Hiscox is a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow. We are listed on the London Stock Exchange, headquartered in Bermuda and currently have over 2,700 staff across 14 countries and 32 offices. We can trace our roots back to 1901 and have grown organically over time from our beginnings in the Lloyd’s market.
37 Governance 63 Remuneration 89 Financial summary2 Strategic report 2 Financial highlights 3 Why invest in Hiscox? 8 Chairman’s statement 10 Chief Executive’s report 18 Building a balanced business 20 Actively managed business mix 21 Actively managed key underwriting exposures 22 Capital 24 Group financial performance 26 Group investments 28 Additional performance measures 29 Ten good reasons to work at Hiscox 38 Risk management 48 Corporate responsibility 52 Board of Directors 54 Chairman’s letter to shareholders 55 Corporate governance 60 Audit Committee report 64 Letter from Chairman of the Remuneration Committee 66 Remuneration summary 68 Annual report on remuneration 2017 76 Remuneration policy 85 Directors’ report 87 Directors’ responsibilities statement 90 Independent auditor’s report 96 Consolidated income statement 96 Consolidated statement of comprehensive income 97 Consolidated balance sheet 98 Consolidated statement of changes in equity 99 Consolidated statement of cash flows 100 Notes to the consolidated financial statements 152 Five-year summary
Gross premiums written (£m) 2,549.3 2,402.6 Net premiums earned (£m) 1,874.5 1,675.0 Profit before tax (£m) 30.8 354.5 Profit before tax excluding foreign exchange (£m) 93.6 202.1 Profit after tax (£m) 26.3 337.0 Earnings per share (p) 9.3 119.8 Total ordinary dividend per share for year (p) 29.0 27.5 Net asset value per share (p) 618.6 649.9
Combined ratio excluding foreign exchange (%) 98.8 90.6 Return on equity (%) 1.5 23.0
Our strategy Building balance – a symbiotic relationship Total Group controlled income for 2017 (%)
Retail business A Smaller premium, locally traded, less volatile business written mainly through Hiscox Retail.
Our success is due to our long-held strategy: A to use our underwriting expertise in Bermuda and London to write larger premium, volatile or complex risks; A to build distribution in the UK, Europe, USA and Asia for our specialist retail products; A to protect and nurture our distinctive culture by recruiting the best people, and by focusing on organic growth.
Over the last five years ROE averaged 15%, well above the FTSE All-Share average of 9%. This performance has enabled the Company to distribute £742 million to shareholders since 2013, and deliver a total shareholder return of 280% – well above the FTSE All-Share of 74%.
Hiscox Retail Standout performance from Hiscox USA, with premium growth of 29% in constant currency.
Hiscox London Market Taken decisive action in areas like political risks, healthcare, extended warranty and auto physical damage business, where results were marginal.
increased gross written premiums by 50% to £2.55bn delivered an average combined ratio of reported average return on equity of achieved compound dividend growth of returned capital to shareholders of £742m Hiscox Re & ILS Increasingly material ILS player, now with US$1.5 billion assets under management.
The excellence of our people has been a crucial factor in our continuing success. Their expertise, courage and dedication continue to drive our reputation for quality and professionalism. In return, we strive to provide them with a working environment in which they can flourish.
A Glassdoor’s 8th Best Places to Work 2018, as voted by employees in the UK.
A Bronze Award for Best Places to Interview in the UK from Glassdoor.
We are market leaders in many of the sectors in which we operate, while our commitment to provide clients with quick responses, clear coverage and superb service is at the heart of everything we do. In 2017 it resulted in us receiving a number of accolades.
Insurer for Claims Service by members of ADECOSE, the country’s largest and most influential broker association.
A UK Consumer Intelligence Award for claims in 2017, as voted for by UK householders.
A Hiscox USA’s I’mpossible campaign received top honours for integrated marketing at the Business Marketing Association’s Global Ace Awards 2017.
Big-ticket business A Marketing Campaign of the Year for the Hiscox Cyber Risk Protection Campaign at the Reactions London Market Awards 2017.
A Underwriting Initiative of the Year for FloodPlus, and Young Underwriter of the Year award for Daniel Alpay, at the Insurance Insider Honours Awards 2017.
Our core values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
In big-ticket lines, an extended period of benign claims activity and a flood of capacity had diminished margins across the industry and we reduced as planned in Hiscox London Market and Hiscox Re & ILS. However, following the catastrophes in the third quarter, we adjusted course and reworked our business plans to grow as prices rose. On the whole we have achieved good price rises in property, casualty and catastrophe-exposed lines, particularly in loss-affected areas, and it is my opinion that this momentum will continue through 2018.
Our balance sheet remains strong and the options we have mean we are well placed to seize the opportunities that this changing market is bringing.
Following nine years of service, at which point the UK Corporate Governance Code deems them not independent, Ernst Jansen and Gunnar Stokholm stepped down from the Hiscox Ltd Board in November. I would like to thank them for their trusted counsel and wisdom, which will be sorely missed by the Hiscox Ltd Board. Our three new Non Executive Directors on the Hiscox Ltd Board, Michael Goodwin, Thomas Hürlimann and Costas Miranthis, bring impressive insurance industry experience gained across Asia, Europe and Bermuda, which will be valuable to our business.
It is our people who differentiate us and our focus on building remarkable teams is evident right across the Group. Their enthusiasm, commitment and fearlessness to challenge convention drives us forward and I would like to thank them for their focus and hard work over the year.
Our big-ticket businesses have a renewed vigour, and our retail businesses continue to shine. Outlook
Outlook The $140 billion of catastrophe losses across the sector led to capital destruction and reserve deficits, and as a result the market is turning. This is not an immediate process; it comes about through each difficult conversation, each new quotation and each renewal. We have been waiting for this, and the good teams we have built and innovative products we have developed mean we are well placed to serve the needs of more customers. Being an underwriter in a changing market brings out the battler in us, and I have been proud of the resolve of our teams.
In 2017, the global insurance industry was tested by hurricanes, earthquakes, wildfires and more, and the estimated US$140 billion insured loss makes it the most expensive year for natural catastrophes ever. After reserving net US$225 million for these events, our profit before tax excluding foreign exchange of £93.6 million (2016: £202.1 million) reflects the robustness of the strategy we have pursued for many years. The steady growth of our retail businesses and their underlying profitability balanced the thunder and lightning of the big-ticket lines.
Hiscox Retail Hiscox Retail continues to grow in significance and this year generated 56%
Our retail businesses delivered profits of £109.9 million (2016: £158.0 million) and a combined ratio of 94.6% (2016: 88.0%). Growth in the USA remains impressive, Hiscox UK & Ireland has done well at the top and bottom line, and Hiscox Europe had its best year ever – despite the distraction of preparing for Brexit.
In the high net worth space, we agreed a transfer deal with Aon for its high net worth book of household insurance. In personal lines we also focused on embedding the products we launched in 2016, including our renovations and extensions product and our UK flood product, which have both performed well. We have suffered from an increase in escape of water claims arising from burst pipes, which is a trend affecting the industry. We are working with others to see how we can help policyholders mitigate this risk.
The power and distinctiveness of the Hiscox brand is an important driver of our growth. We have seen good improvements in all key brand measures as the long-term benefits of a consistent strategy and ongoing investment continue to pay off. In the UK, we returned to TV with a sponsored ten-part property
Gross premiums written 1,423.9 1,181.4 Net premiums earned 1,229.9 1,020.5 Underwriting profit 89.0 100.4 Investment result 22.8 30.4 Foreign exchange and other* (1.9) 27.2 Profit before tax 109.9 158.0 Combined ratio 94.6% 88.0% Combined ratio excluding foreign exchange 94.5% 91.8% *Includes impairments and accelerated amortisation.
series on Channel 4, ‘Best Laid Plans’, to support our renovations and extensions product.
Germany and Spain performed particularly well. In Germany, a focus on cyber and classic car continues to deliver and the business is achieving impressive 95% retention rates. We also extended our reach with a new sales branch in Frankfurt.
In Spain, we have focused on growing our existing partnerships, through innovation in products and services. We also launched our new cyber product, Cyber Clear, with promising early signs.
Hiscox France returned to growth after a challenging 2016, driven by the professions book and a focus on specialty commercial schemes. New leadership is also having a positive effect. In Benelux, we continue to focus on professionals and specialty commercial business, and to invest in our market-leading cyber offering.
Our mainland Europe business is supported by our shared service centre in Lisbon, where we now have a team of about 230 people. Operations support is mostly integrated with each individual country to ensure as close an alignment as possible, to overcome the tyranny of distance.
Having initiated technology transformation programmes in our retail businesses in the UK and the USA, our attention will soon turn to Europe. In 2018, we will begin the planning for this task, with an expectation that this will move to execution in 2019 when the UK programme is largely complete. In the meantime, we are re-launching our broker extranet sites under the rubric ‘my Hiscox’ with additional products and self-service features to drive sales and service. We have also deployed a state-of-the-art CRM solution across our broker and direct channels, as well as Robotics Process Automation (RPA) to automate back-end processing and even further improve our service levels to brokers and partners.
Hiscox USA Hiscox USA underwrites small- to mid-market commercial risks through brokers, partnerships and directly to businesses online and over the telephone. The business continues 2017 was another important lesson in the need for flexibility in business, and I have been proud of our resilience.
Our direct and partnerships division, the fastest-growing segment of Hiscox USA, had another strong year. We expanded our underwriting appetite within partnerships into adjacent small business segments, such as food trucks and insurance agents. Our small business operations continue to go from strength to strength and we now have more than 250,000 policies in force.
We remain a small player in the US insurance market, and the opportunity is substantial. Our US team has done extremely well to build a lead in the small business segment, particularly online, and has established strong partnerships.
The business delivered gross written premiums of US$127.3 million (2016: US$128.8 million), a decline of 1.2% in constant currency or a small increase of 3.7% in Sterling terms, which is a good result in intensely competitive trading conditions.
The Security Incident Response product we launched at the start of the year in the UK, and have since rolled out to the USA, Spain and Japan, differentiates us and is creating a market where none existed previously. It gives us opportunities with a wider range of clients who are focused on broader security issues beyond kidnap exposure, such as criminal threats, workplace violence, corporate espionage and cyber extortion. It also enables us to leverage additional distribution channels such as directors and officers’ brokers, and has been very well received so far. We will look at other opportunities to build on this success in 2018.
The Special Risks underwriting centre we established is delivering material benefits to the business by enabling underwriters to spend more time underwriting complex risks and pursuing new business. The operating model is being refined further with a focus on the USA and technological innovation, which we expect will provide further benefits.
Despite the extremely competitive environment in Singapore the team is attracting new business thanks to ongoing investment in the brand, improving conversion rates in our contact centres and a more targeted approach to pricing. We also extended our distribution in conjunction with a local aggregator, and established new partnerships with a major vehicle inspection centre and with Shell – both of which are already yielding encouraging results. Product innovations including cover for motorcycle delivery riders and NCD60, a rewards system for customers, have also enhanced our proposition.
A new initiative in 2016 and 2017 was our FloodPlus product which is a commercial market alternative to the government-backed National Flood Insurance Program. Our underwriting resolve and risk selection was tested in Hurricane Harvey which caused extensive flooding in Houston. We paid losses, which is after all the product we sell, but we see opportunities ahead. We created a Lloyd’s consortium with other leading players and in 2018 the consortium will seek to grow this award-winning product materially.
All lines were impacted by an ever softening market in the first half of the year.
Losses from hurricanes Harvey, Irma and Maria affected our hull and cargo accounts in the second half. To date, rate increases in these lines have not been at the level expected, so we will need to remain disciplined.
Casualty Our casualty division includes our directors and officers’, cyber, professional indemnity and general liability lines.
We have reduced in healthcare and miscellaneous professional indemnity, focusing instead on our investment lines of directors and officers’, general liability and cyber, where our market-leading teams and products are having a positive effect. Directors and officers’ and general liability are seeing a welcome uptick in pricing, and the cyber market continues to grow substantially as global demand increases.
Specialty This division includes our aviation, contingency, terrorism, personal accident and product recall business. The space business moved into Hiscox MGA over the course of the year, and we stopped writing political risks business during 2017.
Product recall is still a relatively new line of business and there is some overcapacity, but it remains an attractive specialty area where we can add value with niche expertise. Market losses have helped to curtail rate reductions and we have achieved good growth. We agreed to buy the renewal rights to Liberty’s London Market product recall book, and we launched an aviation-focused product that has been endorsed by the Aircraft Builders Council as the product recall policy of choice for its members.
Hiscox London Market In a year severely affected by natural catastrophes, it is no surprise that Hiscox London Market, which has a focus on catastrophe exposed risks, delivered a loss of £36.2 million (2016: profit of £44.0 million), equal to a combined ratio of 111.6%.
The market conditions facing Hiscox London Market have been deteriorating for some time, so in 2017 we shrank our premium by almost £150 million to £581.7 million (2016: £726.0 million). This was not an across the board retreat, but focused on lines like political risks, healthcare and extended warranty/auto physical damage where our results were marginal. We worked hard to hold market share in our core lines including terrorism, household and commercial property binders, and to progress in our investment lines of cyber, US flood, general liability, product recall and cargo. We believe that this discipline is the key to long-term outperformance.
It was another difficult year for aviation, where rates continued to fall, eroding an already non-existent margin. We significantly reduced our exposure to this line during 2017 and in 2018 will withdraw from aviation hull and liability underwriting.
Alternative risk Last year I said we would materially reduce our involvement with underwriting agency White Oak in 2017, and we kept to this plan – exiting the extended warranty and auto physical damage business. With the benefit of hindsight our expansion into this area was a mistake as we failed to achieve the margins we expected.
