Total at beginning of year 6,276.0 (2,921.0) 3,355.0 4,992.2 (2,047.1) 2,945.1 Claims and claim adjustment expenses for the year 2,966.5 (1,043.8) 1,922.7 3,206.7 (1,630.6) 1,576.1 Cash (paid)/received for claims settled in the year (2,085.0) 768.8 (1,316.2) (1,940.6) 761.9 (1,178.7) Foreign exchange and other adjustments 133.9 (17.0) 116.9 17.7 (5.2) 12.5 Total at end of year 7,291.4 (3,213.0) 4,078.4 6,276.0 (2,921.0) 3,355.0
The insurance claims expense reported in the consolidated income statement is comprised as follows: Year ended 31 December Gross $m
Chapter 6 113 Financial summary Notes to the consolidated financial statements 23 Insurance liabilities and reinsurance assets 23.2 Movements in insurance claims liabilities and reinsurance claims assets continued In response to the Covid-19 pandemic, the Group reviewed and assessed the potential implications for each class of business that the Group underwrites, across all its platforms, with involvement from underwriting, reserving, claims and finance teams. The output of this assessment formed the basis of reserving.
The Group has material exposure to losses arising out of the Covid-19 pandemic and currently reserves $475 million net of reinsurance for these claims (Hiscox Retail: $398 million, Hiscox London Market: $13 million, Hiscox Re & ILS: $64 million on Group’s share basis). The Covid-19 pandemic is an unprecedented event for the insurance industry and the effects of it as a loss event to the insurance and reinsurance markets remain both ongoing and uncertain. The ultimate amounts of these claims are subject to a higher than normal level of uncertainty in the best estimate at this stage of development. Consequentially, in measuring the liabilities, the Group has included an allowance for risk and uncertainties that is above the best estimate to reflect the early stage in the claim development process.
In determining the Covid-19-related net claims, the Group estimates the reinsurers’ share of the claims by applying a consistent set of assumptions with those in determining the gross claims, considering the individual wording of the reinsurance treaties, and estimating default risks, as described in note 3.3(d). Changes to this set of assumptions and estimate could materially affect the amount of reinsurers’ share of the claims.
Following the sanction of the scheme by the High Court on 25 November 2020, the scheme took effect on 30 December 2020 and the members and former members of the Syndicate transferred the impacted EEA policies and related liabilities to Lloyd’s Brussels, together with cash of $154.8 million. On the same date, under the reinsurance agreement, Lloyd’s Brussels reinsured the same risks back, together with an equal amount of cash of $154.8 million and non-cash assets relating to the transferred liabilities. The combined effect of the two transactions had no economic impact for the Syndicate, and accordingly there is no impact on the Syndicate’s income statement and no net impact on the balance sheet.
No adjustment has been made in the segmental note for transactions that occurred in respect of the transferred business up to the date of the transfer, which is consistent with the income statement presentation. Outstanding debtor and creditor balances in respect of the transferred business that were previously classified as arising out of direct reinsurance operations have been reclassified as arising out of reinsurance operations.
Creditors arising out of direct insurance operations 101.0 139.4 Creditors arising out of reinsurance operations 836.0 823.1
Reinsurers’ share of deferred acquisition costs 15 106.9 124.7 Accruals and deferred income 148.4 145.0
Included within accruals and deferred income is $4.9 million (2019: $6.4 million) of deferred gain on retroactive reinsurance contracts.
The Group acts as both lessee and lessor in relation to various offices in the UK and overseas, which are held under non-cancellable lease agreements. The leases have varying terms, escalation clauses and renewal terms.
Not later than one year 16.5 15.9 Later than one year and not later than five years 38.9 46.5 Later than five years 13.6 18.0 Total undiscounted lease liabilities at 31 December 69.0 80.4
There were no leases with residual values guarantees (2019: none). The leases not yet commenced to which the Group is committed amounted to $55.2 million (2019: $55.3 million).
Payments associated with short-term leases amounting to $1.2 million (2019: $2.7 million) and leases of low-value assets amounting to $nil (2019: $0.1 million) are recognised on a straight-line basis as an expense in profit or loss.
Current tax Expense for the year 11.5 36.0 Adjustments in respect of prior years 1.7 (7.0) Total current tax expense 13.2 29.0
Deferred tax Credit for the year (12.3) (28.7) Adjustments in respect of prior years 26.4 3.8 Effect of rate change (2.1) 0.1 Total deferred tax expense/(credit) 12.0 (24.8) Total tax charged to the income statement 25.2 4.2
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is -9% (2019: 8%).
