Strategic report 2 Corporate highlights 4 Why invest in Hiscox? 6 Chairman’s statement 8 Chief Executive’s report 16 Building a balanced business 17 Executive Committee 18 Actively managed business mix 19 Actively managed key underwriting exposures 20 Capital 22 Group financial performance 24 Group investments
Hiscox London Market continues to grow profitably, benefiting from new teams in complementary specialty lines.
Hiscox Re performing well with Kiskadee Investment Managers’ AUM on track to reach US$1 billion in 2016 after its second year of operation.
Our three divisions covering reinsurance, London Market insurance, and retail insurance, provide the Group with a natural hedge against major catastrophes and market cycles in each of our businesses. Our operations span every continent and we are not overly reliant on any one of our divisions for the Group’s overall profits.
A balanced business with a symbiotic relationship between catastrophe-exposed internationally traded lines, and less volatile local specialty business
Internationally traded lines w Large premium, catastrophe exposed w Shrinks and expands according to rates w Excess profits allow investment in retail development
A track record of profitable growth Over the last five years the Hiscox Group has: increased gross written premiums by 34.2% to £1.94bn delivered average combined ratio of posted average return on equity of achieved compound dividend growth of returned capital to shareholders of £815m
A resilient business Strong underwriting discipline, a diversified strategy and sound capital management lead to a lower risk profile for the Group.
Our divisions always underwrite for profit, not for market share, and we actively manage our business mix according to the conditions in each sector.
Unique culture and strong brand The excellence of our people has been a crucial factor in our continuing success. Their expertise, courage and dedication continue to drive our reputation for quality and professionalism. In return we strive to provide them with a working environment in which they can flourish. In our annual global employee engagement survey we looked at how connected employees feel to Hiscox, their managers, their teams and their role. Hiscox enjoys very high employee engagement, which averages in the top quartile of over 200 companies worldwide. Of our employees, 90% said they are proud to work for us, while 95% said they believed in our corporate values.
We are acknowledged market leaders in many of the sectors in which we operate, while our commitment to provide clients with quick responses, clear coverage and superb service is at the heart of everything we do. We have invested significantly in creating a powerful, differentiated brand that reflects our values and customer service ethos, with which our target clients identify. For example in DirectAsia, Thailand, brand awareness reached 37% in our first year of advertising, which is higher than expected.
– In the USA, 97% of small business customers surveyed would recommend us.
Focus on creating long-term shareholder value with a progressive dividend policy (%) Hiscox FTSE Non Life Insurance FTSE All Share
dividend equivalent of 16.0p per share (2014: 15.0p), taking the total ordinary dividend per share for the year to 24.0p, an increase of 1.5p (2014: 22.5p) and; an additional return of capital of 16.0p per share (2014: 45.0p). On this occasion the Directors have decided not to offer a scrip alternative.
It has never been our style to take excessive risk with our investment portfolio, particularly given the uncertainty and lack of liquidity which prevails in many investment markets. Our priority remains that of capital preservation over appreciation and whilst our portfolio of predominantly short-term bonds offers only modest upside, it reflects the nature of our liabilities and should limit the volatility of our portfolio overall. We have always been prepared to take some risk in the portfolio and we maintain an allocation to equity and hedge funds which we think is appropriate over the longer term despite more frequent outbreaks of short-term turbulence. The outlook for 2016 seems no clearer and we are planning for another year of similar returns.
Cyber opportunity Cyber attack is mainly about theft of data or malicious damage by electronic means. This can lead to a whole series of consequences from reputational damage to manufacturing plants breaking down, and worse. As such it is definitely the province of insurers, and shouldn’t be left up to governments (as has been suggested). We have the underwriting expertise to address the issues and for over 15 years we have worked
The Hiscox Group delivered a very healthy profit of £216.1 million (2014: £231.1 million) in 2015 with some help from a benevolent Mother Nature.
Our retail operations have grown profitably and now account for half the Group’s income, reaping the rewards of our long-term investment in the Hiscox brand. Our London Market business has also had a strong year, exercising prudence and adding new teams in complementary specialty lines. Here we have benefited from the fallout from the recent M&A activity. Hiscox Re, with its focus on product development combined with technical strength and good underwriting, has done well, again delivering good profits. And Kiskadee, our insurance linked securities (ILS) business, is on track to reach US$1 billion of funds in 2016.
Results The result for the year ending 31 December 2015 was a very good profit before tax of £216.1 million (2014: £231.1 million). Gross written premium increased by 10.7% to £1,944.2 million (2014: £1,756.3 million). The combined ratio was 85.0% (2014: 83.9%). Earnings per share increased to 72.8p (2014: 67.4p) and the net asset value per share increased by 17.8% to 545.0p (2014: 462.5p). Return on equity was 16.0% (2014: 17.1%).
Dividend and capital The Board has declared a second interim dividend of 32.0p per share (to be paid on 7 April 2016 to shareholders on the register at 11 March 2016), which comprises a final
Outlook Although the result was in some part due to clement weather internationally, our strategy has once again proved itself in challenging conditions. For the best part of three decades we have sought to strike a balance between big-ticket wholesale exposures and smaller, less volatile retail risks; creating diversity in product, distribution and geography in order to grow despite market conditions. The Hiscox Group is now the only specialist insurer with established operations in all forms of insurance markets – from a direct-to-consumer offering, to a significant ILS fund management business and everything in between.
Treacherous currents and difficult headwinds will increasingly prevail in the years ahead and our experience tells us that catastrophes can occur at any time. As the operating environment gets tougher however, we believe our strategy will continue to give us profitable opportunities as we continue on our independent path with focus and discipline.
Robert Childs hard to provide our customers with responsive cover. Cuthbert Heath, the great 20th century innovator of our industry, would have relished the challenge and so do we.
Two new members of the Board bring a wealth of retail financial services and marketing experience; Lynn Carter and Anne MacDonald support our focus on retail growth and brand building. In November we announced the appointment of our new Senior Independent Director and Chairman of the Remuneration Committee, Colin Keogh, who has had a long career in the financial services sector.
In August we said farewell to Stuart Bridges who left after 16 years as our Chief Financial Officer. Stuart made a significant contribution to the Group. He joined in 1999 when our gross written premium was £241 million and shareholder funds were £134 million. By the time he left our market cap had risen to £2.5 billion, and we delivered a total shareholder return of 16.1% per annum. Stuart played an important role in our growth, guiding our financial strategy through the challenges of overseas expansion, testing investment markets and increasing regulation. I would like to thank him for all he has achieved for Hiscox.
People During the year we were very happy to celebrate 20 years of operating in France and Germany, as well as ten years in Spain, USA and Bermuda. Our European business has matured into a profitable and growing part of the company against a backdrop of economic difficulty. The US and Bermudian businesses are profitable and
I am proud and grateful for the talent and dedication our brand attracts.
Hiscox UK and Europe This division provides personal and commercial lines cover. Personal lines include high-value households, fine art and collectibles and luxury motor. Commercial insurance is focused on
Bronek Masojada Chief Executive small- and medium-sized businesses, typically operating in white-collar industries. These products are distributed both via brokers, through a growing network of partnerships, and direct to the consumer.
Our retail businesses in the UK and Europe made profits of £64.9 million (2014: £73.3 million). Claims within the UK and European businesses were benign for the majority of the year which encouraged us to boost our marketing expenditure by £4 million above plan. This looked like a sensible decision until December when storms Desmond, Eva and Frank hit the UK. The impact of these events on our business is estimated at £10 million. Europe enjoyed a record year in Euro terms thanks to strong underlying performance, augmented by a single significant prior year release. Exchange rate movements mean that this performance is not reflected in our Sterling result.
Our marketing reach means we receive many enquiries from customers whose needs are outside of our underwriting appetite. In 2016, we are creating a managing general agent to underwrite these risks on behalf of other insurers, providing them with a flow of business and us with fees and profit commission.
At the end of the year we celebrated the opening of our new office in York, on time and on budget. Housing over 250 employees, with room for further expansion, this is the hub of our direct- to-consumer operations and represents our high ambitions for this business. This office was off to a strong start on day one, as the team beat their sales targets and served our customers brilliantly; a testament to our motivated and talented people. However, we did have a heartstopping moment in December when swathes of York flooded and water crept towards our office. Thanks to our dedicated staff, all of whom were
Our European business offers opportunities for steady growth despite the Eurozone’s travails. In 2016, we will explore opportunities in the classic car market, look to grow the commercial and partnership business, and continue to use segmentation to drive productivity and efficiency.
Hiscox International This division comprises Hiscox USA, Hiscox Guernsey and DirectAsia. Its revenues grew by 26.4% to £380.5 million (2014: £301.1 million) and it achieved a combined ratio of 97.9% (2014: 100.1%). Hiscox USA was the biggest contributor to the division’s growth and profit improvement.
Our core professional liability and small commercial products continue to drive growth. During the year the team honed its underwriting strategy in order to grow its footprint and retain its competitive edge in the directors and officers’, technology errors and omissions (E&O) and general liability product lines. We also made good progress in entertainment, enhancing Hiscox One, the first integrated E&O, property and workers’ compensation offering for entertainment professionals.
Our direct-to-consumer operations continue to grow apace, with policies in force now numbering over 95,000. Direct and partnership small business insurance is now our single biggest US line of business, and marketing has been an important component of its success.
During the year, Hiscox Specialty Commercial was launched in France and Germany. This suite of products broadens our liability and property offering to small businesses. We hope to replicate the success we have experienced in the UK and early signs have been very positive. Our cyber product in Germany and the Netherlands has also done particularly well, as demand grows and customer preparedness to buy increases. Alternative distribution, via broker schemes and partnerships with other organisations, is growing in importance. In Spain, participation in a number of contingency and personal accident managing general agencies is generating good growth.
Not everything went to plan. One of our priorities was to accelerate the growth of our Franco-German direct commercial business through a significant marketing investment. We achieved growth of over 20% to €5 million, but the returns were not commensurate with the cost. We have decided that the panEuropean experiment did not work and will be pursuing a less ambitious path in 2016. A key part of this is transforming the direct business to one which can also support the broker and partnership channels, and is managed and led at a local level.
In 2016 we will launch an updated, comprehensive but simply-designed cyber product that reinforces our market position as a leading specialist insurer.
Singapore performed solidly in a competitive pricing environment. Hong Kong made good progress too, despite the challenges of a small motor insurance market and low average premiums. We continue to make particularly good progress in Thailand, where we see strong growth potential and where our brand-building work has been well received. Investment in a new TV campaign, supported by print and social media marketing, has moved brand awareness to 37%, driving 500% growth in premium income.
We are developing our brand around the strapline ‘encourage courage’. To promote this we have sponsored the Tough Mudder fitness challenge across the US and created the Courageous Leaders web series. We hope that, in time, our US brand presence will match that of our UK business.
In 2016 we celebrate ten years of Hiscox USA. It has achieved critical mass, now provides the Group with a robust and sustainable profit stream, and has delivered 18% compound organic growth in the last five years. We have established teams of experts in key states, including an exploratory team in Dallas in 2015, and a growing brand. We will not stop there; we see real opportunities despite competitive markets, and will continue investing in new talent, IT and our brand in 2016.
We have combined the different teams from across the Group that focus on special risks, including kidnap and ransom, private client fine art and executive security, into a single structure which is now branded Hiscox Special Risks. Led from Guernsey, the division will include teams in London, Munich, Paris, New York, Los Angeles and Miami. We believe that will allow us to provide better service and up-to-date products to corporate and personal customers in the increasingly volatile world in which we live.
DirectAsia In early 2014 Hiscox acquired DirectAsia, a direct-to-consumer business with operations
Our London Market business remains a cornerstone of expertise, energy and profit within Hiscox.
Chief Executive’s report continued and energy liability business did well to maintain its position in 2015, mainly due to our increased appetite as market conditions held up. However given overall conditions, we expect existing marine and energy lines to reduce in future, except for cargo business which has been reinvigorated with some new hires.
– Casualty: this business grew by over 39% as a result of our investment in new talent and new lines of business over a number of years. During the year, the team launched a new cyber product that covers medium- to large-sized businesses for extortion threats and cyber breaches. The directors and officers’ team won ‘Underwriting Team of the Year’ at the 2015 Insurance Day Awards. A new team was also brought on board to focus on US general liability.
– Aerospace and specialty: this division includes our aviation, space, contingency, terrorism, kidnap and ransom, political risks and personal accident business.
Despite a series of aviation losses in recent years, including the Germanwings and Metrojet disasters in 2015, this market is under extreme pricing pressure. The team is navigating its way through turbulent conditions with opportunities seized in the more profitable manufacturers and airports business. Our political risks business has been hit by falling oil prices and political unrest in Ukraine, where we reserved claims for net £16 million at year end.
