1Hiscox Ltd Report and Accounts 2018 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 A specialist approach 42 Risk management 52 Responsibility 58 Board of Directors 60 Chairman’s letter to shareholders 61 Corporate governance 65 Audit Committee report 68 Letter from Chairman of the Remuneration Committee 70 Remuneration summary 72 Annual report on remuneration 2018 84 Remuneration policy 94 Directors’ report 96 Directors’ responsibilities statement 98 Independent auditor’s report 104 Consolidated income statement 104 Consolidated statement of comprehensive income 105 Consolidated balance sheet 106 Consolidated statement of changes in equity 107 Consolidated statement of cash flows 108 Notes to the consolidated financial statements 160 Five-year summary
Gross premiums written ($m) 3,778.3 3,286.0 Net premiums earned ($m) 2,573.6 2,416.2 Profit before tax ($m) 137.4 39.7 Profit before tax excluding foreign exchange ($m) 151.1 120.6 Profit after tax ($m) 128.0 33.9 Earnings per share (¢) 45.1 12.0 Total ordinary dividend per share for year (¢) 41.9 39.8 Net asset value per share (¢) 819.1 835.1
Combined ratio excluding foreign exchange (%) 94.4 98.8 Return on equity (%) 5.6 1.5
Reserve releases ($m) 326.5 324.2 *Additional performance measures are discussed on page 28.
Our strategy Building balance – a symbiotic relationship Total Group controlled income for 2018 (%)
Over the last five years ROE averaged 13%, above the FTSE All-Share average of 11%. This performance has enabled the Company to distribute $1,123 million to shareholders since 2014, and deliver a total shareholder return of 67% – well above the FTSE All-Share of 20%.
Hiscox Re & ILS Demand for our ILS offering has been sustained, with assets under management now exceeding $1.5bn after last year‘s losses.
Claims We paid out £1.2 billion in claims in 2018 – getting our customers back on their feet when the worst happened.
We have invested significantly in creating a unique culture that reflects our values and customer-focused ethos, and a powerful, differentiated brand which our target clients can identify with.
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 work environment in which they can flourish.
Pleasingly, Hiscox also ranked seventh in Glassdoor’s annual Employees’ Choice Awards for the UK’s Best Places to Work, up from eighth place last year. This accolade is especially important to us as the listing is based on the feedback that employees have shared about us on Glassdoor over the past year.
Hiscox Group A Hiscox ranked seventh in Glassdoor’s annual Employees’ Choice Awards for the UK’s Best Places to Work – up from eighth place last year.
We have specialist knowledge and great relationships, and we care about our customers and each other. We have always believed that doing the right thing, however hard, will lead to success. In 2018 this approach resulted in us receiving a number of new accolades.
Retail business A Hiscox USA picked up six awards at the Financial Communications Society’s 24th Annual Portfolio Awards for its ‘I’mpossible’ and ‘Has America Lost its Courage?’ advertising campaigns.
Underwriting Team of the Year for our FloodPlus product, and Rising Star of the Year for product recall and terrorism underwriter Amie Townsend at the Insurance Day London Market Awards 2018.
Our values guide our business: to have courage and integrity, to provide quality products, to excel in the service we provide and, above all, to be human. At the heart of our business is a restless spirit to challenge convention in our industry, and in ourselves, to always do better.
In big-ticket lines, market conditions have been challenging but our London Market business has reaped the rewards of the tough action we have taken over the last three years to reduce or exit from unprofitable lines, and returned to excellent growth and profitability.
In our investments, we were impacted by both difficult equity markets and the value of our bond portfolio which naturally reduced as interest rates rose in the US. We will benefit from those same rising interest rates in 2019 and recover 2018 losses as we hold the bonds to maturity.
Our market We are ruled by the market, particularly in big-ticket and reinsurance lines, and adjust our appetite according to the
I would like to finish by thanking everyone at Hiscox for their efforts this year, particularly as we entered the FTSE 100. Their hard work in serving our customers, paying claims, establishing new partnerships, building new systems and supporting our growth has all contributed to this result.
Robert Childs opportunities it provides. Rates did not respond as much as we feel they should have following the losses arising from hurricanes Harvey, Irma and Maria in 2017, but where they did we were able to take advantage. A second successive year of historic market losses seems to have done little to spur a widespread market turn, but once again we have been ready, taking opportunities where they have been available.
Progress can feel painstaking, but we are gaining ground on improved rates, and on the technical, but important, area of terms and conditions. As our London Market result shows, we are happy to navigate these waters and our underwriters are up to the task.
People and culture People and culture make a difference; indeed, culture and values are as important as strategy and distribution, so when it comes to values we expect our top executives and the Board to show leadership. As Hiscox continues to grow, the continuity of our culture is key. It has been pleasing this year to see strong succession from within and, in retail, the top team sharing their expertise with different parts of our business to help drive Hiscox to the next level.
I am regularly told by those that know us that Hiscox has a distinctive culture underpinned by strong values. Being the highest ranking financial services firm in Glassdoor’s 2019 best places to work in the UK, and receiving very positive customer feedback, validates that our values are being lived. We do not take this for granted, and around every five years, as new people join and the business evolves, we undertake an exercise to refresh them. I am pleased that we are embarking upon another such exercise, led by our Chief Executive Bronek. It doesn’t mean that we feel they are wrong – language becomes dated and core principles need to be expressed so they resonate with new generations of employees. Our values inform all our day-to-day decisions and that makes them critical to maintaining our reputation for integrity and decent and fair behaviour in everything we do.
Outlook The diversity of our products and distribution continues to give us options. Our retail operations have again balanced the volatility of the big-ticket lines, validating our long-held strategy. We have talked before about the moderating percentage growth rate in Hiscox USA, but we find the size of the US opportunity exciting.
Hiscox Retail wrote over $2 billion of premium, served one million customers and has become a strong profit generator for the Group, with its profits covering the dividend for the third consecutive year. As a result of portfolio optimisation, we expect growth in Hiscox Retail to be in the high single digits for the next 12 months.
$3,778.3m Hiscox has grown gross premiums written by 15.0% to $3,778.3 million and more than tripled profits to $137.4 million.
Germany is now our largest business in terms of premium, with our technology, management liability, motor and cyber products proving most popular. The Frankfurt branch we opened in 2017 is performing well, and having a physical presence in Germany’s financial capital is yielding good results. We will extend our regional footprint further during 2019, with new offices in Stuttgart and Berlin.
We made some important leadership changes across retail in 2018. As previously announced, Ben Walter moved from CEO of Hiscox USA to the newly created role of CEO Hiscox Global Retail. Ben is helping to sharpen the focus of our retail operations, and address the common challenges that our retail businesses face when it comes to driving product innovation, creating scale and digitising for the modern age. In addition, Steve Langan moved from CEO of Hiscox UK & Ireland to CEO of Hiscox USA while remaining Chief Marketing Officer for the Group. Steve has the business-building experience and branding firepower that our US operations require for their next phase of growth. Bob Thaker, who is currently serving as CEO of DirectAsia, will succeed Steve as Hiscox UK CEO in the first quarter of 2019, and we have begun the search for his replacement. Each of these appointments will help to drive Hiscox Retail forward in the medium to long term, but as each new CEO gets settled in their new roles, I am expecting growth to be more conservative in the short term.
Hiscox UK & Europe This division provides personal lines cover – from high-value household, fine art and collectibles to luxury motor – and commercial insurance for small- and medium-sized businesses, typically operating in white collar industries.
$809.6m Hiscox USA continues to achieve strong growth, with gross premiums written increasing by 15.4% to $809.6 million (2017: $701.4 million).
In France, growth has been more muted. After a challenging period in household, we have taken action, implementing a new underwriting and pricing strategy. Cyber and partnerships with financial institutions have performed well, and in motor the partnership we established with Aon has enabled us to materially grow our classic car book.
The robotic process automation (RPA) that I mentioned last year, which allows us to automate back-end processing and further improve our service levels to brokers and partners, has been rolled out across policy administration, claims and finance and resulted in the automation of 70,000 transactions in 2018. Our focus on IT infrastructure in Europe will continue in 2019, when we will start work to prepare the business for a new core policy, claims, billing and collections system. This will be a similar multi-year undertaking to the work we have done within our UK and US businesses.
Due to the structural changes we have made to our business in readiness for Brexit, Ireland will be reported as part of Hiscox Europe from 2019. One of the upsides of the changes we have implemented is that Hiscox Europe will benefit from greater clarity and attention, with its own Board oversight.
The operational resilience of the business has been boosted by new offices in Las Vegas and Phoenix, which improve our capabilities to serve West Coast customers.
Hiscox Special Risks Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art. Hiscox Special Risks has 1 Strategic report Chief Executive’s report 41 Governance 67 Remuneration 97 Financial summary
The business grew its controlled premiums by 32.7% to reach $19.5 million (2017: $14.7 million). This excludes premiums controlled by DirectAsia Thailand, which is currently written via an agency relationship into Hiscox Insurance Company (Bermuda) Limited and reported within Hiscox Re & ILS. From 2019 onwards, premiums controlled by DirectAsia Thailand will be reported within Hiscox Retail, in line with the way the Group reports agency income.
Both Singapore and Thailand remain competitive markets, but focused marketing execution along with product and pricing enhancements in car, motorcycle and travel are helping us to attract and retain more customers. We continue to invest in the business as we strive to reach scale.
We have also expanded our distribution capabilities through commercial partnerships with complementary brands including SingTel, Prudential, DBS, and VICOM in Singapore and KTC in Thailand this year. These partnerships broaden our reach, endorse our brand and help us to grow.
(2017: loss of $46.7 million) and the combined ratio improved to 89.3% (2017: 111.6%).
The tough action taken in previous years continued in the first part of 2018, when we stopped writing aviation hull and liability, and reshaped our D&O exposure. This work meant we were well positioned for the Lloyd’s Decile 10 directive, a crackdown on unprofitable lines by mandating that each syndicate submit plans to address the worst-performing 10% of their business. It made for an interesting business planning process but we had far fewer adjustments to make than some of our peers. We view the action taken by Lloyd’s as positive; we all benefit from the Lloyd’s brand, rating, central fund and licences, and it is their right to make sure members are competitive. Lloyd’s is considered the problem-solver of insurance – its reputation for having the expertise and experience to place complex or unusual risks has been earned through decades of hard work – and we must play our part in helping to retain that.
Our London Market team worked hard to push through rate rises in 2018 and overall rates went up 7%. Notable rate rises for the year were in household and general liability, while terrorism and cyber remain competitive. The 1 January 2019 renewals are most significant for our property and specialty insurance lines, which grew between 5% and 10% year-on-year, teams in London, Guernsey, Cologne, Munich, Paris, New York, Los Angeles and Miami.
Gross premiums written 877.7 749.8 Net premiums earned 551.8 561.6 Underwriting profit/(loss) 68.2 (46.0) Investment result 13.3 14.5 Foreign exchange and other* (3.3) (15.2) Profit/(loss) before tax 78.2 (46.7) Combined ratio 89.3 111.6 Combined ratio excluding foreign exchange 89.0 108.7 *Includes impairment.
The discipline our London Market business has shown over the last three years has paid dividends. Since the end of 2016, the team has walked away from $400 million of challenged business and by the end of 2018 they had succeeded in replacing it. Hiscox London Market 1 Strategic report Chief Executive’s report 41 Governance 67 Remuneration 97 Financial summary
Our casualty team focuses on larger company cyber, D&O and general liability. In cyber, although overcapacity is impacting pricing, we remain ambitious and continue to invest in our cyber training programme for brokers which is helping to boost understanding of what remains a complex risk. We have some exposure to the Marriott data loss whose scale and cost reminds us that this is not a risk-free area of activity. The D&O market remains especially challenging, and we significantly refocused our ambitions during the year. Our general liability book continues to grow well and trends look positive. We will expand our capacity in 2019 using consortia with other Lloyd’s syndicates.
In product recall we remain opportunistic. We responded to the Canadian Cannabis Act – which allows recreational use of marijuana in Canada and has meant that marijuana growers now require product recall cover – with a new product in less than a month, which is just the sort of fleetness of foot and innovation we want to be known for.
We are making progress with Lloyd’s Placing Platform Limited (PPL), the market’s move to digital trading. Hiscox bound 45% of all syndicate risks through PPL, exceeding the target of 30% that was mandated by Lloyd’s. This is good progress, but there is more to do. In 2019 we will support market moves to make the use of PPL for submissions mandatory, as this is where we will begin to gain the greatest efficiencies.
Hiscox MGA Hiscox MGA underwrites and distributes products where customers’ requirements for capacity exceed Hiscox’s own risk appetite, or where the team’s distribution focus – both digital and physical – allows us to access business in local markets around the world. It operates out of London, Paris and Miami.
Hiscox Re & ILS Good ILS performance, reinsurance market remains tough Hiscox Re & ILS comprises the Group’s reinsurance teams who are based in London and Bermuda, and ILS activity primarily conducted through our flagship Kiskadee funds. The team underwrites on behalf of Hiscox and third-party capital partners, whether they are insurance companies, other syndicates or capital market investors.
We have seen sustained demand for our ILS offering. Our funds have performed in line with expectations, with the losses of the second half consistent with modelled outcomes. Assets under management now exceed $1.5 billion after last year’s losses.
Hiscox reserved $165 million for Hurricanes Florence and Michael in the USA, and Typhoons Jebi and Trami in the Far East, together with the impact of historic wildfires in California.
We exercise prudence when it comes to claims reserving, and this approach is evident in reserve releases of $326 million (2017: $324 million) from prior years. This includes favourable experience on the $225 million reserves established for Hurricanes Harvey, Irma and Maria at the end of 2017.
We also announced that the leadership of our claims function is evolving. Jeremy Pinchin, who has held multiple leadership positions during his 13 years at Hiscox, but served throughout as our Group Claims Director, will retire in 2019. When Jeremy joined us in 2005, he was our first Group Claims Director. That year, we paid total claims of around £450 million and had a claims team of less than 50 people. Jeremy has driven the ongoing professionalism of our claim’s operations, ensuring its capabilities have scaled in line with our growth, and it is under his leadership that we now have an award-winning claims function, a 250-strong team, and in 2018 paid out £1.2 billion in claims. Paying claims is what we are here for and Jeremy has enabled Hiscox to go from strength-to-strength in this regard. He also made a huge contribution to our industry, particularly after 9/11 when he had the unique role of Special Counsel for Lloyd’s and coordinated the market’s management of its exposure to the losses arising from September 11.
We continued to develop our specialty lines where we see growing opportunity, launching a first-of-its-kind industry loss warranty product in cyber, and in flood, where our FloodXtra product differentiates us.
During the 1 January 2019 renewal period, we saw overall rate improvements of around 2% across all lines, driven by increases in retro, risk excess, casualty and specialty. As we look towards the Japanese renewals at 1 April and US renewals at 1 June and 1 July, both of which will be loss-affected, we anticipate further pricing correction.
