where information is not provided. No such restrictions are presently in place. The Company was authorised by shareholders at the 2014 Annual General Meeting to purchase in the market up to 10% of the Company’s issued ordinary shares. No shares have so far been bought back under this authority.
Separate resolutions for the appointment of Lynn Carter and Anne MacDonald as additional Non Executive Directors will be put to shareholders at the Annual General Meeting. The process surrounding these appointments is described on page 44. Biographical details of the two prospective Non Executive Directors and the reasons why the Board believe they should be appointed will be set out in the circular which will accompany the notice of Annual General Meeting.
Annual General Meeting The notice of the Annual General Meeting, to be held on 20 May 2015, will be contained in a separate circular to be sent to shareholders. This will be despatched following the Extraordinary General Meeting to be held on 25 March 2015. The deadline for submission of proxies is 48 hours before the meeting.
By order of the Board Jeremy Pinchin, Secretary, Wessex House, 45 Reid Street Hamilton HM12, Bermuda
74 Independent auditors’ report 75 Consolidated income statement 75 Consolidated statement of comprehensive income 76 Consolidated balance sheet 77 Consolidated statement of changes in equity 78 Consolidated statement of cash flows 79 Notes to the consolidated financial statements 128 Five-year summary 73Financial summary Hiscox Ltd Report and Accounts 2014
We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 75 to 127 which comprise the consolidated balance sheet as at 31 December 2014, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
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 2014 to be audited are free from material misstatement.
We review whether the corporate governance statement reflects the Company’s compliance with the ten provisions of the 2012 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.
Income Gross premiums written 4 1,756,260 1,699,478 Outward reinsurance premiums (412,850) (328,364)
Profit for the year 216,152 237,758 Other comprehensive income Items never reclassified to profit or loss: Remeasurements of the net defined benefit liability (22,759) 9,775 Income tax relating to components of other comprehensive income 5,470 (2,865)
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations 34,019 (2,030) Income tax relating to components of other comprehensive income – –
Total comprehensive income for the year (all attributable to owners of the Company) 232,882 242,638
Property, plant and equipment 15 29,497 20,219 Investments in associates 16 10,670 7,754
The consolidated financial statements were approved by the Board of Directors on 2 March 2015 and signed on its behalf by: RS Childs Chairman
Final dividend equivalent – – (47,423) – – (47,423) – (47,423) Shares issued in relation to Scrip Dividend
Share consolidation and sub-division (1,032) 1,032 – – – – – – Shares purchased by Trust – – – – (10,593) (10,593) – (10,593) Acquisition of DirectAsia 33 – – – – – – 866 866 Shares issued in relation to Scrip Dividend
Profit before tax 231,075 244,538 Adjustments for: Interest and equity dividend income (45,146) (42,571) Interest expense 6,418 7,176 Net fair value gains on financial assets (12,121) (14,847) Depreciation, amortisation and impairment 14, 15 12,857 9,650 Charges in respect of share-based payments 9, 24 14,439 12,523 Profit from sale of subsidiaries – (1,536) Other non-cash movements (497) 925 Effect of exchange rate fluctuations on cash presented separately 6,740 491
Changes in operational assets and liabilities: Insurance and reinsurance contracts 174,158 70,576 Financial assets carried at fair value (171,076) (170,817) Financial liabilities carried at fair value 6,880 (72) Other assets and liabilities (27,943) (527)
Proceeds from the issue of ordinary shares 24 2,743 4,123 Shares repurchased 24 (10,593) – Distributions made to owners of the Company 24, 32 (197,466) (220,219)
Cash and cash equivalents at 1 January 564,375 657,662 Net increase/(decrease) in cash and cash equivalents 93,016 (92,796) Effect of exchange rate fluctuations on cash and cash equivalents (6,740) (491)
Consolidated statement of cash flows For the year ended 31 December 2014
Consolidated statement of cash flows Hiscox Ltd Report and Accounts 2014
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the US with over 1,800 staff.
The financial statements were approved for issue by the Board of Directors on 2 March 2015.
The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.
2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity.
The Group has financial assets and cash of over £3.2 billion, excluding the assets held by the Kiskadee Diversified and Select Funds. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
The Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.
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 2014, and have been applied in preparing these consolidated financial statements.
to the definitions of assets and liabilities in the Framework for the Preparation and Presentation of Financial Statements. The Group may also recognise intangible items not previously recognised by the acquired entity such as customer relationships.