Our terrorism business has felt the impact of facilities in the market where brokers are bundling risks together to make them easier to place. We participated where we saw margin and opportunity.
Hiscox London Market has also benefited from market dislocation resulting from M&A activity, as leading underwriting talent joins our ranks. This has allowed us to strengthen our existing cargo team and establish new teams in product recall and US general liability in London, and property in Miami.
This area had another excellent year due to careful risk selection and a general lack of catastrophes. We focused on retaining small-ticket commercial and household business, written through binding authorities with long-standing US partners. Continuing pressure on big-ticket traded business meant the team needed to remain extremely disciplined as it dealt with market challenges and looked for new opportunities. The launch of flood cover for the newly deregulated US market is one example of such an opportunity. The private sector can offer wider terms and coverage than the government-backed National Flood Insurance Program, giving consumers a more accurately priced and responsive product. It is ironic that London Market firms have an appetite for flood exposure, whilst in the UK the government has pushed the domestic industry to create a mutualised and distorted approach to tackling this risk.
– Marine and energy: challenging trading conditions continue to depress the marine and energy market and our business in this sector shrank by 12.2%. Upstream energy was already under pressure but the substantial drop in the price of oil has further affected this account as pressure grows on clients’ budgets. The team has actively reduced exposure where the margins are unreasonable. Our marine
local currency. Good growth in international, specialty and healthcare, along with income from Kiskadee, helped to offset the reductions in US property catastrophe reinsurance. We’ve experienced another year of low losses, a combination of fewer catastrophes and the team’s strong risk selection. The benign claims environment continues to put pressure on rates. Last year’s important 1/1 renewals saw rates fall by 12% and this year they fell again by 5%.
We continue to leverage third-party capital through quota share arrangements (with other insurers) and through ILS activity (with capital markets investors). This gives us the ability to remain agile and relevant as we can offer larger lines and bespoke reinsurance solutions to a broad spectrum of clients.
In two years, our ILS business including our flagship Kiskadee Funds has grown to be a significant brand in the market. In 2015, we also launched Cardinal Re Ltd, a Bermuda-domiciled special purpose insurer designed to transform collateralised insurance and reinsurance risk into a security more suited for capital market investors. Kiskadee Investment Managers’ assets under management are on track to reach US$1 billion in 2016.
– Hiscox MGA: early in 2015, we acquired R&Q Marine Services, the mega-yacht and general marine leisure managing general agent. This furthers our capabilities to meet the needs of high net worth customers and acts as a vehicle through which we can act for Hiscox and other London-based carriers where the client’s requirements exceed our risk appetite. We have re-branded the business Hiscox MGA and included within it our Miami-based terrorism and fine art teams. Our Miami offering has expanded to include property underwritten for Hiscox and others, and in 2016 we will include Middle East terrorism and a South of France-based yacht underwriter.
IT As Hiscox grows, having an efficient reliable infrastructure is becoming ever more important. In early 2016 we reached the halfway point in the replacement of our UK retail systems with the launch of our new UK direct commercial platform. With all of our UK direct business now operating from this platform, we should see the same benefits across direct commercial that we saw when direct home migrated to the platform last year – sharper pricing, better customer responsiveness and greater efficiency. This £45 million, four-year programme remains broadly on track and work is well underway to adapt the system for the next phase, UK broker channel commercial.
If 2015 was relatively benign in the insurance world, the same cannot be said for investments. Not only are we learning to live with structurally be equally destructive and the positive feedback from the claims management demonstrated that the Hiscox service and efficiency is provided consistently across our teams.
In the London Market, Hiscox was ranked number one by brokers in the 2015 Gracechurch annual survey of claims performance, for overall best service. Hiscox UK was awarded Personal Lines Claims Initiative of the Year at the Insurance Times’ Claims Excellence Awards 2015, in recognition of our team’s improvement of customer satisfaction from the already high level of 95% to 98% as part of our effort to create customers for life.
lower interest rates but there is also a marked pick up in outbreaks of volatility. Who remembers the Swiss devaluation at the beginning of the year and the Greek crisis of the summer? These have now given way to the consequences of an unexpected decline in commodity prices and the reality of a slowing China transitioning from an economy driven by exports to one of domestic consumption. The cracks have been papered over by the support of central banks since the financial crisis but there is a growing feeling that they are reacting to events rather than anticipating them. With this volatility comes illiquidity and we are more aware than ever that we must be prepared, in the case of bonds, to hold what we own to maturity and in the case of equities to accept periods of negative returns. In an increasingly short-term world we need to take a long-term view. The early weeks of 2016 have seen sharp declines in equity prices as well as weakness in the higher-yielding areas of the bond market that we have avoided since 2011. Our priority as ever with the investment portfolio is to pay claims and support the business but we do have some dry powder should the current turmoil throw up some compelling opportunities.
The Board is committed to being well capitalised relative to regulatory capital models, but also has to meet clients’ expectations as to rating.
Amanda joined Hiscox in 2006 as Group Human Resources Director. Prior to joining the Group, Amanda worked for Mars, PepsiCo and Whitbread in senior human resources roles in Europe and internationally. Previous roles include: Compensation and Benefits Director for PepsiCo’s restaurants division in Europe and Africa; Group Compensation and Benefits Director for hotel and restaurant company Whitbread; and Human Resources Director for Marriott Hotels in the UK. Amanda began her career at Mars Confectionery where she joined as an English graduate from Reading University.
Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modeled losses January 2016
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2016 and industry data. Given the nature of the risks underwritten, the loss estimates may be materially different from those that arise depending on the size and nature of the event.
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm 10–25 year 25– 50 year 50 –100 year 100 –250 year5–10 year
Management compares the capital requirements of the Group against its available capital. Available capital is defined by the Group as the total of shareholders’ equity and subordinated debt. At 31 December 2015 available capital was £1,804 million (2014: £1,454 million), comprising shareholders’ equity of £1,529 million (2014: £1,454 million) and subordinated debt of £275 million (2014: £nil).
Capital requirements The Group monitors its capital requirements based on both external risk measures, set by regulators and the rating agencies, and its own internal guidelines of risk appetite. A full description of the requirements set by the regulators for the most significant insurance carriers is included in note 3.3 to the financial statements. A brief explanation of the primary internal and external capital constraints at Group level is given below.
The Solvency II regime came into force in Europe on 1 January 2016. In addition, the European Commission has proposed that Bermuda be granted equivalence with Solvency II. This recommendation needs to be adopted by the European Parliament during 2016. The Group does not expect these new regimes to impact its capital requirements materially.
Internal capital requirements The Group sets risk limits and tolerances which reflect the amount of risk it is willing to accept as a business. As part of good risk management, our current exposure by the key risk types is monitored against these pre-defined measures throughout the year. The largest driver of our capital 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 (£100 million) with an allowance for expected investment income. This underwriting risk limit definition has not changed since last year. A market loss at this remote return period would be very big indeed and would be expected to bring about positive market changes. The Group would be well positioned in the resulting strong market with capital in excess of £1 billion in addition to its LOC facilities and its now well-developed reinsurance partnerships. After the payment of the second interim dividend on 7 April 2016, the available capital will reduce to approximately £1.71 billion, comfortably meeting the current regulatory, rating agency and internal capital requirements. The Board believes that this level of capital gives sufficient flexibility to achieve its desired business growth whilst maintaining the Group’s current capital strength.
Rating agency assessments shown are internal Hiscox projections of the agency capital requirements on the basis of projected 2015 year end results. Hiscox uses the internally developed Group Capital Model to assess its own capital needs on both a trading (economic) and purely regulatory basis. All capital requirements have been normalised with respect to variations in the allowable capital in each assessment for comparison to a consistent available capital figure. The available capital figure comprises shareholders’ equity and subordinated debt.
Group financial performance £891.1 million). Gross premiums written for the UK were up slightly by 1.9% at £443.3 million (2014: £435.0 million). Europe’s gross premiums written fell slightly by 2.1% to £151.8 million (2014: £155.1 million), yet up 7.8% in currency terms. The US again had strong growth, up 32.0%, with the professions and direct business lines contributing well to that growth. Guernsey’s gross premiums written was up 5.1% year-onyear at £67.8 million. A full year of ownership of DirectAsia contributing £18.2 million of premium income.
The net claims ratio has remained steady at 38.6% (2014: 40.9%). The expense ratio has seen an uptick of 2.0% to 54.0%, as we invest more heavily in marketing spend, an additional £12.7 million for 2015, and IT development. The net combined ratio remained at 93.5% (2014: 93.5%), which is a good turnout compared against the additional investment being made.
Profit before tax for the year was £216.1 million (2014: £231.1 million). This continues a theme for the past three years of a lack of major catastrophe activity. The investment return reduced to 1.0% (2014: 1.8%), whilst lower than the previous year, they have again outperformed their benchmarks. Foreign exchange gains in 2015 were £15.2 million (2014: £5.0 million) with the US Dollar strengthening balanced by a weakening Euro for a second year. The Group recorded a posttax return on equity of 16.0% (2014: 17.1%) and earnings per share were 72.8p (2014: 67.4p).
Inflows for the year were £71.0 million (2014: inflow of £93.0 million). The Group paid £27.8 million of tax during the year compared to £62.6 million in 2014. The Group had cash outflows from investing activities of £59.7 million (2014: outflow of £43.6 million), incorporating the purchase of Hiscox MGA. Continued investment in IT architecture remains, and we completed the build of our new York building. Marketing expenses increased significantly to £44.5 million in the year (2014: £31.8 million).
During the year, the Group successfully issued £275 million of long-term debt at attractive rates of interest. The issuance, which was well received by the markets, counts towards our Tier 2 rating agency and regulatory capital requirements and means that we have been able to substantially repay the Group’s drawn-down Letter of Credit, with just $71.9 million (2014: $441.5 million) remaining drawn as at 31 December 2015. It is our intention to fully repay this amount to leave $500 million undrawn on an on-going basis.
Group investments very quickly and no sooner had the summer worries about Greece been allayed, than markets were taken by surprise by the Chinese decision in August to devalue their currency. From a position where growth was gaining traction in the likes of the USA and the UK and on a recovery path in Japan and Europe, there was suddenly concern that a slowdown in China would derail the global economy. This sparked a sharp sell-off in equity markets and a surge in volatility. Despite a rally in October, major equity indices declined during the second half. In fixed income markets the notable event was the Federal Reserve’s decision in December to increase US interest rates for the first time in nine years. This prompted an increase in yields generally but more particularly in the US bond markets. Returns from the bond portfolios since June, therefore, whilst positive, did not keep pace with the first half.
Predictably, the impact of the increase in the Federal funds rate was greatest in the US Dollar bond market and particularly at the short end of the yield curve. US Dollar bonds now account for 70.7% of our fixed income assets and, given the nature of our liabilities, are focused on a short duration. Our investment returns are therefore sensitive to price movements there. With twoyear US government bond yields increasing markedly from 0.5% to over 1%, the Dollar benchmark which most of our managers are measured against delivered a negative return in the final quarter. A further challenge for bond investors in the latter half of 2015 has been a widening in credit spreads. Whilst this has been most pronounced in the energy and materials sector and the high-yield market, where the portfolios have very little exposure, there has been a knock-on effect for credit markets more broadly. It has been a similar story in Sterling although yields did not rise as much given that expectations of a rate increase by the Bank of England receded into the second half of 2016. The Sterling returns, therefore, having lagged those denominated in Dollars for much of the year, caught up in the second half.
With central bank activity driving down government bond yields in recent years, we chose to accept the lower returns on offer rather than hunting for yield in longer duration or lower credit quality securities or by straying into non-traditional asset classes. Once again in 2015 our priority was capital preservation over appreciation. Whilst the ECB’s quantitative easing programme provided a supportive investment background for much of the first half of the year, the headwinds latterly have been much more severe. Sentiment can turn
Cash balances at the end of the year were higher than normal, largely reflecting the fact that the proceeds of the bond issue received at the end of last year were held in cash or near cash over the year-end. Subject to market conditions, these will be invested broadly in line with our overall asset allocation during the first quarter of 2016.
Our core business is to take risk and our strategy is to maximise return on equity within a defined risk appetite. Our continuing success depends on how well we understand and manage the significant exposures we face, and this risk knowledge informs every important operating decision the Group makes.
The framework is supported by a central risk team that reports to the Risk Committee of the Board. This team monitors and reviews the risk profile and the effectiveness of our risk management activities.
Our continuing success depends on how well we understand and manage the significant exposures we face.
We operate three lines of defence in co-ordinating duties, roles and responsibilities to manage the full range of risks to which we are exposed. These risks include: underwriting risk, reserve risk, investment risk, FX risk, reinsurance credit risk, broker credit risk, operational risk and aggregate risk.