Gross premiums written 812.0 700.8 Net premiums earned 257.4 269.3 Underwriting (loss)/profit (23.2) 4.5 Investment result 12.9 27.9 Foreign exchange and other* (12.9) (6.9) (Loss)/profit before tax (23.2) 25.5 Combined ratio 116.9 101.3 Combined ratio excluding foreign exchange 112.5 98.9 *Includes finance cost.
We continued to develop our specialty lines where we see growing opportunity, launching a first-of-its-kind industry loss warranty product in cyber, and in flood, where our FloodXtra product differentiates us. Hiscox Re & ILS
I am pleased that we will continue to benefit from his wisdom as a Non Executive Chairman of Hiscox Special Risks, and as Chairman of the Hiscox Pension Fund.
Marketing Our marketing is focused on building a differentiated brand in all our markets to drive value over the short and long term. In 2018 we spent $69.7 million on acquisition and brand-building activity (2017: $69.1 million) with award-winning campaigns such as CyberLive in the UK driving double-digit premium growth in our small business offering. The I’mpossible campaign in the USA continued to run across digital, print, radio and in sponsorship, while in the UK the Hiscox Ever Onwards campaign continued its successful combination of outdoor and radio. Cyber-focused campaigns drove increased awareness of Hiscox across both our business and home insurance customers. We saw great momentum in DirectAsia with new marketing campaigns and distribution partnerships driving new business performance.
Across the Group we activated key partnerships in our core interest areas of art, classic cars and technology, driving awareness and affinity of Hiscox.
The staggered approach we have taken to replacing our core underwriting systems across Hiscox Retail, starting with the UK, has been prudent. Embedding new systems and training our teams to use them takes time, and has had a short-term impact on service levels as our UK business adjusts, but in time we will reap the benefits of new infrastructure. In the USA, we remain on track for our direct and partnerships business to start transitioning to a new system towards the end of 2019. This will create efficiencies for the US business that are essential, given the size of the opportunity ahead of us. In Europe, we have reviewed our IT requirements and made some progress on improving our broker portals and relationship management systems. In time, our European operations will require the same core systems replacement as the UK and USA, so the associated business readiness activities will happen this year.
As we have said before, like others we have also had a plethora of external factors to respond to; Brexit (more on that below), General Data Protection Regulation (GDPR), New York Cybersecurity Regulation, IFRS 17 accounting standards, the Insurance Distribution Directive (IDD) and the updated Senior Managers Certification Regime (SMCR). So as the Chairman has said, 2018 was a year of change and achievement in our operations, with more planned in 2019.
Brexit Our business is ready for Brexit, even if British politicians are not. We have always said that, for Hiscox, Brexit is structural not strategic. We have built a profitable business in mainland Europe and Ireland over the past 25 years, which serves over 200,000 customers and employs 420 staff. We have put in place the structures needed to continue to serve these customers, as well as those of our customers from elsewhere in the world who have assets or exposures in these territories.
We are maturing into a larger and more prominent company, but we strive to retain our entrepreneurial spirit. We were approximately €100 million, around half of which will moderate over time.
I am proud of the resolve of our teams around the world who have delivered our Brexit solution and I would like to thank them all for their hard work on the project. The Part VII legal process of transferring relevant policies and their associated liabilities from Hiscox Insurance Company to Hiscox SA, as we have just done, is complex, but provides certainty to our customers that we can legally pay all valid claims, even in a hard Brexit scenario. In 2019 we will work with Lloyd’s as they complete their Part VII transfer.
Our prediction that the end of 2017 would be a turning point in financial markets proved to be correct, and 2018 was a difficult environment for investors. Interest rate rises, volatility spikes and equity price slumps contrasted sharply with the preceding year. Nevertheless, our cautious approach to risk and asset allocation enabled us to generate reasonable returns in turbulent markets.
In keeping with our long-held conservative approach to investing, we were content to accept the returns on offer in the safer corners of the bond markets while maintaining a modest allocation, to equities and hedge funds. As a result of this strategy, our investments made $42.5 million (2017: $112.5 million), before derivatives and fees, a return of 0.7% (2017: 2.0%).
Retail business A Smaller premium, locally traded, relatively less volatile business written mainly through Hiscox Retail. A Growth between 5-15% per annum. A Pays dividends.
Building a balanced business Hiscox enjoys a symbiotic relationship between more catastrophe-exposed, globally traded business, and comparatively less volatile, smaller premium retail business which gives us opportunities throughout the insurance cycle.
Hiscox Special Risks Hiscox USA Hiscox Asia * Hiscox Retail includes $1.5m GWP of fully reinsured run-off portfolios.
Total Group controlled premium 2018: $4,224 million (Period-on-period in local currency)
Kidnap and ransom Contingency Terrorism Product recall Personal accident Aerospace Contractors’ equipment FTC
Small commercial $1,452m $894m $442m $469m $554m $198m$215m 20 Hiscox Ltd Report and Accounts 2018 1 Strategic report1 Strategic report
Actively managed business mix 41 Governance 67 Remuneration 97 Financial summary
– $2 b n m ar ke t l os s 7 ye ar re tu rn p er io d
$ 6b n m ar ke t l os s y ea r r et ur n p er io d
Capital Hiscox monitors its capital requirements based on external risk measures and internal risk appetite.
Capital management The Board is responsible for monitoring the capital strength of the Hiscox Group and ensuring that its insurance carriers are suitably capitalised for regulatory and rating purposes, taking into account future needs including growth where opportunities arise.
The Group measures its capital requirements against its available capital. Available capital is defined by the Group as the total of net tangible asset value and subordinated debt.
The subordinated debt issued by the Group is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements. At 31 December 2018 available capital was $2,463 million (2017: $2,553 million), comprising net tangible asset value of $2,113 million (2017: $2,182 million) and subordinated debt of $350 million (2017: $371 million).
Rating agencies Our ability to attract business, particularly reinsurance, is dependent upon the maintenance of appropriate financial strength ratings from the leading rating agencies: A.M. Best, S&P and Fitch. These ratings are assigned based on a range of factors, including business model, risk management framework and financial strength. They are assigned individually to the insurance carriers of the Group, but capital adequacy is monitored primarily by the rating agencies at the consolidated Group level.
The GSSA is based on the Group’s own internally assessed capital requirements and is informed by the Group-wide Hiscox Integrated Capital Model (HICM) which, together with the BSCR, forms part of the BMA’s annual solvency assessment. The HICM provides a consistent view of capital requirements for all segments of the business and at Group level.
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. A copy of our FCR can be found at www.hiscoxgroup.com/ about-hiscox/group-policies-and-disclosures
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of year end 2018 results. Hiscox uses the internally developed Hiscox integrated capital model to assess its own capital needs on both a trading (economic) and purely regulatory basis. All capital requirements have been normalised with respect to variations in the allowable capital in each assessment for comparison to a consistent available capital figure. The available capital figure comprises net tangible assets and subordinated debt.
The BMA is planning to phase in changes to the BSCR over a three-year period, starting at the end of 2019, which is expected to reduce the BSCR solvency ratio. The Group expects to maintain an appropriate margin of solvency after these changes have taken effect. The total impact of this change once it has been fully phased in, is shown in the chart on the left. It is expected to reduce the BSCR solvency ratio by approximately 15%-20%.
Our focus on efficient capital management means the business remains well positioned to support growth in areas expected to be profitable. Capital management $2,463m Available capital as at 31 December 2018.
Group financial performance Good underwriting performances in our retail and London Market businesses helped mitigate the impact of natural catastrophes, large losses and investment market volatility.
The Hiscox Group delivered profit before tax for the year of $137.4 million (2017: $39.7 million), or $151.1 million (2017: $120.6 million) excluding foreign exchange gains/losses.
Net asset value per share decreased by 1.9% to 819.1¢ (2017: 835.1¢), with net tangible asset value at 746.4¢ (2017: 769.5¢). The Board has proposed a final dividend of 28.6¢ per share, to be paid on 12 June 2019 to shareholders on the register at 10 May 2019, taking the total ordinary dividend per share for the year to 41.9¢, an increase of 5.2% (2017: 39.8¢). The Group maintains a progressive dividend policy.
Overall the net combined ratio improved to 93.6% (2017: 94.6%), with the net claims ratio decreasing to 43.8% (2017: 45.2%) despite an increase in losses for Hiscox USA, and increased operational expenditure on major projects which saw the expense ratio increase slightly to 49.8% (2017: 49.3%). Profit before tax was $136.0 million (2017: $141.6 million). The underwriting result, excluding the impact of foreign exchange, finance costs and investments, improved by 11.1% to $125.4 million (2017: $112.8 million). This result highlights the quality of our retail underwriting and the balance that the more stable earnings of our retail businesses brings to our more volatile, catastrophe-exposed big-ticket lines.
Hiscox London Market Gross premiums written increased by 17.1% to $877.7 million (2017: $749.8 million), as the business took advantage of a second successive year of rate improvement, finding opportunities in property and specialty lines. This represents a 16.3% increase (2017: 23.1% decline) in constant currency. The net claims ratio improved to 46.0% (2017: 70.1%) as the business delivered a strong performance in the face of significant market losses. This is reflected in the combined ratio which, excluding foreign exchange movements, improved to 89.0% (2017: 108.7%). The expense ratio rose to 43.0% (2017: 38.6%) due to an increase in the proportion of higher-commission property binder business being written, as well as Group project expenditure. The profit before tax for the year was $78.2 million (2017: loss of $46.7 million) or, excluding foreign exchange gains, $80.9 million (2017: loss of $31.5 million).
Hiscox Corporate Centre The central investment portfolio returned $2.4 million (2017: $32.9 million) during the year. As the Corporate Centre holds a significant proportion of US Dollar assets to support the underwriting activities 41 Governance 67 Remuneration 97 Financial summary
† Includes a run-off casualty portfolio following the completion of a loss portfolio transfer reinsurance treaty effective from 2018 ceding any future payments on losses arising from claims developments related to policies written from 2010 to 2016, with premiums earned of $(57.4) million and claims adjustment expenses net of reinsurance of $57.5 million.
The Group paid $24.2 million of tax during the year compared with $43.4 million in 2017. The 2017 payment includes of the managed syndicates, foreign exchange movements resulted in a loss of $13.7 million (2017: loss of $80.7 million). The impact was moderated significantly by the Group’s change in functional currency to US Dollars at the beginning of 2018. As a result, the loss before tax was $53.6 million (2017: loss of $80.7 million).
The Group’s change in functional currency to US Dollars at the beginning of 2018 had the desired effect, significantly reducing the impact of foreign exchange movements during the period.
The Group had net cash outflows from investing activities of $59.6 million (2017: inflow of $3.3 million), with continued underwriting software development. Marketing expenses remained a major component of our expense base at $69.7 million during the year (2017: $69.1 million).
2018 proved to be very different to the preceding year. Disappointing overall asset performance was driven largely by concerns around the tightening of USA monetary policy. In the first quarter this led to increased market volatility depressing equity markets. In the fourth quarter, comments by US Federal Reserve Chairman Jerome Powell again drove equity markets down and also, this time, bond yields.
Rising interest rates, while clearly beneficial to our portfolios over the medium term, do negatively impact short-term performance as increasing rates lead to lower bond values and mark-to-market losses. Returns from bond coupon income were strong and we expect to recover the mark-to-market losses as bonds mature. We are now re-investing cash at rates over 3% for the first time since 2009.
While our overall asset performance suffered in the conditions, the impact was mitigated by our cautious approach to asset allocation which saw us hold an overweight portion of 20% in cash – one of the best performing asset classes in 2018 – and an underweight position of only 7% in risk assets. This action was timely, as 2018 was a particularly difficult year for risk assets as global equities, UK equities and hedge funds all struggled.
Bond credit quality 20.6% Cash 6.4% Risk assets 73.0% Bonds 9.2% EUR
In addition to our sensible, tactical asset allocation position, our selection of asset managers benefited our return; each asset class outperformed its respective index. 2018 has demonstrated the value of active management in minimising losses in volatile markets, with about half of our asset return arising from the outperformance of our active managers. Nevertheless, we see value in both active and passive approaches and will utilise whichever best suits Hiscox’s interests.
We remain underweight on all risk metrics, maintaining a prudent stance in the face of volatility to support the core Hiscox business. Nevertheless, we remain ready for a healthier investment climate.
2019 will also see an increase in focus on responsible investing as well as a specific focus on the impact of our investments on climate change.
41 Governance 67 Remuneration 97 Financial summary1 Strategic report Group investments
Additional performance measures (APMs) APMs are commonly used measures to allow comparison across peer companies.
This eliminates the impact exchange fluctuations have on the result and therefore allows a direct comparison between years. This is performed on a business unit basis and gives an accurate indication of premium growth compared to prior years.
We are one of the few insurers to cover one-man-bands, right up to the largest multinationals, and we try to bring that spirit of versatility to everything we do, even as the landscape shifts.
Security Incident Response (SIR) Global businesses face a myriad of security and integrity risks, and nowhere in the world can security be taken for granted. The threats presented by crime, terrorism, corruption and political instability are increasingly complex in nature and frequently transcend international borders. Every business with a global presence, with offices in any major city centre on any continent, or whose employees are expected to travel widely, needs to understand and manage these hazards in order to protect their people, operations and reputation. Hiscox launched its SIR product in 2017 to help large, multinational organisations address these challenges through our experience and that of our partner, Control Risks, an international risk management and security consultancy. It allows a response to be activated at the first suspicion of a developing risk, meaning executives and their senior teams can get ahead of fast-moving events before they become a crisis.
Small business Across the world’s most developed economies, the landscape of enterprise is undergoing a dramatic shift. Where once it was large corporations that powered economies, small businesses are now providing more of the fuel. As the digital revolution opens new avenues, the nature of small businesses – and therefore the risks they are exposed to – is also changing. At Hiscox, we have a long track record of helping entrepreneurs manage their risks, insuring around 480,000 small businesses, professionals and consultants worldwide. We understand that any small business in any sector will have its own unique character and needs. We also know that many of tomorrow’s large businesses are starting out today as small ones – Hiscox itself, which began life as a partnership, is proof enough of that.
Governance 41 Governance 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 A specialist approach
We are a Bermuda-incorporated company and therefore not subject to the UK Companies Act and related UK secondary legislation. As a company listed on the London Stock Exchange we comply with the reporting requirements set out in the UK Corporate Governance Code (2016), and the Listing Rules and Disclosure & Transparency Rules of the UK Listing Authority (the UK’s securities regulator).
In our 2016 Annual Report, our remuneration reporting was consistent with UK regulations and the policy and remuneration report were presented for an advisory vote at the Annual General Meeting on 18 May 2017 on that basis. Our remuneration reporting continues to be made on that basis.
