Remuneration Committee’s letter 76 Remuneration policy report 85 Annual report on remuneration 2016 92 Directors’ report 95 Directors’ responsibilities statement
Profit before tax (£m)Ordinary dividend (p per share) Net asset value (p per share)
Gross premiums written (£m) 2,402.6 1,944.2 Net premiums earned (£m) 1,675.0 1,435.0 Profit before tax (£m) 354.5 216.1 Profit after tax (£m) 337.0 209.9 Earnings per share (p) 119.8 72.8 Total ordinary dividend per share for year (p) 27.5 24.0 Special dividend (p) – 16.0 Net asset value per share (p) 649.9 545.0 Group combined ratio (%) 84.4 85.0 Group combined ratio excluding foreign exchange (%) 90.8 85.7 Return on equity (%) 23.0 16.0
What do we mean by big-ticket and retail business? We characterise big-ticket as larger premium, catastrophe-exposed business written through Hiscox Re and ILS and Hiscox London Market. We expand and shrink these lines according to market conditions.
Our success is due to this long-held strategy. It provides opportunity throughout the insurance cycle, allowing us to deliver in the short, medium and long term.
Big-ticket business A Larger premium, globally-traded, catastrophe-exposed. A Shrinks and expands according to rates. A Excess profits allow investment in retail development.
Retail business A Smaller premium, locally-traded, less volatile. A Growth between 5-15% per annum. A Pays dividends. A Brand builds strong market position. A Profits act as additional capital.
Europe Amsterdam, Bordeaux, Brussels, Cologne, Dublin, Hamburg, Lisbon, Lyon, Madrid, Munich, Paris 2,300+ The Hiscox Group has over 2,300 people in 13 countries.
Bermuda Adaptability of Hiscox Re and ILS drives excellent result. Kiskadee AUM now over $1.25 billion.
A resilient business Strong underwriting discipline, a diversified strategy and sound capital management led to a lower risk profile for the Group.
A track record of profitable growth Over the last five years the Hiscox Group has: Asia Bangkok, Singapore
UK and Ireland Hiscox UK and Ireland invests in infrastructure and new specialist products, launching a homeowners’ renovation and extension cover and crime cover for small businesses.
Unique culture and strong brand The excellence of our people has been a crucial factor in our continuing success. Their expertise, courage and dedication continue to drive our reputation for quality and professionalism. In return we strive to provide them with a working environment in which they can flourish. In our annual global employee engagement survey we looked at how connected employees feel to Hiscox, their managers, their teams and their roles. Hiscox enjoys very high employee engagement, which averages in the top quartile of over 200 companies worldwide. Of our employees, 89% said they are proud to work for us, while 94% said they believed in our corporate values.
We are market leaders in many of the sectors in which we operate, while our commitment to provide clients with quick responses, clear coverage and superb service is at the heart of everything we do. We have invested significantly in creating a powerful, differentiated brand that reflects our values and customer service ethos, with which our target clients identify. For example, our brand awareness in the US has doubled in the last year, the result of a long-term campaign highlighting the courage of small businesses.
Specialist expertise that is valued by our customers In France, 98% of small business customers are satisfied with our services. In the US, Hiscox small business customers rated us 4.8 out of 5 for customer service.
««««« For the past ten years running, Defaqto has awarded Hiscox Home Insurance five stars. Defaqto is an independent financial research company, which rates products from 1 to 5 depending on the level of quality and comprehensiveness of the features and benefits it offers.
In 2016 we received a number of industry accolades across the Group: A Hiscox London Market won Best
Product Innovation at The Lloyd’s Market Innovation Awards for its FloodPlus product, and Kieran Giddons was announced as the Insurance Insider Honours Young Claims Professional of the Year; A Hiscox Re and ILS won Underwriting Team of the Year at the Insurance Day London Market Awards; A Hiscox UK and Ireland received the Consumer Intelligence 2016 Best Claims Award; A DirectAsia Singapore won Best Online Buying Experience at the TripZilla Excellence Awards.
Hiscox UK and Ireland received Underwriting Team of the Year, Cyber/ Technology Risks Team of the Year and Professional Indemnity and Directors’ & Officers’ Team of the Year.
Top 100 Hiscox USA was recognised in the Top 100 Small Business Influencer Awards.
Challenging convention At Hiscox our core values include challenging convention, to have courage, to provide quality products, to excel in the service we provide and be human in our approach. These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
Challenging convention Our values define our business. At their heart is a restless spirit to challenge convention in our industry and ourselves to always do better.
I am pleased to announce a final dividend of 19.0p, a step up in the full year ordinary dividend to 27.5p, which is an increase of 15%. Dividend, balance sheet and capital management
On-going investment in our brand, infrastructure, and the hard work of our highly talented, energetic teams have all contributed to a strong result for Hiscox Retail. Hiscox USA has performed particularly well and continues to represent an excellent growth opportunity for the Group.
Hiscox London Market delivered a good result against a backdrop of fierce competition in specialty classes of business. Profitability is under pressure in most lines, and on the whole we are exercising caution. We hunt for opportunities where we can but are not afraid to sit on our hands where margins are thin. We are cautiously growing in some lines, particularly in new product areas and in our fledgling MGA business, which gives us access to attractive returns, helping to offset reductions elsewhere.
Dividend, balance sheet and capital management In view of the performance of the Group, the growing contribution of the retail business, and the diversification of our reinsurance offering, I am pleased to announce a final dividend of 19.0p, a step up in the full year ordinary dividend to 27.5p, which is an increase of 15%. Going forward we will maintain our progressive dividend policy. The record date for the dividend will be 12 May 2017 and the payment date will be 20 June 2017.
The Board proposes to offer a scrip alternative subject to the terms and conditions of Hiscox Ltd’s 2016 Scrip Dividend Scheme. The last date for receipt of scrip elections will be 19 May 2017 and the reference price will be announced on 30 May 2017.
Investments We made a much improved investment return of £74.8 million (2015: £33.7 million), excluding derivatives, which equates to a return of 1.9% (2015: 1.0%) on total assets under management. We would happily have accepted this at the beginning of the year, particularly given the political surprises that added considerably to the already challenging investment environment.
to leverage our underwriting expertise to give clients a full range of solutions, as well as providing an attractive source of regular fee income. It sits comfortably alongside our well-developed partnership with various quota share reinsurers.
2 Strategic report Chairman’s statement 35 Governance 73 Remuneration 101 Financial summary
We learnt a number of valuable lessons from the exercise. The industry has a vital part to play in the economy in the aftermath of a major event, and this exercise demonstrated that it has all the ingredients it needs not just to survive such a marketturning event, but to thrive. We confirmed that the resilience of the London Market depends on the robustness of reinsurance and recapitalisation arrangements and the ability of firms to implement these arrangements during a turbulent financial environment. We also resolved that out of five critical factors – capital, rates, liquidity, underwriting expertise and regulatory response – it is a deep underwriting expertise and surefooted regulatory response that will differentiate the London insurance market in a marketturning event.
2016 was a great year for us in this respect. Further consolidation in the London Market enabled us to recruit several marketleading specialty teams, and our new apprenticeship scheme for non-graduates also saw us take on clever, enthusiastic young people whose positive attitude and fresh outlook are beneficial to our business.
It has also been pleasing to see our Board and Executive Committee boosted by the addition of Aki Hussain, our new Chief Financial Officer, who brings different skills to our top team as well as important regulatory experience. His positive impact is already being felt and we are learning a lot from him.
Ultimately our people and our culture set us apart. I am always hugely impressed by the passion and positivity I encounter when I visit any of our 30 offices around the world. I am grateful to all our people for their focus and commitment to excellence, and thank them for their hard work over the year.
The last time I saw market conditions like this was in the 1990s, but the difference between then and now is that the Group has a depth of expertise and experience and more tools to deal with market challenges than before. Hiscox remains disciplined, and our longstanding strategy serves us well. We expect the tension between underwriting discipline and market relevance to continue in 2017, particularly in the London Market, and will respond by retreating in those lines where margins are vanishing.
Despite the difficult trading environment, the Hiscox Group has never been in better shape. The strategy we began so many years ago is guiding us in the soft market, giving us precisely the kind of options and flexibility that we could only have dreamt of some years ago. We look forward with optimism and confidence.
Our adaptability has meant we have evolved organically over the past decade. We are now a lot more than a Lloyd’s business with a retail play on the side.
Our 2016 result represents a record year for Hiscox with profits before tax of £354.5 million (2015: £216.1 million), beating our previous record of £320.6 million achieved in 2009. The improvement since last year is thanks to increased investment returns, significant foreign exchange gains and good underwriting which has offset the impact of a softening market. At the same time we were able to grow our revenues to £2,402.6 million (2015: £1,944.2 million), an increase of 14.1% at constant exchange rates.
Hiscox Retail is becoming an ever more important part of our business, growing revenues by 13.2% in local currency and doubling profits to £158.0 million (2015: £78.6 million). Our retail business has come of age and now accounts for 49% of the Group’s GWP, 61% of NWP and 45% of profits (60% excluding foreign exchange gains), and again covers the dividend. Our long-held strategy of balance and diversity gives us choice and flexibility in this soft market and the symbiotic relationship we have created between our retail operations and bigger-ticket, more volatile lines, is not quickly replicated. It is the culmination of years of investment in infrastructure, our skills and our brand.
Gross premiums written 1,181.4 989.8 Net premiums earned 1,020.5 888.0 Underwriting profit 99.5 72.2 Investment result 31.3 17.4 Foreign exchange and other* 27.2 (11.0) Profit before tax 158.0 78.6 Combined ratio 88.1% 92.9% Combined ratio excluding foreign exchange 91.9% 92.0% *Includes impairments and accelerated amortisation.
In our direct-to-consumer business, the investment in infrastructure that I have spoken about previously is bearing fruit. We completed our migration to a new online platform with an improved user experience, and that has helped to drive good growth, particularly in commercial lines where we have broadened our appetite to include more businesses at the ‘medium’ end of the SME scale. In direct home, we are already benefiting from our new IT system’s ability to tailor pricing intelligently.
2016 was also the year we saw the muchdebated Flood Re scheme go live. We are proud to have supported our customers by successfully campaigning for higher council tax band homes to be included within the scheme. However, we were disappointed to see the Government announce further increases to Insurance Premium Tax (IPT) in the Autumn Statement. This is the third price increase in 18 months, taking IPT from 10% to 12% from June 2017 and, alongside the Flood Re levy of 4%, punishes the prudent. The latest hike amounts to a 300% increase since the introduction of IPT in 1994 and is hitting consumers’ pockets and their ability to protect their assets – which I am sure is not the aim of HM Revenue and Customs.
Continued investment in our brand saw us achieve some of our strongest ever brand health scores in 2016. Targeted small business and cyber insurance campaigns boosted brand affinity amongst SMEs to a record high of 53%. Our home insurance marketing also delivered strong results amongst target customer groups and helped new business to grow by 21%.
Hiscox Europe Hiscox Europe grew gross written premiums to £174.7 million (2015: £148.3 million), 9.0% in constant currency. This good growth was driven by Germany, Spain and Benelux, all of which exceeded expectations at both the top and bottom line, and by our specialty commercial business, which performed well in all markets.
Our German operations are doing very well. Here, core homeowner and small business products continue to deliver, while a focus on classic cars, the expansion of our cyber business, and new products launched for online shops and IT freelancers all help to differentiate us. It is a similar story in
In Spain, all lines are growing, with a particularly good performance in professional indemnity and directors and officers’ business. We have also expanded our appetite for partnerships with financial service providers, with promising early signs.
Our shared service centre in Lisbon continues to improve our expense ratio for Europe. Around one third of our 325 Hiscox Europe staff are based there, and the team are involved not only in credit control and collection processes, but also in underwriting, pricing, broker relations, claims and IT.
Hiscox International This division comprises Hiscox USA, Hiscox Special Risks and DirectAsia. Its revenues grew by 27.6% to £508.1 million (2015: £398.2 million), 16.9% at constant currency, and it achieved a combined ratio of 93.6% (2015: 93.9%). Hiscox USA was the biggest contributor to the division’s growth and profit improvement.
Hiscox USA Hiscox USA underwrites small-to-mid market commercial risks through brokers, other insurers and directly to businesses online and over the telephone. The outstanding momentum in this business has not stopped, delivering excellent growth of 30% in constant currency to £400.0 million (2015: £280.7 million) and a second year of aggregate profitability. Our business model is working.
Our broker business and direct and partnerships division have both performed well, with key contributors being our professional liability and cyber lines. The general liability account is also now established. Our first mover advantage in the direct and partnerships division is reaping rewards, delivering almost across all lines. We continue to find opportunities in new and established markets though, helped by disciplined underwriting and careful expense management to protect profitability. In the Middle East, our fine art offering has been well received, and Latin America remains a source of great opportunity. New partnerships and distribution channels have also proven successful.
The team is navigating a highly competitive motor insurance market in Singapore, where restrictions on car ownership limit the size of the opportunity. In 2017 the Singapore team will focus on the core motor market and begin exploring the potential to use our digital platform to enter other lines of business.
US$100 million in premium in 2016 and increasing its customer base to 175,000 policyholders. The low loss environment which benefited our terrorism line was offset by a more normal loss experience in the property account to deliver a good result in a challenging market.
During the year we expanded our cyber and data risk solutions to include Hiscox CyberClear, a product aimed at small and medium-sized enterprises in the US with less than US$1 billion in annual revenue. This complements our existing offering for larger businesses. We also launched a new workplace violence coverage for our management liability product, and re-launched our industry-leading terrorism product to include a wider range of risks, such as the threat of an ‘active shooter’.
Our operating model continues to adapt and evolve to accommodate a fastgrowing business. We now have over 20 professionals working in a dedicated underwriting centre in Atlanta to service small accounts efficiently, which in turn enables our field underwriters to win more complex middle-market business, and we are benefiting from this approach. We are also embarking on a major project to replace our underlying US infrastructure with a more digital-friendly environment to ensure we have the capacity to support the size of business we would like to build.
On-going investment in the brand, including a US$28 million marketing spend, is paying off, with brand affinity amongst our target customers growing to 23% (2015: 7%). Our UK experience is that brand investment combined with good service drives customer growth, and that certainly appears to be the case here. We remain very optimistic about our ability to grow profitably in the US market. We expect that Hiscox’s combination of flexible underwriting delivered locally and our willingness to challenge convention by developing our direct offering will continue to differentiate us.
Gross premiums written 726.0 571.0 Net premiums earned 443.1 366.4 Underwriting (loss)/profit (3.4) 40.9 Investment result 13.4 6.8 Foreign exchange and other* 34.0 6.9 Profit before tax 44.0 54.6 Combined ratio 91.0% 86.6% Combined ratio excluding foreign exchange 99.7% 88.8% *Includes impairment.
Looking at each division in turn: Property Our property division includes US and international commercial property, power and mining risks, and US catastropheexposed personal and small commercial lines traded in the London Market.
Our property teams shrank in areas where rates are under most pressure such as large commercial property, power and mining. It has seen some growth in catastrophe-exposed personal and small commercial lines, where rates have held up. We see real opportunity for growth in US flood insurance, where the market is deregulating. Our new FloodPlus product has been well received by the market and was awarded Best Product Innovation at the Lloyd’s Market Innovation Awards.
Marine and energy Our marine and energy business is one of the most challenged divisions, yet continues to deliver excellent profits.
Market challenges are less pronounced in our casualty business, where we have invested in new teams and products. We have received good support from brokers for our new general liability product as the team brings business to London which would otherwise have been written elsewhere. We will continue to grow in these lines in 2017, particularly in cyber which remains an opportunity for the Group.