Risk strategy Key aspects of our risk strategy are: – maintaining underwriting discipline when writing high-margin, volatile and complex risks; – seeking balance and diversity to generate
This will enable us to effectively capture the upside of the risks we pursue as well as managing the downside of the risks we are exposed to.
Risk management framework process We evaluate risks both individually and in aggregate, which enables us to evaluate how different risks interact to determine where correlations and concentrations may occur, and allows us to pursue our strategic objective of seeking balance and diversity.
Three lines of defence 1. First line of defence Own the risk
The first line of defence is responsible for the ownership and management of risks on a day-to-day basis in order to achieve the Group objectives. The first line of defence consists of individual risk owners at an operational level.
The Board approves Group risk policies and procedures, which address every aspect of risk, identification, appetite, measurement, mitigation, monitoring, reporting and governance. Their objective is to protect the Group’s shareholders, policyholders and other stakeholders from negative events.
The risk team has a wide range of tools at its disposal to monitor risks, ensure risk remains within the appetite set by the Board and share best practice on managing risks across the Group.
The tools include: – risk and control register; – key risk indicators; – critical risk monitoring; – audit reports; – Own Risk and Solvency Assessment
Business planning and risk profile Validation Capital and solvency assessment Board oversight
– Pricing discipline: we are firmly resolved to reject business that is unlikely to generate underwriting profits. Accepting risks below their technical price is detrimental to the industry as it can drive market rates down to a point where underwriting losses mount, insurers’ capital is destroyed causing some businesses to fail, customers to receive poor service and the industry to suffer negative publicity.
– Remuneration: Hiscox incentivises underwriters on return on equity, rewarding staff for profit not revenue.
– Careful management: we have identified the key aspects of our business that are critical to maintaining our ratings. These are closely managed to minimise the risk of an event, or change in strategy, that might jeopardise our ratings.
Binding authorities Hiscox generates considerable premium income through agents to whom binding authority is given to underwrite insurance policies on our behalf. Agents may underwrite business outside of our normal guidelines.
Though volatile and potentially costly, this business is compelling for us, as it is capable of earning good margins over the medium to long term.
– Risk appetite: we clearly define our risk appetite for underwriting risk, which dictates our business plan. To ensure that we do not exceed our risk appetite, we monitor our exposures closely and take mitigating actions to maintain the business plan. This enables us to maximise the expected risk return profile on the whole portfolio and offset the potential losses on more volatile accounts.
– Underwriting discipline: underwriters are incentivised to make sound decisions that are aligned with the Group’s overall strategic objectives and risk appetite. Clear limits are placed on their underwriting authority. Policy wordings are regularly reviewed in the light of legal developments to ensure the Group’s exposure is restricted, as far as possible, to those risks identified in the policy at the time of issue.
– Modeling: we have tailored our modeling resources to assist insurance and reinsurance plans and ensure that the exposure we write matches expectations. The risk aggregation and modeling resources are shared across the Group to ensure everyone uses the same modeling tools.
We invest the cash we receive from our clients and the capital on our balance sheet until it might be needed to be paid as claims.
– Senior management and Board approval: our provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
– Conservative policy: our overriding concern is to not lose money or to put at risk the Group’s capacity to underwrite. Our policy is designed to maximise returns within an overall risk appetite.
– Duration: as many of our insurance and reinsurance liabilities have short time spans, we do not aim to match exactly the duration of our assets and liabilities.
– Benchmarks: our fixed income fund managers are set benchmarks that approximate the payment profile of our claims while still providing them with some flexibility to enhance returns.
– Equities: a proportion of the Group’s assets is allocated to riskier assets, principally equities. For these assets we take a long-term view so we can achieve the best risk-adjusted returns. The proportion of funds we invest in risk assets will depend on the outlook for investment and underwriting markets. 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.
– Guidelines: investment risk also encompasses the risk of default of counterparties, which is primarily with issuers of bonds in which we invest. Our third-party investment managers are issued guidelines as to the type and nature of bonds in which to invest.
Liquidity We are unable to meet our liabilities to customers or other creditors when they fall due. Also the risk that we incur excessive costs by selling assets or raising finance quickly to meet our obligations.
Foreign exchange risk Our reporting currency is Sterling, but a significant proportion of our underwriting activity is located in the US and Europe. In addition the capital bases of our insurance companies in Bermuda, Guernsey and US are in US Dollars. Therefore, movements in foreign exchange rates may have a material adverse effect on our financial performance and position.
We provide cover against a range of catastrophes, so if one occurs we may be faced with large, unplanned cash demands. This situation could be exacerbated if we have to fund a large portion of claims pending recovery from our reinsurers.
– Currency matching: as the US Dollar is the Group’s largest underwriting currency, our policy is to match our US Dollar insurance liabilities with investments held in that currency to minimise any losses from currency fluctuations. We will hold a percentage of our capital in the matching currency of that part of our underlying business, where it is deemed appropriate.
Regulatory change The insurance industry is undergoing a period of unprecedented regulatory change, which may impact the capital we are required to hold.
We cover clients against a range of catastrophes and protect ourselves through reinsurance. We face credit risk where we seek to recover sums from other reinsurers.
We operate in a world where the volume of sensitive data and the number of connected devices and applications have increased exponentially. In parallel, the threat environment is constantly evolving as cyber attacks become increasingly frequent and sophisticated. Cyber risk is an integral part of what we do. As such, it is managed as a business risk, not an IT responsibility.
– Careful selection: we buy reinsurance only from companies that we believe to be strong. Every reinsurer we use must be approved by a dedicated Group Credit Committee, based on an assessment of financial strength, trading record, payment history, outlook, organisational structure, plus its external credit ratings.
– Careful selection: we follow the same careful selection, monitoring and guidelines process for broker credit risk as reinsurance credit risk.
– Strategy: our cyber security risk strategy combines industry standard perimeter security with data-centric protection for specific highly confidential information. – Risk management: we have dedicated IT security resources which provide advice on security design and standards, establishing appropriate system protection, embedding of security within IT practices and management of incidents.
Corporate responsibility on the risks associated with climate change. Hiscox is independently assessed against a commitment to six key principles: risk analysis, public policy, influencing our customers, investment strategies, managing our own impact and reporting on our direct emissions. More information on ClimateWise and the work Hiscox is doing here is available at www.climatewise.org.uk.
We believe in identifying, then minimising the environmental impact of our business activities, including the direct impact of our own business operations. We seek to reduce the amount of waste our activities produce, and the amount of resources we consume. We are committed to reducing our carbon footprint, and for the business to operate more sustainably. This includes measuring our use of water, energy and other products in order to reduce consumption over time; buying sustainably sourced or energyefficient products where we can; and minimising waste by recycling products where we can. In 2015 Hiscox committed to six new targets for a real-term reduction in carbon emissions of 20% by 2020 relative to 2014.
At Hiscox our core values include challenging convention, to have courage, to provide quality products, to excel in the service we provide and be human in our approach. These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
Total tonnes CO2e per FTE (Scope 1 and 2) 1.27 1.20 1.17
Corporate responsibility continued as well as ensuring all relevant Group financial information is available on the corporate website. Senior management and key employees also regularly meet investors and analysts throughout the year to explain and answer questions on our financial performance and business strategy.
Dealing with customers Our ethos of outstanding customer service has earned Hiscox a reputation as an insurer whose word can be trusted, which sets us apart in our industry. Our belief is that insurance is a promise to pay, so should a loss occur we aim to fully support our customers, and to pay every valid claim as soon as possible. This approach was recognised at the Insurance Times Claims Excellence Awards, where Hiscox UK’s property claims team was awarded Personal Lines Claims Initiative of the Year.
The workplace Culture The Hiscox culture is underpinned by a set of core values that determine a standard of behaviour that we expect all our employees to follow. We firmly believe that, through high standards of conduct, we are more likely to achieve business success and, therefore, create additional value for shareholders. We aim to have the highest standards of corporate governance while striving to remain, in essence, a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or a speedy response. We believe that we have the balance right and, furthermore, that this is one of our greatest strengths. We seek to follow the best practices in managing our people and to be a fair and professional employer. Hiscox aims to maintain a culture that encourages employees to raise any concerns relating to malpractice or wrongdoing without threat of unfair treatment as a result. If an employee has a serious concern relating to the operation of the business, we have a whistleblowing policy that enables that person to confidentially raise their misgivings with the Group Compliance and Audit Director, Chief Executive or Chairman. Employees also have the option to raise a concern with the Chairman of the Audit Committee. Hiscox also subscribes to Public Concern at Work, which provides free legal advice to any employee with a concern about possible danger or malpractice in the workplace. Hiscox wants to employ the best people and to provide them with the means and the motivation to excel. This is achieved with fair rewards and by providing staff with an environment in which they can enjoy their work and reach their full potential.
Hiscox Group operations will continue to offset the emissions we are not able to reduce, currently through our support of the awardwinning climate and sustainable development experts, ClimateCare. Its LifeStraw Carbon for Water project provides simple gravity-fed water filters for 4.5 million people in Western Kenya, minimising exposure to water-borne diseases. This project also cuts carbon emissions by reducing the need to boil water to make it safe to drink.
The Hiscox London office received a Gold with Special Commendation Award at the 2015 Clean City Awards, as well as a Bronze Award in the Mayor of London’s Business Energy Challenge 2015. Hiscox remains a member of the Carbon Disclosure Project (CDP), an initiative that provides a global system for companies to measure, disclose, manage and share vital environmental information.
The Hiscox culture is underpinned by a set of core values that determine a standard of behaviour.
In 2015, all Hiscox website content was reviewed specifically for raising the profile of company governance, human resources and environmental transparency.
Inclusion Senior management believes that being successful at Hiscox should be purely down to talent, personal values and effort. Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment, regardless of disability, sex, race, religion, sexual inclination or background. To support this, in 2015 we focused on gender with the launch of a new Women in Leadership programme in order to help more women become Hiscox leaders. Being a more inclusive business will bring a broader range of opinions and ideas to decision-making.
Communication and participation Employees are kept informed of business developments through formal briefings, team meetings, intranet bulletins, video conferences and other more informal routes. We listen to the views of our people and involve all in new ideas to take forward the business.
Hiscox Germany has chosen to support two refugee projects: one in Bavaria and the other in Syria, through the United Nations High Commissioner for Refugees (UNHCR).
In Colchester, employees raised £15,000 for the Tom Bowdidge Foundation. This included £5,000 raised through their participation in the Colchester Half Marathon and over £3,000 at a Charity Golf Day.
In York, employees have already raised over £5,000 through a series of activities for their two chosen charities: York Mind and Snappy.
In London, Hiscox worked with The Brokerage Citylink during the summer of 2015, participating for the second time in The City of London Business Traineeship Programme, which offered four young students from inner London the chance to work in the business for eight weeks. The scheme helps inner-city school leavers gain experience of working in a big City firm, as well as to learn extra social and professional skills to help them get a job at the end. The scheme was once again a success, with one intern still working with us into next year during her gap year.
Hiscox recognises how important it is for employees to maintain a healthy work/life balance and it gives them the option of flexible and home working wherever possible.
Supporting the arts, science and technology Hiscox continues to support the arts, science and technology, through its work with the Royal Academy Schools, providing a bursary for two second-year students, and with the City of London’s Sculpture in the City project, designed to transform the local landscape with unique and well-known pieces of modern sculpture. Hiscox employees volunteered to work with students from Bethnal Green Academy and other local schools to bring the sculptures to life. Hiscox is a founding benefactor of the Public Catalogue Foundation, which was created to catalogue all oil paintings in public ownership in the UK. 2015 was the final year of Hiscox’s support of the Royal Institution (RI), the oldest independent research body in the world, dedicated to connecting people with the world of science for over 200 years. Hiscox has for the past five years been title sponsor of the Sunday Times Hiscox Tech Track 100, charting the fastest growing private technology, telecoms and digital media companies. Hiscox Germany continues to support promising young artists, along with Hamburg’s renowned Academy of Fine Art, presenting a €7,500 prize to the best young artist selected by a jury of well-known art experts.
Insurance carriers One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes.
One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole.
Syndicate 3624 Syndicate 3624 is a wholly-owned Syndicate which began underwriting for the 2009 year of account. The Syndicate has a diversified portfolio of worldwide risks including FTC (fire, theft and collision), auto extended warranty, E&O, property, construction, technology and media, healthcare and aviation.
The diversification of the Syndicate from both an exposure and a geographical perspective means the Syndicate is well balanced to grow in a controlled way. Total underwriting capacity of Syndicate 3624 has increased to £400 million for the 2016 year of account.
Syndicate 6104 Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account. It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s property catastrophe reinsurance account. The arrangement has been extended through to the 2016 year of account and Syndicate 6104’s capacity was decreased to £56 million, from £65 million. Syndicate 6104 pays an overrider and profit commission to Syndicate 33.
