Why ownership is so important to us Taking ownership means making it your business. It means being passionate, curious and restless, always looking for a better way of doing things. We strive to be the kind of people who take responsibility, are ambitious, accountable, pragmatic, tenacious and proudly high-achieving.
6 Our response to Covid-19 8 Our purpose, values, culture and vision 10 Our strategy and how we operate 12 Key risks and business priorities 14 Why invest in Hiscox?
17 Owning our understanding of the cyber risk 18 Chairman’s statement 21 Chief Executive’s report 34 Capital 36 Risk management 40 Stakeholder engagement 42 Environmental, social and governance (ESG)
51 Owning the Hiscox view of risk 52 Board of Directors 54 Senior management 56 Chairman’s letter to shareholders 57 Corporate governance 63 Compliance with the UK
Our key performance indicators (KPIs) The global pandemic impacted on profitability in 2020, but digitisation and exceptional commitment from our employees helped to deliver good underlying performance and our usual service levels.
Chapter 1 3 A balanced business Our key performance indicators (KPIs)
Extended cover in some lines such as home and motor, provided premium refunds for event insurance customers, waived 30-day cancellation periods for commercial insurance policyholders, and offered a range of financial concessions including payment holidays.
IT home-working tips, additional training and drop-in sessions quickly upskilled employees on safe and secure remote working – from setting up new devices to using new tools for video conferencing and staying connected.
“The mental health training made you reflect about your own well-being, as well as the well-being of your team, and gave me tools that I can have confidence will work.”
Retained all current roles during 2020; did not furlough staff or access any UK, USA or European government support schemes.
“We are grateful to Hiscox USA for helping us nourish our frail-aged neighbours during this difficult time.”
Established new partnerships with organisations that aim to improve SME access to funding and critical business resources, including Business in the Community in the UK and The Women’s Business Development Center in the USA.
Set up a ‘donate your commute’ initiative to encourage employees to use their commuting time to work to practically support a cause close to their heart.
Donated over $9 million to a range of good causes, helping some of those most affected by the global pandemic.
Established four distinct workstreams, led by Executive Committee members, to manage our response, focused on operating effectively, underwriting exposure and customer service through claims, financial flexibility and resilience, and working with regulators and governments.
“We began preparing our IT systems in January 2020 for the potential transition from our usual c.600 remote workers per week to over 3,000, and it paid off – with little to no systems downtime.”
Redeployed 27 employees to provide additional frontline support to ensure we could continue to effectively serve our customers at a time of increased demand.
Led the Bermuda reinsurance market in supporting the Bermuda Education Network by providing computers for home-schooling for over 300 children, and in raising more than $550,000 for Bermuda’s King Edward VII hospital.
“Being in the business of risk means managing claims surges. Whether those surges are the result of a flood, a hurricane, or as we saw this year, a global pandemic, we have established and repeatable structures and processes for handling claims during large loss events.”
Our purpose, values, culture and vision We have had a strong set of values for decades which, along with our purpose, culture and vision, connect us to the business, our customers and each other.
We periodically review our purpose, values, culture and vision to ensure they are still true to the business and fit for the future. Our values are incredibly important to us; we are guided by them and we work hard to make sure they are lived, not paid lip service to. By doing so, we become a business that our customers can relate to, and we provide employees with a work environment in which they can flourish. In our 2020 annual global employee engagement survey, which was completed by almost 2,500 employees, 90% said they believe in our corporate values, 83% said employees are treated fairly regardless of disability, age or professional background, and 77% said they felt proud to work for Hiscox.
Our purpose As experts in risk, we give people and businesses the confidence to realise their ambitions.
Our culture We work hard to nurture our culture, and it is something we regularly measure and monitor to ensure we keep it alive. In 2020, we began designing new office space with our distinctive culture in mind and embodying our values of ownership, connected and human. Examples of this from our Bermuda and London offices can be seen in the images to the right. We are also establishing exciting new ways of working that balance both flexibility and collaboration and support our desire to attract and retain the best talent.
A truly international business As the nature of risk evolves, we want to be diversified in both the range of insurance we write and its geographical spread. Our business is truly international, with over 3,000 staff across 14 countries and 35 offices and a portfolio of products and services that reach every continent. We are one of the few insurers to cover every size of business, from one-man-bands right up to the largest multinationals; an approach which means we can adapt to market conditions and which gives us opportunities for profitable growth throughout the insurance cycle.
A strategy of balance Hiscox’s long-held strategy ensures we are not overly reliant on any one of our divisions for the Group’s overall profits. We maintain a balance between big-ticket business – the larger premium, globally traded and catastrophe-exposed lines written through Hiscox London Market and Hiscox Re & ILS – and the smaller premium, locally traded, relatively less volatile business written through Hiscox Retail. In our big-ticket businesses, we shrink and expand according to the pricing environment. In retail, where our specialist knowledge differentiates us, we target growth of 5-15% per annum and invest in brand-building to continually strengthen our market position.
View a breakdown of our big-ticket and retail business for 2020.
Chapter 1 3 A balanced business Our strategy and how we operate
Customers – true to our word We invest in creating a customer-focused ethos and a powerful differentiated brand that our target customers identify with.
Our people – a great place to work for the hard-working, ambitious and talented The quality of our people is a crucial factor in our continuing success. Their expertise, courage and dedication drive our reputation for quality and professionalism. In return, we strive to provide them with a work environment in which they can flourish.
Key risks and business priorities As an insurance business, understanding and managing risk is part of our DNA. This is how we will balance risk and opportunity in 2021.
Underwriting risk The risk that insurance premiums prove insufficient to cover future insurance claims and associated expenses. Likely causes include failing to price policies adequately for the risk exposed, making poor risk selection decisions, allowing insurance exposures to accumulate to an unacceptable level, or accepting underwriting risks outside of agreed underwriting parameters. This includes people, process and system risks directly related to underwriting, such as human error in paying invalid claims or misquoting premium prices.
Credit risk The risk of a reinsurance counterparty being subject to a default or downgrade, or that for any other reason they may renege on a reinsurance contract or alter the terms of an agreement. The Group buys reinsurance as a protection, but if our reinsurers do not meet their obligations to us, this could put a strain on our earnings and capital and harm our financial condition and cash flows. Similarly, if a broker were to default, causing them to fail to pass premiums to us or pass the claims payment to a policyholder, this could result in Hiscox losing money.
Market risk The threat of unfavourable or unexpected movements in the value of the Group’s assets or the income expected from them. It includes risks related to investments – for example, losses within a given investment strategy, exposure to inappropriate assets or asset classes, or investments that fall outside of authorised strategic asset allocation or tactical asset allocation limits.
Read more on how we manage key risks in note 3.
Chapter 1 3 A balanced business Key risks and business priorities
We are becoming a more digital business, having invested $500 million in technology over the last five years. In 2021, we will look to realise these efficiencies in order to seize the significant digital opportunity ahead, and begin our claims transformation journey. We will also focus on rigour in execution; rebalancing our global versus local capabilities to ensure we have the right knowledge in the right place, embedding consistent and repeatable processes, and pooling resources to benefit from our growing scale. This will result in some simplification within the business to improve the speed of decision-making and delivery.
Chapter 6 113 Financial summary compound GWP growth over the last ten years in big-ticket business.
compound GWP growth over the last ten years in Hiscox Retail.
A focus on creating sustainable and compounding shareholder returns We aim to achieve this by balancing consistent capital returns to our shareholders with reinvesting excess capital into our business to ensure sustainable growth in the medium to long term. The challenging operating environment over the past 12 months has resulted in the Board’s decision to suspend dividend payments. However, the Board believes that as our business delivers the 2021 business plan and as profits flow through, it may be in a position to consider paying a dividend with the 2021 interim results.
Why invest in Hiscox? A balanced business which provides opportunities throughout the insurance cycle.
We are a growing company and you need to grow with us.
Chapter 2 17 A closer look 18 Hiscox Ltd Report and Accounts 2020
For Hiscox UK, Covid-19 brought about a dispute with a number of our customers over the wording in some commercial property policies. Our commitment to putting things right for our customers has long been the cornerstone of the Hiscox brand. But for the first time, our reputation for paying claims quickly and without fuss came under intense scrutiny. We regret any dispute with a customer, but particularly where
Chapter 2 17 A closer look Chairman’s statement 19Hiscox Ltd Report and Accounts 2020
Over the years, we have employed some of the best minds in the industry, but like any business we must work hard to continue to attract and retain good people. I am immensely proud that in 2020 we welcomed over 300 new talented and ambitious individuals across the Group. Starting a new job during lockdown cannot be easy, and we have found new ways to welcome them.
Diversity and inclusion We are committed to creating a diverse and inclusive workplace and an environment where all employees are supported and can thrive. Under the leadership of Kate Markham, Hiscox London Market CEO and Group Executive Sponsor for D&I, we are improving the gender balance at all levels through a combination of key performance indicators, training, networking, mentorship and partnerships such as the Insurance Supper Club and the Independent Women in Insurance Network. This progress is reflected in our improved gender pay gap for the UK, and more diverse succession pipelines with at least one female successor for every leadership team role.
This work will continue in 2021, along with a sharpened focus on ethnicity and race as we look to make further progress against the action plans put in place this year in support of the #WeStandTogether movement.
the policy wording was not as clear as it should have been. That is why we willingly agreed to be one of the group of insurers that assisted the FCA with the test case and we welcome the finality and certainty the Supreme Court Judgment has brought. We are now paying covered claims as quickly as possible.
In the face of unprecedented economic uncertainty, prudent capital management is critical to ensure we are able to continue to serve our customers, pay valid claims and grow where opportunity permits. We have taken a range of proactive actions, both before the onset of the pandemic and since, to further strengthen Hiscox’s robust balance sheet and position us for growth.
In our first quarter 2020 trading statement, we announced an equity placing for up to 19.99% of our issued share capital to support growth opportunities and rate improvements in the US wholesale and reinsurance markets. This placement was successful and we raised £375 million. I would like to thank our shareholders for their support during a challenging time.
The Group remains strongly capitalised against both our regulatory and rating agency requirements, and we are able to withstand a combination of severe downside scenarios including an active hurricane season.
People Without the resilience of our 3,000 employees across the globe, we would not have overcome this challenging year. I would like to take this opportunity to thank everyone for their dedication, flexibility and, most of all, their hard work.
“Disciplined underwriting over the last three years as we weeded out underperforming business has meant that we are very well placed to take advantage of the improving conditions.”
We can look forward with confidence as some normality returns globally in 2021 and we continue to focus on providing excellent service during these difficult times in all our markets.
“In all segments we have benefited from our multi-year investment in new technology and digital tools, including new underwriting platforms, quote and buy systems, robotics and APIs.”
Chief Executive’s report 2020 is a year few of us will forget as we all adapted to the impact of Covid-19 on our societies, our businesses and our lives. Adaptability and resilience were core to weathering the storm and few of us are untouched by the human tragedies it has caused.
Like many others, Hiscox adjusted well to the challenges of working from home, operating effectively to serve our customers and brokers, and contributing to our local communities. We established new partnerships to increase small business access to essential services and funding in both the UK and the USA, and supported a number of charitable endeavours – donating over $9 million to good causes around the world. These included foodbanks, mental health and well-being charities, hospitals, and the Association of British Insurers’ Covid-19 Support Fund. Our ability to do all of this was due to the hard work and dedication of our staff, who were all the while dealing with their own personal Covid-19 challenges. I would like to thank them all for their tremendous efforts this year.
Against a backdrop of sharp economic contraction across the markets in which we operate, the Group has maintained its revenues at $4.0 billion. Hiscox London Market has had a stellar year, growing its revenues by 5.7% to $1.0 billion, delivering a 93.7% combined ratio and profits of $97.2 million. Hiscox Retail grew by 3.2% to $2.3 billion and, excluding Covid-19 claims, delivered a combined ratio, within our guidance, of 97.7% and profits of $162 million. Including Covid-19, Hiscox Retail’s combined ratio is 120.0% and it made a pre-tax loss of $237.6 million. Our direct and partnerships business across the world grew by 15% with total revenues approaching $600 million as we benefited from the ongoing structural shift to digital. Hiscox UK maintained its revenues at $756.1 million. The good performance in these segments offset the reduction in revenue in Hiscox Re & ILS as it showed discipline at last January’s renewals, before benefiting from price rises in the rest of the year.
Hiscox’s 2020 performance, while understandable, is not satisfactory. We have worked hard to address underperforming segments in our business through our Decile 10 action plans, and equally to grow our top-performing lines through our quartile 1 focus. The performance of Hiscox London Market shows the positive impact of these plans.
As we look into 2021, we see two trends which will benefit Hiscox. The first is the dramatic digital acceleration which will benefit our direct and partnerships business, as well as our London Market business where we bound over 90% of our risks through Lloyd’s PPL platform in 2020 and already trade $75 million through digital means with brokers and coverholders not located in London. The second is the rating environment that will drive strong return to profit by our London Market and Re & ILS businesses. This, in turn, will allow us to drive growth in our Retail division, making use of the inherent strength of our balanced business. It is this strategy that will position Hiscox to benefit from the generational shift to digital trading. This will allow us to serve more customers more effectively and the whole of Hiscox to prosper.
Paying claims in a fair and fast manner is part of our DNA. We have reserved $475 million for Covid-19 claims across all lines. Claims teams across the Group mobilised and delivered for our clients. The Group’s largest share of Covid-19 losses is for event cancellation and abandonment, where Hiscox proactively sold communicable disease cover, and many of these claims have already been paid.
We clearly regret the uncertainty and anguish that the dispute has caused to our customers, so it is important that we learn from this experience. The most important lesson is the need for clarity in wordings, to ensure intent is properly reflected in the policy detail. In addition, the customisation of policies has to be restricted to ensure that there is not a long tail of wordings serving very small numbers of customers. In 2021, we have commenced a series of initiatives aimed at addressing these issues.
Hiscox Retail Hiscox Retail comprises our retail businesses around the world: Hiscox UK, Hiscox Europe, Hiscox USA, Hiscox Special Risks and Hiscox Asia. In this segment, our specialist knowledge and retail products differentiate us and our ongoing investment in brand, distribution and technology helps us build a strong market position in an increasingly digital world.
Hiscox Retail’s 2020 result is a loss of $237.6 million (2019: profit of $169.2 million) and a combined ratio of 120.0% (2019: 99.3%). This result has been materially impacted by Covid-19. Excluding the impact of Covid-19 claims, Hiscox Retail delivered profits of $162 million, the combined ratio is at 97.7%, which is in line with our guidance.
At the end of 2020 and in 2021, we are making two changes to improve the focus of Hiscox Retail. In late 2020, we restructured our Special Risks division, integrating its activities with Hiscox Europe, Hiscox USA and Hiscox
Over the past five years the digitally traded direct and partnerships segment has grown to be an increasing and more attractive part of Hiscox USA’s business and it is where we see long-term growth opportunity. To accelerate this strategic shift, we have taken a decision to reshape our broker channel book, by exiting liability business for customers with revenues over $100 million as well as all broker channel stand-alone general liability business. We will also reshape our cyber book to respond to adverse ransomware trends. These actions will result in a reduction of up to $100 million in the USA broker channel which will be partially offset by continued strong growth in digital direct and partnerships business.
The combined effect of these changes will result in a one-time circa $200 million reduction in Retail premiums. In addition, these changes together with more cautious loss picks adopted for 2021 to reflect the uncertain economic environment, and the inevitable time taken to address fixed costs as a result of this premium reduction, will mean our goal of reaching 90% to 95% Retail combined operating ratio range is expected to take to 2023. For 2021, we expect the Hiscox Retail combined ratio to be broadly in line with the 2020 result, excluding Covid-19 claims. We then expect an improving trajectory to 2023 as higher rates are recognised and the portfolio and expense management actions start to earn through.
Chapter 2 17 A closer look Chief Executive’s report 25Hiscox Ltd Report and Accounts 2020
Hiscox Europe Hiscox Europe insures high-value household, fine art and classic cars and commercial insurance for small- and medium-sized businesses.
Germany remains the key engine of Hiscox Europe. Our German business was the largest contributor to premiums in the region and delivered very healthy growth of 15%, thanks to a strong performance in commercial lines, technology and cyber. Benelux also delivered strong double-digit growth, supported by a strong performance in Belgium, which grew 16%.
Spain and Ireland both experienced mid-single digital premium growth. In Spain, we continue to focus on successful partnerships with banks and other carriers, as well as technology and insurtech companies.
Hiscox USA Hiscox USA underwrites small- to mid-market commercial risks through brokers, other insurers and distribution partners and directly to businesses online and over the telephone. Gross written premiums grew by 2.6% to $887.1 million
Hiscox UK Hiscox UK provides commercial insurance for small- and medium-sized businesses, media, events and entertainment as well as high net worth personal lines, fine art and luxury motor.
Hiscox UK’s commercial business, both direct and through the broker channel, has been the key driver of this performance. The business had strong growth in the first two months of the year, despite the headwinds caused by the IR35 tax changes which affect our direct commercial client base. We shrank between March and June due to the reduced level of business activity during the first lockdown. As the economy started to re-open over the summer period, we saw signs of recovery in July and August which has continued, and our direct commercial business had some of the strongest months in its history in November and December.