(Loss)/profit before tax (268.5) 53.1 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2019: 0%) Effects of Group entities subject to overseas tax at different rates (20.6) 7.9 Impact of overseas tax rates on: Effect of rate change (2.1) 0.6 Expenses not deductible for tax purposes 2.7 1.2 Tax losses for which no deferred tax asset is recognised 8.6 1.6
Trading losses in overseas entities 31.8 51.5 Deferred tax assets 140.6 76.1 Deferred tax liabilities (101.7) (50.7) Total deferred tax asset 70.7 76.9
Net deferred tax liabilities Deferred tax assets (2.0) – Deferred tax liabilities 4.7 0.4 Total net deferred tax liability 2.7 0.4
Chapter 6 113 Financial summary Notes to the consolidated financial statements 26 Deferred tax Net Group deferred tax assets/(liabilities) analysed by balance sheet headings continued Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of comprehensive income to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of comprehensive income. The total recognised outside the income statement is $3.5 million of income (2019: income of $3.6 million), comprising $2.1 million deferred tax income and $1.4 million current tax income (2019: $0.5 million deferred tax expense and $4.1 million current tax income).
Factors affecting tax charges in future years Budgets in previous years announced changes to the main rate of UK corporation tax. The current rate of 19% was enacted on 26 October 2015 and applied from 1 April 2017.
A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016, and the UK deferred tax asset as at 31st December 2019 was calculated based on this rate. In the 11 March 2020 Budget it was announced that the UK tax rate will remain at the current 19% and not reduce to 17% from April 2020. This was substantively enacted 17 March 2020. This will have a consequential effect on the company’s future tax charge and deferred tax assets in relation to the UK have increased by $2.5 million.
Present value of scheme obligations 417.9 366.7 Fair value of scheme assets (344.4) (311.6) Net amount recognised as a defined benefit obligation 73.5 55.1
The amounts recognised in total comprehensive income are as follows: Note $m $m
The Group has completed an estimate of the impact of the ruling on the scheme using one of the methods identified by the High Court (C2) for equalising GMPs and has recognised a charge of £15,000 ($20,000) during the year (2019: $nil).
A reconciliation of the present value of obligations of the scheme is as follows: $m $m
Opening present value of scheme obligations 366.7 302.0 Past service cost – – Interest expense 7.6 8.6 Cash flows Benefit payments (21.4) (10.4) Remeasurements Changes in actuarial assumptions 52.1 52.6 Foreign exchange movements 12.9 13.9 Closing present value of scheme obligations 417.9 366.7
Chapter 6 113 Financial summary Notes to the consolidated financial statements 27 Employee retirement benefit obligations continued Other principal actuarial assumptions are as follows: %
Discount rate 1.40 2.10 Inflation assumption (RPI) 2.90 2.90 Inflation assumption (CPI) 2.50 1.90 Pension increases 2.75 2.90
The most sensitive and judgemental financial assumptions are the discount rate and inflation. These are considered further below. CPI revaluation in deferment is used for contracted-out members. Contracted-in members are linked to RPI as well as for all pension in payment increase.
Effect of a change in discount rate Use of discount rate of 1.65% 73.5 53.5 20.0 Use of discount rate of 1.15% 73.5 95.0 (21.5)
Chapter 6 113 Financial summary Notes to the consolidated financial statements 28 Earnings per share Basic (loss)/earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
(Loss)/profit for the year attributable to the owners of the Company ($m) (293.7) 48.9 Weighted average number of ordinary shares (thousands) 320,562 284,015 Basic (loss)/earnings per share (cents per share) (91.6)¢ 17.2¢ Basic (loss)/earnings per share (pence per share) (71.5)p 13.5p
Final dividend for the year ended: 31 December 2018 of 28.6¢ (net) per share – 81.4 Interim dividend for the year ended: 31 December 2019 of 13.75¢ (net) per share – 39.5
The Board also agreed that, for 2020, the Group would not propose an interim dividend payment, or conduct any further share buybacks. In addition, the Board has not declared a final dividend for the year ended 31 December 2020 (2019: $75.2 million and 296,044 shares for the scrip dividend). The interim dividends for 2019 were either paid in cash or issued as a scrip dividend at the option of the shareholder (2020: $nil; 2019: $36.4 million and 157,487 shares for the scrip dividend).
Chapter 6 113 Financial summary Notes to the consolidated financial statements 30 Contingencies and guarantees The Group’s parent company and subsidiaries may become involved in legal proceedings, claims and litigation in the normal course of business. The Group reviews and, in the opinion of the Directors, maintains sufficient provision, capital and reserves in respect of such claims.