42 Risk management 52 Responsibility 58 Board of Directors 60 Chairman’s letter to shareholders 61 Corporate governance 65 Audit Committee report 68 Letter from Chairman of the Remuneration Committee 70 Remuneration summary 72 Annual report on remuneration 2018 84 Remuneration policy 94 Directors’ report 96 Directors’ responsibilities statement 98 Independent auditor’s report 104 Consolidated income statement 104 Consolidated statement of comprehensive income 105 Consolidated balance sheet 106 Consolidated statement of changes in equity 107 Consolidated statement of cash flows 108 Notes to the consolidated financial statements 160 Five-year summary 41Hiscox Ltd Report and Accounts 2018 1 Strategic report 67 Remuneration 97 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 and regulatory, legal and tax risks. Our collective risk knowledge informs every important decision we make.
Exposures are monitored and evaluated both within the business units and at Group level to assess the overall level of risk being taken and risk mitigation approaches. We consider how different exposures and risk types interact, and whether they may result in correlations, concentrations or dependencies. The overall objective is to optimise risk-return decision-making while managing total exposure in order for it to remain within the parameters set by the Board.
Second line of defence Assesses, challenges and advises on risk objectively The second line of defence provides independent oversight, challenge and support to the first line of defence. Functions in the second line of defence include the Group risk team and the compliance team.
Third line of defence Provides independent assurance of risk control The third line of defence is made up of the internal audit function, which provides independent assurance to the Board that risk control is being managed in line with approved policies, appetite, frameworks and processes. It also helps verify that the system of internal control is effective.
Risk appetite, which is set for each of our insurance carriers and for the Group as a whole, is reviewed annually. It is flexed to respond to internal and external factors such as the growth or shrinkage of an area of the business, or changes in the underwriting cycle which may have an impact on capacity and rates.
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, reserving, investments and credit, as well as emerging risks. The Group Risk and Capital Committee and the Group Underwriting Review Committee make wider decisions on risk.
s Stress and scenario testing, performed to identify and measure the likelihood and impact of potentially plausible, but extreme, events. This included consideration and challenge of 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.
ORSA process Hiscox’s ORSA process is an evolution of its long-standing risk management and capital assessment processes. It is the self-assessment of the risk mitigation and capital resources necessary to achieve the strategic objectives of the Group and relevant insurance carriers on a current and forward-looking basis, while remaining solvent, given their risk profiles.
2017 and 2018 have seen the recruitment and on-boarding of business unit risk managers who provide risk management advice on the ground, further enhancing the breadth and capability of the second line.
Principal risks The principal risks facing the organisation are described on the following pages.
This year, topics have included the direct and indirect implications of geopolitical and macroeconomic forces, such as Brexit, changes to governments, the impact of shifting trade relations and volatility in financial markets. Strategic risk
Strategy evolution and execution The Group’s continuing success depends on: i) how well we understand our clients, markets and the various internal and external factors affecting our business; and ii) having a strategy in place to address risks and opportunities arising out of this. Not having the right strategy could have a detrimental impact on profitability, capital position, market share and reputation.
Setting the right course and long-term strategic objectives at a high level is essential for the long-term success of the Group. This is especially important because some strategic initiatives require multi-year commitment and execution.
Furthermore, the Group’s emerging risk forum assesses risks and opportunities that could potentially affect the business. This year, topics have included the direct and indirect implications of geopolitical and macroeconomic forces, such as Brexit, changes to governments, the impact of shifting trade relations and volatility in financial markets. Additional consideration has been placed on items that have already emerged but are constantly evolving, assessing the secondary impact of these on our business and the markets in which we operate. Consideration was also given to the impact of various post-Brexit scenarios, with their impact on strategy and performance of the business being assessed as part of business planning. We have taken measures to ensure that the solution we have put in place in response to Brexit is appropriate regardless of the final outcome of government negotiations.
Pricing This is the risk of failing to price policies adequately, or making poor risk selection decisions.
Hiscox competes against major international insurance and reinsurance groups. At times, competitors may choose to underwrite risk at prices below the break-even technical price. Prolonged periods in which premium levels are low or competition is intense are likely to have a negative impact on the Group’s financial performance.
Accepting risks below their technical price is detrimental to the industry. It can drive market rates down to a point where underwriting losses mount, insurers’ capital is reduced and some businesses fail. Customers could receive poor service and the industry could suffer negative publicity.
We operate in open, aggressively competitive markets in which barriers to entry for new players are relatively low. Competitors may choose to differentiate themselves by undercutting their rivals. As a result, capacity levels in these markets rise and fall, causing prices to go up and down, creating volatile market cycles.
Pricing policies have been developed for each legal entity and class of business. In addition, some classes of business maintain more detailed technical underwriting guidelines.
Pricing adequacy is assessed via the peer review process. All underwriters and classes of business are subject to peer review.
Underwriting exposure management Hiscox insures individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (for example, hurricanes or earthquakes) and man-made (for example, terrorism), which can cause heavy underwriting losses that materially impact the Group’s earnings and financial condition if they occur.
The Group buys reinsurance protection to manage catastrophe risk and reduce the volatility that major losses could have on our financial position. If the Group’s reinsurance protection were proven to be inadequate or inappropriate, it could significantly affect our financial condition.
The Group underwrites catastrophe risk in a carefully managed, controlled manner. Our strategy of creating and maintaining a diversified portfolio, both by product and geography, helps limit our overall catastrophe exposure.
Hiscox assigns underwriting parameters based on a number of factors, including level of experience and skill of the individual.
These parameters are in place for all relevant Hiscox employees and those that fall under a third-party delegated authority.
Underwriter authority letters (UALs) are in place for all underwriters and reviewed at least annually. The underwriting control function maintains records of the UALs. Potential breaches of UALs are monitored periodically and escalated where necessary to senior management. Material underwriting breaches are reported to the nominated Director and relevant division management team.
Peer reviews and technical underwriting reviews assess whether or not UALs are adhered to.
Insurance risk – reserving The risk of unsuitable case reserves (for example, over- or under-reserving) and/or insufficient technical reserves in place to meet incurred losses and associated expenses.
Reserve risk The Group makes financial provisions for unpaid claims, defence costs and related expenses to cover liabilities both from reported claims and from ‘incurred but not reported’ (IBNR) claims. If insufficient reserves were put aside to cover our exposures, this could affect the Group’s future earnings and capital.
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 best estimate to reduce the risk that actual claims may exceed the amount we have set aside.
Our provision estimates are subject to rigorous controls and review by all areas of the business, as well as by independent actuaries. 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 23 to the consolidated financial statements.
Credit risk The risk of loss or adverse financial impact due to default by counterparties to which Hiscox is exposed.
We cover clients against a range of catastrophes and protect ourselves through reinsurance. We face credit risk when we seek to recover sums from our reinsurers.
We buy reinsurance only from companies we believe to be strong. A dedicated Reinsurance Credit Committee, a subcommittee of the Group Credit Committee, must approve the use of every reinsurer, based on an assessment of their financial strength, trading record, payment history, outlook, organisational structure and external credit ratings.
Credit risk – brokers If a broker defaults, causing them to fail to pass premiums to us or fail to pass the claims payment on to a policyholder, this can result in us losing money.
A significant portion 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 continued 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.
Market risk The threat of unfavourable or unexpected movements in the value of Hiscox’s assets and/or the income expected from them.
Asset value Money received from our clients in premiums, and the capital on our balance sheet, is invested until it is needed to pay claims or other liabilities. These funds can be exposed to investment risk.
Although our investment policies stress the conservation of principal and liquidity, our investments are subject to market-wide risks and fluctuations.
The Group’s cash requirements can normally be met through regular income streams: premiums, investment income, existing cash balances or by realising investments that have reached maturity. Our primary source of inflows is insurance premiums, while our outflows are largely expenses and payments to policyholders through claims. We forecast our cash flow for the week, month, quarter, or up to three years ahead, depending on the source.
Information security (including cyber security) A failure to properly protect information could compromise the confidentiality, integrity or availability of our information and data.
Cyber security risk is a subset of information security risk and is the threat to the Group posed by the higher maturity of attack tools and methods, the increased exposure and the increased motivation of attackers.
We operate in a world in which the volume of sensitive data and the number of connected devices and applications have increased exponentially, while cyber attacks are increasingly frequent and sophisticated. Our business depends on the confidentiality, integrity and timely availability of the information and data we maintain, own and use.
Our stress testing and scenario analysis considers the impact and likelihood of information security exposures and assesses management actions, including response plans.
Information technology and systems failure A major IT, systems or service failure could have a significant impact on our business.
Project risk and change management This is the risk that projects and/or change initiatives are not delivered to plan, budget or specification, or that the risks inherent in projects, or the interdependencies across 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.
All major programmes have dedicated project governance structures to oversee their delivery of the programme, including risk management aspects. Programme sponsors also provide updates to the Boards and Risk Committees as appropriate.
Heads of change in business units and for the Group provide portfolio-level oversight of risks, issues and resource needs across projects. This includes the evolution of project governance and the coordination of best practice guidance.
Regulatory, legal and tax risks The risk of financial loss, regulatory censure, additional taxation, reputational damage and/or other adverse impact as a result of non-compliance with all relevant regulatory, legislation and tax requirements in all relevant jurisdictions.
Regulatory, legal and tax change The insurance industry is exposed to continuous regulatory, legal and tax change. There is a risk that we fail to act in accordance with relevant regulatory requirements in all relevant jurisdictions or that there is deterioration in the quality of our relationship with one or more of our regulators.
The Group understands that sound, prudent regulation is key to the stability and sustainability of the insurance market 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, legal and tax change and provide effective compliance with the various and evolving requirements.
Hiscox UK & Ireland and Hiscox London Market both have the Chartered Insurance Institute’s Chartered Insurer status, and we consider this an important marker for attracting high-quality business partners such as brokers. The risks we write through brokers account for approximately 90% of our business, so it is essential that we build strong and lasting relationships with those brokers that share our values. It is why we have instigated a ‘superb service’ ethos, designed to develop a greater understanding of brokers’ needs, and is also why we run annual broker summit events for our senior broker partners and for the rising stars in their businesses.
Our suppliers are also important to us. They enable us to function to the highest standards and put customers back together again swiftly when the worst happens, so we expect all our suppliers to reflect our values and adhere to the same high standards as we do in order to provide the kind of customer service that our reputation is built upon.
Being good to our environment Hiscox is committed to reducing the environmental impact of its work. Our environmental policy sets out the standards we aim to achieve throughout the Hiscox Group by minimising our direct emissions, and actively seeking to identify new products and services that support our customers in adapting to the effects of climate change.
We also remain fully committed to being a carbon neutral business. We choose to offset our global emissions through a carbon offset scheme which is reviewed annually. In 2018, we worked with Carbon Footprint Ltd in the Great Rift Valley in Kenya for the second consecutive year. This scheme uses carbon finance to fund tree planting and support the local community, and offsets our 9,197 tonnes of carbon emissions.
Being a good corporate citizen As a business We hold ourselves to high standards of professionalism and ethical practice in every part of our business and operate in accordance with our values, which are outlined on page 7. Our belief is that insurance is a promise to pay: should a loss occur, we aim to support our customers and pay every valid claim as quickly as possible.
Scope 1 – company car use, on-site gas combustion and refrigerant loss 590 612 742 750
Tonnes CO2e per FTE (all scopes 1, 2 and 3) 3.22 3.02 2.88 2.98
Conduct Treating our customers fairly and helping them to achieve the best possible outcome is central to the Hiscox culture. We aim to ensure that high standards of customer service are adhered to across the customer journey for consumers and corporates alike. Excellent customer experience is an important pillar of management decision-making and our corporate philosophy. It is good for our customers, but also helps us meet regulatory expectations and protects the hard-earned value of our brand.
Identification of conduct risk (the risk of our actions leading to poor outcomes for customers) is an operational and strategic imperative. We seek out customer feedback and learn from qualitative and quantitative analysis of customer interactions to improve the design of products, sales, service and claims processes. A culture and process of continuous improvement helps us to meet our customers’ expectations, manage risk and continue to succeed.
There are many ways in which we seek to attract talent.
s We have two graduate schemes: one for underwriters, and a commercial programme for areas of specialism such as marketing, IT or HR. Each scheme gives individuals the opportunity to undertake a series of rotations, working in different parts of our business, and to gain comprehensive training through professional qualifications. Our graduate programme has evolved over the years, but since the scheme began in 2009 we have taken on over 150 graduates from a wide variety of universities. The scheme continues to play a major role in our youth attraction strategy, with graduates past and present helping us to refine and improve the programme year after year.
s We also have a three-year actuarial training programme which builds on the skills and technical knowledge gained from university for those thinking of a career as an actuary. The programme combines in-house courses with specialist external training, and on-the-job experience across different actuarial functions including pricing and capital management. It also offers the possibility of an overseas placement to one of our offices in the USA, Bermuda or Europe.
s We offer a small number of paid summer internships each year across our UK, US and European businesses, which equip students with real-life workplace skills. Some of our interns have even made their way back to Hiscox after graduation.
cyber and the new EU General Data Protection Regulation (GDPR). We operate in a highly-regulated industry and take our responsibilities in this regard seriously. For example, as part of our induction process in the UK, individuals are required to complete six regulatory assignments within three months of joining: Hiscox conduct risk and treating customers fairly; Hiscox introduction to the FCA; Hiscox money laundering and how you can prevent it; what whistleblowing is and why we need it; Hiscox data protection training; and business ethics. This training 41 Governance Responsibility ensures a consistent level of understanding across the business to matters including anti-bribery and anti-corruption as well as other important business ethics issues. We also support those pursuing professional qualifications on the job, such as AAT for our accounting teams or ACII for our underwriters. Training and development needs are formally 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.
Diversity and inclusion policy We want to build teams that are as diverse as the customers and communities we serve and create an environment where all our people can thrive. Our diversity and inclusion policy, and the culture and processes we are embedding in our business, help us to do this. More information on our progress in diversity and inclusion can be found on page 56.
Environmental policy Our environmental policy outlines our approach to managing the environmental impact of our business activities and those that arise from our ownership and occupation of office premises. We actively manage and aim to minimise our environmental impacts, due to the resources we consume and the amount of waste our activities produce, as well as complying with relevant environmental legislation and other requirements such as the ClimateWise Principles.
Equality policy statement Our equality policy statement outlines our aim to provide equal opportunities to all in employment, irrespective of gender, race, disability, age, sexuality, religion, beliefs, marital status and social class. Hiscox strongly opposes all forms of unlawful and unfair discrimination.
Health and safety policy Our health and safety policy is to provide a work environment and work activities that ensure the health, safety and welfare of all our employees and those who are affected by our operations across all Hiscox Group activities and locations.