Our high net worth personal lines and fine art business has proven resilient. Revenues have been challenged as the team showed discipline on broker commissions. We also faced losses from Storms Dennis and Ciara in February as well as a large, individual fine art loss. We simplified our business by selling RH Specialist vehicle insurance as the cross-sell opportunities were fewer than expected. Our media, entertainment and events lines have faced real challenges; not only due to pandemic-related losses, but also as a result of dwindling media production and events activity.
(2019: $865.0 million). Planned reductions were made in the broker channel in private company D&O and media to improve our book, and these were offset by continued strong growth in our direct and partnerships small commercial business. This channel grew revenues by 22.7% in the year to $337.7 million and now insures approximately 430,000 customers. Our operations have proven to be robust in the face of the pandemic. Despite the lockdown we continued to deliver excellent uninterrupted service, taking nearly one million calls with 80% answered within 20 seconds.
Hiscox Special Risks wrote $127.8 million in premiums, broadly in line with the prior year period (2019: $129.9 million). Existing business retention has been strong and while we have experienced heightened ransomware claims, this has been mitigated by reinsurance.
Our Special Risks products are increasingly purchased by our clients as part of a broader suite of crisis management products and to reflect this shift, we are moving to a geographic distribution-led approach. Under the new structure, locally-written kidnap and ransom business in the USA and Europe will be written through the respective Retail businesses, while a newly-created crisis management division within Hiscox London Market will handle business written in Guernsey, Miami and London. All business units will continue to work closely with long-time partner and market-leading response firm Control Risks.
Hiscox Asia Our brand in Asia, DirectAsia, is a direct-to-consumer business operating in Singapore and Thailand that sells predominantly motor insurance.
In this challenging year, DirectAsia grew its written premiums by 26% to $48.2 million. Thailand posted an exceptional 58% growth, with Singapore delivering a respectable 10% increase, despite the extended Covid-19 lockdowns which seriously impacted its travel and partnerships business. Thanks to this growth, underwriting discipline and diligent management, DirectAsia has seen a significant improvement in its combined ratio.
Chapter 2 17 A closer look Chief Executive’s report 27Hiscox Ltd Report and Accounts 2020
Hiscox London Market is also making steady progress in its own digital initiatives. These plans have two strands. The first is through supporting the Lloyd’s market initiatives, where we bound over 90% of our risks through PPL, the Lloyd’s market digital platform. The second involves digital trading with brokers and coverholders not located in London. FloodPlus allows us to price risks in real-time with US coverholders, managing aggregate and pricing on a day-to-day basis, especially important when a river is in flood. Across all lines we traded almost $75 million of business through non-traditional digital means. Our medium-term ambition is to grow this steadily to $250 million. We see this as a critical step to allow Hiscox London Market to concentrate most of its underwriting talent in London, while using digital tools to unlock growth opportunities around the world.
In 2021, Hiscox London Market will benefit from the continuing hardening market. Thanks to Syndicate 33’s stamp capacity of £1.7 billion we have sufficient headroom to do this. We will judiciously increase our aggregate exposures, with most growth coming from rates. As a result, we expect London Market growth in 2021 in mid to high single digits delivered at improving margins. The compounding impacts of rate and portfolio improvements in recent years will, we believe, drive attractive multi-year profitability.
2020 saw gross written premiums reduce by 14.2%, to $743.4 million (2019: $866.5 million), driven by a disciplined approach to price inadequacy at the start of the year. This includes $15.1 million of reinstatement premiums (2019: $87.2 million). Hiscox Re & ILS made a loss of $35.1 million (2019: loss of $107.6 million). Excluding Covid-19 claims it made a profit of $28.4 million; this is a good result considering the high frequency of North American catastrophe and weather-related events in 2020 and adverse developments in exited healthcare and casualty business.
Hiscox London Market Our London Market business is the star performer of 2020. It continues to use the global licences, distribution network and credit rating of Lloyd’s to insure clients throughout the world. The team’s focus over the past several years has been on improving portfolio quality in a rising market so growth is modest at 5.7%, taking gross written premiums to $1,023.4 million (2019: $967.9 million). A focus on quality has been rewarded with profits of $97.2 million (2019: $23.3 million) and a net combined ratio of 93.7%, a 11.9% improvement on 2019. More importantly, we have delivered an underwriting profit of $40.7 million (2019: loss of $26.3 million), even after including $13 million of Covid-19-related losses.
Gross premiums written 743.4 866.5 Net premiums written 192.7 216.7 Underwriting profit (67.7) (144.7)†
During the year we have been reshaping the book to focus where we see the most opportunity. In US property catastrophe and excess of loss, we adjusted the portfolio away from the more capital-intensive nationwide covers and Florida programmes. In the international catastrophe book, we secured rate increases of 16% in Japan, in line with an updated view of typhoon risk which reflects two active years for Japanese windstorm losses. Net exposure in our retrocession book was up 65% as we sought to take advantage of rate improvements of over 20%.
In 2020, Hiscox ILS assets under management declined slightly to $1.4 billion (2019: $1.5 billion). The slight reduction on the previous year is mostly due to redemptions we reported last year.
The high quality of the Hiscox claims experience has been recognised by brokers in the London Market and across the UK. The Lockton Claims Survey ranked Hiscox as the number one performer out of 37 peer insurers. AON’s 2020 ‘Voice of the Client Claims Insights Global’ rated Hiscox’s net promoter score as 15th best out of 475 participating insurers. Hiscox was also one of just two insurers to be awarded five stars in Insurance Times’ 2020 Personal Lines Ratings.
Asset allocation Bonds 71.7 Cash and cash equivalents 20.7 Risk assets 7.6
Bond credit quality Gvt 19.9 AAA 7.5 AA 15.7 A 29.0 BBB 26.0 BB and below 1.9
We continue to look through ongoing volatility to steadily invest into positions where valuations present attractive long-term risk and capital adjusted outcomes.
Capital and balance sheet strength Hiscox’s approach to capital management is to ensure our balance sheet is sufficiently robust to absorb large shocks, whether due to insurance losses or economic stress, while maintaining the financial flexibility to seize opportunities as they arise.
At the end of the year, the Hiscox Group estimated a regulatory solvency ratio of 190%, after absorbing our 2020 loss and the second stage of the Bermuda Monetary Authority’s strengthening of its solvency regime. Over the period 2019 to 2021 the Bermuda Solvency Capital basis is being strengthened, resulting in higher capital requirements; to the end of 2020 this has had a zero percentage point impact on the Hiscox coverage ratio. The final stage of basis strengthening will occur in 2021 and is expected to reduce the coverage ratio by 10-15 percentage points. This basis strengthening is expected to be funded by organic capital generation. We remain A-rated by S&P and A.M. Best and A+ by Fitch.
As Hiscox has grown organically, we have often introduced complexity to win every piece of business and handle every customer need. This means we have too many legal entities, too many wording variations, too many sub-scale business relationships and too many suppliers. Under the rubric of the Hiscox simplification programme we are addressing these and other unnecessary complexities in 2021. We expect the savings generated will help deliver on our plan to reduce our expense ratio by 1% a year over the next two-to-three years. It will also ensure our business is easier to manage and control.
Investments We manage our investment portfolio with two main objectives in mind: providing sufficient liquidity to pay claims and providing capital to support the underwriting business, while generating strong risk-adjusted returns. Despite the turbulence of 2020, the portfolio strategy helped us navigate the volatile markets well. The investment returns for 2020 were very robust at $198 million (2019: $223 million) after investment expenses, a return of 2.8% (2019: 3.6%).
After a difficult start to 2020 we saw a significant improvement in market sentiment in the second half of the year. Incremental additions to risk assets during the depths of the crisis have performed well and helped boost returns for the year. Encouraged that the end of the pandemic is in sight, the assets of the most affected sectors of the economy surged on the expectation that economic activity may improve markedly in 2021. We have subsequently taken profits in some of our risk asset positions.
“Our current capital position is sufficient to support our 2021 business plan, allowing us to take advantage of the hardening market in our big-ticket businesses.”
Our current capital position is sufficient to support our 2021 business plan, allowing us to take advantage of the hardening market in our big-ticket businesses. These businesses already have scale, and as can be seen from Hiscox London Market’s 2020 result, a judicious balance of exposure increases, portfolio optimisation and compounding rate rises leads to attractive returns. We anticipate that the strong return to profit of our big-ticket businesses will allow us to drive growth in our retail business. This makes use of the inherent strength of our balanced business and allows us to position Hiscox to benefit from the generational shift to digital trading in the small business sector around the world.
In the face of the uncertainty arising from Covid-19 and the losses it generated, the Board took the decision not to pay a 2019 final or 2020 interim dividend. In view of the full year loss and a desire to have capital to deploy into a strong market, the Board has also taken the decision not to pay a 2020 final dividend. The Board believes that as our business delivers the 2021 business plan and as profits flow through, it will, subject to approval at the time, resume paying dividends with the 2021 interim results.
Hiscox is a member of ClimateWise, a constituent of CDP, the Dow Jones Sustainability Index and FTSE4Good, and our assets are managed by firms that are aligned with the UN-supported Principles for Responsible Investment. We are committed to being a sustainable business and will ensure that our business practices continue to evolve to support the transition to a net-zero world.
Our staff are involved in a myriad of environmentally-focused activities. These include beach clean-ups in Bermuda, creating virtual reality experiences that allow our brokers to experience a Category 5 hurricane, promoting recycling initiatives in our offices, and establishing new partnerships that detect water leaks early; thereby reducing water wastage in customer’s homes. I am proud of these efforts, and more information on them is available in our 2020 climate report on our corporate website. This complies with our Task Force on Climate-related Financial Disclosure obligations.
We also took additional steps to support our employees this year. WeMind, Hiscox’s mental health and well-being employee network, has been very active, providing new mental health training and expert webinars and promoting the services of our in-house mental health first aiders. Our other employee networks, such as our Parents and Caregivers network, have also found new ways to connect and collaborate.
Finally, in 2020, we launched an updated Hiscox Group Governance Framework which clarified interactions, expectations and decision making across Hiscox Ltd, the Group and business units. This structure will prove useful to ensure that the Group acts in concert and clear prioritisation can be taken, with individual Boards having ownership and accountability for critical decisions in a challenging time and ensuring compliance with local regulatory expectations.
We continue to attract talent at all levels, including through our graduate scheme in the UK, USA and Germany and our UK summer intern programme which changed to a virtual programme in 2020. We are pressing ahead with similar programmes for 2021, with a focus on reaching new and diverse talent pools. Hiscox has a diverse set of leaders at the Executive Committee, business unit CEO and functional leader level, but this wanes in the middle ranks. We are committed to addressing this both through adapting our internal processes and through partnerships in the UK
Outlook In 2021, we expect to see the benefits of our balanced business strategy asserting itself in a proactive manner after the past four years where the benefits have been mostly defensive. In 2017-2019, profits in our Retail business offset the pressures of the bottom of the cycle faced by Hiscox London Market and Hiscox Re & ILS. In 2020, Hiscox London Market’s stellar performance supported by profits in Hiscox Europe and Hiscox Special Risks and better-than-expected investment returns, mitigated the impact of the pandemic.
In 2021, I expect our big-ticket businesses to perform well, thanks to the increased capital allocated to them, their judiciously positioned portfolios, and the benefit of compound rate increases. Hiscox London Market and Hiscox Re & ILS are in their best markets for almost half a decade and their focus is on driving profits over maximising scale. This will provide good returns for shareholders and allows our Retail businesses to navigate the economic uncertainties within their respective countries of operation.
Chapter 2 17 A closer look 34 Hiscox Ltd Report and Accounts 2020
The Group measures its capital requirements against its available capital, which is defined by the Group as the total of net tangible asset value and subordinated debt. The subordinated debt issued by the Group is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements. At 31 December 2020 available capital was $2,431 million (2019: $2,276 million), comprising net tangible asset value of $2,055 million (2019: $1,912 million) and subordinated debt of $376 million (2019: $364 million).
The Group can source additional funding from its borrowing facilities which comprise a revolving credit and Letter of Credit facility as well as a Tier 1 Funds At Lloyd’s facility. Standby funding from these sources comprised $946 million (2019: $800 million), of which $524 million was utilised as at 31 December 2020 (2019: $50 million).
The Group manages the underwriting portfolio so that in a 1-in-200 aggregate bad year it will lose no more than 12.5% of core capital plus 100% of buffer capital ($135 million), with an allowance for expected investment income. A market loss of this magnitude would be expected to bring about increases in the pricing of risk, and the
Group’s capital strength and financial flexibility following this scenario means we would be well positioned to take advantage of any opportunities that might arise as a result.
Chapter 2 17 A closer look Capital 35Hiscox Ltd Report and Accounts 2020
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of projected year-end 2020 results. Hiscox uses the internally developed Hiscox integrated capital model to assess its own capital needs on both a trading (economic) and purely regulatory basis. All capital requirements have been normalised with respect to variations in the allowable capital in each assessment for comparison to a consistent available capital figure. The available capital figure comprises net tangible assets and subordinated debt.
The Hiscox businesses are rated ‘A’ by A.M. Best and S&P and A+ by Fitch. Read more in note 3 to the financial statements.
Read more about our financial condition in our financial condition report hiscoxgroup.com/about-hiscox/ group-policies-and-disclosures
The Group’s core business is to take risk where it is adequately rewarded, guided by a strategy that aims to maximise return on equity within a defined risk appetite. The Group’s success is dependent on how well we understand and manage our exposures to principal risks.
The risk management framework is underpinned by a system of internal control, which provides a proportionate and consistent system for designing, implementing, operating and assessing how we manage our key risks. This framework is regularly reviewed and enhanced to reflect evolving practice on risk management and governance. Over 2020, we continued to embed and strengthen our system of internal control.
Risk appetite The risk appetite sets out the nature and degree of risk the Group is prepared to take to meet its strategic objectives and business plan. It forms the basis of our exposure management and is monitored throughout the year.
Second line of defence Assesses, challenges and advises on risk objectively
“Given the rapid pace of change during 2020, I am pleased that the robust risk management and governance framework we have established over the years – along with the discipline we have embedded in the business – served us well. This meant we were able to respond and adapt quickly, maintaining resilient operations and making timely risk-based decisions even in such unusual circumstances.”
The Risk Committee relies on frequent updates from within the business and from independent risk experts. At each of its meetings during the year, the Risk Committee reviews and discusses a risk dashboard and a critical risk tracker which monitors the most significant exposures to the business, including emerging risks and risks that have emerged but are evolving. The Risk Committee also engages in focused reviews. Stress tests and reverse stress tests (scenarios such as those shown in the chart opposite, which could potentially give rise to business failure as a result of a lack of viability or capital depletion) are also performed and reported on to the Risk Committee. During 2020, the Risk Committee actively tracked the changing risk landscape and potential impacts to the Group’s risk profile.
In light of these arrangements, the Directors are satisfied that a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity, has been carried out during the year and no material changes to the principle risks are required.
The role of the Group risk team The Group risk team is responsible for designing and overseeing the implementation and continual improvement of the risk management framework. The team is led by the Chief Risk Officer who reports to the Chief Executive, the Risk Committee of the main Board and to those of the relevant subsidiary boards.
This chart shows a modelled range of net loss the Group might expect from any one catastrophe event. The white line between the bars depicts the modelled mean loss.
Chapter 2 17 A closer look 40 Hiscox Ltd Report and Accounts 2020
Regular investor dialogue We maintain regular dialogue with our shareholders beyond the financial reporting cycle, predominantly via our Chief Financial Officer and investor relations, who meet with existing shareholders, potential investors and research analysts, and participate in industry conferences and roadshows. During 2020 they conducted over 300 meetings and met with over 130 investors.
Annual General Meeting (AGM) Our AGM provides another regular investor touchpoint. At the 2020 AGM all resolutions were passed, with votes in favour ranging from 88% to 100%.
Workforce engagement Our annual employee engagement survey gives all our employees the opportunity to provide honest feedback on how they feel about Hiscox. We also have an employee engagement network, led by our Employee Liaison and Non Executive Director, Anne MacDonald. For more, see page 48.
Training and development All employees have access to internal and external resources to help drive their own learning and development, as well as two formal opportunities each year to discuss development needs and potential.
Communication updates Employees receive regular updates on business plans and performance through emails and newsletters, intranet articles, team meetings and Company-wide ‘connected’ events.
UK Living Wage We believe a hard day’s work deserves a fair day’s pay, which is why we are an accredited UK Living Wage employer.
Attending key broker events We participate in key broker events in every part of our broker-facing business. This includes: BIBA, a UK insurance and broker conference; the CIAB, a US marketplace meeting for commercial property and casualty brokers and insurers; and, in our big-ticket business, Monte Carlo, Baden Baden, and RIMS.
Shareholders Our shareholders value our consistent strategy, successful track record of delivery, strong underwriting discipline and sound capital management, and we maintain ongoing engagement with them.
Chapter 2 17 A closer look Stakeholder engagement 41Hiscox Ltd Report and Accounts 2020
Research and insight We talk to thousands of customers each year, through surveys, focus groups and other qualitative research, which helps us to continually improve our offering. We also measure our customer service by collecting feedback after they have contacted our service centre, bought a product or made a claim. For more, see page 5.