In aviation we have significantly reduced our airline account as prices remain under pressure, but have looked to grow our products and airports business. Personal accident had a challenging year as the market was hit by a number of losses but we saw good top line growth. Our focus for 2017 is to ensure this account is well balanced and profitable. Terrorism has benefited from a lack of losses, and our leadership position in the market stands us in good stead, however this is an area of the market where broker pressure on acquisition costs is at its most severe. We continue to grow the product recall account, where we have a market-leading team, and will expand in both product and distribution in 2017. We have taken the decision to exit political risks as the growing length of cover – now regularly over five years – and greater role of credit has moved it outside of our risk appetite.
In Thailand we see strong growth potential and our brand-building work continues to deliver results. Thailand has some 60 million people and over 12 million cars, so the opportunity for us here is significant. The challenge is to build the operational infrastructure to a level which can efficiently convert enquiries into sales. This will remain our focus for 2017.
Hiscox London Market Conditions in the London Market remain challenging, with pressure on rates, terms and conditions, and acquisition costs. Against this backdrop, our London Market business delivered a profit of £44.0 million (2015: £54.6 million) whilst increasing premiums by 27.1% to £726.0 million (2015: £571.0 million). On a constant currency basis, premium growth was 14.2%.
Hiscox London Market’s combined ratio of 91.0% (2015: 86.6%), reflects the impact of the challenging market combined with a return to a more normal loss experience. This included claims in property (where we saw losses from Hurricane Matthew, the Alberta wildfires, Houston floods and Texas hailstorm), marine and energy (including the Jubilee Oil Field loss), personal accident and terrorism (where we had a small exposure to the Brussels terrorist attack), and a number of large directors and officers’ claims.
2 Strategic report Chief Executive’s report 35 Governance 73 Remuneration 101 Financial summary £42.1m Investment in marketing and brand building in 2016.
Our mega yacht business faced a challenging year and was not without losses, but our focus on the Mediterranean yacht market – and local presence – is already bearing fruit. For 2017, our Paris-based space team will become part of Hiscox MGA. Space is a longstanding class of business for us, and in offering material line sizes by underwriting on behalf of not only Hiscox but other insurers, we can remain relevant in this challenging market. In Miami, which serves as our gateway to Latin America, we have made good progress in our fine art, property and terrorism lines, and will be launching a casualty offering to the market in 2017. We have also extended the reach of our terrorism and political violence coverage, writing risks in the Middle East and Africa from London.
Gross written premiums for Hiscox Re and ILS increased by 29.1% to £495.2 million (2015: £383.4 million), 16.1% in constant currency, driven by growth in casualty and specialty lines as well as business written on behalf of Kiskadee. Net of cessions to supporting capital partners, premiums remained constant at £226.8 million (2015: £225.0 million), although declined 10.7% in constant currency. In a challenging trading environment, the business delivered a profit of £115.5 million (2015: £97.5 million) and a 53.7% combined
Marketing In 2016 the Group invested £42.1 million on marketing and brand-building activity (2015: £44.5 million). This was focused on our key retail businesses with incremental marketing investment accelerating the growth of our direct-toconsumer lines around the world. In the UK our consistent marketing approach helped maintain excellent brand awareness and relevance in the small business sector and a new home insurance marketing campaign contributed to a 25% year-on-year increase in new business premium. In the US we doubled brand awareness to a record 38% (2015: 21%) through the successful activation of the ‘Encourage Courage’ campaign, which also helped to deliver 45% growth in our direct small business division.
The market continues to be awash with capital from new and traditional sources, which has seen rating pressure across the portfolio. While single-digit rate reductions at the important January renewals were within expectations, we remain willing to walk away from unattractively priced business. We are finding opportunity in non-catastropheexposed lines, such as smaller-ticket casualty and specialty reinsurance.
Product innovation continues to be a key focus for the team. New products developed in 2016 include cyber reinsurance covers and a collateralised reinsurance ILS offering which was launched for the 2017 renewal season.
Claims We sell a promise to pay should the worst happen, and claims is where that promise is tested. We were therefore delighted to be rated number one in the Gracechurch London Claims Report for overall service quality for the second year in a row. One of our staff also received the Young Claims Professional of the Year Award at the Insurance Insider Honours Awards, and our net promoter scores remained at very positive levels. These are all signs that our ongoing investment in claims does not go unnoticed and is in fact recognised by clients, brokers and competitors alike.
In 2016 the global insurance market returned to a more normal claims environment with earthquakes in Japan and Ecuador, Hurricanes Hermine and Matthew, wildfires in Alberta and floods in Louisiana. With the exception of Hurricane Matthew these events had limited impact on Hiscox.
Hurricane Matthew was the first material storm to make landfall on the east coast of the United States since Hurricane
Investments We have learnt to live with lower investment returns for the last few years and have resisted the temptation to stretch for yield given the high valuations that prevail in many parts of the bond and equity markets. Our strategy, however, has been one of low risk rather than no risk given that so-called risk free returns remain at minimal, and in many parts of the world negative, levels. The result for 2016 therefore is a good one and certainly exceeds the expectations we had at the beginning of the year. Our investments, before derivatives, made £74.8 million (2015: £33.7 million) equating to a return of 1.9% (2015: 1.0%). The significant improvement on last year is pleasing and masks the volatility in bond and equity markets which arose following the main political events on either side of the Atlantic. Whilst the Brexit vote in June provided a boost for our bond portfolios, the election of President Trump in November reversed much of the benefit, particularly in the US bond market where many of our assets are invested. Our bond managers performed well in the fast changing conditions and the overall return of 1.9% from the bond portfolios is the highest for several years and comfortably ahead of the benchmarks against which they are measured. After initial weakness both outcomes were viewed as being positive for equities but with a wide range of performance between sectors. The risk assets portfolio delivered 6.2% in a challenging year for active managers.
There is currently much debate as to whether the increase in US yields that has occurred recently will persist in 2017. We have seen numerous false dawns on this front but with the Federal Reserve indicating that they intend to continue along a path of gradually increasing interest rates, our hope and expectation is that they will indeed rise. Such a move would be welcome and, given the short duration of our bond portfolios, we are well positioned to benefit. On balance we continue to err on the side of caution. Whilst there are signs of improvement economically, emergency monetary measures remain in place in many parts of the world prolonging the period of artificially elevated asset prices and doing little to reduce the overall levels of debt in the world. Political uncertainty can be added to the likely source of volatility in 2017 and, as 2016 has shown us, predicting outcomes and market reaction to them is something of a lottery. At risk of repetition, the outlook for 2017 therefore seems no clearer or more predictable than of late and our focus on resilience over return is likely to remain in place.
Capital management The key measure of value creation in insurance is return on equity. All of our internal financial incentives are focused on having a good return on equity, with reasonable leverage and within a tightly defined appetite for risk. In 2016 we delivered a 23.0% return on equity (2015: 16.0%).
A further demand for capital will be to fund the creation of an EU-27 carrier to allow us to trade in Europe post-Brexit. This will require some initial capital commitment, though we expect that as the European business with our UK carrier develops there will be a release of capital here. Inevitably though there will be a timing difference.
IT Robust infrastructure is required as we grow into a business whose customer numbers will be measured in the millions, not the tens of thousands, so an investment in IT is a multi-year priority for the Group.
We are undertaking some significant IT infrastructure projects, particularly within our Retail businesses. In the UK, a new underwriting and policy administration platform will allow the business to grow scale efficiently, adapt to the increasingly digital world and meet customers’ changing expectations. The UK direct business has already migrated to our new platform and is already benefiting from better conversion rates, more targeted pricing and improved customer service. The UK broker channel commercial business will follow suit during 2017. Hiscox USA is beginning the task of replacing its policy and claims administration system to ensure we are fit for future growth. This will be another multi-year investment.
We expect that as these new systems come on stream their impact on efficiency will more than offset the increased depreciation cost.
Evolution of Hiscox Growth of our retail business 2010 split %
2 Strategic report Chief Executive’s report 35 Governance 73 Remuneration 101 Financial summary 2017 will represent yet another step change in the evolution of our business. Outlook the side. Slowly they are seeing this in our results, and this year with retail contributing to 45% of pre-tax profits, I think that they will see that reality matches our message.
Political environment 2016 has seen some major changes in the political environment. Brexit is becoming a reality and it is possible that the US may enact major changes to its trading and taxation relationships with other countries.
The only difficulty we see at the moment is the handling of claims on in-force or historic policies. The cost of a Part VII court approved process to transfer these liabilities to a new EU-27 carrier is significant. In the Brexit negotiations to come we hope that pragmatism will prevail and practical transition arrangements will be developed.
There is, understandably, interest in the inclusiveness of businesses and their gender pay gap. There are two elements to this – first, whether individuals performing the same roles with the same level of competence are paid equally, and second, the gender mix at different levels of seniority. Hiscox conducted an audit of the first and has corrected any anomalies. In the second, despite a 50/50 gender split at entry level, Hiscox sees a decline in females filling senior roles. Although this has been a focus in the last two years, we have decided to take further steps to address this and Richard Watson, our Chief Underwriting Officer, has become the champion of our internal efforts in this regard.
As Hiscox grows and evolves, we are pleased that our people are able to fulfil their personal ambitions and build their careers here. The success and adaptability of Hiscox is thanks to the collective endeavours of each person. I would like to thank all 2,300 of my colleagues for their commitment and achievements throughout the year.
Outlook 2017 will represent yet another step change in the evolution of our business, with our retail businesses further growing in importance. We have diversity by earnings, investments, geography, product and distribution. We are increasingly leveraging our underwriting expertise and brand to generate fees and commissions.
Another source of business uncertainty is the emerging conversation in the US on its relationship with the rest of the world. There is much talk of ‘border adjustment taxes’, changes to the taxation of related party transactions and a reduction in the headline rate of corporation tax. It is very uncertain what will be enacted by Congress and the Senate and approved by the President. We currently feel that Hiscox has the flexibility and capital to adjust to these developments as they unfold, but we will be keeping a close eye on trends in the US.
After five years in Bermuda Jeremy Pinchin, Chief Executive Officer of Hiscox Re and ILS and Chief Executive Officer of Hiscox Bermuda, is to return to London next year where he will continue to serve as our Global Head of Claims and also join the Board of Hiscox Special Risks. Mike Krefta, currently the Chief Underwriting Officer of Hiscox Re and ILS, will succeed Jeremy in these roles with effect from 1 August 2017, subject to regulatory and immigration approvals. Jeremy has made a major contribution to this business in his time in Bermuda. He brought together the Bermuda, London and Paris reinsurance teams into a powerful single unit, made innovation a core part of our client interaction and was instrumental in the creation of Kiskadee
Building a balanced business Hiscox enjoys a symbiotic relationship between more catastropheexposed, globally-traded business, and less volatile, smaller premium, retail business which gives us opportunities throughout the insurance cycle.
19Hiscox Ltd Report and Accounts 2016 2 Strategic report Building a balanced business 35 Governance 73 Remuneration 101 Financial summary
Hiscox Re and ILS Hiscox UK and Ireland Hiscox London Market Hiscox Europe
£762m Professional liabilities Errors and omissions Private directors and officers’ liability Cyber Commercial small package Small technology and media Healthcare related Media and entertainment £530m Kidnap and ransom Contingency Terrorism Product recall Personal accident Political risks Aerospace Contractors’ equipment FTC Extended warranty £533m Non-marine Marine Aviation Casualty Specialty £308m Home and contents Fine art Classic car Luxury motor Asian motor £285m Commercial property Onshore energy USA homeowners Managing general agents International property £129m Cargo Marine hull Energy liability Offshore energy Marine liability £126m Public D&O, PI Healthcare General liability
bn m ar ke t l os s y ea r r et ur n pe rio d
Capital requirements The Group monitors its capital requirements based on both external risk measures, set by regulators and the rating agencies, and its own internal guidelines of risk appetite. A full description of the requirements set by the regulators for the most significant insurance carriers is included in note 3.3 to the financial statements. A brief explanation of the primary internal and external capital constraints at Group level is given below and they are presented in the chart on page 24.
Management compares the capital requirements of the Group 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 is hybrid in nature, which means it counts towards regulatory and rating agency capital requirements. At 31 December 2016 available capital was £1,970 million (2015: £1,678 million), comprising net tangible asset value of £1,695 million (2015: £1,403 million) and subordinated debt of £275 million (2015: £275 million).
Rating agencies The ability of the Group to attract business, particularly reinsurance, is dependent upon the maintenance of appropriate financial strength ratings from the leading rating agencies: 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 also monitored by the rating agencies at the consolidated Group level.
A.M. Best, S&P and Fitch have shared their capital models with management. These models calculate capital adequacy by measuring available capital, after making various balance sheet adjustments, and comparing it with required capital, which incorporates charges for premium, reserve, investment and catastrophe risk. Management’s
2 Strategic report Capital 35 Governance 73 Remuneration 101 Financial summary interpretation of A.M. Best’s ‘Best’s Capital Adequacy Ratio’ (BCAR) model indicates the Group has a healthy surplus above the minimum capital required to maintain the carriers’ A ratings. A.M. Best is currently consulting on a new BCAR model and rating methodology, which is expected to be introduced during 2017. Hiscox is monitoring these developments closely. On a similar basis the S&P modeled result indicates a surplus within the required A range. Finally, Hiscox’s own assessment of capital requirements arising from Fitch’s Prism Factor-Based Model places the Group’s capital in the ‘extremely strong’ range, comfortably above that necessary to maintain the current Fitch A+ rating. The rating agency requirements shown in the chart on page 24 are consistent with Hiscox’s own internal projections of rating agency capital requirements.
The GSSA is based on Hiscox’s own internally assessed capital requirements and is informed by the Group Capital Model (GCM) which, together with the BSCR, forms part of the BMA’s annual solvency assessment. The GCM provides a holistic view of the Group capital requirements and draws upon the Group’s key underlying risk models.
2 Strategic report Capital 35 Governance 73 Remuneration 101 Financial summary
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of 2016 year end results. Hiscox uses the internally developed Group 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.
Additional performance measures (APM) APMs are commonly used measures to allow comparison across peer companies.
The Group has identified additional performance measures (APM) that are not defined in accordance with Generally Accepted Accounting Principles (GAAP), being International Financial Reporting Standards (IFRS), and may not necessarily have standardised meanings for ease of comparability across other organisations in the industry. These non-GAAP measures are used within these interim financial statements. These APMs are: profit excluding foreign exchange gains/(losses), GWP growth in local currency, combined claims and expense ratios, return on equity, net asset value pence per share and reserve releases. These are commonly used measures across the industry, and allow the reader of the Annual Report to compare across peer companies.
Gross written premium, as reported in the consolidated income statement, is measured in the underlying currency and compared to prior years on a constant currency rate basis. This eliminates the impact exchange fluctuations has on the result and therefore allows a direct comparison between the years. This is performed on a business unit basis and gives an accurate indication of premium growth compared to prior years.
A Return on equity (ROE) As is common within the financial services industry, the Group uses
ROE as one of its key performance metrics. Whilst the measure enables the company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance related pay and shared based payment structures, as discussed within the remuneration policy report in the Annual Report and Accounts. The ROE is shown in note 6, along with an explanation of the calculation.
A Reserve releases Reserve releases are a measure of favourable development on claims reserves that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast our performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The release is calculated as the movement in ultimate losses on prior accident years between the current and prior year balance sheet date, as shown in note 26, as the result of better than expected outcomes of the estimates booked at the prior period close.
Group financial performance Underwriting discipline, favourable foreign exchange gains and a good investment return all contribute to this record result.