Modern slavery statement Hiscox complies with the provisions of the Modern Slavery Act. Our modern slavery statement outlines our zero-tolerance approach to slavery or human trafficking in our supply chains or in any part of our business.
This year we piloted unconscious bias training for all people managers in the USA and all employees in Germany. Through our partnership with PDT, a global D&I training consultancy, we have trained over 110 employees this year, with roll-out across the Group in 2019 ensuring that everyone managing a team will be trained within the next 12-18 months. This training is important in uncovering employees’ own personal biases and learning how to challenge them, and we will continue its roll-out to other parts of our business.
A new area of focus this year has been supporting women in their return to work after maternity leave. New handbooks that improve clarity around what to expect from work before, during and after your new arrival have been developed to help employees and managers, and a buddy system has been introduced which matches new parents returning to work with others who can share their experience and offer advice and support.
We also took important steps towards improving our recruitment efforts by using diversity job boards, partnering with more diverse schools and universities and making D&I part of the discussion with external recruiters and hiring leaders. We aim to have diverse interview panels and diverse candidate slates for jobs across the Group, and ensure that job descriptions are gender neutral.
The second of our gender pay reports was published at the end of the year. It showed a small year-on-year improvement in our median pay gap, though the pay gap between men and women remains higher than we would like at 24.5% (2017: 26.2%). This is still mainly driven by the fact that we have more men than women in more senior, higher-paid roles and we continue to work hard to address this – with D&I remaining a strategic priority for the Executive Committee in 2019.
Diversity and inclusion (D&I) D&I remained a Group-wide priority in 2018 and we made good progress here.
We also conduct an annual global employee engagement survey, a formal mechanism for checking how our staff are thinking and feeling and which gives us the ability to benchmark against the wider financial services industry. In our 2018 employee engagement survey 86% of staff say they are proud to work for us, 94% said they believe in our corporate values and 80% said they would recommend Hiscox as a great place to work. Each year the survey results are shared throughout our business via emails, intranet articles and presentations from business leaders where our people also have the opportunity to discuss the results and question the actions that will be taken. Business units each review what is said for their area, and many establish representative working groups to drive the employee agenda and help make tangible, practical changes. This has included creating new communications channels, such as monthly newsletters, in those parts of the business that have said they want more frequent communications from senior leaders.
We strive to remain, in essence, a non-bureaucratic organisation. We have an effective system of internal controls to ensure that risks are managed within acceptable limits, which are outlined in the risk management section on pages 42 to 51, but these do not come at the expense of innovation or speed of response. Our ability to strike this balance, while achieving the highest standards of corporate governance as detailed on pages 61 to 64, is one of the Group’s greatest strengths.
Giving back to our community The Group is fully committed to supporting the communities within which it operates, through donations, professional support and the volunteer work of its employees. In 2018, our teams around the world contributed to the following charitable endeavours.
The Group is also a passionate supporter of the arts, science and technology. In the UK, Hiscox supported the City of London’s Sculpture in the City project for the eighth consecutive year, and continued to be the insurance partner of the Whitechapel Gallery, a free-to-access gallery close to our London office that champions contemporary art. We are The National Gallery’s first Contemporary Art Partner, and this multi-year partnership continued in 2018, as did our support of Art Night – a free contemporary arts festival that puts art into extraordinary locations around London for one night a year, encouraging the public to experience art and their city through fresh eyes. Through ArtUK, we support the Masterpieces in Schools programme, which enables schools in the UK to apply to have a sculpture visit their school and helps make art more accessible to more people. This year, we also commenced a three-year partnership as corporate supporters of The Hepworth Wakefield. Hiscox Germany continued to support promising young artists, presenting a €7,500 prize to the best young artist selected by a jury at Hamburg’s renowned university of fine art, HFBK, and supporting another artist with an artist-in-residence scholarship. Meanwhile, Hiscox France worked with FIAC, France’s premier art fair.
s 2018 saw the official launch of our Hiscox Gives charity initiative, which supports charities chosen by employees and aims to raise awareness and encourage volunteering across the Group. Our London office chose to support three local charities – KEEN London, Providence Row and The Felix Project – through a combination of fundraising and volunteering. London staff have responded well to a renewed focus on volunteering, with over 70 people signed up to take part, and over 390 hours of volunteering completed. Other initiatives such as the reading partners scheme, which involves working with children in local primary schools, through to the Lloyd’s Community Programme, continue.
s Hiscox London Market commenced a multi-year partnership with the Dust Project, a charity which helps disadvantaged children in Sri Lanka by pairing building projects with child sponsorship. In 2018, the first year of our support, we raised over £11,000, and eight of our London Market team went to Sri Lanka to help build the first house for a disadvantaged family. The team were so moved by their trip that they now also sponsor eight local children through their education. We will continue to support the charity and its goal of building 20 houses in the next five years through 2019 and beyond.
s Community work was also undertaken across many of our other UK offices. In Colchester, staff raised over £13,000 for their chosen cause, Cohoc, the Colchester Hospitals charity, through fundraising efforts including running the Colchester Half Marathon and abseiling down their local town hall. This money has enabled Cohoc to purchase a new incubator to help care for sick or premature babies. In York, the team raised over £11,000 for York SANDS (Stillbirth and Neonatal Death Society), which saw employees bungee jumping from the Middlesbrough Transporter Bridge. The team also continued to cultivate the colony of bees that we have installed on the roof of our office, and supported the Yorkshire Air Ambulance as part of a multi-year partnership.
s Hiscox Bermuda supported organisations working with local young people, the elderly and the most vulnerable members of the
Caroline Foulger joined Hiscox in January 2013 having retired from a partnership at PwC. Until May 2012, Caroline led PwC’s insurance and reinsurance practice in Bermuda. Caroline is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Directors. Caroline is a Non Executive Director of the Bank of N.T. Butterfield & Son Limited and Oakley Capital Investments Limited.
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, when he became Non Executive Chairman. In 2012, Robert joined the Council of Lloyd’s and in 2017 became Deputy Chairman of Lloyd’s.
Bronek Masojada joined Hiscox in 1993 as Group Managing Director and he became Chief Executive in 2000. From 1989 to 1993 he was employed by McKinsey & Company. Bronek served as Deputy Chairman of Lloyd’s from 2001 to 2007 and was Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is currently a member of the Board of the Association of British Insurers and a Director of Pool Reinsurance Company Limited. In March 2018 he took over as Chair of Placing Platform Limited, the organisation responsible for moving the London insurance market to an electronic trading platform.
Caroline Foulger Independent Non Executive Director (Aged 58) 1 January 2013*
Anne MacDonald joined Hiscox in May 2015. Anne has held the position of Chief Marketing Officer at four different Fortune 100 companies, marketing some of the most recognisable corporate names in the world – from Citigroup and Travelers to Macy’s and PepsiCo. With an MBA from Bath University, Anne is currently a Director of New York Stock Exchange-listed company Boot Barn. She was formerly a Director of NASDAQ-listed Rentrak Corporation, stepping down from the Board on completion of its merger with comScore, Inc.
Bob McMillan joined the Hiscox Ltd Board in December 2010. He spent 24 years with the Progressive Insurance Corporation, where he served in various positions including National Director of Product Development, then claims, before becoming National Director of Marketing. He led Progressive’s initiatives in multi-channel distribution, financial responsibility-based rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured at the University of Virginia’s Darden School of Business and at the Harvard Business School. He has been a Non Executive Director of Hiscox Inc. since March 2007.
Thomas Hürlimann joined Hiscox in November 2017. Thomas has 29 years’ experience in banking, reinsurance and insurance, most recently as CEO Global Corporate at Zurich Insurance Group, a business with $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. Thomas is also a Non Executive Director of WiseKey and a Senior Advisor to Drake Star Partners. He holds an MBA from IMD.
Costas Miranthis joined Hiscox in November 2017. He was President and CEO of PartnerRe, a position from which he stepped down in 2015. Prior to joining PartnerRe in 2002 he was a Principal of Tillinghast-Towers Perrin in its London office with responsibility for the European non-life practice. He is a Fellow of the Institute and Faculty of Actuaries and a member of the American Academy of Actuaries. He is also a past Chair of the European Reinsurance Association Board.
Michael Goodwin Independent Non Executive Director (Aged 60) 16 November 2017*
Constantinos Miranthis Independent Non Executive Director (Aged 55) 16 November 2017*
67 Remuneration 97 Financial summary1 Strategic report 41 Governance Board of Directors
The arrangements we have in place in relation to governance are described in detail within our corporate governance section on pages 61 to 64, but I would like to highlight a few notable events since last year’s report. s The Financial Reporting Council published a revised UK Corporate Governance Code (the 2018 Code), which applies to accounting periods from 1 January 2019. We have carefully reviewed the Code to ensure that our governance practices not only reflect the requirements but also the spirit of the Code. Where necessary we have updated our Terms of Reference for the Committees to better reflect their responsibilities and will report our compliance with the 2018 Code in next year’s Report and Accounts.
s In the UK the Senior Managers and Certification Regime (SMCR) replaced the Senior Insurance Managers Regime (SIMR) this year. The regime aims to reinforce the importance of individual accountability, especially at senior levels, but also to encourage personal responsibility at all levels. Work with Board members and the Executive Committee was undertaken in 2018 to ensure our compliance with SMCR, and we will continue to evolve this process in 2019 when certification will be required from additional members of the organisation.
s An externally facilitated evaluation of the Board was conducted to follow up on the external evaluation carried out in 2017. It considered progress made against the issues highlighted in last year’s evaluation and included a review of Board composition; whether there was an appropriate balance of skills, experience, independence and knowledge; and whether the Board worked together as a unit. The key outcomes from the latest evaluation are summarised on page 63.
Overview and basis of reporting Hiscox Ltd (the Company) is the Bermuda incorporated holding company for the Group and has a premium listing on the London Stock Exchange. The corporate governance framework for the Company is derived from its constitution together with the Bermuda Companies Act. The Listing Rules require the Company to report against the UK Corporate Governance Code published in April 2016 (the Code). During 2018, and up to the date of this Annual Report and Accounts, the Group has complied with the provisions of the Code in all material respects. The Financial Reporting Council (FRC) published a revised UK Corporate Governance Code (the 2018 Code) in July 2018 which applies to accounting periods beginning on, or after, 1 January 2019. The Company intends to report against this version in next year’s Report and Accounts.
All Directors have access to the Company Secretary for advice and guidance on matters relating to corporate governance, and they are all entitled to seek independent professional advice at the Company’s expense. As part of the Board evaluation conducted during the year, Directors were asked to assess the quality of the support they receive from the Company Secretary and the support was rated highly. The Board meets at least four times a year in person with scheduled calls in between. In addition, the Board operates within established Terms of Reference and receives appropriate and timely information to enable Directors to review business strategy, trading performance, business risks and opportunities.
The Nominations and Governance Committee The Nominations and Governance Committee comprises Robert Childs, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan, Costas Miranthis and Lynn Pike, and is chaired by Robert Childs. 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. For example, 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. More information on the Group’s diversity policies and work during the year can be found in the responsibility section on pages 52 to 57.
Performance evaluation The Code requires an externally facilitated Board evaluation to be undertaken every three years and this last took place in 2017. Since the last report, a follow-up evaluation was conducted, which included a review of Board composition; whether there was an appropriate balance of skills, experience, independence and knowledge; and whether the Board worked together as a unit. It also asked Directors to rate the level of diversity of the Board. Other areas covered were succession planning, Board meeting content and focus, the support to the Board, the quality and provision of information, the Non Executive Directors’ input into the strategy and shareholder engagement. The findings of the evaluation were discussed by the Board as a whole.
Overall the evaluation found that the Board’s composition and dynamics were rated highly, but the value of further increasing the Board’s diversity was also recognised. The testing and development of strategy was positively rated, as was the Board’s monitoring of culture and its understanding of employee needs. It was noted that there was scope to further focus on succession plans for Executive Committee members, and retaining and developing talent. The other key areas of focus for the Board in response to the evaluation are a continued focus on corporate culture and values, strategy and customer feedback, greater interaction with employees, improving understanding of technological and digital developments, and closer monitoring of competitor performance, as well as a continued focus on risks.
In addition to the forward-looking evaluation of the Board, the Senior Independent Director, Colin Keogh, met with the other Non Executive Directors without the Chairman present to appraise the performance of the Chairman. During the year, the Non Executive Directors also periodically met without the Executive Directors to discuss a wide range of issues concerning the Company and the Group.
Shareholder engagement Directors communicate and meet directly with shareholders and analysts throughout the year, and do not limit this to the period following the release of financial results or other significant announcements. The views expressed by shareholders have been reported back to the Board through its committees and any specific items covered in letters received from major shareholders are also reported to the Board. All Directors attended the Annual General Meeting in 2018.
Major shareholders are invited to request meetings with the Senior Independent Director and/or the other Non Executive Directors. An alert service is available on www.hiscoxgroup.com to notify any stakeholder of new stock exchange announcements.
Accountability and internal control Risk is at the heart of any insurance organisation and the management of risk is fundamental to the success of its business model. The principal risks facing the organisation are described in the risk management section on pages 42 to 51 together with an explanation of how they are managed or mitigated. These risks are managed dynamically in response to changing circumstances. For example, more work has been completed this year around the risk and control self-attestation process, as noted in the Chairman’s letter to shareholders on page 60.
Emerging risks often influence our strategic approach, and are considered holistically as part of the wider risk landscape. These principal risks comprise the Group’s ‘critical risks’, or exposures which materially threaten financial strength, severely impact business operations or significantly affect strategy. Critical risks often develop over a short time, or offer limited time to react, respond or recover, thereby requiring continuous focus. The Group is subject to regulatory requirements aimed at ensuring its continuing solvency and has established arrangements to assess and manage its principal risks continually. Risk and solvency assessments are conducted and the Group is required to assess the capital resources necessary to achieve its strategic business objectives over the coming year while remaining solvent, given its risk profile. This includes a forward-looking assessment which considers the business plan over a three-year period.
An alert service is available on hiscoxgroup.com to notify any stakeholder of new stock exchange announcements. Shareholder engagement period, the period over which the Board considers it possible to form reasonable expectations as to its position is the three years to 31 December 2021. This corresponds to the forward-looking element of the Group’s regulatory solvency assessments and allows reliance to be placed on the output from those assessments as well as the other arrangements described above. On the basis of its robust assessment of the principal risks, and on the assumption that they can continue to be managed or mitigated as described (and taking account of the most recent solvency assessments, together with the results of the stress tests and focused risk reviews), the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2021.