Vulnerable customers We have an established team of 20 vulnerable customer champions in the UK, whose work is supported by tailored policies and procedures for those customers that are identified as vulnerable.
Cover during Covid-19 In response to Covid-19, we extended cover in some lines such as home and motor, provided premium refunds for event insurance customers, waived 30-day cancellation periods for commercial insurance policyholders, and offered a range of financial concessions including payment holidays. These changes resulted in more frequent communications with our customers in 2020.
Supervisory co-operation In 2020, our Group supervisor the Bermuda Monetary Authority (BMA) hosted a supervisory college, which included nearly all of the Group’s regulators worldwide. This is an important annual opportunity for us to present a consistent message to our regulators on issues of common interest, so seven members of our senior management team participated in the session.
Scenario analysis and stress testing We maintain a regular cycle of stress testing and scenario analysis to ensure we manage risk well and evolve at the same pace as the risks we cover. We also continue to participate in regulator-led exercises such as the biennial General Insurance Stress Test (GIST) – facilitated by the UK’s Prudential Regulation Authority – which was last completed in 2019.
Regulatory reporting The Group and its subsidiaries met all material regulatory reporting obligations for 2020.
Customers We have over 1.3 million retail customers worldwide and providing each of them with products they can rely on is what we are here for.
“We have built strong relationships with our distribution partners, and this year we found new ways to work and engage with them. Virtual meetings, social and educational events proved popular, with more than 25,000 participants attending our webinars across Europe during 2020. Our technology investments in recent years, including in broker extranet sites, also made it easier for our brokers to do business with us, and resulted in more than 60% of small commercial business being traded online.”
R ob us t i nt er na l co nt ro ls
, p ol ic ie s an d pr oc ed ur es
ESG measurement Our ESG efforts are measured both internally and externally. Externally, we participate in a number of key ESG indices and we report against Task Force on Climate-related Financial Disclosures (TCFD)-aligned principles in our annual climate report.
We carefully manage our environmental impact and work with our customers, suppliers and business partners to respond to the changing climate. For Hiscox, this means looking at our operations and how we can reduce waste – water, electricity and other consumption – helped by our growing network of green teams. It also means investing in areas such as research, catastrophe modelling and new technologies that improve our underwriting capabilities and benefit our brokers and customers.
Exposure reduction commitments to support move to low-carbon economy (Re)insurers have a role in ensuring an orderly transition to a low-carbon economy and we want to play our part. Our aim is to reduce steadily and eliminate by 2030 our insurance, reinsurance and investment exposure to coal-fired power plants and coal mines; Arctic energy exploration, beginning with the Arctic National Wildlife Refuge; oil sands; and controversial weapons such as land mines. These ambitions form our new Group-wide ESG exclusions policy, which aligns with the Lloyd’s ESG ambitions published in December 2020.
Embedding rhythm and accountability in our approach to climate change We take a strategic, holistic and long-term approach to managing the risks arising from climate change, considering the potential impact to all aspects of the Group’s risk profile and balance sheet. During 2020, we further formalised our approach; ensuring that physical, transition, liability and reputational risks arising from climate change, and their potential impacts, are monitored, managed and owned across the business via repeatable cycles of activity and considered over a range of business planning time frames, while also taking into account wider market and regulatory trends. We have established a cycle of reporting to the Executive Committee and Board on climate-related issues, and appointed two senior managers with regulatory responsibility for managing the financial risks from climate change onto our relevant UK boards. We have also held a number of Board informational sessions on climate change during 2020, where current exposure to – and management of – climate change risks were discussed. We will continue to develop and embed our approach and legal-entity specific plans further in 2021.
Evolving the Hiscox view of risk for Japanese windstorm Following several active years for Japanese windstorms, which inflicted sizable market losses, in 2020 we undertook a fundamental reappraisal of windstorm risk in the region. This meant looking at our evolving knowledge of the peril and its potential impact on catastrophe models – with a particular focus on hazard, vulnerability, data quality, and climate change. This is particularly important as the granularity of the available exposure data in the region does not compare favourably to the data available in other parts of the world – for example in the USA, where it is customary to use location-level information. This reappraisal enabled us to gain insights on model behaviour at various scales, including the potential effects of ‘urban canyons’ – the wind tunnels created in urban areas as a result of tall buildings – and the role that climate change can play in our understanding of current Japanese windstorm risk. Each new event provides us with a new data point with which to update the Hiscox view of risk and the 2018 and 2019 Japanese windstorm events have – along with this reappraisal – enabled us to evolve our modelling approach and as a result improve underwriting performance in this line of business.
We achieved a 20 percentage point increase in our ClimateWise score for 2020, where we disclosed against TCFD-aligned principles.
Supporting ethnic diversity and social justice We strive to be an inclusive employer and to create workplaces where employees feel they can be themselves regardless of their background. Following the death of George Floyd and the ensuing protest movement, we responded with a number of initiatives aimed at demonstrating our commitment to racial and social justice. In the USA, we donated to noteworthy charities like the Equal Justice Initiative and National Cares Mentoring Movement, piloted a diverse talent development programme specifically aimed at African-Americans, and enhanced our unconscious bias training programme for managers. We also empowered our US employees by giving them $100 each to spend at a black-owned business of their choice. In the UK, we launched a new chapter of our Pan-African employee network, which led our inaugural celebration of UK Black History Month with a keynote speaker and kickstarted a programme of networking and educational opportunities for our UK employees.
Enhancing small business’ access to essential services at a time of need Small businesses have been among those hit hard by the global pandemic, but through new partnerships we have endeavoured to increase their access to essential services, such as access to finance. In the USA, we have teamed up with Accion, which provides capital, coaching and connections to entrepreneurs; the Women’s Business Development Center, which offers technical assistance and financial advisory services including micro-lending to women and underserved communities; and the Women’s Business Enterprise Council, which serves established businesses by providing networking, programming, and financial consulting services. In the UK, we are working with Swoop to improve small business access to funding, and with Business in the Community as part of their National Business Response Network which connects business support with community need, and we have also established the Hiscox Business Support Hub to give our small business customers access to a range of free or significantly discounted services during this time.
Taking the temperature with our global employee engagement survey Each year, we survey our global employee base to find out more about how employees feel about Hiscox, its leadership, their managers and their roles. In 2020, over 2,500 employees responded; 77% told us they felt proud to work for Hiscox, 83% said employees are treated fairly regardless of disability, age or professional background, 90% said they believe in our corporate values, and 91% said they are given the flexibility in their job to manage their work/life balance. In addition, manager effectiveness scores improved six percentage points year-on-year to 81% following a Group-wide effort to improve in this area. Given the events of the year we also asked how well we have managed the change in working environment and supported employees through the pandemic, and 86% said we have managed this well. All these scores will inform our work in 2021 around nurturing talent in new ways, which is one of our business priorities for the year ahead (see page 13).
This year we signed the Race at Work Charter in the UK, furthering our commitment to increase ethnic and racial diversity across our organisation.
86% of employees said we managed the change in working environment well in 2020, and that they felt supported.
“2020 marked my first year as Executive Sponsor for diversity and inclusion and what a year it’s been. We now have 12 employee networks with over 1,700 members, whose passion for progress is fantastic to see. We’re also improving diversity within our succession planning, with at least one female successor targeted for each leadership role; kick-starting our race and ethnicity agenda with new actions plans; and broadening out where we search for talent via new partnerships.”
Kate Markham Chief Executive Officer, Hiscox London Market and D&I Executive Sponsor
As a global insurer, good governance practices are essential to our day-to-day business of serving customers and paying claims. Good governance encompasses not just having the appropriate internal controls, policies and procedures, and structures and oversight; it also requires our 3,000+ staff to be accountable for their actions and empowered to raise their hand if something goes wrong. Naturally it also means complying with the laws and regulations that are relevant to our operations, so as a Bermuda-incorporated company with a UK listing, we comply with the Bermuda Companies Act, UK listing rules and local country laws.
Piloting culture dashboards in our subsidiary boards During 2020, we began piloting culture dashboards across a number of our subsidiaries to allow those boards and leadership teams to create a rigorous and repeatable process for measuring and monitoring culture. Through this approach, we set out a number of culture standards we wish to live by, around themes such as openness, diversity and inclusion, customer-centricity, respectful personal behaviour, operational focus, diligence in risk management, and good leadership. We are then able to assess whether the agreed standards are being met via a list of pre-agreed culture metrics, which measure everything from customer net promoter scores and number of complaints received, to employee engagement scores and gender diversity at every level of the business. Our culture dashboards are reviewed monthly by business unit leadership teams and shared with the relevant subsidiary boards, and the findings are used to inform areas of focus when it comes to maintaining the right culture. In the UK, we also have a culture steering committee that helps drive progress through their monthly meetings to discuss culture indicators, culture strategies and new culture projects.
Monthly cycle of employee training In 2020, employees received a range of mandatory new and refresher training across regulatory issues, information security and learning and development. The 2020 training programme built on the regime introduced in 2019, with modules including cyber security, financial crime, underwriting controls, working in a regulated environment, privacy and reporting regulatory incidents. Given the move to remote working in response to Covid-19, new modules included taking security home, safe web browsing, and staying secure in a connected world.
Governance in a Covid-19 world During a turbulent year, it was important for us to engage more with our shareholders to update them on the evolving situation and reassure them of our response. We held over 30 meetings with shareholders, representing over 70% of our share register. The Board also met more frequently in 2020, with 17 informational sessions to assess our exposures and responses. Their sessions covered all aspects of the pandemic, and updates to the Board included potential loss exposures, our reinsurance programmes, reputation and engagement with regulators. The Board also carefully considered our remuneration approach for such an extraordinary year. Given our remuneration policy is designed to focus on long-term performance and drive long-term shareholder value, no bonuses were paid to Executive Directors in 2020, however personal performance bonuses were paid to frontline staff.
Owning the Hiscox view of risk When it comes to natural catastrophes, understanding how these risks evolve over time is vital when it comes to coverage levels and contract pricing. For three consecutive years (2017-2019), the industry experienced significant loss activity as a result of Japanese typhoons, US hurricanes and California wildfires, and Hiscox Re & ILS was not immune to this. These types of large loss events indicated a trend towards more intense natural catastrophes over time, leading to higher claims frequency and severity – and addressing them required an ownership approach.
We’ll get there by learning and improving just a little bit every day.
Relevant skills, experience and contribution s Extensive knowledge of Hiscox, having worked for the Group for over 30 years. s Significant expertise in insurance cycle management, having worked through unprecedented large loss events such as 9/11 and Hurricanes Katrina, Rita and Wilma.
Robert joined Hiscox in 1986 and has held a number of senior roles across the Group, including Active Underwriter for Syndicate 33 and Group Chief Underwriting Officer, before becoming Non Executive Chairman in February 2013. Robert is also Chair of the Nominations and Governance Committee, the Investment Committee, and the Hiscox Syndicates Limited Board. He joined the Council of Lloyd’s in 2012 and served as Deputy Chairman of Lloyd’s from 2017 to 2020.
Bronek joined Hiscox in 1993 as Group Managing Director and became Chief Executive in 2000. Bronek also sits on the Board of a number of Hiscox subsidiary companies. Prior to that he worked with McKinsey & Company, where he advised Lloyd’s on its renowned Reconstruction and Renewal plan. Bronek also previously served as Deputy Chairman of Lloyd’s and Chairman of the Lloyd’s Tercentenary Research Foundation, and currently serves as a City of London Alderman.
External board appointments Association of British Insurers; Pool Reinsurance Company Limited; Policy Placement Limited.
Executive Director Hamayou Akbar Hussain (Aged 48) Group Chief Financial Officer Appointed to the Board: September 2016
Relevant skills, experience and contribution s Considerable experience of providing strategic, financial and commercial management and in-depth knowledge of the regulatory and compliance environment.
Aki joined Hiscox in 2016 as Group Chief Financial Officer and also sits on the Board of a number of Hiscox subsidiary companies. Aki came to Hiscox from Prudential, where he was Chief Financial Officer of its UK and Europe business. Before that, he held a number of senior roles across a range of sectors, including Finance Director for Lloyds Banking Group’s consumer bank division until 2009. Aki is a Chartered Accountant, having trained with KPMG.
Executive Director Joanne Musselle (Aged 50) Group Chief Underwriting Officer Appointed to the Board: March 2020
Senior Independent Director Colin Keogh (Aged 67) Appointed to the Board: November 2015
Colin has spent his career in financial services, principally at Close Brothers Group plc where he worked for 24 years and served as CEO for seven years until 2009. Colin is also Chair of the Remuneration Committee and of the Hiscox Insurance Company Limited Board.
Independent Non Executive Director Caroline Foulger (Aged 60) Appointed to the Board: January 2013
Caroline is a resident of Bermuda and led PwC’s insurance and reinsurance practice in Bermuda until her retirement in 2012. With a strong background in accounting, she 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 also serves on the Hiscox Insurance Company (Bermuda) Limited and Hiscox Syndicates Limited Boards as a Non Executive Director and is Chair of the Audit Committee.
External board appointments Oakley Capital Investments Limited; Catalina Holdings (Bermuda) Ltd; Generation Life Ltd; General Two Ltd; Atlas Arteria; Ocean Wilsons.
Relevant skills, experience and contribution s Significant knowledge of the Asian insurance market. s Deep understanding of risk management as a trained actuary.
Michael has over 25 years’ experience in the insurance industry, having worked in Australia and the Asia Pacific region for QBE Insurance Group for over 20 years. Michael started his career as an actuary, is a Fellow of the Institute of Actuaries of Australia and served as Vice President of the General Insurance Association of Singapore between 2006 and 2012. Michael also serves on the DirectAsia Board as a Non Executive Director.
External board appointments Partner Reinsurance Asia Pte Ltd; Steadfast Distribution Services Pte Ltd; NCI Brokers (Asia) Pte Ltd; Galaxy Insurance Consultants Pte Ltd; Enya-Lea Pte Ltd; Werombi Pte Ltd.
Relevant skills, experience and contribution s Extensive marketing expertise, particularly in the USA. s Sizable experience in developing well-known global brands.
Independent Non Executive Director Constantinos Miranthis (Aged 57) Appointed to the Board: November 2017
Costas served as President and CEO of PartnerRe Ltd, one of the world’s leading reinsurers, until 2015 and prior to that was a Principal of Tillinghast-Towers Perrin in London, where he led its European non-life practice. A trained actuary, he is a member of the UK Institute and Faculty of Actuaries and a resident of Bermuda. Costas also serves on the Hiscox Insurance Company (Bermuda) Limited Board as a Non Executive Director.
Independent Non Executive Director Lynn Pike (Aged 64) Appointed to the Board: May 2015
Relevant skills, experience and contribution s Strong background in the US financial services sector.
Lynn worked in the US banking industry for nearly four decades, most recently as President of Capital One Bank. Before that, she was President of Bank of America’s small business banking division, a multi-billion-Dollar business with 110,000 clients and over 2,000 employees. Lynn also serves on the Hiscox Insurance Company Inc. Board as a Non Executive Director and is Chair of the Risk Committee.
Senior management Attracting and retaining top talent is important to us, and at a senior management level we have a diverse team whose combination of experience and fresh-thinking provides challenge and drives progress.
Stéphane Flaquet Chief Executive Officer, Hiscox Europe Joined Hiscox: March 2010
Relevant skills, experience and contribution s Considerable legal expertise as a qualified US lawyer.
s Proven track record of building robust global claims functions for retail and big-ticket lines.
Hanna leads our global team of risk and compliance experts, located in our key geographies and jurisdictions. She has Groupwide responsibility for Hiscox’s enterprise risk management and regulatory compliance, and manages our relationships with regulators.
Relevant skills, experience and contribution s Significant global expertise in growing retail businesses throughout the insurance cycle.
s Extensive experience of brand-building and marketing, particularly across Europe and the USA.
Steve has held a number of senior roles throughout Hiscox; Chief Marketing Officer for the Group, CEO of Hiscox UK & Europe, and CEO of the DirectAsia Group. In his current role he is now focused on building our retail business and recognised brand in the USA.
Kate Markham Chief Executive Officer, Hiscox London Market Joined Hiscox: June 2012
s Track record of establishing operational and digital infrastructures that support growth.
James is responsible for the Group’s investment portfolios, implementing overall investment policy and directing all portfolio management, research, trading and strategy. He leads our small in-house team, overseeing asset allocation along with the selection and monitoring of our externally appointed asset managers.
Relevant skills, experience and contribution s Deep expertise in IT strategy, development, engineering, operations, IT change and programme execution.
Ian leads the Group’s technology function, overseeing a team of 700+ colleagues and partners globally. His experience of designing and safeguarding applications and infrastructure in a regulated industry informs our work around customer channels, software development, automation, and information security.
Kathleen Reardon Chief Executive Officer, Hiscox Re & ILS Joined Hiscox: January 2021
Evolving governance structures We have continued to evolve our governance framework and underlying governance structures to meet the needs of our growing business. This year we focused on refining our approach to Board composition reviews as well as the succession planning process for our Non Executive Directors. This supports the established and robust succession processes we have in place for Executive talent reviews.