IFRIC 21: Levies Charged by Public Authorities on Entities that Operate in a Specific Market IFRIC 21 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 has not had a material impact on the financial statements.
The Group is in the process of analysing the impact of these standards on its consolidated financial statements. –IFRS 9: Financial Instruments – IFRS 9: Amendment: Financial
– Annual Improvements to IFRSs 2.3 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled 2 Significant accounting policies continued 2.2 Basis of preparation continued Changes in accounting policies continued
Notes to the consolidated financial statements continued by the Group. Control exists when the Group has power over an entity, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases.
Hiscox Dedicated Corporate Member Limited (‘HDCM’) underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and 3624). As at 31 December 2014, HDCM owned 72.5% of Syndicate 33 (2013: 72.5%). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements.
of its deemed cost, which represents the amount recorded under previous generally accepted accounting principles.
(c) US state authorisation licences State authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Board considers that economic benefits will accrue to the Group over an indefinite number of future periods due to the stability of the US insurance market. The licences are tested annually for impairment, and any accumulated impairment losses recognised are deducted from the historical cost amount to produce the net balance sheet carrying amount. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
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
In respect of acquisitions prior to this date, goodwill is included on the basis
Euros, those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars, Hiscox Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars. Functional currencies of entities operating in Asia include US Dollars, Hong Kong Dollars, Singapore Dollars and Thai Baht.
(a) Financial assets at fair value through profit or loss A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with documented strategy, if acquired principally for the purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no 2 Significant accounting policies continued 2.6 Intangible assets continued
premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (premiums earned) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk provision’). Any DAC written-off as a result of this test cannot subsequently be reinstated.
2.12 Revenue Revenue comprises insurance and reinsurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of fair value movements on derivative instruments not formally designated for hedge accounting treatment. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales-based taxes collected on behalf of third-parties. Profit commission is calculated and accrued based on the results of the managed syndicate.
(b) Recognition and measurement Gross premiums written comprise 2 Significant accounting policies continued 2.10 Derivative financial instruments continued
the approved and unapproved share option schemes, and the Group’s performance share plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes.
are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses. Plan assets exclude any insurance contracts issued by the Group. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions 2 Significant accounting policies continued
reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
The third-party investment in the Kiskadee Funds is measured at fair value.
modeling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; – monitoring legal developments and amending the wording of policies when necessary; – regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; – examining the aggregated exposures in advance of underwriting further large risks; and – developing processes that continually factor market intelligence into the pricing process.
i) Underwriting risk The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk, seeking to exploit identified opportunities in the light of other relevant anticipated market conditions. Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: – regularly updating the Group’s risk models; – documenting, monitoring and reporting on the Group’s strategy to manage risk; – developing systems that facilitate the identification of emerging issues promptly; – utilising sophisticated computer 2 Significant accounting policies continued 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 Board exercises oversight of the development and operational implementation of its risk management policies and procedures, and ongoing compliance therewith, partially through its own enquiries but primarily through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in common with the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2013
3 Management of risk continued 3.1 Insurance risk continued i) Underwriting risk continued experience data and the locations of the assets covered, and the individual levels of security taken by owners, are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
The Group’s home and contents insurance contracts are exposed to weather and climatic risks such as floods and windstorms and their consequences. As outlined earlier the frequency and severity of these losses do not lend themselves to accurate prediction over the short-term. Contract periods are therefore not normally more than one year at a time to enable risks to be regularly repriced.
and major asset policies is different to that typically contained in the other classes of property (such as private households and contents insurance) covered by the Group.
Other property risks The Group provides home and contents insurance, together with cover for artwork, antiques, classic cars, jewellery, collectables and other assets. The Group also extends cover to reimburse certain policyholders when named insureds or insured assets are seized for kidnap and a ransom demand is subsequently met. Events which can generate claims on these contracts include burglary, kidnap, seizure of assets, acts of vandalism, fires, flooding and storm damage. Losses on most classes can be predicted with a greater degree of certainty as there is a rich history of actual loss
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 highfrequency, 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 man-made 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.
Geographic focus Specific UK mandates 47 42 Global mandates 53 58
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2014 would have been expected to reduce Group equity and profit after tax for the year by approximately £22.6 million (2013: £19.9 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
(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 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.
