As a Bermuda–incorporated company, Hiscox is not subject to the UK Companies Act. As a company listed on the London Stock Exchange, we comply with the requirements set out in the UK Corporate Governance Code 2018 and the Listing Rules and Disclosure & Transparency Rules of the of the UK Listing Authority. Our remuneration report is consistent with UK regulations. Any additional disclosures over and above these requirements, have been made for the benefit of shareholders, on a voluntary basis.
Set up dedicated Covid-19 claims telephone lines, as well as an online claims portal to process and pay business insurance claims as quickly as possible.
Took a ‘pay it forward’ approach to contract staff and suppliers by continuing to pay them during national and local lockdowns and office closures.
Operational risk The risk of direct or indirect loss resulting from internal processes, people or systems, or from external events. This includes cyber security risk, which is the threat posed by the higher maturity of attack tools and methods and the increased motivation of cyber attackers, in conjunction with a failure to implement or maintain the systems and processes necessary to protect the confidentiality, integrity or availability of information and data. Operational risk also covers the potential for financial losses, information and cyber security risks which have implications from a legal, regulatory, reputational or customer perspective, for example, major IT, systems or service failures.
Regulatory, legal and tax governance This relates to the business failing to act in accordance with its applicable regulatory requirements in all its applicable jurisdictions, or a deterioration in the quality of our relationship with one or more of our regulators. Legal risk is the risk of acting contrary to the relevant legal requirements in any of the jurisdictions in which we operate, while tax governance risk covers the consequences of any failure to act in accordance with relevant taxation laws or adapt to changes in taxation.
“The past year has only accelerated the pace at which the insurance market is going digital, and Hiscox is uniquely placed to seize the moment. Our multi-year technology investments have given us the tools to deliver superb digital experiences for customers, brokers, partners, and employees alike. The opportunity is huge.”
Retail business Hiscox UK Hiscox Europe Hiscox Special Risks Hiscox USA Hiscox Asia * Hiscox Retail includes $1.5m GWP of fully reinsured run-off portfolios.
Our long-term strategy has been to build a balanced book of business. We have grown our small-ticket Retail business in the UK, Europe, USA and Asia to balance the big-ticket London Market and Re & ILS businesses written through Lloyd’s and in Bermuda. We have seen strong profitable growth in Hiscox London Market as rates continue to surge ahead in the wholesale markets. Disciplined underwriting over the last three years as we weeded out underperforming business has meant that we are very well placed to take advantage of the improving conditions. In Retail, Hiscox Europe and the US direct and partnerships business, in particular, had good results, notwithstanding the pandemic.
Similar disagreements occurred across the industry, and the Financial Conduct Authority recognised this by bringing an expedited industry test case before the UK courts on behalf of policyholders. Their ambition was to bring clarity to approximately 370,000 policies with over 50 insurers which were subject to dispute. In May, we agreed to participate in the industry test case process, along with seven other insurers and two customer action groups.
Hiscox has undoubtedly suffered some brand damage this year. While I was reassured that net customer numbers in the UK remained stable in 2020, the route to restoring our brand is the same one which created it; providing flexible insurance cover to meet each customer’s needs, paying each claim fairly and quickly, and doing this all with good customer service. Our reputation was built one risk, one claim, and one customer at a time, and with that same focus, in time, the brand will strengthen.
Chapter 2 17 A closer look Chief Executive’s report 26 Hiscox Ltd Report and Accounts 2020
Our claims teams took the lead in managing our participation in the UK industry test case, and now that it is over, are managing our claims settlement processes. We have created significant surge capacity, drawing on resources in the UK, USA and Australia to make sure we have the capacity to deal with all claims fairly and quickly.
During the year we made material progress in claims transformation. In the USA we completed the insourcing of some of our legal work, and where we do rely on external lawyers, we have renegotiated hourly rates and consolidated vendors to make this more cost-effective. This is part of our global initiative to create a single vendor management platform integrating all external providers across our markets, which has already led to significant panel cost savings in the USA and Europe.
The Group’s estimate for the year-end 2020 BSCR solvency coverage ratio is 190%, which includes the second stage of changes to the BSCR standard formula being phased in by the BMA over a three-year period, which began in 2019. The changes are expected to reduce the Group’s BSCR solvency coverage ratio by an estimated ten percentage points over the next year.
Chapter 2 17 A closer look Risk management 37Hiscox Ltd Report and Accounts 2020
Internally, we set key performance indicators for ESG issues which are periodically reviewed and refined.
“ESG really matters to me, and it matters to Hiscox. We made great progress this year through pragmatism and focus, and in 2021 we will build on this – embedding our divestment policies and setting new carbon reduction targets which are aligned to the Science Based Targets initiative.”