Profit before tax for the year was £354.5 million (2015: £216.1 million). This has been boosted by significant foreign exchange gains from strengthening US Dollars and Euros following the UK’s decision to leave the European Union, recording gains of £152 million (2015: £15 million). The investment return increased to 1.9% (2015: 1.0%), exceeding our expectations. The Group recorded a post-tax return on equity of 23.0% (2015: 16.0%) and earnings per share of 119.8p (2015: 72.8p).
Gross premiums written of £2.4 billion were up 23.6% year-on-year, on a constant exchange rate basis 14.1%. Strong growth has continued for most areas of the business, with Hiscox Retail comprising 49% of the total gross premiums written. The Group’s combined ratio including foreign exchange fluctuations was 84.4% (2015: 85.0%).
The underwriting performance for each operating segment is detailed as follows.
Hiscox Retail Hiscox Retail accounts for 49% of the Group’s gross premiums written at £1,181.4 million (2015: £989.8 million). Within this segment, gross premiums written for the UK were up a healthy 12.5% at £498.6 million (2015: £443.3 million). Europe’s gross premiums written were up 17.8% to £174.7 million (2015: £148.3 million), 9.0% in local currency. The US again had strong growth, up 42.5% to £400.0 million, 30.1% in local currency. Special Risks gross premiums written were down 4.2% at £95.2 million (2015: £99.3 million), down 11.6% in local currency in the face of tough competition. Having sold the Hong Kong entities during the year, DirectAsia contributed £13.0 million of gross premiums written.
Cash and liquidity The Group’s primary source of liquidity is from premium and investment income. These funds are used predominantly to pay
Profit has been boosted by significant foreign exchange gains from strengthening US Dollars and Euros.
Marketing expenses remained a major component of our expense base at £42.1 million in the year (2015: £44.5 million).
There were no impairments recorded against cash or cash equivalents and no issues regarding recoverability have been identified on these assets.
Group investments We are pleased with our investment return which represented a significant increase over last year.
Bond markets in particular had something of a rollercoaster year. Economic weakness was foremost in central bankers’ minds for much of the early part of 2016 and yields generally declined. The second half was, of course, dominated by the unexpected outcomes of the UK referendum and the US presidential election but reactions in government bond markets diverged somewhat. In the UK, yields plumbed new lows following the referendum and, in the case of much of Europe, turned increasingly negative. However, in the USA, where stronger economic data prompted the Federal Reserve to make more hawkish statements, the impact did not persist and yields there soon started to rise again. This move was exacerbated following the election of Donald Trump. The potential for his pro-growth policies 15.7% Cash 6.9% Risk assets 77.4% Bonds 9.5% EUR 1.7% CAD and other 18.3% GBP
2 Strategic report Group investments 35 Governance 73 Remuneration 101 Financial summary to fuel inflation made the final few weeks of the year particularly painful for US bond investors. Equity markets experienced similar levels of volatility around these events but quickly confounded the dire predictions of market experts and rallied strongly at the end of the year.
Political events in 2016 added considerably to the problems faced by investors and the impact of their possible consequences remains hard to fathom. On the economic front, however, a degree of optimism prevails and there is a sense that the recent era of falling interest rates may have come to an end. If yields increase, returns from the bond portfolios will be harder to come by but higher interest rates would be welcome and, given our short duration, we will be amongst the first to benefit. Equity markets have momentum but seem to be pricing in a lot of good news so we believe some caution is warranted. We are happy to hold our level of risk assets at around 7%. Not losing money or putting at risk the Group’s capacity to underwrite remain foremost amongst our objectives. Given the heightened levels of political uncertainty and the ongoing distortions in the capital markets caused by abnormal monetary policies, we still believe that it is sensible to have a portfolio with a reasonable chance of making a modest return rather than one with a smaller chance of a higher return given the risk reward ratios on offer.
ANTI- SOCIAL NETWORKS The ever-increasing connectivity of the fourth industrial revolution brings with it extraordinary benefits but also new and unpredictable risks, meaning that cyber insurance is likely to remain an area of significant growth for years to come.
As with the fire of Matthew’s analogy, there’s a remarkable ubiquity to this modern threat. The vast majority of businesses, from sole traders to global giants, depend upon networked devices in one form or another, and where there are networks there are risks. “We’re in the midst of the fourth industrial revolution, a world of hyper-connectivity, an explosion in the ‘Internet of Things’, an era of continual innovation and development,” explains Matthew. “That all talks towards increased risk.” In 2015, Lloyd’s estimated that companies were losing US$400 billion a year to cyber-attacks, taking into account both the immediate damage and subsequent disruption – and that number, as the recent slew of hack-based headlines will vividly attest, is unlikely to shrink any time soon.
US$400bn In 2015, Lloyd’s estimated that companies were losing US$400 billion a year to cyber-attacks.
While uptake of cyber insurance is significantly lower in Europe, even among the largest companies, that transatlantic gap is likely to shrink in the coming years, driven by a similar legislative catalyst. In May 2018, the General Data Protection Regulation (GDPR) will come into force throughout the European Union, strengthening and unifying data protection laws across the 28 member states. “There’s a lot of prescriptive-ness within the GDPR: if you’re a company over a certain size, you will have to employ a designated Data Protection Officer; you will have to notify the regulator within 72 hours of discovering a breach; exactly what constitutes personal data will be more clearly defined,” explains Matthew.
writes specific cyber insurance across five of its six business units: the US, Europe, the UK, London Market and reinsurance. Even in the sixth area, special risks, Hiscox includes cyber extortion cover within its kidnap and ransom policy.
In fact, a degree of cyber risk will impact on policies that extend far beyond the specific cyber products. “Take a household policy, for instance: it will insure against perils like fire, but that doesn’t differentiate between fire caused by a box of matches and fire caused by a connected oven being hacked,” says Matthew. Event cancellation, the loss of perishable contents, business disruption, industrial accidents, environmental liability: all of these and many more can quite conceivably result from the kind of havoc wreaked by a virus or hack.
Currently, the US is by far the most developed marketplace for specific cyber insurance products. “Depending on which reports you read, you’ve got 30-40% of companies buying cyber insurance in the US,” says Dan Burke, US Head of Cyber. “Worldwide it’s something like a US$2.5 billion industry, but with US$2 billion of that emanating from the US, so there’s a massive disparity.”
This maturity is partly a result of the speed with which, in the early 2000s, US legislators responded to the nascent threat of data breaches. “Mandatory notification laws were passed in 2002 in California, enacted in 2003, and then gradually spread across the states,” says Burke. “If there is a breach, you have
The cyber threat: how ready is your business? How well prepared are businesses when it comes to understanding and dealing with the cyber threat? To find out we surveyed more than 3,000 businesses – from the smallest companies, right up to the largest organisations – in the US, UK and Germany in November 2016 and found that more than half (57%) had experienced at least one cyber-attack in the past year.
The Hiscox Cyber Readiness Report 2017 showed that average losses for the largest incident experienced ranged from £29,000 for small UK companies to £81,000 (US$102,000) for large US companies. Our report also found that nearly half (46%) of businesses that experienced a cyber-attack took two days or more to get back to business as usual.
US$7.5bn According to a recent report from PwC, the worldwide market for cyber insurance is expected to grow to US$7.5 billion by the end of 2020.
Our report found that nearly half (46%) of businesses that experienced a cyber-attack took two days or more to get back to business as usual.
Hiscox cyber cover is notable for the clarity of its wording – unusual in a marketplace beset with impenetrable technical jargon. “From a value proposition perspective, we’ve had a lot of focus on trying to simplify the policy wording,” says Matthew. “With the London Market and US wording there’s a single insuring agreement, so it’s easier for brokers and customers to understand. The UK wording, I reduced down from something like 22 pages to seven pages – in the same font.”
Hiscox cyber insurance is “driven by the ‘loss’, not by the ‘how’”. Rather than attempting to cover against specific sources of cyber-attack or data breach – something of a Sisyphean task given the rapidly evolving nature of the sector – it instead looks to the consequences of those perils, and describes them in terms that can be understood by customers who lack an intimate understanding of technology.
There will always be growth in cyber, but getting sustainable profitable growth over the long haul: that’s what we’re all about.
The Group’s success depends on how well it understands and manages its significant exposures across key risk types, which consist of strategic risk, insurance risk (underwriting and reserve risk), market risk, credit risk, operational risk and Group risk. Our collective risk knowledge informs every important decision we make.
Risk strategy A robust risk strategy better positions us to capture the upside of risks we pursue as well as effectively manage the downside of risks we are exposed to. Key aspects of our risk strategy are: s maintaining underwriting discipline when writing high-margin, volatile and complex risks; s seeking balance and diversity to generate opportunities throughout the underwriting cycle; s taking a transparent approach to risk to improve awareness of exposures and enhance response and action.
The risk management framework provides a controlled and consistent system for how risk within the Group is identified, measured, mitigated, monitored and reported. It supports innovative and disciplined underwriting across many different classes of insurance by guiding our appetite and tolerance for risk.
The risk management framework is reviewed and enhanced regularly in light of changes to the Group’s risk profile, the external environment and evolving best practice on risk management and governance.
Our risk appetite is set out: s in qualitative terms through risk appetite statements which outline the level of risk we are willing to assume; s in quantitative terms through risk limits and tolerance which act as boundaries where actual risk exposure is actively monitored.
We set out our risk appetite for each of our insurance carriers, and for the Group as a whole, and review it every year. It can be flexed to respond to a number of internal and external factors such as growing or shrinking an area of the business, or changes in the underwriting cycle impacting capacity and rates.
Risk management across the business The Group coordinates risk management roles and responsibilities across three lines of defence.
Risk is also overseen and managed by (formal and informal) committees and working groups across the first and second lines of defence. These focus on specific risks, such as catastrophe, reserve, investment, credit and emerging risk. The Group risk and capital committee and the Group underwriting review committee make wider decisions on risk.
The first line of defence is responsible for ownership and management of risks on a day-to-day basis, and consists of everyone at every level in the organisation, as all have responsibility for risk management at the individual operational level.
The Group risk team is responsible for implementing the risk management framework, and continually improving it. Role of the risk team s Updates to the risk and control register, which sets out the biggest risks facing the Group and the key controls in place to mitigate them, as agreed with Group and business unit senior management.
s The Own Risk and Solvency Assessment (ORSA), comprising many of the components described above, performed to evaluate what risk practices and capital resources are necessary to achieve the Group’s strategic and business objectives. The ORSA stresses the risk profile on a current and forward-looking basis.
Role of the risk team The Group risk team is responsible for implementing the risk management framework, and continually improving it. The team works with the business units to understand how they maintain the first line of defence and whether they need to make changes in their approach. The team is also responsible for meeting regulatory expectations around enterprise risk management, and reporting on risk to the Board and Risk Committee.
Strategic risk The risk associated with implementation of strategic decisions and objectives, including uncertainties and opportunities in the internal and external environments.
Strategy evolution and execution Our continuing success depends on how well we understand our clients, markets and the various external factors affecting our business. Having the wrong strategy or badly executing the right strategy could have widespread repercussions on our Group’s profitability, capital, market share, growth and reputation.
Setting the right course, particularly in such a hazardous industry as insurance, is essential for our long-term success.
A key pillar of the Group’s strategy is to balance underwriting high-margin, volatile, complex global risks by also selling stable, local specialist retail products.
The Group’s emerging risk forum assesses risks and opportunities with potential to impact the business. This includes considering geopolitical changes like Brexit and US trading and taxation relationships.
Stress testing and scenario analysis help identify unanticipated dependencies and correlations between risks, which could impact the Group’s strategy.
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 may 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 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.
Hiscox rewards its staff for producing profit not revenue, which helps to maintain underwriting discipline in soft markets.
We underwrite catastrophe risk in a carefully managed, controlled manner. Hiscox’s strategy of creating and maintaining a well-diversified portfolio, both by product and geography, helps limit its catastrophe exposure.
We have a clearly-defined appetite for underwriting risk, which dictates the Group’s business plan, and we closely monitor the Group’s risk exposure to maximise the expected risk return profile on our whole portfolio and offset the potential losses on more volatile accounts.
Underwriters are incentivised to make sound decisions that are aligned with the Group’s overall strategic objectives and risk appetite. Clear limits are placed on their underwriting authority. Policy wordings are regularly reviewed in light of legal developments to ensure exposure is maintained, as much as possible, to those risks identified in the policy at the time of issue.
We tailor modeling resources to support insurance and reinsurance plans and ensure exposure matches expectations. Risk aggregation and modeling resources are shared across the Group.
Stress and scenario testing is performed by the Group and individual insurance carriers to assess our potential exposure to certain catastrophes.
The Group might not be able to purchase the right level or type of reinsurance due to market conditions. This could result in reduced protection against losses, which could affect our financial condition and cash flows.
We buy reinsurance protection to manage catastrophe risk and reduce the volatility that major losses could have on our financial position.
We have a clear outwards reinsurance strategy and a centralised reinsurance programme to minimise gaps in coverage across the business and to get the right deal by leveraging our size. Decisions about the type and amount of reinsurance we buy are supervised by a dedicated reinsurance purchasing team using modeling techniques.
Insurance risk – reserve The risk of managing the volatility of claim provision reserves set aside to pay for existing and future claims.
Investment risk also encompasses the risk of default of counterparties, which is primarily with issuers of bonds in which we invest, and investment managers.
Our objective is to maximise our investment result in the prevailing financial, economic and market conditions without undue risk which could affect the Group’s capacity to underwrite. Funds held for reserves are invested primarily in high-quality bonds and cash and as far as possible, are maintained in the currency of the original premiums for which they are set aside, to reduce foreign exchange risk. As many of our insurance and reinsurance liabilities have short time spans, we do not aim to match exactly the duration of our assets and liabilities.
Our fixed-income fund managers operate within guidelines as to the type and nature of bonds in which to invest, which reflect the rate at which we expect to pay claims, while providing them some flexibility to enhance returns.
A proportion of funds is allocated to riskier assets, principally equities. We take a long-term view on these assets so we can achieve the best risk-adjusted returns. 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.
Liquidity The risk we are unable to meet cash requirements from available resources to pay liabilities to customers or other creditors when they fall due.
The failure of our liquidity strategy could have a material adverse effect on the Group’s financial condition and cash flows.
Our investment policy recognises the demands created by our underwriting strategy, so that some investments may need to be sold before maturity or at short notice. A high proportion of our investments are in liquid assets, which reduces the risk that they may make losses if they have to be sold quickly. Funds held for reserves are invested primarily in high-quality, short duration bonds and cash so the Group can meet its aim of paying valid claims quickly.
We run tests to estimate the impact of a major catastrophe on our cash position to identify potential issues. We also run scenario analysis that considers the impact on our liquidity should a number of adverse events occur simultaneously, such as an economic downturn and declining investment returns combined with unusually high insurance losses.
Regulatory change The insurance industry is exposed to continuous regulatory change, which may impact the capital we are required to hold. We are also exposed to new and emerging risks, including through legal or political decisions or legislative changes.
The Group supports sound prudential regulation as a key element in the stability and sustainability of the insurance and wider financial markets in which we operate. We continuously monitor new regulation and review our internal processes to facilitate compliance. Our approach is to combine local expertise with a globally consistent framework to manage regulatory change and provide effective compliance with the varied and evolving requirements.
Credit risk – brokers We may lose money if the broker fails to pass the premium to us, or if the broker fails to pass the claims payment to the policyholder.
In some instances for large losses, we pay policyholders directly to reduce broker credit risk on material transactions.
Cyber security risk is the threat from globally connected networks such as the internet. It differs from the exposure posed by underwriting cyber risks, which is considered an insurance risk.
Information security risk can result in loss of profit, and legal, regulatory and reputational consequences.
Our stress testing and scenario analysis considers the impact and likelihood of information security exposures to assess their effect on our business, as well as management actions, including response plans.