Hiscox Insurance Company (Bermuda) Limited Gross premiums written ($m) external business
Hiscox Insurance Company (Bermuda) Formed by Hiscox in late 2005, Hiscox Insurance Company (Bermuda) Limited was set up as an expansion of the reinsurance operations of Hiscox and as an internal reinsurer of the Group. Hiscox Bermuda has an A.M. Best rating of A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2015, net assets exceeded $848 million (2014: $895 million).
Hiscox Insurance Company Inc. Hiscox Insurance Company Inc. was acquired by the Group in 2007 through the purchase of the then parent holding company ALTOHA, Inc. Hiscox Insurance Company Inc. is based in Chicago, Illinois and is an admitted insurance company with licences in all 50 US states and the District of Columbia. Its main business is property and liability cover sold through insurance brokers. In November 2010, the Company launched a direct commercial business. Hiscox Insurance Company Inc.
DirectAsia In March 2014, the Group acquired Direct Asia Insurance (Holdings) Pte Ltd (‘DirectAsia’). DirectAsia underwrites through subsidiaries in Singapore and Hong Kong, and an agency in Thailand. Its primary business is motor insurance, with ancillary lines in travel, personal accident and healthcare. At the end of 2015, the insurance company subsidiaries have net assets exceeding SGD$15 million (2014: SGD$16 million) and HK$125 million (2014: HK$134 million).
Robert Simon Childs Non Executive Chairman (Aged 64) 26 February 2013*
Anne MacDonald joined Hiscox in May 2015. Anne has held the position of Chief Marketing Officer at four different Fortune 100 companies, marketing some of the most recognisable corporate names in the world – from Citigroup and Travelers to Macy’s and PepsiCo. With an MBA from Bath University, Anne currently serves on the Board of Rentrak Corporation, the NASDAQ-listed global digital media measurement and research company serving the entertainment and advertising industries.
Ernst Jansen joined Hiscox in 2008. He held several Managing Director positions in the European chemical industry between 1980 and 1990. He was an Executive Director then Vice Chairman of Eureko B.V. (now Achmea BV) between 1992 and 2007 and following retirement he became an advisor to the Executive Board and is director of two investment vehicles of Achmea.
Colin Keogh Senior Independent Director and Chairman of the Remuneration Committee (Aged 62) 19 November 2015*
Colin Keogh joined Hiscox in November 2015. Colin has spent his career in financial services, principally at Close Brothers Group plc, where he worked for 24 years and was CEO from 2002 until 2009. Colin currently holds directorships at London-listed Virgin Money Holdings (UK) plc and is Chairman for a specialist financial services business Premium Credit Limited.
Caroline Foulger joined Hiscox in January 2013 having retired from a partnership at PwC on December 31, 2012. Until May 2012, Caroline led PwC’s Insurance and Reinsurance practice in Bermuda. Caroline is a Fellow of the Institute of Chartered Accountants in England and Wales, a member of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Directors. Caroline is the Chair of the Board of the Bermuda Business Development Agency and a Non Executive Director of the Bank of N.T. Butterfield & Son Limited and Catalina Holdings (Bermuda) Ltd.
Along with the opportunity to shape the future of the Group comes responsibility. We expect Hiscox Partners to act as proprietors of the business, bringing attention to areas where they feel that Hiscox is not pursuing the correct course – not only in top-level strategy, but also day-to-day business behaviour in every area. Partners are expected to encourage and exemplify the Hiscox values and lead at all levels.
Steve Langan* CEO Hiscox Insurance Company, CEO of DirectAsia Group, Chief Marketing Officer
Paul Lawrence* Chief Underwriting Officer, Hiscox London Market and Joint Active Underwriter Syndicate 33
Simon Williams Head of Marine and Energy, Hiscox London Market *Hiscox Executive Committee
Corporate governance Colin Keogh was appointed by the Board on 19 November 2015 and, in accordance with the Company’s Bye-Laws, will seek re-appointment at the Annual General Meeting. In accordance with the Code the remaining Directors will also submit themselves for re-appointment. The external commitments of the Chairman and the Executive Directors are disclosed in their profiles on page 42. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting. A review of the remuneration of the Non Executive Directors, which does not include performance-related elements, was carried out in respect of the 2015 financial year and adjustments were made to their remuneration as described in the annual report on remuneration on page 67. Whilst the Board acknowledges the value that knowledge and experience of the organisation can bring, it also recognises the need to progressively refresh Board membership over time. Non Executive Directors will normally be expected to serve for six years. They may be invited to serve for longer, but service beyond nine years is unlikely. Any service beyond six years is subject to a particularly rigorous review.
Overview and basis of reporting Hiscox Ltd (‘the Company’) is the Bermuda incorporated holding company for the Group. The Company has a premium listing on the London Stock Exchange. The corporate governance framework for the Company is derived from its constitution together with Bermuda Companies Act legislation. The Listing Rules require the Company to report against the UK Corporate Governance Code published in September 2014 (the Code). During 2015, and up to the date of this Report and Accounts, the Group has complied with the provisions of the Code in all material respects.
There is a formal induction process for new Directors and induction training was provided to Lynn Carter, Anne MacDonald and Colin Keogh during the year. The needs of a new Director joining the Board are assessed and appropriate training arranged. Existing Directors are provided with the opportunity to attend training sessions. During the year Directors received briefings on capital modeling and cyber risk. Directors’ training requirements were also assessed as part of the Board evaluation described on pages 47 and 49. The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and overall strategy and meets periodically with the Senior Independent Director. The Chief Executive has responsibility for running the Group’s business.
The Board meets at least four times a year and operates within established Terms of Reference.
It was reported last year that the Board had accepted the advice of the Committee with regard to the requirement for FTSE 350 companies to put the external audit out to tender and the audit of the Group was duly put out to tender for the first time, at the end of 2014. (Further details of this process are provided on page 52.) In accordance with the recommendation of the Committee, PwC will be proposed for appointment as auditors at the next Annual General Meeting. Caroline Foulger played no part in the audit tender process and absented herself from all meetings of the Committee at which this topic was discussed. The internal and external auditors have unrestricted access to the Committee. All nonaudit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Committee. KPMG has confirmed to the Committee that in its opinion it remains independent. The Committee is satisfied that this is the case. In respect of the 2015 financial year the Committee reported to the Board on how it had discharged its responsibilities and provided advice to the Board on how the Annual Report and Accounts were fair, balanced and understandable and provided the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The arrangements by which staff may, in confidence, raise concerns about possible improprieties are described in the corporate responsibility statement on page 35. The internal audit function reviewed these arrangements during the year and reported on their findings to the Audit Committee. Further information on the activities of the Committee is included in the Audit Committee report on page 51.
A copy of any such advice would be provided to the Company Secretary who would then circulate it to all Directors. The appointment and removal of the Company Secretary is a matter for the Board as a whole. As part of the internal Board evaluation conducted during the year Directors were asked whether they had sufficient access to the advice and services of the Company Secretary and there were no negative responses received. The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. As part of the Board evaluation Directors were asked about the quality of information provided to the Board and no concerns were raised. The Board of Hiscox Ltd held four scheduled meetings during 2015. The Code does not require the independence or otherwise of a Non Executive Chairman to be considered subsequent to their appointment. The Board considers all other Non Executive Directors to be independent within the meaning of the Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board’s Terms of Reference include a Schedule of Matters Reserved for Board Decision, a copy of which can be found on the Group’s website: www.hiscoxgroup.com. Aside from the opportunity which the Non Executive Directors have to challenge and contribute to the development of strategy in the regular Board meetings, the Non Executive Directors also attended the annual Hiscox Partners’ meeting held during the year. The Board retains ultimate authority for high-level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of interim dividends and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus issues or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share awards. The Board has appointed an Executive Committee (described on page 49) and authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Board or Executive Committee approval is not required.
The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs.
The Committee’s role is to monitor the structure, size and composition of the Hiscox Ltd Board and, when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Group believes that opportunity should be limited only by an individual’s ability and drive. The Committee considers diversity, including gender diversity, when recommending appointments to the Board. The Committee has a policy in place to ensure that the candidate pool for each new appointment includes at least one female but does not consider it appropriate to set quotas for diversity. As referred to earlier in this report three Non Executive Directors who had served for nine years, or were approaching nine years’ service, retired from the Board during 2015. With this in mind early in 2014 the external search consultancy firm, Egon Zehnder, was commissioned by the Committee to identify suitable independent non executive candidates. Other than undertaking search assignments Egon Zehnder has no connection to the Group. The qualities and experience specified by the Committee in the search briefs were aimed at balancing the existing skills, experience, independence and knowledge on the Board. Each candidate was interviewed by the Chairman, the Chief Executive and the Group Human Resources Director. As a result of the search a shortlist was produced and from that shortlist two candidates, Anne MacDonald and Lynn Carter, were nominated by the Committee. In February 2015 the Board agreed to recommend their appointment to shareholders and a separate resolution for each appointment was duly passed at the 2015 Annual General Meeting.
In February 2015 the external search consultancy firm, Sam Allen Associates, was commissioned to identify suitable candidates for the role of Senior Independent Director. Other than undertaking search assignments and insuring their business with Hiscox, Sam Allen Associates have no connection to the Group. Again the search brief was aimed at balancing the existing skills, experience, independence and knowledge on the Board. A shortlist of five potential candidates was produced and each was interviewed by the Chairman and the Group Human Resources Director. Two of the candidates were then interviewed by the Chief Executive and for a second time by the Chairman. Colin Keogh was then nominated by the Committee and appointed by the Board in November 2015. His biographical details are set out on page 43 and the reasons why the Board believed Colin Keogh should be appointed will be stated in the circular which will accompany the notice of the 2016 Annual General Meeting.
The Nominations Committee’s role is to monitor the structure, size and composition of the Hiscox Ltd Board.
The external search consultancy firm, JCA, has been commissioned to advise the Committee. The search has taken account of both internal and external candidates. Other than undertaking search assignments JCA have no connection to the Group. The Committee will take external advice as appropriate.
The Risk Committee The Risk Committee of the Board oversees the risk management framework and advises the Board on how best to manage the Group’s risk profile. The Committee normally meets three times per year. The Committee comprises Lynn Carter, Robert Childs, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan and Gunnar Stokholm. It is chaired by Caroline Foulger. The risk management framework is described in the risk management section on pages 27 to 34.
Performance evaluation The Code requires an externally facilitated Board evaluation to be undertaken every three years and this last took place in 2014. In 2015 an internal evaluation was conducted. The evaluation included a review of Board composition and whether there was an appropriate balance of skills, experience, independence and knowledge and whether the Board worked together as a unit. It also considered how diversity, including gender diversity, could be improved. Other areas covered were succession planning, Board meeting content and focus, the support to the Board, the quality and provision of information, the Non Executive Directors’ input into the strategy and shareholder engagement. As part of the Board evaluation Directors were asked whether additional information is required to support decisionmaking. The findings of the evaluation were discussed by the Board as a whole.
Shareholder communications During the year the Company has engaged with its largest shareholders on the audit tender process and on the proposed renewal of its Performance Share Plan. The views expressed by shareholders have been reported back to the Board through its committees. Further details on the renewal of the Plan are set out on page 54. The Executive Directors communicate and meet directly with shareholders and analysts throughout each year, and do not limit this to the period following the release of financial results or other significant announcements. All Directors attended the Annual General Meeting in 2015. The Company commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research, together with the analysts’ research notes, are copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders and analysts.
to major shareholders in February 2015 to consult them on the audit tender process and to offer to meet with them. Major shareholders have also been consulted on the renewal of the Company’s Performance Share Plan, approval of which will be considered at the next Annual General Meeting. Major shareholders are invited to request meetings with the Senior Independent Director and/or the other Non Executive Directors. An alert service is available on www.hiscoxgroup.com to notify any stakeholder of new stock exchange announcements.
Accountability and internal control The principal risks facing the organisation are described on pages 30 to 34 together with an explanation of how they are managed or mitigated. Risk is at the heart of any insurance organisation and the management of risk is fundamental to the success of its business model. The Group is subject to regulatory requirements aimed at ensuring its continuing solvency and has established arrangements to assess and manage its principal risks continually. Risk and solvency assessments are conducted and the Group is required to assess the capital resources necessary to achieve its strategic business objectives over the coming year whilst remaining solvent given its risk profile. This includes a forward-looking assessment which considers the business plan over a three-year time horizon.
The Group has a dedicated risk team led by the Chief Risk Officer which reports to both the Risk Committee of the main Board and to those of the relevant subsidiary boards. At each of its meetings during the year the Risk Committee reviews and discusses a risk dashboard and critical risk tracker which monitors the most significant risks. A critical risk is one which materially threatens financial strength and therefore requires regular focus. The Risk Committee also engages in focused reviews. Stress tests and reverse-stress tests (scenarios which could potentially give rise to business failure) are undertaken and these are reported to the Risk Committee. In the light of these arrangements the Directors are satisfied that a robust assessment of the 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. The internal audit function carries out a rolling programme of reviews aimed at ensuring complete coverage of the Group’s operations over a three-year period. The findings of internal audit reviews and the ratings given are reported to the Audit Committee. Taken together these activities enable the Board to monitor the Group’s risk management and internal control systems.