We are now focused on portfolio business, where we match our capacity and experience with the expertise of underwriters in niche lines that complement our core appetite.
Hiscox Re & ILS Hiscox Re & ILS comprises the Group’s reinsurance businesses across the world and ILS activity through our flagship ILS funds. Our strategy of underwriting on behalf of Hiscox and third-party capital, whether they are insurance companies, other syndicates or capital market investors, is working well.
Growth in US catastrophe reinsurance has been especially pleasing, and helped to offset the closure of our healthcare business and reductions in retro and casualty lines, where rates were under more pressure. Property catastrophe
Catastrophe reinsurance pricing into the key 1 January renewal season saw average prices increase by 9%. There were clear variations within this, with loss-affected accounts seeing larger increases. The increases were less than we had expected and our aggregate book will grow less than initially planned. It is clear though that rate decreases are few and far between, so we think that 2018 will offer a better risk/reward trade-off than 2017.
Growing in non-catastrophe lines will be a focus for 2018, with opportunities in cyber and casualty. The ILS team will also be working with their insurance colleagues to see how we can utilise our access to both capital market investors and primary insurance to create new products and opportunities.
Claims 2017 will be remembered as one of the most costly years in history for natural catastrophes as a result of hurricanes Harvey, Irma, Maria and Nate, Mexico
37 Governance 63 Remuneration 89 Financial summary2 Strategic report Chief Executive’s report dealing with each customer and broker in a fair and reliable way. This amplification is not cheap and in 2017 the Group spent £54 million on marketing and brand-building activity (2016: £42 million). Our initiatives include the ‘I’mpossible’ brand idea which ran on digital, press, event, radio and even ‘in elevator’ mediums in the USA. Our US brand awareness peaked at 44% during the year (2016: 38%) and our ambition is to reach the 70% we have in the UK. Our new UK brand idea of ‘ever onwards’ was also launched in the year. This small commercial-focused marketing drove a double-digit increase in premiums.
In 2017, Hiscox USA began the preparatory phase of its system replacement, entering phase one in 2018. We now have over 250,000 small commercial customers, so the move to a more robust and digital friendly platform is well timed.
earthquakes and California wildfires. The total cost of these events to the industry is estimated at in excess of US$140 billion, and Hiscox established net reserves of US$225 million to cover the expected losses from them. We try to take a prudent view when we create these reserves, but as with many matters in insurance, uncertainties remain. The prudence of our team in reserving prior catastrophes and individual claims was demonstrated with the release of £252 million (2016: £213 million) from prior years. Shocks in insurance are normally negative, so it was pleasing to demonstrate past prudence.
Gross premiums written 543.7 495.2 Net premiums earned 209.0 211.4 Underwriting profit 3.5 84.1 Investment result 21.7 10.1 Foreign exchange and other* (5.4) 21.3 Profit before tax 19.8 115.5 Combined ratio 101.3% 53.0% Combined ratio excluding foreign exchange 98.9% 64.9% *Includes finance cost.
Capital and external environment Hiscox’s capital requirement is driven by a mixture of the level needed to provide the required security to our customers and brokers, the expectations of regulators around the world and political decisions in the countries in which we operate. Over the past two years these factors have conspired to drive an atomisation of our capital, resulting in a consequent reduction of diversification and increased capital needs and cost. These trends look likely to continue into 2018.
It will also lead to a temporary increase in required capital of approximately £50 million, with only 75% of this moderating over time, due to the loss of diversification in our capital base.
The third driver of capital is our collective regulators. The financial crisis of 2008/09 continues to cast a long shadow, so each stress test or model improvement seems to result in a small incremental increase in regulatory capital requirement. There is little incentive for a regulator to say ‘we feel you are more than adequately capitalised’.
The final driver is the rating agencies. Hiscox is often referred to as a Lloyd’s business, which is a fair reflection of where we came from, but not of the shape of our business today. Rating agencies looked at us in the same category as pure catastrophe writers, not giving credit to the benefits of diversification that our now substantial retail business brings. I am pleased to report that in 2017, S&P had a fresh look at Hiscox and moved us from a high risk category to a medium risk category. I hope that they, and the other rating agencies, feel their judgement is vindicated with Hiscox being profitable in a year of US$140 billion of catastrophe losses. This was a great piece of work by
May 2018, and ahead of our interim results we will publish comparative restated data for our final and interim results of 2017.
Evolution of leadership It is a common market misconception that the structure and leadership of Hiscox is unchanging. This is not the case. We seek to have a steady evolution of our structure and leadership as we look to marry personal plans with what is needed to achieve our ambitions.
This year our organisation’s structure has evolved, some of our pioneers are departing and we have filled their roles and created new roles with a mix of internal talent and judicious external recruitment. Our retail businesses now account for 56% of our income and, as this year’s results have shown, are substantial contributors to our profits and bring welcome resilience to our balance sheet. Reflecting this, and recognising their common challenges of creating a compelling customer experience, driving product innovation, creating scale ,and leveraging expenses and digitising for the modern age, we appointed Ben Walter, CEO Hiscox USA to the newly created role of CEO Hiscox Global Retail. Ben will relocate to the UK in July and Hiscox UK & Ireland, Hiscox Europe, Hiscox USA and Hiscox Special Risks will report to him. He will work alongside Joanne Musselle, Chief Underwriter of Hiscox UK who was promoted to the newly created role of Chief Underwriter, Hiscox Global Retail in January. Together they will work to drive forward our retail businesses across the world.
Outlook 2017 was a challenge for Hiscox and the industry. Our balance, in product and geography, has benefited our policyholders and our shareholders. As we look forward, this diversity, from direct-to-consumer products, to big-ticket and reinsurance lines as well as insurance-linked strategies, gives us the kind of options that we didn’t have even ten years ago.
We welcomed two new appointments to the Executive Committee, and it was pleasing to recruit from within for these roles. Mike Krefta joined the Executive Committee in September on his promotion to Hiscox Re & ILS CEO, and Kate Markham, UK Head of Direct, followed suit in November on her appointment to the newly created role of Hiscox London Market CEO. Mike and Kate both bring fresh thinking and technical and consumer expertise to the Executive Committee. Jeremy Pinchin returned to the UK from Bermuda, relinquishing his roles as the founding CEO of Hiscox Re & ILS and Group Company Secretary to focus on his roles of Group Claims Director and Executive Committee member. He has also taken on chairmanship of the Hiscox pension scheme and Hiscox Special Risks. During his time in Bermuda, Jeremy brought together our London and Bermuda reinsurance teams, drove the creation of our ILS business and established Hiscox Re & ILS as an innovative force in the reinsurance industry.
Some Hiscox pioneers have left the business. After 23 years of service to Hiscox, Steve Camm, Hiscox Special Risks CUO, retired. Steve established our Guernsey operations in 1998, beginning with just one colleague in a basement office, growing it to the centre of our Special Risks operation. He was relentless in his pursuit of a retail approach to our kidnap and ransom underwriting in the face of strong market opposition. We will continue to benefit from his experience as a Non Executive Director to Hiscox Special Risks. Kevin Henry, who has been underwriting kidnap and ransom risks with Hiscox for nine years, has stepped into his shoes.
A Shrinks and expands according to pricing environment. A Excess profits allow further investment in retail development.
Building a balanced business Hiscox enjoys a symbiotic relationship between more catastrophe exposed, globally traded business, and less volatile, smaller premium, retail business which gives us opportunities throughout the insurance cycle.
Commercial property Onshore energy USA homeowners Managing general agents International property
0b n m ar ke t l os s 7 ye ar re tu rn p er io d
4b n m ar ke t l os s y ea r r et ur n p er io d
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these sources comprised US$500 million at 31 December 2017 (2016: US$500 million), of which US$10 million was utilised at 31 December 2017 (2016: US$10 million).
A.M. Best, S&P and Fitch have shared their capital models with the Group. These models calculate capital adequacy by measuring available capital, after making various balance sheet adjustments, and comparing it with required capital, which incorporates charges for premium, reserve, investment and catastrophe risk. Our interpretation of the results of each of these models indicates we are comfortably able to maintain our current ratings as set out in note 3.3 to the financial statements. The rating agency requirements shown in the chart on page 23 are consistent with the Group’s own internal projections of rating agency capital requirements.
We are also required to publish a Financial Condition Report (FCR), which sets out details of the measures governing the Group’s business operations, corporate governance framework, solvency and financial performance. The FCR is also intended to provide additional information about the Group’s business model, enabling the public to make an informed assessment on whether the business is run in a prudent manner.
Internal capital requirements The Group sets risk limits and tolerances that reflect the amount of risk it is willing to accept. To ensure good risk management, our current exposure by key risk type is monitored against these predefined measures throughout the year.
Bermuda enhanced solvency capital requirement £1.83 billion available capital (post-�nal dividend)
Net asset value per share decreased by 4.8% to 618.6p (2016: 649.9p), with net tangible asset value at 570.0p (2016: 605.7p). The Board has declared a final dividend of 19.5p per share, to be paid on 12 June 2018 to shareholders on the register at 11 May 2017, taking the total ordinary dividend per share for the year to 29.0p, an increase of 5.5% (2016: 27.5p). The Group continues to maintain a progressive dividend policy.
Gross premiums written of £2.5 billion increased 6.1% year-on-year or, on a constant exchange rate basis, 1.9%. Strong growth continued in Hiscox Retail, up 20.5% for the year, and now accounts for 56% of the Group’s gross premiums written – helping to offset the expected decline in gross premiums written in Hiscox London Market. The Group’s combined ratio including foreign exchange movements was 99.9% (2016: 84.2%), or 98.8% (2016: 90.6%) excluding the impact of foreign exchange.
Hiscox Retail Hiscox Retail accounts for 56% (2016: 49%) of the Group’s gross premiums written at £1,423.9 million (2016: £1,181.4 million). Gross premiums written for Hiscox UK & Ireland were up a healthy 11.6% at £556.3 million (2016: £498.6 million). Hiscox Europe’s gross premiums written also grew, up 22.1% to £213.3 million (2016: £174.7 million), or 12.3% in constant currency. Hiscox USA was once again a standout performer, with gross premiums written up 36.0% to £544.1 million (2016: £400.0 million), or 28.8% in constant currency. Gross premiums written within Hiscox Special Risks were up to £98.7 million (2016: £95.2 million), however down 1.2% in constant currency, and DirectAsia contributed £11.4 million of gross premiums written (2016: £13.0 million).
The net claims ratio increased to 45.2% (2016: 38.4%) with increases in USA and Special Risks after good returns in the prior year. The increased claims ratio also resulted in an increase to the net combined ratio which, excluding the impact of foreign exchange, grew to 94.5% (2016: 91.8%). Careful expense management resulted in the expense ratio reducing to 49.3% (2016: 53.4%). Profit before tax is £109.9 million (2016: £158.0 million), but before foreign exchange remains more consistent at £110.3 million (2016: £120.7 million). This result validates our long-held strategy of building retail businesses that provide balance to the more volatile, catastrophe-exposed big-ticket lines.
Financial assets and cash* (£m) 4,412.7 4,409.7 Other assets (£m) 2,794.6 2,232.1 Total assets (£m) 7,207.3 6,641.8 Net assets (£m) 1,754.4 1,818.4 Net asset value per share (p) 618.6 649.9 Net tangible asset value per share (p) 570.0 605.7 Adjusted number of shares in issue (m) 283.6 279.8 *Excluding derivative assets and insurance-linked securities funds.
The Group had net cash inflows from investing activities of £3.0 million (2016: outflow of £31.0 million), with continued underwriting software development. Marketing expenses remained a major component of our expense base at £53.6 million during the year (2016: £42.1 million).
Bond markets in 2017 increasingly had to contend with Central Bankers withdrawing their monetary stimulus to varying degrees. In the USA, Canada and the UK there were a series of official rate rises. The Federal Reserve increased the federal funds rate three times as expected, while the Bank of Canada and Bank of England surprised markets somewhat with their respective increases. Additionally, there was a move by major central banks, apart from the Bank of Japan, to prepare investors for a reduction in their balance sheets – so-called quantitative tightening. The impact of the above in government bond markets was for short-term yields to rise over the year and yield curves generally to flatten. The move to higher yields gained traction in the second half of the year as the two-year US Treasury yield jumped from 1.3% to 1.9% with equivalent UK gilt yields increasing from 0.1% to 0.5%. Against this background short-dated government benchmarks in Sterling, Euros and Canadian Dollars delivered negative returns for the year while the one- to three-year US government benchmark returned just 0.4%.
Bond credit quality 14.7% Cash 7.6% Risk assets 77.7% Bonds 9.7% EUR 1.9% CAD and other 18.7% GBP
34.4% Government 27Hiscox Ltd Report and Accounts 2017 2 Strategic report Group investments gave way during the year to optimism that they would be justified by improved earnings growth. This was driven by a broad-based economic recovery and reinforced latterly, in the USA at least, by the potential benefits of tax reform. The subsequent strength of equity markets has seen our risk assets generate a 13% return and contribute a significant portion of the overall result. With less diversity in sector performance our range of actively managed funds have done better on an absolute and relative basis than last year. Our allocation to global funds produced strong results and our selection of hedge funds also bounced back from a period of underperformance, beating the relevant hedge fund index and contributing usefully to the return. The performance of funds investing in the UK market has been more mixed but stayed in touch with the benchmark which had a particularly strong end to the year. At today’s levels, concerns about equity valuations persist but momentum remains in their favour.