Our information technology and systems are critical to conducting business and providing continuity of service to our clients, including supporting underwriting and claims processes.
Our stress testing and scenario analysis considers the impact and likelihood of an IT or systems failure, to assess the effect on the business and discuss what management actions could be taken to mitigate the risk.
At Hiscox our core values include challenging convention, to have courage, to provide quality products, to excel in the service we provide and be human in our approach. These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business. Hiscox’s commitment to responsible business practice is reflected in the following.
The environment Hiscox is a founding member of ClimateWise, a global network of over 30 leading insurance companies united by their concern for climate change and the risks it presents to both society and the insurance industry. We have taken part in each of their annual audits of business performance on climate change issues and published the latest version of our annual climate reports, endorsed by senior management. In the 2016 assessment we maintained the same score of 71% as the previous year and were fifth overall. The Hiscox ClimateWise Report 2016 is available at www.hiscoxgroup.com/responsibililty. More information on ClimateWise is available at www.climatewise.org.uk.
We believe in identifying, then minimising, the environmental impact of our business activities, including the direct impact of our own business operations. We seek to reduce the amount of waste our activities produce, and the amount of resources we consume. We are committed to reducing our carbon footprint, and for the business to operate more sustainably. This includes measuring our use of water, energy and other products in order to reduce consumption over time; buying sustainably sourced or energy-efficient products where we can; and minimising waste by recycling products where we can. The Hiscox London office received a Gold Award at the 2016 Clean City Awards for their work in this area.
In 2016, Hiscox continued with our commitment to be a carbon neutral business. Our global emissions continue to be offset through an innovative collaboration with the LifeStraw Carbon for Water project, managed by ClimateCare with the Ministry of Public Health and Sanitation in Kenya. For more information, see the case study in the Hiscox ClimateWise Report 2016 at www.hiscoxgroup.com/responsibility.
The marketplace In 2016, Hiscox London Market was awarded Insurance Team of the Year at the Reactions London Market Awards, as well as Most Innovative Managing Agent and Best Product Innovation for its FloodPlus product at The Lloyd’s Market Innovation Awards. Hiscox UK and Ireland was named Cyber/Technology Risks, Professional Indemnity and Directors’ & Officers’ Team of the Year as well as Underwriting Team of the Year at the Insurance Post Underwriting Service Awards 2016. Direct Asia Insurance (Singapore) Pte Ltd won Best Online Buying Experience at the TripZilla Excellence Awards 2016 and Hiscox USA was recognised in the Top 100 Small
Business Influencer Awards. Hiscox Re and ILS picked up Underwriting Team of the Year at the Insurance Day Awards, where it was recognised for its product development in areas such as cyber insurance and risk aggregation.
Dealing with investors We have a policy of open and transparent communication with our shareholders. Hiscox reports both its half and full year results to investors via a series of presentations, as well as ensuring all relevant Group financial information is available on the corporate website. Senior management and key employees also regularly meet investors and analysts throughout the year to explain and answer questions on our financial performance and business strategy.
There is increasing regulatory focus on the conduct risk in firms’ strategies and business models. We feel very familiar with the concept of conduct, as Hiscox has a long history of putting the customer at the heart of what we do. In 2016 we designed and have begun implementing a conduct risk strategy for Hiscox UK and Europe and Hiscox London Market.
Hiscox is a founding member of ClimateWise, a global network of over 30 leading insurance companies. The environment
Total tonnes CO2e per FTE (Scope 1 and 2) 1.20 1.20 1.15 Scope 3 – air, rail, and personal car business travel 4,906 4,538 4,596
Tonnes CO2e per FTE (all Scopes 1, 2 and 3) 3.68 3.18 3.03 * The 2015 baseline has been re-stated. This is as a result of more accurate actual data available where estimates were previously used.
Inclusion Senior management believe that being successful at Hiscox should be purely down to talent, personal values and effort. Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment, regardless of disability, sex, race, religion, sexual inclination or background. In 2016, we focused on gender with the launch of a new Women in Leadership programme in order to help more women become Hiscox leaders. We see activity in 2016 as a precursor to a broader inclusion agenda in 2017, with Women In Leadership becoming one of our main Group-wide priorities for 2017.
Training and development Hiscox is committed to training and developing our employees to help them maximise their potential. Each permanent member of staff is provided with a tailored personal development programme. Their training and development needs are reviewed twice a year, as well as their performance against clearly set objectives.
Communication and participation Employees are kept informed of business developments through formal briefings, team meetings, intranet bulletins, video conferences and other more informal routes. We listen to the views of our people and involve them in new ideas to take forward the business.
The Hiscox Women in Leadership programme is designed to help more women become Hiscox leaders. Inclusion
2 Strategic report 35 Governance Corporate responsibility 73 Remuneration 101 Financial summary strings chamber camp and an advanced repertoire programme for violin at Ithaca College, New York. Donations were made to assist Bermuda’s youth organisations, including the Bermuda Sloop Foundation, The Family Centre, Outward Bound and Big Brothers Big Sisters, to name a few. Hiscox supports the community with donations to Open Airways, the Bermuda Stroke and Family Support Association, the Matilda Smith Williams Seniors residence and Windreach, as well as the island’s sporting groups through donations to the Bermuda Equestrian Federation and the Bermuda Lawn Tennis Association. Our support of Boccia Bermuda enabled two Bermudian players to participate in the Boccia World Individual Championships in Beijing and the Paralympics in Rio de Janeiro.
In 2016, Hiscox Germany supported two refugee projects in Bavaria and Syria, through the United Nations High Commissioner for Refugees (UNHCR).
The Hiscox Foundation The Hiscox Foundation is a charity, funded by an annual contribution from the Group, which gives priority to any charity in which an employee is involved. In the UK the Foundation contributed over £35,000 during the year to the fundraising totals of Hiscox employees and continues to support the Humanitarian Aid Relief Trust (HART) and Richard House Children’s Hospice. HART helps some of the poorest and most abused people in the world. Richard House Children’s Hospice provides care and support to children and young people who have a life-limiting or life-threatening health condition. In aggregate, the Hiscox Foundation in the UK and USA donated £215,000 during the year.
At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by third-party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 20% of profit on the element it does not own. For the 2017 year of account, Syndicate 33’s capacity has increased to £1,150 million.
The chart right shows the gross premiums written of Syndicate 33 for the last ten years.
* Quota share reinsurance policies, which Lloyd’s allows in certain circumstances, enable a syndicate to write gross premium in excess of its capacity.
51Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance Insurance carriers 73 Remuneration 101 Financial summary
Syndicate 6104 Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account. It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s property catastrophe reinsurance account. The arrangement has been extended through to the 2017 year of account and Syndicate 6104’s capacity was maintained at £56 million. Syndicate 6104 pays an overrider and profit commission to Syndicate 33.
Hiscox Insurance Company (Bermuda) Limited Gross premiums written ($m) external business 53Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance Insurance carriers 73 Remuneration 101 Financial summary
UK and Ireland and European division of Hiscox Ltd. Its principal activity is the transaction of general insurance business, in particular personal and commercial insurance. Personal insurance includes high-value household, fine art and collectibles, as well as luxury motor vehicles. Commercial insurance is focused on small- and medium-sized businesses, particularly for professional indemnity and other liabilities such as employment liability and property risk. The success of the portfolio can be seen in the chart opposite. Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 11.6% from 1997 to 2016. It has significantly improved its combined ratio during this time.
Hiscox Insurance Company Limited has an A.M. Best rating of A (Excellent), a S&P rating of A (Strong) and an A+ (Strong) rating from Fitch. At the end of 2016, net assets were £275 million (2015: £269 million).
Hiscox Insurance Company Inc. Hiscox Insurance Company Inc. was acquired by the Group in 2007 through the purchase of the then parent holding company ALTOHA, Inc.. Hiscox Insurance Company Inc. is based in Chicago, Illinois and is an admitted insurance company with licences in all 50 US states and the District of Columbia. Its main business is commercial property and liability cover sold through insurance brokers and on a direct basis. Hiscox Insurance Company Inc. is rated A (Excellent) by A.M. Best. At the end of 2016, net assets exceeded $72 million (2015: $66 million).
Lynn Carter Independent Non Executive Director (Aged 60) 20 May 2015*
Bronislaw Edmund Masojada Chief Executive Officer (Aged 55) 12 December 2006*
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 was formerly a Director of NASDAQ-listed Rentrak Corporation, stepping down from the Board on completion of its recent merger with comScore, Inc.. Anne is also a former Director of New York Stock Exchange-listed Catalina Marketing Corporation.
Robert (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 multichannel distribution, financial responsibilitybased rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured on business innovation 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.
Auditors PricewaterhouseCoopers Ltd. Dorchester House 7 Church Street West Hamilton HM 11 Bermuda
Ernst Robert Jansen Independent Non Executive Director and Chairman of the Conflicts Committee (Aged 68) 20 November 2008*
Member of the Audit Committee Member of the Conflicts Committee Member of the Remuneration Committee Member of the Nominations Committee
Committee is highlighted in solid *Effective date of Hiscox Ltd contract.
Amanda joined Hiscox in 2006 as Group Human Resources Director. Prior to joining the Group, Amanda worked for Mars, PepsiCo and Whitbread in senior human resources roles in Europe and internationally. Previous roles include: Compensation and Benefits Director for PepsiCo’s restaurants division in Europe and Africa; Group Compensation and Benefits Director for hotel and restaurant company, Whitbread; and Human Resources Director for Marriott Hotels in the UK. In 2016, Amanda also became a Non Executive Director of Micro Focus, a FTSE 100 global software company.
Since joining Hiscox in 1992, Paul has underwritten a broad range of business lines including fine art, high-value household, personal accident, contingency and all types of property. Paul was appointed Divisional Head of Property within Hiscox London Market in 2007 and, in April 2013, promoted to Chief Underwriting Officer, Hiscox London Market, and Joint Active Underwriter of Syndicate 33. Before joining Hiscox, Paul worked as an underwriting assistant for C P Attenborough Syndicate 144 at Lloyd’s and for broker E W Payne.
The Executive Committee was established as a Committee of the Board in February 2015. It makes recommendations to the Board and approves various matters (some of which may also require Board approval).
Bronek joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007 and was Chairman of the Lloyd’s Tercentenary Research Foundation from 2008 to 2014. He is a past President of The Insurance Institute of London and a Past Master of The Worshipful Company of Insurers. He is currently a member of the Board of the Association of British Insurers and a Director of Pool Reinsurance Company Limited.
Richard joined Hiscox in 1986, having previously worked for Sedgwick’s and Hogg Robinson. In 2005, he was appointed Managing Director of Hiscox Global Markets, the largest division of Hiscox by premium income, and was the Underwriter of Syndicate 33 from 2006 to 2009. In 2009, Richard moved to New York and served as the Chief Executive Officer for Hiscox USA for three years. He returned to London in 2012 to become Chief Underwriting Officer for the Hiscox Group. He is a Non Executive Director of White Oak Underwriting Agency Limited.
A Partner’s contribution can be in a variety of ways: through the leadership or development of an important area or line of business, or through technical and operational expertise that benefits the business significantly. Most have taken a risk in their careers and many have made personal sacrifices for Hiscox, whether it be moving into an unproven or new area for the Group or relocating themselves and their families. The Partners are the leaders of our business and individually and collectively influence our Group’s development and success.
Guy Ellis Head of Marine and Aviation Reinsurance, Hiscox Re and ILS
2 Strategic report 35 Governance Hiscox Partners 73 Remuneration 101 Financial summary
James Pilgrim-Morris Head of Professional Indemnity Claims, Hiscox UK and Ireland and Hiscox London Market
Derrick Potton Head of Professions and Specialty Commercial, Hiscox UK and Ireland
David Slevin Divisional Head of Aerospace and Specialty, Hiscox London Market
Damien Smith Director of Underwriting, Hiscox Bermuda, Hiscox Re and ILS
Phil Thorn Head of Direct Home Insurance, Hiscox UK and Ireland
Dear Shareholder As the size and shape of the Hiscox Group continues to grow and develop it is vital that we have in place a robust governance framework to underpin our business model. This goes beyond mere compliance with Codes. It is about having the right culture, a balanced Board with independent Non-Executives and a well-defined network of committees.
The arrangements we have in place are described in detail within this Corporate Governance Statement but it is worth highlighting a few notable events from this year.
s The Remuneration Committee engaged with shareholders, representing 75% of the register, on the renewal of the Remuneration Policy and this will be put to shareholders at the AGM.
s The Terms of Reference of our Conflicts Committee were widened to allow the Committee to act as arbiter on potential conflicts arising from having external investors in the insurance-linked securities funds which we manage.
The needs of a new Director joining the Board are assessed and appropriate training arranged. Directors’ training requirements were assessed using an online questionnaire circulated during the year. Existing Directors are provided with the opportunity to attend training sessions.
During the year Directors received briefings on the new Market Abuse Regulation and the implications for the Group of the result of the UK referendum on membership of the European Union (‘Brexit’). The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and strategy. The Chief Executive has responsibility for running the Group’s business. As previously announced, Hamayou Akbar (Aki) Hussain was appointed as Group Chief Financial Officer and a Director of the Company with effect from 12 September 2016. In accordance with the Company’s Bye-Laws, he will seek re-appointment at the 2017 Annual General Meeting. In accordance with the Code the remaining Directors will also submit themselves for re-appointment. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 54. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting. During the year the Board agreed to set voluntary restrictions on the number of other Directorships a Non Executive Director is permitted to hold. The remuneration of the Non Executive Directors does not include performancerelated elements and is reviewed annually. Whilst the Board acknowledges the value that knowledge and experience of the organisation can bring, it also recognises the need to progressively refresh Board membership over time. Non Executive Directors will normally be expected to serve for six years. They may be invited to serve for longer, but service beyond nine years is unlikely. Any service beyond six years is subject to a particularly rigorous review. Details of the Board succession planning arrangements are set out below in the section describing the Nominations Committee.
All Directors are entitled to seek independent professional advice at the Company’s expense. A copy of any such advice would be provided to the Company Secretary who would then circulate it to all Directors. The appointment and removal of the Company Secretary is a matter for the Board as a whole. As part of the internal Board evaluation conducted during the year Directors were asked to assess the
2 Strategic report 35 Governance Corporate governance 73 Remuneration 101 Financial summary quality of the support they receive from the Company Secretary and the responses were all positive. The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. As part of the Board evaluation Directors were asked to rate the length, structure and timeliness of information provided to the Board and use of summaries. Whilst there were some suggestions for improvement, overall the Directors rated the information 4 out of 5 for appropriateness. The Board of Hiscox Ltd held four scheduled meetings during 2016. The Code does not require the independence or otherwise of a Non Executive Chairman to be considered subsequent to their appointment. Caroline Foulger is a former partner of PwC, the Company’s auditors, but retired from the firm on 31 December 2012 and is considered to be independent. The Board considers all other Non Executive Directors to be independent within the meaning of the Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board’s committees The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs including financial reporting, internal control and risk management. Each committee operates within established written Terms of Reference and each committee Chairman reports directly to the Board.