Each year the internal audit function reviews the internal audit universe and updates it to reflect changes in the Group’s operations including new business units and divisions. There is also an annual review of the Group’s compliance with the governance requirements emanating from its regulators and the Code. The findings and overall rating from this review are reported to the Board through its Audit Committee. For the year ended 31 December 2015 the review resulted in a satisfactory rating.
Notwithstanding the uncertainties arising from the risks summarised on pages 30 to 34 there is a statement at page 73 which confirms that for the 2015 financial year the Directors considered it appropriate to adopt the going concern basis of accounting. For the reasons explained above the prospects of the Company are assessed over a longer period than the 12 months required by the Code. The Group calculates and projects forward the capital requirements of its regulators and those of the rating agencies to ensure that it will continue to meet any applicable solvency requirements and achieve the ratings it feels are necessary to conduct its business profitably. Whilst the Board has no reason to believe the Group’s business model will not be viable over a longer period, the period over which the Board considers it possible to form reasonable expectations as to its position, is the three years to 31 December 2018. This corresponds to the forward-looking element of the Group’s regulatory solvency assessments and allows reliance to be placed on the output from those assessments as well as the other arrangements described above. On the basis of its robust assessment of the principal risks and on the assumption that they can continue to be managed or mitigated as described and taking account of the most recent solvency assessments, together with the results of the stress tests and focused risk reviews, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2018.
iii) The valuation of the investment portfolio The Group reports its assets at fair value. As discussed in note 2.21, during periods of economic stress, the resulting diminished liquidity means estimating fair value involves a higher level of judgement. The Committee has evaluated the process which management has used to estimate the fair value of the investment portfolio and is satisfied with their conclusions.
v) Kiskadee deconsolidation As discussed in note 2.3(a), due to significant inflows into the Kiskadee vehicles during 2015, the direct interest held by the Group fell to a level where it was deemed prudent to reassess the original decision to consolidate the vehicles in 2013. The Audit Committee has reviewed the report of the key judgements including the variability of returns and other significant qualitative factors and is satisfied with the conclusion reached that the Group does not meet the criteria for consolidation of the Kiskadee vehicles as from 1 July 2015.
External auditor The external auditors are invited to attend all meetings of the Committee and it is the responsibility of the Committee to monitor their performance, objectivity and independence. The Committee discusses and agrees the scope of the audit plan for the full year and the review plan for the interim statement with the auditors. The Audit Committee receives reports from external auditors at regular intervals during the audit process including in relation to the judgements outlined above.
To aid the review, the Committee considered the report of the key judgements in the financial statements from the Chief Financial Officer as well as reports from the external auditor on the outcomes of their annual audit and their half-year review. The Committee is supportive of KPMG in displaying the necessary professional scepticism their role requires. The primary areas of judgement considered by the Committee in relation to the 2015 Annual Report and Accounts were: i) Reserving for insurance losses As set out in our significant accounting policies on page 89, the reserving for losses, in particular losses incurred but not reported, is the most critical estimate in the Company’s consolidated balance sheet. The Chief Actuary presented a Group reserving report to the Committee and the Committee reviewed the approach taken by management when making their selection of reserving estimates and is satisfied with the judgements taken and the reporting and disclosure of the estimates.
Internal audit The Group Compliance and Audit Director is invited to attend all meetings of the Committee. It is the responsibility of the Audit Committee to monitor and review the effectiveness of the Group’s internal audit function and to consider reports prepared by internal audit on the effectiveness of systems of internal control. An internal Board and Committee evaluation was conducted during the year, the scope of which included the Audit Committee.
Audit tender It was disclosed in last year’s report that a tender process was underway for the audit of the Group. KPMG had served as auditors of the Group since it was admitted to the main market of the London Stock Exchange in 1997. The audit had not been subject to a tender process in the past and as previously reported, in view of the length of their tenure, it was decided that KPMG should not participate. Having taken this decision the Committee discussed the effectiveness of the current external audit process in the context of what would be required from a new external auditor. The process which was undertaken can be summarised as follows.
– The prospective candidates (including one mid-tier firm) were interviewed by the then Chairman of the Audit Committee, with the then Chief Financial Officer accompanying him to the initial meetings. – As a result of those interviews two firms were invited to submit a tender. It became apparent that it would not be possible to identify a suitable mid-tier firm with sufficient global coverage and experience. – The Company’s major shareholders were consulted and invited to provide input to the process.
The recommendation, which has been accepted by the Board, is that PwC be proposed for appointment in place of the Company’s present auditors at this year’s Annual General Meeting. Daniel Healy retired as the Chairman of the Audit Committee in October 2015 and I was appointed to succeed him with effect from 1 January 2016. As a former partner of PwC I played no part in the audit tender process and absented myself from all meetings of the Audit Committee and the Board at which this topic was discussed.
Last year we responded to shareholder feedback by making certain refinements to the way in which we operate the remuneration policy. Consistent with evolving best practice, the Committee capped annual bonuses and variable pay under the recruitment policy, introduced new clawback provisions and added a holding period to future performance share awards. These changes were disclosed in last year’s report and received strong support from our shareholders at the 2015 AGM.
The remuneration policy is next due for renewal at the 2017 AGM and the Committee will undertake an appropriate review in preparation for this.
Aligning our remuneration to business results The main elements of our remuneration structure are unchanged.
– Annual incentive scheme: in order for Executive Directors to receive a payment under this scheme, the Company must achieve a pre-tax return on equity for the year in excess of a pre-established Hurdle Rate. If the Hurdle Rate is not met, we simply do not pay bonuses to the Directors. In other words, like shareholders, we are focused on results, not inputs or effort or other measures often used to justify bonus payments. Once the Hurdle Rate is achieved the aggregate size of the bonus pool is calculated based on the level of profits delivered and the Executive Directors’ bonuses are paid from this pool.
2015 results and remuneration outcomes In 2015 Hiscox has delivered a post-tax ROE of 16.0% compared with a 2014 result of 17.1%. Profit before tax declined by 6.5% to £216 million and NAV per share increased by 17.8%. We have announced a second interim dividend of 32.0p per share which comprises a final dividend equivalent
– Annual incentives: the approach taken to set Executive Director incentive awards for 2015 is described in the annual remuneration report. In summary, the Executive Directors’ bonuses are based on the above hurdle pre-tax ROE result of 16.5% and the profit performance of the Group. Given the satisfactory individual performance of Bronek Masojada and Richard Watson in 2015, the Committee sees no reason why they should not receive a bonus which reflects these results. The Committee also reviews profit and ROE results from prior years as a check that the bonuses are appropriate.
Richard Watson has been awarded a bonus of £900,000. This award is primarily due to the strong underwriting performance across the Group which has been a major part of the 2015 results. It also reflects Richard’s broadening contribution to the Group and to the Board, having been in the role for three years.
As part of Stuart Bridges’ departure terms we agreed to pay him a bonus to reflect the proportion of the year he worked. Stuart’s bonus payment of £475,000 takes account of the profit outcome and is pro-rated based on eight months’ service in 2015. Further details on Stuart’s exit arrangements were published on 1 September 2015 and are set out in the annual remuneration report.
– Performance Share Plan: I am delighted to say that over the past three years (2013/14/15) Hiscox has delivered an average post-tax ROE of 17.5%. As a result, the 2013 performance share plan grant has vested in full.
The Committee is confident that our remuneration practices continue to provide strong shareholder alignment and incentivise Directors appropriately for the delivery of absolute performance. The Executive Director remuneration for 2015 reflects that approach.
From January 2015 we have operated the following restrictions to our remuneration policy: – Annual bonuses will be capped From the year ended 31 December 2015 the cap on the annual bonus which can be earned by the CEO and CFO for any one year will be 400% of salary. The cap for the Chief Underwriting Officer will be 500% of salary, reflecting the commercial nature of the role.
These vary by local country practice but all open Hiscox retirement schemes are based on defined contributions. This approach will be generally maintained for any new appointments other than in specific scenarios (e.g. local market practice dictates other terms).
Bonuses for more junior employees are calculated using a more formulaic approach. Further details are set out on page 65.
For delivery of the threshold hurdle, up to 25% of the relevant award will vest. For full vesting, the stretch hurdle needs to be met in full. Usually, there will be straight-line vesting for performance between the threshold and stretch hurdle.
Participation in this Plan is restricted to Executive Directors and other senior individuals.
Paid shortly after the end of the financial year in which the bonus was achieved.
Deferred awards are subject to a malus provision. Further details on the malus provision are set out on page 61 of this report.
Dividends (or equivalents) may accrue on vested shares prior to release. Further details on this are set out on page 61. Unvested awards are subject to a malus provision. Further details on the malus provision are set out on page 61 of this report. The PSP rules also enable the Company to grant market value options, however there are currently no plans to use this for regular awards.
The Chairman typically receives an all-inclusive fee in respect of the role. In addition to his fees the Chairman may be provided with incidental benefits (e.g. private healthcare and life assurance). The remuneration of the Chairman is determined by the Committee.
– Benefits as received during 2015, as disclosed in the Executive Director remuneration table on page 64.
– Retirement benefit as received during 2015, as disclosed in the Executive Director remuneration table on page 64.
Above target performance Fixed reward plus variable pay for the purpose of illustration as follows. – Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and 500%
of salary for the CUO. – PSP: assumes vesting of 100% of the maximum award.
A ‘buy-out’ payment/award may be necessary in respect of arrangements forfeited on joining the Company. The size and structure of any such buy-out arrangement will take account of relevant factors in respect of the forfeited terms including potential value, time horizons and any performance conditions which apply. Where relevant, the Committee will review the likelihood of achievement of performance conditions based on the track record of payments and relevant performance of the candidate’s current employer within the testing period. The objective of the Committee will be to suitably limit any buy-out to the commercial value forfeited by the individual.
On initial appointment (including interim Director appointments) the Committee recognises that there may be a need to offer more bespoke arrangements in order to facilitate recruitment. In such circumstances, the Committee may opt to vary the approach set out in the policy as it considers appropriate and necessary at the time. The exact structure of any such awards, including the mode of delivery (e.g. cash or shares), the timeframe for payment or vesting, and the detail of performance measures and targets (if any) would be tailored as appropriate but would remain consistent with the overall Hiscox approach to pay. In all circumstances, any movement from the ongoing policy would only be considered where there is a strong commercial rationale to do so and where the Committee felt this was in the best interests of the Company and shareholders. The Company would seek to clearly disclose and explain any such arrangements to shareholders as appropriate.
Policy on payment for loss of office Subject to the execution of an appropriate general release of claims an Executive Director may receive on termination of employment by the Company: 1. Notice period of 12 months Executive to remain on the payroll but may be placed on gardening leave for the duration of the notice period (or until they leave early by mutual agreement, whichever is sooner). During this period they will be paid as normal, therefore this will include base pay, pension contributions (or benefits allowance as appropriate) and other benefits (e.g. healthcare).
Consideration of shareholder views Hiscox regularly discusses remuneration policy matters with a selection of shareholders.
The Remuneration Committee takes into consideration the range of views expressed in making its decisions.
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2015 and how it will be applied for the 2016 financial year. KPMG has been engaged to audit the report to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013, being the sections in the annual report on remuneration 2015 below entitled ‘Executive Director remuneration’, ‘details of pension entitlements’, ‘Non Executive Director remuneration’, ‘payments for loss of office and payments to past Directors’ and ‘Directors’ shareholding and share interest’.
1Salaries are reviewed from 1 April, further detail on April 2015 increase can be found below. 2Benefits for Executive Directors include cover under the Company healthcare scheme, life insurance, income protection insurance and critical illness policies as well as gym membership and a Christmas gift hamper.
3 A proportion of the bonus amount is deferred as set out on page 58 of the policy report. 4 2015 long-term incentives relate to performance share awards granted in 2013 where the performance period ends on 31 December 2015. The award is due to vest on 2 April 2016. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the average share price during the three-month period to 31 December 2015 of 990.92p. The 2014 long-term incentive award relates to performance share awards granted in 2012 where the performance period ends on 31 December 2014. The amount also includes dividend equivalents accrued on this award. For the purpose of this table the performance share award has been valued based on the share price on 19 March 2015 of 805.00p. 5SJ Bridges’ appointment as an Executive Director ceased on 31 August 2015. The 2015 amounts shown above are pro-rated based on eight months’ service.
Bonus Hiscox’s approach to remuneration is underpinned by the belief that a reasonable portion of total remuneration should be attained through incentive awards, thereby linking rewards directly with performance.