Additional work was undertaken to ensure the Group governance model is also reflected in our largest subsidiary boards. As a result, we have developed subsidiary-level governance manuals and embedded a repeatable process for updates to subsidiary board composition and Non Executive Director succession planning which is in line with the Group approach.
Anne MacDonald, as our Employee Liaison, is able to share. More information on this is outlined on page 48.
Remuneration Last year we made some changes to our remuneration policy to rebalance the weighting of incentives towards the long term – encouraging an ownership culture and increasing the focus on long-term performance. We continue to evolve our approach, and are proposing to introduce a second measure for the 2021 PSP awards to provide a broader view of our performance. You can read more about this in the letter from the Chair of the Remuneration Committee on pages 76 to 77.
Board composition The Board has responsibility for the overall leadership of the Group and its culture.
The Board comprises the Non Executive Chairman, three Executive Directors, and seven independent Non Executive Directors including a Senior Independent Director. The operations of the Board are underpinned by the collective experience of the Directors and the diverse skills which they bring. Biographical details for each member of the Board are provided on pages 52 to 53. Notable changes during 2020 include Joanne Musselle, Group Chief Underwriting Officer, being appointed to the Board in March 2020. In accordance with the Company’s Bye-laws and the Code, all Directors will seek re-appointment at the 2021 Annual General Meeting and no issues have arisen that would prevent the Chairman from recommending the re-appointment of any individual Director. More information on the role of the Board can be found on pages 52 to 53.
The Hiscox Ltd Board of Directors: s set the Group’s strategic direction, purpose and values and align these with its culture; s oversee competent and prudent management of internal control, corporate governance and risk management; s determine the sufficiency of capital in light of the Group’s risk profile and business plans; and s approve the business plans and budgets.
Corporate governance Our robust governance framework underpins our business model and continues to serve us well, including during the Covid-19 pandemic.
Director role responsibilities To ensure that the Board operates efficiently, each Director has role responsibilities. The role of the Chairman, Senior Independent Director and Chief Executive are distinct to demonstrate the segregation of responsibilities.
Chairman Senior Independent Director (SID) Chief Executive s Leadership of the Board. s Ensuring effective relationships exist between the Non Executive and Executive Directors.
s Ensuring that the views of all stakeholders are understood and considered appropriately in Board discussions.
s Overseeing the annual performance evaluation and identifying any action required.
s Proposing and delivering the strategy as set by the Board.
s Leading the Executive Committee, which delivers operational and financial performance.
s Representing Hiscox internally and externally to stakeholders, including shareholders, employees, government and regulators, suppliers and contractors.
The Board has delegated a number of its responsibilities to its Audit, Nominations and Governance, Remuneration and Risk Committees
Remuneration Committee Risk Committee s Advises the Board on financial reporting.
s Succession planning. s Ensures an appropriate mix of skills and experience on the Board.
s Provides advice, oversight and challenge to embed and maintain a supportive risk culture throughout the Group.
The Nominations and Governance Committee report can be found on pages 68 to 70.
The remuneration report can be found on pages 80 to 93.
Corporate governance oversight The Board operates within an established governance structure to ensure that through the delegations, strategy can be implemented effectively and this is supported by transparent, well informed and balanced decision-making. The Board’s terms of reference include a schedule of matters reserved for Board decision, a copy of which can be found at hiscoxgroup.com/investors/corporate-governance. Each Board committee operates within established written terms of reference and each committee Chairman reports directly to the Board. The matters reserved for Board decision and the committee terms of reference were further reviewed in late 2020 as part of the annual review of terms of reference.
Hiscox Group governance model The Hiscox Group governance model shows the relationship between the Board exercising strategic direction and oversight of the Hiscox Group, and the subsidiary boards’ delivery of their respective entities.
The model is divided into key themes, aligned to the division of responsibilities, and translated into explicit terms of reference for the principal subsidiaries – ensuring alignment to the overall Group approach to values, purpose, culture of risk awareness, ethical behaviour and Group controls.
Board meetings and attendance in 2020 The Group has an effective Board which supports a culture of accountability, transparency and openness. Executive management and the Non Executive Directors continue to work well together as a unitary Board and debate issues freely. The Board culture is congenial; however, both Non Executive Directors and Executive Directors continually challenge each other in order to deliver our shared aim. In the context of unitary Boards, Non Executive Directors provide Executive Directors with support and guidance, not just challenge, and our Non Executive Directors are close enough to the business to do this.
In line with the agreed meeting schedule, the Board held four comprehensive meetings in 2020 (these meetings comprise meetings of the Board and of each of the Committees of the Board). There were additional Board meetings which covered specific topics such as the approval of May’s capital raise, the Company’s response to Covid-19 and the insurance industry test case. During an unprecedented and rapidly evolving period, we also held an additional 17 informational calls between Board meetings. These informational calls provided an opportunity to ensure the Board was kept informed of any business developments and allowed the Directors to monitor exposures, emerging issues and opportunities.
Directors to travel to Bermuda or join the meetings as a result of restrictions on international travel and the airport in Bermuda being closed for periods of time. In light of this, the Board held an additional 17 informational calls which allowed for the continued sharing of information and ensured that all Directors had an opportunity to be apprised of all Board issues, even when, through no fault of their own, they were not able to attend the comprehensive Board meetings in person or, as a result of the prohibition in the Bye-laws, by telephone.
There were also four meetings of each of the Committees of the Board during 2020. All of the Company’s Non Executive Directors are members of each of the Audit Committee, Nominations and Governance Committee, Remuneration Committee, Risk Committee and Investment Committee and their attendance (and the number of meetings that they were eligible to attend) is as follows: Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Costas Miranthis (4/4); Colin Keogh (2/2); Anne MacDonald, Lynn Pike (1/1). Robert Childs is a member of the Nominations and Governance Committee, Risk Committee and Investment Committee and he attended all three of the meetings that he was eligible to attend. Aki Hussain, Bronek Masojada and Joanne Musselle are members of the Investment Committee and attended all three meetings that they were eligible to attend.
Outside of the formal Board and Committee meetings and informational calls, Non Executive Directors have unfettered access to employees at all levels of the business, regularly
s Agreement on business priorities and review of these within the context of Covid-19. s Oversight of work on the development of a robust and open culture. Ongoing monitoring and assessment of culture has been an area of focus for 2020, thanks to the piloting of a number of ‘culture dashboards’ within some of the subsidiary Boards, as detailed on page 48.
Board papers are circulated in advance of each meeting to ensure Directors have appropriate time to review them, and to seek clarification where necessary. The quality of Board papers is kept under regular review.
The Code sets out a set of ‘comply or explain’ provisions. This section, along with the corporate governance section on pages 57 to 62, provides meaningful disclosure on our application of the principles of each section of the Code in turn, and explains the rationale for any deviation from its provisions. A copy of the Code is available at frc.org.uk.
Purpose and values have always been important at Hiscox, and the Board reviews and refines them every five or so years to ensure they remain relevant as the business evolves, with the last comprehensive review undertaken in 2019. The Board believes that the Company’s purpose and values act as a barometer by which the Board and the wider workforce can hold each other to account. For more information on our purpose and values see page 8.
The Board operates within a Group-wide governance framework which was also explicitly set out in a Board-approved governance manual during 2019. The governance framework complements the Company’s internal controls which are designed to enable risk to be properly assessed and managed. To support this, the Board has a formal schedule of matters reserved for the Board’s determination that covers areas including: setting the Group’s purpose and strategic vision; monitoring performance of the delivery of the strategy; approving major investments, acquisitions and divestments; risk oversight and setting the Group’s risk appetite; and reviewing the Group’s governance.
Diversity and inclusion remains as important as ever to our business, and we have policies and processes to ensure there is a balanced workforce and an appropriately diverse pipeline.
Section 2 of the Code: Division of responsibilities The Chairman is responsible for the leadership and overall effectiveness of the Board. He recognises the importance of creating a boardroom culture which encourages openness and debate and ensures constructive relations between Executive and Non Executive Directors. There is a clear division of responsibilities between the Chairman, Chief Executive and Senior Independent Director to ensure that no individual has unfettered powers of decision, which is outlined on page 57.
The Non Executive Directors provide constructive challenge and help develop proposals on strategy. They are also responsible for scrutinising management performance and ensuring that financial information, risks and controls, and systems of risk management are robust. The Board ensures, through the Nominations and Governance Committee, that Board composition is kept under review, that appropriate succession plans are in place, that the independence of Non Executive Directors is not compromised and that they have the time and resources necessary to devote to the role.
The General Counsel and Company Secretary acts as a trusted adviser to the Board and its Committees, and ensures there are appropriate interactions between senior management and the Non Executive Directors. He is responsible for advising the Board on all governance matters and all Directors have access to him for advice.
The Company’s whistleblowing policy ensure that employees feel empowered to raise concerns in confidence and without fear of unfair treatment. The structures and processes in place allows for the proportionate and independent investigation of any such matters, and for appropriate follow up action to be taken where necessary. The Board and the Audit Committee – whose Chair also who serves as the Group’s whistleblowing champion – has oversight of whistleblowing and routinely receives reports arising from its operation.
Where Directors took on additional Board positions during the year, these were reviewed as part of our corporate governance processes and were not deemed to be significant to the extent that they would overburden Directors’ time. There is no issue with the time commitments or availability of these Directors; this has been demonstrated throughout 2020 where all Directors have given additional time to the Company due to increased meetings regarding the pandemic response.
Chapter 3 51 Governance Compliance with the UK Corporate Governance Code 2018 65Hiscox Ltd Report and Accounts 2020
The Board therefore retains complete confidence in the Chairman’s ability to act independently, and unanimously supports his re-election at the Annual General Meeting (AGM).
Section 3 of the Code: Composition, succession and evaluation The current composition of the Board is set out on pages 52 to 53 and is considered to be an appropriate size for the business, with the right balance of Executive and Non Executive Directors. The Board is satisfied that it has the appropriate balance of skills, experience, independence, and knowledge of the Company to enable it to discharge its duties and responsibilities effectively, and that no individual or group dominates the Board’s decision-making. Any changes to the Board during the period are outlined on page 57.
On joining the Board, all Non Executive Directors take part in a full, formal induction programme which is tailored to their specific requirements. Board members can also participate in training and development opportunities throughout the year. These typically include visits to Hiscox offices, specific sessions on key business areas and upcoming developments, and inclusion at the annual Hiscox Partners event, attended by those employees who make significant contributions to the development and profitability of the Group, and which this year took place as an online event. These visits provide an opportunity to meet employees and other key stakeholders, and to develop a deeper understanding of the challenges and opportunities at operational sites and in the business areas more generally. The Chairman holds annual appraisal meetings with all Directors to review their performance, and to discuss their training and development needs. The Board also enjoys a full programme of informal meetings that support the Board meetings; this helps to ensure that the Non Executive Directors in particular have wide access to all levels of the business. A number of Non Executive Directors also serve on the subsidiary boards of the major insurance carriers in the Group, which serves as an additional control with respect to subsidiary oversight of the Group.
Hiscox’s response to section 3 of the Code The Company complied with all of the provisions of section 3 with the exception of Provision 19. The Chairman has been in post since 2013, and has served less than nine years as Chair, however, the Chairman has served as a Director prior to that and continues in that post for reasons outlined in Hiscox’s response to section 2 of the Code.
Section 5 of the Code: Remuneration The remuneration policy is developed by the Remuneration Committee in consultation with shareholders and is designed to support the Company’s strategic aims and promote the long-term sustainable success of the Company while also being aligned with the Company’s purpose, values and culture.
The remuneration policy was reviewed in 2019 ahead of its renewal in May 2020. The Code stipulates the importance of clarity, simplicity, risk, predictability, proportionality and alignment to culture in remuneration, and how we address this for Hiscox is outlined in the table on the opposite page.
Chapter 3 51 Governance Compliance with the UK Corporate Governance Code 2018 67Hiscox Ltd Report and Accounts 2020
How we have addressed the following factors in the UK Corporate Governance Code 2018
Clarity – remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce.
s Hiscox’s remuneration framework is simple, comprising three main elements: i) fixed pay (base salary, benefits and pension); ii) annual bonus; and iii) performance share awards.
s The range of possible values are set out in the performance scenario charts in the remuneration policy on page 104.
Alignment to culture – incentive schemes should drive behaviours consistent with Company purpose, values and strategy.
Board structure – appointment and succession The Nominations and Governance Committee leads in the delivery of formal, rigorous and transparent procedures on appointments and succession, ensuring the development of a diverse pipeline of Board members and senior managers. This includes an annual review of succession plans for Executives and Non Executives, a process which is guided by the appointment and succession principles set out in the Group governance manual, and which was again carried out in 2020 across the Group.
As part of the Board succession planning process, the Nominations and Governance Committee reviewed the composition of the Board in 2020. This included a skills and experience review – encompassing independence, length of service, the balance of skills and experience, diversity, and the capacity required to oversee the delivery of the Company’s strategy – and Board succession planning on an immediate and longer-term basis for the Chair and all members of the Board. As part of this Board review, an appointment process was initiated for the replacement of Caroline Foulger as Director and Chair of the Audit Committee. Caroline’s nine-year term completes in January 2022. However, the Nominations and Governance Committee approved that Caroline could continue in office until May 2022 so that the financial cycle may be completed prior to the formal handover, as changing the Audit Chair mid-cycle could be detrimental to the process. The recruitment process for an Audit Committee Chair has been initiated, and the selection of an external search company is in progress.
2020 external Board effectiveness review A market review of third-party Board evaluation providers was carried out in early 2020, with Lintstock selected as the external Board evaluation facilitator for 2020. Lintstock is confirmed as independent; it provides no other services to the Company, and has no other connection with the Company or individual Directors, aside from having carried out the external Board effectiveness review in 2017 and the internal review in 2018. Lintstock engaged with key project sponsors to set the context for the evaluation and carried out the review in the fourth quarter of 2020 with a formal report to the Board in early 2021. All Board members were invited to complete a survey addressing the performance of the Board, the Chair and each of the committees, after which each of the Directors were interviewed by Lintstock representatives. The anonymity of the respondents was ensured throughout the process in order to promote an open and frank exchange of views. The key areas highlighted in the scope of the review included Lintstock’s assessment of the independence of the Board, the role of the Chair, and the robustness of Non Executive Director succession plans.
2020 outcomes Lintstock presented the findings of their review, confirming that the findings were positive on the whole. 2020 has been a challenging year for all organisations but the fact that the Board has maintained a strong, positive dynamic that fosters
All Directors were fully engaged with the Board evaluation process. The Board welcomed the review’s findings with the actions above feeding directly into ongoing succession planning discussions. The Chair is leading the implementation of these actions and will report on their delivery in the 2021 Annual Report and Accounts.
Individual Director reviews Individual Director reviews are an opportunity to discuss individual skills, training requirements, succession and any other issues. No significant issues were raised in 2020. However, the Nominations and Governance Committee will continue to review the overall skills, succession and rotation of Directors.
Review of the prior year outcomes In 2019, our internal annual evaluation of Board and Committee performance was updated to deliver an even more robust evaluation of Board, Committee Chair and individual Director performance. As part of this, the Committee reviewed the action plan to completion. Overall the prior year’s Board and Committee effectiveness was rated as good or extremely good with no fundamental issues highlighted. The following themes of improvement were progressed throughout the year: additional development of strategy with a focus on competitor analysis; revised plans for focusing deeper in the organisation; continued engagement with management information to deliver better Board oversight; further review of the remuneration policy (see page 94); and enhancing the Executive succession planning process with an explicit Board and Non Executive Director succession planning process.
Diversity and inclusion Diversity and inclusion (D&I) has been a strategic priority for a number of years and remains important to us. We have a Head of Diversity and Inclusion and a D&I Executive Sponsor for the Group who together drive our progress, a diversity and inclusion policy that applies to all employees, and a Board diversity statement that applies to our Executive and Non Executive Directors. Our Board diversity statement, which is available on our corporate website, reflects the ethos of the Company in that opportunity should be limited only by an individual’s ability and drive. Our Board diversity statement focuses on key requirements for appointments; it is also central to the preparation of Board appointments via the Board succession planning process which monitors skills, knowledge and experience in additional to diversity (both gender and ethnicity).
We have also complied with the target of having at least one ethnic minority Director on the Board by 2021, as set out in the Parker Review.
To aid the review, the Committee considered the key judgements and estimates in the financial statements as identified by the Chief Financial Officer, as well as reports from the external auditor on the outcomes of its annual audit and half-year review. The Committee supported the external auditor, PwC, in displaying the necessary professional scepticism its role requires. The primary areas considered by the Committee in relation to the 2020 Annual Report and Accounts were: i) Going concern assessment and longer-term viability statements The Committee reviewed and advised the Board on the Group’s going concern and longer-term viability statements included in this Annual Report and the assessment reports prepared by management in support of such statements. As part of this review, the Committee assessed the methods, assumptions and judgements underpinning the going concern assessment in particular around the consideration of the impact of and the uncertainties due to Covid-19 on the Group’s current and projected capital and liquidity position. The Committee was satisfied by the level of analysis presented during the year, the related approach taken and statements made in the Group’s key external reporting. More information on the going concern and viability statements can be found on pages 108 to 109.