Our three strategic pillars for charitable givingWe are active members of Insuring Women’s Futures, a Chartered Insurance Institute initiative aimed at evolving our industry’s approach to women and risk.
Relevant skills, experience and contribution s Strong financial services background. s Sizable insurance industry experience gained within a range of European territories.
The Audit Committee report can be found on pages 71 to 73.
Engagement s Board members met throughout the year with the Group regulator, the Bermuda Monetary Authority, in addition to key regulators in the principle subsidiaries, as part of an ongoing focus on cultivating open and transparent relationships with all key regulators.
Compliance with the UK Corporate Governance Code 2018 As a company listed on the London Stock Exchange, the UK Corporate Governance Code (the Code) is applicable to Hiscox.
Data from Lloyd’s of London shows that our efforts in gender diversity planning have delivered above market gender ratios and we continue to evolve our efforts, with a specific focus on improving our ethnic diversity.
Each year, the Directors are required to provide a complete list of all third-party relationships that they maintain. This is analysed to determine if there is any actual or potential conflict of interest. The Nominations and Governance Committee review the findings and determine if there is any conflict of interest. With respect to 2020, the Committee determined that there are no conflicts which could cause an actual or potential conflict, and additionally there are no concerns regarding overboarding by Directors with adequate time available by all to carry out their duties.
s Incentive awards are capped and are not considered excessive. s Executive Directors’ annual bonus awards are judgement-based to ensure they reflect their overall performance rather than being measured according to a formulaic outcome. Risk is also taken into consideration as part of this.
Board evaluation The Board and its Committees have a culture of continuous improvement and as part of this undertake a formal and rigorous annual evaluation of Board and Committee performance; the results of which help to inform appropriate action and development. Board and Committee effectiveness evaluations are carried out each year and the results are reviewed and discussed at the Board and each of the Committees. Every third year, the Board evaluation is undertaken by an external evaluator, as was the case in 2020.
Chapter 3 51 Governance Nominations and Governance Committee report 70 Hiscox Ltd Report and Accounts 2020
Internal audit The Head of Group Internal Audit updates the Audit Committee at least quarterly on the progress of the internal audit plan, the outcomes of recent audits, the progress of related audit actions, and any other relevant activities including its key performance measures and the development of its resources.
The 2018-2020 Performance Share Plan was set against stretching net asset value plus dividends per share targets. The net asset value per share threshold of 7% over the three-year performance period was not met. The Committee assessed performance in the round and concluded that there would be no exercise of discretion to override the outcome of the performance conditions for 2020, therefore the awards granted in 2018 will lapse in full.
p 40% of the awards will be based on relative total shareholder return (‘TSR’) against a group of global insurance peers. The vesting schedule for the TSR element will be in line with UK market norms, with threshold vesting for median-ranked performance, and full vesting of this element for upper-quartile performance.
The Committee believes that relative TSR aligns to our strategy of generating long-term value for shareholders, benchmarking those returns versus our closest listed peers. Further detail on the 2021 PSP measures and targets are set out on page 88.
In recognition of the withdrawal of the 2019 final dividend, the Committee agreed that Executive Directors would not be paid a bonus until the dividend has resumed.
The performance conditions for this award were set at the start of the performance period and are as follows: Growth in net asset value plus dividends
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2020 and 31 December 2019.
3Robert McMillian stepped down from the Ltd Board following the May 2019 AGM.
Growth in NAV plus dividends measured on a per-share basis Award vesting (% of maximum)*
* Restated to reflect cancellation of full-year 2019 final dividend. See note 29 for further details.
Disclosure under LR 9.8.4 of the Listing Rules The information that fulfils the reporting requirements relating to the following matters can be found at the pages identified below.
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman, Robert Childs, and the Chief Financial Officer, Hamayou Akbar Hussain. The statements were approved for issue on 3 March 2021.
Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Hiscox Ltd (the Company) and its subsidiaries (together the Group) as at 31 December 2020, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).
Chapter 6 113 Financial summary Independent auditor’s report are relevant to our audit of the consolidated financial statements in Bermuda. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the ethical requirements of the CPA Bermuda Rules.
The impact of Covid-19 on going concern: We obtained management’s going concern assessment which considered the Group’s capital, solvency and liquidity positions. We validated the analysis to supporting documentation and assessed management’s scenarios whereby they considered plausible downside sensitivities. We performed further sensitivity analysis on management’s assessment and assessed the impact on the Group’s capital, solvency, liquidity and debt covenants.
Notes to the consolidated financial statements 1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and the USA and currently has over 3,000 staff.
