Gross premiums written ($m) Ordinary dividend (¢ per share) Profit before tax excluding FX ($m)
increased gross premiums written by 31% to $3.78bn delivered an average combined ratio of reported average return on equity of achieved compound dividend growth in constant currency of returned capital to shareholders of $1,123m
Our products worked, our clients are happy, and while it cost us more, that is the nature of our business.
Our ambition for 2019 is to continue to grow premiums, albeit at a slightly slower pace than 2018. We are hopeful that positive pricing momentum and ongoing portfolio optimisation will lead to improved underwriting profits, with higher interest rates driving better investment returns.
Our online direct and partnerships division, where the business we write is predominantly for small businesses with one to five employees, continues to be the biggest driver of growth for Hiscox USA. It grew by 43% to reach $206 million.
He is succeeded as Group Claims Director by Grace Hanson. She will be responsible for the strategic direction of Hiscox’s claims activities across the Group, working with the standard-bearers for Hiscox’s customer promise. We will benefit from Grace’s experience, which includes big-ticket property and casualty claims while at Allied World, and volume claims while at Homesite. This combination of knowledge and experience will shape our claims response to the digital era.
The conventional wisdom that a negative environment for bonds bodes well for equities did not hold true in 2018, with both asset classes underperforming in the majority of markets. In response, we reduced our bond exposure, reducing mark-to-market losses in the process; took refuge in cash, holding more US Dollars than usual; and maintained a low exposure to riskier assets.
Investments We manage our investment portfolio with two main objectives in mind: providing sufficient liquidity to pay claims and providing capital to support the underwriting business, while generating strong risk-adjusted returns. These objectives were certainly challenged this year.
Group regulators As a Bermudian-registered holding company, the Group is regulated by the Bermuda Monetary Authority (BMA) under the Bermuda Group Supervisory Framework. The BMA requires Hiscox to monitor its Group solvency capital requirement and provide a solvency return in accordance with the Group Solvency Self Assessment framework (GSSA), including an assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR). The BSCR model applies factors to premium, reserves and assets/liabilities to determine the minimum capital required to remain solvent throughout the year.
The largest driver of our capital is underwriting risk. The Group manages the underwriting portfolio so that in a one-in-200 aggregate bad year it will lose no more than 12.5% of core capital plus 100% of buffer capital ($135 million) with an allowance for expected investment income. A market loss at this remote return period would be very large indeed and would be expected to bring about increases in the pricing of risk. Our capital strength and financial flexibility following this scenario means the Group would be well positioned to take advantage of any opportunities that might arise. After the payment of the final dividend on 12 June 2019, the available capital will reduce to approximately $2,382 million, comfortably meeting the current regulatory, rating agency and internal capital requirements. Our estimate of the year-end 2018 BSCR solvency ratio is 210%. The Group continues to operate with a strong solvency position. In addition, each of the respective insurance carriers holds appropriate capital positions on a local regulatory basis.
Clearly, markets have entered a new phase and we expect to have to weather more bouts of volatility as growth slows and liquidity is drained from the market. In 2018, we started to restructure our risk assets to reduce volatility while maintaining return. We will continue this process in 2019, again choosing strong, diversifying risk asset managers and using more sophisticated quantitative techniques to manage our positions. We have also started to incrementally increase the risk in our bond portfolios by investing in shorter-dated, high-quality non-government bonds. This will increase our medium-term expected return with only a modest increase in risk.
p Premium growth in local currency Gross premiums written, as reported in the consolidated income statement, is measured in the underlying currency and compared to prior years on a constant currency rate basis.
Flood The disparate effects of climate change around the globe are an increasingly fundamental concern for the insurance industry. Because so many of the risks we underwrite are impacted by climate variability, Hiscox is investing heavily in supporting internal and external research on climate, weather and catastrophe patterns, and seeking to identify new products and services that will support customers in adapting to these far-reaching changes. Major weather events are occurring with increased frequency and severity, one of the most widespread and destructive effects of which is flooding. It’s an area in which Hiscox is increasingly active. We are participants in the UK’s Flood Re scheme; we have award-winning US FloodPlus products, which use proprietary technology and advanced analytics to provide more substantial cover at a fairer price than that available through the under-pressure government-backed scheme; and our reinsurance product, FloodXtra, provides a new flood insurance solution for US admitted personal lines writers. Combined, we believe these products offer the potential for significant growth in the coming years.
Risk management framework The Group takes an enterprise-wide approach to managing risk. The risk management framework provides a controlled system for how risk is identified, measured, managed, monitored and reported across the Group. It supports innovative and disciplined underwriting across many different classes of insurance by guiding our appetite and tolerance for risk.