The Chief Actuary presents a quarterly report to the Committee covering Group loss reserves which discusses both the approach taken by management in arriving at the estimates and also the key judgments within those estimates.
The Committee reviewed and challenged the key judgements and estimates in valuing the insurance liabilities. During the year, Covid-19 was the most significant loss event to impact the Group. It is important that the Company can quickly, and with a reasonable degree of reliability, estimate potential losses and, in the case of Covid-19, the robust and established large loss process was used to determine potential exposures and associated loss estimates. The estimate of insurance claims related to Covid-19 in 2020, after taking into account the Supreme Court Judgment for the UK insurance industry test case on the contractual interpretation of business interruption policy wordings, is $475 million net of reinsurance. This loss estimate, along with other insurance claims, are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. The Committee received presentations from the Chief Actuary and management on the process undertaken and the judgements arrived at to establish key estimates. While there remains uncertainty around the final cost of these events to the Group, the Committee notes that the Group continues to adopt a prudent approach where uncertainty exists as to the final cost of settlement.
The Committee also reviewed the level of margin held within the insurance liabilities in the Group’s balance sheet. Management confirmed that they remain satisfied that the claims reported and claims adjustment expenses, together with claims incurred but not reported liabilities included in the financial statements, provide an appropriate margin over projected claims costs to allow for the risks and uncertainties within the portfolio. As with the prior years, the Committee also considers the report of the external auditor following its re-projection of reserves using its own methodologies and the independent actuary who reviews the estimates of insurance liabilities for the Hiscox Syndicates. On the basis of this work,
iii) The valuation of the investment portfolio The Group values and reports its investment assets at fair value. Due to the nature of the investments, as disclosed in note 17, the fair value is generally straightforward to determine for most of the portfolio which is highly liquid. For the element of the portfolio held in risk assets, a small proportion relies on a higher degree of estimation. The Committee, through the Investment Committee, receives quarterly reports on the portfolio valuation and is content with the process and the estimates reported. Sensitivity analysis on valuation of assets is captured within market risk section (note 3.3) of this report.
The Committee reviewed and discussed detailed reporting with management and challenged the appropriateness of the assumptions made, the consistent application of management’s methodology and the achievability of the business plans.
The impairment assumptions were reviewed and updated where required for the potential impact of, and uncertainties related to, Covid-19. The Committee is satisfied with the approach taken and the recoverability of those assets.
v) Accounting for the defined benefit scheme As explained in note 2.15, the Group recognises the present value of the defined benefit obligation, less the fair value of plan assets at the balance sheet date. The Audit Committee reviewed the report of the key judgements and estimates in the financial statements from the Chief Financial Officer, and the results of the independent pension valuation, and is satisfied that the assumptions used to measure the net liabilities are reasonable.
vi) The recoverability of reinsurance assets As a result of the large loss activity in the year predominantly due to Covid-19, the level of credit risk exposure to reinsurers has significantly increased. The Committee received an update on the process to monitor the levels of recoverability, including the level of collateral held, and the regular contact with counterparties, the ratings of reinsurers and the concentration of risk. The reinsurer panel and associated exposures appear to be robust, and management are not aware of any material issues regarding concentration risk, credit risk or default risk. This view is supported by assessments provided by S&P and the Group’s reinsurance brokers. The Committee is satisfied with the approach taken and the recoverability of those assets.
Chapter 3 51 Governance Audit Committee report contracts or other policy amendments. The estimated gross written premium is regularly reviewed and the movements are sufficiently explained. The Committee is satisfied with the approach taken.
Systems and process change projects The various systems and process change projects under way across the Group continued this year, particularly within the Retail business units and in finance, where a multi-year Group-wide finance transformation programme (FTP) has replaced outdated finance IT systems and controls. The Committee received quarterly updates on the status of the FTP which enabled it to monitor progress and provide challenge where necessary. This project successfully reached its conclusion this year, with the deployment of the remaining four of the nine systems. As is commonly the case, certain areas of finance continue to require short-term manual workarounds. However, the Committee is satisfied that the results of these are appropriate.
External auditor PwC has been the Company’s external auditor since 2016. PwC is invited to attend all meetings of the Committee and it is the responsibility of the Committee to monitor their performance, objectivity and independence. The Committee discusses and agrees with PwC the scope of its audit plan for the full-year and the review plan for the interim statement.
To provide a forum in which any matters of concern could be raised in confidence, the Non Executive Directors met with the external and internal auditors throughout the year without management present. The Committee also meets annually with the auditor and finance team without management present.
Throughout the year, the Audit Committee assesses the independence, effectiveness and quality of the external audit process. This process forms the basis for its recommendation to shareholders to reappoint the external auditor.
Fair, balanced and understandable The Committee assessed whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s financial position and performance, business model and strategy. The Committee reviewed the processes and controls that underpin its preparation, ensuring that all contributors, and senior management are fully aware of the requirements and their responsibilities.
Dear fellow Shareholder At Hiscox, our aim is to deliver strong returns across the insurance cycle and create sustainable long-term value for our shareholders. Our remuneration strategy continues to be designed to attract and keep talented, ambitious people, and foster a culture that encourages sustainable high performance in which pay reflects results, as well as effort.
For Executives across the Group to earn incentives, such as an annual bonus or long-term share awards, they must have helped to earn profits and deliver shareholder value above and beyond demanding performance targets.
Following the AGM, and acknowledging the unprecedented uncertainty caused by Covid-19, the Committee exercised its discretion to reduce the actual 2020 Performance Share Plan (PSP) award levels to approximately 160% of salary for Executive Directors (from 250% of salary as communicated in the 2019 Directors’ remuneration report). In addition, in recognition of the withdrawal of the 2019 final dividend, we committed that Executive Directors would not be paid a bonus until the dividend has resumed.
Performance and remuneration outcomes In 2020, the Executive Directors drove a resilient performance in a turbulent year. The top line was stable with gross written premiums of $4,033.1 million (2019: $4,030.7 million), despite the economic challenges brought on by Covid-19. The Group expects to pay $475 million in Covid-19-related claims and as a result has delivered a pre-tax loss of $268.5 million and a combined ratio of 114.5%. Excluding this impact, Hiscox’s combined ratio was 97.0%, which reflects the underlying improvement in performance in many parts of the Group and the benefit of delivering around $80 million in one-off expense savings – the result of a recruitment freeze and curtailment of travel and entertainment expenditure, alongside existing efficiency programmes already underway.
The Committee believes that the Executive Directors continue to drive value for shareholders in the long term and have achieved a number of key objectives during the year as outlined on page 83. While the business has made good progress against the priority areas set out in last year’s report, it has not been immune to the external impacts of Covid-19 and the resulting economic contraction, which created some share price volatility during the period. Therefore, as the pre-tax ROE hurdle rate of 6% was not achieved, and taking into account the withdrawal of the 2019 final dividend, as well as the overall performance of the business, no bonuses were paid in respect of 2020 to Executive Directors.
Chapter 4 75 Remuneration Letter from the Chair of the Remuneration Committee
There are no proposed changes to the award levels or structure of annual bonus awards, which will continue to be based on pre-tax ROE performance, alongside individual and strategic performance, including non-financial factors, the shareholder and wider stakeholder experience and consideration of risk. Bonuses will not be paid unless the Group’s performance exceeds a hurdle rate of return set taking into account prevailing market conditions.
For the PSP, taking into account feedback received from a number of our shareholders and their representatives, we are proposing to introduce a second measure for the 2021 PSP awards to complement the growth in net asset value plus dividends metric, and provide a broader view of our performance. It is proposed that, for 2021 awards: p 60% of the awards will continue to be based on stretching growth in net asset value (NAV) plus dividends targets. The Committee has reviewed the targets and decided that these will remain the same as for the 2020 awards, as disclosed in the 2019 Directors’ remuneration report. These are considered to be very stretching targets in the current environment.
The Committee has reviewed the 2021 PSP award levels in the context of Company, individual, and share price performance. As previously set out, the Committee was proactive ahead of the 2020 PSP grant and, taking into account shareholder guidance, exercised its discretion to reduce the award levels up-front rather than wait to assess whether there are any ‘windfall’ gains at the point of vesting. Taking into account the increase in the share price since last year, the Committee has decided that the 2021 PSP award levels will revert back to the levels set out in the remuneration policy as approved by shareholders at the 2020 AGM (i.e. 250% salary). The Committee will review the PSP outcomes at the end of the performance period and retains the ability to apply independent judgement to ensure that the outcome is a fair reflection of the performance of the Company, and individual, over the performance period.
In the UK, Hiscox has been paying the living wage for a number of years and in November 2019 received accreditation from the Living Wage Foundation. This approach ensures that everyone at Hiscox receives a wage that recognises the actual cost of living in the UK.
Hiscox also operates an all-employee Sharesave Scheme to foster a culture of ownership among the wider workforce. The scheme provides all employees with the opportunity to save over a three-year period and to purchase Hiscox shares at a discounted price, and it is popular – with over 60% of employees across the Group currently participating.
Executive Directors’ pension benefits have always been consistent with the wider UK workforce, and Executive Directors receive either a 10% of salary cash allowance in lieu of the standard employer pension contribution or a combination of cash and pension contribution, totalling 10% of salary.
The Hiscox remuneration policy is designed to drive a culture of high performance and create sustainable long-term value for shareholders. The policy follows three clear principles: A simple and results-driven, with variable rewards if Hiscox delivers profits and shareholder returns in excess of specified return thresholds; A incentivise Executive Directors appropriately, over the short and long term; and
A align Executive Directors’ interests with those of our shareholders, focusing on effective risk management, return on equity (ROE) and net asset value growth, which drives total shareholder return over time.
Salaries for 2020: — Bronek Masojada: £654,000 — Aki Hussain: £503,500 — Joanne Musselle: £503,500
Over the past ten years, the average bonus to the CEO has been equivalent to 25% of the current maximum opportunity.
2020 actual as percentage of salary: — Bronek Masojada: 0% — Aki Hussain: 0% — Joanne Musselle: 0%
2020 award as percentage of salary: — Bronek Masojada: c.160% — Aki Hussain: c.160% — Joanne Musselle: c.160%
Maximum opportunity and time horizons unchanged. 2021 award as a percentage of salary reinstated to 250% of salary, taking into account the increase in share price since the 2020 PSP grants. Measures based on NAVPS growth plus dividends (60% weighting) and relative TSR (40% weighting).
Post-employment shareholding requirement: retain a shareholding at the level of the in-employment guideline for one year and half this amount for the following year.
Annual report on remuneration 2020 This report explains how the remuneration policy was implemented for the financial year ending 31 December 2020 and how it will be applied for the 2021 financial year.
PwC has been engaged to audit the sections in the annual report on remuneration 2020 below entitled ‘Executive Director remuneration’ and ‘additional notes to the Executive remuneration table, ‘annual bonus’, ‘long-term incentives’, ‘Non Executive Director remuneration’, ‘Directors’ shareholding and share interest’, ‘Performance Share Plan’ and ‘Sharesave Schemes’, ‘Payments to past Directors’, ‘Payments for loss of office’, to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
1 2020 long-term incentives relate to performance share awards granted in 2018 where the performance period ends on 31 December 2020. The award is due to vest on 6 April 2021. Based on performance achieved, this award is due to lapse in full. As the award will lapse in full there is no part of the award attributable to share price appreciation.
3Richard Watson stepped down from the Board with effect from 31 December 2019.
Benefits For 2020, benefits provided for Executive Directors included the healthcare scheme, Sharesave Scheme, life insurance, income protection insurance and critical illness policies, as well as a Christmas gift hamper.
Variable pay To ensure that remuneration is aligned with Company performance and the shareholder experience, a significant proportion of pay is delivered through incentive awards, consisting of an annual bonus and share awards under the Performance Share Plan, which can vary significantly based on the level of performance achieved. Bonuses are only paid if results exceed a specified threshold set taking into account prevailing market conditions.
Annual bonus As part of the policy renewal, the bonus opportunity was reduced to 300% of salary from 400% of salary for the Chief Executive Officer and Chief Financial Officer and to 400% of salary from 500% of salary for the Chief Underwriting Officer.
The bonus is structured in a way that ensures significant variability in outcomes, including the possibility of no bonus being paid. The Remuneration Committee believes that the most appropriate measure for the calculation of the bonus pool is pre-tax return on equity (ROE), as this aligns management’s interests with those of shareholders, minimises the possibility of anomalous results, and ensures that incentives for Executive Directors and other employees are tied to the Company’s profit performance.
Executive Directors’ cash incentives and return on equity 82 Hiscox Ltd Report and Accounts 2020
When setting targets, the Committee seeks to motivate strong performance while also encouraging sustainable behaviours, in line with the defined risk appetite of the business. In determining the size of the Executive Director bonuses for 2020, the Committee used the following framework. Actual bonus outcomes also take into account individual performance and risk management.
<RFR +5% 0% RFR +5% to RFR +10% 0-30% RFR +9% to RFR +14% 25-55% RFR +13% to RFR +18% 45-75% RFR +16% to RFR +21% 65-90% Greater than RFR +19% 80-100% The risk-free rate (RFR) is reviewed annually using government bonds as a reference point, reflecting the rate available to investors without commercial risk. For 2020, the RFR was set at 1%. For 2020 a maximum bonus would have required ROE performance of at least RFR plus 20%.
Shareholder information 2020 key objectives and individual achievements by the Executive Directors
Aki appointed a new CIO in 2020, which led to a repositioning of the portfolio to take advantage of market volatility in early 2020, increasing investment returns.
Joanne has continued to identify and develop underwriting talent, focusing on the key competencies and characteristics necessary not just for today but for the future. Partnering with a games development company, a new custom-built 3D simulation offers a different way of helping underwriters learn the key demands of the job.
Minimum threshold vesting RFR + 6 = 7 20 Maximum vesting RFR + 14 = 15 100 Straight-line vesting between these points The risk-free rate (RFR) was set at 1%.
PSP awards granted during the 2020 financial year The 2019 annual report on remuneration and remuneration policy, which were approved by shareholders at the 2020 AGM, provided for a maximum allowance for awards for the Executive Directors totalling 250% of salary. Acknowledging the unprecedented uncertainty caused by Covid-19, the Committee exercised discretion to reduce the awards payable to approximately 160% of salary. As a result of this, the additional stretch targets for awards above 200% of salary, as set out in the 2019 Directors’ remuneration report, do not apply to this award.
* The middle market quotation on the date of grant (15 May 2020) was £6.998. The middle market quotation immediately prior to grant (14 May 2020) was £6.744 which corresponds to an award level of c.160% of salary.
Minimum threshold vesting RFR + 6 = 7 20 Maximum vesting RFR + 14 = 15 100 Straight-line vesting between these points
Executive Directors will be required to retain any shares vesting (net of tax charges) at the end of the performance period for a further two years (five years post the start of the performance period).
There is a post-employment shareholding guideline for Executive Directors which will apply for a period of two years from stepping down from the Board. This will be set at the level of the in-employment shareholding guideline for one year (or the actual shareholding on stepping down from the Board if lower) and at half of this amount for the following year.
Executive Directors: Bronek Masojada 3,014,225 2,990,109 Aki Hussain 80,786 71,794 Joanne Musselle 40,798 33,106 Non Executive Directors: Robert Childs 1,208,502 1,200,810 Caroline Foulger 29,000 13,231 Michael Goodwin 12,678 4,986 Thomas Hürlimann 15,786 8,863 Colin Keogh 39,695 24,967 Anne MacDonald 39,893 35,375 Constantinos Miranthis 6,832 4,525 Lynn Pike 1,538 –
Bronek Masojada 1,040 – – (1,040) – 8.648 11,085 01-Jun-20 30-Nov-20
Payments for loss of office No payments were made during the year for loss of office.
Salary Annual salary reviews take effect from April each year. The Committee takes account of a number of factors, primarily the increase applied to other UK-based employees. The Committee applies judgement when using external market data.
For 2021, salaries for Executive Directors will be increased by 2.0%. This is in line with other UK-based employees. Salaries from April 2021 will be as follows: April 2021 £
Below median 0 Median 20 Upper quartile 100 *Applies to 40% of awards. Straight-line vesting in between each point.
The peer group will consist of the following 24 companies: Admiral Group, Alleghany, American Financial Group, Arch Capital, Argo, Axis Capital, Beazley, Conduit, Cincinnati Financial, CNA Financial, Direct Line Insurance Group, Everest Re, Fairfax Financial Holdings, Hanover Insurance, James River Group, Kinsale Capital Group, Lancashire Holdings, Markel, QBE, Renaissance Re, RLI, SCOR, White Mountains Insurance Group, and WR Berkley.
External Non Executive Directorships Executive Directors may not accept any external appointment that may give rise to a conflict of interest, and all external appointments require the consent of the Chairman. During the year Bronek Masojada held Directorships on the Board of the Association of British Insurers and Pool Reinsurance Company Limited and was Chair of Policy Placement Limited. Bronek Masojada was remunerated £42,090 for his Directorship at Pool Reinsurance Company Limited. Aki Hussain held a Directorship at VISA Europe Limited and received a fee of £115,000. Joanne Musselle was remunerated £18,500 for her Directorship at Realty.