The Group has identified additional performance measures (APMs) that are not defined in accordance with Generally Accepted Accounting Principles (GAAP), being International Financial Reporting Standards (IFRS), and may not necessarily have standardised meanings for ease of comparability across other organisations in the industry. These non-GAAP measures are used within the financial statements. The APMs are: profit excluding foreign exchange gains/(losses), GWP growth in local currency, combined claims and expense ratios, return on equity, net asset value pence per share and reserve releases. These are commonly used measures across the industry, and allow the reader of the Annual Report to compare across peer companies.
A Profit excluding foreign exchange gains/(losses) This represents the profit for the period after deducting foreign exchange gains or adding back foreign exchange losses in the relevant period. This enables the reader of these financial statements, and the Group, to measure the comparability of underlying profitability without the volatility of these positions. To obtain the value, the reader of these financial statements should remove the foreign exchange gains/(losses), as identified in the income statement, from the profit for the period.
A Combined claims and expense ratios The combined claims and expense ratios are common measures enabling comparability across the insurance industry that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if we owned all of the business, including the 27.4% of Syndicate 33 that the Group does not own. The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables us to measure all of our underwriting businesses on an equal measure. The calculation is discussed further in note 4, operating segments. The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.
A Return on equity (ROE) As is common within the financial services industry, the Group uses ROE as one of its key performance metrics. While the measure enables the Company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance-related pay and shared-based payment structures, as discussed within the remuneration policy report in the Annual Report and Accounts. The ROE is shown in note 6, along with an explanation of the calculation.
A Net asset value (NAV) pence per share The Group uses NAV pence per share as one of its key performance metrics. This is a widely used key measure for management and also for users of the financial statements to provide comparability across peers in the market. NAV pence per share is shown in note 5, along with an explanation of the calculation.
“We share the same morals, but different opinions; believe in the same fundamentals, but practice in an individual manner.” Ten years with Hiscox
#3. Work for a business that cares about people Hiscox people are treated as exactly that: people. We asked new recruits (people who had worked with us for less than two years) what surprised them most about working here and they told us it was our approachable senior leaders and the intelligent, friendly, caring nature of our teams.
If you think working in insurance is about being dictated to by large spreadsheets and complex calculations, the way we do business here might surprise you – the numbers are important, of course, but human thoughts, feelings and intuition rule supreme.
“Although it can get a little hectic, I’ve never felt like I’m on my own.” One year with Hiscox
#4. Take risks and grasp opportunities As a business, Hiscox is flatter and leaner than many of its competitors – and that brings with it significant challenges. But there are two sides to every coin: our people are able to make their job their own; they are empowered to run with ideas and spot opportunities. And while they’ll be given plenty of support if they need it, no one is going to hold their hand while they’re getting on with the job. We want to grow our own leaders, so we actively encourage our people to apply for new roles in Hiscox offices around the world to help broaden their experiences and develop their leadership skills.
Our business model is one that looks beyond just hitting the numbers on a quarterly basis. We invest for the long term too, and that means taking big bets when it feels right. We find that this approach works as well for people as it does for business. We invest in people who have the courage to take bets on themselves.
“Hiscox doesn’t have room for those who do just enough to get by – what we call ‘the 51 percenters’.” Ten years with Hiscox
#6. Enjoy a balanced life, inside and outside of work We understand that people have lives outside of work. They might be parents or carers; they may want time for hobbies or improving their well-being; they may want to attend the school play or sports day; they might have a long commute from which they sometimes need a break. We’re all grown-ups here, so we manage our own time – if we need to visit the dentist or watch our children perform in a play, we’re trusted to make it work around work. Hiscox also has a flexible working policy, which we want people to use – nearly all of our flexible working requests have been approved in full.
“The art is awesome, kind of makes you realise that the Company is far from short-sighted; art is both an investment in value and an investment in staff morale and long-term happiness.” Five years with Hiscox
#8. Earn benefits that help you plan for the future We offer a competitive salary and benefits such as: profit-related and personal performance-based bonus. We’re not a business that feels the need to say thank you for every little thing, but when people excel at their jobs, their efforts are rewarded.
A major aim of our benefits package is to enable employees to plan for the future, which is why it includes generous retirement benefits and life, personal accident and health insurances. We also offer a ‘save as you earn’ scheme, so that employees can save for the things that are important to them – we’ve heard stories of deposits for first homes, major home renovations, holidays and weddings. Many of our employees also keep fit with our subsidised gym memberships, and enjoy some downtime at Christmas with our Christmas gift (in the UK, we particularly love our food and wine hampers!). The specifics vary from country to country, based on local labour laws and customs, but we try to ensure our packages are equal wherever you work.
#9. Improve your well-being We offer sports club memberships as part of our benefits packages. And in some of our offices – such as London and York – there are also subsidised therapies on offer, including sports massage, acupuncture and osteopathy. For those who wish to cycle or run to work or exercise during their lunch break, there are showers and lockers for their things.
There’s fruit on offer in lots of our offices (or biscuits in some if you’d rather!). Others have toast and local jams. We also have a confidential employee assistance phone line that can offer support with personal and professional issues.
#10. Work hard and have fun Whether working closely with our teams on challenging projects, celebrating good work or fundraising for the things we care about, we aim to enjoy each other’s company. There’s usually a lot going on in our offices around the world – from social committees organising still life art classes, wine tastings and pop-up nail bars, to low-key team outings and celebrations and, of course, the annual office Christmas party. Lots of people around the Hiscox Group take part in fundraising initiatives to support Group or local projects and charities, too. On top of their day jobs, we’ve got sky-divers, dragon boat racers, bakers and decorators and more beyond, all raising money for important causes.
#7. Work in an environment that inspires 37 Governance 63 Remuneration 89 Financial summary2 Strategic report
38 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
The Group’s success depends on how well we understand and manage our exposures across key risk types. These consist of strategic risk, insurance (underwriting and reserve) risk, market risk, credit risk, operational risk, regulatory and legal risk and group risk. Our collective risk knowledge informs every important decision we make.
Risk strategy Our robust risk strategy positions us to capture the upside of the risks we pursue and effectively manage the downside of the risks to which we are exposed. Our risk strategy is based upon three key principles: s we maintain underwriting discipline; s we seek balance and diversity through the underwriting cycle; s we are transparent in our approach to risk, which allows us to continually improve awareness and hone our response.
Risk management framework The Group takes an enterprise-wide approach to managing risk. The risk management framework provides a controlled system for how risk is identified, measured, mitigated, monitored and reported across the Group. It supports innovative and disciplined underwriting across many different classes of insurance by guiding our appetite and tolerance for risk.
39Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance Risk management 63 Remuneration 89 Financial summary
Risk appetite 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 real-time exposure management and is monitored throughout the year.
Our risk appetite is set out in two ways: s in qualitative terms through risk appetite statements, which outline the level of risk we are willing to assume by risk type and overall; s in quantitative terms through risk limits and tolerances, which act as boundaries where actual risk exposure is more actively monitored. Risk tolerance is the maximum threshold we do not want to exceed; nearing it would represent a ‘red alert’ for senior management and the Board.
Risk is also overseen and managed by formal and informal committees and working groups across the first and second lines of defence. These focus on specific risks such as catastrophe, reserve, investment, credit and emerging risk. The Group Risk and Capital Committee and the Group Underwriting Review Committee make wider decisions on risk.
The Risk Committee of the Board advises on how best to manage the Group’s risk profile by reviewing the effectiveness of risk management activities and monitoring the Group’s actual risk exposure, to inform Board decisions. The Risk Committee relies on frequent updates from within the business and from independent risk experts.
s Stress and scenario testing, performed to identify and measure the likelihood and impact of potential plausible but extreme events. The Board considered and challenged the findings and associated action plans for the scenarios, which had been designed to test the resilience of the business plan to major and minor shocks.
s Specific risk reviews, providing a deeper understanding of key risks and potential exposures to the business.
ORSA process Hiscox’s ORSA process is an evolution of its long-standing risk management and capital assessment processes. It is the self-evaluation of the risk mitigation and capital resources needed to achieve the Group’s and individual insurance carriers’ strategic objectives on a current and forward-looking basis, given their risk profiles.
The structure of the GSSA report and the insurance carriers’ ORSA reports have been further refined in 2017 to streamline the documents and strengthen the narrative relating to conclusions, with procedure-related supporting documentation maintained in an ORSA record.
Role of the Group risk team The Group risk team is responsible for designing and overseeing the implementation of the risk management framework and continually improving it. The team works with the business units to understand how they maintain the first line of defence and whether they need to make changes in their approach. The team is also responsible for monitoring that the business meets regulatory expectations around enterprise risk management and reporting on risk to the Board and the Risk Committee.
The Group risk team is led by the Group Chief Risk Officer, who reports to the Group Chief Executive Officer and Chair of the Group Risk Committee.
During 2017, the Group has invested significantly in further strengthening the breadth of the Group risk team, with the recruitment of a number of additional team members.
Strategy evolution and execution The Group’s continuing success depends on how well we understand our clients, markets and the various external factors affecting our business. Having an ineffective strategy could have widespread repercussions on profitability, capital, market share, growth and reputation.
Setting the right course, particularly in a sector as hazardous as insurance, is essential for our long-term success.
A key pillar of the Group’s strategy is to balance the underwriting of high-margin, volatile, complex global risks by also selling stable, local specialist retail products.
The Group’s emerging risk forum assesses risks and opportunities that could potentially affect the business, including geopolitical changes such as Brexit or US trading and taxation relationships. Stress testing and scenario analysis help identify unanticipated dependencies and correlations between risks, which could impact upon the Group’s strategy.
The Group’s business plan is underpinned by a clearly-defined appetite for underwriting risk. We closely monitor our risk exposure to maximise the expected risk-return profile of our entire portfolio and offset any potential losses from more volatile accounts.
Our modeling resources are tailored to support insurance and reinsurance plans and ensure that exposure matches expectations. Risk aggregation and modeling resources are shared across the Group.
Stress and scenario testing is performed by the Group and by individual insurance carriers to assess our potential exposure to certain catastrophes.
Binding or delegated authorities give the Group access to a greater volume of business and can contribute significantly to our profitability and market share.
Insurance risk – reserve The risks of managing the adequacy and volatility of claim provision reserves set aside to pay for existing and future claims.
The provisions we make to pay claims reflect our own experience and the industry’s view of similar business. They are also influenced by loss payments, pending levels of unpaid claims, historic trends in reserving patterns and potential changes in rates arising from market or economic conditions. Provisions are set above the actuarial mid-point to reduce the risk that actual claims may exceed the amount we have set aside.
Our provision estimates are subject to rigorous review by all areas of the business, as well as by independent actuaries on the managed Syndicates. The relevant boards approve the amount of the final provision, on the recommendation of dedicated reserving committees.
Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out in note 25 to the consolidated financial statements.
Liquidity A failure of our liquidity strategy could leave us unable to meet cash requirements to pay liabilities to customers or other creditors when they fall due. We might also incur high costs in selling assets or raising money quickly in order to meet our obligations.
To identify potential issues, we run stress tests to estimate the impact of a major catastrophe on our cash position. We also consider the impact on our liquidity of other adverse events occurring, such as an economic downturn and declining investment returns.
The Group maintains extensive borrowing facilities with a range of major international banks. This minimises the risk of one or more institutions being unable to honour commitments to us.
The vast majority of our business is written through brokers. We face credit risk when money is transferred to and from brokers for premiums or claims.
We monitor our exposure to brokers on an ongoing basis and have a continuing dialogue with our core brokers to quickly identify and resolve any credit issues that arise. Such monitoring takes into account a number of factors, which can include credit rating, financial position, financial performance, payment history and market factors.
As well as causing financial losses, information security risk can have legal, regulatory and reputational consequences.
The Group constantly deploys and evolves systems, policies and procedures to mitigate internal and external threats to our IT infrastructure. We conduct Group-wide mandatory training on information and cyber security, which is also mandatory for all third parties and contractors.
We have dedicated IT resources that support the Group’s technology needs and oversee critical systems and applications.
Our stress testing and scenario analysis considers the impact and likelihood of an IT or systems failure and assesses how management actions could be taken to mitigate the risk.
Project risk and change management The risks that projects and/ or change initiatives are not delivered to plan, budget or specification, or that the risks inherent in projects are not appropriately managed.
Where this occurs, there may be not only direct financial losses but also indirect losses through distraction risks and inefficiencies.
We operate in an everchanging environment, with technological advancements, customer behaviour and external expectations evolving rapidly in recent years. To remain relevant we must continue to evolve how we conduct our business.
Specialist resource is used to augment project resources, either in a contractor or advisory capacity, as needed.
Regulatory and legal risk The risk of financial loss, regulatory censure, reputational damage and/or other adverse impact as a result of non-compliance with all relevant regulations and/or legislation in all relevant jurisdictions.
Insurance is a highly regulated industry. There may be times when the regulatory landscape undergoes a significant shift that directly impacts our business.
The Group understands that sound, prudent regulation is key to the stability and sustainability of the insurance and wider financial markets. We continuously monitor new regulation and review our internal processes to facilitate compliance. Our approach is to combine local expertise with a globally consistent framework to manage regulatory change and provide effective compliance with the varied and evolving requirements.
Corporate responsibility Our values underpin every aspect of our business and have earned us a reputation for decency and integrity. They are reflected in our work around the environment, the marketplace, the community and in our workplace culture.
Employees and workplace culture* It is Hiscox’s policy to require all staff to meet standards of behaviour that reflect the core values of the Group. By consistently demonstrating these high levels of conduct, we believe we are more likely to achieve business success and create value for shareholders.