In setting the 2015 bonus payments for the Executive Directors the Remuneration Committee took account of the following: w the Hurdle Rate for the 2015 financial year was set at 7%. The 2015 pre-tax ROE was 16.5% which meant that the bonus hurdle had been met and a bonus pool was generated in respect of 2015; w the achievement of satisfactory individual performance which meant that the Executive Directors could participate fully in the bonus pool; w the size of the overall bonus pool (which is calculated based on profit, as described in the remuneration policy) and the number and level of employees eligible for a bonus in the year. The Hiscox remuneration philosophy is that junior bonuses are more formulaic, whereas bonuses for senior participants may vary significantly depending on the size of the overall pool. As ROE and profit achievement drive the size of the overall bonus pool, they are key determinants in bonus levels for Executive Directors; w ROE and profit results from prior years are used as a check that bonuses are appropriate. The 2015 bonus for Bronek Masojada reduced by 10% compared with a year-on-year profit decline of 6.5%. Richard Watson’s bonus took account of the strong underwriting performance across the Group and his broadening contribution now that he has been in his role for three years. The table below shows the ROE performance compared with aggregate Executive Director bonus payments over the past ten years. This table is included to demonstrate to shareholders that appropriate bonus decisions are being made reflecting the varying shareholder outcomes. As can be seen from the table, the bonuses vary significantly with performance from year to year.
Long-term incentives Performance Share Plan (PSP) awards where the performance period ends with the 2015 financial year Executive Directors were granted awards under the PSP in 2013 for the three-year performance period 1 January 2013 to 31 December 2015. The performance conditions for this award were set at the start of the performance period and are as follows: Required average post-tax ROE over the three-year performance period
PSP awards granted during the 2015 financial year On 13 April 2015 the Executive Directors were granted awards under the PSP as follows: Number of awards granted
1SJ Bridges ceased to be an Executive Director with effect from 31/8/2015. The change in value over the period 01/01/2015 to 31/12/2015 is for information purposes only.
*Following the share capital consolidation on 26 March 2015, the nominal value of the ordinary shares changed from 6p to 6.5p.
Payments for loss of office and payments to past Directors SJ Bridges stepped down as Chief Financial Officer and an Executive Director of Hiscox Ltd with effect from 31 August 2015. Upon leaving employment his salary and benefits ceased immediately. In recognition of his 18 years’ tenure and contribution to the strong performance of the Company, the Remuneration Committee agreed to release outstanding deferred bonuses earned and disclosed in previous years of £587,500. His bonus for the 2015 financial year was pro-rated to 31 August 2015 and will be paid after the conclusion of the financial year, based on financial results. All unvested PSP share awards (235,000) lapsed on termination of employment. His outstanding options under the HMRC-approved all-employee Sharesave Scheme have been dealt with in accordance with the rules of the scheme.
Share options The interests of Executive Directors under the Sharesave Schemes are set out below: Number of options at 1 January
Performance Share Plan The interests of Directors under the Performance Share Plan are set out below: Number of awards at
External non executive directorships No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest. The consent of the Chairman is required in any event. During the year BE Masojada held directorships on the Board of the Association of British Insurers, Bajka Investments (Pty) Ltd and Heptagon Assets Ltd. He was appointed a Director of Pool Reinsurance Company Limited on 21 May 2015. He was not remunerated for his services. Prior to stepping down from the Board, SJ Bridges held directorships on the Board of Caledonia Investments plc and did not retain a fee for his services. RC Watson held a directorship at White Oak Underwriting Agency Limited and was a Board Member of Lloyd’s Members Association. He was not remunerated for his services.
Percentage change in remuneration of Director undertaking the role of Chief Executive The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2014 and 2015 financial years. We have chosen UK-based employees as the comparator group for base salary and benefits as this is where the Chief Executive is based and this allows for the closest comparison in terms of salary increases which take into account country inflation and the benefits package provided. For bonus we have used Group-wide employees as the comparator. The change is based on employees who were employed and eligible for a salary review and bonus in both financial years.
PSP vesting as % of maximum opportunity 100 100 85 39 53 100 100
1 Prior to 2015, the annual bonus plan was operated on an uncapped basis. Subsequently, the outcomes for prior years and for 2015 are shown as a percentage of salary, in order to facilitate comparison. For 2015, the bonus for the CEO was capped at 400% of salary, and therefore the outcome for the year represented 39% of the maximum opportunity.
Membership of the Remuneration Committee The Committee members at 31 December 2015 were C Foulger, ER Jansen, R McMillan, G Stokholm, LA Carter (20 May), A MacDonald (20 May), C Keogh – Chairman (19 November). R Gillingwater stepped down on 20 May along with Dr J King. DM Healy and AS Rosen left on 11 October.
External advisors The Committee received independent advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee. Deloitte is a founder member of the Remuneration Consultants Group and, as such, voluntarily operates under its code of conduct in relation to executive remuneration consulting in the UK. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in market practice, corporate governance and institutional investor views and on the development of the Company’s incentive arrangements. Total fees for advice provided to the Committee during the year were £28,500. The Committee is satisfied that the advice they have received has been objective and independent. During the year Deloitte also provided other HR consulting services.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in Disclosure and Transparency Rule 7.2 can be found on pages 46 to 50 and in this report.
Viability The statement required to be included in the Annual Report under C.2.2 of the UK Corporate Governance Code can be found on page 50.
Corporate responsibility Information on environmental, employee and community issues including details of the Company’s policies are set out in the corporate
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 24 to the consolidated financial statements. The ordinary shares of 6.5p each are the only class of shares presently in issue and carry voting rights. There is power under Bye-law 45 of the Company’s Byelaws for voting rights to be suspended if calls on shares are unpaid. However, there are no nil or partly paid shares in issue on which calls could be made. The Bye-laws also allow the Company to investigate interests in its shares and apply restrictions including suspending voting rights where information is not provided. No such restrictions are presently in place. The Company was authorised by shareholders at the 2015 Annual General Meeting to purchase in the market up to 10% of the Company’s issued ordinary shares. No shares have been bought back under this authority as at the date of this report.
Directors The following individuals were Directors at the start of the year and served until the dates shown against their names: Stuart Bridges (31 August 2015); Richard Gillingwater (20 May 2015); Daniel Healy (11 October 2015); Dr James King (20 May 2015); and Andrea Rosen (11 October 2015). The names and details of the other individuals who served as Directors of the Company during the year and up to the date of this report are set out on pages 42 to 43. Details of the Chairman’s professional commitments are included in his biography on page 42 and there were no changes during the year. The Bye-laws of the Company govern the appointment and replacement of Directors. Mr Colin Keogh who was appointed by the Board as Senior Independent Director
Biographical details of the Directors and the reasons why the Board believe they should be appointed or re-appointed will be set out in the circular which will accompany the notice of Annual General Meeting.
By order of the Board Jeremy Pinchin, Secretary, Wessex House, 45 Reid Street Hamilton HM 12, Bermuda
78 Independent auditor’s report 79 Consolidated income statement 79 Consolidated statement of comprehensive income 80 Consolidated balance sheet 81 Consolidated statement of changes in equity 82 Consolidated statement of cash flows 83 Notes to the consolidated financial statements 132 Five-year summary 77Financial summary Hiscox Ltd Report and Accounts 2015
Report on the consolidated financial statements and annual report on remuneration 2015 We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 79 to 131 which comprise the consolidated balance sheet as at 31 December 2015, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the annual report on remuneration 2015 that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the United Kingdom’s Companies Act 2006.
Management’s responsibility Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements and the annual report on remuneration 2015 that are free from material misstatement whether due to fraud or error.
Opinion In our opinion: – the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at 31 December 2015, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU; and – the part of the annual report on remuneration 2015 which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the United
Report on other matters In addition to our audit of the consolidated financial statements and part of the annual report on remuneration 2015, the Directors have engaged us to review their going concern and longer-term viability statement on pages 50 and 73 that has been prepared by the Directors to comply with the Company’s requirements under the Listing Rules of the United Kingdom’s Financial Conduct Authority. We have nothing to report in respect to this responsibility.
Gross premiums earned 1,828,334 1,674,982 Premiums ceded to reinsurers (393,318) (358,723)
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations 34,478 34,019 Income tax relating to components of other comprehensive income – –
Total comprehensive income for the year (all attributable to owners of the Company) 265,847 232,882
Property, plant and equipment 15 46,509 29,497 Investments in associates 16 13,525 10,670
Loans and receivables including insurance receivables 20 619,563 556,259 Current tax asset 3,243 8,031 Cash and cash equivalents 23 727,880 650,651
Profit for the year (all attributable to owners of the Company)
Other comprehensive income net of tax (all attributable to owners of the Company)
Profit before tax 216,100 231,075 Adjustments for: Interest and equity dividend income (40,951) (45,146) Interest expense 9,662 6,418 Net fair value losses/(gains) on financial assets 8,538 (12,121) Depreciation, amortisation and impairment 14, 15 22,734 12,857 Charges in respect of share-based payments 9, 24 17,726 14,439 Other non-cash movements (782) (497) Effect of exchange rate fluctuations on cash presented separately (971) 6,740
Changes in operational assets and liabilities: Insurance and reinsurance contracts 47,125 174,158 Financial assets carried at fair value (43,374) (171,076) Financial liabilities carried at fair value (7,093) 6,880 Other assets and liabilities 56,877 (27,943) Cash paid to the defined benefit pension scheme – (200) Interest received 40,768 43,292 Equity dividends received 1,027 1,702 Interest paid (8,453) (5,990) Current tax paid (27,757) (62,563) Cash derecognised on derecognition of Kiskadee Funds (342,655) – Cash flows from subscriptions received in advance 123,000 169,928
Cash and cash equivalents at 1 January 650,651 564,375 Net increase in cash and cash equivalents 71,031 93,016 Effect of exchange rate fluctuations on cash and cash equivalents 6,198 (6,740)
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the US with over 2,200 staff.
The financial statements were approved for issue by the Board of Directors on 29 February 2016.
2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities, to all periods presented, solely for the purpose of producing the consolidated Group financial statements.
A review of the financial performance of the Group is set out on pages 22 to 23. The financial position of the Group, its cash flows and borrowing facilities are included therein. In addition, note 3 to the financial statements provides a detailed discussion on the insurance and financial risks which are inherent to the Group’s business and how those risks are managed.
Changes in accounting policies A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on or after 1 January 2015. They have been applied in preparing these consolidated financial statements. There were no new standards, amendments or interpretations that had a material impact on the Group.
The amendments included minor changes to the following standards: IAS 19: Defined Benefit Plans: Employee Contributions Annual Improvements to IFRSs 2010 – 2012 Cycle –IFRS 2: Share-based Payments –IFRS 3: Business Combinations –IFRS 8: Operating Segments –IFRS 13: Fair Value Measurement –IAS 16: Property, Plant and Equipment – IAS 24: Related Party Disclosures – IAS 38: Intangible Assets Annual Improvements to IFRSs 2011 – 2013 Cycle –IFRS 13: Fair Value Measurement
The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2016 and have not been applied in preparing these financial statements.
(b) Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50% of an entity’s voting rights. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity-accounted basis from the date that significant influence commences until the date that significant influence ceases. The Group’s share of its associates’ postacquisition profits or losses after tax is recognised in the income statement for each period, and its share of the movement in the associates’ net assets is reflected in the investments’ carrying values in the balance sheet. When the Group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.
(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. In accordance with IAS 21, 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.
Hiscox Dedicated Corporate Member Limited (‘HDCM’) underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and 3624). As at 31 December 2015, HDCM owned 72.5% of Syndicate 33 (2014: 72.5%). 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 2 Significant accounting policies continued 2.2 Basis of preparation continued Changes in accounting policies continued
Notes to the consolidated financial statements continued included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
As a result, from that date the assets and liabilities of the Kiskadee Funds as well as the two SPIs have been derecognised at their carrying amounts and the Group’s investment in the Kiskadee Funds is recognised as a financial asset measured at fair value through profit and loss. Below is a table disclosing the impact to the consolidated financial statement following the deconsolidation on 1 July 2015: Total assets no longer recognised in the consolidated balance sheet
Total currency translation reserve no longer recognised in the balance sheet
As at 31 December 2015, the Group recognised a financial asset at fair value of £40.0 million in relation to its investment in the Kiskadee Funds (note 19). In assessing the maximum exposure to loss from its interest in the Kiskadee Funds and SPIs, the Group has determined it is no greater than the fair value recognised as at the balance sheet date.
In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous generally accepted accounting principles.
at the date of the transactions); and – all resulting exchange differences are recognised as a separate component of equity.