(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as IAS 39 effective net investment hedges or when the underlying balance is deemed to form part of the Group’s net investment in a subsidiary operation and is unlikely to be settled in the foreseeable future. Non-monetary items carried at historical cost are translated on the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined.
2.4 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance items are charged to the income statement during the financial period in which they are incurred.
A the disintegration of the active market(s) to which the asset is related.
2 Basis of preparation 2.9 Impairment of assets (b) Financial assets continued
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each business unit to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk reserve’). Any DAC written-off as a result of this test is not subsequently reinstated.
(i) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.
2.15 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review.
(c) Share-based compensation The Group operates a number of equity settled share-based employee compensation plans. These include the 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 (for example, 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.
2.21 Use of significant judgements, estimates and assumptions The preparation of financial statements requires the Group to select accounting policies and make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses in the consolidated financial statements.
To assist with the process of pricing and managing underwriting risk the Group routinely performs a wide range of activities including the following: A regularly updating the Group’s risk models; A documenting, monitoring and reporting on the Group’s strategy to manage risk; A developing systems that facilitate the identification of emerging issues promptly; A utilising sophisticated computer modelling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; A monitoring legal developments and amending the wording of policies when necessary; A regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; A examining the aggregated exposures in advance of underwriting further large risks; and
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 high-frequency, 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 predict over the short term, which complicates attempts to anticipate claims frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, claims frequencies on the reinsurance inwards book can be relatively low.
(a) Reliability of fair values The Group has elected to carry loans and receivables at amortised cost and all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy.
Property – marine and major assets 78.3 55.8 46.8 14.8 195.7
This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-US Dollar functional currency financial statements.
(g) Limitations of sensitivity analysis The sensitivity information given in notes 3.3 (a) to (f) demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented in note 27 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
A Hiscox London Market comprises the internationally traded insurance business written by the Group’s London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage and aviation business, however these are in run-off.
Net foreign exchange (losses)/gains – – – (14.5) (14.5) – – – 8.5 8.5
The Group determined that it does not control these entities. Hence they are not consolidated.
Acquisition costs incurred in relation to insurance contracts written 977.3 (269.8) 707.5 943.4 (301.4) 642.0 Acquisition costs expensed to the income statement* (1,002.9) 289.0 (713.9) (944.9) 283.9 (661.0) Foreign exchange and other adjustments 8.7 (1.4) 7.3 1.7 (0.4) 1.3 * Including unexpired risk reserve write-off of $6.6 million (2019: $nil).
An analysis of the credit risk and contractual maturity profiles of the Group’s financial instruments is given in notes 3.3(d) and 3.3(e).
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 release of $2.3 million (2019: loss of $5.3 million) for the impairment of receivables during the year ended 31 December 2020. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
The fair values of the Group’s financial assets are typically based on prices from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.
Share repurchase The Trustees of the Group’s Employee Benefit Trust purchased 1,958,864 shares (2019: nil) 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.
A reconciliation of the gross premium written to net premium earned is as follows: $m $m
Interest cost on defined benefit obligation 7.6 8.6 Interest income on plan assets (6.5) (7.6) Net interest cost 1.1 1.0 Administrative expenses and taxes – – Total expense recognised in operational expenses in the income statement 9 1.1 1.0 Remeasurements Effect of changes in actuarial assumptions 52.1 52.6 Return on plan assets (excluding interest income) (6.5) (32.8) Remeasurement of third-party Names share of defined benefit obligation (7.6) (3.3) Total remeasurement included in other comprehensive income 38.0 16.5 Total defined benefit charge recognised in comprehensive income 39.1 17.5
(d) Hiscox Insurance Company Limited has arranged a LOC of £50,000 (2019: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s; the arrangement is collateralised with cash of £50,000 (2019: £50,000).
(f) As Hiscox Bermuda is not an admitted insurer or reinsurer in the USA, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide LOCs or other terms of collateral to clients. Hiscox Bermuda has in place a LOC reimbursement and pledge agreement with Citibank for the provision of a LOC facility in favour of USA ceding companies and other jurisdictions, and also LOC facility agreements with National Australia Bank and Commerzbank AG. The agreements combined are a three-year secured facility that allowed Hiscox Bermuda to request the issuance of up to $470.0 million in LOCs (2019: $470.0 million).
A Combined claims and expense ratios The combined claims and expense ratios are common measures enabling comparability across the insurance industry that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if the Group owned all of the business, including the proportion of Syndicate 33 that the Group does not own (Group controlled income). The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables the Group to measure all of its underwriting businesses on an equal measure. The calculation is discussed further in note 4, operating segments. The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.