Strategic risk The possibility of adverse outcomes that may result from strategic ‘bets’/business initiatives taken or not taken by the Group. This may include business expansion or contraction, mergers and acquisitions, negative impact to reputation or brand, or failure of the Board to provide adequate oversight of the business or make appropriate business decisions.
We are also exploring how we can align our approach to climate change, and to manage our environmental impacts to the UN Sustainable Development Goals, which are increasingly seen as the international standard for businesses to more consistently and collaboratively engage with the sustainable development agenda.
s We are committed to training and development and all employees have access to a range of resources to help in their career development, both internally and externally. Success Factory is our internal training tool and contains hundreds of different courses covering technical and professional development, honing leadership skills and how to have more productive performance review meetings. In 2018, over 31,000 training hours were completed through Success Factory and many more hours of external training, coaching and mentoring were delivered. This figure also excludes all mandatory training undertaken around areas including 41 Governance Responsibility
s The Companies (Miscellaneous Reporting) Regulations 2018 came into force. The regulations came into effect for financial years beginning on, or after, 1 January 2019 and introduce a number of new reporting requirements for quoted companies incorporated in the UK including: disclosures regarding the way companies engage with their employees; enhanced reporting on governance arrangements; a requirement to disclose Chief Executive pay ratios; and how directors fulfil their statutory duties. Although the new regulations do not apply to Hiscox as a Bermuda incorporated company, we believe in maintaining the highest standards of disclosure and transparency, and accordingly we will include additional disclosures in our 2019 Report and Accounts where we think to do so would improve our narrative reporting and give shareholders a better understanding of our corporate governance arrangements. In that spirit, we have decided to voluntarily report our Chief Executive’s pay ratio, which is included in our annual report on remuneration on pages 72 to 83.
While 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. Bob McMillan was appointed to the Board in 2010 and, in accordance with the criteria set out in the Code, potentially ceases to be independent if he continues to serve beyond nine years. Accordingly, Bob McMillan will not seek re-appointment at the 2019 Annual General Meeting and will retire from the Board.
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 a critical risk tracker which monitors the most significant exposures to the business, including emerging risks and risks that have emerged but are evolving. The Risk Committee also engages in focused reviews, with recent topics being data security and the potential impact of climate change. Stress tests and reverse stress tests (scenarios which could potentially give rise to business failure as a result of a lack of viability or capital depletion) are also performed and reported on to the Risk Committee. In light of these arrangements the Directors are satisfied that a robust assessment of the 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.
Salaries for 2018: — Bronek Masojada: £620,000 — Aki Hussain: £477,000 — Richard Watson: £477,000 Salary increase of 3.4%, in line with average UK employee increase.
For 2018, the pre-tax ROE bonus hurdle rate of 6% was achieved therefore a bonus pool was created and, in line with the pre-disclosed bonus ranges, this level of performance enabled Executive Directors to be considered for bonus awards. In considering bonus awards, the Committee took account of the personal performance of the individuals, the size of the bonus pool and the overall performance of Hiscox, including strong underwriting performance, good growth and improved ROE. As such, the three Executive Directors were awarded bonuses representing 9% of maximum opportunity. This is in line with our approach of rewarding financial outcomes, not just effort. For the wider workforce, we paid bonuses relative to personal performance and profitability of business area.
Under the Company’s existing PSP, awards to good leavers are generally released at the end of the normal performance period and therefore Directors generally retain a significant interest in Company shares after they leave the Company. As part of the renewal process of the remuneration policy in 2020, the Committee will give further consideration to how Executives remain aligned with the performance of the business following departure.
Remuneration for the wider workforce The Remuneration Committee receives regular information on Group-wide remuneration policies and uses internal and external measures to assess the appropriateness of remuneration including gender analysis and market benchmarking of pay, bonus pools split by business area, levels of share plan participation and pay ratios between Executives and average employees. The Committee will continue to monitor market practice in this area, given this is an area of particular shareholder focus and also in light of the provisions detailed within the revised UK Corporate Governance Code.
Implementation of remuneration policy for 2019 Salary Annual salary reviews take effect from April each year. For 2019, salaries for Executive Directors will be increased by 2.7% in line with other UK-based employees.
3. Release of any deferred bonuses All outstanding bonuses deferred from the annual incentive scheme will normally be paid in full.
p PSP: assumes vesting of 100% of the maximum award plus assumed share price growth of 50%.
Directors’ report The Directors have pleasure in submitting their Annual Report and consolidated financial statements for the year ended 41.85¢ Total dividend payment for the year ended 31 December 2018.
Corporate governance statement The information that fulfils the requirements of the corporate governance statement as referred to in DTR 7.2 can be found on pages 61 to 64 in this report.