Land and artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives. The rates applied are as follows: –buildings 20–50 years –vehicles 3 years – leasehold improvements including fixtures and fittings 10–15 years – furniture, fittings and equipment 3–15 years
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’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands, Spain, Portugal, Ireland and Belgium whose functional currency is Euros; those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars; Hiscox Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars. Functional currencies of entities operating in Asia include US Dollars, Hong Kong Dollars, Singapore Dollars and Thai Baht.
in which a particular asset is traded or deployed; – adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and – the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
(d) Rights to customer contractual relationships Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be between ten and 20 years and are carried at cost less accumulated amortisation and impairment losses.
2.7 Financial assets and liabilities including loans and receivables The Group has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by the Group to designate all financial investments, comprising debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales 2 Significant accounting policies continued 2.6 Intangible assets continued
(f) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in the income statement.
value movements on derivative instruments not formally designated for hedge accounting treatment. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales-based taxes collected on behalf of third parties. Profit commission is calculated and accrued based on the results of the managed syndicate.
Claims and associated expenses are charged to profit or loss as incurred, based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their 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. 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.
scheme sponsor in the form of refunds or reduced future contributions.
(c) Share-based compensation The Group operates a number of equity settled share-based employee compensation plans. These include both the approved and unapproved share option schemes, and the Group’s Performance Share Plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes. The fair value of the employee services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense, with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions (e.g. profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest.
(g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.
With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element.
As shown in note 30, following the triennial valuation for December 2014 having updated the experience data, this has significantly reduced the scheme obligations and the deficit recorded.
that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
2.21 Use of critical estimates, judgements and assumptions The preparation of financial statements requires the use of significant estimates, judgements and assumptions. The Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of deferred tax assets and liabilities as being most critical to an understanding of the Group’s result and position.
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures through the Risk Committee and ongoing compliance therewith, through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in common with the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such premium inflows is reasonably predictable. In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events noncorrelated to financial markets, and not by the inclination or will of policyholders.
As at 1 July 2015 the Group has determined that it no longer meets the criteria for consolidation of the Kiskadee Funds and Kiskadee Special Purpose Insurers (‘SPI’) as defined in IFRS 10. The Group considered the following factors to determine whether it is acting as an agent or a principal: –the power the Group has over the Kiskadee Funds and the ability to direct relevant activities; –rights to variable returns from the Group’s involvement with the Kiskadee Funds; and –the ability to use that power to affect the amount of the Group’s returns.
The fee income and the Group’s direct investment exposes it to variability of returns from the activities of the Kiskadee Funds and SPIs without creating exposure that is of such significance that it indicates that the Group is acting as a principal. The Group considered additional factors including the purpose of the design of the structure, the business model, and a broad range of qualitative factors in determining whether the Kiskadee Funds and SPIs still met the criteria for consolidation.
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2014
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2015 competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross premiums written and maximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief Underwriting Officer and a specialist team in order to monitor claim development patterns and discuss individual underwriting issues as they arise.
The Group’s insurance contracts include provisions to contain losses, such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection, such as excess of loss cover, 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.
Below is a summary of the gross and net insurance liabilities for each category, split by region of risk.
Other property risks The Group provides home and contents insurance, together with cover for artwork, antiques, classic cars, jewellery, collectables and other assets. The Group also extends cover to reimburse certain policyholders when named insureds or insured assets are seized for kidnap and a ransom demand is subsequently met. Events which can generate claims on these contracts include burglary, kidnap, seizure of assets, acts of vandalism, fires, flooding and storm damage. Losses on most classes can be predicted with a greater degree of certainty as there is a rich history of actual loss experience data and the locations of the assets covered, and the individual levels of security taken by owners, are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
The Group’s home and contents insurance contracts are exposed to weather and climatic risks such as floods and windstorms and their consequences. As outlined earlier the frequency and severity of these losses do not lend themselves to accurate prediction over the short term. Contract periods are therefore not normally more than one year at a time to enable risks to be regularly repriced.
Consequently the frequency and severity of reinsurance inwards claims are related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year, but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
Marine and major property contracts are normally underwritten by reference to the commercial replacement value of the property covered. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and time taken to restart or resume operations to original levels for business interruption losses are the key factors that influence the level of
The estimated liquidity profile to settle the gross claims liabilities is given in note 3.2(e).
Reinsurance inwards The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the highfrequency, low-severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or man-made occurrence. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
At 31 December 2015, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio, but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group did not experience any material defaults on debt securities during the year.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and unit trust investments. This is limited to a relatively small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are diversified over a number of companies and industries. The fair value of equity assets in the Group’s balance sheet at 31 December 2015 was £260 million (2014: £253 million). These may be analysed as follows: Nature of equity and unit trust holdings
ii) Reserving risk The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 26.
Certain marine and property insurance contracts, such as those relating to
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
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. The Group’s debt and fixed income assets are further detailed at note 19.
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 2015 would have been expected to reduce Group equity and profit after tax for the year by approximately £23.8 million (2014: £22.6 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
3 Management of risk continued 3.2 Financial risk continued (d) Credit risk continued strength and performance as well as detailed analysis from a dedicated in-house security consultant. The financial analysis of reinsurers produces an assessment categorised by Standard & Poor’s (S&P) rating (or equivalent when not available from S&P).
The Committee considers the reputation of its reinsurance partners and also receives details of recent payment history and the status of any ongoing negotiations between Group companies and these third parties. This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset, where counterparties are both debtors and creditors of the Group, and obtaining collateral from unrated counterparties. Management information reports detail provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
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 exposure to sovereign debt in Spain, Italy, Ireland, Greece or Portugal.
The largest counterparty exposure within the AAA rating at 31 December 2015 and 2014 is the German government. For the AA rating it is with the US Treasury at both 31 December 2015 and 2014. A significant proportion of other/non-rated assets are rated BBB and BB at both 31 December 2015 and 2014.
Reinsurance inwards 155,994 85,991 90,317 38,090 370,392 Property – marine and major assets 114,808 70,342 76,013 26,668 287,831 Property – other assets 135,034 68,120 26,522 7,193 236,869 Casualty – professional indemnity 184,651 197,953 236,258 103,787 722,649 Casualty – other risks 65,715 55,198 105,009 48,427 274,349 Other* 82,253 24,953 24,113 14,687 146,006
(f) Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: w structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and w operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity’s functional currency.
Employee retirement benefit obligations 75 – – – 75 Deferred tax 29,814 – – – 29,814 Insurance liabilities 719,518 1,904,441 325,508 98,895 3,048,362 Financial liabilities 275,679 – – – 275,679 Current tax 4,582 – 302 – 4,884 Trade and other payables 166,723 221,704 2,275 25,656 416,358
As at 31 December 2015 Effect on equity after tax £m
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2015 year of account for Syndicates 33 and 3624 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
Syndicate 33 benefits from an A.M. Best rating of A (Excellent). In addition, the Syndicate also benefits from the Lloyd’s ratings of A (Excellent) from A.M. Best, A+ (Strong) from Standard & Poor’s and AA- (Very strong) from Fitch.
Capital performance The Group’s main capital performance measure is the achieved return on equity (ROE). This marker best aligns the aspirations of employees and shareholders. As variable remuneration, the vesting of options and longer-term investment plans all relate directly to ROE, this concept is embedded in the workings and culture of the Group. The Group seeks to maintain its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
The Group’s activities are funded by a mixture of capital sources including issued equity share capital, retained earnings, Letters of Credit, bank debt, long-term debt and other third-party insurance capital.
During the year the Group was in compliance with capital requirements imposed by regulators in each jurisdiction where the Group operates.
Gearing The Group currently utilises gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: – Letter of Credit and revolving credit facility – the Group’s main facility of $500 million may be drawn as cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed $228 million. This facility was reduced to $500 million from $875 million in December 2015 by the Company’s subsidiary Hiscox plc with the maximum cash portion reduced from $400 million. The Letter of Credit availability period ends on 31 December 2015. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2015, 2016 and 2017 years of account. The revolving credit facility has a maximum three-year contractual period for repayment. At 31 December 2015 US$71.9 million was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings (2014: $441.5 million and £nil million respectively) to support general trading activities. The Group will be renegotiating this facility in 2016; –£275 million of fixed-to-floating rate subordinated notes that are classified
The sensitivity analysis does not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action.
The FGD has been applied in the UK through the Integrated Prudential Sourcebook for Insurers (INSPRU) and General Prudential Sourcebook (GENPRU). In accordance with these provisions, the parent company’s solvency margin consideration became a minimum capital requirement for the Group from 31 December 2006 onwards. The Group complied with the requirement for the current and prior year.
3.4 Tax risk The Group is subject to income taxes levied by the various jurisdictions in which the Group operates, and the division of taxing rights between these jurisdictions results in the Group tax expense and effective rate of income tax disclosed in these financial statements. Due to the Group’s operating model, there is an unquantifiable risk that this division of taxing rights could be altered materially, either by a change to the tax residence, or permanent establishment profile, of Hiscox Ltd or its principal subsidiaries; or due to the re-pricing or re-characterisation for tax purposes of transactions between members of the Group, under local transfer pricing or related tax legislation. The Group seeks to manage this risk by: –maintaining appropriate internal policies and controls over its operations worldwide; –monitoring compliance with these policies on an ongoing basis; –adhering to internationally recognised best practice in determining the appropriate division of profits between taxing jurisdictions.
For Syndicate 33 and Syndicate 3624, internal model results are uplifted by Lloyd’s to identify the capital required to hold the A rating. Capital models are used more widely across the Group to monitor exposure to key risk types, inform decision-making and measure ROE across different segments of the business. In addition to the Solvency II requirements, the EU Insurance Groups Directive of 1998, as amended by the Financial Groups Directive (FGD), compels insurance companies that are members of a group to consider the solvency margin of their ultimate parent company. This consideration must refer to the surplus assets of the ultimate parent’s related insurers, reinsurers, intermediate holding companies and other regulated entities.
Year to 31 December 2015 Year to 31 December 2014 4 Operating segments continued
The Group’s wholly-owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. The Group’s percentage participation in Syndicate 33 can fluctuate from year to year and, consequently, presentation of the results at the 100% level removes any distortions arising therefrom.
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses, including profit-related pay, as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year-end rates of exchange. All ratios are calculated using the 100% results.
At Group level 1% change in claims or expense ratio 8,705 3,839 1,807 – 7,907 3,325 1,930 –
(c) Segmental analysis of assets and liabilities The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows: Hiscox Retail £000
The Group has not reported geographical segmental details of non-current assets excluding financial instruments and including loans and receivables, rights and obligations under insurance and reinsurance contracts, investments in associates and subsidiaries as such details are not used by the chief operating decision-maker to evaluate the performance of the Group.
Investment result – financial assets 8 33,680 56,355 Net fair value gains/(losses) on derivative financial instruments 21 1,701 (143)
Wages and salaries 124,466 108,622 Social security cost 21,884 19,551 Pension cost – defined contribution 8,432 8,112 Pension cost – defined benefit 1,825 660 Share-based payments 17,726 14,439 Marketing expenses 44,499 31,829 Investment expenses 4,267 4,192 Depreciation, amortisation and impairment 22,734 12,857 Other expenses 115,382 110,591
In accordance with IAS 32, any changes in the fair value of the third-party investment in Kiskadee Funds, classified as a financial liability, are recognised as fair value gains and losses through profit or loss. At the point of derecognition of the Funds at 1 July 2015, the Group recognised a loss of £6,374,000 which is included in other underwriting income above.
Interest charge associated with long-term debt 19 1,754 – Interest and expenses associated with bank borrowings 2,156 1,931 Interest and charges associated with Letters of Credit 34 5,363 3,894 Interest charges on experience account 389 593 11 Auditor’s remuneration Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group
Opening balance sheet impact of non-retranslation of non-monetary items 1,608 (4,790) Gain included within profit representing the non-retranslation of non-monetary items 1,842 6,398
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor, based on a weighted average cost of capital (WACC) for the Group of 6.4% (2014: 6.6%), has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is written down to this amount.
Capitalised software and development costs are amortised when the assets become available for use on a straight-line basis over the expected useful life of the asset. The carrying value of software and development costs is reviewed for impairment on an ongoing basis by reference to the stage and expectation of a project. No impairment is due as at 31 December 2015.
The Group’s land and buildings assets relate to freehold property in the UK. There was no impairment charge during the year (2014: £nil). Assets with a net book value of £nil were held under finance leases (2014: £nil).