It was decided to put the audit of the Group out to tender, for the first time, at the end of 2014. The then incumbent auditors were not invited to participate in view of the longevity of their appointment and upon conclusion of the process PwC were recommended by the Audit Committee as the Company’s next auditors and were duly appointed at the 2016 Annual General Meeting. As a tender process has been conducted so recently there are currently no plans to re-tender the audit. The internal and external auditors have unrestricted access to the Committee. All non-audit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Committee. PwC have confirmed to the Committee that in its opinion it remains independent. The Committee is satisfied that this is the
Further information on the activities of the Committee is included in the Audit Committee report on page 66. The Audit Committee
The Remuneration Committee The Remuneration Committee comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. It is chaired by Colin Keogh. The Committee operates according to Terms of Reference published on the Group’s website and generally meets three times a year. The Remuneration Committee takes care to recognise and manage conflicts of interest when receiving views from Executive Directors or senior management or consulting the Chief Executive about its proposals. No Executive is permitted to be present when the Committee discusses his or her remuneration. The Committee’s role in remuneration is described in the remuneration policy report on page 76. The remuneration policy applicable to the Executive Directors is described on pages 76 to 84 and will be put to shareholders at the Annual General Meeting. The overall aim is to attract and retain high-calibre individuals and incentivise them to deliver long-term success for the Company. Executive Directors are subject to malus and clawback provisions in relation to their remuneration and the circumstances in which these would apply are described on page 82. The renewal of the Company’s Performance Share Plan was approved by shareholders at the 2016 Annual General Meeting.
Gunnar Stokholm and is chaired by Ernst Jansen. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and Syndicate 6104 are managed by a Hiscox-owned Lloyd’s Managing Agency. 27.5% of the Names on Syndicate 33 are third parties and 72.5% of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third parties. The Committee serves to protect the interests of the third-party Syndicate Names. There is also potential for similar conflicts to arise as a result of the Group’s insurance-linked securities (ILS) activity and the Committee serves to protect the interests of the external investors in the ILS funds.
The Company commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research, together with the analysts’ research notes, are copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders and analysts.
An alert service is available on www.hiscoxgroup.com to notify any stakeholder of new stock exchange announcements. Shareholder communications
2 Strategic report 35 Governance Corporate governance 73 Remuneration 101 Financial summary
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 this organisation are described on pages 40 to 45 together with an explanation of how they are managed or mitigated. Changes to last year’s principal risks include the addition of ‘strategy evolution and execution’ risk, ‘inadequate reinsurance’ risk and ‘information technology and systems failure’ risk, and the removal of ‘credit rating’ risk and ‘emerging risks’. 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 whilst remaining solvent given its risk profile. This includes a forward looking assessment which considers the business plan over a three-year time horizon.
Financial reporting The primary role of the Audit Committee in relation to financial reporting is to monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and review significant financial reporting judgements contained in them. In carrying out its role the Committee reviewed with both management and the external auditor the appropriateness of the half-year and annual financial statements, concentrating on, amongst other matters: s the quality and acceptability of accounting policies and practices; s the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; s material areas in which significant judgements have been applied or there has been discussion with the external auditor; and s any correspondence from third parties in relation to our financial reporting.
To aid the review, the Committee considered the report of the key judgements in the financial statements from the Chief Financial Officer as well as reports from the external auditor on the outcomes of their annual audit and their half-year review. The Committee is supportive of PwC in displaying the necessary professional scepticism their role requires. The primary areas of judgement considered by the Committee in relation to the 2016 Annual Report and Accounts were: i) Reserving for insurance losses As set out in our significant accounting policies on page 119, the reserving for losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet. The Chief Actuary presented a Group reserving report to the Committee and the Committee reviewed the approach taken by management when making their selection of reserving estimates and is satisfied with the judgements taken and the reporting and disclosure of the estimates.
External auditor Last year we reported on the audit tender process which we had begun in 2014. The conclusion of that process was a recommendation from the Committee to appoint PwC. (In view of my previous association with PwC I played no part in the tender process). That recommendation was endorsed by the Board and PwC were duly appointed as the Group’s auditors at the 2016 Annual General Meeting.
Alongside this we appointed a new Group Head of Internal Audit during the year – Chris Hood, who re-joined Hiscox.
The external auditors provide reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. Any contracts with the auditors, PwC, for non-audit services in excess of £50,000 must be approved by the Committee in advance. Approval will not be given for any contract which may impair the auditor’s independence or objectivity. During the year the value of non-audit services provided by PwC amounted to £315,000 (2015: £144,000). There were no circumstances where PwC was engaged to provide services which might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditors. During the year the Non Executive Directors met with the external and internal auditors without the Executive Directors present so as to provide a forum to raise any matters of concern in confidence.
TESTING TIMES In the autumn of 2016, Hiscox played a lead role in an unprecedented industry-wide ‘dry run’ of a market-turning event: a complex simulation designed to test the preparedness of the London insurance market.
On 6 November 2016, a Category 5 hurricane made landfall in Miami. After devastating Florida’s most densely populated city, it crossed the Gulf of Mexico and barrelled its way towards Louisiana and Texas. Already reeling from the Halloween Blackout event and stock market meltdown caused by the previous week’s cyber-attack, the US found itself confronted by unparalleled financial and humanitarian crises.
“With catastrophes, it’s not if, it’s when,” says Robert Childs, Chairman of Hiscox. “They’re always going to happen. The question is: are we prepared for them when they do?” It was in recognition of the urgency of this question that Robert set about formulating last year’s dry run – an ambitious, time-intensive simulation in which dozens of London Market businesses and institutions were persuaded to participate. “It’s very unusual for a market to drive something like this itself,” he says. “When firms commit to something like this, it’s normally an obligation, imposed by a regulator. But this was a group of businesses deciding to do it together, under their own steam.”
The last time a genuine catastrophe shook the London Market was the terrorist attacks of 9/11. At that time, Robert was among the senior managers at Hiscox forced to navigate a route out of the maelstrom that followed. “9/11 wasn’t necessarily a huge loss financially, but it was a shocking loss,” he explains. “It affected a lot of insurance people directly; Aon and Marsh had offices in the World Trade Center, so we knew some of those who were killed. It also hit America’s financial capital, where a lot of decision-makers worked. It was an Armageddon event, and that made it genuinely very frightening.”
In the immediate aftermath of the events that day in New York and Washington DC, the insurance industry was briefly gripped by what felt like an existential crisis, as insurers struggled to get to grips with their exposure. “There was a lot of fear,” explains Robert. “Initially, a lot of companies weren’t entirely sure if they were even solvent.” But as demand for specialist insurance spiralled and prices followed suit, the London Market recovered. After 9/11, in a relatively flexible regulatory environment, London’s insurers were able to raise new capital, write new business, and slowly steer themselves away from the looming icebergs. Solid strategies for responding
Over the past decade, this generational shift has been accompanied by a significant tightening and reordering of the British insurance industry’s supervisory regime. The European Union’s Solvency II directive has set new capital requirements, and the insurance industry has two new regulators: the PRA and the FCA. In contrast to 2001, says Robert, those who oversee the industry are now “much more interested in whether you’re going bust than they are in what you can do to grow”. It is against this backdrop that the critical interaction between the market and the regulators in a crisis had not yet been rigorously tested.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary centre. “Capital is extremely fluid,” says Robert. “There’s a lot of it around, but there is no longer any guarantee that it would come to London in a major loss event. After 9/11 and the hurricanes of 2005, the majority of capital went to other places that were more receptive and that demonstrated some degree of flexibility. Capital is what fires up the market. The Hiscox head office is in Bermuda, but the London insurance market remains an important part of our operations and so of course I want that market to thrive. But to do that, it needs to be responsive.”
To be effective, the London Market’s response to a catastrophe has to be properly coordinated. The market is, says Robert, “fragmented and syndicated, a complex web”, so for any dry run to have meaning, the many strands of that web needed to be brought together. “I’ve been talking about crisis planning internally for many years, and we’ve done some things on our own, but as Hiscox, we represent just a fraction of the market. For this to work, we had to carry other people with us.”
In the London Market, carriers compete with each other for customers and capital, but the collective commitment to the market as a whole runs deep, so when Hiscox began to pitch the idea of the dry run, it was met with considerable interest. “I spoke to a lot of people and nobody thought it was a bad idea,” says Robert. “A few people didn’t want to get involved, but primarily because they didn’t have the time at what was already going to be a busy time of year in the lead up to year-end renewals. This was going to be immensely hard work – at Hiscox alone, we had at least 25 people working on this intensely at one time or another.”
The exercise was designed to be as broad as possible in its scope: as well as assessing liquidity levels and access to capital, it sought to rigorously examine the participants’ operational readiness – particularly their ability to support clients in their hour of need and pay claims swiftly and fairly. In setting the parameters, Robert was inspired in part by one of the founding legends of the London Market: “There’s a very famous quote from Cuthbert Heath, who founded the non-marine insurance market. After the 1906 San Francisco earthquake, when he was an underwriter at Lloyd’s, he sent a famous instruction to his agent over there: ‘Pay all of our policyholders in full, irrespective of the terms of their policies.’ This proved to be extraordinarily important for the London Market. Some of the other European insurers who were around in America at the time nickel and dimed, and they lost 20 or 30 years of development in the States because people remembered how badly they’d behaved.”
The number of organisations that chose to take part in the ‘dry run’.
Halloween Blackout On Monday 31 October, a cyber-attack on US power stations results in more than 50 generators malfunctioning. The subsequent blackout affects 93 million people across 15 states and lasts for several days, resulting in food shortages, a communications meltdown and reports of environmental damage from industrial failures. Outages last for over two weeks, with a projected insured loss of US$45 billion.
Global equity loss On the first day of the blackout, the New York Stock Exchange pauses trading for only the second time since 9/11. When it reopens on 2 November, values fall by over 10%; a collapse mirrored worldwide. Collectively, global stock values drop by 16.2% over the course of the week.
Reinsurance event While Hurricane Guy Fawkes batters Florida, the CEO of a major reinsurer is forced to resign as an accounting or model validation scandal reaches its crescendo. Potential defaults and delays in reinsurance payments mean that 10% of all reinsurance recoveries related to the storms will not be paid, and a similar proportion will be significantly delayed. The impact of the Halloween Blackout on future reinsurance capacity is also severe.
The exercise tested the mettle of the hundreds of insurance professionals who spent long days locked in its alternate reality – one that had been designed to replicate as closely as possible the intensity of a real-life crisis. “The one problem with a tabletop exercise is that you can’t quite recreate the same real fear, real tension,”
The results of the exercise, published in a comprehensive white paper, London Market looks ahead: preparing for the next big insurance event, have been anonymised so that none of the parties know which numbers relate to which participants – a nod to the natural tension between competition and collaboration that exists in the London Market. Overall, the paper provides a positive view of the market’s financial stability: despite significant losses, the reported liquidity level of every participant remained positive, and all of them expected to be able to recapitalise quickly and efficiently, either through their parent companies or by tapping into a global marketplace which is awash with capital.
None of the conclusions came as any surprise to Robert: “As it turned out, the process ended up saying what I thought it would say: that capital is not a problem anymore; the problem will be the speed of response, of the regulators as well as market participants. It is not just about this market carrying the losses; it is also about seizing the opportunity in a hardened rating environment post-event.”
2 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 25 Additional performance measures 26 Group financial performance 28 Group investments
Hooked on classics 101 Financial summary 102 Independent auditor’s report 108 Consolidated income statement 108 Consolidated statement of comprehensive income 109 Consolidated balance sheet 110 Consolidated statement of changes in equity 111 Consolidated statement of cash flows 112 Notes to the consolidated financial statements 164 Five-year summary
Chairman of the Remuneration Committee’s letter line with profit performance and that the Executive Directors’ portion of that total represents an appropriate share. We acknowledge that this approach is not completely formulaic and therefore we have sought to explain the objectivity applied by the Remuneration Committee in awarding Executive incentives. We have done this on page 86 of the annual report on remuneration.
p Performance Share Plan (PSP): the vesting of share grants is dependent on achieving a post-tax return on equity above the pre-established Hurdle Rate. The value of the vested grant is therefore linked to a growth in net asset value per share over the performance period.
p Executive share ownership: senior managers at Hiscox are encouraged to hold a meaningful number of Hiscox shares. With a considerable amount of personal wealth invested in Hiscox shares, we believe that Directors are aligned with our shareholders and thus focused on net asset growth, total shareholder return and risk management. As at the year end the Chief Executive had a holding equivalent to over 55 times his base salary.
Executive Directors to receive a payment under this scheme, the Company must achieve a pre-tax return on equity for the year in excess of a pre-established Hurdle Rate. If the Hurdle Rate is not met, we simply do not pay bonuses to the Directors. Like our shareholders, we are focused on results. Once the Hurdle Rate is achieved the aggregate size of the bonus pool is calculated based on the level of profits delivered and the Executive Directors’ bonuses are paid from this pool. This profit share approach means that the Remuneration Committee can ensure that the total incentives paid to employees are in
Remuneration Committee’s letter 101 Financial summary we introduced a number of additional restrictions to the policy for 2015 (including holding periods on performance shares, clawback provisions and bonus caps).
Performance and remuneration outcomes As described earlier in this report, Hiscox delivered a record profit of £354.5 million in 2016 through a combination of good underwriting, improved investment returns and a very favourable foreign exchange gain. Post-tax return on equity was 23.0% and net asset value per share grew by 19.2%.
The bonus outcomes described in the Annual Report reflect the year-on-year profit increase of 64% and the pre-tax ROE of 24.2% – significantly above our 7% hurdle.
I am also delighted to say that over the past three years (2014/15/16) Hiscox has delivered an average post-tax ROE of 18.7%. As a result, the 2014 performance share plan grant has vested in full.
Hiscox incentivises long-term performance. Over the last four years, the average annual incentive earned by the Chief Executive has been 200% of salary (of which 50% is deferred over three years). The annual incentive scheme caps payments at 400% of salary for the Chief Executive and payments at the upper end of the range would only be considered for exceptional performance. In 2016 when record profits have been delivered, the bonus outcome represents 64% of the maximum. The long-term performance shares represent the biggest element in the Chief Executive’s single figure for 2016. The value of the original awards granted have increased by over 60% as a result of share price growth and dividends over the last three years, and therefore the number in the single figure mirrors the experience of our shareholders.
The bonus outcomes described in the Annual Report reflect the year-on-year profit increase of 64% and the pre-tax ROE of 24.2% – significantly above our 7% hurdle. Performance and remuneration outcomes
The core function of the Remuneration Committee’s role is to determine: p the overall remuneration strategy, policy and cost for the Group; p the levels and make-up of remuneration for the Executive Directors; p the award of sizeable bonuses to individuals other than the Executive Directors; and p the awards and operation of the Company’s share plans, including the Performance Share Plan.
The new remuneration policy has been drafted to incorporate the restrictions previously adopted by the Company in 2015. These have been communicated to shareholders in prior years and are formalised under the new policy.
maximum capped bonus opportunities for the Executive Directors and an upper limit on the variable incentives which may be granted under the recruitment policy; p clawback – this safeguard provision was adopted in 2015 to complement the existing malus provision. It has now been formalised within the new policy; and p holding period – for PSP awards granted from 2015 onwards, a two-year holding period applies following the end of the performance period.
In prior years, the Company consulted with major shareholders regarding the restrictions described above and generally received positive feedback in respect of the changes.
Operation Retirement benefits These vary by local country practice but all open Hiscox retirement schemes are based on defined contributions or an equivalent cash allowance. This approach will be generally maintained for any new appointments other than in specific scenarios (e.g. local market practice dictates other terms). For current Executive Directors, a cash allowance of up to 10% of salary is paid in lieu of the standard employer pension contribution.
Executive Directors’ benefits are determined on a basis consistent with all employees.
Bonus awards are subject to malus and clawback provisions as described in the notes to the policy table on page 82.
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 86.
Operation Awards are granted under the Performance Share Plan approved by shareholders in 2016 (with previous awards granted under the equivalent plan implemented in 2006). All awards are governed by the rules of the relevant plan under which they are granted.
Dividends (or equivalents) may accrue on vested shares prior to release. Awards are subject to malus and clawback provisions as described in the notes to the policy table on page 82.