Hiscox aims to provide its staff with both the means and the motivation to excel. This is achieved through a fair system of rewards and an environment in which employees can enjoy their work and reach their full potential. Hiscox recognises the importance of maintaining a healthy work/life balance, so offers the option of flexible and homeworking wherever possible.
The environment* Hiscox is committed to a policy of reducing the environmental impact of our work. By 2020, we aim to complete a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per full-time equivalent (FTE), relative to 2014. We are ahead of target. The table far right depicts the Group’s global carbon emissions year-on-year since 2014.
We also remain fully committed to being a carbon neutral business. Our global emissions are currently being offset through a pioneering collaboration with Carbon Footprint Ltd in the Great Rift Valley in Kenya, which uses carbon finance to fund tree planting and support the developing community. We review our collaborations every year and in 2016 offset 7,383 tonnes in carbon emissions through this scheme.
Hiscox is one of the founding members of ClimateWise, a global network of over 20 leading insurance companies united by their concerns over climate change and their ability to understand and communicate the risks associated with it. Since the network’s launch in 2008, our progress in meeting a set of principles outlined by ClimateWise has been subject to annual independent review. In 2017, we were given a score of 69%, ranking us seventh among the participants. The Hiscox ClimateWise Report is available at www.hiscoxgroup.com/responsibility.
This commitment to the environment has a commercial imperative as well as a moral one. Hiscox is a constituent of indexes including CDP and the FTSE4Good Index Series, a series of benchmark and tradable indexes designed to help investors integrate environmental, social and governance (ESG) factors into their investment decisions.
The marketplace In its dealings with the marketplace, the Group aims to demonstrate the highest levels of professionalism, expertise and ethical practice. In recognition of these qualities, Hiscox UK & Ireland and Hiscox London Market both have the Chartered Insurance Institute’s Chartered Insurer status – an important marker for attracting partners that are looking to work with high-quality insurers.
Dealing with investors Hiscox communicates openly and transparently with its shareholders. The Group reports both its half- and full-year results to investors via a series of presentations, and all relevant financial information is available on the corporate website. Senior managers and key employees meet regularly with investors and analysts to explain the Group’s business strategy and financial performance and answer any questions.
Tonnes CO2e per FTE (all scopes 1, 2 and 3) 3.68 3.22 3.02 2.88 † The 2016 baseline has been re-stated. This is as a result of more accurate actual electricity data available where estimates were previously used: Bordeaux, Cologne, Hamburg, Munich and Dublin.
Training and development Hiscox is committed to training and developing employees to help them maximise their potential. Every permanent member of staff has the opportunity to pursue training and development, with training and development needs reviewed twice a year as part of our Group-wide performance management and review process, which is also when performance is measured against clearly-set objectives.
Social and community matters* The Group is fully committed to supporting the communities within which it operates, through donations, professional support and the volunteer work of its employees.
s In 2017, Hiscox Bermuda supported organisations working with local young people, the elderly and the most vulnerable members of the community. These groups included The Family Centre, The Reading Clinic, the Eliza Dolittle Society, The Bermuda Society for the Blind, Big Brothers Big Sisters, Meals on Wheels, Purvis Primary School PTA and the Adult Education School. We continued to support various environmental groups including Greenrock, Bermuda Environmental Sustainability Taskforce, Reef Watch and Groundswell, and inclusive sports programmes such as Beyond Rugby, Bermuda Tennis Association Grassroots programme, Boccia Bermuda and the Hiscox Under-11 Cricket League. We were also pleased to take part in Keep Bermuda Beautiful’s clean-up campaign, Adopt a Spot.
Our focus on D&I as a strategic priority continues in 2018 as we broaden the scope of activities beyond gender, drive
In the UK, the Foundation contributed over £51,000 to the charitable endeavours of Hiscox staff. It also continued its support for the Richard House Children’s Hospice, which provides care to children and young people with life-limiting health conditions, and Humanitarian Aid Relief Trust, which works with marginalised, oppressed and exploited communities around the world. The Hiscox Foundation USA provided similar backing to the charitable work of Hiscox staff. This included donations to the Romeo Milio Lynch Syndrome Foundation, which supports those with a hereditary predisposition to certain types of cancers; Special Olympics Unified Sports, which promotes social inclusion through sport; Volunteers of America in Greater New York’s Operation Backpack, which in 2017 provided 17,000 children living in a New York City shelter with a new, full backpack in time for the first day of school; and the American Red Cross for its Hurricane Maria Disaster Relief appeal. The Hiscox Foundation USA also continued its support for the Parris Foundation, an s Hiscox Benelux supported the community during Christmas by offering food cheques to the elderly.
Hiscox remained title sponsor of The Sunday Times Hiscox Tech Track 100, which charts the fastest-growing private technology, telecoms and digital media companies, and supported the prize
The Hiscox Foundation donated £182,000 to charities in the UK and USA during 2017.
For more detail on corporate responsibility see hiscoxgroup.com organisation dedicated to teaching children in deprived communities about science, technology, engineering and mathematics.
Respect for human rights* Maintaining a positive, open and inclusive culture that respects our colleagues’ human rights is fundamental to the Group’s strategy, and we are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. In light of this, and the nature of our business, we do not maintain a standalone human rights policy.
All individual incidents are reported using the suspicious transactions/anti-fraud procedure. In 2017, no incidents in relation to anti-bribery were reported.
Whistleblowing Our Group-wide whistleblowing policy ensures employees feel empowered to raise concerns relating to malpractice or wrongdoing without fear of unfair treatment. If an employee has a serious concern relating to the operation of the business, our whistleblowing procedures enable them to confidentially raise their concerns with senior management or, if they choose, with the Chair of the Hiscox Ltd Audit Committee. All Hiscox staff can also access free, confidential advice from the whistleblowing charity Public Concern at Work.
* Part of our non-financial reporting statement under ss.414CA and CB of the Companies Act 2006.
2 Strategic report 37 Governance Corporate responsibility 63 Remuneration 89 Financial summary www.hiscoxgroup.com
Richard Watson joined Hiscox in 1986, having previously worked for Sedgwick and Hogg Robinson. In 2005, he was appointed Managing Director of Hiscox Global Markets, the largest division of Hiscox by premium income, and was the Underwriter of Syndicate 33 from 2006 to 2009. In 2009, Richard moved to New York and served as the Chief Executive Officer for Hiscox USA for three years. He returned to London in 2012 and became Chief Underwriting Officer for the Hiscox Group.
Robert Childs joined Hiscox in 1986, served as the Active Underwriter of the Hiscox Lloyd’s Syndicate 33 between 1993 and 2005, and was the Group’s Chief Underwriting Officer until February 2013. In 2012 Robert joined the Council of Lloyd’s. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005. He is a Trustee of Enham (a charity for the disabled), former Chairman of the Advisory Board of the School of Management of Royal Holloway, University of London, Chairman of The Bermuda Society and, in 2017, became Deputy Chairman of Lloyd’s.
Hamayou Akbar Hussain Chief Financial Officer (Aged 45) 12 September 2016*
2 Strategic report 37 Governance Board of Directors 63 Remuneration 89 Financial summary
Thomas Hürlimann joined Hiscox in November 2017. Thomas has 28 years’ experience in banking, reinsurance and insurance. Most recently as CEO Global Corporate at Zurich Insurance Group, a business with US$9 billion premiums and a network in over 200 countries. Before that he worked at Swiss Re and started his career with National Westminster Bank. He holds an MBA from IMD.
Robert McMillan Independent Non Executive Director (Aged 65) 1 December 2010*
s During the year, Jeremy Pinchin stepped down as CEO of Hiscox Re & ILS and Group Company Secretary to return to London, where he remains our Group Claims Director. Marc Wetherhill was appointed by the Board as Group Company Secretary and General Counsel in September 2017.
Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting.
While the Board acknowledges the value that knowledge and experience of the organisation can bring, it also recognises the need to progressively refresh Board membership over time. Non Executive Directors will normally be expected to serve for six years. They may be invited to serve for longer, but service beyond nine years is unlikely. Any service beyond six years is subject to a particularly rigorous review.
The Chairman, Robert Childs, did not meet the independence criteria set in the Code on appointment. However, the Code does not require the independence or otherwise of a Non Executive Chairman to be considered subsequent to their appointment. Caroline Foulger is a former
The Board of Directors As at the date of this report, the Board comprises the Non Executive Chairman, three Executive Directors, and eight independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 52 to 53. The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and strategy. The Chief Executive has responsibility for running the Group’s business.
partner of PwC, the Company’s auditors, but retired from the firm on 31 December 2012, prior to PwC’s appointment as auditor, and is considered to be independent. The Board considers all other Non Executive Directors to be independent within the meaning of the Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board and Committee meetings usually take place over two days when all of the Directors convene in Bermuda.
There is a formal induction process for new Directors and induction training was provided to our three new Hiscox Ltd Board members: Michael Goodwin, Thomas Hürlimann and Costas Miranthis, during the year. The needs of a new Director joining the Board are assessed and appropriate training arranged. Directors’ training requirements were assessed as part of the Board evaluation undertaken by Lintstock. Existing Directors are provided with the opportunity to attend training
external auditor’s fees. The Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The Audit Committee receives reports from the auditors who also attend meetings of the Committee to report on the status of their audit and any findings. This allows the Committee to monitor the effectiveness of the auditors during the year.
The Board retains ultimate authority for high-level strategic and management decisions, including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of interim dividends and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus issues or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share awards.
Prior to the Board and Committee meetings taking place, the Board and the Executive Committee together hold in-focus sessions exploring specific aspects of the Hiscox Group. The Board of Directors 2 Strategic report 37 Governance Corporate governance 63 Remuneration 89 Financial summary
The Group believes that opportunity should be limited only by an individual’s ability and drive, and the Committee considers diversity – including gender diversity – when recommending appointments to the Board. The Nominations Committee
The Nominations Committee The Nominations Committee comprises Lynn Carter, Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan and Costas Miranthis. It is chaired by Robert Childs. It operates according to Terms of Reference published on the Group’s website and meets as and when the Chairman determines appropriate, but at least once a year.
The Committee’s role is to monitor the structure, size and composition of the Hiscox Ltd Board and, when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Group believes that opportunity should be limited only by an individual’s ability and drive, and the Committee considers diversity – including gender diversity – when recommending appointments to the Board. The Committee has a policy in place to ensure that the candidate pool for each new appointment includes at least one female but does not consider it appropriate to set quotas for diversity.
During 2017, the external search consultancy firm JCA Group was commissioned to identify suitable candidates for the role of Independent Non Executive Director. Other than undertaking search assignments, JCA has no connection to the Group. The search brief was aimed at balancing the existing skills, diversity, experience, independence and knowledge on the Board. Each candidate was interviewed by the Chairman, the Chief Executive and the Group Human Resources Director. This process produced a shortlist and, from that shortlist, Michael Goodwin, Thomas Hürlimann and Costas Miranthias were nominated by the Committee. In July 2017, the Board approved these appointment on the recommendation of the Committee. The three new Non Executive Directors bring additional international experience and diversity to the Board. Michael Goodwin has experience in the Asia-Pacific markets, Thomas Hürlimann has experience working in Europe and Costas Miranthis has a background in Bermudian and US reinsurance operations. The Committee also has a role in considering the succession planning for Executive Directors and senior management, and a remit to make recommendations on future leaders.
The Conflicts Committee The Group has a Conflicts Committee which comprises Lynn Carter, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan and Costas Miranthis and is chaired by Bob McMillan, following the retirement of Ernst Jansen in November 2017. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and Syndicate 6104 are managed by a Hiscox-owned Lloyd’s 2 Strategic report 37 Governance Corporate governance 63 Remuneration 89 Financial summary
Managing Agency. 27.4% of the Names on Syndicate 33 are third parties and 72.6% of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third parties. The Committee serves to protect the interests of the third-party Syndicate Names. There is also potential for similar conflicts to arise as a result of the Group’s insurance-linked securities (ILS) activity and the Committee serves to protect the interests of the external investors in the ILS funds.
The Executive Committee The Executive Committee comprises Senior Executives and normally meets every six weeks. It makes recommendations to the Board and approves various matters (some of which may also require Board approval). The Committee approves senior appointments and remuneration outside the scope of the Remuneration Committee or Nominations Committee, approves operational policy, takes decisions on annual budgets, business plans, mergers and acquisitions, considers significant issues raised by management and approves exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
Performance evaluation During the year, in line with the Code requirement, the Company undertook an evaluation of the Board and its Committee which was externally facilitated by Lintstock. The last external evaluation was carried out in 2014. Other than carrying out this evaluation, Lintstock has no other connection to the Group. The external evaluation involved one-to-one interviews with the Chairman and individual Directors. Most of the recommendations in the evaluation report were characterised as potential refinements to existing practices rather than material changes in approach.
The Company also commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research, together with the analysts’ research notes, is copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders and analysts.
RS Childs 4/4 N/A N/A 4/4 BE Masojada 4/4 N/A N/A N/A HA Hussain 4/4 N/A N/A N/A RC Watson 4/4 N/A N/A N/A LA Carter 4/4 4/4 4/4 4/4 C Foulger 4/4 4/4 4/4 4/4 M Goodwin* 1/1 1/1 1/1 1/1 T Hürlimann* 1/1 1/1 1/1 1/1 C Keogh 4/4 4/4 4/4 4/4 A MacDonald 4/4 4/4 4/4 4/4 R McMillan 4/4 4/4 4/4 4/4 C Miranthis* 1/1 1/1 1/1 1/1 * Michael Goodwin, Thomas Hürlimann and Costas Miranthis were appointed as Directors with effect from 16 November 2017.