The Committee regularly reviews the advice it receives and is satisfied that this has been objective and independent. During the year Deloitte also provided the Company with other tax and consulting services.
In addition to the external advisors, the Chief Executive and Chief Human Resources Officer attend the Committee meetings by invitation and provided material assistance to the Remuneration Committee during the year. No Director or Committee member was involved in determining their own remuneration during the year.
Total shareholder return performance The graph below shows the total shareholder return of the Group against the FTSE All-Share and FTSE Non-Life Insurance indices. These reference points have been shown to assess performance against the general market and industry peers. Between December 2010 and 2020, Hiscox delivered total shareholder return of 190%.
Chief Executive historic remuneration The table below shows the single total remuneration figure for the Chief Executive for the past ten years.
Prior to 2015 the annual bonus was operated on an uncapped basis. In order to facilitate comparison the cap has been applied retrospectively.
Comparator data Remuneration for the wider workforce The Remuneration Committee receives information on Group-wide remuneration policies and uses internal and external measures to assess the appropriateness of the remuneration policy and outcomes for Executive Directors. During the year, the Committee reviewed information on market levels of pay in our peer group, bonus pools split by business area, levels of share plan participation and pay ratios between Executives and average employees. No employees were furloughed and all were offered flexible working options to help juggle the demands of work life and home life during 2020.
The table below shows the salary and total remuneration of each employee at the quartile positions.
The Committee has considered the pay data for the three employees identified and believes that it fairly reflects pay at the relevant quartiles among the UK employee population. There has been minimal change in the ratios over the last year, primarily as a result of the CEO not receiving a bonus in either year and the long-term incentives lapsing. In future years the expectation is that the ratios will be higher and more variable as the remuneration of our most senior executives, including the CEO, is more highly performance geared than other roles in the business. The Committee is comfortable that the pay ratio for 2020 aligns to the pay and progression policies for employees, in particular that pay is truly linked to performance and that individuals are appropriately motivated and rewarded according to their knowledge and seniority within the business.
CEO remuneration – short-term versus long-term weighting Fixed pay – salary and benefits PSP – value at vesting PSP – share price appreciation Annual bonus
Robert Childs 1.7 (1.7) – Caroline Foulger (3.2) – – Michael Goodwin 4.2 – – Thomas Hürlimann (2.0) – – Colin Keogh (2.5) – – Anne MacDonald 2.2 – – Constantinos Miranthis (5.2) – – Lynn Pike (6.3) – – 1 Median employee salary, benefits and bonus have been calculated on a full-time equivalent basis. Salary and benefits are calculated as at 31 December, bonus is that earned during the year ending 31 December.
Relative importance of the spend on pay The charts below show the relative movement in profit, shareholder returns and employee remuneration for the 2019 and 2020 financial years. Shareholder return for the year incorporates the distribution made in respect of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits. Profit is the ultimate driver behind the performance metrics of the bonus and long-term incentive schemes. Profit before tax can be located on page 122.
Maximum potential value The salaries for current Executive Directors which apply for 2021 are set out on page 88.
Pension benefits will be in line with the standard employer contribution taking into account any local requirements.
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results. For 2021, the bonus pool will be funded by a set percentage of profits on achievement of a hurdle rate of ROE. The bonus for prior years was determined on a similar basis. Further detail is set out on page 82.
For Executive Directors, individual allocations from the pool are determined by the Remuneration Committee based on a judgement of various factors including: p size of the Group bonus pool; p results of business area (where relevant); p individual performance, including non-financial and strategic factors; and p consideration of risk.
Bonus awards are subject to malus and clawback provisions as described in the notes to the policy table on page 101.
Bonus pools are determined based on financial performance against a hurdle (reviewed annually). Performance at or above this hurdle is rewarded and where performance falls below this hurdle, payouts will be nil. Financial performance is therefore the main determinant of overall bonus payouts.
To facilitate and encourage share ownership in order to align senior employees with Hiscox shareholders.
Balance of bonus split 50% to be paid after year two, and 50% after year three.
Deferred awards are subject to malus and clawback provisions as described in the notes to the policy table on page 101.
To encourage share ownership among participants and align interests with shareholders.
Awards normally vest after a three-year period subject to the achievement of performance conditions. An additional holding period, which is currently two years, may also apply. Further details are set out on page 86.
Dividends (or equivalents) may accrue on vested shares prior to release. Awards are subject to malus and clawback provisions as described in the notes to the policy table on page 101.
Maximum potential value Maximum annual grant of up to 250% of salary in respect of any one financial year.
The discretions available to the Committee in assessing the achievement of the performance target are as set out in the notes to the policy table on page 101.
The current fees payable to Non Executive Directors are set out on page 89.
Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for further duties (for example, Board Committee membership and chairmanship). The fees for the Non Executive Directors (excluding the Chairman) are determined by the Governance and Nominations Committee.
The Company operates a bonus pool approach for the annual incentive. This ensures that both individual bonus levels and overall spend are commensurate with the performance of the Company. The Committee applies judgement based on a range of factors (as described in the table on page 82) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than on a formulaic outcome. The profit pool approach currently used ensures that overall bonus amounts are aligned to the performance of the Company and remain appropriate and affordable.
PSP performance measures are intended to motivate and reward to deliver long-term Company success. The Committee considers performance metrics and targets prior to the grant of each award to ensure that these remain suitable and relevant.
The Committee may continue to satisfy remuneration payments and payments for loss of office (including the exercise of any discretions available to the Committee in connection with such payments) where the terms of the payment were: p agreed before 15 May 2014 when the first approved remuneration policy came into effect; p agreed before the policy set out above came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ remuneration policy in force at the time they were agreed; or p agreed at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company.
For these purposes, such payments include the Committee satisfying awards of variable remuneration.
Annual bonus and PSP awards granted to Executive Directors shall also be subject to clawback provisions for up to two years from the date of vesting in the above circumstances.
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: p prevailing competitive pay levels for the role; p experience and skills of the candidate;
Service contracts It is the Company’s policy that Executive Directors should have service contracts with an indefinite term which can be terminated by the Company by giving notice not exceeding 12 months or the Director by giving notice of six months.
In the event of a termination where Hiscox requests that the Executive Director ceases work immediately, a payment in lieu of notice may be made that is equal to fixed pay, pension entitlements and other benefits (benefits may continue to be provided). Payments may be made in instalments and would ordinarily be subject to mitigation should the individual find alternative employment during the unexpired notice period.
4. Unvested Performance Share Plan awards Treatment would be in accordance with the plan rules and relevant grant documentation. The intended approach is summarised below. p Awards will vest in line with the normal plan vesting date (unless the Committee determines otherwise). Awards vest to the extent that the relevant performance target is considered to have been met.
If the departing Executive Director does not sign a release of claims, they would normally be entitled to payments defined under point 1 only. In the event that the Executive is dismissed for gross misconduct, they would forfeit any payments under UK and Bermuda employment law. In the event of a voluntary resignation to join another company, no payments would normally be made other than remaining on the payroll, with associated benefits, during the contractual notice period of six months.
Remuneration for the most senior executives, including the CEO is more highly performance geared towards the longer term in order to encourage delivery of strong returns across the insurance cycle and create sustainable long-term value for our shareholders. Senior employees participate in a performance share plan with awards normally vesting after a three-year period subject to the achievement of performance conditions. An additional holding period applies for Executive Directors.
The Committee consulted with major shareholders during 2019 and took shareholders feedback into account when finalising the revised 2020 policy. In anticipation of introducing TSR as an additional performance metric for the PSP in 2021, the Committee wrote to major shareholders, ISS, Glass Lewis and the Investment Association. All responses received were positive and no major concerns were raised.
Fixed remuneration Fixed reward (base salary, benefits and retirement benefit). p Salary with effect from 1 April 2020.
p PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 98. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
and 400% of salary for the CUO. p PSP: vesting of 100% of the maximum award.
Owning our contributions to the local community Contributing to the communities in which we live and work has long been a feature of our business; it is important to us, and it is reflected in our values. The tragedies resulting from Covid-19 have underscored this and we have been pleased to play our part and ‘own’ our commitment to our communities during a time of need. During 2020 we pledged over $9 million to support a range of causes affected by the global pandemic, and our employees found new ways to give back – with many choosing to use the time they would have previously spent commuting to volunteer locally.
Directors’ report The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 31 December 2020.
Emerging and principal risks The confirmation required by provision 28 of the Code in relation to the Board’s assessment of the Company’s emerging and principal risks can be found on page 12.
Financial results The Group delivered a pre-tax loss for the year of $268.5 million (2019: profit of $53.1 million). Detailed results for the year are shown in the consolidated income statement on page 122.
Going concern A review of the financial performance of the Group is set out in the Chief Executive’s report on pages 21 to 33. The financial position of the Group, its cash flows and borrowing facilities are included in the capital section on pages 34 to 35. The Group has considerable financial resources and a well-balanced book of business.
Chapter 5 107 Shareholder information Directors’ report 109Hiscox Ltd Report and Accounts 2020
Longer-term viability statement The preparation of the longer-term viability statement includes an assessment of the Group’s long-term prospects in addition to an assessment of the ability to meet future commitments and liabilities as they fall due.
Against this background, the Directors have assessed the prospects of the Group in accordance with provision 31 of the UK Corporate Governance Code 2018, with reference to the Group’s current position and prospects, its strategy, risk appetite and key risks, as detailed in the key risks section on page 12 and the risk management section on pages 36 to 39, as well as note 3 to the consolidated financial statements.
Major interests in shares The Company has been notified of the interests of 5% or more of voting rights in its ordinary shares, which are outlined in the table below.
Political donations and charitable contributions The Group made no political donations during the year (2019: $nil). Information concerning the Group’s charitable activities is contained in the environmental, social and governance (ESG) section on pages 42 to 49 and at hiscoxgroup.com/responsibility.
Climate-related matters In preparing and signing off this report, the Board has considered the relevance of material climate-related matters, including climate change and transitional risks. Climate-related matters are regularly discussed by the Board, and most recently this included Board approval of a new ESG exclusions policy for underwriting and investments. For more information, see page 44.
Note 22 to the consolidated financial statements on employee share schemes (page 169)
The notice of the Annual General Meeting will be held on 13 May 2021.
We confirm that to the best of our knowledge: — the financial statements, prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, give a true and fair view, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
— the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Solicitors Appleby Canon’s Court 22 Victoria Street PO Box HM 1179 Hamilton HM EX Bermuda
By adopting a commercial mindset, we will manage costs and control tedious bureaucracy.
PPL enables brokers and insurers to quote, negotiate, bind and endorse business digitally, and since its inception Hiscox has consistently exceeded the phased targets towards total market adoption. When the pandemic hit, our London Market operations team developed new training to upskill and empower our underwriters, and the number of risks bound online went from 70% in the first quarter of 2020 to over 90% in the third quarter. Taking ownership of the need to transact digitally with minimal disruption to brokers and clients supports our aspiration of being digital where possible, but with a human touch where it matters most.
What we have audited The Group’s consolidated financial statements comprise: A the consolidated income statement for the year ended 31 December 2020; A the consolidated statement of comprehensive income for the year ended 31 December 2020; A the consolidated balance sheet as at 31 December 2020; A the consolidated statement of changes in equity for the year then ended; A the consolidated statement of cash flows for the year then ended; and A the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.
Independence We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the ethical requirements of the Chartered Professional Accountants of Bermuda Rules of Professional Conduct (CPA Bermuda Rules) that
A For certain other components, we performed audit procedures over specified financial statement line item balances.
A The impact of Covid-19 on the Group. A Valuation of gross incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves.
A Assessment of the carrying value of certain finite lived intangible assets.
The five full scope audit components are: i) Hiscox Dedicated Corporate Member Syndicate no. 33; ii) Hiscox Dedicated Corporate Member Syndicate no. 3624; iii) Hiscox Insurance Company Limited; iv) Hiscox Insurance Company Inc.; and v) the parent company, Hiscox Ltd (including consolidation).
For certain other components, we identified account balances which were considered to be significant in size or audit risk at the financial statement line item level in relation to the consolidated financial statements, and performed financial statement line item audit procedures over these specified balances. Analytical procedures over the remaining components that were not inconsequential were performed by the Group engagement team.
Key audit matters Key audit matters are those matters that, in the auditor’s professional judgement, were of most significance in the audit of the consolidated financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
‘The impact of Covid-19 on the Group’ and ‘assessment of the carrying value of certain finite lived intangible assets’ are new key audit matters this year. The prior year key audit matter in respect of uncertain tax positions was included in ‘the impact of Covid-19 on the Group’. Otherwise, the key audit matters that follow are consistent with last year.
Rationale for the materiality benchmark applied $30.5 million 0.75% of gross earned premium for the year ended 31 December 2020.
Gross earned premium provides a good representation of the size and complexity of the business and it is not distorted by insured catastrophe events to which the Group is exposed or the levels of external reinsurance purchased by the Group.
Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole.
The impact of Covid-19 on the Group has been significant and wide ranging. In particular, the Group has: A experienced an increase in claims activity resulting in the establishment of substantial Covid-19-related loss reserves (see key audit matter 2 on page 118); A responded to operational challenges brought about by remote working and travel restrictions (see uncertain tax positions below); A assessed the potential impact of Covid-19 on other areas of the consolidated financial statements such as the carrying value of certain finite lived intangible assets (see key audit matter 3 on page 119); and
Uncertain tax positions The Group recognises provisions, or determines it appropriate not to recognise provisions, for uncertain tax positions based on facts and circumstances at the balance sheet date.
The on-going pandemic has increased residency and permanent establishment (PE) risk, given the difficulties in relation to travel. The potential impact of a successful challenge on the Group’s uncertain tax positions by either HMRC or the IRS is significant and as a consequence this was a specific focus area of our audit.
The impact of Covid-19 on going concern The Group prepares its consolidated financial statements using IFRS as adopted by the EU on a going concern basis of accounting. Management’s assessment of going concern is dependent on significant judgement and can be influenced by management bias. Given the impacts of Covid-19 as described above our audit focused on management’s assessment of going concern.
In performing our detailed audit work over uncertain tax positions (specifically in relation to the Group’s residency and PE risk) and management’s going concern assessment, in light of Covid-19, we performed the following work.
Uncertain tax positions With the assistance of our PwC tax dispute specialists, we obtained, critically assessed and challenged management’s residency and permanent establishment documentation and supporting evidence, paying particular attention to the impact, and management of, Covid-19 travel disruption.
We also assessed the disclosures made by management in respect of going concern.
Key audit matter 2. Valuation of gross incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves
Refer to note 2.13, 2.21 and 23 to the consolidated financial statements for disclosures of related accounting policies and balances.
Total gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves are material estimates in the consolidated financial statements and as at 31 December 2020 amount to $4,572 billion and $2,228 billion respectively. The methodologies and assumptions used to develop gross IBNR loss reserves and the reinsurers’ share of IBNR loss reserves involves a significant degree of judgement. As a result, we focused on this area as the valuation can be materially impacted by numerous factors including: A the underlying volatility attached to estimates for certain classes of business, where small changes in assumptions can lead to large changes in the levels of the estimate held; A the risk of inappropriate assumptions used in determining current year estimates. Given that limited data is available, especially for ‘long-tailed’ classes of business, there is greater reliance on expert judgement in management’s estimation; and
A the risk that key assumptions in respect of natural catastrophes and other large claims losses, including those reserving estimates associated with classes of business exposed to claims and potential claims arising from Covid-19, are inappropriate. There is significant judgement involved in these loss estimates, particularly as they are often based on limited data.
In performing our detailed audit work over the valuation of gross IBNR loss reserves and the associated reinsurer’s share of IBNR loss reserves we used PwC actuarial specialists, where appropriate. Our procedures included: A developing independent point estimates for classes of business considered to be higher risk, particularly focusing on the largest and most uncertain estimates, as at 30 September 2020 and performing roll-forward testing to 31 December 2020; A testing, for certain other classes of business (including those impacted by Covid-19, natural catastrophes and other large claims), the methodology and assumptions used by management to derive the gross IBNR loss loss reserves, and the associated reinsurer’s share of IBNR loss reserves; A performing analytical review procedures over the remaining classes of business to evaluate gross IBNR loss reserves and the associated reinsurer’s share of IBNR loss reserves; and
A evaluating the appropriateness of the booked gross IBNR loss reserve margin, and the associated reinsurer’s share, taking into account estimation uncertainty inherent in the underlying insurance business, including testing the sensitivity of loss reserves.
Refer to note 2.5, 2.9, and 12 to the consolidated financial statements for disclosures of related accounting policies and balances.
The results of our procedures indicated that the carrying value of certain finite lived intangible assets (software development costs) were supported by the evidence we obtained.
Other information Management is responsible for the other information. The other information comprises the Report and Accounts (but does not include the consolidated financial statements and our auditor’s report thereon).