Valuation of these securities will continue to be impacted by external market factors including default rates, rating agency actions, and liquidity. The Group will make adjustments to the investment portfolio as appropriate as part of its overall portfolio ii) Reserving risk The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 26.
Despite the rigorous nature of this assessment exercise, and the resultant restricted range of reinsurance counterparties with acceptable strength and credit credentials that emerges therefrom, some degree of credit risk concentration remains inevitable.
flow stream to be recovered, where the weightings involved are based on the discounted present values of each cash flow. A closely related concept, modified duration, measures the sensitivity of the instrument’s price to a change in its yield to maturity. Convexity measures the sensitivity of modified duration to changes in the yield to maturity.
The Group’s maximum exposure to credit risk is represented by the carrying values to fall and vice versa if credit spreads remained constant.
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 assets in the Group’s balance sheet at 31 December 2014 was £2,526 million (2013: £2,336 million). These may be analysed below as follows: Nature of debt and fixed income holdings
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a duration-convexity-based sensitivity analysis, if market interest rates had risen by 100 basis points at the balance sheet date, the Group equity and profit after tax for the year might have been expected to decrease by approximately £36 million (2013: £31 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets.
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2014 and 2013.
Reinsurance inwards 143,946 71,902 71,750 24,377 311,975 Property – marine and major assets 79,272 46,400 50,942 17,770 194,384 Property – other assets 86,444 56,704 18,449 4,924 166,521 Casualty – professional indemnity 165,465 173,795 220,867 92,612 652,739 Casualty – other risks 43,700 35,999 64,639 31,183 175,521 Other* 47,906 16,078 19,214 15,207 98,405
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statement. Further details of the impact of the accounting treatment are provided in note 12.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2014 Sterling
Employee retirement benefit obligations 4,366 – – – 4,366 Deferred tax 75,946 – – – 75,946 Insurance liabilities 670,049 1,499,514 345,130 94,428 2,609,121 Financial liabilities – 229 – – 229 Current tax 32,332 – 51 – 32,383 Trade and other payables 115,136 159,734 23,542 5,726 304,138
Sensitivity analysis As at 31 December 2014, the Group used closing rates of exchange of £1:€1.28 and £1:$1.56 (2013: £1:€1.20 and £1:$1.65). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
As at 31 December 2014 Effect on equity after tax £m
£nil million respectively) to support general trading activities; – external Names – 27.5% of Syndicate 33’s capacity is capitalised by third-parties paying a profit share of approximately 20%; – Syndicate 6104 at Lloyd’s – with a capacity of £72 million for the 2014 year of account (2013 year of account: £66 million). This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s international property catastrophe reinsurance account; – gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and – qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes.
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2014 year of account for Syndicates 33 and 3624 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
Financial strength The financial strength ratings of the Group’s significant 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 of the Group. The Group maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
light of changes in economic conditions and the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
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 re-secured during 2014 by the Company’s subsidiary Hiscox plc. The Letter of Credit availability period ends on 31 December 2015. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2014, 2015 and 2016 years of account. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2014 US$441.5 million was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings (2013: $333 million and
(g) Limitations of sensitivity analysis The sensitivity information given in notes (a) to (f) above demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are nonlinear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented at note 30 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
3.3 Capital risk management The Group’s primary objectives when managing its capital position are: – to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; – to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; –to maintain an efficient cost of capital; – to comply with all regulatory requirements by a significant margin; and – to maintain financial strength ratings of A in each of its insurance entities.
4 Operating segments The Group’s operating segment reporting follows the organisational structure and management’s internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. During 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines.
The 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 these requirements.
The following charges are included within the consolidated income statement: Hiscox Retail
The Group’s wholly-owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. The Group’s percentage participation in Syndicate 33 can fluctuate from year-to-year and, consequently, presentation of the results at the 100% level removes any distortions arising therefrom.