60 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
The Chief Actuary presented a Group reserving report to the Committee, which reviewed the approach taken by management when making their selection of reserving estimates. The Committee is satisfied with the judgements taken and the reporting and disclosure of these estimates.
ii) The carrying value of deferred tax As fully explained in note 2.22, a deferred tax asset has been established relating to operating losses arising in foreign subsidiaries. The recoverability of these assets is dependent upon the future profitability of these subsidiaries. The Committee reviewed the methodology used by management to assess the projected profitability and the carrying amount of the deferred tax asset and is satisfied with the methodology.
2 Strategic report 37 Governance Audit Committee report 63 Remuneration 89 Financial summary diminished liquidity means that estimating fair value involves a higher level of judgement. The Committee has evaluated the process used by management to estimate the fair value of the investment portfolio and is satisfied with their conclusions.
iv) Accounting for the defined benefit scheme As explained in note 2.16, 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 in the financial statements from the Chief Financial Officer and is satisfied that the assumptions used to measure the deficit are reasonable.
Finance Transformation Programme The Company has embarked on a Finance Transformation Programme (FTP), which involves a wide-ranging transformation of the Finance IT systems and controls. The head of the FTP project provides a quarterly update to the Committee on the status of the project.
Internal audit The Group Head of Internal Audit is invited to attend all meetings of the Committee. It is the responsibility of the Committee to monitor and review the effectiveness of the Group’s internal audit function and to consider reports prepared by internal audit on the effectiveness of systems of internal control.
External committee evaluation During the year an external evaluation of the Committee was conducted by Lintstock. The performance of the Committee was rated highly and a number of priorities were identified for 2018. These included developing the information that the Committee receives to become more succinct, in particular: highlighting key items in lengthy reports; making more use of private sessions to enable conversations without non-members present; and continuing to ensure that any issues or concerns are raised as early as possible.
Remuneration 37 Governance 63 Remuneration 89 Financial summary2 Strategic report 2 Financial highlights 3 Why invest in Hiscox? 8 Chairman’s statement 10 Chief Executive’s report 18 Building a balanced business 20 Actively managed business mix 21 Actively managed key underwriting exposures 22 Capital 24 Group financial performance 26 Group investments 28 Additional performance measures 29 Ten good reasons to work at Hiscox 38 Risk management 48 Corporate responsibility 52 Board of Directors 54 Chairman’s letter to shareholders 55 Corporate governance 60 Audit Committee report 64 Letter from Chairman of the Remuneration Committee 66 Remuneration summary 68 Annual report on remuneration 2017 76 Remuneration policy 85 Directors’ report 87 Directors’ responsibilities statement 90 Independent auditor’s report 96 Consolidated income statement 96 Consolidated statement of comprehensive income 97 Consolidated balance sheet 98 Consolidated statement of changes in equity 99 Consolidated statement of cash flows 100 Notes to the consolidated financial statements 152 Five-year summary
— Incentivise Executive Directors appropriately, over the short and long term.
Listening to shareholders The Remuneration Committee believes that the general remuneration structure continues to work well and therefore no changes to the remuneration policy approved by shareholders at the 2017 AGM are proposed this year. However, through conversations with shareholders during the last AGM season, some themes emerged on how we could improve our approach and the Committee is proposing to make a number of changes to how the policy will be implemented in the future.
1. Greater transparency over bonus outcomes Although shareholders recognised that bonuses at Hiscox are closely aligned to performance, with performance below threshold leading to zero bonuses twice in the last ten years, we have taken on board requests for greater transparency over the bonus outcomes. In this year’s remuneration report we provide more detail on bonus structure, including both retrospective and prospective disclosure of pre-tax return on equity (ROE) targets applicable to the bonus. In years where bonuses are paid, we will provide enhanced retrospective disclosure of individual performance factors used to determine outcomes.
We have consulted with our major shareholders and received support for the direction we are taking.
Dear fellow Shareholder At Hiscox we have a very clear strategy which aims to deliver strong returns across the insurance cycle and create sustainable long-term value for our shareholders. We want to employ and keep good people and provide them with the means and motivation to excel.
Although the remuneration structure has naturally evolved over time to reflect market and best practice, the simple framework and main design features have been in place for more than 15 years. The underlying philosophy is that base remuneration should be competitive but not excessive, and that outperformance will be rewarded through variable pay. We expect all employees to meet or exceed their non-financial targets such as delivering great service to customers, adhering to regulation and playing their part in building a business for the long-term. However, in order for executives to be eligible for a bonus, Hiscox must also deliver profits in excess of a specified return threshold.
Rewarding results and not effort is integral to Hiscox’s high performance culture which, in the Board’s opinion, is a key element of the Company’s success. Hiscox has consistently delivered market-leading performance. Over the last five years ROE averaged 15%, well above the FTSE All-Share average of 9%. This performance has enabled the Company to distribute £742 million to shareholders since 2013, and deliver a total shareholder return of 280% – well above the FTSE All-Share of 74%. As a consequence Executive Directors and employees have been well rewarded over this period. We believe this philosophy works well for investors and employees.
The core function of the Remuneration Committee is to determine: — the overall remuneration strategy, policy and cost for the Group; — the levels and make up of remuneration for the Executive Directors; — the awards of sizeable bonuses to individuals other than the Executive Directors; and — the awards and operation of the Company’s share plans, including the Performance Share Plan.
The significant contribution of the retail businesses continues to demonstrate the value of the business strategy and the overall balance sheet remains strong.
Despite the challenges in 2017, the performance trend over the longer term is more positive. Based on a strong average ROE performance of 13.5% over the last three years (1.5% in 2017, 23.0% in 2016 and 16.0% in 2015), the long-term incentive plan (LTIP) award granted in 2015 will vest at 85% of maximum.
Looking ahead Overall, the Remuneration Committee is satisfied that our practices are aligned with the interests of shareholders and incentivise Directors appropriately over the short and long term.
Over the past year, we have listened to our shareholders and responded to feedback. During 2018, the Committee will pay close attention to any reforms implemented by the Government and will review our general approach following the publication of the revised Corporate Governance Code which is expected later in the year.
Looking further ahead we remain committed to the principles which have underpinned our remuneration strategy for a number of years.
Summary of remuneration arrangements for 2018 Key principles underpinning remuneration at Hiscox The following principles have driven a culture of high performance at Hiscox, creating sustainable long-term value for shareholders. — The remuneration policy must be simple, and strictly results-driven with variable rewards only if Hiscox delivers profits in excess of a specified return threshold.
— Remuneration should aim to incentivise Executive Directors appropriately over both the short and long term.
— Remuneration should align Directors’ interests with our shareholders’ by focusing on effective risk management, ROE, and net asset growth which drives total shareholder returns over time.
Remuneration outcomes for 2017 2017 was a historic year for catastrophes, and this impacted our financial results. While the Company’s balance sheet remains strong and Hiscox is in a good position to capitalise on opportunities, incentive outcomes for 2017 will be significantly lower than in recent years.
As detailed in the Remuneration Committee Chairman’s letter, certain changes have been made to implementation in response to shareholder feedback.
Maximum opportunity: — up to 400% of salary for CEO and CFO; — up to 500% of salary for CUO. Over the past ten years, the average bonus to the CEO has been equivalent to c.40% of the current maximum opportunity.
2017 actual as percentage of salary: — BE Masojada: 0% — HA Hussain: 0% — RC Watson: 0%
Share ownership guidelines of 150% of salary for all Executive Directors, after five years in role.
Enhanced transparency of outcomes: full disclosure of prospective ROE target ranges upon which bonus outcomes are determined.
We will also provide enhanced disclosure around the individual performance factors used to support the determination of outcomes in future years.
Share ownership guidelines increased to 200% of salary for all Executive Directors, after five years in role.
Benefits can include health insurance, life insurance, long-term disability schemes and participation in all-employee share schemes. Retirement benefits are delivered via a cash allowance of 10% of salary paid in lieu of the standard pension contribution, the same as most other employees in the organisation.
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2017 and how it will be applied for the 2018 financial year. PwC has been engaged to audit the sections in the annual report on remuneration 2017 below entitled ‘Executive Director remuneration’ and additional notes, ‘annual bonus’, ‘long-term incentives’, ‘details of pension entitlements’, ‘Non Executive Director remuneration’, and ‘Directors’ shareholding and share interest’ to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
BE Masojada 2017 595,969 9,720 0 1,629,670 52,370 2,287,729 CEO 2016 582,500 8,839 1,500,000 1,826,470 52,657 3,970,466 RC Watson 2017 458,438 9,367 0 1,218,482 41,674 1,727,961 CUO 2016 445,000 10,095 1,350,000 1,287,894 40,453 3,133,442 HA Hussain3 2017 458,438 7,128 0 481,349 41,674 988,589 CFO 2016 138,068 1,727 800,000 549,515 12,551 1,501,861 1 A proportion of the bonus amount is deferred as set out on page 79 of the policy report. 2 2017 long-term incentives relate to performance share awards granted in 2015, or on joining in the case of HA Hussain, where the performance period ends on 31 December 2017. The award is due to vest on 13 April 2018. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2017 of 1392.63p. The 2016 long-term incentive award relates to performance share awards granted in 2014 where the performance period ends on 31 December 2016. The amount also includes dividend equivalents accrued on this award (HA Hussain’s amount has been restated based on dividends received). For the purpose of this table the performance share award has been valued based on the share price on 17 March 2017 of 1082.00p. 3 Appointed 12 September 2016. Details of his joining package are in the 2016 remuneration report.
Benefits For 2017, benefits provided for Executive Directors included the Company healthcare scheme, life insurance, income protection insurance and critical illness policies as well as a Christmas gift hamper.
Variable pay The Hiscox approach to remuneration places emphasis on alignment with performance and the shareholder experience. Therefore, a significant portion of total remuneration is delivered via incentive awards which can vary significantly based on the level of performance achieved. At Hiscox, variable pay consists of an annual bonus and share awards under the Performance Share Plan.
Although the remuneration structure has naturally evolved over time to reflect market and best practice, the simple framework has been in place for more than 15 years. The approach has reinforced the strong performance culture across the business as bonuses are only paid if results exceed the specified threshold, and not for effort alone.
Structure of bonus The bonus is structured so that there can be significant variability in outcomes, including years where no bonus is paid. The Remuneration Committee continues to believe that the most appropriate measure for the calculation of the bonus pool is pre-tax return on equity as it aligns management’s interests most effectively with shareholders’ interests and minimises the possibility of anomalous results. It enables the Committee to ensure that Executive Directors’ and other employees’ incentives are aligned with the Company’s profit performance.
Individual bonuses are based on the results of the relevant business area, individual performance and the size of the relevant bonus pool. The Remuneration Committee determines the bonuses to be paid to the Executive Directors based on judgement regarding the performance of the Group and a robust assessment of individual performance including adherence to specific risk management objectives. Bonuses are not paid if actual performance does not exceed the threshold, irrespective of individual performance.
Where performance is below the specified threshold, no bonus is paid. Over the last ten years, on the two occasions when the Group has delivered pre-tax ROE below the required threshold, no bonuses were paid to Executive Directors.
2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017 89 Financial summary
Despite delivering good progress against these objectives, the pre-tax return on equity for 2017 was 1.7% (2016: 24.2%) and the resulting profit of £30.8 million was driven by an expensive year for catastrophe claims and large foreign exchange losses. In line with the assessment framework set out on page 69, no bonus pool was allocated to the Executive Directors as the final pre-tax ROE level for the year was below the specified threshold.
Long-term incentives Performance Share Plan awards (PSP) where the performance period ends with the 2017 financial year BE Masojada and RC Watson were granted awards under the PSP in 2015 for the three-year performance period 1 January 2015 to 31 December 2017. As outlined in the 2016 Directors remuneration report, HA Hussain was granted a buy-out award under his appointment terms which is based on performance over the same period.
The performance conditions for these awards are as follows: Required average post-tax ROE over three-year performance period
The ROE targets are set in order to outperform investment expectations and are reviewed annually to ensure they continue to motivate and drive the right behaviours within the management team.
Details of pension entitlements All open Hiscox retirement schemes are based on defined contributions. BE Masojada, RC Watson and HA Hussain hold lifetime allowance protection certificates and have therefore opted out of the Company pension scheme. They receive a 10% cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. The value of this benefit is shown in the Executive Director remuneration table on page 68.
*Benefits include life assurance and healthcare. **Appointed effective 16 November 2017. †Resigned effective 16 November 2017. 2017 fees that were paid in USD have been converted to GBP using an exchange rate of 1.289. 2016 fees were converted using 1.24.
Non Executive Director fees were reviewed in 2018, having been unchanged for the last three years. RS Childs’ fee increased by 3.6%. The other Non Executive Directors’ basic fees increased by 2.4%. The Remuneration Committee Chair fee increased by US$2,000 to US$17,000 and member fees by US$1,000 to US$8,500. The Risk Committee fees increased by US$2,000 (Chair US$17,000, member US$10,000).
2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017
Directors’ shareholding and share interests We believe that senior managers within Hiscox should be aligned with Hiscox shareholders by owning a minimum number of Hiscox shares. Formal shareholding guidelines are in place and were increased in 2017 to reflect our long-standing culture of share ownership among Executives. Executive Directors are now expected to own Hiscox shares valued at 200% of salary (previously 150%) within five years of becoming an Executive Director. BE Masojada and RC Watson have over 20 and 30 years’ service respectively and as such their shareholdings far exceed the guidelines. HA Hussain was appointed to the Board in September 2016 and will be expected to a build a shareholding in the Company over the course of his tenure. There have been no changes in the Director share interests between 31 December 2017 and 26 February 2018.