Additions during the year 2,089 2,103 Disposals during the year – (416) Distributions received (241) – Net profit from investments in associates 1,007 1,229
Associates incorporated in the UK from 10% to 35% 74,881 50,036 41,312 4,734 Associates incorporated in Europe from 10% to 49% 1,969 1,454 2,616 207
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 212,149 183,810 After one year 26,157 16,348
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 301,022 287,528 After one year 237,788 237,817
19 Financial assets and liabilities Financial assets designated at fair value through profit or loss are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
Total investments 2,881,403 2,805,480 Insurance linked funds 40,045 22,888 Derivative financial instruments 21 137 479
The effective maturity of the debt and fixed income securities due within and after one year are as follows: Within one year 607,968 616,038 After one year 2,007,046 1,910,141
Third-party investment in Kiskadee Funds – 7,033 Derivative financial instruments 21 16 76
Long-term debt 273,909 – Accrued interest on long-term debt 1,754 –
Following a significant inflow of capital from third-party investors during 2015, the Group has determined that it no longer meets the criteria for consolidation of the Kiskadee Funds and SPIs from 1 July 2015 as defined in IFRS 10. As a result, from that date the assets and liabilities of the Kiskadee Funds as well as the two SPIs have been derecognised at their carrying amounts and the Group’s investment in the Kiskadee Funds is recognised as a financial asset measured at fair value through profit and loss.
At 31 December 2014, the Group had an investment in the Third Party Reinsurance Opportunities Fund which was classified as an insurance linked fund. These positions were redeemed during early 2015 as the contracts expired. No positions remain open at December 2015.
The interest accrued on the long-term debt was £1.75 million at the balance sheet date and is included in financial liabilities.
Gross receivables arising from insurance and reinsurance contracts 538,652 482,641 Provision for impairment (2,175) (2,131)
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 598,317 534,921 After one year 21,246 21,338
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £44,000 (2014: loss of £849,000) for the impairment of receivables during the year ended 31 December 2015.
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £1,940,000 (2014: gain of £1,941,000) as included in note 7. There was no initial purchase cost associated with these instruments.
Financial assets Debt and fixed income securities 682,940 1,843,239 – 2,526,179 Equities and shares in unit trusts – 239,238 13,678 252,916 Deposits with credit institutions 26,385 – – 26,385 Insurance linked fund – – 22,888 22,888 Derivative instrument assets – 479 – 479
Level 2 of the hierarchy contains certain government bonds, US government agencies, corporate securities, asset backed securities and mortgage-backed securities. The fair value of these assets is based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over-the-counter derivatives.
Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant. At 31 December 2014, the Group had an investment in a third-party insurance linked fund that specialised in catastrophe reinsurance opportunities. The fund was partially redeemed in January 2015 with remaining redemption shares issued which paid out when the underwriting contracts expired on 30 June 2015. At 31 December 2015, the insurance linked funds of £40,045,000 represents the Group’s investment in the Kiskadee Funds.
*Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance linked fund.
Cash at bank and in hand 601,301 400,245 Short-term deposits 126,579 39,220 Cash held by special purpose vehicles – 41,258 Subscriptions received in advance – 169,928
Following a significant inflow of capital from third-party investors during 2015, the Group has determined that it no longer meets the criteria for consolidation of the Kiskadee Funds and SPIs from 1 July 2015 as defined in IFRS 10. As a result, since 1 July 2015 the Group no longer recognises any assets or liabilities held by these vehicles including the cash held by special purpose vehicles or the subscriptions received in advance as described below.
Authorised ordinary share capital of 6.5p (2014: 6p) 240,000 3,692,308 40,000 666,667 Issued ordinary share capital of 6.5p (2014: 6p) 19,030 292,776 19,913 331,874
At an Extraordinary General Meeting held on 25 March 2015 a resolution was passed to subdivide and consolidate the 400,000,000 unissued shares of par value of 50.0p each into shares of 6.5p each to rank pari passu with the ordinary shares in the capital of the Company.
Issue of C/D Shares – (35) – 128,988 46,824 – – Redemption of C/D Shares – – – (128,988) (46,824) – – Share consolidation and subdivision (1,032) 1,032 – – – – – Scrip dividends to owners of the Company 17 1,798 – – – – –
Issue of E/F Shares – (32) – – – 143,176 46,351 Redemption of E/F Shares – – – – – (143,176) (46,351) Share consolidation and subdivision (930) 930 – – – – – Scrip dividends to owners of the Company 18 2,516 – – – – –
There were no E/F Shares outstanding at 31 December 2015 as both classes of shares had been redeemed and cancelled by that date.
As a result of these arrangements total capital of £189,559,000 was returned to shareholders, of which £32,000 was charged against the share premium account and the remaining £189,527,000 charged against retained earnings. An additional £2,862,000 of E Shares were distributed to the Employee Benefit Trust. The amount is not reported as a distribution as the Trust forms part of the consolidated result.
Share repurchase The Trustees of the Group’s Employee Benefit Trust purchased Hiscox Ltd shares through the market during the period for £6,712,000 (2014: £10,593,000) to facilitate the settlement of vesting awards under the Group’s Performance Share Plan. As the trust is consolidated into the Group financial results, these purchases have been accounted for in the same way as treasury shares and have been charged against retained earnings. The shares are held by the Trustees for the beneficiaries of the Trust.
Employee share option scheme – ordinary shares issued 458 1,236 Scrip dividends to owners of the Company 32 274 271 Share consolidation as a result of the special capital distribution (39,830) (40,848)
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 2015 2014
Annual risk-free rates of return and discount rates (%) 0.76-0.82 1.09-1.32 Long-term dividend yield (%) 4.28 4.46 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 19.4 20.5 Weighted average share price (p) 884.7 684.9
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances outstanding at 31 December 2015 for the Executive Directors are shown in the Directors’ remuneration report. The total number of options and Performance Share Plan awards outstanding is 11,005,621 (2014: 12,460,938) of which 2,043,465 are exercisable (2014: 3,723,170). The total number of SAYE options outstanding is 2,041,124 (2014: 2,013,508).
The Group purchased its own shares during 2015 for a net amount of £6,712,000 and placed them in the Trust for future utilisation on vesting of Performance Share Plan awards (2014: £10,593,000).
Recoverable from reinsurers Claims reported and claim adjustment expenses 118,322 129,134 Claims incurred but not reported 247,155 239,185 Unearned premiums 173,333 157,026
Net Claims reported and claim adjustment expenses 706,075 695,883 Claims incurred but not reported 966,544 903,662 Unearned premiums 836,933 710,309
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2015 25 Retained earnings and other reserves 26 Insurance liabilities and reinsurance assets
(b) Claims development tables The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group’s actual level of ownership. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group’s share of ultimate claims for each accident year, three years after the end of that accident year.
In exceptional cases the required provision is calculated with reference to the actual exposures on individual policies. In addition, the reserves determined for the managed Syndicate are converted to annually accounted figures using earnings patterns that are consistent with those for the underlying Syndicate business.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique
Total net liability to external parties at 100% level 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued (b) Claims development tables continued
Total at end of year (2,038,096) 365,477 (1,672,619) (1,967,864) 368,319 (1,599,545)
Due to the deconsolidation of the Kiskadee Funds, note 2.3(a), the impact on reinsurance unearned premium is included in other adjustments. The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this note 26.
Reinsurers’ share of deferred acquisition costs 17 33,211 30,215 Accruals and deferred income 117,270 106,319
The UK Finance Act 2015 introduced a new tax with effect from 1 April 2015, the Diverted Profits Tax (DPT), which in certain situations applies a tax of 25% on income which would not otherwise be chargeable to UK tax. The Group is currently in discussions with HMRC as to the scope of the new tax in the context of the Group’s operations. No provision for DPT has been made in 2015.
Trading losses in UK entities 1,378 (1,378) – – Trade and other payables 4,244 (464) – 3,780 Intangible assets – Syndicate capacity 2,155 (371) – 1,784
Following changes to the future UK main rate of corporation tax introduced in the Finance Act 2015, the deferred tax on the Syndicates’ open years of account is calculated with reference to the tax rate expected to be in force when those years close, and all other UK deferred income tax assets and liabilities are calculated at 18% for the year ended 31 December 2015 (2014: 20%).
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 gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: Present value of scheme obligations 199,120 227,375 Fair value of scheme assets (199,045) (195,209)
Deficit for funded plans 75 32,166 Effect of asset ceiling/onerous liability – –
Managed fund pooled investment vehicles UK equity funds 70,871 81,163 Emerging market equity funds 7,515 8,340 Global equity funds 46,129 43,974 Bond funds 38,580 43,542 US equities 16,302 14,770
All managed fund pooled investment vehicles and equity holdings have quoted prices in active markets.
Interest cost on defined benefit obligation 8,320 8,309 Interest income on plan assets (7,118) (8,589) Interest expense on effect of onerous liability – 496
Total expense recognised in operational expenses in the income statement 9 1,825 660
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2015
Additional memorandum information at the end of the current and previous six accounting periods is presented below: Present value of scheme obligations 199,120 227,375 179,479 173,420 155,685 146,737 140,676 Fair value of scheme assets 199,045 (195,209) (185,666) (156,513) (140,517) (144,056) (118,391)
Gross liability recognised on balance sheet 75 32,166 4,366 16,907 – – –
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows: years 2014 years
Profit for the year attributable to the owners of the Company (£000) 209,895 216,152
Weighted average number of ordinary shares in issue (thousands) 288,209 320,554 Adjustments for share options (thousands) 9,603 14,315
Diluted earnings per share has been calculated after taking account of 8,872,744 (2014: 13,527,726) options and awards under employee share option and performance plan schemes and 730,477 (2014: 787,419) options under SAYE schemes.
Interim dividend for the year ended: 31 December 2015 of 8.0p (net) per share 22,403 – 31 December 2014 of 7.5p (net) per share – 23,469
33 Business combinations Hiscox MGA Ltd (Formerly R&Q Marine Services Ltd) On 27 February 2015, the Group acquired 100% of the share capital and voting rights of R&Q Marine Services Ltd for £9,250,000. Soon after the acquisition the company’s name was changed to Hiscox MGA Ltd. The company is an underwriting agency specialising in yachts and the general marine leisure industry. They write a range of products, providing cover for super-yachts, small yachts, marina trades and yacht race cover. The acquisition will give Hiscox a platform within the yacht and marine leisure industry to underwrite to its existing Syndicate 33 on certain lines and to develop the MGA platform for the Group, providing opportunities for future growth.
Intangible assets – 9,185 9,185 Other debtors 299 – 299 Cash and cash equivalents 1,204 – 1,204
DirectAsia On 31 March 2014, the Group acquired 100% of the share capital and voting rights of Direct Asia Insurance (Holdings) Pte Ltd (DirectAsia) for US$24,575,000 (£14,804,000). In addition the Group purchased the outstanding debt of the company totaling US$31,750,000 (£19,127,000) from the previous owners. DirectAsia’s primary business is motor insurance, with ancillary lines in travel, personal accident, healthcare and term life products sold as an agent. This acquisition provides the Group with a distribution platform in Asia, providing opportunities for future growth.
The goodwill above was recognised on acquisition in relation to acquiring a skilled workforce who provide insight into operating in new territories, as included in note 14.
Limited (HDCM), to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £29 million (2014: £29 million) in respect of Hiscox Ltd supported by £30 million of investment securities (2014: £29 million) and US$423 million (2014: US$274 million) in respect of Hiscox Capital Ltd supported by US$401 million of investment securities (2014: US$262 million). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called. Additionally HDCM held £172 million of cash in favour of Lloyd’s.
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2014: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s the arrangement is collateralised with cash of £50,000 (2014: £50,000).
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the US, 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 US ceding companies and other jurisdictions, and also Letter of Credit facility agreements with the Royal Bank of Scotland and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to US$350 million in Letters of Credit (2014: US$350 million). Letters of Credit issued under these facilities are collateralised by US government and corporate securities of Hiscox Bermuda. Letters of Credit under this facility totaling US$81.1 million were issued with an effective date of 31 December 2015 (2014: US$98.7 million on a US$350 million facility) and these were collateralised by US government and corporate securities with a fair value of US$92.4 million (2014: US$115.6 million). In addition, Hiscox Bermuda holds US$403.5 million of restricted marketable securities collateralising reinsurance obligations.
Operating lease commitments The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totaled £9,794,000 (2014: £9,031,000). Operating lease rental income for the year totaled £226,000 (2014: £595,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 8,951 9,082 Office equipment and other 356 276
Later than one year and no later than five years Land and buildings 29,801 30,080 Office equipment and other 557 432
Obligations under finance leases There were no finance lease arrangements in place at 31 December 2015 or 31 December 2014.
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2015 (2014: 43,216).
37 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2015 on pages 64 to 72. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
Hiscox Group insurance carriers 19,181 33,576 58,960 55,070 Hiscox Group insurance intermediaries 6,425 5,365 (15,396) (13,920) Other Hiscox Group companies – – (8,043) (9,381)
Profit for the year after tax 209,895 216,152 237,758 208,026 21,272
Key statistics *The 2012 results have been restated to reflect the revised pension accounting standard. †Closing mid-market prices.