Performance metrics The performance conditions for awards are set to align with the long-term objectives of the Company.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. Details of targets for awards to be granted in 2017 are set out on page 87.
Operation Within five years of becoming an Executive Director, individuals will normally be expected to own Hiscox shares valued at 150% of salary.
Executive Directors are required to hold more shares than other senior managers.
The current fees payable to Non Executive Directors are set out on page 88.
Chairman The Chairman typically receives an all-inclusive fee in respect of the role. In addition to his fees the Chairman may be provided with incidental benefits (e.g. private healthcare and life assurance). The remuneration of the Chairman is determined by the Committee.
Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for further duties (e.g. Board Committee membership and chairmanship). The fees for the Non Executive Directors (excluding the Chairman) are determined by the Chairman.
The Company operates a bonus pool approach for the annual incentive. This ensures that both individual bonus levels and overall spend are commensurate with the performance of the Company. The Committee applies judgement based on a range of factors (as described in the table on pages 77 to 81) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than based on a formulaic outcome. The profit pool approach currently used ensures that overall bonus amounts are aligned to the performance of the Company and remain appropriate and affordable.
The 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. Recent awards have been based on ROE performance – the key indicator of the Company’s long-term success.
Malus and clawback provisions In respect of unvested compensation, specifically deferred bonuses and unvested performance share plan awards, the Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, cancel or impose further conditions in the following circumstances: p a retrospective material restatement of the audited financial results of the Group for a prior period error in accordance with IAS 8; p actions of gross misconduct, including fraud, by the participant or their team leading to the Company suffering significant reputational or financial damage.
and other elements which will be forfeited by the candidate; p transition implications on initial appointment.
The Committee will always aim to provide a remuneration package which is consistent with the overall Hiscox approach.
A ‘buy-out’ payment/award may be necessary in respect of arrangements forfeited on joining the Company. The size and structure of any such buy-out
2 Strategic report 35 Governance 73 Remuneration Remuneration policy report 101 Financial summary no contractual termination payments being due and subject to retirement pursuant to the Bye-laws at the Annual General Meeting. The contract for the Chairman is subject to a six-month notice provision on either side.
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, therefore this will include base pay, pension contributions (or cash allowance as appropriate) and other benefits (e.g. healthcare).
4. Unvested Performance Share Plan awards Treatment would be in accordance with the plan rules and relevant grant documentation. The intended approach is summarised below: p awards will vest in line with the normal scheme vesting date (unless the Committee determines otherwise). Awards vest to the extent that the relevant performance target is considered to have been met; 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.
If the departing Executive Director does not sign a release of claims, they would normally be entitled to payments defined under point 1 only. In the event that the Executive is dismissed for gross misconduct, they would forfeit any payments under UK and Bermudian employment law. In the event of a voluntary resignation to join another company, no payments would normally be made other than remaining on the payroll, with associated benefits during the contractual notice period of six months.
The PSP performance measures are intended to motivate and reward to deliver long-term Company success. Performance measure targets and target setting arrangement will take account of relevant factors in respect of the forfeited terms including potential value, time horizons and any performance conditions which apply. The objective of the Committee will be to suitably limit any buy-out to the commercial value forfeited by the individual.
Service contracts It is the Company’s policy that Executive Directors should have service contracts with an indefinite term which can be terminated by the Company by giving notice not exceeding 12 months or the Director by giving notice of six months. Non Executive Directors are appointed for a three-year term, which is renewable, with three months’ notice on either side,
2 Strategic report 35 Governance 73 Remuneration Remuneration policy report 101 Financial summary
Variable remuneration Assumptions have been made in respect of the annual incentive and the PSP for the purpose of these illustrations. p Annual incentive: the amounts shown in the scenarios are for illustration only. In practice the award would be determined based on a range of performance factors, and therefore vary depending on the circumstances. The maximum award reflects the incentive caps described at the beginning of this report.
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: assume vesting of 50% of the maximum award.
of salary for the CUO. p PSP: assumes vesting of 100% of the maximum award.
Annual report on remuneration 2016 This report explains how the remuneration policy was implemented for the financial year ending 31 December 2016 and how it will be applied for the 2017 financial year.
Executive Director remuneration The table below sets out the remuneration received by current Executive Directors for the financial years ended 31 December 2016 and 31 December 2015.
Chief Financial Officer 2015 – – – – – – 1 Salaries are reviewed from 1 April, further detail on April 2016 increase can be found below. 2 Benefits for Executive Directors include cover under the Company healthcare scheme, life insurance, income protection insurance and critical illness policies as well as gym membership and a Christmas gift hamper.
3 A proportion of the bonus amount is deferred as set out on page 79 of the policy report. 4 2016 long-term incentives relate to performance share awards granted in 2014, or on joining in the case of HA Hussain, where the performance period ends on 31 December 2016. The award is due to vest on 17 March 2017. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2016 of 1035.56p. The 2015 long-term incentive award relates to performance share awards granted in 2013 where the performance period ends on 31 December 2015. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the share price on 4 April 2016 of 967.00p.
In line with the remuneration policy, the Executive Directors, along with other employees across the Group, participated in the 2016 profit-related bonus pools. These pools were calculated at a business unit level and for the Group as a whole on the basis of a set percentage of profits on achievement of a return on allocated equity hurdle (‘Hurdle Rate’). The Hurdle Rate is set annually by using an investment benchmark rate which takes account of one-to-three year gilt and treasury yields, cash returns and the general investment environment. The return on equity Hurdle Rate for the 2016 financial year was set at 7%, which was 5% above the investment benchmark rate.
The Remuneration Committee believes that the most appropriate measure for the calculation of the bonus pool is return on equity as it aligns managements’ interests most effectively with shareholders’ interests and minimises the possibility of anomalous results. It enables the Committee to ensure that Executive Directors’ and other employees’ incentives are aligned with the Company’s profit performance.
In determining the 2016 incentive payments the Remuneration Committee considered the following: p the 2016 pre-tax return on equity was 24.2%. This is significantly in excess of the 7% hurdle and therefore a bonus pool can be created; p profit before tax in 2016 increased by over 60%; p as part of the risk management safeguards in place, the Committee reviewed adherence to reserving policies and the strength of the overall capital position; p the personal performance of BE Masojada and RC Watson was strong. Personal performance is assessed by taking account of achievement of strategic objectives, adherence to effective risk management and good management of ongoing business metrics. A successful performance review enables full participation in the bonus pool; p HA Hussain was new in role, therefore his incentive payment took account of his buyout agreement from the 2016 Prudential incentive scheme as well as the Hiscox 2016 financial results; p in determining the size of the Executive Director bonuses, the Committee also looked at the pattern of historic profit, ROE and bonus outcomes.
Bonus awards for the 2017 financial year The bonus return on equity Hurdle Rate has been reviewed as described above and will remain unchanged for the 2017 financial year at 7%.
Minimum threshold vesting 7 25 Maximum vesting 14.5 100 Straight-line vesting between these points
Based on the three-year average return on equity of 18.7%, the awards ending with the 2016 performance year will vest at 100% on 17 March 2017. Executive Directors will also receive dividend equivalents in the form of additional awards based on dividends paid during the three-year performance period. The estimated value of these awards is covered in the Executive Director remuneration table on page 85.
The performance conditions for these awards are as follows: Required average post-tax ROE
PSP awards to be granted during 2017 In the coming year, the Committee intends to grant awards to Executive Directors and the performance conditions and targets will be unchanged from the 2016 awards.
BE Masojada, RC Watson and HA Hussain hold lifetime allowance protection certificates and have therefore opted out of the Company pension scheme. They receive a 10% cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. The value of this benefit is shown in the Executive Director remuneration table on page 85.
In respect of the 2016 financial year, HA Hussain was granted an award of 75,000 Hiscox shares subject to the rules of the PSP and performance conditions which will be measured over the 2016, 2017 and 2018 financial years and will vest in 2019, but will be required to be held (net of taxes) for a further two years. This award will be subject to malus, clawback and holding period.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2016 and 31 December 2015.
2016 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.24. 2015 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.529.
Directors’ shareholding and share interests We strongly believe that senior managers within Hiscox should be aligned with Hiscox shareholders by owning a minimum number of Hiscox shares. Formal shareholding guidelines are in place which mean that within five years of becoming an Executive Director, the Director will be expected to own Hiscox shares valued at 150% of salary. BE Masojada and RC Watson have over 20 and 30 years’ service respectively and as such their shareholdings far exceed the guidelines.
Performance Share Plan The interests of Executive Directors under the Performance Share Plan are set out below: Number of awards at
Share options The interests of Executive Directors under the Sharesave Schemes are set out below: Number of options at 1 January 2016
BE Masojada 1,744 – – (1,744) – 5.160 10.210 01-Dec-16 31-May-17
Performance graph The graph above shows the total shareholder return of the Group against the FTSE All Share and FTSE Non Life Insurance indices. These reference points have been shown to assess performance against reference points from the general market and industry peers.
Table of historic data The table below shows the single total remuneration figure for the Chief Executive for the past eight years.
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2015 and 2016 financial years. We have chosen UK-based employees as the comparator group for base salary and benefits as this is where the Chief Executive is based and this allows for the closest comparison in terms of salary increases which take into account country inflation and the benefits package provided. For bonus we have used Group employees as the comparator. The change is based on employees who were employed and eligible for a salary review and bonus in both financial years.
Relative importance of the spend on pay The charts above shows the relative movement in profit, shareholder returns and employee remuneration for the 2016 and prior financial year. Shareholder return for the year incorporates the distribution made on behalf of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct in relation to executive remuneration consulting in the UK. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views and on the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £25,150. The Committee is satisfied that the advice they have received has been objective and independent. During the year Deloitte also provided other HR consulting services.
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the US, the UK, Guernsey, Europe and Asia. The information that fulfils the requirements of the management report as referred to in Chapter 4 of the Disclosure Guidance and Transparency Rules (DTR), including additional explanation of amounts included in the financial statements and the branches of the Group in different countries, can be found on pages 10 to 17, 36 to 45 and 112 to 163.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in DTR 7.2 can be found on pages 61 to 65 and in this report.
Dividends An interim dividend of 8.5p (net) per ordinary 6.5p share (2015: 8p (net), per ordinary 6.5p share) was paid on 9 September 2016 in respect of the year ended 31 December 2016. The Directors are proposing payment of a final dividend in respect of the year ended 31 December 2016 of 19.0p which will be paid on 20 June 2017 to shareholders on the register at 12 May 2017. In the previous year a special dividend of 16p per share as well as an amount in place of a final dividend of 16p were paid. The Directors have decided to offer a scrip alternative.
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 24 to the consolidated financial statements. The ordinary shares of 6.5p each are the only class of shares presently in issue and carry voting rights. There is power under Bye-law 45 of the Company’s Bye-laws for voting rights to be suspended if calls on shares are unpaid. However, there are no nil or partly paid shares in issue on which calls could be made. The Bye-laws also allow the Company to investigate interests in its shares and apply restrictions including suspending voting rights where information is not provided. No such restrictions are presently in place. The Company was authorised by shareholders at the 2016 Annual General Meeting to purchase in the market up to 10% of the Company’s issued ordinary shares. No shares have been bought back under this authority as at the date of this report.
Biographical details of the Directors are set out on pages 54 and 55 and the reasons why the Board believe they should be appointed or re-appointed will be set out in the circular which will accompany the notice of Annual General Meeting.
Note 24 to the consolidated financial statements on employee share schemes (page 146)
Invesco Limited1 37,662,240 13.18 Massachusetts Financial Services Company1 27,742,612 9.71 * Per RNS announcement there were 285,703,853 shares in issue (excluding Treasury shares) as at 31 December 2016.
We confirm that to the best of our knowledge: – the financial statements, prepared in accordance with the applicable set of accounting standards, present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
The Directors 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 27 February 2017.
The London to Brighton Veteran Car Run has been organised by the Royal Automobile Club since 1930. Held every year on the first Sunday in November, the event re-enacts the Emancipation Run of 1896, which celebrated the raising of the speed limit for ‘light locomotives’ from four to 14 miles per hour and the abolition of the requirement for a man to walk ahead of every car, waving a red flag. For the 2016 run – and for two more years to come – the event’s supporting partner is Hiscox.
The run (it is categorically not a ‘race’) is a sight to behold. There are cars of all shapes and sizes: tricycles, dogcarts, waggonettes. The most basic resemble motorised picnic hampers; others are truly beautiful, with paintwork in deep reds and greens, soft leather seats, and brass metalwork buffed to a dazzling sheen. The drivers and passengers are just as well turned out, bedecked in waxed jackets, vintage hats, scarves and goggles – think Toad of Toad Hall, but without his reckless disregard for safety.
Among the passengers in 2016 was Justin Gott, Head of Art and Private Client at Hiscox UK and Ireland, who found himself in a striking 1903 Mors. “It was such an experience,” he says. “You set out in the heart of London, heading through the city as it slowly wakes up. You make your way into leafy suburbia, then out into the countryside. The event draws huge crowds, and everyone enjoys the spectacle – even the drivers who get stuck behind you while you’re crawling along the A23. Nobody seems to mind.”
In the UK, the business already has strong partnerships with all of the leading brokers in this field. In 2015 Hiscox further boosted its capabilities with the acquisition of RH Specialist Insurance, a classic car insurer which this year celebrates its 40th birthday. “It’s a very strong and well established brand in the classic car world, the service is good, and so is the proposition,” says Justin. “RH Specialist Insurance has 40,000 customers paying an average premium of just over £200 – it’s high volume, low premium business and brings scale and access to a market we wouldn’t otherwise have. This means that we can now accommodate anything from the £100 premium to the £100 million collection.”
Over the next few years, Hiscox UK and Ireland will continue to invest in its capabilities in the classic car market. “We already have a lot of classic cars insured on our luxury motor insurance policy,” explains Justin, “but for those people who are attracted to the Hiscox brand, we want to give them a unique proposition that works for their classics and a separate one that works for their luxury motors: their needs are different, and we want to attract both types of customer.”
“We want to be a top three specialist classic car insurer in the UK by 2020, and we have big ambitions in Germany too, where we believe the opportunity is massive.” says Justin. “Classic car covers a huge range of insurance. It encompasses insurance for established multi-million pound collections, museums, dealers, restorers, and private owners with that one special classic car. We get to know their specific needs, create propositions that meet those needs and deliver them in a way that suits the customers’ buying habits.”
Hooked on classics continued We want to be a top three specialist classic car insurer in the UK by 2020.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary certain artist,” says Justin. And, just like art, the value of classic cars can fluctuate rapidly, making accurate valuation a tricky prospect and one that requires a flexible approach to underwriting.
The classic car scene is sub-divided into highly specialised groups, the nuances of which need to be carefully understood by insurers. “You have the London to Brighton scene, you have the Edwardians, the pre-war, the post-war, the specialist US scene, the motorcycles, the racetrack scene – each one is separate and different,” explains Rainer Peukert, Partnership Manager for Classic Cars at Hiscox Europe, who has been collecting classic cars for 30 years, starting with a Plymouth Barracuda that he liberated from a breaker’s yard at the age of 17.
The existence of these coherent subcultures, shaped by their respective membership organisations, enables insurers to create strong bonds through support and partnerships. For example, RH Specialist Insurance has very close and long-standing ties with the Rolls-Royce Enthusiasts’ Club and the Bentley Drivers Club, whose combined worldwide membership exceeds 13,000.