Chapter 6 113 Financial summary Independent auditor’s report statements represent the underlying transactions and events in a manner that achieves fair presentation; and
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Gross premiums earned 4,071.2 3,931.9 Premiums ceded to reinsurers (1,319.0) (1,296.3)
Total income 2,999.9 2,911.7 Expenses Claims and claim adjustment expenses 23.2 (2,966.5) (3,206.7)
Claims and claim adjustment expenses, net of reinsurance 4, 23.2 (1,922.7) (1,576.1) Expenses for the acquisition of insurance contracts 15 (1,002.9) (944.9) Reinsurance commission income 15 289.0 283.9
(Loss)/profit for the year (all attributable to owners of the Company) (293.7) 48.9
Other comprehensive income net of tax 26.3 (14.1) Total comprehensive income for the year (all attributable to owners of the Company) (267.4) 34.8
Deferred acquisition costs 15 439.2 456.1 Financial assets carried at fair value 17 6,116.8 5,539.0
Loss for the year (all attributable to owners of the Company) – – – (293.7) (293.7) – (293.7) Other comprehensive income net of tax (all attributable to owners of the Company) – – – 55.5 (29.2) 26.3 – 26.3 Employee share options: Equity settled share-based payments – – – – 10.3 10.3 – 10.3 Deferred and current tax on employee share options – – – – (5.4) (5.4) – (5.4) Net movements of treasury shares held by Trust – – – – (23.9) (23.9) – (23.9) Shares issued in the period 22, 29 4.6 446.0 – – – 450.6 – 450.6 Balance at 31 December 2020 38.7 516.5 184.0 (270.8) 1,884.4 2,352.8 1.1 2,353.9
(Loss)/profit before tax (268.5) 53.1 Adjustments for: Net foreign exchange loss/(gain) 14.5 (8.5) Interest and equity dividend income (107.4) (123.7) Interest expense 44.0 36.6 Net fair value (gains) on financial assets (51.2) (70.8)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 633.6 414.3 Financial assets carried at fair value (475.4) (405.0) Financial liabilities carried at fair value (0.1) (0.5) Financial liabilities carried at amortised cost 0.8 0.8 Other assets and liabilities 33.3 14.3 Cash paid to the pension fund (30.4) (3.6) Interest received 102.5 130.8 Equity dividends received 1.6 1.1 Interest paid (42.4) (36.4) Current tax paid (39.1) (11.2) Net cash (used in)/flows from operating activities (117.1) 39.5
Purchase of property, plant and equipment (9.0) (6.4) Proceeds from the sale of property, plant and equipment 8.6 – Purchase of intangible assets (62.5) (90.9) Proceeds from the sale of intangible assets 10.2 – Net cash used in investing activities (52.7) (97.3)
The Company is registered and domiciled in Bermuda and its ordinary shares are listed on the London Stock Exchange. The address of its registered office is: Chesney House, 96 Pitts Bay Road, Pembroke HM 08, Bermuda.
The consolidated financial statements have been prepared under the historical cost convention, except that pension scheme assets included in the measurement of the employee retirement benefit obligation which is determined using actuarial analysis, and certain financial instruments including derivative instruments, are measured at fair value.
The consolidated financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Group’s current and forecast solvency and liquidity positions for the next 12 months and beyond. As part of the consideration of the appropriateness of adopting the going concern basis, the Directors use scenario analysis to assess the robustness of the Group’s solvency and liquidity positions. To make the assessment, the Group constructed a combined scenario which included applying material sensitivities to (re)insurance claims relating to Covid-19, modelling a significant catastrophe loss and a default in the Group’s reinsurance programme. An aggregated scenario such as this, and the sequence of events it involves, is considered to be remote and there are mitigating recovery actions that can be taken to restore the capital position to the Group’s target range.
The impact of Covid-19 has been factored into a number of the significant financial reporting judgements and estimates discussed in Note 2.21, and has been reflected in the relevant sections of the consolidated financial statements, notably impairment testing on intangible assets, fair value measurement of investments, insurance liabilities and deferred tax assets. The specific consideration relating to the current market conditions was also taken into account in the various sections of the risk management note.
The financial statements were approved for issue by the Board of Directors on 3 March 2021.
The amendments to published standards include: A Amendments to IFRS 3 Definition of a Business The amendment to IFRS 3 clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarified that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the consolidated financial statements, but may impact future periods should the Group enter into any business combinations.
A Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform
The amendments to IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments had no impact on the consolidated financial statements of the Group as it does not have any interest rate hedge relationships.
The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. The revised Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Group.
Chapter 6 113 Financial summary Notes to the consolidated financial statements reflecting expected as well as incurred credit losses. The Group expects a recognition of an earlier and higher loss allowance under this approach compared to the current approach resulting in a negative impact on equity and will perform a detailed assessment in the future to determine the extent. IFRS 9 has been endorsed by the EU.
The Group’s implementation programme is progressing in line with expectations. IFRS 17 is effective on 1 January 2023 and has not yet been endorsed by the EU.
Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: A assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; A income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and
The rates applied are as follows: A buildings 20–50 years A vehicles 3 years A leasehold improvements including fixtures and fittings 10–15 years A furniture, fittings and equipment 3–15 years
2.7 Financial assets and liabilities including loans and receivables The Group classifies its financial assets as a) financial assets at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial assets based on the purpose for which the financial assets are held at initial recognition. The decision by the Group to designate debt and fixed income securities, equities and investment funds and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis.
Chapter 6 113 Financial summary Notes to the consolidated financial statements be impaired include, but are not limited to, the following: A negative rating agency announcements in respect of investment issuers, reinsurers and debtors; A significant reported financial difficulties of investment issuers, reinsurers and debtors; A actual breaches of credit terms such as persistent late payments or actual default; A the disintegration of the active market(s) in which a particular asset is traded or deployed; A adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and A the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
2.13 Insurance contracts (a) Classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk.
Claims and associated expenses are charged to profit or loss as incurred, based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group.
The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are determined based on the best estimate of the cost of future claim payments plus an allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes using, as inputs, the assessments for individual cases reported to the Group, statistical analysis for the claims incurred but not reported, an estimate of the expected ultimate cost of more complex claims that may be affected by external factors, for example, court decisions, and an allowance for quantitative uncertainties not otherwise approved.
(e) Outwards reinsurance contracts held Contracts entered into by the Group with reinsurers, under which the Group is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.
(f) Retroactive reinsurance transactions Reinsurance transactions that transfer risk but are retroactive are included in reinsurance assets. The excess of estimated liabilities for claims and claim expenses over the consideration paid is established as a deferred credit at inception. The deferred amounts are subsequently amortised using the recovery method over the settlement period of the reserves and reflected through the claims and claim adjustment expenses line. In transactions where the consideration paid exceeds the estimated liabilities for claims and claim adjustment expenses, a loss is recognised immediately.
2.14 Taxation Current tax, including corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. A provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable. The assessment is based on the judgement of tax professionals within the Group supported by previous experience in respect of such activities and in certain cases based on advice sought from specialist tax advisors.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Chapter 6 113 Financial summary Notes to the consolidated financial statements effective. The Group hedged elements of its net investment in certain foreign entities through foreign currency borrowings that qualified for hedge accounting from 3 January 2007 until their replacement on 6 May 2008; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship was effective during this period. Accumulated gains or losses will be recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedge is recognised immediately in the income statement.
2.17 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit and interest in respect of lease liabilities. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
2.18 Provisions Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
The Audit Committee reviews the reasonableness of critical judgements, estimates and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee report on pages 71 to 73.
Significant accounting judgements The following accounting policies are those considered to have a significant impact on the amounts recognised in the consolidated financial statements, with those judgements involving estimation summarised thereafter. A Going concern: assessment of whether the Group has adequate resources to continue in operational existence over a period of at least 12 months from the date of the consolidated financial statements. See note 2 ‘basis of preparation’ for further details; A Consolidation: assessment of whether the Group controls an underlying entity, for example, the treatment of insurance-linked securities funds including consideration of its decision-making authority and its rights to the variable returns from the entity; A Insurance contract: assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as an insurance contract or as a financial instrument; A Financial investments: classification and measurement of investments including the application of the fair value option.
Significant accounting estimates All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and their predictions of future events. Actual results may differ from those estimates, possibly significantly.
In 2020, Covid-19 has had a significant impact on market conditions and the business. Estimates and their underlying assumptions continue to be reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Where an estimate has been made in response to Covid-19, additional disclosure has been provided in the relevant note to provide context to the figures presented.
The following describes items considered particularly susceptible to changes in estimates and assumptions. The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported, which is included within insurance liability and reinsurance assets on the balance sheet. The total gross estimate as at 31 December 2020 is $4,571.9 million (2019: $4,017.0 million) and is included within total insurance liabilities on the balance sheet. The total estimate for reinsurers’ share of losses incurred but not reported as at 31 December 2020 is $2,227.7 million (2019: $2,106.4 million).
The Group carries its financial investments at fair value through profit or loss, with fair values determined using published price quotations in the most active financial markets in which the assets trade, where available. Where quoted market prices are not available, valuation techniques are used to value financial instruments. These include third-party valuation reports and models utilising both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuation for financial investments. Note 3.3 discusses the reliability of the Group’s fair values.
2 Basis of preparation 2.21 Use of significant judgements, estimates and assumptions continued
Chapter 6 113 Financial summary Notes to the consolidated financial statements 2 Basis of preparation continued 2.22 Reporting of additional performance measures The Directors consider that the combined ratio measures reported in respect of operating segments and the Group overall in note 4 and net asset value per share and return on equity measures disclosed in notes 5 and 6, 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 the internal performance measures reviewed by senior management including the chief operating decision-maker. However, these 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.
A The Group’s investments portfolio remains heavily weighted toward government issued and investment grade corporate debts with minimum exposure to unlisted investments, as detailed in note 3.3 (d).
During the year, the Group took an action to increase its liquidity position in short-term deposits and similar cash and cash equivalents.
The capital raised from the share issuance in 2020, while predominantly held to better position the business for future growth opportunities, also provided additional strength to the capital and liquidity positions in light of the continued uncertainty arising from Covid-19.
Measures the Group has implemented to adapt to Covid-19 have proven largely effective in addressing the relevant challenges and operational risks and some of these measures represent an acceleration of longer-term plans.
Chapter 6 113 Financial summary Notes to the consolidated financial statements account for any one potential catastrophe event or disaster. The Group’s underwriting risk appetite seeks to ensure that it should not lose more than 12.5% of core capital, defined as NAV plus subordinated debt less expected dividend less buffer capital, plus 100% of buffer capital ($135 million) with an allowance for expected investment income, as a result of a one-in-200 aggregate bad underwriting year.
A developing processes that continually factor market intelligence into the pricing process.
The selection of extreme loss scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and unprecedented, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodelled risks. This means that should an extreme loss event actually occur, the Group’s final ultimate losses could materially differ from those estimates modelled by management. The Group’s insurance contracts include provisions to contain losses, such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
Below is a summary of the gross and net insurance liabilities for each category of business.
Estimated concentration of gross and net insurance liabilities on the balance sheet as at 31 December 2020 Types of insurance risk in the Group
The estimated liquidity profile to settle the gross claims liabilities is given in note 3.3(e).
Typical property covered by marine and other major property contracts includes fixed and moveable assets such as ships and other vessels, cargo in transit, energy platforms and installations, pipelines, other subsea assets, satellites, commercial buildings and industrial plants and machinery. These assets are typically exposed to a blend of catastrophic and other large loss events and attritional claims arising from conventional hazards such as collision, flooding, fire and theft. Climate change may give rise to more frequent and severe extreme weather events (for example windstorms and river flooding) and it may be expected that their frequency will increase over time.
The provision of insurance to cover allegations made against individuals acting in the course of fiduciary or managerial responsibilities, including directors and officers’ insurance, is one example of a casualty insurance risk.
The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than other categories of business. In addition there is increased potential for accumulation in casualty risk due to the growing complexity of business, technological advances, and greater interconnectivity and interdependency across the world due to globalisation. The Group’s pricing strategy for casualty insurance policies is typically based on historical claim frequencies and average claim severities, adjusted for inflation and extrapolated forwards to incorporate projected changes in claims patterns. In determining the price of each policy, an allowance is also made for acquisition and administration expenses, reinsurance costs, investment returns and the Group’s cost of capital.
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 23. The Group’s provision estimates are subject to rigorous review by senior management from all areas of the business. The managed Syndicates and US business receive a review of their estimates from independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
With the exception of any unquoted investments shown in note 20, 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 market prices at the balance sheet date. The ability to obtain quoted 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.
Directly held equity securities 8 4 Units held in funds – traditional long only 58 52 Units held in funds – long and short and other special strategies 34 44 Geographic focus Specific UK mandates 37 29 Global mandates 63 71
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. We make allocations to diversifying and less volatile strategies, such as 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.
The Group may also, from time to time, enter into interest rate future contracts in order to reduce interest rate risk on specific portfolios. The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2020 was $5,475 million (2019: $4,990 million). These may be analysed below as follows: Nature of debt and fixed income holdings
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. The Group’s debt and fixed income assets are further detailed in note 17.
(d) Credit risk The Group has exposure to credit risk, which is the risk that a counterparty will suffer a deterioration in actual or perceived financial strength and be unable to pay amounts in full when due, or that for any other reason they renege on a contract or alter the terms of an agreement. The concentrations of credit risk exposures held by insurers may be expected to be greater than those associated with other industries, due to the specific nature of reinsurance markets and the extent of investments held in financial markets. In both markets, the Group interacts with a number of counterparties who are engaged in similar activities with similar customer profiles, and often in the same geographical areas and industry sectors. Consequently, as many of these counterparties are themselves exposed to similar economic characteristics, one single localised or macroeconomic change could severely disrupt the ability of a significant number of counterparties to meet the Group’s agreed contractual terms and obligations.
Covid-19 has caused economic disruption around the world with many businesses and individuals forced to alter, reduce or cease business activity in light of government lockdowns. As a result, the risk that counterparties fail to meet their financial obligations as they fall due, for whatever reason, has increased.
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets, but collateral may be requested to be held against these assets. The Group structures the levels of credit risk accepted by placing limits on its exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review.
The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in a portfolio of high-quality corporate and government bonds.
The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The largest counterparty exposure included in reinsurance assets at 31 December 2020 is to Kiskadee. The fully collateralised recoverable from Kiskadee represents 19% (2019: 17%) of this category of assets.
For the current period and prior period, the Group did not experience any material defaults on debt securities. The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2020 and 2019.
A significant proportion of the Group’s investments is in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The Group’s exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges.
3 Management of risk 3.3 Financial risk (d) Credit risk continued
The main focus of the investment portfolio is on high-quality, short-duration debt and fixed income securities and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December is as follows.
Debt and fixed income securities 1,560.0 1,435.2 2,050.8 428.5 5,474.5 4,989.9 Cash and cash equivalents 1,577.2 – – – 1,577.2 1,115.9
Following the certainty provided by the Supreme Court Judgment in January 2021, the Group is aiming to settle Covid-19 and business interruption related claims as quickly as possible. This may mean that there is a delay between claims settlement and recovery under our reinsurance arrangements. The Group has forecast a range of scenarios and has plans in place to navigate any liquidity timing differences.
Average contractual maturity analysed by denominational currency of investments as at 31 December 2020 years years
The Group’s exposures to foreign exchange risk arise mainly with respect to the US Dollar, Sterling and the Euro. These exposures may be classified in two main categories: A operational foreign exchange exposure arises from the conversion of foreign currency transactions resulting from the activities of entering into insurance, investment and operational contracts in a currency that is different to each respective entity’s functional currency; and
Structural currency risk The Group’s exposure to structural currency risks mainly relates to Sterling and the Euro net investments in businesses operating in the UK and Europe. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. However, the Group does not ordinarily seek to use derivatives to mitigate the structural risk because: A the currency translation gains and losses are accounted for in the currency translation reserve (a component of equity)
and does not affect income statement unless the related foreign operation is disposed of; A the currency translation gains and losses have no cash flow.
Employee retirement benefit obligations – 73.5 – – 73.5 Deferred tax – – 2.7 – 2.7 Insurance liabilities 6,133.5 1,771.3 907.0 301.6 9,113.4 Financial liabilities 125.0 821.3 0.4 – 946.7 Current tax – 10.0 20.4 – 30.4 Trade and other payables 706.4 456.4 154.3 82.7 1,399.8 Total liabilities 6,964.9 3,132.5 1,084.8 384.3 11,566.5 Total equity 1,857.5 215.6 142.6 138.2 2,353.9
Financial assets carried at fair value 3,791.3 1,157.7 400.7 189.3 5,539.0
Employee retirement benefit obligations – 55.1 – – 55.1 Deferred tax – – 0.4 – 0.4 3 Management of risk 3.3 Financial risk (f) Currency risk continued
3.4 Capital risk management The Group’s primary objectives when managing its capital position are: A 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; A to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; A to maintain an efficient cost of capital; A to comply with all regulatory requirements by an appropriate margin; A to maintain financial strength ratings of A in each of its insurance entities; and A to settle policyholders’ claims as they arise.
At 31 December 2020, the available capital under IFRS was $2,431 million (2019: $2,276 million), comprising net tangible asset value of $2,055 million (2019: $1,912 million) and subordinated debt of $376 million (2019: $364 million).