(b) During the year, HDCM entered into a $65 million FAL agreement under which the lending bank provides assets on HDCM’s behalf under a security and trust deed charged to Lloyd’s of London as part of the Company’s Fund’s at Lloyd’s provision. At 31 December 2020 the full $65 million was utilised.
(c) Hiscox plc continued with its LOC and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, which may be drawn in cash up to £450 million under a revolving credit facility or LOC up to $266 million (2019: $800 million aggregate facility). The terms also provide that the facility may be drawn in USD, GBP or EUR, or another currency with the agreement of the banks. At 31 December 2020 $266.0 million (2019: $50.0 million) was utilised by way of LOC to support the Funds at Lloyd’s requirement and $193.4 million cash drawings were outstanding (2019: $nil).
(e) The Council of Lloyd’s has the discretion to call a contribution of up to 3% of capacity if required from the managed syndicates.
LOCs issued under these facilities are collateralised by cash, US government and corporate securities of Hiscox Bermuda. LOCs under these facilities totalling $140.1 million were issued with an effective date of 31 December 2020 (2019: $150.8 million on a $470 million facility) and these were collateralised by US government and corporate securities with a fair value of $169.5 million (2019: $172.9 million). In addition, Hiscox Bermuda maintained assets in trust accounts to collateralise obligations under various reinsurance agreements. At 31 December 2020, total cash and marketable securities with a carrying value of approximately $18.4 million (2019: $9.3 million) was held in external trusts. Cash and marketable securities with an approximate market value of $598.7 million (2019: $476.3 million) were held in trust in respect of internal quota share arrangements.
Chapter 6 113 Financial summary Notes to the consolidated financial statements 31 Capital commitments and income from subleasing Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was $9.9 million (2019: $11.9 million). During the year, the Group has reviewed the reporting on contracted commitments and as a result identified contracts that were previously omitted. Comparative figures have been represented to reflect this. In addition, please refer to note 27 related to the Groups’ funding contributions commitment to the defined benefit scheme.
No later than one year 0.4 0.7 Later than one year and no later than five years – 0.4 32 Principal subsidiary companies of Hiscox Ltd at 31 December 2020
at 31 December $m 31 December $m 31 December $m 31 December $m
Hiscox Group insurance carriers 15.6 (34.6) (114.8) (130.5) Hiscox Group insurance intermediaries (1.5) 5.8 (14.4) (6.7) Other Hiscox Group companies 32.8 31.1 22.6 0.4
(c) Internal reinsurance arrangements During the current and prior year, there were a number of reinsurance arrangements entered into in the normal course of trade between various Group companies. The related results of these transactions have been eliminated on consolidation.
A Return on equity (ROE) Use of return on equity is common within the financial services industry, and the Group uses ROE as one of its key performance metrics. While the measure enables the Company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance-related pay and pre-2018 shared-based payment structures. The ROE is shown in note 6, along with an explanation of the calculation.
A Net asset value (NAV) per share and net tangible asset value per share The Group uses NAV per share as one of its key performance metrics, including using the movement of NAV per share in the calculation of the options vesting of awards granted under Performance Share Plans (PSP) from 2018 onwards. This is a widely used key measure for management and also for users of the financial statements to provide comparability across peers in the market. Net tangible asset value comprises total equity excluding intangible assets. NAV per share and net tangible asset value per share are shown in note 5, along with an explanation of the calculation.
A Prior-year developments Prior-year developments are a measure of favourable or adverse development that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast the Group’s performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The prior-year development is calculated as the positive or negative movement in ultimate losses on prior accident years between the current and prior-year balance sheet date, as shown in note 23.
Financial assets carried at fair value 6,116.8 5,539.0 5,029.7 5,139.6 4,702.1
Net asset value per share (¢) 689.0 768.2 798.6 817.1 792.5 Key statistics Basic (loss)/earnings per share (¢) (91.6) 17.2 41.6 8.1 159.0 Basic (loss)/earnings per share (p) (71.5) 13.5 31.2 9.3 119.8 Diluted (loss)/earnings per share (¢) (90.6) 16.9 40.8 11.6 157.3 Diluted (loss)/earnings per share (p) (70.7) 13.3 30.6 9.0 116.0
†Closing mid-market prices. *2019 final dividend was declared but subsequently canceled. See note 29 for further details.
Photography by Two & Quarter Photography (Bermuda office image p9) Haze (London office image p9) Gary Hamill (Crates image p47) Suki Dhanda (Board images p52 to 53, senior management images p54 to 55)
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