At 100% level (note 4b) 1% change in claims or expense ratio 8,089 4,273 2,293 – 7,284 3,889 3,181 –
Year to 31 December 2014 Year to 31 December 2013 restated
4 Operating segments continued (c) Segmental analysis of assets and liabilities continued
Profit for the year (all attributable to owners of the Company) 216,152 237,758 Opening shareholders’ equity 1,409,461 1,365,366 Adjusted for the time-weighted impact of capital distributions and issuance of shares (142,812) (134,580)
Investment income including interest receivable 45,146 42,571 Net realised (losses)/gains on financial investments at fair value through profit or loss (1,055) 2,391 Net fair value gains on financial investments at fair value through profit or loss 12,264 13,962
Investment result – financial assets 8 56,355 58,924 Fair value (losses)/gains on derivative financial instruments 21 (143) 885
Debt and fixed income securities 36,714 1.5 17,105 0.7 Equities and shares in unit trusts 17,604 7.6 39,289 18.3 Deposits with credit institutions/cash and cash equivalents 2,037 0.4 2,530 0.5 9 Other revenues and operational expenses
Interest and expenses associated with bank borrowings 1,931 2,457 Interest and charges associated with Letters of Credit 34 3,894 4,050 Interest charges on experience account 593 669 11 Auditors’ remuneration Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group
Amounts receivable by the auditor and associates in respect of: The auditing of the accounts of any associate of the Group 1,201 966 All audit-related assurance services 189 80 All non-audit-related assurance services 88 88
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereas resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
Closing balance sheet impact of non-retranslation of non-monetary items 1,608 (4,790)
13 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses/(gains) arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
All intangible assets have a finite useful life except for the Syndicate capacity and goodwill.
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a Weighted Average Cost of Capital (WACC) for the Group of 6.6% (2013: 6.8%), has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is written down to this amount.
In 2013, the £65,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement. There was no impairment for 2014.
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 the WACC rate. Key assumptions include new business growth, retention rates, market cycle and claims inflation. The results of that test show no impairment is due.
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 2014.
The net book value of capitalised internally generated software costs at 31 December 2014 was £37,565,000 (2013: £26,961,000). There are no charges for impairment during the current or prior financial year.
The Group’s land and buildings assets relate to freehold property in the UK.
Assets with a net book value of £nil were held under finance leases (2013: £nil).
Additions during the year 2,103 – Disposals during the year (416) (900) Net profit/(loss) from investments in associates 1,229 (400)
Associates incorporated in the UK from 25% to 35% 67,657 48,671 28,540 2,589 Associates incorporated in Europe from 25% to 49% 1,935 1,114 2,625 257
During 2013, the Group disposed of its holding in Senior Wright Indemnity Ltd. During 2014, the Group acquired a 10.6% holding in White Oak Underwriting Agency Limited as well as a 10% holding in Carl Rieck GmbH for a total consideration of £2,103,000 as referred to in note 33.
Reinsurers’ share of insurance liabilities 526,085 459,603 Provision for non-recovery and impairment (740) (781)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 20). The Group recognised a gain during the year of £41,000 (2013: £217,000) in respect of previously impaired balances.
In 2014 and 2013, the Group participated 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 $2.1 million were ceded to the entity (2013: $3.3 million).
Gross receivables arising from insurance and reinsurance contracts 482,641 422,405 Provision for impairment (2,131) (1,282)
Due from contract holders, brokers, agents and intermediaries 349,955 302,820 Due from reinsurance operations 130,555 118,303
Prepayments and accrued income 9,068 6,754 Other loans and receivables: Net profit commission receivable 25,116 18,905 Accrued interest 9,448 9,463 Share of Syndicates’ other debtors’ balances 12,952 12,192 Other debtors including related party amounts 19,165 24,982
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £1,941,000 (2013: loss of £77,000) as included in note 7. The opposite exchange gain is included within financial investments. There was no initial purchase cost associated with these instruments.
22 Fair value measurements In accordance with IFRS 13: Fair Value Measurement, the fair value of financial instruments, based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value, is provided below.
Financial liabilities Third-party investment in Kiskadee Funds – – 7,033 7,033 Derivative financial instruments – 76 – 76
Fair value gains or losses through profit or loss* 2,920 1,725 4,645 (589) Foreign exchange gains/(losses) 284 1,246 1,530 (408)
The cash held by special purpose vehicle consists of underlying interests held by the Kiskadee Funds which are consolidated by the Group but in which the Group has an interest of less than 100%. The remaining interests are held by third-party investors and included in the consolidated balance sheet as financial liabilities in accordance with IAS 32.