Viability The statement required to be included in the Annual Report under C.2.2 of the UK
Political and charitable contributions The Group made no political contributions during the year (2017: $nil). Information concerning the Group’s charitable activities is contained in the responsibility section on pages 52 to 57.
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 2018, 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 EU.
On 1 January 2018, the functional currency of a number of trading subsidiaries changed from Sterling to US Dollars. The change was as a result of changes made to various underlying contracts and arrangements (i.e. quota share contracts, profit commission and capital arrangements) which were effected on 1 January 2018 and are denominated in US Dollars as opposed to Sterling resulting in a significant proportion of earnings in US Dollars.
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 Basis of preparation 2.2 Basis of consolidation continued 110 Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Other $000 * Total *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism and other risks which contain a mix of property and casualty exposures. †See note 2.1 for further details.
The Group’s provision estimates are subject to rigorous review by senior management from all areas of the business. The managed syndicates and USA business receive a review of their estimates from independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
Operational currency risk Operational foreign exchange risk is principally managed within the Group’s individual entities by broadly matching assets and liabilities by currency and liquidity. Due attention is paid to local regulatory solvency and risk-based capital requirements. All foreign currency derivative transactions with external parties are managed centrally.
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The Group had sufficient capital at all times throughout the year to meet the BMA’s requirements. The BMA is planning to phase in changes between the 2019 and 2021 year-ends. The Group expect to maintain an appropriate margin of solvency after these changes have taken effect.
The Solvency II regime came into force in Europe on 1 January 2016. This requires insurance companies to calculate their capital requirements using either an internal model or a standard formula. Hiscox Insurance Company Limited and Hiscox Société Anonyme use the standard formula to calculate their regulatory capital requirements. Their risk profiles are sufficiently well represented by the standard formula not to warrant going through the internal model approval process. Hiscox’s Lloyd’s operations use the internal model that has been built to meet the requirements of the Solvency II regime. The model is concentrated specifically on the particular product lines, market conditions and risk appetite of each risk carrier.
At 31 December 2018 there were $37,502,000 of assets under development on which amortisation has yet to be charged (2017: $24,735,000).
The assets are expected to be recovered or settled more than 12 months after the reporting date and as such are considered to be non-current.
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 1,277,862 925,805 After one year 1,178,713 907,450 *See note 2.1 for further details.
All of the financial liabilities carried at fair value are due within one year. The amounts owed to credit institutions relate to outstanding investment trades in trust funds that are not available for offset against the same counterparty under cash and cash equivalents. These positions would be rated A had they have been recorded under cash and cash equivalents. The long-term debt is due after one year, with its accrued interest due within one year.
Foreign exchange forward contracts 104,627 1,451 (599) 852 Interest rate futures contracts 118,497 – (480) (480)
Equity index options During the year, no equity index futures were purchased. All contracts held in prior years were exchange traded in 2017 and the Group made a loss on these future contracts of $186,000 as included in the investment result in note 7.
Included within Level 1 of the fair value hierarchy are certain government bonds, treasury bills, long-term debt and exchange-traded equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at amortised cost, is estimated at $706.3 million (2017: $428.5 million) and is considered as Level 1 in the fair value hierarchy.
Liability recognised in respect of prior accident years at 100% level 135,491 Total gross liability to external parties at 100% level 5,740,176 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2018.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year: 1,043,379 1,188,318 1,478,605 1,165,479 1,112,603 1,160,605 1,235,375 1,449,168 1,834,262 1,788,472 13,456,266 eight years later 745,754 874,749 – – – – – – – – 1,620,503 nine years later 744,878 – – – – – – – – – 744,878
Claims reported and claim adjustment expenses 1,957,222 (690,569) 1,266,653 1,626,087 (488,237) 1,137,850 Claims incurred but not reported 3,034,981 (1,356,530) 1,678,451 2,724,479 (1,004,061) 1,720,418 Total at end of year 4,992,203 (2,047,099) 2,945,104 4,350,566 (1,492,298) 2,858,268
27 Employee retirement benefit obligations continued 155Hiscox Ltd Report and Accounts 2018 1 Strategic report 41 Governance 67 Remuneration 97 Financial summary Notes to the consolidated financial statements
Trust Deed charged to Lloyd’s of London, to meet any liabilities they occur from their interest in Syndicates 33 and 3624. At 31 December 2018, HDCM held £261 million of investments, £18 million of cash and a £20 million Letter of Credit in favour of Lloyd’s of London under this arrangement. At 31 December 2018, HCL held £449 million of investments (2017: £485 million), £11 million of cash and a £20 million Letter of Credit in favour of Lloyd’s of London under this arrangement.