Performance Share Plan (PSP) The interests of Executive Directors under the PSP are set out below: Number of awards at
Share options The interests of Executive Directors under the Sharesave Schemes are set out below: Number of options at
HA Hussain – 2,081 – – 2,081 8.648 1-Jun-20 30-Nov-20 BE Masojada 1,649 – – (1,649) – 5.456 12.34 1-Jun-17 30-Nov-17
Hiscox FTSE All-Share FTSE Non-Life Insurance 73Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Annual report on remuneration 2017
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 2008 and 2017, Hiscox delivered total shareholder return of 400% – well above the FTSE All-Share and FTSE Non-Life Insurance indices.
Dividend and return of capital to shareholders (£m) +6.4 (% change)
Implementation of remuneration policy for 2018 Salary Annual salary reviews take effect from April each year. For 2018, salaries for Executive Directors will be increased by 3.4% in line with other UK-based employees. Salaries from April 2018 will be as follows: April 2018 £
In determining the size of the Executive Director bonuses, the Committee uses the following framework to supports its decision making process: Pre-tax return on equity Indicative bonus range (% of max)
Long-term incentives For 2018, PSP awards will be measured against growth in net asset value (NAV) plus dividends, measured on a per share basis. The Committee deems growth in NAV to be the most appropriate metric for the PSP given that our strategy is built around the objective of generating long-term shareholder value and NAV is aligned with shareholder value creation.
Awards will be subject to growth in net asset value plus dividends measured on a per share basis.
The maximum opportunity for all Executive Directors will be 200% of salary. We expect that risk-free rate (RFR) will not drop below 1% before the Hiscox remuneration policy is next due for renewal in 2020.
Membership of the Remuneration Committee The Committee members at 31 December 2017 were C Foulger, R McMillan, L Carter, A MacDonald, T Hürlimann, M Goodwin, C Miranthis and C Keogh (Chairman). No Director or Committee member was involved in determining their own remuneration during the year.
Statement of shareholder voting At the AGM on 18 May 2017, the Directors’ annual report on remuneration received the following votes from shareholders: Remuneration policy Annual report on remuneration
Remuneration policy Hiscox has a forward-looking remuneration policy for its Board members. The policy was last approved at the 2017 AGM and is replicated below. For clarity we have updated the content to reference how arrangements will be implemented in the coming year; these are shown in italics. The original policy can be viewed in the 2016 Annual Report and Accounts at www.hiscoxgroup.com.
Operation Base salary is normally reviewed annually taking into account a range of factors including inflation rate movements by country, relevant market data and the competitive position of Hiscox salaries by role.
Increases above this level may be considered in other circumstances as appropriate (for example, address market competitiveness, development in the role, or a change in role size, scope or responsibility).
Certain Board members retain legacy interests in closed defined benefit schemes. However, there is no entitlement to any further accrual under these plans.
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 69 of this report for further details. Where performance is deemed to be below a predetermined hurdle, payouts will be nil.
Performance above this hurdle is rewarded and where performance falls below this hurdle, payouts will be nil.
The current fees payable to Non Executive Directors are set out on page 71.
Chairman The Chairman typically receives an all-inclusive fee in respect of the role. In addition to his fees the Chairman may be provided with incidental benefits (for example, private healthcare and life assurance). The remuneration of the Chairman is determined by the Committee.
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: i) agreed before 15 May 2014 when the first approved remuneration policy came into effect; ii) 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 iii) 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.
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 Bermudian 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.
Through conversations with shareholders during the last AGM season, some themes emerged on how we could improve our approach and the Committee is proposing to make a number of changes to how the policy will be implemented in the future. These are summarised in the Chairman’s letter on page 54.
Fixed remuneration Fixed reward (base salary, benefits and retirement benefit). p Salary with effect from 1 April 2017.
Variable remuneration Assumptions have been made in respect of the annual incentive and the PSP for the purpose of these illustrations. p Annual incentive: the amounts shown in the scenarios are for illustration only. In practice, the award would be determined based on a range of performance factors and therefore vary depending on the circumstances. The maximum award reflects the incentive caps described at the beginning of this report.
p PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 80. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
Maximum performance Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and CFO and 500% of salary for the CUO. p PSP: assumes vesting of 100% of the maximum award.
85Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration
29.0p Total dividend payment for the year ended 31 December 2017.
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the USA, the UK, Guernsey, Europe and Asia. The information that fulfils the requirements of the management report as referred to in Chapter 4 of the Disclosure Guidance and Transparency Rules (DTR), including additional explanation of amounts included in the financial statements and the branches of the Group in different countries, can be found on pages 10 to 17, 38 to 47 and 96 to 151.
The key performance indicators are shown on page 2. Details of the use of financial instruments are set out in note 20 to the consolidated financial statements. An analysis of the development and performance of the business during the financial year, its position at the end of the year, any important events since the end of the year and the likely future development can be found within the Chief Executive’s report on pages 10 to 17. The Chief Executive’s report also describes the main trends and factors likely to affect the future development, performance and position of the Company’s business and includes a description of the Company’s strategy and business model. The Company’s strategy is also described on page 3. A description of the principal risks and uncertainties and how they are managed or mitigated can be found in the risk management section on pages 38 to 47. In addition, note 3 to the consolidated financial statements provides a detailed explanation of the principal risks which are inherent to the Group’s business and how those risks are managed.
The confirmation required by C.2.1 of the UK Corporate Governance Code can be found on page 59.
Corporate responsibility Information on non-financial reporting disclosures including environmental, employee and community issues, anti-corruption, human rights and anti-bribery are set out in the corporate responsibility statement on pages 48 to 51. This also includes disclosure of greenhouse gas emissions.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in DTR 7.2 can be found on pages 55 to 59 and in this report.
Financial results The Group achieved a pre-tax profit for the year of £30.8 million (2016: £354.5 million). Detailed results for the year are shown in the consolidated income statement on page 96, and also within the Group financial performance section on pages 24 to 25.
After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to 89 Financial summary
86 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration Directors’ report
Power of Directors The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2017, the Directors were granted authorities to allot and issue shares and to make market purchases of shares and intend to seek renewal of these authorities in 2018.
Wessex House 45 Reid Street Hamilton HM 12 Bermuda continue in operational existence for the foreseeable future, a period of at least 12 months from the date of this report. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.
Viability The statement required to be included in the Annual Report under C.2.2 of the UK Corporate Governance Code can be found on page 59.
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 23 to the consolidated financial statements. The ordinary shares of 6.5p each are the only class of shares presently in issue and carry voting rights. There is power under Bye-law 45 of the Company’s Bye-laws for voting rights to be suspended if calls on shares are unpaid. However, there are no nil or partly paid shares in issue on which calls could be made. The Bye-laws also allow the Company to investigate interests in its shares and apply restrictions including suspending voting rights where information is not provided. No such restrictions are presently in place. The Company was authorised by shareholders at the 2017 Annual General Meeting to purchase in the market up to 10% of the Company’s issued ordinary shares. No shares have been bought back under this authority as at the date of this report.
Directors The names and details of all Directors of the Company who served during the year and up to the date of this report are set out on pages 52 and 53. Details of the Chairman’s professional commitments are included in his biography on page 52 and there were no changes during the year. The Bye-laws of the Company govern the appointment and replacement of Directors. Thomas Hürlimann, Michael Goodwin and Costas Miranthis were appointed by the Board with effect from 16 November 2017 and they will submit themselves for appointment as a Director by shareholders at the Annual General Meeting. In accordance with the UK Corporate Governance Code, all other Directors will submit themselves for re-appointment at the Annual General Meeting.
Directors’ responsibilities statement The Board is responsible for ensuring the maintenance of proper accounting records which disclose with reasonable accuracy the financial position of the Company. It is required to ensure that the financial statements present a fair view for each financial period. The Directors explain in the Annual Report their responsibility for preparing the Annual Report and Accounts.
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman, Robert Childs, and the Chief Financial Officer, Hamayou Akbar Hussain. The statements were approved for issue on 26 February 2018.
89Hiscox Ltd Report and Accounts 2017 37 Governance 63 Remuneration 89 Financial summary2 Strategic report 2 Financial highlights 3 Why invest in Hiscox? 8 Chairman’s statement 10 Chief Executive’s report 18 Building a balanced business 20 Actively managed business mix 21 Actively managed key underwriting exposures 22 Capital 24 Group financial performance 26 Group investments 28 Additional performance measures 29 Ten good reasons to work at Hiscox 38 Risk management 48 Corporate responsibility 52 Board of Directors 54 Chairman’s letter to shareholders 55 Corporate governance 60 Audit Committee report 64 Letter from Chairman of the Remuneration Committee 66 Remuneration summary 68 Annual report on remuneration 2017 76 Remuneration policy 85 Directors’ report 87 Directors’ responsibilities statement 90 Independent auditor’s report 96 Consolidated income statement 96 Consolidated statement of comprehensive income 97 Consolidated balance sheet 98 Consolidated statement of changes in equity 99 Consolidated statement of cash flows 100 Notes to the consolidated financial statements 152 Five-year summary
What we have audited The Group’s consolidated financial statements comprise: A the consolidated income statement for the year ended 31 December 2017; A the consolidated statement of comprehensive income for the year then ended; A the consolidated balance sheet as at 31 December 2017; 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 a summary of significant accounting policies.
Rationale for the materiality benchmark applied 0.75% of gross earned premium
In determining our materiality, we have considered financial metrics which we believe to be relevant to the primary users of the Group’s consolidated financial statements. We concluded gross earned premium was the most relevant benchmark to these users.
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 financial statements as a whole.
We have understood, evaluated and tested the design and operational effectiveness of key controls in place in respect of the valuation of gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves, which included controls over the reconciliation of data from the underlying systems and the review and approval of the IBNR loss reserves as components of insurance liabilities and associated reinsurance assets. On a sample basis we have agreed the underlying source data back to supporting documentation.
2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Independent auditor’s report
Except as noted in the Report on other legal and regulatory requirements section, our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: A Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. A Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. A Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. A Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. A Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. A Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
Going concern The Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements, as explained on pages 85 and 86. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the balance sheet date. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
Corporate governance statement Under the United Kingdom’s Listing Rules we are required to review the part of the Corporate Governance Statement on pages 55 to 59 relating to eleven provisions of the UK Corporate Governance Code and the Directors have requested that we also review their statements on going concern and the longer-term viability of the Company as required for UK registered companies with a premium listing on the London Stock Exchange. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Income Gross premiums written 4 2,549,279 2,402,579 Outward reinsurance premiums (685,046) (614,636) Net premiums written 4 1,864,233 1,787,943
Claims and claim adjustment expenses, net of reinsurance 25.2 (1,017,001) (739,772) Expenses for the acquisition of insurance contracts 16 (619,704) (538,467) Reinsurance commission income 16 163,599 128,627
Share of profit from associates after tax 15 201 134 Profit before tax 30,798 354,543
Profit for the year (all attributable to owners of the Company) 26,310 336,986
Earnings per share on profit attributable to owners of the Company *Reclassification of investment fees, see note 2.1.
Profit for the year 26,310 336,986 Other comprehensive income Items that will not be reclassified to profit or loss: Remeasurements of the net defined benefit obligation 8,661 (46,531) Income tax on the remeasurement of other comprehensive income (1,768) 9,502
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations (53,483) 111,094 Income tax on the remeasurement of other comprehensive income – –
Deferred acquisition costs 16 330,466 346,592 Financial assets carried at fair value 18 3,807,143 3,792,033
The notes on pages 100 to 151 are an integral part of these consolidated financial statements.
Profit for the year (all attributable to owners of the Company) – – – – 336,986 336,986 – 336,986 Other comprehensive income net of tax (all attributable to owners of the Company) – – – 111,094 (37,029) 74,065 – 74,065 Employee share options: Equity settled share-based
Consolidated statement of changes in equity 98 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
Profit before tax 30,798 354,543 Adjustments for: Net foreign exchange losses/(gains) 62,753 (152,408) Interest and equity dividend income (63,296) (54,789) Interest expense 20,863 20,266 Net fair value losses/(gains) on financial assets (26,656) (13,786)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 223,794 251,836 Financial assets carried at fair value (183,532) (431,324) Financial liabilities carried at fair value 13,311 458 Financial liabilities carried at amortised cost 110 156 Other assets and liabilities (53,780) 3,687 Interest received 55,940 55,273 Equity dividends received 554 505 Interest paid (19,910) (21,852) Current tax paid (32,139) (6,108) Cash flows from subscriptions (paid)/received in advance (6,918) (4,000) Net cash flows from operating activities 68,729 56,893
Cash and cash equivalents at 1 January 664,816 727,880 Net decrease in cash and cash equivalents (2,408) (123,773) Effect of exchange rate fluctuations on cash and cash equivalents (19,619) 60,709 Cash and cash equivalents at 31 December 22 642,789 664,816 *£17,477,000 of cash derecognised on loss of control has been reclassified to cash flows from the sale of subsidiaries in 2016.
Consolidated statement of cash flows 99Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the US with over 2,700 staff.
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. The address of its registered office is: 4th Floor, Wessex House, 45 Reid Street, Hamilton HM 12, Bermuda.
Changes in accounting policies A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on or after 1 January 2017. They have been applied in preparing these consolidated financial statements. There were no new standards, amendments or interpretations that had a material impact on the Group.
In 2017, the Group changed the presentation of investment result in the consolidated income statement to be investment result net of investment management fees. The prior year figures have been reclassified accordingly by an amount of £4.4 million from operational expenses to investment results.