Sponsorship of races and events provides Hiscox with the opportunity to gain valuable visibility. In 2016, Hiscox was a sponsor at the International Edelweiss Bergpreis Rossfeld Berchtesgaden and the Stadtrallye Hamburg, as well as having a presence at several other German classic car meets. Rainer, with his sizable collection of cars, is also a great ambassador for the brand: in 2016 he attended 68 events over 40 weekends, both in Germany and further afield. Like many of his countrymen, he particularly enjoys driving in Italy: “A lot of German collectors drive in rallies in Italy. It’s the nice weather, the lifestyle. They want to have fun in their cars, and they don’t want rain!”
Over the next five years, the potential market in Germany is going to grow from 500,000 cars to 6.5 million cars. There are so many opportunities for an insurer that understands the scene.
Classic car insurance is a growing marketplace, as the passage of time slowly turns old cars into collectibles. “In Germany, the car has to be 30 years or older to qualify as a classic car,” explains Rainer. “1986 and 1987 had very big productions of very popular cars: the Mercedes 190, the E30 BMW, the Porsche 911. Over the next five years, the potential market in Germany is going to grow from 500,000 cars to 6.5 million cars. There are so many opportunities for an insurer that understands the scene.” The prospect of growth in other areas as a direct result of success in this sector is also very real. “The classic car customers are people who we’d want to insure for many different types of insurance, and as our classic car business grows, we have many thousands of opportunities to do just that,” says Justin. A collector who is happy with the service you provide for something about which they are truly obsessed is likely to trust you with the more functional aspects of their insurance as well. As Jan says: “One broker told me, for an insurance company, the easiest way to get in is through the biggest door in the house: the garage door.”
“There’s definitely an emotional element,” adds Justin. “You see it in a fine art collector. You see it in somebody who has restored a beautiful period home over ten years. You see it in anybody who has worked hard to get what they love and wants us to help them look after it. If the worst happens, we’ll be there – and they know that, because we’re Hiscox.”
Financial summary 2 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 25 Additional performance measures 26 Group financial performance 28 Group investments
What we have audited Hiscox Ltd’s consolidated financial statements comprise: A the consolidated income statement for the year ended 31 December 2016; A the consolidated statement of comprehensive income for the year ended 31 December 2016; A the consolidated balance sheet as at 31 December 2016; A the consolidated statement of changes in equity for the year ended 31 December 2016; A the consolidated statement of cash flows for the year ended 31 December 2016; and
A the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
Audit scope As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below.
A Overall group materiality: £12 million, which represents 5% of the average profit before tax over the past three years.
A We conducted an audit of five full scope components covering over 90% of the Group’s consolidated assets, and revenues. Each of the components were audited by local component audit teams, located in the United Kingdom and Bermuda. The Group engagement team had regular interaction with the aforementioned component teams, and the engagement leader performed site visits during the audit process.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £600,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Independent auditor’s report
Valuation of incurred but not reported (IBNR) loss reserves See notes 2.13, 2.21, 3 and 26 of the consolidated financial statements for disclosures of related accounting policies, judgments and estimates.
As historical claims data is a key input into the actuarial reserving process, we tested the completeness, accuracy and reliability of the underlying data utilised by management, to support the actuarial valuation.
In order to challenge management’s assumptions and methodologies, we were assisted by our actuarial specialist team members who performed independent re-projections on selected classes of business, particularly focusing on the largest and most volatile reserves as these were considered higher risk. For these classes we compared our independent claims reserve estimates, to those booked by management, and sought to understand any significant differences.
In relation to catastrophe reserves, we also tested the point estimate to specific notifications received confirming event data.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: A identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; A obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; A evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; A conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; A evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; A obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to
107Hiscox Ltd Report and Accounts 2016 communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Going concern The Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements, as explained on page 93. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.
In our opinion, the part of the report on directors’ remuneration to be audited has been properly prepared in accordance with the UK Companies Act 2006.
Share of profit from associates after tax 16 134 1,007 Profit before tax 354,543 216,100
Profit for the year (all attributable to owners of the Company) 336,986 209,895
Profit for the year 336,986 209,895 Other comprehensive income Items that will not be reclassified to profit or loss: Remeasurements of the net defined benefit obligation (46,531) 28,236 Income tax on the remeasurement of other comprehensive income 9,502 (6,762)
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations 111,094 34,478 Income tax on the remeasurement of other comprehensive income – –
108 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
Deferred acquisition costs 17 346,592 271,517 Financial assets carried at fair value 19 3,792,033 2,921,585
Current tax 21,735 4,884 Trade and other payables 27 599,202 416,358 Total liabilities 4,823,375 3,775,172 Total equity and liabilities 6,641,778 5,304,001
The notes on pages 112 to 163 are an integral part of these consolidated financial statements.
Consolidated balance sheet 109Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
Consolidated statement of changes in equity 110 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
Charges in respect of share-based payments 9, 24 26,274 17,726 Other non-cash movements – (782)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 251,836 38,975 Financial assets carried at fair value (431,324) (5,606) Financial liabilities carried at fair value 458 (7,093) Financial liabilities carried at amortised cost 156 – Other assets and liabilities 3,687 41,441 Interest received 55,273 40,768 Equity dividends received 505 1,027 Interest paid (21,852) (8,453) Current tax paid (6,108) (27,757) Cash derecognised on loss of control (17,477) (342,655) Cash flows from subscriptions (paid)/received in advance (4,000) 123,000 Net cash flows from operating activities 39,416 71,521
Proceeds from long-term debt issue, net of fees – 273,909 Distributions made to owners of the Company 24, 32 (112,656) (209,428) Net cash flows from financing activities (149,658) 59,198 Net (decrease)/increase in cash and cash equivalents (123,773) 71,031
Cash and cash equivalents at 1 January 727,880 650,651 Net (decrease)/increase in cash and cash equivalents (123,773) 71,031 Effect of exchange rate fluctuations on cash and cash equivalents 60,709 6,198 Cash and cash equivalents at 31 December 23 664,816 727,880
Consolidated statement of cash flows 111Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
2 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 at note 2.21.
The Group has financial investments and cash of over £4.4 billion. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
A review of the financial performance of the Group is set out on pages 26 to 27. The financial position of the Group, its cash flows and borrowing facilities are included therein. In addition, note 3 to the financial statements provides a detailed discussion on the insurance and financial risks which are inherent to the Group’s business and how those risks are managed.
Changes in accounting policies A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on or after 1 January 2016. 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.
Annual Improvements to IFRSs 2010 – 2012 Cycle – IAS 19: Employee Benefits
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2017 and have not been applied in preparing these financial statements. – IFRS 17 will replace IFRS 4 and is expected to include a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard will likely have a significant impact on the results of the Group. In addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2021 is likely to be the earliest date for the adoption of a new standard. The date of release of the standard is not yet known. – IFRS 9: Financial Instruments; Classification and Measurement. The new standard is effective for annual periods beginning on or after 1 January 2018. The IASB has stated they will allow insurers to defer implementation of IFRS 9 until the earlier of the effective date of IFRS 17 and 2021. The Group will adopt the deferral approach to better align the implementation of the new standards. The Group qualifies for the deferral option by having a ratio of Insurance Liabilities to Total Liabilities greater than 80% and by not having any significant non-insurance related activities. A full impact analysis is expected to be completed at least 12 months prior to the effective date of the standard. – IFRS 15: Revenue from Contracts with Customers replaces IAS 18 and is effective from 1 January 2018. Revenue from contracts accounted for under IFRS 4 is outside the scope of IFRS 15. The new standard’s requirement for accounting of variable consideration could change the timing of revenue recognition for non-insurance contracts issued by the Company. The impact of this standard is expected to be limited to the timing of the recognition of profit commission, and not deemed to have a material impact at December 2016. – IFRS 16: Leases, will take effect from 1 January 2019 and specifies how the Company will recognise, measure, present and disclose leases. The standard requires lessees to implement a ‘right-of-use’ model, 2 Significant accounting policies 2.2 Basis of preparation Changes in accounting policies continued replacing the ‘risks and rewards’ model of IAS 17. The new standard will therefore require the Company to recognise an asset and liability at the inception of nearly all leases. The impact of the new standard on the 2016 consolidated statement of financial position would have been an increase in assets and liabilities by £51.3 million. There is little change in how the Company is required to account for leases in the instances where the Company is the lessor.
Hiscox Dedicated Corporate Member Limited (‘HDCM’) underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and 3624). As at 31 December 2016, HDCM owned 72.5% of Syndicate 33 (2015: 72.5%), and 100% of Syndicate 3624 (2015: 100%). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
The Kiskadee Diversified Fund and Kiskadee Select Fund (‘Kiskadee Funds’) were launched in 2014 to provide investment opportunities to institutional investors in property catastrophe reinsurance and insurance-linked strategies. The Group made an initial investment of £30.2 million in the Kiskadee Funds. The Kiskadee Funds are managed by Kiskadee Investment Managers Ltd which is a wholly owned subsidiary of the Group. All of the Kiskadee 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 Kiskadee Funds.
Following a significant inflow of capital from third-party investors during 2015, the Group determined that it no longer meets the criteria for consolidation of the Kiskadee Funds and SPIs from 1 July 2015 as defined in IFRS 10.
As at 31 December 2016, the Group recognised a financial asset at fair value of £46.8 million (2015: £40.0 million) in relation to its investment in the Kiskadee Funds (note 19). In assessing the maximum exposure to loss from its interest in the Kiskadee Funds and SPIs, the Group has determined it is no greater than the fair value recognised as at the balance sheet date. The total size of the funds were £683 million at 31 December 2016.
On 9 March 2016 the Group reached an agreement to sell the Hong Kong entities of the DirectAsia business to Well Link Group Holdings Limited. The transaction subsequently received regulatory approval from the Office of the Commissioner of Insurance (OCI) in Hong Kong.
The Group is exposed to credit risk associated with reinsurance recoverables on risks fronted for the Kiskadee SPIs. Note 3.2(d) discusses how the Group manages credit risk associated with reinsurance assets.
The operations of the Kiskadee 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 Kiskadee Funds or SPIs.
are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
will provide economic benefits over an indefinite number of future periods. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the fair value of consideration of an acquisition over the fair value of the Group’s share of the net identifiable assets and contingent liabilities assumed of the acquired subsidiary or associate at the acquisition date.
Goodwill is allocated to the Group’s cash generating units identified according to the smallest identifible unit to which cash flows are generated.
(b) Syndicate capacity The cost of purchasing the Group’s participation in the Lloyd’s insurance syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurance market, the Board believes that the Group’s ownership of syndicate capacity 2 Significant accounting policies 2.5 Property, plant and equipment continued 115Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
2.9 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
(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 nonfinancial 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.
(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; 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.
2.12 Revenue Revenue comprises insurance and reinsurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales-based taxes collected on behalf of third parties. Profit commission is calculated and accrued based on the results of the managed syndicate. The fee and profit commission equates to approximately 20% of profit on the element of the managed syndicate.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
immediately. If the adverse development exceeds the original loss, deferred gains are recorded. The deferred gains are subsequently recognised into earnings over the settlement period of the reserves.
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 liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.
2.14 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from for losses arising from liability adequacy tests (‘the unexpired risk provision’). Any DAC written-off as a result of this test cannot subsequently be reinstated.
Reinsurance liabilities primarily comprise premiums payable for outwards reinsurance contracts. These amounts are recognised in profit or loss proportionally over the period of the contract. Receivables and payables are recognised when due.
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. When the terms and conditions of an equity settled share-based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the pre-modification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
insurance contracts issued by the Group. The calculation of the defined benefit obligation is performed annually by a qualified actuary using the projected unit method. As the plan is closed to all future benefit accrual, each participant’s benefits under the plan are based on their service to the date of closure or earlier leaving, their final pensionable earnings at the measurement date and the service cost is the expected administration cost during the year. Past service costs are recognised immediately in income.
To the extent that a surplus emerges on the defined benefit obligation, it is only recognisable on the asset side of the balance sheet when it is probable that future economic benefits will be recovered by the scheme sponsor in the form of refunds or reduced future contributions.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. Plan assets exclude any 2 Significant accounting policies 2.14 Deferred tax continued 118 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element, as shown in note 30.
classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
The preparation of financial statements requires the use of significant estimates, judgements and assumptions. The Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of deferred tax assets and liabilities as being most critical to an understanding of the Group’s result and position.
outflows are typically triggered by the occurrence of insured events noncorrelated to financial markets, and not by the inclination or will of policyholders.
The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and unprecedented, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodeled risks. This means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates modeled by management.
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2016
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2015
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 and professional and technological liability risks rather than human bodily injury risks, which are only accepted under limited circumstances.
contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
Marine and major property contracts are normally underwritten by reference to the commercial replacement value of the property covered. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and time taken to restart or resume operations to original levels for business interruption losses are the key factors that influence the level of claims under these policies. The Group’s exposure
At 31 December 2016, the Group holds asset-backed and mortgagebacked fixed income instruments in its investment portfolio, but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group did not experience any material defaults on debt securities during the year.
(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
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.
The Group’s provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
3 Management of risk 3.1 Insurance risk i) Underwriting risk Casualty insurance risks continued 123Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
At 31 December 2016, no amounts were outstanding on the Group’s borrowing facility (2015: £nil). At 31 December 2016, the Group had long-term debt of £275 million (2015: £275 million) being fixed-to-floating rate notes, as explained in note 19. The floating rate becomes effective from November 2025. 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 33.
investments would tend to fall and vice versa if credit spreads remained constant.
(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 2016 was £305 million (2015: £260 million). These may be analysed as follows: Nature of equity and unit trust holdings 2016
(c) Interest rate risk Fixed income investments represent a significant proportion of the Group’s assets and the Board continually monitors investment strategy to minimise the risk of a fall in the portfolio’s market value which could affect the amount of business that the Group is able to underwrite or its ability to settle claims as they fall due. The fair value of the Group’s investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates rise, the fair value of the Group’s debt and fixed income 3 Management of risk 3.2 Financial risk continued 124 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
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.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and unit trusts, based on S&P or equivalent rating, is presented below: The Group Credit Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance as well as detailed analysis from a dedicated in-house security consultant. The financial analysis of reinsurers produces an assessment categorised by S&P rating (or equivalent when not available from S&P).
The largest counterparty exposure within the AAA rating at 31 December 2016 and 2015 is the German government. For the AA rating it is with the US Treasury at both 31 December 2016 and 2015. A significant proportion of other/non-rated assets are rated BBB and BB at both 31 December 2016 and 2015.
Between one and two years 1,004,085 3,054 – 1,007,139 836,800 Between two and five years 1,182,680 499 – 1,183,179 922,242 Over five years 521,484 – – 521,484 345,350
Reinsurance inwards 227,438 117,669 123,975 42,663 511,745 Property – marine and major assets 119,114 73,272 78,464 27,488 298,338 Property – other assets 202,617 84,902 41,573 11,223 340,315 Casualty – professional indemnity 231,754 243,872 279,303 117,541 872,470 Casualty – other risks 86,609 72,901 138,789 63,555 361,854 Other* 103,556 31,794 29,051 16,701 181,102 Total 971,088 624,410 691,155 279,171 2,565,824
The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operations in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net investments made in European and Asian operations. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. Exchange rate derivatives are used when appropriate to shield the Group against significant movements outside of a defined range.