The Group’s borrowing facilities include financial covenants that are standard in such arrangements, including certain balance sheet measures. These are monitored on a regular basis, at least quarterly, but more frequently where necessary.
This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s property catastrophe, terrorism and cyber reinsurance accounts; A 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
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The Group had sufficient capital at all times throughout the year to meet the BMA’s requirements. The BMA is part-way through phasing in capital requirements changes, which started at the 2019 year-end and will continue until the 2021 year-end. The Group expects to maintain an appropriate margin of solvency after these changes have taken effect.
3.5 Tax risk The Group is subject to income taxes levied by the various jurisdictions in which the Group operates, and the division of taxing rights between these jurisdictions results in the Group tax expense and effective rate of income tax disclosed in these financial statements. Due to the Group’s operating model, there is an unquantifiable risk that this division of taxing rights could be altered materially, either by a change to the tax residence, or permanent establishment profile, of Hiscox Ltd or its principal subsidiaries; or due to the re-pricing or re-characterisation for tax purposes of transactions between members of the Group, under local transfer pricing or related tax legislation. The Group seeks to manage this risk by: A maintaining appropriate internal policies and controls over its operations worldwide; A monitoring compliance with these policies on an ongoing basis; A adhering to internationally recognised best practice in determining the appropriate division of profits between taxing jurisdictions; A taking additional advice and obtaining legal opinions from local third-party professionals with the necessary experience in the particular area.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 4 Operating segments The Group’s four primary business segments are identified as follows: A Hiscox Retail brings together the results of the Group’s retail business divisions in the UK, Europe, USA and Asia, as well as
Hiscox Special Risks. Hiscox UK and Hiscox Europe underwrite personal and commercial lines of business through Hiscox Insurance Company Limited and Hiscox Société Anonyme (Hiscox SA), together with the fine art and non-US household insurance business written through Syndicate 33. Hiscox Europe excludes the kidnap and ransom business written by Hiscox SA. Hiscox Special Risks has traditionally comprised the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited and the European kidnap and ransom business written by Hiscox SA and Syndicate 33. Hiscox USA comprises commercial, property and specialty business written by Hiscox Insurance Company Inc. and Syndicate 3624, however, in late 2020 we restructured our Special Risks division, integrating its activities with Hiscox Europe, Hiscox USA and Hiscox London Market.
In 2020, the Group has further refined how it manages and evaluates the performance of the business units. All foreign exchange gains and losses are managed centrally. Therefore the foreign gains and losses are now fully allocated to and presented in the segmental reporting within Corporate Centre. Comparative figures have been re-presented to reflect this change, along with the previously reported figures where the foreign exchange gains and losses were allocated to each segment to aid comparability. This change has no effect on the Group IFRS results or financial position.
Claims and claim adjustment expenses, net of reinsurance (1,395.6) (294.4) (232.7) – (1,922.7) (929.7) (356.1) (290.3) – (1,576.1) Expenses for the acquisition of insurance contracts (539.0) (148.4) (26.5) – (713.9) (497.0) (147.9) (16.1) – (661.0)
Share of (loss)/ profit of associates after tax – – – (0.3) (0.3) – – – 0.1 0.1 * In 2020, the Group has further refined how it manages and evaluates the performance of the different businesses segments. All foreign exchange gains and losses are therefore allocated to, and managed by, Corporate Centre. To align external reporting to management reporting, the foreign exchange gains and losses are presented in the segmental reporting within Corporate Centre. Comparative figures have been re-presented to reflect this management view, along with the previously reported figures where the foreign exchange gains and losses were allocated to each segment to aid comparability. This change has no effect on the Group IFRS results or financial position.
Impairment of intangible assets 0.2 – – – 0.2 – – – – –
At 100% level (note 4(b)) 1% change in claims or expense ratio 20.1 7.5 2.7 19.3 7.2 2.5 At Group level 1% change in claims or expense ratio 19.8 5.5 2.3 19.0 5.3 2.1
Net foreign exchange (losses)/gains – – – (12.6) (12.6) – – – 11.1 11.1 *See note 4 on page 150 for further details.
The following table provides an analysis of the Group’s non-current assets by material geographical location excluding financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts: Non-current assets total $m total $m
The net asset value per share is based on 341,647,634 shares (2019: 285,051,997 shares), being the shares in issue at 31 December 2020, less those held in treasury and those held by the Group Employee Benefit Trust.
Net tangible assets comprise total equity excluding intangible assets. The net asset value per share expressed in pence is 503.9p (2019: 580.1p).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 6 Return on equity $m $m
(Loss)/profit for the year (all attributable to owners of the Company) (293.7) 48.9 Opening total equity 2,189.7 2,259.0 Adjusted for the time-weighted impact of capital distributions and issuance of shares 307.8 (52.3) Adjusted opening total equity 2,497.5 2,206.7 Return on equity (%) (11.8) 2.2
Chapter 6 113 Financial summary Notes to the consolidated financial statements 11 Auditor’s remuneration Fees payable to the Group’s external auditor, PwC, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group 2020 $m $m
Amounts receivable by the auditor and its associates in respect of: The auditing of the accounts of the Group and its subsidiaries 3.3 3.2 All audit-related assurance services 0.4 0.3 All other non-audit services 0.1 –
Year ended 31 December 2020 Opening net book amount 8.3 33.1 8.5 202.1 26.0 278.0 Additions – – – 62.5 – 62.5
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 that reflect the estimated impact of, and uncertainty related to, Covid-19. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 7.0% to 8.5%, depending on the underlying currency (2019: 7.0%), 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.
Impairment assessments The recent development of the pandemic, with reduced global economic activity, a surge in some insurance claims and the global political response to try to contain transmission of the virus, indicate the potential for impairments.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value less costs to sell or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s Syndicate capacity auctions. The value in use is determined using cash flow projections based on business plans approved by management and discounted at the applicable WACC rate. At 31 December 2020, the value in use exceeded the fair value less cost to sell or the carrying value of Syndicate capacity recognised on the balance sheet.
(b) US state authorisation licences As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset has been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting business.
Internally developed computer software is only capitalised when it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group and the cost of the asset can be measured reliably. Amortisation of internally developed computer software begins when the software is available for use and is allocated on a straight-line basis over the expected useful life of the asset.
(d) Rights to customer contractual relationships (included in other) Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be ten years and are carried at cost less accumulated amortisation and impairment losses.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 13 Property, plant and equipment
Year ended 31 December 2020 Opening net book amount 24.9 7.3 29.0 66.2 1.0 128.4 Additions – 0.3 8.8 3.2 1.0 13.3 Disposals (0.5) (3.6) (4.5) (4.1) – (12.7)
Foreign exchange movements – (0.1) 1.1 1.2 – 2.2 Closing net book amount 23.2 2.6 28.8 53.4 1.4 109.4 At 31 December 2020 Cost 30.2 13.6 61.1 79.7 2.7 187.3 Accumulated amortisation and impairment (7.0) (11.0) (32.3) (26.3) (1.3) (77.9)
The income from subleasing right-of-use assets amounted to $0.8 million (2019: $0.7 million).
As at 31 December 2020, HDCM owned 72.6% of Syndicate 33 (2019: 72.6%), and 100% of Syndicate 3624 (2019: 100%). 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. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
(b) SPIs The Kiskadee Diversified Fund and Kiskadee Select Fund (the Funds) were launched in 2014 to provide investment opportunities to institutional investors in property catastrophe reinsurance and insurance-linked strategies. The Funds are managed by Hiscox Re Insurance Linked Strategies Ltd (formerly known as Kiskadee Investment Managers Ltd) which is a wholly owned subsidiary of the Group.
The Group is exposed to credit risk associated with reinsurance recoverables on risks fronted for the SPIs. Note 3.3(d) discusses how the Group manages credit risk associated with reinsurance assets. The operations of the Funds and SPIs are financed through the issuance of preference shares to external investors. The Group does not intend to provide any further financial support to the Funds or SPIs.
At beginning of year 8.6 9.9 Disposals during the year – –
Transfer to equity investments – (0.5) Distributions received (0.2) (0.3) Net profit from investments in associates (0.3) 0.1 Foreign exchange movements – 0.7 At end of year 4.9 8.6
% interest held at 31 December Assets $m Liabilities $m Revenues $m Profit after tax $m
Associates incorporated in the UK and USA from 29% to 35% 18.6 15.9 12.2 (2.1) Associates incorporated in Europe from 26% 4.4 2.3 2.5 1.2 Total at the end of 2020 23.0 18.2 14.7 (0.9)
The net amounts expected to be recovered before and after one year are estimated as follows: $m $m
Chapter 6 113 Financial summary Notes to the consolidated financial statements 16 Reinsurance assets
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 1,798.1 1,510.9 After one year 1,846.5 1,876.0
17 Financial assets and liabilities Financial assets designated at fair value through profit or loss are measured at fair values, with all changes from one accounting period to the next being recorded through the income statement.
Debt and fixed income securities 5,474.5 4,989.9 Equities and investment funds 578.3 486.4 Deposits with credit institutions – – Total investments 6,052.8 5,476.3 Insurance-linked fund 63.2 61.2 Derivative financial instruments 19 0.8 1.5 Total financial assets carried at fair value 6,116.8 5,539.0
Derivative financial instruments 19 0.6 0.6 Total financial liabilities carried at fair value 0.6 0.6 $m $m
On 25 November 2015 the notes were admitted for trading on the London Stock Exchange’s regulated market. The notes were rated BBB- by S&P as well as by Fitch.
The fair value of the borrowings is estimated at $822.6 million (2019: $787.3 million). The fair value measurement is classified within Level 1 of the fair value hierarchy. The fair value is estimated by reference to the actively traded value on the stock exchanges.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 18 Loans and receivables including insurance receivables $m $m
Due from contract holders, brokers, agents and intermediaries 880.2 862.2 Due from reinsurance operations 568.5 549.4
Prepayments and accrued income 26.9 16.9 Other loans and receivables: Net profit commission receivable 8.1 13.1 Accrued interest 26.5 22.3 Share of Syndicates’ other debtors’ balances 43.0 32.2 Other debtors including related party amounts 38.0 60.2 Total loans and receivables including insurance receivables 1,591.2 1,556.3
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 1,517.4 1,305.0 After one year 73.8 251.3
19 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2020. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2020 all mature within one year of the balance sheet date and are detailed below: 31 December 2020 Gross contract notional amount $m
Derivative financial instruments included on balance sheet Foreign exchange forward contracts 56.2 0.8 (0.5) 0.3 Interest rate futures contracts 86.2 – (0.1) (0.1)
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 41.4 13.4 54.8 Gross fair value of liabilities (40.6) (13.9) (54.5)
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-Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of $1.7 million (2019: loss of $1.5 million) as included in the investment result in note 7. There was no initial purchase cost associated with these instruments.
Interest rate futures contracts To substantially hedge the interest rate risk the Group is exposed to, it continued to sell a number of government bond futures denominated in a range of currencies. All contracts are exchange traded and the Group made a loss on these futures contracts of $0.4 million (2019: loss of $0.7 million) as included in the investment result in note 7.
The levels of the fair value hierarchy are defined by the standard as follows: A Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; A Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on market observable data; A Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
Investments in mutual funds, which are included in equities and investment funds comprise a portfolio of stock investments in trading entities which are invested in various quoted and unquoted investments. The fair value of these investment funds are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.
Cash at bank and in hand 1,448.8 903.2 Short-term deposits 128.4 212.7
Chapter 6 113 Financial summary Notes to the consolidated financial statements 22 Share capital
The amounts presented in the equity section of the Group’s consolidated balance sheet relate to Hiscox Ltd, the legal parent company.
Equity raise – May 2020 4,595 444,503 – Employee share option scheme – proceeds from shares issued 13 1,446 –
On 6 May 2020, the Group announced the successful completion of the non-pre-emptive placing of new ordinary shares of 6.5 pence each in the capital of the Company announced on 5 May 2020. The capital raise of 57,693,425 new ordinary shares raised gross proceeds of approximately $463 million or £375 million. The issuance represents, in aggregate, approximately 19.48% of the existing issued ordinary share capital of Hiscox prior to the capital raise. As a consequence the shareholders’ equity of the Group and the available capital increased by approximately $452 million and the total issued ordinary share capital of $555 million.
During the year the decision was made not to pay a dividend to shareholders.
Equity raise – May 2020 57,693 – Employee share option scheme – ordinary shares issued 154 339 Scrip dividends to owners of the Company – 454
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 amount recognised in the consolidated income statement during the year was an expense of $10.3 million (2019: expense of $3.6 million). This comprises an expense of $10.1 million (2019: expense of $2.7 million) in respect of Performance Share Plan awards and an expense of $0.2 million (2019: expense of $0.9 million) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument.
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2020 2019
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2020 for the Executive Directors are shown in the annual report on remuneration 2020 (see pages 80 to 87). The total number of options and Performance Share Plan awards outstanding is 9,349,986 (2019: 9,293,491) of which 1,979,101 are exercisable (2019: 2,682,751). The total number of SAYE options outstanding is 2,642,893 (2019: 1,530,653).
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 2020 and 2019 are not material.
23.1 Insurance contracts assumptions (a) Process used to decide on assumptions There are many risks associated with insurance contracts, and this means that there is a considerable amount of uncertainty in estimating the future settlement cost of claims. There is uncertainty in both the amounts and the timing of future claim payment cash flows.
The Group relies on actuarial analysis to estimate the settlement cost of future claims. Via a formal governed process, there is close communication between the actuaries and other key stakeholders, such as the underwriters, claims and finance teams when setting and validating the assumptions. The unpaid claims reserve is estimated based on past experience and current expectations of future cost levels. Allowance is made for the current premium rating and inflationary environment.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,995.0 1,666.1 1,336.9 1,462.0 1,569.5 1,952.2 3,402.2 3,175.5 3,416.1 3,888.1 23,863.6 eight years later 1,548.8 1,299.9 – – – – – – – – 2,848.7 nine years later 1,548.5 – – – – – – – – – 1,548.5 Current estimate of cumulative claims 1,548.5 1,299.9 946.7 1,047.4 1,331.6 1,709.7 2,999.4 3,475.8 3,136.6 3,888.1 21,383.7
Liability recognised in respect of prior accident years at 100% level 171.0 Total gross liability to external parties at 100% level† 8,280.0 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2020. †Excluding the unexpired risk reserve of $43.4 million gross at 100%.
Current estimate of cumulative claims 1,548.5 1,299.9 946.7 1,047.4 1,331.6 1,709.7 2,999.4 3,475.8 3,136.6 3,888.1 21,383.7 Less: attributable to external Names (221.1) (163.7) (98.5) (108.1) (138.9) (179.2) (405.4) (437.0) (410.7) (467.5) (2,630.1) Group’s share of current ultimate claims estimate 1,327.4 1,136.2 848.2 939.3 1,192.7 1,530.5 2,594.0 3,038.8 2,725.9 3,420.6 18,753.6
Less: attributable to external Names 213.3 155.5 92.7 99.2 117.1 148.1 301.4 254.3 156.1 105.9 1,643.6 Group’s share of cumulative payments (1,315.9) (1,057.8) (801.7) (853.7) (997.3) (1,228.6) (1,942.9) (1,810.6) (1,038.3) (584.3) (11,631.1) Liability for 2011 to 2020 accident years recognised on Group’s balance sheet 11.5 78.4 46.5 85.6 195.4 301.9 651.1 1,228.2 1,687.6 2,836.3 7,122.5 Liability for accident years before 2011 recognised on Group’s balance sheet 137.4 Total Group liability to external parties included in balance sheet – gross** 7,259.9 **This represents the claims element of the Group’s liabilities excluding the unexpired risk reserve of $31.5 million.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 23 Insurance liabilities and reinsurance assets 23.1 Insurance contracts assumptions (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – net of reinsurance at 100%
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,515.0 1,187.8 1,140.0 1,185.3 1,260.2 1,477.1 1,857.2 1,815.3 1,812.1 2,234.8 15,484.8 eight years later 1,190.0 902.6 – – – – – – – – 2,092.6 nine years later 1,190.0 – – – – – – – – – 1,190.0 Current estimate of cumulative claims 1,190.0 902.6 811.5 836.7 1,088.8 1,331.0 1,665.1 1,801.6 1,751.7 2,234.8 13,613.8
Liability recognised in respect of prior accident years at 100% level 137.3 Total net liability to external parties at 100% level† 4,506.8 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2020. †Excluding the unexpired risk reserve of $31.6 million net at 100%.
Less: attributable to external Names 152.7 86.1 74.9 73.8 92.3 101.3 115.9 125.3 96.3 61.0 979.6 Group’s share of cumulative payments (1,025.4) (747.4) (689.8) (648.5) (787.9) (944.8) (1,141.2) (1,108.9) (735.8) (435.0) (8,264.7) Liability for 2011 to 2020 accident years recognised on Group’s balance sheet 5.2 62.0 41.5 107.2 188.4 260.5 368.5 524.4 832.6 1,559.1 3,949.4 Liability for accident years before 2011 recognised on Group’s balance sheet 106.1 Total Group liability to external parties included in balance sheet – net*† 4,055.5 *This represents the claims element of the Group’s insurance liabilities.