Goodwill is allocated to the Group’s cash generating units identified according to the smallest identifiable unit to which cash flows are generated.
The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its recoverable amount. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment. Any impairment charges are presented as part of operational expenses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
2.10 Derivative financial instruments (a) Non-financial assets Objective factors that are considered when determining whether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: – adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; – the likelihood of accelerated obsolescence arising from the development of new technologies and products; and – the disintegration of the active market(s) to which the asset is related.
best use from a market participant’s perspective. When using this approach, the Group takes into account the asset’s use that is physically possible, legally permissible and financially feasible. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received.
If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 21.
2.7 Financial assets and liabilities including loans and receivables The Group classifies its financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial assets based on the purpose for which the financial assets at initial recognition. The decision by the Group to designate debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis.
Intangible assets with infinite lives such as syndicate capacity are subsequently valued at cost and are subject to annual impairment assessment.
2.6 Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. This presumes that the transaction takes place in the principal (or most advantageous) market under current market conditions. Fair value is a market-based measure and in the absence of observable market prices in an active market, it is measured using the assumptions that market participants would use when pricing the asset or liability.
(c) Impairment loss An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). For financial assets, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
2.11 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a 2.14 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. Such contracts may also transfer financial risk.
2.13 Revenue Revenue comprises insurance and reinsurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales-based taxes collected on behalf of third parties. Profit commission is calculated and accrued based on the results of the managed syndicate.
amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.
2.15 Deferred tax 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.
2.16 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review. The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
(i) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the
2 Basis of preparation 2.14 Insurance contracts continued 105Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
2.17 Net investment hedge accounting In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at each period end to ensure that the hedge remains highly 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.
When the terms and conditions of an equity settled share-based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the pre-modification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group’s financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice, as shown in note 28. To the extent that taxable losses carried forward by the Group exceed taxable temporary differences relating to the same taxation authority and taxable entity, which will result in amounts against which the losses can be utilised, the Group uses estimates of probable future taxable profits available to determine whether recognition of a deferred tax asset is appropriate. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
The Group carries its financial investments at fair value through profit or loss, with fair value determined using published price quotations in the most active financial markets in which the assets trade, where available. During periods of economic distress and diminished liquidity, the ability to obtain quoted bid prices may be reduced and as such a greater degree of judgement is required in obtaining the most reliable source of valuation.
2.19 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 Group’s delivery of its contractual obligations and its achievement of sustainable profitable economic and social performance.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures through the Risk Committee and ongoing compliance therewith, through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in common with the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such premium inflows is reasonably predictable. In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events non-correlated to financial markets, and not by the inclination or will of policyholders.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own account 3 Management of risk continued The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross premiums written and maximum aggregated exposures per geographical zone and risk class. Regular meetings are held between the Chief Underwriting Officer and a specialist team in order to monitor claim development patterns and discuss individual underwriting issues as they arise.
The specific insurance risks accepted by the Group fall broadly into the following main categories: reinsurance inwards, marine and major asset property, other property risks, professional indemnity casualty and casualty other insurance risks. These specific categories are defined for risk review purposes only, as each contains risks specific to the nature of the cover provided. They are not exclusively aligned to any specific reportable segment in the Group’s operational structure or the primary internal reports reviewed by the chief operating decision-maker. The following describes the policies and procedures used to identify and measure the risks associated with each individual category of business.
Reinsurance inwards The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the high-frequency, low-severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or man-made occurrence. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
example of a casualty insurance risk. The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than the other categories of business.
The Group’s pricing strategy for casualty insurance policies is typically based upon 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.
The Group’s provision estimates are subject to rigorous review by senior management from all areas of the business. The managed syndicates 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.
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
assets in the Group’s balance sheet at 31 December 2017 was £334 million (2016: £305 million). These may be analysed as follows: Nature of equity and unit trust holdings 2017
closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and unit trust investments. This is limited to a relatively small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are diversified over a number of companies and industries. The fair value of equity related business interruption risks, can also take longer than normal to settle. This is because of the length of time required for detailed subsea surveys to be carried out and damage assessments agreed together with difficulties in predicting when the assets can be brought back into full production.
The Group Credit Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance as well as detailed analysis from our internal credit analysis team. The financial analysis of reinsurers produces an assessment categorised by S&P rating (or equivalent when not available from S&P).
Key areas of exposure to credit risk include: – reinsurers’ share of insurance liabilities; – amounts due from reinsurers in respect of claims already paid; – amounts due from insurance contract holders; and – counterparty risk with respect to cash and cash equivalents, and investments including deposits, derivative transactions and catastrophe bonds.
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets, but collateral may be requested to be held against these assets. The Group structures the levels of credit risk accepted by placing limits on their
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a durationconvexity -based sensitivity analysis, if market interest rates had risen by 100 basis points at the balance sheet date, the Group equity and profit after tax for the year might have been expected to decrease by approximately £53 million (2016: £61 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets. Duration is the weighted average length of time required for an instrument’s cash flow stream to be recovered, where the weightings involved are based on the discounted present values of each cash flow. A closely related concept, modified duration, measures the sensitivity of the instrument’s price to a change in its yield to maturity. Convexity measures the sensitivity of modified duration to changes in the yield to maturity. Using these three concepts, scenario modeling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
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 at note 18.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and unit trusts, based on S&P or equivalent rating, is presented below: As at 31 December 2017 Note AAA
Debt and fixed income securities 18 631,414 1,577,814 651,362 554,359 3,414,949
The largest counterparty exposure within the AAA rating at 31 December 2017 is a fully collateralised recoverable from Kiskadee (2016: German government). For the AA rating it is with the US Treasury at both 31 December 2017 and 2016. Other/non-rated assets include £462 million rated as BBB (2016: £511 million).
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2017 and 2016.
113Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Average contractual maturity analysed by denominational currency of investments as at 31 December 2017 Years
(f) Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: – structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and – operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity’s functional currency.
3 Management of risk 3.2 Financial risk (e) Liquidity risk continued 114 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
(f) Currency risk continued The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operations in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net investments made in European and Asian operations. 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. Exchange rate derivatives are used when appropriate to shield the Group against significant movements outside of a defined range.
Loans and receivables including insurance receivables 254,612 454,752 59,517 34,025 802,906 Current tax asset 2,180 – 226 – 2,406
Sensitivity analysis As at 31 December 2017, the Group used closing rates of exchange of £1:€1.13 and £1:$1.35 (2016: £1:€1.17 and £1:$1.24). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
Strengthening of US Dollar 142.8 89.4 149.8 88.4 Weakening of US Dollar (116.8) (73.1) (122.6) (72.3)
3 Management of risk 3.2 Financial risk (f) Currency risk continued 116 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through Hiscox Insurance Company Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company Inc. and Hiscox Société Anonyme is driven by the level of resources necessary to maintain both regulatory requirements and the capital necessary to maintain financial strength of an A rating.
Gearing The Group currently utilises gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: – Letter of Credit and revolving credit facility – the Group’s main facility of US$500 million may be drawn as cash (under a revolving credit facility), utilised as Letter of Credit or a combination thereof. This facility was reduced to $500 million from US$875 million in December 2015 by the Company’s subsidiary Hiscox plc with the maximum cash portion reduced from US$400 million to US$300 million. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2016, 2017 and 2018 years of account. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2017 US$10 million was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings outstanding (2016: US$10 million and £nil respectively) to support general trading activities. The funds raised through Letters of Credit and loan facilities have been applied to support both the 2017 year of account for Syndicates 33 and 3624; – £275 million of fixed-to-floating rate subordinated notes that are classified as Tier 2 debt. This was raised in November 2015 and matures in 2045. The debt is rated BBB- by S&P and Fitch; – external Names – 27.4% of
Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 20%; – Syndicate 6104 at Lloyd’s – with a capacity of £56 million for the 2018 year of account (2017 year of account: £56 million). This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s international property catastrophe reinsurance account; – gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and 3 Management of risk continued 117Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
For Syndicate 33 and Syndicate 3624, internal model results are uplifted by Lloyd’s to the level of capital required to support its ratings. Capital models are used more widely across the Group to monitor exposure to key risk types, inform decision-making and measure ROE across different segments of the business.
kidnap and ransom business written by Hiscox Insurance Company Limited. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division. It also includes the European kidnap and ransom business written by Hiscox Insurance Company Limited and Syndicate 33. – Hiscox London Market comprises the internationally traded insurance business written by the Group’s London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage and aviation business. – Hiscox Re & ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are included. The segment also includes the performance and fee income from the ILS funds, along with the gains or losses made as a result of our investment in the funds. – Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings. Further details of these can be found in note 12. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.
Profit before tax and foreign exchange gains /(losses) 110,270 (24,462) 23,861 (16,118) 93,551 120,747 9,020 92,532 (20,164) 202,135 * Investment fees have been reclassified from operational expenses to investment result, to record investment result on a net basis.
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses, including profit-related pay, as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. All ratios are calculated using the 100% results.
Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio. The impact on profit before tax of a 1% change in each component of the segmental combined ratios is shown in the following table. Any further ratio change is linear in nature.
At 100% level (note 4b) 1% change in claims or expense ratio 12,585 5,459 2,438 – 10,468 5,502 2,425 – At Group level 1% change in claims or expense ratio 12,299 4,357 2,090 – 10,205 4,431 2,114 –
4 Operating segments (a) Profit before tax by segment continued 120 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
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 2017 total
United States 16,421 12,333 Rest of world 2,729 3,665 5 Net asset value per share
Profit for the year (all attributable to owners of the Company) 26,310 336,986 Opening total equity 1,818,403 1,528,829 Adjusted for the time-weighted impact of capital distributions and issuance of shares (33,766) (60,742) Adjusted opening total equity 1,784,637 1,468,087 Return on equity (%) 1.5 23.0
Investment income including interest receivable 63,296 54,789 Net realised (losses)/gains on financial investments at fair value through profit or loss (3,980) 6,416 Net fair value (losses)/gains on financial investments at fair value through profit or loss 27,971 13,631 Investment result – financial assets 8 87,287 74,836 Net fair value (losses)/gains on derivative financial instruments 20 (1,315) 155 Investment expenses (4,709) (4,361) Total result 81,263 70,630 * Investment fees have been reclassified from operational expenses.
Agency-related income 12,549 11,743 Profit commission 9,113 11,720 Other underwriting income (5,710) 3,666 Other income 26,003 10,465 Other income 41,955 37,594 Wages and salaries 130,517 145,997 Social security cost 23,291 23,288 Pension cost – defined contribution 9,903 8,243 Pension cost – defined benefit 1,756 172 Share-based payments 25,186 26,274 Marketing expenses 53,607 42,051 Depreciation, amortisation and impairment 21,651 28,162 Other expenses 144,469 137,171 Operational expenses 410,380 411,358 * Investment fees have been reclassified to be shown within the investment result in note 7.
7 Investment result 122 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
123Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Acquisitions on purchase of subsidiary – – – 20,735 844 21,579 Other additions – – – (333) – (333)
Goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to the smallest identifiable unit to which cash flows are generated. £5,480,000 (2016: £5,480,000) is allocated to the Lloyd’s corporate member entity CGU and £847,000 (2016: £2,092,000) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use.
In 2017, the £1,245,000 impairment recognised in the year for goodwill and is included in operational expenses in the consolidated income statement and relates to Hiscox UK as a CGU (2016: £163,000).
(a) Syndicate capacity The cost of purchasing the Group’s participation in the Lloyd’s insurance syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurance market, the Board believes that the Group’s ownership of Syndicate capacity will provide economic benefits over an indefinite number of future periods. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
124 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
13 Goodwill and intangible assets (a) Syndicate capacity continued The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value less costs to sell or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2017 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
The carrying value of this asset is tested for impairment based on its value in use to the Group’s US insurer. The value in use is calculated using a discounted projected cash flow based on business plans approved by management, and discounted at the WACC rate. Key assumptions include new business growth, retention rates, market cycle and claims inflation. The results of that test show no impairment is due.
(c) Software and development costs Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of between three and ten years on a straight-line basis.
As at 31 December 2017, HDCM owned 72.6% of Syndicate 33 (2016: 72.5%), and 100% of Syndicate 3624 (2016: 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, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
(b) Special Purpose Insurers 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 Group made an initial investment of £30.2 million in the Funds. 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 majority of the Funds’ exposures to reinsurance risk are fronted by the Group into two Bermuda Licensed Special Purpose Insurers (‘SPI’), Kiskadee Reinsurance 1 Ltd and Kiskadee Reinsurance 2 Ltd which have been collateralised by the Funds.
As at 31 December 2017, the Group recognised a financial asset at fair value of £37.0 million (2016: £46.8 million) in relation to its investment in the Funds (note 18). In assessing the maximum exposure to loss from its interest in the Funds and SPIs, the Group has determined it is no greater than the fair value recognised as at the balance sheet date. The total size of the funds were £606 million at 31 December 2017 (2016: £683 million). In addition to the return on the financial asset, the Group also receives fee income through Hiscox Re Insurance Linked Strategies Ltd and Hiscox Insurance Company (Bermuda) Ltd, both wholly owned subsidiaries, under normal commercial terms.
At beginning of year 13,835 13,525 Additions during the year – 450 Disposals during the year (5,592) (2) Distributions received (501) (272) Net profit from investments in associates 201 134 At end of year 7,943 13,835
Associates incorporated in the UK from 17 to 35% 53,731 30,456 43,037 3,905 Associates incorporated in Europe from 10% to 26% 2,323 1,821 2,060 727 Total at the end of 2016 56,054 32,277 45,097 4,632
The equity interests held by the Group in respect of associates do not have quoted market prices and are not traded regularly in any active recognised market. The associates concerned have no material impact on the results or assets of the Group.