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities, intended to produce a natural hedge. Due attention is paid to local regulatory solvency and risk-based capital requirements. Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £249 million (2015: £218 million) which are denominated in foreign currencies.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2016 Sterling
Employee retirement benefit obligations 56,139 – – – 56,139 Deferred tax 17,030 – – – 17,030 3 Management of risk 3.2 Financial risk continued 127Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Intangible assets 118,408 7,220 – 594 126,222 Property, plant and equipment 39,278 4,787 1,250 1,194 46,509 Investments in associates 13,019 – 506 – 13,525 Deferred tax – 34,224 923 – 35,147 Deferred acquisition costs 63,972 171,023 29,873 6,649 271,517 Financial assets carried at fair value 579,508 2,013,688 287,284 41,105 2,921,585 Reinsurance assets 61,527 420,967 31,869 24,447 538,810 Loans and receivables including insurance receivables 203,551 355,008 40,425 20,579 619,563 Current tax asset – – 3,194 49 3,243 Cash and cash equivalents 378,126 204,419 80,088 65,247 727,880 Total assets 1,457,389 3,211,336 475,412 159,864 5,304,001
(g) Limitations of sensitivity analysis The sensitivity information given in notes 3(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 at note 30 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
3 Management of risk 3.2 Financial risk (f) Currency risk continued 128 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
3.3 Capital risk management The Group’s primary objectives when managing its capital position are: – to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; – to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; – to maintain an efficient cost of capital; – to comply with all regulatory requirements by a significant margin; – to maintain financial strength ratings of A in each of its insurance entities; and – to settle policyholders claims as they arise.
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded capital modeling tools within its business. These join together short-term and longterm business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
Syndicate 33 benefits from an A.M. Best rating of A (Excellent). In addition, the Syndicate also benefits from the Lloyd’s ratings of A (Excellent) from A.M. Best, A+ (Strong) from S&P and AA- (Very strong) from Fitch.
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through Hiscox Insurance Company Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company Inc. is driven by the level of resources necessary to maintain both regulatory requirements and the capital necessary to maintain financial strength of an A rating.
Gearing The Group currently utilises gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: – Letter of Credit and revolving credit facility – the Group’s main facility of $500 million may be drawn as cash (under a revolving credit facility), utilised as Letter of Credit or a combination thereof, providing that the cash portion does not exceed $300 million. This facility was reduced to $500 million from $875 million in December 2015 by the Company’s subsidiary Hiscox plc with the maximum cash portion reduced from $400 million. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2016, 2017 and 2018 years of account. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2016 US$10 million was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings (2015: US$71.9 million and £nil million respectively) to support general trading activities; – £275 million of fixed-to-floating rate subordinated notes that are classified as Tier 2 debt. This was raised in November 2015 and matures in 2045. The debt is rated BBB- by S&P and Fitch; – external Names – 27.5% of Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 20%; – Syndicate 6104 at Lloyd’s – with a capacity of £56 million for the 2017 year of account (2016 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.
3 Management of risk continued 129Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The BMA’s new regulatory capital requirements became effective on 1 January 2013. The Group had sufficient capital at all times throughout the year to meet these requirements.
From the 2016 year end, the Group is required to publish a financial condition report, as part of its regulatory filing with the BMA. This will be a public document and will set out the financial performance and solvency position of the Group in accordance with the economic balance sheet return filed with the BMA.
In the Group’s other geographical territories, including the US and Asia, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
– Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings. Further details of these can be found in note 13. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.
The Group has aligned its kidnap and ransom business under Special Risks during 2016, and as a result, has restated the prior period segmental information.
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. The Group’s four primary business segments are identified as follows: – Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the USA, Special Risks and Asia retail business divisions. Hiscox UK and Europe underwrite European personal and commercial lines of business through Hiscox Insurance Company Limited, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, the UK includes elements of specialty and international employees and officers’ insurance written by Syndicate 3624 and Hiscox Europe excludes the kidnap and ransom business written by Hiscox Insurance Company Limited. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division.
Share of profit of associates after tax 1,137 (1,003) – – 134 661 346 – – 1,007
The following charges are included within the consolidated income statement: Year to 31 December 2016 Year to 31 December 2015 restated
Year to 31 December 2016 Year to 31 December 2015 restated 100% ratio analysis Hiscox Retail
Combined ratio excluding foreign exchange impact (%) 91.9 99.7 65.6 – 90.8 92.0 88.8 51.4 – 85.7
Year to 31 December 2016 Year to 31 December 2015 restated
4 Operating segments (a) Profit before tax by segment continued 132 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Segment results at the 100% level presented above differ from those presented at the Group’s share at note 4(a) solely as a result of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd’s.
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 2016 Year to 31 December 2015 restated
The Group’s largest external policyholder contributed less than 2% of total gross Group premium revenues earned and the details thereof are not disclosed on the grounds of materiality.
The following table provides an analysis of the Group's non-current assets by material geographical location excluding financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts: Non-current assets 2016 total
United States 12,333 11,302 Rest of world 3,665 11,520 4 Operating segments continued (b) 100% operating result by segment 133Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
The net asset value per share is based on 279,805,393 shares (2015: 280,516,658 shares), being the shares in issue at 31 December, less those held in treasury and those held by the Group Employee Benefit Trust.
Profit for the year (all attributable to owners of the Company) 336,986 209,895 Opening shareholders’ equity 1,528,829 1,454,206 Adjusted for the time-weighted impact of capital distributions and issuance of shares (60,742) (146,028) Adjusted opening shareholders’ equity 1,468,087 1,308,178 Return on equity (%) 23.0 16.0 7 Investment result The total result for the Group before taxation comprises: Note
8 Analysis of return on financial investments (a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was: %
Debt and fixed income securities 55,709 1.9 21,585 0.9 Equities and units in unit trusts 17,246 6.2 10,410 4.0 Deposits with credit institutions/cash and cash equivalents 1,881 0.3 1,685 0.4 5 Net asset value per share 134 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Other expenses include, but not limited to, legal and professional costs, computer costs, contractor-based costs and property costs. None of the items are individually material.
Interest charge associated with long-term debt 19 16,844 1,754 Interest and expenses associated with bank borrowings 1,703 2,156 Interest and charges associated with Letters of Credit 33 580 5,363 Interest charges on experience account 1,139 389 11 Auditor’s remuneration Fees payable to the Group’s main external auditors, PwC, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group 2016
12 Net foreign exchange gains The net foreign exchange gains for the year include the following amounts: Exchange gains recognised in the consolidated income statement 152,408 15,153 Exchange gains classified as a separate component of equity 111,094 34,478 Overall impact of foreign exchange-related items on net assets 263,502 49,631
Opening balance sheet impact of non-retranslation of non-monetary items 3,450 1,608 Gain included within profit representing the non-retranslation of non-monetary items 8,094 1,842 Closing balance sheet impact of non-retranslation of non-monetary items 11,544 3,450 13 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses/ (gains) arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
137Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 6.6% (2015: 6.4%), has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is written down to this amount.
At 31 December 2016 there were £24,797,000 of assets under development on which amortisation has yet to be charged (2015: £20,478,000).
The Group’s land and buildings assets relate to freehold property in the UK. There was no impairment charge during the year (2015: £nil). Assets with a net book value of £nil were held under finance leases (2015: £nil). During the year, the Group disposed of £10.2 million fully depreciated fixtures, fittings and equipment.
Associates incorporated in the UK from 10% to 35% 74,881 50,036 41,312 4,734 Associates incorporated in Europe from 10% to 49% 1,969 1,454 2,616 207 Total at the end of 2015 76,850 51,490 43,928 4,941
Acquisition costs incurred in relation to insurance contracts written 586,115 (157,738) 428,377 474,534 (94,021) 380,513 Acquisition costs expensed to the income statement (538,467) 128,627 (409,840) (441,376) 97,093 (344,283) Foreign exchange and other adjustments 27,427 (4,359) 23,068 7,986 (6,068) 1,918
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £66,681,000 (2015: £33,211,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 252,837 212,149 After one year 27,074 26,157 18 Reinsurance assets
Reinsurers’ share of insurance liabilities 806,245 539,540 Provision for non-recovery and impairment (596) (730)
16 Investments in associates continued 140 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Debt and fixed income securities 3,414,949 2,615,014 Equities and units in unit trusts 305,342 259,705 Deposits with credit institutions 24,592 6,684 Total investments 3,744,883 2,881,403 Insurance-linked funds 46,821 40,045 Derivative financial assets 21 329 137 Total financial assets carried at fair value 3,792,033 2,921,585
Equities and units in unit trusts do not have any maturity dates. The effective maturity of all other financial assets are due within one year.
All of the financial liabilities carried at fair value are due within one year. The long-term debt is due after one year, with its accrued interest due within one year.
On 24 November 2015, the Group issued £275.0 million 6.125% fixed-to-floating rate callable subordinated notes due 2045, with a first call date of 2025.
The interest accrued on the long-term debt was £1.80 million at the balance sheet date and is included in financial liabilities.
Due from contract holders, brokers, agents and intermediaries 524,958 405,284 Due from reinsurance operations 173,534 131,193
Prepayments and accrued income 7,713 8,130 Other loans and receivables: Net profit commission receivable 21,232 26,139 Accrued interest 12,590 8,637 Share of Syndicates’ other debtors’ balances 30,223 13,173 Other debtors including related party amounts 32,656 27,007 Total loans and receivables including insurance receivables 802,906 619,563
£52,208,000 of loans and receivables previously reported as within one year in the prior year, has been correctly presented under positions due after one year.
19 Financial assets and liabilities continued 142 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures denominated in a range of currencies to informally hedge interest rate risk on specific long portfolios. All contracts are exchange traded and the Group made a loss on these futures contracts of £111,000 (2015: loss of £239,000) as included in note 7.
Equity index options During the year, the Group purchased a number of equity index futures in order to economically hedge equity market exposure. All contracts were exchange traded and the Group made a loss on these future contracts of £398,000 (2015: £nil) as included in note 7.
22 Fair value measurements In accordance with IFRS 13: Fair Value Measurement, the financial instruments carried at fair value, based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value, are provided below.
Financial liabilities Derivative financial liabilities – 474 – 474 143Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
22 Fair value measurements continued 144 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
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 asset Financial liability
Fair value gains or losses through profit or loss* (279) 3,666 3,387 – Foreign exchange gains 729 7,719 8,448 –
Authorised ordinary share capital of 6.5p (2015: 6.5p) 240,000 3,692,308 240,000 3,692,308 Issued ordinary share capital of 6.5p (2015: 6.5p) 19,060 293,227 19,030 292,776
The Company relies upon dividend streams from its subsidiary companies to provide the cash flow required for distributions to be made to shareholders. The ability of the subsidiaries to pay dividends is subject to regulatory restrictions within the jurisdiction from which they operate.
Employee share option scheme – ordinary shares issued 332 458 Scrip dividends to owners of the Company 32 119 274 Share consolidation as a result of the special capital distribution – (39,830)
Annual risk-free rates of return and discount rates (%) 0.16-0.55 0.76-0.82 Long-term dividend yield (%) 3.59 4.28 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 22.0 19.4 Weighted average share price (p) 966.7 884.7
The weighted average fair value of each share option granted during the year was 183.8p (2015: 156.7p). The weighted average fair value of each Performance Share Plan award granted during the year was 961.8p (2015: 885.0p).
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2016 for the Executive Directors are shown in the Annual report on remuneration. The total number of options and Performance Share Plan awards outstanding is 10,848,727 (2015: 11,005,621) of which 2,528,736 are exercisable (2015: 2,043,465). The total number of SAYE options outstanding is 1,971,842 (2015: 2,041,124).
Gross Claims reported and claim adjustment expenses 977,664 824,397 Claims incurred but not reported 1,588,160 1,213,699 Unearned premiums 1,287,152 1,010,266 Total insurance liabilities, gross 3,852,976 3,048,362 Recoverable from reinsurers Claims reported and claim adjustment expenses 159,141 118,322 Claims incurred but not reported 383,974 247,155 Unearned premiums 262,534 173,333 Total reinsurers’ share of insurance liabilities 18 805,649 538,810 Net Claims reported and claim adjustment expenses 818,523 706,075 Claims incurred but not reported 1,204,186 966,544 Unearned premiums 1,024,618 836,933 Total insurance liabilities, net 3,047,327 2,509,552
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,674,538 1,330,074 After one year 1,372,789 1,179,478
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 2016 and 2015 are not material.
The Group relies on actuarial analysis to estimate the settlement cost of future claims. There is close communication between the actuaries and other key stakeholders, such as the underwriters, claims and finance teams when setting and validating the assumptions. The unpaid claims reserve is estimated based on past experience and current expectations of future cost levels. Allowance is made for the current premium rating and inflationary environment.
Current estimate of cumulative claims 720,172 940,974 724,057 870,930 1,307,009 1,059,662 752,789 895,765 1,094,579 1,528,757 9,894,694
Liability recognised in respect of prior accident years at 100% level 154,921 Total gross liability to external parties at 100% level 2,981,030 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2016.
Less: attributable to external Names 137,580 179,034 116,177 121,117 166,079 112,737 67,777 67,870 47,428 29,515 1,045,314 Group’s share of cumulative payments (552,073) (738,384) (542,427) (664,781) (974,028) (739,186) (540,222) (556,724) (443,690) (271,756) (6,023,271) Liability for 2007 to 2016 accident years recognised on Group’s balance sheet 23,808 20,353 53,426 67,614 134,486 179,107 128,102 236,447 526,285 1,077,902 2,447,530 Liability for accident years before 2007 recognised on Group’s balance sheet 118,294 Total Group liability to external parties included in balance sheet – gross** 2,565,824 **This represents the claims element of the Group’s insurance liabilities.
Total at beginning of year (2,038,096) 365,477 (1,672,619) (1,967,864) 368,319 (1,599,545) Claims and claim adjustment expenses for year (1,004,601) 264,829 (739,772) (685,897) 113,444 (572,453) Cash paid for claims settled in the year 776,722 (149,465) 627,257 673,083 (129,606) 543,477 Exchange differences and other movements (299,849) 62,274 (237,575) (57,418) 13,320 (44,098) Total at end of year (2,565,824) 543,115 (2,022,709)(2,038,096) 365,477 (1,672,619)
Claims reported and claim adjustment expenses (977,664) 159,141 (818,523) (824,397) 118,322 (706,075) Claims incurred but not reported (1,588,160) 383,974 (1,204,186) (1,213,699) 247,155 (966,544) Total at end of year (2,565,824) 543,115 (2,022,709)(2,038,096) 365,477 (1,672,619)
Current year claims and claim adjustment expenses (1,275,018) 299,564 (975,454) (943,824) 165,507 (778,317) Over-provision in respect of prior year claims and claim adjustment expenses 270,417 (57,465) 212,952 257,927 (52,063) 205,864 Acquisitions/(divestments) and transfers* – 22,730 22,730 – – – Total claims and claim adjustment expenses (1,004,601) 264,829 (739,772) (685,897) 113,444 (572,453)
*The net movement in 2016 relates to a retroactive reinsurance arrangement that transferred the benefits and risks of some of the Group’s insurance portfolio.
The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this note 26.
Share of Syndicates’ other creditors’ balances 9,844 11,095 Social security and other taxes payable 16,429 12,266 Other creditors 5,650 11,654
Deferred tax Credit for the year (5,055) (1,849) Adjustments in respect of prior years (3,786) (490) Effect of rate change (832) (1,098) Total deferred tax credit (9,673) (3,437) Total tax charged to the income statement 17,557 6,205
Adjustment for share-based payments 812 260 Non-taxable income – (3,313) Prior year tax adjustments (8,796) (754) Tax charge for the period 17,557 6,205
Open years of account (27,946) 1,738 – (26,208) Total deferred tax liabilities (59,007) 7,589 – (51,418) Net total deferred tax liabilities (29,814) 3,428 9,356 (17,030)
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 2016 (2015: 18%).
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 changes in equity to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of changes in equity is £11,409,000, comprising £9,356,000 deferred tax and £2,053,000 current tax (2015: £5,204,000 deferred tax and £(4,203,000) current tax).
29 Deferred tax (b) Net Group deferred tax liabilities analysed by balance sheet headings continued 155Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements