4 From purpose to performance 6 Our strategy and how we operate 8 Business priorities and key risks 10 Why invest in Hiscox?
Chapter 4 63 Remuneration 64 Letter from the Chairman of the Remuneration Committee 66 Remuneration summary 68 Annual report on remuneration 2019 82 Remuneration policy
We are listed on the London Stock Exchange, headquartered in Bermuda, and currently have over 3,100 staff across 14 countries and 35 offices.
As a Bermuda–incorporated company, Hiscox is not subject to the UK Companies Act. As a company listed on the London Stock Exchange, we comply with the requirements set out in the UK Corporate Governance Code (2018) and the Listing Rules and Disclosure & Transparency Rules of the of the UK Listing Authority. Our remuneration report is consistent with UK regulations. Any additional disclosures over and above these requirements, have been made for the benefit of shareholders, on a voluntary basis.
We have courage in our convictions, but are also not afraid to ask other people for their opinions – because someone else might have a better solution.
We remember that it’s not all about making money and working hard. Take time to have fun.
That’s why in 2019 we adopted ‘connected’ as one of our new core values. It simply states what we’ve always known – that by being connected to our past and to each other we can build a stronger future.
on our relationships with a network of experts beyond our business.
4.8/5 Customer reviews using Feefo – USA In the USA, we ask customers to review their experience of Hiscox post purchase. We do this using Feefo, which has a five-star rating system, and are pleased to maintain such high scores year after year even as the business grows.
Broker satisfaction – London Market Each year, we survey our London Market broker partners to understand more about their experience of working with Hiscox throughout the year. Their feedback is a reflection of our products and service levels, so receiving consistently good scores matters to us.
During the year, we hosted 26 workshops attended by over 500 employees in 17 locations to find out what makes them proud to be part of Hiscox, what values resonate with them and what values they see being lived. The Executive Committee debated these results in depth and refined our values and their meaning. We strive to make our five values – courage, ownership, integrity, connected and human – the heart of everything we do. Our challenge is to ensure that everyone at Hiscox lives them every day. In 2020, one of our strategic initiatives is to ensure these values become embedded across the Group.
At the same time, the Executive Committee focused on developing a meaningful purpose for the Group. This articulates why we exist – not simply what we do, but why and how we do it differently. It’s our collective sense of identity which gives us strength in adversity and power in pursuing a common goal.
We want to give our customers, whether they are a small business, a risk manager for a large corporate, a homeowner or a collector, the confidence to pursue their ambitions. We exist to offer them peace of mind, by providing advice, expertise, a safety net or simply an arm around them when they need it most.
Read more about our culture and values in our Chairman’s statement
Our vision For Hiscox to be the leading specialist insurer in material markets – not the biggest, but the most respected. We want to be known by customers for being true to our word, as a great place to work and grow for those who are ambitious and talented, and to be seen as an industry leader in attitude, sales growth, profits and value creation.
Read more about our performance by product and geography in our Chief Executive’s report
Retail business A Smaller premium, locally traded, relatively less volatile business written mainly through Hiscox Retail.
A Growth between 5-15% per annum. A Pays dividends. A Specialist knowledge differentiates us and investment in brand builds strong market position.
– a great place to work for the hard-working, ambitious and talented
Our efforts are focused on delivering the major projects already under way, such as the systems changes taking place in our Retail businesses and our Group-wide finance transformation programme. These changes mean we are building a business that is fit for the future. We will also be driving a more disciplined approach to expenses and external commissions, and efficiently executing regulatory changes. We are now focused on embedding our approach in first-line teams and evolving our structures, processes and culture accordingly.
The new values and vision we developed in 2019 have been well received. They now need to become embedded throughout the business. For 2020, our focus will be to ensure they are well understood by everyone, demonstrated by our leadership, and visible in our daily life.
Key risks As an insurance group, specific risks related to our business include: Strategic risk The possibility of adverse outcomes resulting from ineffective business plans and strategies, decision-making, resource allocation or adaptation to changes in the business environment. The Group’s continuing success depends on how well we understand our clients, markets and the various internal and external factors affecting our business, and having a strategy in place to address risks and opportunities arising out of this. Not having the right strategy could have a detrimental impact on profitability, capital position, market share and reputation.
Operational risk The risk of direct or indirect loss resulting from internal processes, people or systems, or from external events. This includes cyber security risk, which is the threat posed by the higher maturity of attack tools and methods and the increased motivation of cyber attackers, in conjunction with a failure to implement or maintain the systems and processes necessary to protect the confidentiality, integrity or availability of information and
Regulatory, legal and tax governance This relates to the business failing to act in accordance with its applicable regulatory requirements in all its applicable jurisdictions, or a deterioration in the quality of our relationship with one or more regulators. Legal risk is the risk of acting contrary to the relevant legal requirements in any of the jurisdictions in which we operate, while tax governance risk covers the consequences of any failure to act in accordance with relevant taxation laws or adapt to changes in taxation.
A strong track record of creating profitable growth By running a well-balanced business, underpinned by a clear set of values and characterised by a careful, disciplined approach to underwriting, our aim is to grow the business in a way that is organic, sustainable and profitable. As the chart opposite shows, over the past 26 years the Group’s controlled income has been rising in a steady, sustained manner, despite the industry’s innate volatility. That growth has been fuelled by progress across all our divisions and regions.
total shareholder return over the last ten years, well above the FTSE All-Share of 118%.
compound growth over the last ten years in Hiscox Retail. Six per cent across the Group.
When one of our youngest Hiscox Re & ILS team members wanted to share with undergraduates his passion for insurance as being a great industry in which to work, he found a great way to connect Hiscox to university students.
He took the concept of a ‘Hiscox University Challenge’ and worked with colleagues throughout the Group to devise a programme that enabled students to cut their teeth on the sort of problems underwriters face every day, have professional skills training and meet Hiscox people, including Bronek, our CEO, to get a glimpse of what it’s like to work here. The programme persuaded several of the students to pursue a career in insurance and they are now on our graduate trainee scheme.
Chapter 2: A closer look 13Hiscox Ltd Report and Accounts 2019
From purpose to performance 15Hiscox Ltd Report and Accounts 2019 with central themes that can be locally tailored and executed. We also publicly pledged our support for the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and completed ESG disclosures for FTSE4Good, CDP, Dow Jones Sustainability Index and ClimateWise. Hiscox has been carbon neutral through offsetting since 2014. There is more to do, of course, and we are focused on the opportunity as well as the challenge that this brings.
We enjoy having an Executive team that has had a long service with the Company, and a balance of experience and fresh thinking. This year, Richard Watson retired as Executive Director and Group Chief Underwriting Officer after 33 years with Hiscox. He has made a massive contribution to the business in that time in a variety of leadership roles and I thank him for everything he has done. He stays on with us as Non Executive Chairman of Hiscox Re & ILS and also as a Director of our London Market subsidiary. Both are roles he is admirably suited to, and qualified to do, and I am pleased we will continue to benefit from his expertise in this way.
The market The retail market in the USA is hardening in casualty lines, where we are seeing rate rises up to 13% in response to adverse claims trends. The action taken over the last 18 months to refocus our private company D&O and our media accounts is working. We are seeing increased competition in the UK direct-to-consumer commercial business and expect some impact following the IR35 legislation†, but we also see plenty of opportunity for profitable growth.
The big-ticket insurance business is getting interesting at last. In 2019, Hiscox London Market saw rate rises in 14 out of 15 classes, overall up by 11% and continuing to rise. The direction is good. We don’t need to be greedy and drive huge volatility in pricing, but we need to be persistent in getting reasonable increases year-on-year to repair the damage done by a long decline. We have to be able to cover claims inflation, which has been equally persistent, driven by genuine increased costs but also by the ingenuity of lawyers to meet their budgets at the cost of ours.
Climate change I have spent my working life wrestling with the impact of climate volatility on our business. The year-to-year nature of underwriting risk gives us a front row seat to climate variability. Investment in natural catastrophe research and modelling has always been important to us, and our market-leading catastrophe research team develops not just what we call the ‘Hiscox view of risk’, but now the ‘Hiscox view of climate risk’. We will strengthen our expertise this year with two additional climate change researchers.
As debate around dealing with climate change and, more specifically, environment social and governance (ESG) issues, accelerate, so too do our efforts. We developed the Hiscox ESG framework during the year, which guides our efforts,
Culture and values We periodically review our culture to make sure as a Group we have the right set of values to guide us.
We have recently finished a year-long initiative, which involved canvassing hundreds of employees from across the Group asking: what makes them proud to be a part of Hiscox, what values resonate with them and what values they see being lived. I am glad to say that this has resulted in some fine-tuning of our values to guarantee that they are fit for purpose for the future.
† The new IR35 legislation that comes into effect from April 2020 will change the way in which contractor status is determined when working with medium and large organisations in the private sector.
Hiscox Retail Hiscox Retail comprises our smaller ticket businesses in the UK, Europe, the USA and Asia, and our Special Risks business. In this division, our specialist knowledge and tailored products differentiate us and our ongoing investment in brand helps us build strong market positions.
Retail profits increased by 22% to $178.4 million (2018: $146.3 million*) with a combined ratio of 98.7% (2018: 93.6%). Investment returns were a material contributor and we were pleased that Hiscox Retail experienced continued positive prior year reserve development of $46 million (2018: $100 million) despite strengthening in a few poor performing lines.
As we said in our Q3 trading update, the 2019 combined ratio for Hiscox Retail is outside the 90-95% range we target for this division due to the impact of claims activity in the USA and a cautious approach to reserve development. Our US experience is due to three factors. First, like others in the US private company directors and officers’ (D&O) market, we experienced an increase in claims costs on the employment practices liability element of the cover.
Our lower D&O policy limits leaves us relatively insulated from ‘jumbo awards’, but the trickle-down effect increased average claim size. Second, the time to settle small business casualty claims in the USA has lengthened, increasing our currently outsourced legal costs. Finally, in line with our cautious approach, we are setting more prudent current year loss picks, and we expect to hold reserves for longer.
As we announced last year, we have responded firmly to these factors. We have reduced our private company D&O book from $80 million to less than $20 million and are investing in strengthening our internal claims capability to allow us to in-source more of our legal work. Rates for US private company D&O are turning and we are seeing increases of 13%. We are confident that our Retail combined ratio will improve by 1-2% per annum to return to our 90-95% combined ratio target range in 2022.
We now serve over 1.2 million Retail customers generating $2.2 billion of premiums, growth of 7.1% in constant currency (2018: 1 million customers and $2.1 billion GWP). A key priority has been building the brand as well as the infrastructure to operate effectively at this scale. In the last decade we have invested over $500 million in marketing of which $88.9 million was in the last year (2018: $69.7 million). We see the pay-off in brand awareness, affinity, consideration and decision to purchase, all of which are key drivers of our economics. Our multi-year IT modernisation programmes continue in order to support the growth ahead.
Our direct-to-consumer and partnerships businesses are thriving, seeing compound growth of 29% over the last three years. We focus largely on micro businesses, sole traders and businesses with fewer than ten employees, and 80% of our customers have premiums of less than $/£/€1,000.
The opportunity for Hiscox Retail remains enormous, with an addressable small business market in countries where we already operate of over $80 billion of premium income and growing. We estimate that we currently serve less than 2% of this highly fragmented sector. At the moment this opportunity is clearest in the USA where we are ahead of the competition, but inevitably some are now beginning to respond. Ongoing investment in marketing is essential as we continue to see greater value in investing for profitable growth, rather than running the business for short-term profitability. Building a small-ticket retail business takes time, but persistence pays off in market position, scale and long-term profitability. Our expectations for revenue growth for Hiscox Retail remain between 5-15%.
Hiscox UK Hiscox UK provides commercial insurance for small- and medium-sized businesses as well as personal lines cover, including high-value household, fine art and luxury motor.
The direct-to-consumer market remains competitive, particularly in commercial lines. Despite this, we are operating in healthy niche markets and have been able to grow premiums by around 10%. Looking forward, IR35 (the changing basis of taxation for independent contractors), may have a short-term modest impact on growth.
In household broker business, retention was impacted due to the tough pricing action taken over the last 18 months in response to market-wide claims trends such as the growing prevalence of escape of water claims. I am pleased to report a return to profitability and stability in top line, driven by our award-winning claims reputation.
† These figures have been restated to reflect previously announced tax provisions. See notes 2.2 and 4 to the financial statements.
Professional liability Errors and omissions Private directors and officers’ liability Cyber Commercial small package Small technology and media Healthcare related Media and entertainment
Our European operations had another excellent year, delivering $408.4 million in gross written premiums (2018: $372.2 million), an increase of 15.6% in constant currency. Our new carrier, Hiscox SA, started trading in January 2019, and we successfully transferred all policies to our new entity. This completed our Brexit restructuring for Hiscox Retail, a multi-year effort which cost us $18 million and required $50 million in incremental capital.
In France we have seen a return to stronger profitability after several challenging years. This improvement has been driven by a period of portfolio adjustment which included the introduction of a new underwriting and pricing strategy. A continued focus on growing our partnerships business in Spain, through innovative solutions and by improving the service we offer, has seen a 20% increase in premium versus the prior year. We will continue to build on our successful partnerships in both France and Spain and actively explore new distribution opportunities in the technology and insurtech space.
Similar to the systems changes completed in the UK and under way in the USA, we are also about to begin the multi-year implementation of a new core platform for Europe, starting in Germany in 2020. This is a necessity to support the scale of the business.
Hiscox USA Hiscox USA underwrites small- to mid-market commercial risks through brokers, other insurers and distribution partners and directly to businesses online and over the telephone.
In property, we are actively changing the portfolio mix and reducing our exposure in our household and commercial binders where we have suffered attritional losses alongside catastrophe losses from Hurricane Dorian. This action will improve underlying profitability in time; however, the 12-month terms on binder business means that we will not see the full benefits until 2021 and 2022. Terrorism delivered good profits in tough market conditions, despite being impacted by riots in Hong Kong and Chile.
We are also leading the way in digital trading. Our FloodPlus product uses external data to price risks more precisely and
We have an addressable market of 30 million small businesses in the USA and these investments in IT and marketing will help us achieve our ambitions.
Hiscox Special Risks Hiscox Special Risks underwrites kidnap and ransom (K&R), security risks, personal accident, classic car, jewellery and fine art, with teams in London, Guernsey, Cologne, Madrid, Munich, Paris, New York, Los Angles and Miami.
Gross premiums written decreased by 3.1% in constant currency to $129.9 million (2018: $136.2 million). Our expertise in the K&R market has helped us maintain our leadership position in a very competitive environment. While others in the market are streamlining their offering, we remain focused on building out our expertise and will continue to innovate to preserve our market share. A highlight this year was a new product the team developed and brought to market in just two weeks to support our marine clients travelling to the Gulf following political tensions in Iran. It is precisely this responsiveness which sustains and builds our market position with customers.
Hiscox Asia Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance. It grew gross written premiums by 36.6% in constant currency to $46.6 million.
Hiscox London Market Hiscox London Market uses the global licences, distribution network and credit rating available through Lloyd’s to insure clients throughout the world.
We are optimistic about conditions in the London Market and have increased our stamp capacity – the amount of business we can write through Lloyd’s via Hiscox Syndicate 33 – by 19% year-on-year to £1.7 billion in 2020. This gives us the headroom to execute our plans, taking advantage of the ongoing price rises and dislocation in the market.
Our ILS offering continues to see interest from new and existing clients, with assets under management at $1.5 billion. Both of our flagship Kiskadee funds ended 2019 with positive returns, a good result in a challenging year. We expect that ILS funds under management will decrease in 2020 as one of our investors has indicated that they will reduce their commitment to this asset class. At the beginning of 2019 we launched a new fund, giving ILS investors access to both reinsurance and primary insurance risk through the Hiscox Re and Hiscox London Market teams. The fund launched with $100 million in capital and we have been pleased with its performance in its maiden year. We also launched a new fund for 1 January renewals, offering investors a higher risk/reward profile to complement our existing medium and lower risk/return funds.
For Japanese Typhoons Faxai and Hagibis, and Hurricane Dorian which impacted the Bahamas and the USA, we reserved $165 million and in addition we expect $25 million in reduced fees and profit commission.
Both of our flagship Kiskadee Funds ended 2019 with positive returns, a good result in a challenging year. Hiscox Re & ILS
Gross premiums written 866.5 812.0 Net premiums written 216.7 241.5 Underwriting loss (144.7) (23.2) Investment result 38.5 7.4 Loss before tax (93.8) (28.7)†
Investments We manage our investment portfolio with two main objectives in mind: providing sufficient liquidity to pay claims and providing capital to support the underwriting business, while generating strong risk-adjusted returns. On all fronts, the investment portfolios delivered in 2019.
With the tailwinds of strong markets, our investment return was the best we have seen in several years. US bonds form the majority of our portfolios across the Group, and we maintained a modest allocation to equities and other risk assets. As a result of this strategy, our investments made $223.0 million (2018: $38.1 million) after deducting investment expenses, a return of 3.6% (2018: 0.7%).
technologies with new systems and processes has continued this year. Our Retail customer numbers have grown by 172% to 1.2 million over the last five years, and we need this improved infrastructure to meet their expectations for system availability, digital accessibility, and operational robustness. Regulators are also beginning to scrutinise the financial sector’s operational resilience. Although our core system availability is currently over 99.9% these investments mean we are building a business with the infrastructure to support our future growth ambitions.
2019 saw the bedding in of the new Hiscox UK IT system. After a challenging period of adjustment in which broker service levels were not what we would have hoped, I am pleased to say we have seen a return to normalcy. Those products which are not on the new system will be migrated across by 2022. In the direct channel, the underwriting of 90% of direct commercial business and in the broker channel 60% of new business, is automated. The increased automation of simple underwriting process has freed our underwriters up to do what they do best by focusing their efforts on our most unusual or complex risks.
We are now in the implementation period of our Group-wide finance transformation programme, which will replace our core finance systems and evolve the capabilities of our finance teams worldwide.
2020 will also see Hiscox develop a new UK location strategy. Hiscox London has been located at 1 Great St Helen’s for the last 22 years and our lease will soon come to an end. Before moving into new premises, we have taken the opportunity to review our UK footprint in order to shape our UK-based activities to support growth at a lower cost. Over the next two to three years we will move up to 300 roles out of London to join the 750 Hiscox employees already working in other locations across the UK.
From purpose to performance $1.2bn paid out in claims across the Group.
For many years at a senior level, we have practised personalised career development and succession planning to ensure that we have the right mix of leadership experience, underwriting nous, business acumen and technical skills to drive the Group forward – and it is working. Individual development plans fit in with global succession plans, as we have seen with the recent appointment of Joanne Musselle as Group Chief Underwriter who replaced Richard Watson on his retirement outlined in the Chairman’s statement. Similarly, in April 2019 Bob Thaker was appointed CEO of Hiscox UK, after an internal and external search. Bob joined Hiscox ten years ago in a Group strategy role and has worked in UK Claims, Hiscox Asia as Chief Operating Officer and then Chief Executive. He was replaced in Asia by Celine Chotithamaporn, an external hire who brings valuable local cultural and industry knowledge.
In 2019 we welcomed Grace Hanson as our new Chief Claims Officer, again after an internal and external search. Grace has held multiple roles in the industry in the USA and Bermuda, and she brings a unique blend of experience in both big-ticket and smaller-ticket retail claims. We are already benefiting from her broad experience as she directs the re-engineering of our US claims function.
We believe that this approach – looking ahead, taking career risks on talent, but looking externally as well, ensures smoother senior leadership transitions, to the benefit of the individuals, the business and shareholders.
We see our purpose as ‘As experts in risk, we give people and businesses the confidence to realise their ambitions’. Whether they are a small business, a large corporate, a homeowner or a collector, we believe our expertise and clear products are a safety net, giving our clients confidence. If a loss occurs their claim will be handled sympathetically, professionally and fairly. If we do this well our customers are free to do what they want to do most – pursue their ambitions with confidence.
Our values evolve as our business and the societies we serve evolve. Our refreshed values are: A Integrity – do the right thing, no matter how hard. A Courage – dare to take a risk. A Human – clear, fair and inclusive.
Most businesses have values. The challenge is to believe in them and then live up to them, accepting that we are all human and will err while we strive to do so. The inclusivity of the process we went through in updating our purpose and values showed the real passion our staff have for living the values, and we have all committed to use them as a reference point in our day-to-day and longer-term decision-making. We believe that by trying to do so, we make better decisions, make Hiscox a better business to work with and a better place of employment for talented ambitious people, to the ultimate benefit of customers, staff, shareholders and society.
Outlook I am excited and optimistic about the scale of opportunity we have ahead of us.
In the short term we will take advantage of the strong pricing momentum in our London Market business, navigate our way through the pricing challenges in reinsurance and continue to build our profitable Retail businesses. Our success in this will be reflected in our 2020 earnings.
Looking further ahead, we are still a small and successful player in many of our areas with plenty of room to grow. Our strategy of balance, between big-ticket lines and our more steady retail earnings, continues to provide us with options. We have made investments in people, brand and infrastructure that will help us deliver our ambition to be the leading specialist insurer in the markets in which we operate – leading in growth rate, profitability and reputation.
Bronek Masojada * Restated – see notes 2.2 and 4 to the financial statements.
We are still a small and successful player in many of our areas with plenty of room to grow. Outlook
Read more about our current ratings in note 3 to the financial statements
The largest driver of our capital requirement is underwriting risk. The Group manages the underwriting portfolio so that in a 1-in-200 aggregate bad year it will lose no more than 12.5% of core capital plus 100% of buffer capital ($135 million), with an allowance for expected investment income. A market loss of this magnitude would be expected to bring about increases in the pricing of risk, and the Group’s capital strength and financial flexibility following this scenario means we would be well positioned to take advantage of any opportunities that might arise as a result.
As the Group’s premium base continues to grow and become more diversified, the Group has elected to recognise geographic diversification within its premiums and reserves in the BSCR standard formula. The resulting diversification benefit has offset the impact of the changes in the formula.
The Group expects to further mitigate the impact of the changes to the BSCR standard formula through ongoing capital generation and optimisation activities over the remaining two years of the transition period.
Bermuda enhanced solvency capital requirement $2.19 billion available capital (post-�nal dividend)
Risk management We seek to maximise return on equity by taking risk where it is adequately rewarded, within a defined risk appetite.
More information on our risk management can be found at hiscoxgroup.com/about-hiscox/risk-management
Risk strategy Our robust risk strategy positions us to capture the upside of the risks we pursue and effectively manage the downside of the risks to which we are exposed. It is based on three key principles: s we maintain underwriting discipline; s we seek balance and diversity through the underwriting cycle; s we are transparent in our approach to risk, which allows us to continually improve awareness and hone our response.
Risk management framework The Group takes an enterprise-wide approach to managing risk. The risk management framework provides a controlled system for identifying, measuring, managing, monitoring and reporting risk across the Group. It supports innovative and disciplined underwriting across many different classes of insurance by guiding our appetite and tolerance for risk.
Exposures are monitored and evaluated both within the business units and at Group level to assess the overall level of risk being taken and the mitigation approaches being used. We consider how different exposures and risk types interact, and whether these may result in correlations, concentrations or dependencies. The objective is to optimise risk-return decision-making while managing total exposure, and in doing so remain within the parameters set by the Board.
The risk management framework is underpinned by a system of internal control, which provides a proportionate and consistent system for designing, implementing, operating and assessing how we manage our key risks. This framework is regularly
Provides independent assurance to the Board that risk control is being managed in line with approved policies, appetite, frameworks and processes, and helps verify that the system of internal control is effective. Consists of the internal audit function.
The Risk Committee relies on frequent updates from within the business and from independent risk experts. At each of its meetings during the year, the Risk Committee reviews and discusses a risk dashboard and a critical risk tracker which monitors the most significant exposures to the business, including emerging risks and risks that have emerged but are evolving. The Risk Committee also engages in focused reviews. Stress tests and reverse stress tests (scenarios which could potentially give rise to business failure as a result of a lack of viability or capital depletion) are also performed and reported on to the Risk Committee.
In light of these arrangements, the Directors are satisfied that a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity, has been carried out during the year.
Global Spanish flu-type event (high infection, low mortality) 45% infection rate 20% medical treatment 0.3% case fatality
An economic collapse more extreme than any witnessed since World War II.*
Property catastrophe 1-in-200 year catastrophe event from $220 billion US windstorm.
0b n m ar ke t l os s -y ea r r et ur n p er io d
$ 6b n m ar ke t l os s -y ea r r et ur n p er io d
Property extreme loss scenarios Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modelled losses January 2020
JP EQ – Japanese earthquake, JP WS – Japanese windstorm, EU WS – European windstorm, US EQ – United States earthquake, US WS – United States windstorm.
The Board is at the heart of risk governance and is responsible for setting the Group’s risk strategy and appetite, and for overseeing risk management (including the risk management framework). The role of the Board in risk management
Training and development All employees have access to internal and external resources to help drive their own learning and development, as well as two formal opportunities each year to discuss development needs and potential. Our approach gives people the choice to develop in their current role, take a step up or try something new.
Employee networks Almost one in four employees belong to at least one of our nine networks. From WeMind (mental health and well-being) to Women at Hiscox and LGBT+, each network provides focused discussion, practical activities and support. Some of our Non Executive Directors have participated, for example as part of a panel discussion on career journeys. For more, visit hiscoxgroup.com/our-employee-networks.
Communication updates Employees receive regular updates on business plans and performance through emails, intranet articles and team meetings. We ensure everyone is informed of matters; for example, in our customer experience centre in York, we close the phone lines for one hour each week to give those teams the same opportunity to hear from leadership.
Annual ‘launch’ events and box meetings Business unit leaders hold regular all-staff meetings to align on strategy and objectives, inspire and excite. These events are also when we celebrate those marking ten or 20 years at Hiscox with long-service awards.
Superb service ethos Our long-held ‘superb service’ ethos means we take the time to develop a greater understanding of our brokers’ needs and the needs of their customers. Hiscox UK and Hiscox London Market have Chartered Insurer status from the Chartered Insurance Institute, which recognises the professionalism and expertise of staff, and is a marker for attracting high-quality business partners including brokers.
Broker satisfaction survey Each year we engage with our key brokers to measure their satisfaction with our products and services. In 2019, this involved surveying over 1,200 UK, US and London Market brokers.
Research and insight Finding out more from our customers about insurance products and services enables us to continually improve our offering. We talk to thousands of customers each year, through surveys, focus groups and other qualitative research. This includes measuring our customer service by collecting feedback after they have contacted our service centre, bought a product or made a claim.
Sharing news In the UK, Cover Stories is a channel through which we share news, opinion pieces and tips for our home insurance and collections customers. Here, we share seasonal pieces such as protecting your home for winter, but also insight pieces on upcycled furniture, art world news, developments in collecting items such as wine or watches, and more. We have similar channels in the USA for our small business customers via our blog, including a ‘side hustle to small business’ campaign which showcased how individuals turned their side hustle into a fully-fledged small business.
Vulnerable customers We have developed our approach to dealing with vulnerable customers in the UK this year, with new policies and procedures and by establishing a team of vulnerable customer champions within our UK direct-to-consumer business. We currently have over 20 vulnerable customer champions across our York, London, Birmingham and Colchester offices, and their work is already having a positive effect.
Educational tools We have developed tools to help our customers better understand their exposure to specific types of risk. For example, our cyber exposure calculator helps businesses of different sizes in different jurisdictions to estimate the value of their company’s data.
Regulatory change We want to play our part in industry discussion and help shape our sector, which is why we contribute to the regulatory change process on a variety of issues, both directly and through active membership of trade associations in many of the jurisdictions where we operate, such as the Association of Bermuda Insurers and Reinsurers and the Association of British Insurers. In 2019, subjects covered have included regulatory responses to climate change, ‘green finance’, enhancements to data rights in parts of the USA, and potential changes to the Solvency II regime in Europe.
Supervisory co-operation In 2019, the Bermuda Monetary Authority (BMA) hosted a supervisory college meeting, which included nearly all of the Group’s regulators worldwide. This is an important annual opportunity for us to present a consistent message to our regulators on issues of common interest, so seven of our senior management team contributed to the session.
Stress and scenario testing As in previous years, in 2019 we participated in regulator-led stress and scenario testing exercises, most notably the Prudential Regulation Authority’s General Insurance Stress Test, part of which was carried out in conjunction with the BMA. Beyond the completion of these specific exercises, our engagement with the regulators helped to shape the stress tests from the outset, and also supported our own embedded annual cycle of stress testing.
Regulatory reporting The Group and all of its subsidiaries have met all of their material regulatory reporting obligations during the course of the year.
Clea r r ep ortin g an d di sc los ures
Being an engaged and customers can rely on Being an insurer our in th e com m un ity
Like others, we are responding to a changing climate, and are helping our customers and business partners to adapt through our products and services. We also evolve as regulation changes and public interest in emerging issues grows.
ESG issues touch many different parts of our business – such as HR, risk, finance, underwriting and investments – and the Hiscox ESG framework we developed in 2019 helps us stay focused and make an impact. It ensures we are pragmatic and consistent, teaming Group-wide themes with local market relevance. See chart opposite.
ESG oversight In 2018, we appointed an ESG Executive Sponsor whose role is to provide ESG oversight within the Executive Committee as well as updates at Board level. Facilitated discussions on ESG took place at both an Executive Committee and Board level during 2019, and these sessions focused on approving the Hiscox ESG framework and agreeing the ESG plan for 2020.
From purpose to performance 2019: 46%* 2018: 74% * Change of methodology in 2019.
Highlights s We reduced our Scope 1 and 2 carbon emissions per full-time equivalent (FTE) by 1% year-on-year. Our target remains to complete a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per FTE by the end of 2020, relative to 2014, and we will be setting new carbon emission targets in 2020.
s We have been a carbon neutral business since 2014. In 2019, we worked with Capricorn Ridge Wind Farm in Texas to offset our location-based total of 9,198 CO2e tonnes of carbon emissions.
s We formally pledged our support of the Taskforce for Climate-Related Financial Disclosures (TCFD) in 2019 and reported against TCFD-aligned principles for the first time in our 2019 climate report. You can read the report at hiscoxgroup.com/climate-report.
Keeping Bermuda beautiful with beach clean-ups Our employees are involved in a number of environmentally responsible initiatives around the world. For example, in Bermuda we work with Keep Bermuda Beautiful, the island’s oldest environmental charity. Through their Adopt an Area initiative, which gives individuals or teams responsibility for a specific piece of the island, Hiscox has its own designated area to take care of, so our Bermuda team work together to hold regular beach clean-ups.
Our Bermuda team work together to hold regular beach clean-ups. Keep Bermuda Beautiful
Celebrating Pride in the UK and Bermuda with processions and exhibitions Hiscox employees around the world celebrated Pride. In Bermuda, we took part in the island’s first ever Pride event, and in London we sponsored the Queer Frontiers exhibition which focused on profiling the work of LGBTQ+ artists and raising awareness of issues important to the community. Proceeds from the exhibition raised over £28,000 for LGBTQ+ charities including Switchboard (an LGBT+ helpline) and AKT (an LGBTQ+ youth homelessness charity).
Equipping underprivileged US girls with essential life skills In the USA, we supported Girls on the Run, a charity which provides a positive youth development programme for school-age girls from low-income, under-resourced communities. The work they do helps to increase physical activity levels and healthy behaviours using an experience-based curriculum, boosting confidence and life skills, and our fundraising enabled 63 girls to benefit from the programme.
employees are members of at least one of our nine employee networks.
Annual Hiscox art prize for promising young artists at Hamburg’s renowned university of fine art, HFBK.
As a global insurer, good governance practices are essential to our day-to-day business of serving customers and paying claims. Good governance encompasses not just having the appropriate internal controls, policies and procedures, and structures and oversight; it also requires our 3,100 staff to be accountable for their actions and empowered to raise their hand if something goes wrong. Naturally it also means complying with the laws and regulations that are relevant to our operations, so as a Bermuda-incorporated company with a UK listing, we comply with the Bermuda Companies Act, UK listing rules and local country laws.
s We published annual financial condition reports (FCR), which are a requirement of the Bermuda Monetary Authority (BMA) and the UK’s Prudential Regulation Authority (PRA). The FCRs provide stakeholders with additional information on the financial condition of the Company over and above that contained in the annual financial statements, and can be viewed at hiscoxgroup.com/about-hiscox/group-policies- and-disclosures.
Building resilience through stress testing and scenario analysis Maintaining a regular cycle of stress testing and scenario analysis is important to ensure we manage risk well and evolve at the same pace as the risks we cover. We have embedded an internal programme of stress testing, which is performed annually to assess the resilience of the business plan in extreme, adverse scenarios. In 2019, a key part of this was the biennial General Insurance Stress Test (GIST) which was facilitated by the UK’s PRA and which we participated in alongside many of our peers. This year’s scenario required us to examine climate and cyber events as new scenarios alongside the traditional scenarios which include a deterioration in the economic environment. Our 2019 stress testing confirmed that the Group is able to withstand the considered short-term shocks and has strong controls and mitigation strategies in place across risk types.
Bringing teams together for cyber crisis simulations and large loss dry runs We carry out a combination of events with leadership and underwriting teams to ensure our preparedness for reputational issues and large losses. In 2019 this included a three-day cyber large loss training exercise, which brought together over 50 participants across 14 locations to test our response to a market-changing cyber loss event, put us under pressure and challenge our plans. It involved senior underwriting, claims and finance teams and its outputs have helped inform our cyber strategy and refine our claims surge plans, and contributed to
Our emerging risks forum looked at topics including climate change, data regulation and the impact of changes in governments in 2019.
Hiscox Iberia staff believe the secret of their success is the close connection between the Madrid and Lisbon teams. Every new recruit spends time in the other office, so a new underwriter in Madrid will spend several weeks learning the ropes in Lisbon, while a fresh hire in our operations team will travel in the opposite direction to do the same.
This exchange scheme helps everyone gain a shop-floor knowledge of the mechanics of the insurance process from start to finish, as well as give them a better appreciation of what their workmates do and the challenges they deal with. This means they work better together to provide client service that is second to none.
Hamayou Akbar Hussain Group Chief Financial Officer (Aged 47) Appointed to the Board: September 2016
Relevant skills and experience s Valuable financial services experience. s Significant knowledge of how to run an international financial business.
Relevant skills and experience s Strong track record of building long-term value, helping guide the Group from initial listing to a $4 billion revenue business.
Bronek joined Hiscox in 1993 as Group Managing Director and became Chief Executive in 2000. Prior to that he worked with McKinsey & Company, where he advised Lloyd’s on its renowned Reconstruction and Renewal plan. Bronek also previously served as Deputy Chairman of Lloyd’s and Chairman of the Lloyd’s Tercentenary Research Foundation.
Joanne joined Hiscox in 2002 and has held a number of roles across the Group, including Head of UK Claims, Chief Underwriting Officer for Hiscox UK & Ireland, and Chief Underwriting Officer for Hiscox Retail. Prior to Hiscox, Joanne spent almost ten years working in a variety of actuarial, pricing and reserving roles at AXA and Aviva in both the UK and Asian markets.
Relevant skills and experience s Extensive knowledge of Hiscox, having worked for the Group for over 30 years. s Significant expertise in insurance cycle management, having worked through unprecedented large loss events such as 9/11 and Hurricanes Katrina, Rita and Wilma.
Michael Goodwin Independent Non Executive Director (Aged 61) Appointed to the Board: November 2017
Relevant skills and experience s Significant knowledge of the Asian insurance market.
External board appointments Partner Reinsurance Asia Pte Ltd; Steadfast Distribution Services Pte Ltd; NCI Brokers (Asia) Pte Ltd; Galaxy Insurance Consultants Pte Ltd.
Caroline is a resident of Bermuda and led PwC’s insurance and reinsurance practice in Bermuda until her retirement in 2012. With a strong background in accounting, she is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Directors.
Thomas Hürlimann Independent Non Executive Director (Aged 56) Appointed to the Board: November 2017
Relevant skills and experience s Considerable experience of leading a global business.
Thomas has 30 years’ experience in banking, reinsurance and insurance. He was CEO Global Corporate at Zurich Insurance Group, a $9 billion business working in over 200 countries. Prior to that, he held senior positions at Swiss Re Group and National Westminster Bank.
Relevant skills and experience s Extensive marketing expertise, particularly in the USA.
Anne has served as Chief Marketing Officer at four Fortune 100 companies, and been in charge of some of the most recognised brands in the world, including Citigroup, Traveler’s, Macy’s and Pepsi.
Costas served as President and CEO of PartnerRe Ltd, one of the world’s leading reinsurers, until 2015 and prior to that was a Principal of Tillinghast-Towers Perrin in London, where he led its European non-life practice. A trained actuary, he is a member of the UK Institute and Faculty of Actuaries and a resident of Bermuda.
Relevant skills and experience s Strong background in the US financial services sector.
Bob spent over two decades with The Progressive Corporation, where he held senior roles in product development, claims and marketing, leading initiatives including multi-channel distribution and immediate-response claims. He stepped down from the Ltd Board in 2019.
Richard worked for Hiscox for over 30 years and held a number of senior roles across the Group including Managing Director of Hiscox Global Markets, Active Underwriter of Syndicate 33, and CEO of Hiscox USA, before succeeding Robert Childs as Group Chief Underwriting Officer in 2012. He retired as Group Chief Underwriting Officer in 2019. Richard will continue as an employee of Hiscox Ltd, providing strategic advice as a Director for key subsidiaries.
Robert Childs Non Executive Chairman 4/4 – 4/4 – 3/4 3/4 Bronek Masojada Chief Executive 4/4 – – – – 4/4 Aki Hussain Chief Financial Officer 4/4 – – – – 4/4 Richard Watson Chief Underwriting Officer 4/4 – – – – – Caroline Foulger Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Michael Goodwin Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Thomas Hürlimann Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Colin Keogh Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Anne MacDonald Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Bob McMillan Independent Non Executive Director 2/2 2/2 2/2 2/2 2/2 2/2 Costas Miranthis Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4 Lynn Pike Independent Non Executive Director 4/4 4/4 4/4 4/4 4/4 4/4
Committee Chairman. See page 50 to read more about each Committee’s roles and responsibilities.
Dear Shareholder Last year I talked about the need for our governance framework to continue to evolve as our business grows, and this work continued in 2019. It was a busy year as we refreshed our values, established a new mechanism for Board engagement with the workforce, and strengthened our governance structures with a new Group governance model, alongside the business-as-usual activities.
We also reviewed the revised UK Corporate Governance Code (the Code), published by the Financial Reporting Council and applicable from 1 January 2019 onwards, and have taken steps to ensure our governance practices not only reflect the latest requirements but also the spirit of the Code. We set out in detail how we have complied with the Code on pages 54 to 57, which should be read in conjunction with the corporate governance section on pages 49 to 53.
Workforce and the Board In light of the Code’s focus on ensuring the views of the workforce have been considered in Board discussions and decision-making, we reviewed our current approach to workforce engagement and the formal and informal mechanisms already in place. I am proud that employee engagement is already wide and varied at Hiscox, so we are building on what we already have in place by establishing a new Employee Liaison role as well as an Employee Engagement Network to strengthen the link between the workforce and the decisions taken in the boardroom. Their work is outlined on page 54.
Corporate governance Our robust governance framework continues to evolve and underpins our business model.
The Hiscox Ltd Board of Directors: s set the Group’s strategic direction, purpose and values and align these with its culture; s oversee competent and prudent management of internal control, corporate governance and risk management; s determine the sufficiency of capital in light of the Group’s risk profile and business plans; s approve the business plans and budgets.
The Board has delegated a number of its responsibilities to its Audit, Nominations and Governance, Remuneration and Risk Committees.
More information on risk management can be found on pages 9 and 28 to 31.
During the year, a review was completed on subsidiary management including the breakdown of decisions taken by the Board and the level of control maintained by the Board and the principal subsidiary boards. This led to the development of the Hiscox Group governance model.
Hiscox Group governance framework How key themes flow through Group and subsidiary level Boards, and where responsibility is centralised versus devolved.
Boards 1. Purpose and values 9. Operations 2. Remuneration 3. Strategy and capital allocation 4. Regulatory environment 5. Risks and controls 7. Conduct 8. Underwriting (exposure, pricing, product)
Board meetings and activity The Group has an effective Board which supports a culture of accountability, transparency and openness. Executive management and the Non Executive Directors continue to work well together as a unitary Board and debate issues freely. The Board culture is congenial; however both Non Executive Directors and Executive Directors continually challenge each other in order to deliver our shared aim. In the context of unitary Boards, Non Executive Directors provide Executive Directors with support and guidance, not just challenge, and our Non Executive Directors are close enough to the business to do this.
In line with the agreed meeting schedule, the Board held four formal meetings in 2019 along with scheduled informational calls in between these meetings. In the months where no full Board meeting was due to be held, an update call was held; these calls provided the opportunity to advise of any business developments, emerging issues and opportunities.
Each Board meeting has at least a two-day series of events which involve the formal Board and Committee meetings alongside a wide spectrum of other sessions which give access to all levels of the business. These include training sessions; Non Executive Director-only meetings; and briefings with Executive Committee members and senior management where the Non Executive Directors have the opportunity to hear key issues and conduct ‘deep dives’ on specialist subjects. In 2019, this included an update on business opportunities, Group governance, strategy, marketing and technology in insurance, as well as deep dives on business unit performance. Specific sessions are held for succession planning and strategy. Outside of these meetings, Non Executive Directors have unfettered access to employees and regularly liaise with management on activities aligned to their key skills as well as the opportunity to attend appropriate management strategy and training days.
Board evaluation 2019 Internal Board evaluations are completed in each of the interim years between our external reviews, which in compliance with the Code are undertaken every three years. More information on our internal Board evaluation in 2019, and preparations for an externally facilitated Board evaluation in 2020, can be found in the Nominations and Governance Committee report on pages 58 to 59.
Board papers are circulated at least five days before each meeting to ensure Directors have appropriate time to review them, and to seek clarification where necessary. The quality of Board papers is kept under regular review.
The Chairman and Non Executive Directors usually meet at the start or end of each Board meeting without the Executive Directors, creating an opportunity for Non Executive Directors to raise any issues privately.
The agenda planner was refreshed during the year to ensure it covered the appropriate strategy, performance and governance items. The agenda planning also includes the review of external influences on the Board including ongoing regulatory review throughout the Group.
Business performance s Approval of the 2020 business plan. s Agreement on business priorities.
Engagement s Board members met throughout the year with the Group regulator, the Bermuda Monetary Authority, in addition to key regulators in the principle subsidiaries.
s Approval of an updated conflicts of interest policy. s Appointment of the external facilitator for the 2020 Board evaluation and discussion of the outcomes of the 2019 Board evaluation review at the February 2020 meeting. s Approval of the Hiscox ESG framework. s Discussion of governance culture and approval of the Group governance framework.
Risk, compliance and internal controls s Oversight of all key risk, compliance, internal control and governance matters as detailed in the Audit Committee report on pages 60 to 61.
Strategy and culture s Approval of the 2030 ambition. s Reviewing the Company’s values and developing a purpose for the Group.
For more, see pages 4 to 5. s Oversight of work on the development of a robust and open culture.
The Board is ultimately responsible for our risk management and internal controls, and for ensuring that the systems in place are robust and take into account the principal and emerging risks faced by the Company. The Board delegates certain matters to the Risk Committee, whose work is outlined on page 30, and the Audit Committee, whose work is outlined on pages 60 to 61. The Audit Committee provides updates to the Board on matters discussed at each meeting.
The Code sets out a revised set of principles and, as with previous versions of the Code, a set of ‘comply or explain’ provisions. This section, along with the corporate governance section on pages 49 to 53, provides meaningful disclosure on our application of the principles of each section of the revised Code in turn, and explanations where we deviate from its provisions along with reasons why the Board believes such deviation to be appropriate.
The General Counsel and Company Secretary acts as a trusted adviser to the Board and its Committees, and ensures that there are appropriate interactions between senior management and the Non Executive Directors. He is responsible for advising the Board on all governance matters and all Directors have access to him for advice.
There are a number of further measures to ensure the robustness of these arrangements. There is a strong Senior Independent Director in place; an annual review of independence of mind as part of the effectiveness review, and oversight of this at the Nominations and Governance Committee; the Chairman is not a member of the Remuneration Committee or the Audit Committee; and a majority of Board Directors are independent Directors. A key focus of the 2020
Each year, the Directors are required to provide a complete list of all third-party relationships that they maintain. This is analysed to determine if there is any actual or potential conflict of interest. The Nominations and Governance Committee review the findings and determine if there is any conflict of interest.
Each Non Executive Director’s letter of appointment outlines the commitments expected of them throughout the year. Each Director has undertaken to allocate sufficient time to the Group in order to discharge their responsibilities effectively, and this is kept under review by the Nominations and Governance Committee. Executive Directors are prohibited from taking more than one Non Executive Directorship in a FTSE 100 company, or the Chairmanship of such a company. Information on Board members’ other appointments are listed on pages 44 to 45.
externally facilitated succession plan will be an assessment of the independence of the Board, the role of the Chairman and the robustness of the Non Executive Director succession plan.
The Board therefore retains complete confidence in the Chairman’s ability to act independently and unanimously supports his re-election at the Annual General Meeting (AGM).
Composition, succession and evaluation The current composition of the Board is set out on pages 44 and 45 and is considered to be an appropriate size for the business, with the right balance of Executive and Non Executive Directors. The Board is satisfied that it has the appropriate balance of skills, experience, independence, and knowledge of the Company to enable it to discharge its duties and responsibilities effectively, and that no individual or group dominates the Board’s decision-making. Any changes to the Board during the period are outlined on page 46.
The remuneration policy was reviewed during the year ahead of its renewal in 2020. Details of the proposed changes and shareholder consultation process are set out in the letter from the Chairman of the Remuneration Committee, on pages 64 to 65 and in the annual report on remuneration on pages 68 to 81. The Code stipulates the importance of clarity, simplicity, risk, predictability, proportionality and alignment to culture in remuneration, and how we address this for Hiscox is outlined in the table on page 72.
Hiscox’s response to section 5 of the Code The Company complied with all of the provisions of section 5.
Audit, risk and internal control A key part of the Audit Committee’s and Risk Committee’s responsibilities is to provide oversight, on behalf of the Board, of the Company’s internal financial controls, and internal control and risk management systems as well as monitoring the integrity of the financial statements of the Company. A report from Caroline Foulger, Chair of the Audit Committee, on the work of the Committee during the year can be found on pages 60 to 61.
Remuneration The remuneration policy is developed by the Remuneration Committee in consultation with shareholders and is designed to support the Company’s strategic aims and promote the long-term sustainable success of the Company while also being aligned with the Company’s purpose, values and culture.
Board structure – appointment and succession The Nominations and Governance Committee leads in the delivery of formal, rigorous and transparent procedures on appointments and succession, ensuring the development of a diverse pipeline. The key activities to ensure delivery of this included the annual review of succession plans for Executives and Non Executives. This was supplemented by the explicit documentation of appointment and succession principles in the Group governance manual.
2019 marked the retirement of Bob McMillan, one of our Independent Non Executive Directors, who retired from the Ltd Board at the 2019 Annual General Meeting, and Richard Watson, Executive Director, who retired as Group Chief Underwriting Officer on 31 December 2019. The Committee and the Board decided to not fill the position vacated by Bob as it was determined that the Board already had sufficient skills and independence; however, a robust and transparent appointment process was carried out for the position vacated by Richard. An executive search firm provided us with some very strong external candidates, but it was Joanne Musselle, an internal candidate, who impressed our Executive and Non Executive Directors during the three-stage selection process which included one-to-one and panel interviews with some of our Executives and Non Executives. Joanne was appointed Group Chief Underwriting Officer from 1 January 2020 and Executive Director in March 2020, and we are benefitting from her underwriting expertise and knowledge of the Group.
Board evaluation Board and Committee effectiveness evaluations are carried out each year and the results are discussed at the Board and each of the Committees. Every third year, the Board evaluation is externally facilitated and this is next scheduled to take place in 2020. Preliminary work on the 2020 evaluation has already commenced and we are reviewing third-party service providers. The interviews and data collection will be undertaken in the fourth quarter of 2020 and a formal report will be prepared and shared with the Board in early 2021, with key focus areas being an assessment of the independence of the Board, the role of the Chair and the robustness of Non Executive Director succession plans.
Individual Director reviews were an opportunity to discuss individual skills, succession and any issues. No significant issues were addressed although the Nominations and Governance Committee will continue to review the overall skills, succession and rotation of Directors. Overall Board and Committee effectiveness was rated as good or extremely good with no fundamental issues highlighted.
Diversity and inclusion Diversity and inclusion (D&I) has been a strategic priority for a number of years and remains important to us. We have a Head of Diversity and Inclusion who drives our progress, a diversity and inclusion policy that applies to all employees, and a Board diversity statement that applies to our Executive and Non Executive Directors.
In 2019, we refined and re-published our Board diversity statement, which is available on our corporate website. It outlines our requirement for the candidate pool for each Board position to include at least one female and one ethnic minority candidate of appropriate merit.
We also complied with the UK obligations to report our gender pay gap ratios with respect to our UK subsidiaries, and published our third annual gender pay report during the year. As the Chairman of the Remuneration Committee indicated in his letter, we are pleased with the year-on-year improvement but will continue to focus on this area with further D&I programmes and initiatives in 2020.
Stage 1 Director review s One-to-one interviews between the Chairman and the Directors to assess Director effectiveness.
s Senior Independent Director meets with the Non Executive Directors to assess the effectiveness of the Chairman.
Stage 4 Outputs shared s Results presented and discussed at Board and Committee meetings.
Additionally, as explained in note 2.22, a deferred tax asset has been established relating to operating losses arising in foreign subsidiaries. The recoverability of these assets is dependent upon the future profitability of these subsidiaries. The Committee reviewed the methodology used by management to assess the projected profitability and the carrying amount of the deferred tax assets and is satisfied with the methodology.
To aid the review, the Committee considered the key judgements and estimates found in the financial statements by the Chief Financial Officer, as well as reports from the external auditor on the outcomes of its annual audit and half-year review. The Committee supported the external auditor, PwC, in displaying the necessary professional scepticism its role requires. The primary areas considered by the Committee in relation to the 2019 Annual Report and Accounts were: i) Reserving for insurance losses As set out in our significant accounting policies on pages 119 to 120, the reserving for insurance losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet.
The Chief Actuary presents a quarterly report to the Committee covering Group loss reserves which reviews both the approach taken by management in arriving at the estimates and also the key judgments within those estimates.
The Audit Committee receives reports from PwC at each meeting which include the progress of the audit, key matters identified and the views of PwC on the judgements outlined above. PwC also reports on matters such as their observations on the Company’s financial control environment, developments in the audit profession, key upcoming accounting and regulatory changes and certain other mandatory communications. To provide a forum in which any matters of concern could be raised in confidence, the Non Executive Directors met with the external and internal auditors throughout the year without management present.
Other committee meeting attendees In addition to the standing invitees discussed above and financial management, the Group’s Chief Risk Officer is also invited to attend all meetings of the Committee. The Company has in place a Risk Committee and the items discussed by the two Committees can overlap, therefore the attendance of the Group’s Chief Risk Officer aids in facilitating discussions relating to risk.
In addition, and depending on the specific agenda, additional invitees are invited to attend from time to time to present to the Committee on findings from any of the above areas or other matters of topical interest.
Caroline Foulger Chairman of the Audit Committee the independent pension valuation, and is satisfied that the assumptions used to measure the net liabilities are reasonable.
Category 5 hurricane and to bring to life our cutting-edge FloodPlus research.
We attend a host of industry events so we can connect with our brokers and coverholders but, when we’re there, we do our best to stand out from the crowd by creating memorable experiences. At an event in San Diego, we used virtual reality (VR) technology to allow our business partners to experience what it’s really like to be caught in a
Dear fellow Shareholder As set out later in this letter, under the normal three-year renewal cycle we are proposing to make some changes to the Executive Directors’ remuneration policy for 2020, subject to shareholder support. But first, I think it worthwhile to set out again the Group’s remuneration strategy and what it seeks to achieve. It is designed to attract and keep talented, ambitious people and create a culture that encourages sustainable high performance in which pay reflects results, not just effort. The Committee believes that for all employees, basic pay should be competitive but not excessive, with bonuses relative to personal performance and profitability of business area. We expect all employees to meet or exceed a series of objectives based on our strategy and values, which are essential to Hiscox’s business operations and reputation, including delivering great customer service, complying with regulation and managing risk.
Performance and remuneration outcomes for Executive Directors In 2019, the Executive Directors led the business in delivering an increase in gross premiums written of 8.1% in constant currency, and a profit before tax of $53 million. In a third year of natural catastrophe events, this result has been driven by a strong investment return of $223 million. Hiscox Retail continues to deliver strong profits and the Executive team made progress on major IT projects in the UK and USA as well as a transformation of the finance function. As mentioned previously in this report, a project to refresh the values and purpose of the Group has been completed and is being rolled out.
The Committee feels that the Executive Directors continue to drive value for shareholders in the long term and have achieved a number of key objectives during the year as outlined on page 71. However, in line with our approach of rewarding financial outcomes and not just effort, as the pre-tax ROE
Notwithstanding good personal performance for the Executive Directors, the Committee stuck to the philosophy of rewarding financial outcomes, not just effort, and did not feel the need to exercise any discretion or override the outcome of the performance conditions.
Ahead of the remuneration policy’s renewal in 2020, the Committee conducted a thorough review of Executive Directors’ arrangements taking into account evolving market practice. This involved ensuring the policy is aligned to our strategy and values and the UK Corporate Governance Code, and has an appropriate balance between short-term and long-term incentive opportunities. I am pleased to report that we do not believe the policy requires wholesale changes, but we do want it to be even more weighted towards long-term returns as we believe this will enhance our strong ownership culture and focus Executives’ minds on building for the future.
We are therefore proposing to rebalance the weighting of incentives further towards the long term by: — reducing the maximum opportunity under the annual bonus scheme by 100% of salary;
The increase in maximum opportunity under the PSP will be accompanied by an increase stretch of the performance targets required to deliver maximum vesting. This increase in PSP opportunity requires an amendment to our plan rules for which shareholder approval is being sought at this AGM.
We are also introducing new post-employment shareholding guidance for our Executive Directors. They would have to hold at least as many shares as they were required to when they were employed by the Group (or, if the shareholding guideline has not been met, then the actual number of shares they held on stepping down from the Board) for at least one year after they have left, and half of this amount for the following year. Also, we are expanding the scope of the malus and clawback provisions that apply to variable pay awards and providing a more robust framework in applying discretion to formulaic incentive outcomes. Further details can be found on page 90.
Meeting the requirements of the UK Corporate Governance Code We comply with the remuneration provisions of the new UK Corporate Governance Code, which came into effect in 2019.
We voluntarily disclosed our Chief Executive pay ratios in our 2018 Annual Report and have done so again this year. We expect these ratios to be volatile from year-to-year due to the variable and performance-based nature of the Chief Executive’s remuneration package, and so it is important they are understood within the context of our business, which is discussed in the Chief Executive’s report on pages 17 to 25. We have outlined how we have addressed other parts of the Code on pages 54 to 57.
With similar legislation now in place in other countries in which the Group operates, we will respond in line with local labour requirements and so may see our reporting requirements in this area expand over time.
In summary The Remuneration Committee is satisfied that our 2019 outcomes are aligned with the interests of shareholders and incentivise Executive Directors appropriately over both the short and long term. We look forward to receiving further feedback at our 2020 AGM where we will be seeking approval of our renewed remuneration policy, annual remuneration report and revised PSP rules.
Summary of remuneration arrangements for 2020Key principles underpinning remuneration at Hiscox The Hiscox remuneration policy is designed to drive a culture of high performance and create sustainable long-term value for shareholders. The policy follows three clear principles: — simple and strictly results-driven, with variable rewards only if Hiscox delivers profits in excess of a specified return threshold; — incentivise Executive Directors appropriately, over the short and long term; — align Executive Directors’ interests with those of our shareholders, focusing on effective risk management, return on equity (ROE) and net asset value growth, which drives total shareholder return over time.
No bonus for Executive Directors as ROE was below the threshold performance level.
Single figure of £698,196 for CEO is 60% lower than last year.
A summary of the remuneration arrangements for Executive Directors is provided opposite.
Salaries for 2019: — Bronek Masojada: £636,500 — Aki Hussain: £490,000 — Richard Watson: £490,000 Salary increase of 2.7%, in line with average UK employee increase.
Maximum opportunity: Reduction of 100% of salary: — up to 300% of salary for CEO and CFO; — up to 400% of salary for CUO.
Increase the maximum opportunity by 50% of salary from up to 200% to up to 250% of salary as part of the wider rebalancing of incentives towards the long term. This increase in opportunity will be accompanied by an increase in stretch of the performance targets at the top end (see page 80). Threshold vesting remains unchanged as a percentage of salary (up to 40% salary). As currently, awards will be subject to a further two-year holding period following vesting.
Executive Directors’ benefits can include health insurance, life insurance, long-term disability schemes and participation in all-employee share schemes. Retirement benefits are delivered via a cash allowance of 10% of salary, paid in lieu of the standard pension contribution, or a combination of pension contribution and cash allowance, totalling 10% of salary. These benefits mirror those available to most other employees in the organisation.
Additional notes to the Executive Director remuneration table Salary Salary reviews take place in the first quarter of the year, effective from 1 April. As noted in last year’s remuneration report, Executive Directors’ salaries were increased by 2.7% from April 2019, the same as the average UK-based employee salary increase. Base salaries for Executive Directors from 1 April 2019 were as follows: April 2019
Benefits For 2019, benefits provided for Executive Directors included the Company healthcare scheme, Sharesave scheme, life insurance, income protection insurance and critical illness policies as well as a Christmas gift hamper.
Variable pay To ensure that remuneration is aligned with Company performance and the shareholder experience, a significant proportion of pay is delivered through incentive awards, consisting of an annual bonus and share awards under the Performance Share Plan, which can vary significantly based on the level of performance achieved. Bonuses are only paid if results exceed a specified threshold and are not used as a reward for effort alone – an approach that has helped reinforce a strong performance culture across the business.
Although the remuneration structure has naturally evolved over time to reflect market and best practice, the simple framework has been in place for more than 15 years.
Annual bonus The bonus is structured in a way that ensures significant variability in outcomes, including the possibility of no bonus being paid. The Remuneration Committee believes that the most appropriate measure for the calculation of the bonus pool is pre-tax return on equity (ROE), as this aligns management’s interests with those of shareholders, minimises the possibility of anomalous results, and ensures that incentives for Executive Directors and other employees are tied to the Company’s profit performance.
Less than RFR* +<5% Nil RFR +5% to RFR +12.5% 0-15% RFR +10% to RFR +17.5% 15-40% RFR +15% to RFR +22.5% 30-60% RFR +20% to RFR +25% 50-70% Greater than RFR +22.5% 60-100% * The risk-free rate (RFR) is reviewed annually using government bonds as a reference point, reflecting the rate available to investors without commercial risk. For 2019, the RFR was set at 1.5%.
Junior and mid-level employees also participate in a personal performance bonus scheme. Awards under this scheme are based entirely on individual performance ratings. It is designed to ensure that junior and mid-level employees continue to be motivated to perform well, irrespective of overall Group performance. The benefit is typically up to 10% of salary.
Bronek has instigated structural processes across the Group to facilitate horizon scanning of emerging risk and regulatory change. The successful implementation of the FCA’s Senior Managers & Certification Regime is an example of this. Bronek has also brought together our environmental, social and governance (ESG) efforts across the Group under a distinctive Hiscox ESG framework.
Richard has established a new process of review and action to ensure proactive management of casualty business around the Group and create an environment of constant course correction. He has also improved our understanding of the cyber peril; driving a refresh of existing large loss scenarios, and leading a three-day large loss training exercise which tested the Group’s response to a market-changing cyber loss event.
Reshape our underwriting portfolio to achieve the right balance of profitable business
As Executive Sponsor for D&I, Richard has overseen another year of improved engagement in D&I initiatives. The Group now has nine established employee networks with over 1,000 members combined, and KPIs that are creating more gender-balanced shortlists for roles.
In another volatile year for earnings, Aki oversaw the continued optimisation of the Group’s capital and financial flexibility, maintaining the strength of the Hiscox balance sheet. Hiscox is well capitalised against both regulatory and ratings agency requirements.
Hiscox is able to self-fund ambitious infrastructure plans in Retail, including additional investment in marketing for Hiscox USA, due to Aki’s efforts to improve the Group’s financial flexibility. Similarly, the Group’s third-party capital capabilities in the big-ticket businesses have evolved to take advantage of opportunities that arise.
The multi-year finance transformation programme is progressing to plan and budget, with five of the nine systems now embedded across the Group. Preparations for the final phase of the programme were completed successfully in 2019, with the final systems and organisational changes to be deployed in 2020.
How we have addressed the following factors in the 2018 UK Corporate Governance Code
Risk – remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated.
s In the new policy, the Committee has the ability to apply independent judgement to ensure that the PSP outcome is a fair reflection of both the company’s performance and that of the individual over that period. s Part of the annual bonus is subject to deferral, and PSP awards are subject to a holding period following vesting. Deferred bonus and variable pay awards are subject to malus and clawback.
s The range of possible values are set out in the performance scenario charts in the remuneration policy. s Limits and ability to exercise discretion are also set out in the policy.
s Historic variable incentive pay-outs have had a strong link to the Company’s actual performance. There is a track record of payment for performance, with evidence of zero bonuses where ROE performance has been below the predetermined hurdle.
s The variable incentive schemes, including quantum, time horizons, form of award and performance measures are all designed with the Company’s purpose, values and strategy in mind. s The pay arrangements for the Executive Directors are aligned with those of the broader workforce and senior team.
The table below details the legacy entitlements from the closed defined benefit pension plan.
1 Benefits include life assurance and healthcare. 2 Bob McMillan stepped down from the Ltd Board following the May AGM. There was no change to the Ltd Board and Committee US Dollar fee structure in 2019. 2018 fees that were paid in US Dollar have been converted using an exchange rate of 1.33. Those paid in Euros were converted using 1.18. 2019 US Dollar fees were converted using 1.276 and Euros were converted using 1.14.
As part of the renewal of the remuneration policy we intend to introduce a post-employment shareholding guideline for our Executive Directors which will apply for a period of two years from stepping down from the Board. This will be set at the level of the in-employment shareholding guideline for one year (or the actual shareholding on stepping down from the Board if lower) and at half of this amount for the following year.
Directors 31 December 2019 6.5p ordinary shares number of shares beneficial 6.5p ordinary shares number of shares beneficial
External Non Executive Directorships Executive Directors may not accept any external appointment that may give rise to a conflict of interest, and all external appointments require the consent of the Chairman. During the year Bronek Masojada held Directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd, Heptagon Assets Ltd, Heptagon BIR Ltd and Pool Reinsurance Company Limited and was Chair of Policy Placement Limited. Bronek Masojada was remunerated £40,114 gross for his Directorship at Pool Reinsurance Company Limited. Richard Watson held a Directorship at White Oak Underwriting Agency Limited and was not remunerated for his services. Aki Hussain held a Directorship at VISA Europe Limited and received a gross fee of £46,320.
Percentage change in Chief Executive remuneration The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2018 and 2019 financial years. As the Chief Executive is based in the UK, UK-based employees have been used as the comparator group for base salary and benefits. This ensures that any comparison avoids the impact of exchange rates and takes into account country-specific inflation and local benefit plans. For the bonus, we have used Group employees as this is a more accurate comparator. The percentage change is based on employees who were employed and eligible for a salary review and bonus in both financial years.
Last year the lower quartile, median and upper quartile employees were determined based on data used to calculate our gender pay gap. This was ‘Option B’ in terms of the permitted calculation methodologies. For 2019 and future years we have selected ‘Option A’ as it is the more robust approach and favoured by investors. This involves calculating the ‘single figure’ remuneration for every employee for 2019 and ranking them in order. Part-time employee single figures were annualised to provide more meaningful comparison. The single figure for P25 was £36,210, P50 £61,155 and P75 £94,661. The salary for P25 was £29,607, P50 £52,248 and P75 £81,145.
By design, the remuneration of our most senior executives including the CEO is more highly performance geared than other roles in the business. The Committee therefore appreciates that the ratio between the pay of the CEO and wider employees can vary significantly over time. For example, in a year when the business performs well, the ratio would typically be higher. In contrast if the CEO’s incentives lapse in full as they have in 2019, the ratio will be lower. The Committee is comfortable that the medium pay ratio aligns to the pay and progression policies for employees, in particular that pay is truly linked to performance and that individuals are appropriately motivated and rewarded according to their knowledge and seniority within the business.
Richard Watson’s retirement from the Board Richard Watson stepped down as Chief Underwriting Officer and as an Executive Director of Hiscox Ltd with effect from 31 December 2019. He continues to be an employee of Hiscox Ltd following his retirement from the Board. Accordingly he has received no loss of office payment in respect of his service as a Director.
As he had served a full year as an Executive Director, Richard Watson was considered for an annual incentive award in respect of 2019. In line with the other Executive Directors, no bonus was payable. Similarly, in line with the other Executive Directors, his 2017 PSP award will lapse in full.
Payments to past Directors There were no payments made during 2019.
New appointments to the Board Joanne Musselle joined the Board in March 2020, following her appointment as Group Chief Underwriting Officer, effective 1 January 2020. Her salary from this date will be £490,000. In line with practice for the current Executive Directors and the majority of other employees, she will receive a combination of pension contributions and cash allowance, totalling 10% of salary. Joanne will receive the same benefits as other Executive Directors, including healthcare insurance, life insurance and the opportunity to participate in all-employee Sharesave Schemes. Details of her variable pay opportunities for 2020 are set out in the following section.
Annual bonus Under the new remuneration policy (detailed on pages 83 to 93), we intend to reduce the maximum opportunity under the annual bonus by 100% of salary.
In determining the bonuses to be paid to Executive Directors, the Committee bases its judgements on both the performance of the Group and a robust assessment of individual performance. These objectives are not prospectively disclosed as they are considered to be commercially sensitive as a result of their close alignment with Hiscox’s strategic goals and objectives over the coming year.
For 2020, PSP awards will continue to be measured against growth in net asset value (NAV) plus dividends, measured on a per-share basis. The Committee deems growth in NAV to be the most appropriate metric for the PSP given that our strategy is built around the objective of generating long-term shareholder value and NAV is aligned with shareholder value creation.
There will be no change in the level of payout (as percentage of salary) for threshold performance. The additional award opportunity above 200% of salary will only be delivered for higher levels of NAV growth, as set out below. The increased targets are considered to be very stretching, requiring average NAV growth plus dividends of above RFR + 17% p.a. over three years for maximum vesting.
Less than RFR + 6% p.a. Nil RFR + 6% p.a. 40% (no change from current plan) RFR + 14% p.a. 200% (no change from current plan) >RFR + 14% to RFR +17% p.a. Straight-line vesting between 200% of salary and maximum award The risk-free rate (RFR) will be 1% for 2020.
Non Executive Director fees Following two years in which Directors fees were not reviewed, the Company Secretary recommended changes based on third-party data which benchmarked Director fees against peer companies. These changes were reviewed in November 2019 by the Nominations and Governance Committee. No Director was involved in approving fees that related to themselves, and recused themselves with respect to any discussion about fee increases.
The Chairman’s fees increased by $3,190, an increase of 1.7%. The Remuneration Committee Chairman and Remuneration Committee membership fees increased by $1,000 and $500 respectively. The Nominations and Governance Committee membership fees increased by $1,500 and the Senior Independent Director fee increased by $1,000. In addition, to reflect the increase in responsibility and the additional time commitment, it was agreed that the role of Employee Liaison would receive a fee of $10,000. All other fees remained the same.
Board Chairman £147,500 Basic fee $ 86,000 Additional fees for: Audit Committee Chair $ 26,000 Audit Committee member $16,000 Remuneration Committee Chair $18,000 Remuneration Committee member $9,000 Risk Committee Chair $17,000 Risk Committee member $10,000 Nominations and Governance Committee member $4,000 Senior Independent Director fee $17,000 Employee Liaison fee $10,000
Statement of shareholder voting At the AGM on 16 May 2019, the Directors’ annual report on remuneration received the votes below from shareholders. The remuneration policy was last voted on at the 2017 AGM; votes shown below.
The Company’s intended forward-looking remuneration policy for Board members is set out on pages 83 to 93.
The Company consulted with major shareholders regarding the above changes and generally received positive feedback in respect of the changes.
Maximum potential value The salaries for current Executive Directors which apply for 2020 are set out on page 79.
Purpose and link to strategy To reward for performance against the achievement of financial results over the financial year and key objectives linked to the strategic priorities.
For Executive Directors, individual allocations from the pool are determined by the Remuneration Committee based on a judgement of various factors including: p size of the Group bonus pool; p results of business area (where relevant); p individual performance, including non-financial and strategic factors; p consideration of risk.
Amounts are paid in accordance with the bonus deferral mechanism described on page 86. Bonus awards are non-pensionable.
Where performance is deemed to be below a predetermined hurdle, payouts will be nil.
Operation Larger bonuses are normally deferred over a three-year period and paid subject to continuing service as explained in the table below.
£50,000, €75,000, $100,000, paid shortly after the end of the financial year in which the bonus was achieved.
Maximum potential value In accordance with the operation of the annual bonus.
Operation Awards are granted under, and governed by, the rules of the PSP as approved by shareholders from time to time.
Awards normally vest after a three-year period subject to the achievement of performance conditions. An additional holding period, which is currently two years, may also apply. Further details are set out on page 73.
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 90.
Currently, the performance measures are linked to the achievement of growth in net asset value plus dividends, measured on a per-share basis, over the performance period.
Participation in this plan is restricted to Executive Directors and other senior individuals.
The current fees payable to Non Executive Directors are set out on page 80.
It is the intention of the Committee that the vesting of PSP awards should normally reflect the outcome of the performance measures set, although the Committee has the ability to apply independent judgement to ensure that the outcome is a fair reflection of the performance of the Company and individual over the performance period. When making this judgement, the Committee has scope to consider any such factors as it deems relevant.
Detailed provisions The Committee may make minor changes to this remuneration policy to aid in its operation or implementation (for example, for regulatory or administrative purposes), provided that any such change is not to the material advantage of Directors. The Committee may continue to operate the share awards under the 2006 and 2016 PSP in accordance with the rules (for example, the treatment of awards in the context of a change of control or other forms of corporate restructure).
Malus and clawback provisions Deferred bonus awards and PSP awards granted for 2020 are subject to malus and clawback provisions as set out below. The Committee may, in its absolute discretion, determine at any time prior to the vesting of an award to reduce, defer, 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 an error in assessing a performance condition applicable to the award or in the information or assumptions on which the award was granted, or vests; p actions of gross misconduct or material error, including fraud, by the participant or their team; p significant reputational or financial damage to the Company (as a result of the participant’s conduct).
The terms set out in the service contracts for the current Executive Directors do not allow for any payments that are not in line with this policy.
3. Release of any deferred bonuses All outstanding bonuses deferred from the annual incentive scheme will normally be paid in full at the normal vesting date.
Whilst the Committee did not consult directly with the broader workforce on the remuneration policy for Executive Directors, we have introduced a process by which employee views are gathered on a range of topics and presented to the Board. The Remuneration Committee also receives an update on the broader workforce remuneration policies and practices during the year which informs the Committee’s consideration of the policy for Executive Directors
Fixed remuneration Fixed reward (base salary, benefits and retirement benefit). p Salary with effect from 1 April 2019.
p Benefits as received during 2019, as disclosed in the Executive Director remuneration table on page 68.
On target performance Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: assume a bonus equivalent to 50% of the maximum opportunity. p PSP: assume vesting of 50% of the maximum award.
Maximum performance Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum bonus equivalent to 300% of salary for the CEO and CFO
Members of our team mentor ambitious students at inner city schools and we also hold ‘master classes’ to teach them about the business of insurance and help them develop extra skills that would be desirable in the Square Mile.
Directors’ report The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended
Management report The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the USA, the UK, Guernsey, Europe and Asia. The information found on pages 17 to 25, 28 to 31, 108 to 166 and 168 fulfils the requirements of the management report as referred to in Chapter 4 of the Disclosure Guidance and Transparency Rules (DTR). This includes additional explanation of the figures detailed in the financial statements and the office locations of the Group in different countries.
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 49 to 53 in this report.
Diversity The diversity of the business is outlined in the Nominations and Governance Committee report on pages 58 to 59.
Financial results The Group achieved a pre-tax profit for the year of $53.1 million (2018: $135.6 million). Detailed results for the year are shown in the consolidated income statement on page 108.
Dividends An interim dividend of 13.75¢ was paid on 11 September 2019 in respect of the year ended 31 December 2019. As in previous years a scrip dividend alternative was offered. The Directors are proposing payment of a final dividend in respect of the year ended 31 December 2019 of 29.6¢ which will be paid on 10 June 2020 to shareholders on the register at 15 May 2020.
Massachusetts Financial Services Company 37,242,009 12.91 Fidelity Management & Research 19,791,140 6.86 * Per RNS announcement there were 288,584,493 shares in issue (excluding Treasury shares) as at 2 January 2020.
As at 28 February 2020, no changes have been notified to the Company.
Political donations and charitable contributions The Group made no political donations during the year (2018: $nil). Information concerning the Group’s charitable activities is contained in the environmental, social and governance (ESG) section on pages 34 to 41 and at hiscoxgroup.com/responsibility.
Annual General Meeting The notice of the Annual General Meeting, to be held on 14 May 2020, will be contained in a separate circular to be sent to shareholders. The deadline for submission of proxies is 48 hours before the meeting.
We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union, give a true and fair view, in all material respects, the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
The 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 2 March 2020.
The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s position, performance, business model and strategy.
Every month, we contact our ‘SME panel’ of 500 small British businesses, as well as frequently touching base with our American small business customers. We canvas their opinions and find out what’s on their minds. We might test a new ad with them before launch. Or we ask them what else we could do that would help make their lives easier, such as apps.
Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects the consolidated financial position of Hiscox Ltd (the Company) and its subsidiaries (together ‘the Group’) as at 31 December 2019, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).
What we have audited Hiscox Ltd’s consolidated financial statements comprise: A the consolidated income statement for the year ended 31 December 2019; A the consolidated statement of comprehensive income for the year ended 31 December 2019; A the consolidated balance sheet as at 31 December 2019; A the consolidated statement of changes in equity for the year then ended; A the consolidated statement of cash flows for the year then ended; and A the notes to the consolidated financial statements, which include significant accounting policies.
A Overall group materiality: $29.4 million, which represents 0.75% of the gross earned premium for the year ended 31 December 2019.
A We performed full scope audit procedures over six significant components.
A Valuation of gross incurred but not reported (IBNR) loss reserves and the associated reinsurers’ share of IBNR loss reserves.
Rationale for the materiality benchmark applied 0.75% of gross earned premium for the year ended 31 December 2019
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 to the right. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole.
Total gross IBNR loss reserves and the associated reinsurers’ share of IBNR loss reserves are material estimates in the consolidated financial statements and as at 31 December 2019 amount to $4.017 billion and $2.106 billion respectively. The methodologies and assumptions used to develop gross IBNR loss reserves and the reinsurers’ share of IBNR loss reserves involves a significant degree of judgement. As a result, we focused on this area as the valuation can be materially impacted by numerous factors including: A the underlying volatility attached to estimates for certain classes of business, where small changes in assumptions can lead to large changes in the levels of the estimate held; A the risk of inappropriate assumptions used in determining current year estimates. Given that limited data is available, especially for ‘long-tailed’ classes of business, there is greater reliance on expert judgement in management’s estimation; A the judgements made in significant areas of uncertainty, for example liability and casualty classes of business; and
The Group recognises provisions, or determines it appropriate not to recognise provisions for uncertain tax positions based on facts and circumstances at the balance sheet date.
In performing our detailed audit work over uncertain tax positions we were assisted by our PwC tax specialists. Our procedures included: A evaluating management’s rationale for the accounting treatment of potential and recognised liabilities, and assessing this treatment against the relevant accounting standards; A examining documentation and correspondence with the relevant tax authorities; A evaluating and challenging management’s assumptions and agreeing input data to underlying supporting evidence; and
The results of our procedures indicated that management’s determination of uncertain tax positions were supported by the evidence we obtained.
The Group is structured into four segments (see note 4 to the consolidated financial statements) and is a consolidation of over 50 separate legal entities.
The Group is a global specialist insurer and reinsurer, and it’s operations primarily consist of the legal entity operations in the United Kingdom, Europe, the United States and Bermuda. A full scope audit was performed for six components located in the aforementioned locations. Financial statement line item audit procedures were also performed over certain other components in the United Kingdom and Bermuda. Taken together, this work gave us over 90% coverage of the Group’s gross earned premium and over 90% of the Group’s total assets.
The six full scope audit components are: (i) Hiscox Dedicated Corporate Member Syndicate No. 33; (ii) Hiscox Dedicated Corporate Member Syndicate No. 3624; (iii) Hiscox Insurance Company Limited; (iv) Hiscox Insurance Company Inc.; (v) Hiscox Société Anonyme; and (vi) the parent company, Hiscox Ltd (including consolidation).
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
In our opinion, the part of the annual report on remuneration to be audited has been properly prepared in accordance with the UK Companies Act 2006.
Total income 2,911.7 2,658.5 Expenses Claims and claim adjustment expenses 23.2 (3,206.7) (2,326.6)
Share of profit of associates after tax 14 0.1 0.4 Profit before tax 53.1 135.6
Profit for the year (all attributable to owners of the Company) 48.9 117.9
Profit for the year 48.9 117.9 Other comprehensive income Items that will not be reclassified to the income statement: Remeasurements of the net defined benefit obligation 27 (16.5) 20.2 Income tax effect 3.4 (4.1)
Other comprehensive income net of tax (14.1) 1.4 Total comprehensive income for the year (all attributable to owners of the Company) 34.8 119.3 *See note 2.2 for further details.
Loans and receivables including insurance receivables 18 1,556.3 1,265.1 1,121.5 Current tax asset 4.7 3.6 5.7 Cash and cash equivalents 21 1,115.9 1,288.8 867.8
Equity attributable to owners of the Company 2,188.6 2,257.9 2,316.1 Non-controlling interest 1.1 1.1 1.1
The consolidated financial statements were approved by the Board of Directors on 2 March 2020 and signed on its behalf by: Aki Hussain Chief Financial Officer
Profit for the year (all attributable to owners of the Company) – – – – 48.9 48.9 – 48.9 Other comprehensive income net of tax (all attributable to owners of the Company) – – – (1.0) (13.1) (14.1) – (14.1) Employee share options: Equity settled share-based
The notes on pages 112 to 166 are an integral part of these consolidated financial statements.
Consolidated statement of changes in equity 110 Hiscox Ltd Report and Accounts 2019
Profit before tax 53.1 135.6 Adjustments for: Net foreign exchange (gain)/loss (8.5) 13.7 Interest and equity dividend income (123.7) (103.0) Interest expense 36.6 34.6 Net fair value (gains)/losses on financial assets (70.8) 33.8
Changes in operational assets and liabilities: Insurance and reinsurance contracts 414.3 136.3 Financial assets carried at fair value (405.0) 3.0 Financial liabilities carried at fair value (0.5) (18.3) Financial liabilities carried at amortised cost 0.8 (53.2) Other assets and liabilities 14.3 58.5 Cash paid to the pension fund (3.6) (3.7) Interest received 130.8 90.8 Equity dividends received 1.1 0.8 Interest paid (36.4) (33.9) Current tax paid (11.2) (24.2) Net cash flows from operating activities 39.5 300.4
Purchase of property, plant and equipment (6.4) (7.8) Purchase of intangible assets (90.9) (51.8) Net cash flows from investing activities (97.3) (59.6)
Proceeds from the issue of ordinary shares 22 3.6 4.1 Shares repurchased 22 – (76.5) Distributions made to owners of the Company 22, 29 (111.6) (105.7) Proceeds from long-term debt issue, net of fees – 380.3 Principal elements of lease payments (15.5) – Net cash flows from financing activities (123.5) 202.2 Net (decrease)/increase in cash and cash equivalents (181.3) 443.0
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the USA and currently has over 3,100 staff.
The balance sheet of the Group is presented in order of increasing liquidity. All amounts presented in the income statement and statement of comprehensive income relate to continuing operations.
Except as described below and overleaf, the accounting policies adopted are consistent with those of the previous financial year.
The Group has adopted IFRS 16 retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using applicable incremental borrowing rates as of 1 January 2019. Lease liabilities amounts are presented in balance sheet under trade and other payables.
Payments associated with short-term leases amounting to $2.7 million and leases of low-value assets amounting to $0.1 million are recognised on a straight-line basis as an expense in profit or loss.
The undiscounted future minimum payments disclosed under the prior standard at 31 December 2018 were $87.0 million. The impact of discounting was $6.3 million, 2 Basis of preparation continued 2.1 Significant accounting policies New accounting standards, interpretations and amendments to published standards continued the short-term leases, for which an exemption was applied, amounted to $1.9 million. The resulting total lease liability recognised as at 1 January 2019 under IFRS 16 is $78.8 million.
Impact on the consolidated income statement for the year ended 31 December 2019 The depreciation expenses from right-of-use assets (operating expenses) and interest expense on the lease liabilities (finance costs) under IFRS 16 in 2019 were $1.1 million higher than the amount of operating lease expenses under IAS 17.
– Amendments to IAS 19 Plan Amendment, Curtailment or Settlement The amendments to IAS 19 address the accounting for the current service cost and net interest when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments are in line with the Group’s existing accounting policy. The adoption of these amendments has no impact on the Group’s consolidated financial statements.
This standard incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39 and new hedge accounting requirements. The Group satisfies the criteria set out in IFRS 4 Insurance Contracts for the temporary exemption from IFRS 9. At 31 December 2015 (the date specified by IFRS 4), the carrying value of the Group’s liabilities connected with insurance comprised over 90% of the total liabilities. These include significant insurance liabilities; the subordinated debt ($0.4 billion) as this debt counts towards the Group’s regulatory and rating agency capital requirements; and creditors arising from insurance operations ($0.3 billion). The activities of the Group remain predominantly connected with insurance.
Financial assets within the scope of IFRS 17 Insurance Contracts such as premiums receivable and reinsurance and other recoveries on paid claims, which together form the majority of the carrying value of the Group’s loans and receivables, and reinsurance recoveries on outstanding claims are outside the scope of IFRS 9 and are unaffected by the new requirements.
The Group’s implementation programme is progressing in line with expectations. IFRS 17 is currently expected to be effective on 1 January 2022 and has not been endorsed by the EU.
The impact on the consolidated cash flow statement is limited to a decrease in profit before tax and a corresponding increase in changes in other assets and liabilities within net cash flows from operating activities of $1.8 million for the year ended 31 December 2018.
(c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two Group entities that have different functional currencies. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
2.4 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). Entities operating in France, Germany, The Netherlands, Spain, Portugal, Ireland and Belgium have functional currency of Euros; those subsidiary entities operating from the USA, Bermuda, Guernsey and Syndicates have functional currency of US Dollars with the exception of Hiscox Ltd, a public company incorporated and domiciled in Bermuda with functional currency of Sterling. Functional currencies of entities operating in Asia include US Dollars, Singapore Dollars and Thai Baht. All other entities have functional currency of Sterling.
Following the approval of the Part VII transfers, insurance contracts covering EU risks and written by Hiscox Insurance Company Limited (HIC) were transferred to Hiscox SA (HSA). These contracts were measured in Euro, the functional currency of HSA.
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and
individual cash-generating units exceeds its recoverable amount. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment. Any impairment charges are presented as part of operational expenses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Subsequent expenditure on other intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
Those intangible assets with finite lives are assessed for indicators of impairment at each reporting date. Where there is an indication of impairment then a full impairment test is performed. An impairment loss recognised for an intangible asset in prior years should be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised.
2.11 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.
Purchases and sales of investments are accounted for at the trade date. Financial assets and liabilities are initially recognised at fair value. Subsequent to initial recognition, financial assets and liabilities are measured as described below. Financial assets are derecognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership.
2.10 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is 2 Basis of preparation 2.7 Fair value continued 118 Hiscox Ltd Report and Accounts 2019
owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group.
The benefits to which the Group is entitled under outwards reinsurance contracts are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract.
For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
Other revenue is recognised when, or as, the control of the goods or services are transferred to a customer, i.e. performance obligations are fulfilled at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. See note 9 for further details.
2.14 Insurance contracts (a) Classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk.
laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
(f) Retroactive reinsurance transactions Reinsurance transactions that transfer risk but are retroactive are included in reinsurance assets. The excess of estimated liabilities for claims and claim expenses over the consideration paid is established as a deferred credit at inception. The deferred amounts are subsequently amortised using the recovery method over the settlement period of the reserves and reflected through the claims and claim adjustment expenses line. In transactions where the consideration paid exceeds the estimated liabilities for claims and claim adjustment expenses a loss is recognised immediately.
2.15 Taxation Current tax, including corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
(b) Other long-term employee benefits The Group provides sabbatical leave to employees on completion of a minimum service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. In determining this liability, consideration is given to future increases in salary levels, experience with employee departures and periods of service.
The Group recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, in periods in which the estimates are revised.
2 Basis of preparation 2.16 Employee benefits continued 2.17 Net investment hedge accounting In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at each period end to ensure that the hedge remains highly effective. The Group hedged elements of its net investment in certain foreign entities through foreign currency borrowings that qualified for hedge accounting from 3 January 2007 until their replacement on 6 May 2008; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship was effective during this period. Accumulated gains or losses will be recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedge is recognised immediately in the income statement.
2.20 Leases (a) Hiscox as lessee The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Right-of-use assets are presented in the balance sheet as ‘property, plant and equipment’.
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as an expense in the period in which the event or condition that triggers the payment occurs. Lease liabilities are included in ‘trade and other payables’ in the balance sheet.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification that is not accounted for as a separate lease: future lease payments that are linked to a rate or index, a change in the lease term, a change in the in-substance fixed lease payments, a change in the assessment to purchase the underlying asset or a change in the amounts expected to be payable under a residual value guarantee.
The Group applies the short-term lease recognition exemption to its short-term leases (i.e. those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
The following describes items considered particularly susceptible to changes in estimates and assumptions. The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported, which is included within insurance liability and reinsurance assets in the balance sheet. The total gross estimate as at 31 December 2019 is $4,017.0 million (2018: $3,035.0 million) and is included within total insurance liabilities on the balance sheet. The total estimate for reinsurers’ share of losses incurred but not reported as at 31 December 2019 is $2,106.4 million (2018: $1,356.5 million).
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 23.
Another key estimate contained within the Group’s close process is an estimate of gross premium written during the year that have not yet been notified by the financial year-end. Premiums in respect of insurance contracts underwritten under binding authorities include those that have not been notified and are estimated based on information provided by the brokers and coverholders, past underwriting experience, the contractual terms of the policy and prevailing market conditions. The estimates are updated on a regular basis.
The Group carries its financial investments at fair value through profit or loss, with fair values determined using published price quotations in the most active financial markets in which the assets trade, where available. Where quoted market prices are not available, valuation techniques are used to value financial instruments. These include third-party valuation reports and models utilising both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuation for financial investments. Note 3.2(a) discusses the reliability of the Group’s fair values.
variables can have a significant impact on the financial statements, as shown in note 27.
A deferred tax asset can be recognised only to the extent that it is recoverable. The recoverability of deferred tax assets in respect of carry forward losses requires consideration of the future levels of taxable profit in the Group. In preparing the Group’s financial statements, management estimates taxation assets and liabilities after taking appropriate professional advice, as shown in note 25. Significant estimates and assumptions used in the valuation of deferred tax relate to the forecast taxable profits, taking into account the Group’s financial and strategic plans.
2 Basis of preparation 2.22 Use of significant judgements, estimates and assumptions Significant accounting estimates continued
The Group’s underwriting risk appetite seeks to ensure that it should not lose more than 12.5% of core capital, defined as NAV plus subordinated debt less expected dividend less buffer capital, plus 100% of buffer capital ($135 million) with an allowance for expected investment income, as a result of a one-in-200 aggregate bad underwriting year.
The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection is purchased at an entity level and is also considered at an overall Group level to mitigate the effect of catastrophes and unexpected concentrations of risk. However, the scope and type of reinsurance protection purchased may change depending on the extent and competitiveness of cover available in the market.
The Group compiles estimates of losses arising from extreme loss events using statistical models alongside input from its underwriters. These require significant management judgement. The extreme loss scenarios, shown on page 30, represent hypothetical major events occurring in areas with large insured values. They also represent areas of potentially significant exposure for Hiscox.
Casualty – other risks $m Other $m * Total $m *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures.
Typical property covered by marine and other major property contracts includes fixed and moveable assets such as ships and other vessels, cargo in transit, energy platforms and installations, pipelines, other subsea assets, satellites, commercial buildings and industrial plants and machinery. These assets are typically exposed to a blend of catastrophic and other large loss events and attritional claims arising from conventional hazards such as collision, flooding, fire and theft. Climatic changes may give rise to more frequent and severe extreme weather events (for example windstorms and river flooding) and it may be expected that their frequency will increase over time.
These form a small proportion of the Group’s overall portfolio. 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 to commodity price risk in relation to these types of insurance contracts is very limited, given the controlled extent of business interruption cover offered in the areas prone to losses of asset production.
The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than the other categories of business.
The market for cyber insurance is still a relatively immature one, complicated by the fast-moving nature of the threat, as the world becomes more connected. The risks associated with cyber insurance are multiplying in both diversity and scale, with associated financial and reputational consequences of failing to prepare for them. The Group has focused its cyber expertise on prevention, in addition to the more traditional recovery product. Cyber products are sold through our businesses in the UK, USA and Europe, and the product is sold both direct to consumers and through a more traditional broker channel.
For the inwards reinsurance lines, there is often a time lag between the establishment and re-estimate of case reserves and reporting to the Group. The Group works closely with the reinsured to ensure timely reporting and also centrally analyses industry loss data to verify the reported reserves.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and investment funds. This is limited to a relatively small and controlled proportion of the overall investment portfolio and the equity and investment funds 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 2019 was $486 million (2018: $398 million).
These may be analysed as follows: Nature of equity and investment funds 2019 % weighting
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets. A 10% downward correction in equity prices at 31 December 2019 would have been expected to reduce Group equity and profit after tax for the year by approximately $44.4 million (2018: $36.4 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
(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 investments would tend to fall and vice versa if credit spreads remained constant. Debt and fixed income assets are predominantly invested in high-quality corporate, government and asset-backed bonds. The investments typically have relatively short durations and terms to maturity. The portfolio is managed to minimise the impact of interest rate risk on anticipated Group cash flows.
These may be analysed below as follows: Nature of debt and fixed income holdings 2019 % weighting weighting
(d) Credit risk The Group has exposure to credit risk, which is the risk that a counterparty will suffer a deterioration in perceived financial strength or be unable to pay amounts in full when due. The concentrations of credit risk exposures held by insurers may be expected to be greater than those associated with other industries, due to the specific nature of reinsurance markets and the extent of investments held in financial markets. In both markets, the Group interacts with a number of counterparties who are engaged in similar activities with similar customer profiles, and often in the same geographical areas and industry sectors. Consequently, as many of these counterparties are themselves exposed to similar economic characteristics, one single localised or macroeconomic change could severely disrupt the ability of a significant number of counterparties to meet the Group’s agreed contractual terms and obligations.
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 the Group’s internal credit analysis team. The financial analysis of reinsurers produces an assessment categorised by factors including S&P rating (or equivalent when not available from S&P).
Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset, where counterparties are both debtors and creditors of the Group, and obtaining collateral from unrated counterparties. Management information reports detail provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in high-quality instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union. The Group has no direct exposure to sovereign debt in Spain, Italy, Ireland, Greece or Portugal.
Within the debt and fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.
The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The largest counterparty exposure included in reinsurance assets at 31 December 2019 is to Kiskadee. The fully collateralised recoverable from Kiskadee represents 17% (2018: 17%) of this category of assets.
(e) Liquidity risk The Group is exposed to daily calls on its available cash resources, mainly from claims arising from insurance and reinsurance contracts. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the minimum level of cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover unexpected levels of claims and other cash demands.
The available headroom of working capital is monitored through the use of a detailed Group cash flow forecast which is reviewed by management quarterly or more frequently as required.
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 17, 19 and 24.
(f) Currency risk Currency risk is the risk of loss resulting from fluctuations in exchange rates. The Group operates internationally and therefore is exposed to the financial impact of fluctuations in the exchange rates of various currencies.
3 Management of risk 3.2 Financial risk (e) Liquidity risk continued 130 Hiscox Ltd Report and Accounts 2019
Employee retirement benefit obligations – 55.1 – – 55.1 Deferred tax – – 0.4 – 0.4
During the year, the Group transacted in a number of over-the-counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
These join together short-term and long-term 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.
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 in weaker markets, particularly with respect to 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 $800 million may be drawn as cash (under a revolving credit facility), utilised as Letter of Credit or a combination thereof. This facility was increased to $800 million from $500 million in June 2018 by the Company’s subsidiary Hiscox plc with the maximum cash portion increased to $800 million from $300 million. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2018, 2019 and 2020 years of account. The facility can also be used to provide regulatory ancillary own funds within a number of the Group’s insurance companies. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2019, $50 million was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings outstanding to support general trading activities (2018: $50 million and £nil respectively); – £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; – £275 million of fixed rate senior notes raised in March 2018 and maturing in 2022. The debt is rated BBB+ by S&P and Fitch; – external Names – 27.4% of Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 20%; – Syndicate 6104 at Lloyd’s – with a capacity of £45 million for the 2020 year of account (2019 year of account: £55 million).
This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s property catastrophe, terrorism and cyber reinsurance accounts; – gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and
– qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes.
The Group’s four primary business segments are identified as follows: – Hiscox Retail brings together the results of the Group’s retail business divisions in the UK, Europe, USA and Asia, as well as
– Hiscox Re & ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda and London. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also includes the performance and fee income from the ILS funds, along with the gains and losses made as a result of the Group’s investment in the funds.
Net foreign exchange gains/(losses) 9.2 7.1 13.8 (21.6) 8.5 1.1 (2.6) (11.6) (0.6) (13.7)
4 Operating segments continued The following charges are included within the consolidated income statement: Year to 31 December 2019 Year to 31 December 2018
Year to 31 December 2019 Year to 31 December 2018 100% ratio analysis Hiscox Retail
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, operational expenses, including profit-related pay and foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims and expenses ratios. All ratios are calculated using the 100% results and excludes a run-off portfolio, where the Group has ceded all insurance risks to a third-party reinsurer, included within Corporate Centre.
(c) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK, the USA, Guernsey, France, Germany, Belgium, The Netherlands, Spain, Portugal, Ireland, Singapore and Thailand.
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 2019 Year to 31 December 2018
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 2019 total $m
United States 120.8 52.0 Rest of world 9.5 3.6 *See note 2.2 for further details.
Net tangible asset value 1,911.7 670.6 2,054.4 726.2 *See note 2.2 for further details.
Net tangible assets comprise total equity excluding intangible assets. The net asset value per share expressed in pence is 580.1p (2018: 627.0p).
Profit for the year (all attributable to owners of the Company) 48.9 117.9 Opening total equity* 2,259.0 2,317.2 Adjusted for the time-weighted impact of capital distributions and issuance of shares (52.3) (83.7) Adjusted opening total equity 2,206.7 2,233.5 Return on equity (%) 2.2 5.3 *See note 2.2 for further details.
Debt and fixed income securities 161.8 3.4 57.5 1.3 Equities and investment funds 61.4 13.3 (27.5) (6.2) Deposits with credit institutions/cash and cash equivalents 7.9 0.7 12.5 0.8 Investment result – financial assets 231.1 3.6 42.5 0.7 9 Other income and operational expenses $m
Agency-related income 28.6 27.1 Profit commission 3.9 7.0 Other underwriting income/(loss) 0.9 (3.4) Other income 19.7 16.1 Other income 53.1 46.8 Wages and salaries 192.3 212.3 Social security costs 33.9 32.7 Pension cost – defined contribution 16.7 14.6 Pension cost – defined benefit 1.0 2.2 Share-based payments 3.6 (3.6) Temporary staff costs 49.6 55.6 Travel and entertainment 20.6 19.7 Legal and professional 40.7 39.9 Office costs 12.7 25.0 Computer costs 70.4 71.1 Marketing expenses 88.9 69.7 Depreciation, amortisation and impairment 44.6 33.2 Other expenses 18.5 35.1 Operational expenses 593.5 607.5 *See note 2.2 for further details.
Interest charge associated with long-term debt 17 28.7 28.3 Interest and expenses associated with bank borrowing facilities 3.2 2.5 Interest and charges associated with Letters of Credit 30 2.0 3.2 Other interest expenses† 2.7 0.6 Finance costs 36.6 34.6 †Including interest expenses on lease liabilities of $1.8 million (2018: $nil).
Year ended 31 December 2018 Opening net book amount 8.5 33.1 8.5 100.1 35.8 186.0
12 Goodwill and intangible assets continued Goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to the smallest identifiable unit to which cash flows are generated. $7.2 million (2018: $7.4 million) is allocated to the Lloyd’s corporate member entity CGU and $1.1 million (2018: $1.0 million) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use.
At the end of each reporting period an assessment is made on whether there is any indication that customer contractual relationships may be impaired. Where indications of impairment are identified, the carrying value is tested for impairment based on the recoverable amount which is considered to be the higher of the fair value less costs to sell or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated using the same method as described above for goodwill and the same discount rate used. The results of this test led to no impairment being recognised (2018: no impairment).
The Group’s land and buildings assets relate to freehold property in the UK. There was an impairment charge during the year of $1.5 million (2018: $nil).
As at 31 December 2019, HDCM owned 72.6% of Syndicate 33 (2018: 72.6%), and 100% of Syndicate 3624 (2018: 100%). In view of the several, but not joint liability of, underwriting members at Lloyd’s for the transactions of Syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
The Kiskadee Latitude Fund was launched in 2019 to give investors access to a more diverse portfolio of insurance and reinsurance risks, with less focus on pure property catastrophe risk. The fund is managed by Hiscox Re Insurance Linked Strategies Ltd which is a wholly owned subsidiary of the Group.
The net amounts expected to be recovered before and after one year are estimated as follows: $m 2018 $m
Within one year 301.7 314.7 After one year 29.7 34.4 144 Hiscox Ltd Report and Accounts 2019
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 1,510.9 1,277.9 After one year 1,876.0 1,178.7
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 18). The Group recognised a gain during the year of $14,000 (2018: gain of $10,000) in respect of previously impaired balances.
Debt and fixed income securities 4,989.9 4,574.6 Equities and investment funds 486.4 398.0 Deposits with credit institutions – 0.4 Total investments 5,476.3 4,973.0 Insurance-linked fund 61.2 55.2 Derivative financial instruments 19 1.5 1.5 Total financial assets carried at fair value 5,539.0 5,029.7
Long-term debt 725.6 697.1 Accrued interest on long-term debt 2.6 2.3 Total financial liabilities carried at amortised cost 728.2 699.4 145Hiscox Ltd Report and Accounts 2019
17 Financial assets and liabilities continued All of the financial liabilities carried at fair value are due within one year. The amounts owed to credit institutions relate to outstanding investment trades in trust funds that are not available for offset against the same counterparty under cash and cash equivalents. These positions would be rated A had they have been recorded under cash and cash equivalents. The long-term debt is due after one year, with its accrued interest due within one year.
The fair value of the long-term debt is estimated at $787.3 million (2018: $706.3 million). The fair value measurement is classified within Level 1 of the fair value hierarchy. The fair value is estimated by reference to the actively traded value on the stock exchanges.
Deposits with credit institutions US Dollars – – Sterling – – Euro and other currencies – 0.4
– 0.4 Total investments 5,476.3 4,973.0 * Following a review of the underlying currency of the debt and fixed income securities, an amount of $67.9 million has been reclassified from US Dollars and Sterling to Euro and other currencies.
Due from contract holders, brokers, agents and intermediaries 862.2 751.0 Due from reinsurance operations 549.4 390.8
Prepayments and accrued income 16.9 26.1 Other loans and receivables: Net profit commission receivable 13.1 16.3 Accrued interest 22.3 20.9 Share of Syndicates’ other debtors’ balances 32.2 27.8 Other debtors including related party amounts 60.2 32.2 Total loans and receivables including insurance receivables 1,556.3 1,265.1
19 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2019. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2019 all mature within one year of the balance sheet date and are detailed below: 31 December 2019 Derivative financial instruments included on balance sheet
Foreign exchange forward contracts 155.0 1.4 (0.6) 0.8 Interest rate futures contracts 82.4 0.1 – 0.1
Financial assets Debt and fixed income securities 1,509.0 3,065.6 – 4,574.6 Equities and investment funds – 379.1 18.9 398.0 Deposits with credit institutions 0.4 – – 0.4 Insurance-linked funds – – 55.2 55.2 Derivative financial instruments – 1.5 – 1.5
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, long-term debt and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at amortised cost, is estimated at $787.3 million (2018: $706.3 million) and is considered as Level 1 in the fair value hierarchy.
The fair value of the Kiskadee Funds is estimated to be the net asset value as at the balance sheet date. The net asset value is based on the fair value of the assets and liabilities in the Fund. The majority of the assets of the Funds are cash and cash equivalents. Significant inputs and assumptions in calculating the fair value of the assets and liabilities associated with reinsurance contracts written by the Kiskadee Funds include the amount and timing of claims payable in respect of claims incurred and periods of unexpired risk. The Group has considered changes in the net asset valuation of the Kiskadee Funds if reasonably different inputs and assumptions were used and has found 7-9% change to the fair value of the liabilities would increase or decrease the fair value of the funds by $4.5 million to $5.2 million.
Fair value gains or losses through profit or loss* 0.2 0.7 0.9 Foreign exchange gains 0.5 – 0.5
Fair value gains or losses through profit or loss* (0.4) (3.1) (3.5) Foreign exchange losses (0.7) – (0.7)
Unrealised gains and (losses) in the year on securities held at the end of the year (0.4) (3.1) (3.5) * Fair value gains/(losses) are included within the investment result in the income statement for equities and investment funds and through other income for the insurance-linked fund.
Authorised ordinary share capital of 6.5p (2018: 6.5p) 425.8 3,692,308 425.8 3,692,308 Issued ordinary share capital of 6.5p (2018: 6.5p) 34.1 296,108 34.0 295,315
Employee share option scheme – proceeds from shares issued 28 3,595 – Scrip dividends to owners of the Company 37 9,228 –
Employee share option scheme – ordinary shares issued 339 460 Scrip dividends to owners of the Company 29 454 371
Share options and Performance Share Plan awards Performance Share Plan awards are granted to Directors and to senior employees. No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’ service (the vesting period) and the Group achieving targeted levels of returns on equity for pre-2018 awards and net asset value targets for awards from 2018. Share options are also conditional on the employees completing two or three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity or net asset value; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
22 Share capital continued Share options and Performance Share Plan awards continued The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2019 2018
Annual risk-free rates of return and discount rates (%) 0.42-0.68 0.83-0.89 Long-term dividend yield (%) 2.39 3.05 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 21.0 22.0 Weighted average share price (p) 1,555.3 1,497.8
Gross Claims reported and claim adjustment expenses 2,259.0 1,957.2 Claims incurred but not reported 4,017.0 3,035.0 Unearned premiums 1,818.5 1,709.3 Total insurance liabilities, gross 8,094.5 6,701.5 Recoverable from reinsurers Claims reported and claim adjustment expenses 814.6 690.6 Claims incurred but not reported 2,106.4 1,356.5 Unearned premiums 465.9 409.5 Total reinsurers’ share of insurance liabilities 16 3,386.9 2,456.6 Net Claims reported and claim adjustment expenses 1,444.4 1,266.6 Claims incurred but not reported 1,910.6 1,678.5 Unearned premiums 1,352.6 1,299.8 Total insurance liabilities, net 4,707.6 4,244.9
23 Insurance liabilities and reinsurance assets continued 23.1 Insurance contracts assumptions (a) Process used to decide on assumptions There are many risks associated with insurance contracts, and this means that there is a considerable amount of uncertainty in estimating the future settlement cost of claims. There is uncertainty in both the amounts and the timing of future claim payment cash flows.
Booked reserves are held above the best estimate to help mitigate the uncertainty within the reserve estimates. As the best estimate matures and becomes more certain, the management margin is gradually released in line with the reserving policy. This approach is consistent with last year.
Liability recognised in respect of prior accident years at 100% level 142.0 Total gross liability to external parties at 100% level 7,231.8 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2019.
Less: attributable to external Names 160.3 213.6 152.9 91.6 99.1 107.3 139.9 252.6 201.8 57.0 1,476.1 Group’s share of cumulative payments (879.8) (1,289.1) (1,019.3) (785.8) (835.6) (933.5) (1,140.8) (1,643.3) (1,363.9) (389.2) (10,280.3) Liability for 2010 to 2019 accident years recognised on Group’s balance sheet 34.4 13.2 113.9 46.7 102.6 226.7 334.3 982.2 1,769.4 2,537.6 6,161.0 Liability for accident years before 2010 recognised on Group’s balance sheet 115.0 Total Group liability to external parties included in balance sheet – gross** 6,276.0 **This represents the claims element of the Group’s insurance liabilities.
23 Insurance liabilities and reinsurance assets continued 23.1 Insurance contracts assumptions (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – net of reinsurance at 100%
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,218.3 1,496.1 1,178.5 1,128.3 1,177.0 1,252.8 1,479.1 1,851.8 1,794.2 1,785.7 14,361.8 eight years later 888.6 1,172.8 – – – – – – – – 2,061.4 nine years later 885.2 – – – – – – – – – 885.2
Current estimate of cumulative claims 885.2 1,172.8 910.2 802.1 833.5 1,056.6 1,285.6 1,613.8 1,837.3 1,785.7 12,182.8
Liability recognised in respect of prior accident years at 100% level 97.9 Total net liability to external parties at 100% level 3,756.4 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2019.
Less: attributable to external Names 119.2 153.5 84.6 74.1 74.0 83.0 96.0 117.7 103.5 46.5 952.1 Group’s share of cumulative payments (729.8) (1,008.5) (728.0) (677.5) (635.9) (732.2) (880.8) (1,010.2) (826.6) (342.7) (7,572.2) Liability for 2010 to 2019 accident years recognised on Group’s balance sheet 27.9 5.6 85.7 42.5 113.5 217.3 275.4 436.7 826.3 1,247.1 3,278.0 Liability for accident years before 2010 recognised on Group’s balance sheet 77.0 Total Group liability to external parties included in balance sheet – net** 3,355.0 **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Claims reported and claim adjustment expenses 2,259.0 (814.6) 1,444.4 1,957.2 (690.6) 1,266.6 Claims incurred but not reported 4,017.0 (2,106.4) 1,910.6 3,035.0 (1,356.5) 1,678.5 Total at end of year 6,276.0 (2,921.0) 3,355.0 4,992.2 (2,047.1) 2,945.1
Gross premium written 4,030.7 3,778.3 Outward reinsurance premium (1,351.9) (1,196.8) Net premium written 2,678.8 2,581.5 Change in gross unearned premium reserves (98.8) (78.6) Change in reinsurers’ share of unearned premium reserves 55.6 70.7 Change in net unearned premium reserves (43.2) (7.9) Net premiums earned 2,635.6 2,573.6 156 Hiscox Ltd Report and Accounts 2019
Creditors arising out of direct insurance operations 139.4 74.1 Creditors arising out of reinsurance operations 823.1 664.8
Share of Syndicates’ other creditors’ balances 2.9 5.8 Social security and other taxes payable 39.7 36.4 Lease liabilities 71.4 – Other creditors 74.1 22.0
Reinsurers’ share of deferred acquisition costs 15 124.7 106.8 Accruals and deferred income 145.0 176.6
Extension and termination options were taken into account on recognition of the lease liability if the Group was reasonably certain that these options would be exercised in the future. As a general rule, the Group recognises non-lease components, such as services, separately to lease payments.
The cost relating to variable lease payments that do not depend on an index or a rate amounted to $nil in the year ended 31 December 2019 (2018: $nil).
There were no leases with residual values guarantees. The leases not yet commenced to which the Group is committed amounted to $55.3 million (2018: $nil).
25 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 32. The amounts charged in the consolidated income statement comprise the following: $m
Adjustment for share-based payments 0.4 (0.2) Non-taxable income (5.2) (3.8) Prior year tax adjustments (3.2) 0.5 Tax charge for the year 4.2 17.7 *See note 2.2 for further details.
Deferred tax assets – – Deferred tax liabilities 0.4 9.1 Total net deferred tax liability 0.4 9.1 *See note 2.2 for further details.
Trading losses in overseas entities 47.6 4.0 – (0.1) 51.5 Net total deferred tax assets/(liabilities) 13.1 12.1 (0.6) 0.8 25.4 Net deferred tax position asset/(liability) 60.7 16.1 (0.6) 0.7 76.9
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of comprehensive income to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of comprehensive income. The total recognised outside the income statement is $3.6 million income (2018: income of $0.1 million), comprising $0.5 million deferred tax expense and $4.1 million current tax income (2018: $3.9 million deferred tax expense and $4.0 million current tax income).
26 Deferred tax continued Deferred tax assets of $51.5 million (2018: $47.6 million), relating to losses arising in overseas entities, which depend on the availability of future taxable profits, have been recognised. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. $12.3 million (2018: $4.9 million) of the tax losses to which these assets relate will expire within ten years; a further $39.2 million (2018: $42.7 million) will expire after ten years or will be available indefinitely. The Group has not provided for deferred tax assets totalling $18.5 million (2018: $13.9 million) in relation to losses in overseas companies of $102.9 million (2018: $76.9 million). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax asset expected to be recovered after more than 12 months is $102.9 million (2018: $47.5 million).
27 Employee retirement benefit obligations The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the trustee and are held separately from those of the Group. 61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme is recorded and the recovery from the third-party Names for their share of the Syndicate 33 recharge is shown as a separate asset.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal full actuarial valuation is performed on a triennial basis, most recently at 31 December 2017, and updated at each intervening balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the related pension liability.
The Group has completed an estimate of the impact of the ruling on the scheme using one of the methods identified by the High Court (C2) for equalising GMPs. The Group has concluded that nothing further has occurred during 2019 that would cause the allowance to be amended. Therefore, no charge has been recognised in 2019 (2018: $85,000).
27 Employee retirement benefit obligations continued A reconciliation of the present value of obligations of the scheme is as follows: $m $m
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: 2019 years 2018 years
Discount rate 2.10 2.90 Inflation assumption (RPI) 2.90 3.10 Inflation assumption (CPI) 1.90 2.10 Pension increases 2.90 3.10
Effect of a change in inflation Use of RPI inflation assumption of 3.15% 55.1 61.5 (6.4) Use of RPI inflation assumption of 2.65% 55.1 49.2 5.9 28 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
Final dividend for the year ended: 31 December 2018 of 28.6¢ (net) per share 81.4 – 31 December 2017 of 19.5p or 27.2¢ (net) per share – 76.0 Interim dividend for the year ended: 31 December 2019 of 13.75¢ (net) per share 39.5 – 31 December 2018 of 13.25¢ (net) per share – 37.5
The Board has declared a final dividend of 29.6¢ per share to be paid on 10 June 2020 to shareholders registered on 15 May 2020, taking the total ordinary dividend per share for the year to 43.35¢ (2018: 41.85¢). The dividends will be paid in Sterling unless shareholders elect to be paid in US Dollars. The foreign exchange rates at which future dividends declared in US Dollars will be calculated is based on the average exchange rate in the five business days prior to the scrip dividend price being determined. On this occasion, the period will be between 26 May 2020 to 1 June 2020 inclusive.
A scrip dividend alternative will be offered to the owners of the Company.
When determining the level of dividend each year, the Board considers the ability of the Group to generate cash; the availability of that cash in the Group, while considering constraints such as regulatory capital requirements and the level required to invest in the business. This is a progressive policy and is expected to be maintained for the foreseeable future.
Trust Deed charged to Lloyd’s of London, to meet any liabilities they occur from their interest in Syndicates 33 and 3624. At 31 December 2019, HDCM held $433.4 million of investments, $40.7 million of cash and a $25.0 million Letter of Credit in favour of Lloyd’s of London under this arrangement. At 31 December 2019, HCL held $622.4 million of investments (2018: $571.9 million), $38.6 million of cash and a $25.0 million Letter of Credit in favour of Lloyd’s of London under this arrangement.
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the USA, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide Letters of Credit or other terms of collateral to clients. Hiscox Bermuda has in place a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of USA ceding companies and other jurisdictions, and also Letter of Credit facility agreements with National Australia Bank and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to $470.0 million in Letters of Credit (2018: $600.0 million).
30 Contingencies and guarantees continued Letters of Credit issued under these facilities are collateralised by cash, US government and corporate securities of Hiscox Bermuda. Letters of Credit under these facilities totalling $150.8 million were issued with an effective date of 31 December 2019 (2018: $130.0 million on a $600 million facility) and these were collateralised by US government and corporate securities with a fair value of $172.9 million (2018: $152.8 million). In addition, Hiscox Bermuda maintained assets in trust accounts to collateralise obligations under various reinsurance agreements. At 31 December 2019 total cash and marketable securities with a carrying value of approximately $9.3 million (2018: $10.7 million) was held in external trusts. Cash and marketable securities with an approximate market value of $476.3 million (2018: $611.6 million) were held in trust in respect of internal quota share arrangements. Additionally, in 2019, $35.9 million (2018: $24.8 million) was maintained in a trust account for credit enhancement purposes.
(f) Hiscox SA has arranged bank guarantees with respect to their various office deposits for a total of €412,000 (2018: €249,000). These guarantees are held with ING Bank (Belgium) €23,000 (2018:€14,000), ABN Amro (Holland) €45,000 (2018: €33,000), HypoVereinsbank – UniCredit (Germany) €135,000 (2018: €160,000) ING Bank (Luxembourg) $42,000 (2018: €42,000) and HSBC (Spain) €167,000 (2018: nil). As a consequence of the cross-border merger with Hiscox Europe Underwriting Limited effective 1 January 2019, Hiscox SA have the obligations under guarantees that were previously held by Hiscox Europe Underwriting Limited during 2018.
31 Capital commitments and income from subleasing Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was $0.7 million (2018: $1.4 million). In addition, please refer to note 27 related to the Groups’ funding contributions commitment to the defined benefit scheme.
Income from subleasing Hiscox acts as a lessor and sublets excess capacity of its office space to third parties.
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: 2019 $m 2018 $m
No later than one year 0.7 0.7 Later than one year and no later than five years 0.4 1.1 32 Principal subsidiary companies of Hiscox Ltd at 31 December 2019
Hiscox Group insurance carriers (34.6) (14.3) (130.5) (67.4) Hiscox Group insurance intermediaries 5.8 3.5 (6.7) (6.9) Other Hiscox Group companies 31.1 31.6 0.4 10.5 * Following a review, the 2018 comparatives for transactions in the income statement have been restated to include Hiscox Underwriting Group Services Limited, under other Hiscox Group companies. There is no impact on the reported Group’s balance sheet, income statement and cash flow statement.
Gross premium income achieved through associates 13.7 1.5 Commission expense charged by associates 3.6 5.1 Amounts payable to associates at 31 December – – Amounts receivable through associates at 31 December 51.5 41.1
The Group uses, throughout its financial publications, additional performance measures (APMs) in addition to the figures that are prepared in accordance with International Financial Reporting Standards (IFRS). The Group believes that these measures provide useful information to enhance the understanding of its financial performance. These APMs are: premium growth in local currency, combined claims and expense ratios, return on equity, net asset value per share and net tangible asset value per share and prior-year developments. These are common measures used across the industry, and allow the reader of our Annual Report and Accounts to compare across peer companies. The APMs should be viewed as complementary to, rather than a substitute for, the figures prepared in accordance with IFRS.
– Combined claims and expense ratios The combined claims and expense ratios are common measures enabling comparability across the insurance industry that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if the Group owned all of the business, including the proportion of Syndicate 33 that the Group does not own (Group controlled income). The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables the Group to measure all of its underwriting businesses on an equal measure. The calculation is discussed further in note 4, operating
– Return on equity (ROE) Use of return on equity is common within the financial services industry, and the Group uses ROE as one of its key performance metrics. While the measure enables the Company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance-related pay and pre-2018 shared-based payment structures. The ROE is shown in note 6, along with an explanation of the calculation.
– Prior-year developments Prior-year developments are a measure of favourable or adverse development that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast the Group’s performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The prior-year development is calculated as the positive or negative movement in ultimate losses on prior accident years between the current and prior-year balance sheet date, as shown in note 23.
Net asset value per share (¢) 768.2 798.6 817.1 792.5 790.0 Key statistics *See note 2.2 for further details. †Closing mid-market prices.
Hiscox therefore expressly disclaims any obligation to update any forward-looking statements contained in this document, except as required pursuant to the Bermuda Companies Act, the UK Listing Rules, the UK Disclosure Guidance and Transparency Rules or other applicable laws and regulations.