Authorised ordinary share capital of 6p (2013: 5 55/89p) 40,000 666,666,667 40,000 712,000,000 Issued ordinary share capital of 6p (2013: 5 55/89p) 19,913 331,873,654 20,854 371,215,489
The authorised but unissued ordinary share capital was also used to create and issue the C/D Shares in 2014. There are no C/D Shares outstanding or in issue at 31 December 2014 as all shares have been redeemed or cancelled.
On 24 February 2014, the Group announced its intention to return approximately £178 million of share capital, which included a final dividend equivalent of 14.0p per share, £49,728,000, to shareholders by way of a C/D Share issue. This was also combined with a consolidation of Hiscox’s existing shares as described overleaf and was subsequently approved by the shareholders at an Extraordinary General Meeting held on 18 March 2014.
There were no C/D Shares outstanding at 31 December 2014 as all shares have been redeemed and cancelled. Total capital of £175,812,000 has been returned to shareholders, of which £35,000 has been charged against share premium and the remaining £175,777,000 has been charged against retained earnings. An additional £1,789,000 of C Shares were distributed to the Employee Benefit Trust. The amount is not reported as a distribution as the trust forms part of the consolidated result.
To ensure the return of capital maintained the net tangible asset per share pre and post the return of capital, a share consolidation was also performed. Each existing ordinary share in Hiscox Ltd was subdivided into 89 ordinary shares of par value 500/7921p each and then these were further subdivided so that 100 of such shares were consolidated into one new share of 6 2474/7921p. Finally the 6 2474/7921p share was split into one new ordinary share of 6p and one deferred share of 2474/7921p. The deferred shares carried almost no economic benefit and no voting rights and had no value. The deferred shares were purchased and cancelled by the Group on 9 April 2014.
Employee share option scheme – ordinary shares issued 1,236 2,458 Scrip dividends to owners of the Company 32 271 324 Share consolidation as a result of the special capital distribution (40,848) (45,636)
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 £14,439,000 (2013: £12,523,000). This comprises charges of £13,968,000 (2013: £12,158,000) in respect of performance share plan awards and £471,000 (2013: £365,000) 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.
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2014 2013
Annual risk-free rates of return and discount rates (%) 1.09-1.32 0.32-0.78 Long-term dividend yield (%) 4.46 4.67 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 20.5 27 Weighted average share price (p) 684.9 570.5
The weighted average fair value of each share option granted during the year was 122.0p (2013: 112.9p). The weighted average fair value of each performance share plan award granted during the year was 688.5p (2013: 568.0p).
The Group purchased its own shares during 2014 for a net amount of £10,593,000 and placed them in the Trust for future utilisation on vesting of performance share plan awards (2013: £nil).
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2014 and 2013 are not material.
For all risks, the Group uses several statistical methods to incorporate the various assumptions made into the ultimate cost of claims. There is close communication between the actuaries involved in the estimation process and the Group’s underwriters to ensure that all parties are aware of material factors relating to outstanding claims reserves. Adjustments are made within the claims reserving methodologies to remove distortions in the historical claims development patterns from large or isolated claims not expected to reoccur in the future. An allowance is also made for the current rating and inflationary environment.
Claims reported and claim adjustment expenses (825,017) 129,134 (695,883) (829,548) 146,946 (682,602) Claims incurred but not reported (1,142,847) 239,185 (903,662) (1,023,514) 213,000 (810,514)
Total claims and claim adjustment expenses (645,145) 113,477 (531,668) (572,440) 53,161 (519,279)
Share of Syndicates’ other creditors’ balances 3,212 8,230 Social security and other taxes payable 9,782 14,764 Subscriptions received in advance 169,928 4,848 Other creditors 11,968 8,052
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 65,537 65,950 Adjustments in respect of prior years (3,365) 6,475
Deferred tax Credit for the year (45,633) (49,865) Adjustments in respect of prior years (811) (7,500) Effect of rate change (805) (8,280)
S1013 CTA 2009 deduction and share-based payments (64) 3 Non-taxable income (892) (1,360) Prior year tax adjustments (4,176) (1,025)
Trading losses in UK entities 789 589 – 1,378 Trade and other payables 4,363 (119) – 4,244 Intangible assets – Syndicate capacity 2,328 (173) – 2,155
† 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.
30 Employee retirement benefit obligations The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the Trustee and are held separately from those of the Group. 61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme is recorded and the recovery from the third-party names for their share of the Syndicate 33 recharge is shown as a separate asset.