As part of the Group’s internal controls, the internal audit function provides objective and independent assurance and advice to the Audit Committee and the Board over the processes and systems of internal control and risk management operating in the Group. It achieves this through an annual risk-based programme of reviews, the scope of which considers an independent view of the risks facing the Group, as well as other factors such as strategic initiatives, emerging risks and change. It includes an annual review of the Group’s compliance with the governance requirements emanating from its regulators and the Code. The findings of these internal audit reviews are reported to the Audit Committee. The Audit Committee oversees the internal control and risk management system in relation to financial reporting. Further details are set out in the Audit Committee report on pages 65 to 66.
Changes in presentation currency and functional currency Following the change in the functional currency of a number of trading subsidiaries and the Group’s presentation currency to US Dollars with effect from 1 January 2018, the Group has performed a historic retranslation of the Group’s results. See note 2.1 for further detail.
The Audit Committee receives reports from the external auditor at regular intervals during the audit process, including those relating to the judgements outlined above. The external auditor provides reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. Any contracts with PwC for non-audit services in excess of £50,000 must be approved by the Committee in advance. It is Group policy not to approve any contract that may impair the auditor’s independence or objectivity.
During the year, the value of non-audit services provided by PwC amounted to $168,000 (2017: $257,000). There were no circumstances in which PwC was engaged to provide services that might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditor. To provide a forum in which any matters of concern could be raised in confidence, the Non Executive Directors met with the external and internal auditors throughout the year without the Executive Directors present.
Caroline Foulger Chairman of the Audit Committee 41 Governance Audit Committee report 67 Remuneration 97 Financial summary1 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 A specialist approach 42 Risk management 52 Responsibility 58 Board of Directors 60 Chairman’s letter to shareholders 61 Corporate governance 65 Audit Committee report 68 Letter from Chairman of the Remuneration Committee 70 Remuneration summary 72 Annual report on remuneration 2018 84 Remuneration policy 94 Directors’ report 96 Directors’ responsibilities statement 98 Independent auditor’s report 104 Consolidated income statement 104 Consolidated statement of comprehensive income 105 Consolidated balance sheet 106 Consolidated statement of changes in equity 107 Consolidated statement of cash flows 108 Notes to the consolidated financial statements 160 Five-year summary 67Hiscox Ltd Report and Accounts 2018 1 Strategic report 67 Remuneration 97 Financial summary41 Governance
In considering bonus awards, the Committee took account of the personal performance of the individuals, the size of the bonus pool and the overall performance of Hiscox, including strong underwriting performance, good growth and improved ROE. As such, the three Executive Directors were awarded bonuses representing 9% of the maximum opportunity. This is in line with our approach of rewarding financial outcomes, not just effort. For the wider workforce, we paid bonuses relative to personal performance and profitability of business area.
The long-term incentive plan (LTIP) award granted in 2016 will vest at 47% of maximum. Over the last two years natural catastrophes have impacted our performance which has driven a three-year average post-tax ROE of 9.24%, the key metric for determining this award under the Performance Share Plan. The vesting outcomes for Executive Directors are lower than in recent years, however, the Committee believes that they are aligned with the experience of shareholders.
The net result of the above is that the remuneration package and single figure result reported for the Chief Executive is lower than previous years. In 2018, the Chief Executive’s single figure was £1,862,710, a decrease of 22%.
The changes outlined in last year’s report comprised a commitment to increased transparency regarding bonus outcomes, including both prospective and retrospective disclosure of pre-tax ROE targets; use of growth in net asset value plus dividends measured on a per share basis for future Performance Share Plan awards; and an increase to the minimum shareholding guidelines for our Executive Directors.
Corporate governance developments The new UK Corporate Governance Code (‘the Code’) comes into effect during 2019. The Remuneration Committee is supportive of much of the guidance and clarity that the new regime will bring in relation to remuneration matters. The Committee believes that Hiscox complies with the spirit of the Code, and we have adopted some of the specific requirements early.
Pension benefits for Executive Directors at Hiscox have always been consistent with the wider UK workforce. All three Executive Directors received a 10% cash allowance in lieu of the standard employer pension contribution. Like other long-serving employees, the Chief Executive and Chief Underwriting Officer have legacy entitlements under a defined benefit scheme and no further accruals are available under this plan.
We have opted to provide disclosure on our Chief Executive’s pay ratios on a voluntary basis in this year’s report. We expect the ratios to be volatile year-on-year due to the variable and performance-based nature of the Chief Executive’s remuneration package. While the ratio needs to be understood within the context of our business, it does provide a further reference point for the Committee. This is outlined on page 81.
Hiscox published its second gender pay gap report for the UK in 2018, which showed a small year-on-year improvement in our median pay gap. The pay gap between men and women remains higher than we would like, at 24.5% (2017: 26.2%), which is mainly driven by the fact that, similar to many organisations, we have fewer women than men in more senior, higher-paid roles. We continue to work hard to address this, with diversity and inclusion remaining a strategic priority for the Executive Committee in 2019. Our work on diversity and inclusion is outlined on page 56.
Board, the remuneration of the Chairman and Executive Directors of the Company, including pension rights and any compensation payments. Doing so addresses the requirements of the UK Corporate Governance Code for clarity, simplicity, risk, predictability, proportionality and alignment to culture; — approving performance-related pay schemes and their total annual payments; — making recommendations on the structure of share incentive plans and determine awards to Executive Directors and senior management.
Remuneration outcomes for 2018 Hiscox more than tripled profits to $137.4 million in what was a difficult year for insurers.
Long-term performance impacted by catastrophes with ROE of 9%. PSP awards granted in 2016 vested at 47% of maximum.
Single figure of £1,862,710 for CEO, is 22% lower than last year.
A summary of the remuneration arrangements for Executive Directors is provided opposite, the remuneration policy is detailed on pages 84 to 93.
Vesting subject to: net asset value per share growth plus dividends. 20% vests for achievement of threshold performance, 100% of maximum.
Executive Directors’ 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. These benefits mirror those available to most other employees in the organisation.
PwC has been engaged to audit the sections in the annual report on remuneration 2018 below entitled ‘Executive Director remuneration’ and additional notes, ‘annual bonus’, ‘long-term incentives’, ‘details of pension entitlements’, ‘Non Executive Director remuneration’, ‘Directors’ shareholding and share interest’, ‘Performance Share Plan’ and ‘Sharesave Schemes’, ‘Payments for loss of office or payments to past Directors, to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
Bronek Masojada £620,000 Richard Watson £477,000 Aki Hussain £477,000 1 Strategic report 41 Governance 97 Financial Summary67 Remuneration
Benefits For 2018, 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 and Sharesave Scheme.
Annual bonus In response to shareholder feedback the Committee has once again sought to improve the transparency around the process for determining bonuses.
Structure of bonus The bonus is structured in a way that ensures significant variability in outcomes, including the possibility of no bonus being paid where performance thresholds are not achieved. For example, in 2017 the share price increased by more than 40%, however no bonuses were paid to Executive Directors as performance thresholds were not met. The Remuneration Committee believes that the most appropriate measure for the calculation of the bonus pool is pre-tax return on equity (ROE), as this aligns management’s interests with those of shareholders, minimises the possibility of anomalous results, and ensures that incentives for Executive Directors and other employees are tied to the Company’s profit performance.
Bonuses are not paid unless the Group’s performance exceeds a given threshold, irrespective of individual performance. Over the past ten years there have been two occasions when the Group delivered a pre-tax ROE below the required threshold and no bonuses were paid to Executive Directors.
The business had strong growth across all business units, growing by 15%, with improving profits and reasonable RoE given the market environment.
The Brexit project was chaired by Bronek and put in place new structures allowing Hiscox to serve customers in any Brexit outcome. These include: a new insurance company in Luxembourg; a Part VII process to transfer policyholder liabilities to the new entity; and adapting to the use of Lloyd’s Brussels. The project was delivered in time for 2019.
Bronek oversaw projects to materially adapt Hiscox to new regulatory expectations such as GDPR and SMCR.
Bronek ensured a key transition as Steve Langan moved to Hiscox USA, from Hiscox UK, to become its new CEO, and Ben Walter moved to the UK as the newly created CEO of Hiscox Global Retail. Bronek also recruited Grace Hanson as Head of Claims in succession to Jeremy Pinchin.
Underwriting talent Richard has championed new ways to identify, retain and develop the best underwriting talent, raising the bar on what Hiscox looks for in underwriters.
Third-party capital Richard has been instrumental in driving a strategy of how much, and where, we use third-party capital, maintaining Hiscox’s relevance in the market. As a result, Hiscox is attractively positioned with a combination of quota shares, ILS funds, consortia and a track record of managing capacity responsibly, and transparently. 2018 saw the funds and facilities grow and a push to develop ILS funds into the insurance market.
Optimising capital Aki has developed a new capital management philosophy and improved the Group’s overall capital position through a range of internal initiatives, supporting increased premium growth. In addition he has improved the rating agency capital position, specifically after an extended period of consultation with S&P, which had been the Group’s biting capital constraint. S&P issued a risk re-classification for Hiscox from high to moderate risk, reflecting the diversification benefit of the retail businesses.
Aki has made good progress in evolving the processes, professionalism and commerciality of the finance function. This includes upgrading core finance systems, improving financial control environment, making preparations for IFRS 17 and a focus on capital efficiency.
Minimum threshold vesting Expected investment return + 5 = 7 25 Maximum vesting Expected investment return + 12.5 =14.5 100 Straight-line vesting between these points
PSP awards granted during the 2018 financial year On 6 April 2018, Bronek Masojada, Richard Watson and Aki Hussain were granted nil cost options under the PSP.
The performance conditions for these awards are as follows: Growth in net asset value plus dividends measured on a per share basis
CEO remuneration – short-term vs. long-term weighting Fixed pay – salary and benefits Annual bonus PSP – value at vesting
The table below details the legacy entitlements from the defined benefit pension plan. There are no further accruals under this plan.
2018 fees that were paid in US Dollars have been converted using an exchange rate of 1.33. Those paid in Euros were converted using 1.18. 2017 US Dollar fees were converted using 1.289.
Directors 31 December 2018 6.5p ordinary shares number of shares beneficial 6.5p ordinary shares number of shares beneficial
Executive Directors Bronek Masojada 3,014,894 3,064,702 Richard Watson 614,973 691,973 Aki Hussain 64,794 19,700 Non Executive Directors Robert Childs 1,274,610 1,379,610 Caroline Foulger 8,231 8,077 Michael Goodwin 4,986 4,950 Thomas Hürlimann 3,682 – Colin Keogh 20,942 17,016 Anne MacDonald 28,611 22,185 Robert McMillan – – Constantinos Miranthis 4,525 – Lynn Pike – –
Performance Share Plan (PSP) Awards in the form of nil-cost options are granted under the PSP as a percentage of salary. All awards are subject to performance conditions. The interests of Executive Directors are set out below: Number of awards at
Total 1,028,946 210,630 (39,237) (95,349) 1,104,990 1 Grants made on 12 September 2016. Details of Aki Hussain’s joining package are in the 2016 remuneration report. *Awards have vested but are unexercised.
External Non Executive Directorships Executive Directors may not accept any external appointment that may give rise to a conflict of interest, and all external appointments require the consent of the Chairman. During the year Bronek Masojada held Directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd, Heptagon Assets Ltd, Heptagon BIR Ltd and Pool Reinsurance Company Limited and was Chair of Policy Placement Limited. He was not remunerated for his services. Richard Watson held a Directorship at White Oak Underwriting Agency Limited. He was not remunerated for his services.
CEO single figure of remuneration (£) 2,536,943 1,759,123 1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,394,428 1,862,710 Annual bonus as percentage of current max 71 29 0 46 51 44 39 64 0 9 PSP vesting as percentage of maximum opportunity 100 100 85 39 53 100 100 100 85 47
Benefits (including retirement benefits) 3.3 2.7 3.4 8.0 *No bonus was paid to the CEO in respect of 2017.
Although the Company is not technically subject to the UK disclosure requirements relating to the disclosure of CEO pay ratios which come into effect next year, we have voluntarily opted to provide information this year.
By design, the remuneration of our most senior executives, including the CEO, is more highly performance geared than other roles in the business. The Board therefore appreciates that the ratio between the pay of the CEO and wider employees can vary significantly over time. For example, in a year when the business performs well, the ratio would typically be higher. In contrast, if the CEO’s incentives lapse in full, the ratio will be lower.
The CEO’s latest single figure total remuneration compared with the median (50th percentile) remuneration of the Company’s UK employees is shown below, along with the 25th and 75th percentiles.
For simplicity, the employees at 25th, 50th and 75th percentiles were identified using the latest gender pay gap information. The Company intends to keep the methodology under review in future years.
In determining the size of the Executive Director bonuses, the Committee uses the ranges below to support its decision-making process. These ranges enable the Remuneration Committee to award payments based on the achievement of specific objectives (not prospectively disclosed as commercially sensitive) and the context in which performance has been delivered.
Individual bonuses are based on the results of the business area, individual performance and the size of the relevant bonus pool. In determining the bonuses to be paid to Executive Directors, the Committee bases its judgements on both the performance of the Group and a robust assessment of individual performance.
Growth in net asset value plus dividend measured on a per share basis
Membership of the Remuneration Committee The Committee members at 31 December 2018 were Caroline Foulger, Robert McMillan, Lynn Pike, Anne MacDonald, Thomas Hürlimann, Michael Goodwin, Constantinos Miranthis and Colin Keogh (Chairman). No Director or Committee member was involved in determining their own remuneration during the year.
Remuneration Committee fees Non Executive Director fees were reviewed in December 2018. No amendments are proposed for 2019.
Remuneration policy Hiscox has a forward-looking remuneration policy for its Board members. Shown below is the updated policy including changes made to be implemented from 1 January 2018. These amendments are shown in italics. The policy was last approved at the 2017 AGM and the original policy can be viewed in the 2016 Annual Report and Accounts at www.hiscoxgroup.com.
Purpose and link to strategy Fixed pay elements enable the Company to be competitive in the recruitment market when looking to employ individuals of the calibre required by the business.
Maximum potential value The salaries for current Executive Directors are set out on page 72.
For new hires and changes in role, the Committee may provide reasonable additional benefits based on the circumstances (for example, travel allowance and relocation expenses).
Maximum potential value Set at an appropriate level by reference to the local market practice and reflecting individual and family circumstances.
Purpose and link to strategy To reward for performance against key objectives and achievement of financial results over the financial year.
Bonus pools are calculated at a business unit level and for the Group as a whole on the basis of Group financial results. For 2018, the bonus pool will be funded by a set percentage of profits on achievement of a hurdle rate of ROE. The bonus for prior years was determined on a similar basis. Further detail is set out on page 73.
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 74 of this report for further details. Where performance is deemed to be below a predetermined hurdle, payouts will be nil.
The total of individual bonuses paid to Executive Directors for a year will not normally exceed 15% of the total pool. If the number of Executive Directors increased in the future, this percentage would be adjusted as required.
Arrangements tailored to roles and responsibilities are operated for selected positions. Bonuses for more junior employees are calculated using a more formulaic approach. Further details are set out on page 73.
The Remuneration Committee can agree to early payment of deferred bonuses to Executive Directors on an exceptional basis at their discretion.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. The minimum threshold vesting will be 20% rather than 25% for PSP awards granted from 2018 onwards.
General approach The total aggregate fees payable are set within the limit specified by the Company’s Bye-laws. The fees paid are determined by reference to the skills and experience required by the Company as well as the time commitment associated with the role. The decision-making process is informed by appropriate market data. Non Executive Directors are not eligible for participation in the Company’s incentive plans. Travel and other reasonable expenses incurred in the course of performing their duties are reimbursed to Non Executive Directors. Non Executive Directors are included on the directors and officers’ indemnity insurance.
The current fees payable to Non Executive Directors are set out on page 77.
Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for further duties (for example, Board Committee membership and chairmanship). The fees for the Non Executive Directors (excluding the Chairman) are determined by the Chairman.
Notes to the policy table Performance measure targets and target setting The performance targets for the annual bonus and share plan awards to Executive Directors are intended to be closely aligned with the Company’s short-term and long-term objectives. The intention is to provide a direct link between reward levels and performance.
The Performance Share Plan (PSP) performance measures are intended to motivate and reward to deliver long-term Company success. The Committee considers performance metrics and targets prior to the grant of each to ensure that these remain suitable and relevant.
The Committee may continue to satisfy remuneration payments and payments for loss of office (including the exercise of any discretions available to the Committee in connection with such payments) where the terms of the payment were: 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.
Recruitment policy A new hire will ordinarily be remunerated in accordance with the policy described in the table on the previous pages. In order to define the remuneration for an incoming Executive Director, the Committee will take account of: p prevailing competitive pay levels for the role; p experience and skills of the candidate; p awards (shares or earned bonuses)
The performance targets for the annual bonus and share plan awards to Executive Directors are intended to be closely aligned with the Company’s short-term and long-term objectives. Performance measure targets and target setting 1 Strategic report 41 Governance 97 Financial Summary67 Remuneration Remuneration policy
p The award will normally be pro-rated to reflect the period which has elapsed from the commencement of the award to the date of termination unless the Committee determines otherwise.
Consideration of shareholder views Hiscox regularly discusses remuneration policy matters with a selection of shareholders. The Remuneration Committee takes into consideration the range of views expressed in making its decisions.
Through conversations with shareholders during the 2017 AGM season, some themes emerged on how we could improve our approach and the Committee made a number of changes to how the policy was implemented from 2018 onwards.
Policy on payment for loss of office Subject to the execution of an appropriate general release of claims an Executive Director may receive on termination of employment by the Company: 1. Notice period of up to 12 months Executive to remain on the payroll but may be placed on gardening leave for the duration of the notice period (or until they leave early by mutual agreement, whichever is sooner). During this period they will be paid as normal, including base pay, pension contributions (or cash allowance as appropriate) and other benefits (for example, healthcare).
p Retirement benefit as received during 2018, as disclosed in the Executive Director remuneration table on page 72.
p PSP: scenario analysis assumes awards are granted at the maximum level set out in the policy table on page 88. In practice, award levels are determined annually and are not necessarily granted at the plan maximum every year.
On target performance Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: assume a bonus equivalent to 150% of salary. p PSP: assumes vesting of 50% of the maximum award.
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.
The confirmation required by C.2.1 of the UK Corporate Governance Code can be found on page 63.
Financial results The Group achieved a pre-tax profit for the year of $137.4 million (2017: $39.7 million). Detailed results for the year are shown in the consolidated income statement on page 104, and also within the Group financial performance section on pages 24 to 25.
Going concern A review of the financial performance of the Group is set out on pages 24 to 25. The financial position of the Group, its cash flows and borrowing facilities are included therein. The Group has considerable financial resources and a well-balanced book of business.
Invesco Limited1 17,211,598 6.19 Massachusetts Financial Services Company1 36,386,481 13.08 FMR LLC1 22,167,818 7.97 BlackRock, Inc.1,2 22,195,030 8.13 * Per RNS announcement there were 287,792,195 shares in issue (excluding Treasury shares) as at 31 December 2018.
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 58 and 59. Details of the Chairman’s professional commitments are included in his biography on page 58 and there were no changes during the year. The Bye-laws of the Company govern the appointment and replacement of Directors. In accordance with the UK Corporate Governance Code, all Directors will submit themselves for re-appointment at the Annual General Meeting.
1 Strategic report 41 Governance 97 Financial Summary67 Remuneration Directors’ report
We confirm that to the best of our knowledge: p the financial statements, prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, give a true and fair view, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and p the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
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 25 February 2019.
Independent auditor’s report to the Board of Directors and the Shareholders of Hiscox Ltd
A Overall Group materiality: $27.7 million, which represents 0.75% of the gross earned premium for the year ended 31 December 2018.
A Valuation of incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves.
A the risk that IBNR loss reserve estimates in respect of natural catastrophes and other large claims losses are inappropriate. There is significant judgment involved in the estimation of such loss estimates, particularly as they are often estimated based on limited data.
We have understood, evaluated and tested the design and operational effectiveness of key controls in place in respect of the valuation of IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves.
A re-calculating gross to net ratios on a test basis against the estimated IBNR loss reserves to calculate the estimated reinsurers’ share of IBNR loss reserves.
1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Independent auditor’s report
Refer to note 2.1 to the consolidated financial statements for related disclosures.
We focused on these areas due to the pervasive impact on the consolidated financial statements, as well as the management judgements applied in the process.
Our work over the changes to the functional currency included the following: A we obtained management’s analysis and results of their determination. We critically evaluated the underlying transactions of the trading subsidiaries for which management determined there was a change in functional currency. We considered the weighting of the various currencies that business is transacted in from a revenue and an expense perspective; A we compared management’s conclusions to the applicable accounting standards; A we inspected and evaluated the underlying contracts to form our own conclusions over the operational currencies; and
Our work over the change in presentation currency included the following: A We re-performed the conversion of the primary statements and notes for the prior financial year which was previously presented in Sterling. We agreed the conversion of all asset and liability items (and related notes) from Sterling to US Dollars at balance sheet closing rates and agreed the conversion of all income statement items (and related notes) from Sterling to US Dollars at average exchange rates for the period which we determined was a proxy for spot rates; A For equity items, we used audited financial statements to determine the dates of historic transactions. We re-calculated the conversion from Sterling to US Dollars at the spot rate of exchange on those dates; and
Based on the procedures performed, no adjustments to the financial statements or disclosures were deemed necessary and the judgements applied were appropriate in the circumstances.
How we tailored our Group audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
Member Syndicate No. 3624, (iii) Hiscox Insurance Company Limited, (iv) Hiscox Insurance Company Inc. and (v) the parent company, Hiscox Ltd.
Other information Management is responsible for the other information. The other information comprises the Annual Report (but does not include the consolidated financial statements and our auditor’s report thereon).
Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
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.
PricewaterhouseCoopers Ltd. Chartered Professional Accountants Hamilton, Bermuda 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Independent auditor’s report
Income Gross premiums written 4 3,778,341 3,286,021 Outward reinsurance premiums (1,196,855) (883,022) Net premiums written 4 2,581,486 2,402,999
Gross premiums earned 3,699,802 3,295,965 Premiums ceded to reinsurers (1,126,163) (879,757) Net premiums earned 4 2,573,639 2,416,208
Earnings per share on profit attributable to owners of the Company *See note 2.1 for further details.
Total equity and liabilities 10,846,305 9,729,813 8,235,799 *See note 2.1 for further details.
Consolidated balance sheet 105Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
Deferred and current tax on employee share options – – – – 6,832 6,832 – 6,832 Net movements of treasury shares held by Trust – – – – (3,738) (3,738) – (3,738) Shares issued in relation to Scrip Dividend 22, 29 30 5,734 – – – 5,764 – 5,764 Dividends paid to owners of the Company 29 – – – – (103,708) (103,708) – (103,708)
Deferred and current tax on employee share options – – – – 4,286 4,286 – 4,286 Net movements of treasury shares held by Trust – – – – (76,474) (76,474) – (76,474) Shares issued in relation to Scrip Dividend 22, 29 32 7,818 – – – 7,850 – 7,850 Dividends paid to owners of the Company 29 – – – – (113,548) (113,548) – (113,548)
Consolidated statement of changes in equity 106 Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
Cash and cash equivalents at 1 January 867,767 824,373 Net increase in cash and cash equivalents 442,983 2,997 Effect of exchange rate fluctuations on cash and cash equivalents (21,899) 40,397 Cash and cash equivalents at 31 December 21 1,288,851 867,767 *See note 2.1 for further details.
† Following a review, prior year comparatives have been represented. Scrip dividend amounts of $5,764,000 are removed from these line items. This does not result in any change to net cash flows from financing activities.
Included within cash and cash equivalents held by the Group are balances totalling $211 million (2017: $178 million) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, $24 million (2017: $15 million) is pledged cash held against Funds at Lloyd’s, and $10 million (2017: $7 million) held within trust funds against reinsurance arrangements.
The notes on pages 108 to 159 are an integral part of these consolidated financial statements.
Consolidated statement of cash flows 107Hiscox Ltd Report and Accounts 2018 97 Financial summary1 Strategic report 41 Governance 67 Remuneration
The Company is registered and domiciled in Bermuda and its ordinary shares are listed on the London Stock Exchange. The address of its registered office is: 4th Floor, Wessex House, 45 Reid Street, Hamilton HM 12, Bermuda.
2.1 Significant accounting policies The principal accounting policies applied in the preparation of these consolidated Group financial statements are set out below. The most critical individual components of these financial statements that involve the highest degree of judgement or significant assumptions and estimations are identified in note 2.21.
Changes in presentation currency and functional currency With effect from 1 January 2018, the Group’s presentation currency changed from Sterling to US Dollars, given that a significant majority of Group earnings are denominated in US Dollars. The Group believes that the presentation currency change will give investors and other stakeholders a clearer understanding of Hiscox’s performance over time.
In addition, taking into consideration the following changes which were effective on 1 January 2018, the functional currency of Syndicate 33, Hiscox Dedicated Corporate Member Limited, Hiscox Syndicates Limited and Hiscox Capital Ltd changed from Sterling to US Dollars also effective from 1 January 2018. –The denomination of a material internal quota share treaty has been changed from Sterling to US Dollars. –The Syndicates’ managing agent’s profit commission and fee has been changed from Sterling to US Dollars. –The Group has aligned its underwriting capital to US Dollars. This change is accounted for prospectively from 1 January 2018.
New accounting standards, interpretations and amendments to published standards 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 2018. 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.
The new standards include: –IFRS 15 Revenue from Contracts with Customers replaces IAS 18 and establishes principles for revenue recognition that apply to all contracts with customers except for insurance contracts, financial instruments and lease contracts. It requires an entity to recognise revenue when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. In particular, it specifies that variable consideration is only recognised to the extent that it is highly probable that a significant
reversal will not occur. The adoption of this standard has an immaterial impact on the Group’s financial statements, because the point at which control of a performance obligation is transferred to customers matches the point in which risk and rewards were transferred under IAS 18. Accounting policy 2.12 has been updated to reflect the new requirements.
2 Basis of preparation 2.1 Significant accounting policies New accounting standards, interpretations and amendments to published standards continued
As of the reporting date, the estimated discounted non-cancellable operating lease commitments of $79 million would be recognised as an additional asset and liability on the balance sheet. This indicates the impact of the adoption of IFRS 16 on the consolidated financial statements. IFRS 16 is effective from 1 January 2019 and has been endorsed by the EU. –IFRS 17 will replace IFRS 4 and includes a number of significant changes to the measurement, presentation and disclosure of insurance contracts. It prescribes a general measurement model based on the discounted current estimates of future cash flows, including an explicit risk adjustment and a contractual service margin which represents the unearned profit of the contracts. Application of a simplified premium allocation approach, which is similar to the current unearned premium approach, is permitted if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. IFRS 17 requires any expected losses arising from loss-making contracts to be accounted for in the income statement when the entity determines that losses are expected. The Group is evaluating the impact of adopting IFRS 17 on the financial statements and the Group’s implementation programme is progressing in line with expectations. IFRS 17 is expected to be effective on 1 January 2022 and has not been endorsed by the EU. –Amendments to IAS 19 Plan Amendment, Curtailment or Settlement address the accounting for the current service cost and net interest when a plan amendment, curtailment or settlement occurs during a reporting period. The adoption of these amendments has no impact on the Group’s consolidated financial statements These amendments are effective on 1 January 2019 and have not been endorsed by the EU.
2.2 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled by the Group. Control exists when the Group has power over an entity, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any noncontrolling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
109Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Goodwill is not amortised but is tested at least annually for impairment and carried at cost less accumulated impairment losses.
(b) Other intangible assets Intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business combination is recognised outside of goodwill if the asset is separable or arises from contractual
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and – all resulting exchange differences are recognised as a separate component of equity.
2.8 Cash and cash equivalents The Group has classified cash deposits and short-term highly-liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.
(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.
The fair value of a non-financial asset is determined based on its highest and 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 20.
Purchases and sales of investments are accounted for at the trade date. Financial assets and liabilities are initially recognised at fair value. Subsequent to initial recognition financial assets and liabilities are measured as described below. Financial assets are derecognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership.
(a) Financial assets at fair value through profit or loss A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with a documented strategy, if acquired principally for the purpose of selling in the short term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
or other legal rights and its fair value can be measured reliably. Customer relationships, syndicate capacity and software acquired are capitalised at cost, being the fair value of the consideration paid. Software is capitalised on the basis of the costs incurred to acquire and bring it into use. Intangible assets with indefinite lives such as syndicate capacity are subsequently valued at cost and are subject to annual impairment assessment.
Amortisation is calculated using the straight-line method to allocate the cost over the estimated useful lives of the intangible assets.
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.
(b) Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: – negative rating agency announcements in respect of investment issuers, reinsurers and debtors; – significant reported financial difficulties of investment issuers, reinsurers and debtors; – actual breaches of credit terms such as persistent late payments or actual default; – the disintegration of the active market(s) in which a particular asset is traded or deployed; – adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and – the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at fair 2.13 Insurance contracts (a) Classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk.
The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are determined based on the best estimate of the cost of future claim payments plus an allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes using, as inputs, the assessments for individual cases reported to the Group, statistical analysis for the claims incurred but not reported, an estimate of the expected ultimate cost of more complex claims that may be affected by external factors, for example, court decisions and an allowance for quantitative uncertainties not otherwise approved.
value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
The Group had no derivative instruments designated for hedge accounting during the current and prior financial year (see note 2.16).
2 Basis of preparation 2.9 Impairment of assets continued 112 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
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.