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £68,004,000 (2016: £66,681,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 26).
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 238,166 252,837 After one year 24,296 27,074 17 Reinsurance assets
Reinsurers’ share of insurance liabilities 1,358,547 806,245 Provision for non-recovery and impairment (581) (596)
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 685,781 466,041 After one year 672,185 339,608
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 19). The Group recognised a gain during the year of £15,000 (2016: gain of £134,000) in respect of previously impaired balances.
129Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Debt and fixed income securities 3,430,243 3,414,949 Equities and shares in unit trusts 334,300 305,342 Deposits with credit institutions 5,320 24,592 Total investments 3,769,863 3,744,883 Insurance-linked fund 36,976 46,821 Derivative financial instruments 20 304 329 Total financial assets carried at fair value 3,807,143 3,792,033
The effective maturity of the debt and fixed income securities due within and after one year are as follows: Within one year 796,587 706,700 After one year 2,633,656 2,708,249
Long-term debt 274,129 274,019 Accrued interest on long-term debt 1,800 1,800 Total financial liabilities carried at amortised cost 275,929 275,819
The notes bear interest from and including 24 November 2015 at a fixed rate of 6.125% per annum payable annually in arrears starting 24 November 2016 up until the first call date in November 2025, and thereafter at a floating rate of interest equal to three-month LIBOR plus 5.076% payable quarterly in arrears on each floating interest payment date. The Group is exposed to cash flow interest rate risk on its long-term debt.
The interest accrued on the long-term debt was £1.8 million (2016: £1.8 million) at the balance sheet date and is included in financial liabilities.
18 Financial assets and liabilities continued Investments at 31 December are denominated in the following currencies at their fair value: Debt and fixed income securities
Total investments 3,769,863 3,744,883 19 Loans and receivables including insurance receivables
Prepayments and accrued income 11,306 7,713 Other loans and receivables: Net profit commission receivable 17,008 21,232 Accrued interest 13,579 12,590 Share of Syndicates’ other debtors’ balances 22,451 30,223 Other debtors including related party amounts 24,277 32,656 Total loans and receivables including insurance receivables 830,704 802,906
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £368,000 (2016: gain of £899,000) for the impairment of receivables during the year ended 31 December 2017. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2017. 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 2017 all mature within one year of the balance sheet date and are detailed below: 31 December 2017 Derivative financial instruments included on balance sheet
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 13,823 16,703 30,526 Gross fair value of liabilities (13,685) (16,824) (30,509)
Foreign exchange forward contracts 26,591 312 (121) 191 Interest rate futures contracts 56,728 17 (106) (89) Equity index futures 10,223 – (247) (247)
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 12,724 13,746 26,470 Gross fair value of liabilities (12,412) (13,867) (26,279)
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures denominated in a range of currencies to informally hedge interest rate risk on specific long portfolios. All contracts are exchange traded and the Group made a loss on these futures contracts of £423,000 (2016: loss of £111,000) as included in investment result in note 7.
20 Derivative financial instruments 132 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Financial assets Debt and fixed income securities 1,192,934 2,237,309 – 3,430,243 Equities and shares in unit trusts – 322,914 11,386 334,300 Deposits with credit institutions 5,320 – – 5,320 Insurance-linked funds – – 36,976 36,976 Derivative financial assets – 304 – 304
The fair values of the Group’s financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, long-term debt and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at amortised cost, is estimated at £317.4 million (2016: £292.3 million) and is considered as Level 1 in fair value hierarchy.
Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance-linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant. At 31 December 2017, the insurance-linked funds of £36,976,000 represents the Group’s investment in the Kiskadee Funds (2016: £46,821,000).
The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the relevant reporting period during which the transfers are deemed to have occurred.
Fair value gains or losses through profit or loss* (341) (5,710) (6,051) Foreign exchange losses (217) (3,687) (3,904)
Fair value gains or losses through profit or loss* (279) 3,666 3,387 Foreign exchange gains 729 7,719 8,448
Unrealised gains and losses in the year on securities held at the end of the year (1,397) 2,305 908 * Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance-linked fund.
Authorised ordinary share capital of 6.5p (2016: 6.5p) 240,000 3,692,308 240,000 3,692,308 Issued ordinary share capital of 6.5p (2016: 6.5p) 19,141 294,484 19,060 293,227
The amounts presented in the equity structure of the Group above relate to Hiscox Ltd, the legal Parent Company.
Share repurchase The Trustees of the Group’s Employee Benefit Trust did not purchase any Hiscox Ltd shares during the year. In 2016, shares to the value of £38,558,000 were purchased to facilitate the settlement of vesting awards under the Group’s Performance Share Plan. As the trust is consolidated into the Group financial results, these purchases have been accounted for in the same way as treasury shares and have been charged against retained earnings. The shares are held by the Trustees for the beneficiaries of the Trust.
Employee share option scheme – ordinary shares issued 897 332 Scrip dividends to owners of the Company 31 360 119
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and Performance Share Plan award instruments issued to employees, over their vesting period through the income statement. The expense recognised in the consolidated income statement during the year was £25,186,000 (2016: £26,274,000). This comprises charges of £24,390,000 (2016: £25,585,000) in respect of Performance Share Plan awards and £796,000 (2016: £689,000) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument.
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2017 2016
Annual risk-free rates of return and discount rates (%) 0.19-0.26 0.16-0.55 Long-term dividend yield (%) 3.09 3.59 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 22.0 22.0 Weighted average share price (p) 1,139.3 966.7
The weighted average fair value of each share option granted during the year was 223.6p (2016: 183.8p). The weighted average fair value of each Performance Share Plan award granted during the year was 1,127.1p (2016: 961.8p).
136 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The Group did not purchase its own shares during 2017. In 2016, the Group purchased £38,558,000 of its own shares and placed them in the Trust for future utilisation on vesting of Performance Share Plan awards.
At 31 December 2017 Hiscox Ltd held 7,523,190 shares in treasury (2016: 7,523,190). Additional details are shown in note 34 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Gross Claims reported and claim adjustment expenses 1,204,509 977,664 Claims incurred but not reported 2,018,131 1,588,160 Unearned premiums 1,227,542 1,287,152 Total insurance liabilities, gross 4,450,182 3,852,976 Recoverable from reinsurers Claims reported and claim adjustment expenses 361,657 159,141 Claims incurred but not reported 743,748 383,974 Unearned premiums 252,561 262,534 Total reinsurers’ share of insurance liabilities 17 1,357,966 805,649 Net Claims reported and claim adjustment expenses 842,852 818,523 Claims incurred but not reported 1,274,383 1,204,186 Unearned premiums 974,981 1,024,618 Total insurance liabilities, net 3,092,216 3,047,327
24 Retained earnings and other reserves 137Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
(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.
Current estimate of cumulative claims 888,380 672,197 819,209 1,193,663 998,221 719,687 817,362 957,756 1,282,020 2,521,450 10,869,945 Less: attributable to external Names (170,298) (116,337) (128,818) (174,624) (129,405) (78,888) (90,645) (103,769) (143,092) (346,420) (1,482,296) Group’s share of current ultimate claims estimate 718,082 555,860 690,391 1,019,039 868,816 640,799 726,717 853,987 1,138,928 2,175,030 9,387,649
25 Insurance liabilities and reinsurance assets 25.1 Insurance contracts assumptions (b) Claims development tables continued 139Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Liability recognised in respect of prior accident years at 100% level 102,358 Total net liability to external parties at 100% level 2,395,354 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2017.
25 Insurance liabilities and reinsurance assets 25.1 Insurance contracts assumptions (b) Claims development tables continued 140 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Current year claims and claim adjustment expenses (2,258,615) 982,093 (1,276,522) (1,275,018) 299,564 (975,454) Over-provision in respect of prior year claims and claim adjustment expenses 327,198 (75,677) 251,521 270,417 (57,465) 212,952 Acquisitions/(divestments) and transfers* – 8,000 8,000 – 22,730 22,730 Total claims and claim adjustment expenses (1,931,417) 914,416 (1,017,001) (1,004,601) 264,829 (739,772)
The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this note 25.
Reinsurers’ share of deferred acquisition costs 16 68,004 66,681 Accruals and deferred income 118,862 153,107
27 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 34. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 18,993 32,240 Adjustments in respect of prior years (82) (5,010) Total current tax expense 18,911 27,230
Deferred tax Credit for the year (21,221) (5,055) Adjustments in respect of prior years 5,690 (3,786) Effect of rate change 1,108 (832) Total deferred tax credit (14,423) (9,673) Total tax charged to the income statement 4,488 17,557
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 14.6% (2016: 5.0%). The higher effective rate in 2017 is due principally to the one-off impact of the revaluation of deferred tax assets, following the change in the US Federal tax rate introduced by the Tax Cuts and Jobs Act in December 2017.
Adjustment for share-based payments (588) 812 Non-taxable income (5,418) – Prior year tax adjustments 5,608 (8,796) Tax charge for the period 4,488 17,557
26 Trade and other payables continued 142 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
Trade and other payables 4,036 (1,517) – 2,519 Intangible assets – Syndicate capacity 1,538 (147) – 1,391
Deferred tax assets of £34,520,000 (2016: £41,392,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits in excess of profits arising from the reversal of other timing differences, are recognised above. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. £1,246,000 (2016: £nil) of the tax losses to which these assets relate will expire within ten years; a further £32,673,000 (2016: £40,572,000) will expire after ten years; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling £7,238,000 (2016: £29,988,000) including £7,238,000 (2016: £26,843,000) in relation to losses in overseas companies of £39,712,000 (2016: £88,185,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax asset expected to be recovered after more than 12 months is £33,919,000 (2016: £41,392,000).
29 Employee retirement benefit obligations The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the Trustee and are held separately from those of the Group. 61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme is recorded and the recovery from the third-party Names for their share of the Syndicate 33 recharge is shown as a separate asset.
The scheme assets are invested are as follows: At 31 December 2017
Managed fund pooled investment vehicles UK equity funds 76,939 76,233 Emerging market equity funds 12,249 9,949 Global equity funds 38,652 35,495 Bond funds 60,468 48,901 US equities 22,409 24,530 28 Deferred tax Net Group deferred tax assets/(liabilities) analysed by balance sheet headings continued 144 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The weighted average duration of the defined benefit obligation at 31 December 2017 was 23.2 years (2016: 23.0 years).
29 Employee retirement benefit obligations continued 146 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
The triennial valuation carried out as at 31 December 2014 resulted in a surplus position of £8.6 million on a funding basis. The Group is therefore not required to currently make any contributions to the pension scheme.
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and income statement. For example, an additional one year of life expectancy for all scheme members would increase the scheme obligations by £9,420,000 at 31 December 2017 (2016: £9,281,000), and would increase the recorded net deficit on the balance sheet by £9,420,000 (2016: £9,281,000).
The most sensitive and judgemental assumptions are the discount rate and inflation. These are considered further below.
Diluted earnings per share has been calculated after taking account of 8,292,818 (2016: 8,653,254) Performance Share Plan awards and 772,427 (2016: 748,600) options under SAYE schemes.
The interim dividends for 2017 and 2016 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim dividend for the year ended 31 December 2017 was paid in cash of £25,799,000 (2016: £22,983,000) and 108,769 shares for the scrip dividend (2016: 119,302).
When determining the level of dividend each year, the Board considers the ability of the Group to generate cash; the availability of that cash in the Group, while considering constraints such as regulatory capital requirements; and the level required to invest in the business. This is a progressive policy and is expected to be maintained for the foreseeable future.
32 Contingencies and guarantees The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, at US$500 million (2016: US$500 million) which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof. The terms also provide that upon request the facility may be drawn in a currency other than US Dollar. At 31 December 2017 US$10.0 million (2016: US$10.0 million) was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2016: £nil).
33 Capital and lease commitments Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was £1,200,000 (2016: £1,881,000).
Operating lease commitments The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totalled £11,251,000 (2016: £9,236,000). Operating lease rental income for the year totalled £569,000 (2016: £448,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 10,127 10,045 Office equipment and other 603 573
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 360 528 Later than one year and no later than five years – 352 Later than five years – –
34 Principal subsidiary companies of Hiscox Ltd at 31 December 2017
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Holdings Inc. Insurance holding company USA (Delaware) ALTOHA, Inc. Holding company USA (Delaware) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox Inc. Underwriting agent USA (Delaware) Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox ASM Ltd Insurance intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox Capital Ltd* Reinsurance Bermuda Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox Europe Underwriting Limited Insurance intermediary Great Britain Hiscox Société Anonyme General insurance Luxembourg Direct Asia Insurance (Holdings) Pte Ltd Holding company Singapore Direct Asia Insurance (Singapore) Pte Limited General insurance Singapore *Held directly.
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2017 (2016: 38,030).
150 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
35 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2017 on pages 68 to 75. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
Hiscox Group insurance carriers 26,848 54,302 98,984 31,802 Hiscox Group insurance intermediaries 7,914 6,890 (25,293) (16,336) Other Hiscox Group companies – – 3,028 (6,626)
The Group is currently in the process of restating the comparative data for this change.
Profit for the year after tax 26,310 336,986 209,895 216,152 237,758 Assets employed
Photography by Spencer Lowell (Bermuda cricket images p50) Lee Mawdsley (Other images p5 and p50) Suki Dhanda (Board images p9, p11, p52 and p53)
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