Interest cost on defined benefit obligation 8,309 7,700 Interest income on plan assets (8,589) (6,934) Interest expense on effect of onerous liability 496 –
Net interest cost 216 766 Administrative expenses and taxes 444 234
Total expense recognised in operational expenses in the income statement 9 660 1,000
Remeasurements Effect of change in demographic assumptions – 6,975 Effect of change in financial assumptions 44,976 (3,982) Effect of experience adjustments – – Return on plan asset (excluding interest income) (6,587) (25,287) Changes in asset ceiling/onerous liability (excluding interest income) (11,049) 10,553 Remeasurement of third-party Names share of defined benefit obligation (4,581) 1,966
Net defined benefit liability at end of year 26,744 3,635 Third-party Names’ share of liability 5,422 731
Additional memorandum information at the end of the current and previous six accounting periods is presented below: Present value of scheme obligations 227,375 179,479 173,420 155,685 146,737 140,676 101,615 Fair value of scheme assets (195,209) (185,666) (156,513) (140,517) (144,056) (118,391) (115,166)
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: years 2013 years
The weighted average duration of the defined benefit obligation at 31 December 2014 was 26.2 years.
Discount rate 3.7 4.7 Inflation assumption (RPI) 3.0 3.4 Inflation assumption (CPI) 2.0 2.4 Pension increases 3.0 3.4
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 scheme was estimated to be fully funded on the trustee’s statutory funding objective, as such the trustees and the Group agreed to put in place a new schedule of contributions effective from 20 August 2014. Under this Schedule no future deficit correction contributions are currently required, therefore the onerous obligation for 31 December 2014 is nil. The Group paid £200,000 to the scheme for the expenses of the fund (2013: £200,000). The scheme is currently in an overall surplus position, on an actuarial basis, at the balance sheet date.
Diluted earnings per share has been calculated after taking account of 13,527,726 (2013: 15,131,711) options and awards under employee share option and performance plan schemes and 787,419 (2013: 728,284) options under SAYE schemes.
Interim dividend for the year ended: 31 December 2014 of 7.5p (net) per share 23,469 – 31 December 2013 of 7.0p (net) per share – 24,746
Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 25 March 2015, the Board proposes to pay 15.0p per ordinary share instead of a final dividend for the year ended 31 December 2014. Together with the interim dividend of 7.5p per ordinary share, this represents a total dividend for 2014 of 22.5p per ordinary share. In addition, the Board proposes to pay a special distribution of 45.0p per ordinary share. Such amounts will be paid by way of a E/F Share Scheme. A scrip dividend alternative will not be offered to shareholders.
The contingent consideration reflected on page 124 of £470,000 represents the current fair value estimate of the expected additional consideration that may be payable to the seller. The contingent consideration is payable based on DirectAsia exceeding certain revenue targets during the first four years post the acquisition.
The assets and liabilities arising from the acquisition are as follows: Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014
Property, plant and equipment 670 – 670 Reinsurance assets 4,678 – 4,678 Loans and receivables, including insurance receivables 5,113 – 5,113 Cash and cash equivalents 32,184 – 32,184
34 Contingencies and guarantees The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
34 Contingencies and guarantees continued be drawn in a currency other than US Dollar. At 31 December 2014 US$441.5 million (2013: US$333 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2013: £nil).
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2013: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s, the arrangement is collateralised with cash of £50,000 (2013: £50,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 9,082 7,883 Office equipment 276 330
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 191 395 Later than one year and no later than five years – 180 Later than five years – –
Obligations under finance leases There were no finance lease arrangements in place at 31 December 2014 or 31 December 2013.
Finance lease interest expense for the year was £nil (2013: £nil).
36 Events after the balance sheet date On 27 February 2015, the Group acquired R&Q Marine Services Ltd (‘RQMS’) for a consideration of £7,375,000 plus a further amount contingent on the business generating levels of gross premiums written over the next 12 months. RQMS are a managing agent specialising in yachts and general marine leisure which underwrites on behalf of other insurers.
**Hiscox Holdings Limited held 43,216 shares in Hiscox Ltd at 31 December 2014 (2013: 48,558).
38 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2014 on pages 60 to 68. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
Financial assets carried at fair value 2,828,847 2,585,054 2,406,269 2,368,636 2,459,107
Cover image: Smoke from our ‘elements of risk’ series, looking at the causes of destruction in what we believe is a thought-provoking and beautiful way.