(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 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
(c) Deferred acquisition costs (DAC) Commissions and other direct and indirect costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as deferred acquisition costs. All other costs are recognised as expenses when incurred. DAC are amortised over the terms of the insurance contracts as the related premium is earned.
(e) Outwards reinsurance contracts held Contracts entered into by the Group with reinsurers, under which the Group is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.
Reinsurance liabilities primarily comprise premiums payable for outwards reinsurance contracts. The Group 2 Basis of preparation 2.13 Insurance contracts continued 113Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(f) Accumulating compensation benefits The Group recognises a liability and an expense for accumulating compensation benefits (for example, holiday entitlement), based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date.
service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. In determining this liability, consideration is given to future increases in salary levels, experience with employee departures and periods of service.
The Group recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. Plan assets include insurance contracts. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income.
The employee retirement benefit scheme obligations are calculated and valued with reference to a number of actuarial assumptions including mortality, inflation rates and discount rate, many of which have been subject to specific recent volatility. This complex set of economic variables can have a significant impact on the financial statements, as shown in note 27.
A deferred tax asset can be recognised only to the extent that it is recoverable. The recoverability of deferred tax assets in respect of carry forward losses requires consideration of the future levels of taxable profit in the Group. In preparing the Group’s financial statements, management estimates taxation assets and liabilities after taking appropriate professional advice, as shown in note 25. Significant estimates and assumptions used in the valuation of deferred tax relate to the forecast taxable profits, taking into account the Group’s financial and strategic plans. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the reporting date and consequently the final amounts payable or receivable may differ from those presented in these financial statements.
The following describes items considered particularly susceptible to changes in estimates and assumptions.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total gross estimate as at 31 December 2018 is $3,035 million (2017: $2,724 million) and is included within total insurance liabilities on the balance sheet.
2.20 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved.
The principal sources of risk relevant to the Group’s operations and its financial statements fall into two broad categories: insurance risk and financial risk, which are described in notes 3.1 and 3.2 below. The Group also actively manages its capital risks as detailed in note 3.3 and tax risks as detailed in note 3.4. Additional unaudited information is also provided in the corporate governance, risk management and capital sections of this Report and Accounts.
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, 2 Basis of preparation continued year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: – regularly updating the Group’s risk models; – documenting, monitoring and reporting on the Group’s strategy to manage risk; – developing systems that facilitate the identification of emerging issues promptly; – utilising sophisticated computer modelling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; – monitoring legal developments and amending the wording of policies when necessary; – regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; – examining the aggregated exposures in advance of underwriting further large risks; and – developing processes that continually factor market intelligence into the pricing process.
116 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Realistic disaster scenarios, shown on page 21, are extreme hypothetical events selected to represent major events occurring in areas with large insured values. They also reflect the areas that represent significant exposures for Hiscox.
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2017 (restated)†
ii) Reserving risk The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 23.
Similar to the underwriting risk detailed above, the Group’s reserve risks are well diversified. The short-tailed claims are normally notified and settled within 12 to 24 months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence. The length of time required to obtain definitive legal judgements and make eventual settlements exposes the Group to a degree of reserving risk in an inflationary environment.
Casualty insurance risks The casualty underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of potential hazard, industry and geography. However, the Group’s exposure is more focused towards marine, professional, general and technological liability risks rather than human bodily injury risks, which are only accepted under limited circumstances. Claims typically arise from incidents such as errors and omissions attributed to the insured, professional negligence and specific losses suffered as a result of electronic or technological failure of software products and websites.
Property risks – marine and major assets The Group directly underwrites a diverse range of property risks. The risk profile of the property covered under marine and major asset policies is different to that typically contained in the other classes of property (such as private households and contents insurance) covered by the Group.
Directly held equity securities 4 3 Units held in funds – traditional long only 58 67 Units held in funds – long and short and special strategies 38 30 Geographic focus Specific UK mandates 36 43 Global mandates 64 57
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets. A 10% downward correction in equity prices at 31 December 2018 would have been expected to reduce Group equity and profit after tax for the year by approximately $36.4 million (2017: $39.3 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
The Group may also, from time to time, enter into interest rate future contracts in order to reduce interest rate risk on specific portfolios. The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2018 was $4,575 million (2017: $4,631 million).
Note 20 provides an analysis of the measurement attributes of the Group’s financial instruments.
(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 assets in the Group’s balance sheet at 31 December 2018 was $398 million (2017: $451 million). These may be analysed as follows: For the inwards reinsurance lines, there is often a time lag between the establishment and re-estimate of case reserves and reporting to the Group. The Group works closely with the reinsured to ensure timely reporting and also centrally analyses industry loss data to verify the reported reserves.
(a) Reliability of fair values The Group has elected to carry loans and receivables at amortised cost and all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments and the insurance-linked funds shown in note 20, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their closing 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 3 Management of risk 3.1 Insurance risk ii) Reserving risk continued 119Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
geographical locations. Such risks are subject to an annual or more frequent review. There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset, where counterparties are both debtors and creditors of the Group, and obtaining collateral from unrated counterparties. Management information reports detail provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
consists of two listed instruments of £275 million each, as explained in note 17: the first being fixed-to-floating rate notes where the floating rate becomes effective from November 2025; the second being fixed rate notes maturing in December 2022. The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 30.
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets, but collateral may be requested to be held against these assets. The Group structures the levels of credit risk accepted by placing limits on its exposure to a single counterparty, or groups of counterparties, and having regard to
These may be analysed below as follows: Nature of debt and fixed income holdings weighting weighting
At 31 December 2018, no cash was drawn on the Group’s borrowing facility (2017: $nil). At 31 December 2018, the Group had long-term debt of £550 million (2017: £275 million). The £550 million 3 Management of risk 3.2 Financial risk (c) Interest rate risk continued 120 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and units in unit trusts, based on S&P or equivalent rating, is presented below: As at 31 December 2018 Note AAA
Debt and fixed income securities 17 762,117 1,951,770 1,044,053 816,689 4,574,629 Deposits with credit institutions 17 – – – 364 364
Debt and fixed income securities 17 810,765 2,207,520 932,926 679,617 4,630,828 *See note 2.1 for further details.
Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.
Other/non-rated assets include $946 million rated as BBB (2017: $624 million). For the current period and prior period, the Group did not experience any material defaults on debt securities. The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2018 and 2017.
A significant proportion of the Group’s investments is in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group’s exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges.
The following is an analysis by liability type of the estimated timing of net cash flows based on the gross claims liabilities held. The Group does not discount claims liabilities. The estimated phasing of settlement is based on current estimates and historical trends and the actual timing of future settlement cash flows may differ materially from the disclosure below.
Property – marine and major assets 109,658 56,105 42,504 9,497 217,764
and does not affect income statement unless the related foreign operation is disposed of; – the currency translation gains and losses have no cash flow.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2018 US Dollar $000
Employee retirement benefit obligations – 35,776 – – 35,776 Deferred tax – – – – –
Employee retirement benefit obligations – 64,114 – – 64,114 Deferred tax – – – – –
(g) Limitations of sensitivity analysis The sensitivity information given in notes 3.2(a) to (f) demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented in note 27 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
At 31 December 2018 available capital was $2,463 million (2017: $2,553 million), comprising net tangible asset value of $2,113 million (2017: $2,182 million) and subordinated debt of $350 million (2017: $371 million).
– 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 2019 year of account (2018 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 – qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes.
to risk and the solvency criteria established by management and statutory regulations.
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. From the 2016 year end, the Group has been required to publish a financial condition report, as part of its regulatory filing with the BMA. This is a public document and sets out the financial performance and solvency position of the Group in accordance with the economic balance sheet return filed with the BMA.
The Group seeks to maintain an open dialogue with the relevant tax authorities and to resolve any issues arising promptly.
4 Operating segments The Group’s operating segment reporting follows the organisational structure and management’s internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. In 2018, the Group has reviewed the segmental presentation of financial information it requires to assess 3 Management of risk 3.3 Capital risk management Capital modelling and regulation continued 126 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
– Hiscox Re & ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda and London. 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 and losses made as a result of the Group’s 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. In addition, from 1 January 2018, the segment includes results from run-off portfolios where the Group has ceded all insurance risks to a third-party reinsurer. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.
All amounts reported below represent transactions with external parties only. In the normal course of trade, the Group’s entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision-maker when evaluating the results of the Group. Performance is measured based on each reportable segment’s profit before tax.
Claims and claim adjustment expenses, net of reinsurance (812,124) (253,273) (217,952) 57,520 (1,225,829) (721,851) (400,229) (188,836) – (1,310,916) Expenses for the acquisition of insurance contracts (459,326) (164,556) (17,401) (388) (641,671) (401,070) (159,823) (27,037) – (587,930)
Share of (loss)/profit of associates after tax (206) – – 635 429 (247) – – 506 259
Profit/(loss) before tax and foreign exchange gains/(losses) 134,784 80,856 (11,592) (52,985) 151,063 142,138 (31,532) 30,756 (20,780) 120,582 *See note 2.1 for further details. † Includes a run-off casualty portfolio following the completion of a loss portfolio transfer reinsurance treaty effective from 2018 ceding any future payments on losses arising from claims developments related to policies written from 2010 to 2016, with premiums earned of $(57.4) million and claims adjustment expenses net of reinsurance of $57.5 million.
4 Operating segments continued 127Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The following charges are included within the consolidated income statement: Year to 31 December 2018 Year to 31 December 2017
Combined ratio excluding foreign exchange impact (%) 93.6 89.0 112.5 – 94.4 94.5 108.7 98.9 – 98.8 *See note 2.1 for further details.
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 and excludes a run-off portfolio, where the Group has ceded all insurance risks to a third party reinsurer, included within Corporate Centre.
At 100% level (note 4b) 1% change in claims or expense ratio 18,630 7,194 2,981 16,622 7,037 3,142 At Group level 1% change in claims or expense ratio 18,219 5,518 2,574 15,853 5,616 2,693 *See note 2.1 for further details.
4 Operating segments (a) Profit before tax by segment continued 128 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Claims and claim adjustment expenses, net of reinsurance (816,109) (330,924) (249,797) 57,520 (1,339,310) (734,160) (493,201) (222,953) – (1,450,314) Expenses for the acquisition of insurance contracts (475,623) (213,872) (19,535) (388) (709,418) (413,145) (197,629) (28,488) – (639,262)
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties: Year to 31 December 2018 Year to 31 December 2017
United States 51,998 22,168 Rest of world 3,611 3,685 *See note 2.1 for further details.
Investment income including interest receivable 102,955 81,590 Net realised losses on financial investments at fair value through profit or loss (25,397) (5,130) Net fair value (losses)/gains on financial investments at fair value through profit or loss (35,070) 36,055 Investment result – financial assets 8 42,488 112,515 Net fair value gains/(losses) on derivative financial instruments 19 1,280 (1,695) Investment expenses (5,667) (6,070) Total result 38,101 104,750 *See note 2.1 for further details.
5 Net asset value per share 130 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
8 Analysis of return on financial investments continued (b) Investment return
131Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Amounts receivable by the auditor and its associates in respect of: The auditing of the accounts of the Group and its subsidiaries 2,705 2,493 All audit-related assurance services 359 266 All other non-audit services 168 257 *See note 2.1 for further details.
In 2017, the $1,605,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement. There was no impairment in 2018.
Intangible assets All intangible assets have a finite useful life except for the Syndicate capacity and US state authorisation licences.
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 2018 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
The asset is not amortised, as the Group considers that economic benefits will accrue to the Group over an indefinite number of future periods due to the stability of the US insurance market. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
The carrying value of software and development costs is reviewed for impairment on an ongoing basis by reference to the stage and expectation of a project. Additionally, at the end of each reporting period, the Group reviews the positions for any indication of impairment, and as a result of this no impairment was provided for (2017: $nil).
133Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
As at 31 December 2018, HDCM owned 72.6% of Syndicate 33 (2017: 72.6%), and 100% of Syndicate 3624 (2017: 100%). In view of the several, but not joint liability of, underwriting members at Lloyd’s for the transactions of Syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
(b) 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 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.
Following a significant inflow of capital from third-party investors during 2015, the Group determined that it no longer met the criteria for consolidation of the Funds and SPIs from 1 July 2015 and deconsolidated them.
The Group is exposed to credit risk associated with reinsurance recoverables on risks fronted for the SPIs. Note 3.2(d) discusses how the Group manages credit risk associated with reinsurance assets. The operations of the Funds and SPIs are financed through the issuance of preference shares to external investors. The Group does not intend to provide any further financial support to the Funds or SPIs.
Associates incorporated in the UK and USA from 17% to 35% 16,939 11,779 16,319 1,332 Associates incorporated in Europe from 10% to 26% 2,833 1,336 2,641 804 Total at the end of 2018 19,772 13,115 18,960 2,136 100% results
Profit after tax 2017 (restated)* Associates incorporated in the UK from 17% to 35% 17,688 13,029 19,398 1,422 Associates incorporated in Europe from 10% to 26% 3,629 2,434 2,728 858 Total at the end of 2017 21,317 15,463 22,126 2,280 *See note 2.1 for further details.
(d) Disposals On 1 May 2017, the Group disposed of its subsidiary Blue Hill Specialty Insurance Company Inc. and on 18 September 2017, the Group completed the sale of its investment in Lark (2012) Limited.
Total assets no longer recognised in the consolidated balance sheet (33,151) Total currency translation reserve no longer recognised in the consolidated balance sheet 1 Cash received on disposal 50,921 Profit recognised in the consolidated income statement 9 17,771 *See note 2.1 for further details.
Acquisition costs incurred in relation to insurance contracts written 898,113 (255,876) 642,237 796,829 (217,092) 579,737 Acquisition costs expensed to the income statement (881,974) 240,303 (641,671) (798,809) 210,879 (587,930) Foreign exchange and other adjustments (6,411) 620 (5,791) 18,332 (2,908) 15,424
The deferred amount of insurance contract acquisition costs attributable to reinsurers of $106,758,000 (2017: $91,805,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 24).
The net amounts expected to be recovered before and after one year are estimated as follows: 2017 (restated)
Within one year 314,675 321,524 After one year 34,424 32,800 *See note 2.1 for further details.
137Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Financial assets designated at fair value through profit or loss are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
Debt and fixed income securities 4,574,629 4,630,828 Equities and shares in unit trusts 398,055 451,305 Deposits with credit institutions 364 7,182 Total investments 4,973,048 5,089,315 Insurance-linked fund 55,182 49,918 Derivative financial instruments 19 1,451 410 Total financial assets carried at fair value 5,029,681 5,139,643
The effective maturity of the debt and fixed income securities due within and after one year are as follows: 2017 (restated)
Equities, shares in unit trusts and insurance-linked securities do not have any maturity dates. The effective maturity of all other financial assets are due within one year.
Long-term debt 697,120 370,071 Accrued interest on long-term debt 2,350 2,430 Total financial liabilities carried at amortised cost 699,470 372,501 *See note 2.1 for further details.
Deposits with credit institutions US Dollars – – Sterling – 3,467 Euro and other currencies 364 3,715
Prepayments and accrued income 26,127 15,263 Other loans and receivables: Net profit commission receivable 16,300 22,961 Accrued interest 20,947 18,332 Share of Syndicates’ other debtors’ balances 27,767 30,309 Other debtors including related party amounts 32,215 32,774 Total loans and receivables including insurance receivables 1,265,110 1,121,452
139Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below: Gross fair value of assets 18,661 22,549 41,210 Gross fair value of liabilities (18,475) (22,712) (41,187)
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of $1,539,000 (2017: loss of $964,000) as included in the investment result in note 7. There was no initial purchase cost associated with these instruments.
19 Derivative financial instruments 140 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
In accordance with IFRS 13 Fair Value Measurement, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value, is set out below.
Financial assets Debt and fixed income securities 1,509,012 3,065,617 – 4,574,629 Equities and shares in unit trusts – 379,139 18,916 398,055 Deposits with credit institutions 364 – – 364 Insurance-linked funds – – 55,182 55,182 Derivative financial instruments – 1,451 – 1,451
Financial liabilities Derivative financial instruments – 163 – 163 *See note 2.1 for further details.
The levels of the fair value hierarchy are defined by the standard as follows: – Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; – Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on market observable data; – Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
20 Fair value measurements 141Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Level 3 contains investments in a limited partnership, unquoted equity securities and insurance-linked funds which have limited observable inputs on which to measure fair value. Unquoted equities, including equity instruments in limited partnerships are carried at fair value. Fair value is determined to be net asset value for the limited partnerships, and for the equity holdings it is determined to be the latest available traded price. 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 2018, the insurance-linked fund of $55,182,000 represents the Group’s investment in the Kiskadee Funds (2017: $49,918,000).
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Financial assets
Unrealised gains and losses in the year on securities held at the end of the year (329) (9,129) (9,458) * 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 (2017: 6.5p) 425,760 3,692,308 425,760 3,692,308 Issued ordinary share capital of 6.5p (2017: 6.5p) 33,986 295,315 33,913 294,484 *See note 2.1 for further details.
Employee share option scheme – proceeds from shares issued 77 6,084 – Scrip dividends to owners of the Company 30 5,734 –
The weighted average fair value of each share option granted during the year was 302.5p (2017: 223.6p). The weighted average fair value of each Performance Share Plan award granted during the year was 1,492.9p (2017: 1,127.1p).
144 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2018 and 2017 are not material.
23 Insurance liabilities and reinsurance assets 145Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Under certain insurance contracts, the Group may be permitted to sell property acquired in settling a claim (for example, salvage). The Group may also have the right to pursue third parties for payment of some or all costs (for example, subrogation). If it is certain a recovery or reimbursement will be made at the valuation date, specific estimates of these salvage and/or subrogation amounts are included as allowances in the measurement of the insurance liability for unpaid claims. This is then recognised in insurance and reinsurance receivables when the liability is settled.
Estimates of where claim liabilities will ultimately settle are adjusted each reporting period to reflect emerging claims experience. Changes in expected claims may result in a reduction or an increase in the ultimate claim costs and a release or an increase in reserves in the period in which the change occurs.
23 Insurance liabilities and reinsurance assets continued 23.1 Insurance contracts assumptions 146 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Current estimate of cumulative claims 894,574 1,082,618 1,533,346 1,312,011 925,591 1,056,275 1,263,033 1,609,341 3,058,051
23 Insurance liabilities and reinsurance assets 23.1 Insurance contracts assumptions (b) Claims development tables continued 147Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Current estimate of cumulative claims 744,878 874,749 1,178,552 919,205 792,666 842,898 1,042,224 1,241,805 1,612,635 1,788,472 11,038,084
Liability recognised in respect of prior accident years at 100% level 91,079 Total net liability to external parties at 100% level 3,305,353 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2017.
Current year claims and claim adjustment expenses 2,780,093 (1,227,812) 1,552,281 2,911,356 (1,265,918) 1,645,438 Over-provision in respect of prior year claims and claim adjustment expenses (453,461) 127,009 (326,452) (421,758) 97,548 (324,210) Acquisitions/(divestments) and transfers† – – – – (10,312) (10,312) Total claims and claim adjustment expenses 2,326,632 (1,100,803) 1,225,829 2,489,598 (1,178,682) 1,310,916 †The net movement in 2018 and 2017 relates to a retroactive reinsurance arrangement that transferred the benefits and risks of some of the Group’s insurance portfolio.
A reconciliation of the unearned premium reserves is as follows: (restated)*
Creditors arising out of direct insurance operations 74,079 82,257 Creditors arising out of reinsurance operations 664,803 504,423
Included within accruals and deferred income is $7.0 million (2017: $10.9 million) of deferred gain on retroactive reinsurance contracts.
Within one year 947,580 743,202 After one year 133,500 145,800 *See note 2.1 for further details.
25 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 32. The amounts charged in the consolidated income statement comprise the following: (restated)
Current tax Expense for the year 19,659 24,483 Adjustments in respect of prior years 1,529 (106) Total current tax expense 21,188 24,377
Deferred tax Credit for the year (11,292) (27,353) Adjustments in respect of prior years (1,017) 7,335 Effect of rate change 497 1,429 Total deferred tax credit (11,812) (18,589) Total tax charged to the income statement 9,376 5,788
Adjustment for share-based payments (216) (758) Non-taxable income (3,829) (6,984) Prior year tax adjustments 512 7,230 Tax charge for the period 9,376 5,788 *See note 2.1 for further details.
Trading losses in overseas entities 47,540 46,601 Deferred tax assets 48,036 20,442 Deferred tax liabilities (34,903) (13,581) Total deferred tax asset 60,673 53,462
UK capital losses – 800 – (36) 764 Trade and other payables 3,401 (300) – (177) 2,924 Intangible assets – Syndicate capacity 1,878 (196) – (100) 1,582
Trading losses in overseas entities 46,601 948 – (9) 47,540 Net total deferred tax assets/(liabilities) 6,861 10,869 (3,898) (699) 13,133 Net deferred tax position asset/(liability) 53,462 11,817 (3,898) (708) 60,673 *See note 2.1 for further details.
Following changes to the future UK main rate of corporation tax introduced in the Finance Act 2016, the deferred tax on the Syndicates’ open years of account is calculated with reference to the tax rate expected to be in force when those years close. Equally, the deferred tax liability on equalisation provision is calculated at the tax rate expected to be applicable as it unwinds. All other UK deferred income tax assets and liabilities are calculated at 17% for the year ended 31 December 2018 (2017: 17%).
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of comprehensive income to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of comprehensive income. The total recognised outside the income statement is $151,000 income (2017: income of £4,553,000), comprising $3,897,000 deferred tax expense and $4,048,000 current tax income (2017: $1,053,000 deferred tax income and $3,500,000 current tax income).
26 Deferred tax 151Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: (restated)
Present value of scheme obligations 301,986 369,634 Fair value of scheme assets (266,210) (305,520) Net amount recognised as a defined benefit obligation 35,776 64,114
As the present value of scheme obligations exceeds the fair value of the scheme assets, the scheme reports a deficit.
26 Deferred tax Net Group deferred tax assets/(liabilities) analysed by balance sheet headings continued 152 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The Group has completed an estimate of the impact of the ruling on the scheme using one of the methods identified by the High Court (C2) for equalising GMPs. The Group has recognised a charge of £64,000 ($85,000) during the year.
Group defined benefit liabilities at beginning of the year 64,114 69,612 Third-party Names’ share of liability (10,738) (11,658) Net defined benefit liability at beginning of year 53,376 57,954 Defined benefit cost included in net income 2,188 2,263 Contribution by employer (3,733) – Credit from third-party Names (367) (379) Foreign exchange movements (2,028) 4,711 Total remeasurement included in other comprehensive income (20,249) (11,173) Net defined benefit liability at end of year 29,187 53,376 Third-party Names’ share of liability 6,589 10,738 Group defined benefit liability at end of year 35,776 64,114
A reconciliation of the fair value of scheme assets is as follows: (restated)
Opening fair value of scheme assets 305,520 266,517 Interest income 7,648 7,333 Cash flows Contribution by the employer 3,733 – Benefit payments (8,747) (10,587) Administration expenses (459) (305) Remeasurements Return on plan assets (excluding interest income) (21,990) 18,234 Foreign exchange movements (19,495) 24,328 Closing fair value of scheme assets 266,210 305,520 *See note 2.1 for further details.
Opening present value of scheme obligations 369,634 336,129 Past service cost 85 – Interest expense 9,292 9,291 Cash flows Benefit payments (8,747) (10,587) Remeasurements Changes in actuarial assumptions (46,314) 4,816 Foreign exchange movements (21,964) 29,985 Closing present value of scheme obligations 301,986 369,634 *See note 2.1 for further details.
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: 2018 years 2017 years
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: 2018 years 2017 years
The weighted average duration of the defined benefit obligation at 31 December 2018 was 19.3 years (2017: 23.2 years).
The triennial valuation carried out as at 31 December 2017 resulted in a deficit position of £26.5 million ($35.8 million) on a funding basis. The Group and the scheme’s trustees have agreed a recovery plan to reduce the deficit and to eliminate the deficit by 2024. A funding contribution of £2.8 million ($3.7 million) was paid during 2018 and under the plan a further payment of £2.8 million ($3.6 million) will be made during 2019 and annually thereafter. The funding plan will be reviewed again following the next triennial funding valuation which will have an effective date of 31 December 2020.
Effect of a change in inflation Use of RPI inflation assumption of 3.35% 35,776 40,913 (5,137) Use of RPI inflation assumption of 2.85% 35,776 30,967 4,809 28 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
Profit for the year attributable to the owners of the Company ($000) 127,999 33,904 Weighted average number of ordinary shares (thousands) 283,564 281,964 Basic earnings per share (cents per share) 45.1¢ 12.0¢ Basic earnings per share (pence per share) 33.9p 9.3p *See note 2.1 for further details.
Profit for the year attributable to the owners of the Company ($000) 127,999 33,904 Weighted average number of ordinary shares in issue (thousands) 283,564 281,964 Adjustments for share options (thousands) 5,650 9,065 Weighted average number of ordinary shares for diluted earnings per share (thousands) 289,214 291,029 Diluted earnings per share (cents per share) 44.3¢ 11.6¢ Diluted earnings per share (pence per share) 33.2p 9.0p *See note 2.1 for further details.
The final dividend for the year ended 31 December 2017 was either paid in cash or issued as a scrip dividend equivalent of 27.2¢ per share. The final dividend for the year ended 31 December 2017 was paid in cash of $71,524,000 and 263,368 shares for the scrip dividend.
The interim dividends for 2018 and 2017 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 2018 was paid in cash of $35,694,000 (2017: $33,255,000) and 107,896 shares for the scrip dividend (2017: 108,769).
The Board has declared a final dividend of 28.6¢ per share to be paid on 12 June 2019 to shareholders registered on 10 May 2019, taking the total ordinary dividend per share for the year to 41.85¢ (2017: 39.8¢). The dividends will be paid in Sterling unless shareholders elect to be paid in US Dollars. The foreign exchange rates at which future dividends declared in US Dollars will be calculated is based on the average exchange rate in the five business days prior to the scrip dividend price being determined. On this occasion, the period will be between 22 May 2019 to 26 May 2019 inclusive.
156 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
The following guarantees have also been issued: (a) Hiscox Dedicated Corporate Member Limited (HDCM) and Hiscox Capital Ltd (HCL) provide assets under a Security and
(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 $800 million (2017: $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 2018 $50.0 million (2017: $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 (2017: $nil).
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the USA, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide Letters of Credit or other terms of collateral to clients. Hiscox Bermuda has in place a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of USA ceding companies and other jurisdictions, and also Letter of Credit facility agreements with National Australia Bank and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to $600 million in Letters of Credit (2017: $400 million). Letters of Credit issued under these facilities are collateralised by cash, US government and corporate securities of Hiscox Bermuda. Letters of Credit under these facilities totalling $130.0 million were issued with an effective date of 31 December 2018 (2017: $100.7 million on a $400 million facility) and these were collateralised by USA government and corporate securities with a fair value of $152.8 million (2017: $115.8 million). In addition, Hiscox Bermuda maintained assets in trust accounts to collateralise obligations under various reinsurance agreements. At 31 December 2018 total cash and marketable securities with a carrying value of approximately $10.7 million (2017: $10.8 million) was held in external trusts. Cash and marketable securities with an approximate market value of $611.6 million (2017: $659.5 million) were held in trust in respect of internal quota share arrangements. Additionally, in 2018, $24.8 million was maintained in a trust account for credit enhancement purposes.
(g) Hiscox SA has arranged a bank guarantee with respect to the office in Luxembourg with a value of €42,000 (2017: €42,000). This guarantee is held with ING Bank (Luxembourg).
157Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
31 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 $1,391,000 (2017: $1,620,000).
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 $15,303,000 (2017: $14,503,000). Operating lease rental income for the year totalled $530,000 (2017: $733,000).
Later than five years Land and buildings* 11,454 11,816 *Minimum lease payments do not include leases that have not yet commenced, specifically the lease on 22 Bishopsgate that is expected to commence in 2021.
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: (restated)
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 Hiscox Assure SAS Insurance intermediary France 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 2018 (2017: 38,030).
34 Post balance sheet event In response to the UK’s decision to leave the European Union, the Group made some necessary changes to its business. These will ensure continuity of cover and settlement of existing claims to all its customers with European risks, so that it can continue to service its policyholders and claimants across Europe post-Brexit. To make these changes the Group used a legal insurance business transfer process known as a Part VII transfer to novate insurance contracts covering EU risks and written by Hiscox Insurance Company Limited (HIC) prior to Brexit to Hiscox SA (HSA), the Group’s EU carrier based in Luxembourg.
The Part VII process is governed by the Part VII of the Financial Services and Markets Act 2000 and is subject to the approval of the High Court of England and Wales and the Royal Court of Jersey. These approvals have been received and became effective on 1 January 2019, which means the Part VII transfer has taken place and HSA is operational.
Following this transfer, Hiscox Europe Underwriting Limited (HEUL) was merged under a EU Cross Border Merger (CBM) into HSA combining the Group’s European insurance intermediary and risk carrier operation on 1 January 2019.
159Hiscox Ltd Report and Accounts 2018 97 Financial summary Notes to the consolidated financial statements 1 Strategic report 41 Governance 67 Remuneration
Profit for the year after tax 127,999 33,904 456,967 320,929 356,218 Assets employed
Financial assets carried at fair value 5,029,681 5,139,643 4,702,121 4,294,730 4,413,001