Business priorities and key risks As an insurance business, understanding and managing risk is part of our DNA. This is how we will balance opportunity and risk in 2020.
Read more about our key risks hiscoxgroup.com/about-hiscox/ risk-management data. Operational risk also covers the potential for financial losses, information and cyber security risks which have legal, regulatory and reputational consequences, for example major IT, systems or service failures.
The reinsurance market has yet to show the same level of discipline as we have seen in our big-ticket insurance lines. It is felt that the very large reinsurers are happy to hold prices at last year’s levels in order to squeeze some smaller players who are reliant on increasingly expensive retrocession. It was ever thus, and the dance will no doubt continue. It is very unlikely that the investment contribution will be so high in 2020 and hopefully reinsurance underwriting discipline will return. In the meantime, we will reduce our exposure, waiting for sense to prevail.
Outlook We aim to balance Hiscox Retail with the higher-volatility big-ticket businesses. Looking forward, we expect our retail business to get back on track, with better growth this year than last and an improved combined ratio. We will trim the reinsurance business to suit conditions. The London Market is seeing improvements in rates and conditions. In the past these improvements have made it straight through to much better returns. We have the brand, talent and diversity of product and geography to make the most of the opportunities ahead.
We continue to see strong demand for our professions, specialty commercial and cyber products across our businesses in Europe. This has enabled us to carve out a leadership position for these lines in Germany, Spain and Benelux.
Hiscox Re & ILS has been impacted by another year of heavy catastrophe claims, resulting in a loss before tax of $93.8 million (2018: loss of $28.7 million*) and a 2019 combined ratio of 163.9% (2018: 116.9%). This is the third consecutive year of large events. Our long-standing relationships in the Japanese market meant that Typhoons Faxai and Hagibis had a material impact on us. We also experienced claims from Hurricane Dorian which impacted the Bahamas and the USA, as well as from the riots in Chile and wildfires in Australia. Unusually, Hiscox Re & ILS suffered prior year deteriorations due to the adverse development of 2018 Typhoon Jebi and the need to strengthen reserves for the healthcare business which we exited in 2017. All of these factors combined meant we had this poor result.
Read more about our financial condition in our financial condition report hiscoxgroup.com/about-hiscox/group-policies-and-disclosures
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 and provide a return in accordance with the Group Solvency Self Assessment (GSSA) framework, including an assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR). The BSCR model applies charges for catastrophe, premium, reserve, credit and market risks to determine the minimum capital required to remain solvent throughout the year.
s We donated just over $1 million to good causes in 2019 through the Hiscox Foundation (UK and USA), Hiscox Gives and individual employee efforts, and published our first impact report, outlining how the money was distributed and the difference it made. You can read the report at: hiscoxgroup.com/impactreport.
Highlights s We developed the Hiscox Group governance model following a review of decision-making and control within the Board and the subsidiary boards. More information can be found on page 51.
s We issued six new mandatory training modules to employees across the Group, to raise awareness of risks including information security and data protection, which resulted in 2,281 hours of mandatory Group-wide information security training being completed – the equivalent of 325 days.
Relevant skills and experience s Considerable experience of providing strategic, financial and commercial management and in-depth knowledge of the regulatory and compliance environment.
Constantinos Miranthis Independent Non Executive Director (Aged 56) Appointed to the Board: November 2017
Reporting The Companies (Miscellaneous Reporting) Regulations 2018, which came into force last year, applied from 1 January 2019 onwards and introduced a number of new reporting requirements for quoted companies incorporated in the UK. Although these new regulations do not apply to Hiscox as a company incorporated under the laws of Bermuda, we have included some additional disclosures where we feel that doing so would give shareholders a better understanding of our governance arrangements. For example, last year we voluntarily reported our Chief Executive’s pay ratio, which is a practice we have continued this year. For 2019, we have also included additional disclosures regarding the way we engage with employees, and the delivery of Director duties, which can be found on pages 32 and 46 respectively.
As at the date of this report, the Board comprised the Non Executive Chairman, three Executive Directors, and seven independent Non Executive Directors including a Senior Independent Director. The operations of the Board are underpinned by the collective experience of the Directors and the diverse skills which they bring. Biographical details for each member of the Board are provided on pages 44 to 45. Notable changes during 2019 include Bob McMillan (Independent Non Executive Director) and Richard Watson (Executive Director) retiring from the Ltd Board in May and December respectively; and Joanne Musselle being appointed to the Board in March 2020 as Group Chief Underwriting Officer – succeeding Richard Watson. In accordance with the Company’s Bye-laws and the Code, all Directors will seek re-appointment at the 2020 Annual General Meeting and no issues have arisen that would prevent the Chairman from recommending the re-appointment of any individual Director. More information on the role of the Board can be found on pages 50 to 53.
The Board is responsible for the success of the Company and the underlying Hiscox Group of companies and as part of this the Board sets the governance framework and the overarching principles which should be applied across the Group. The framework is supported by a formal governance manual which explicitly sets out our corporate governance standards. The Group governance manual sets out the overall Group structures, the division of responsibilities between Group and principal subsidiary boards, operational requirements for the Board and the principles applied to subsidiary management.
In line with the agreed meeting schedule, the Board held four formal meetings in 2019 along with scheduled informational calls in between these meetings. Board meetings and activity
Purpose and values have always been important at Hiscox, and the Board reviews and refines them every five or so years to ensure they remain relevant as new people join and the business evolves. The Board believes that the Company’s purpose and values act as a barometer by which the Board and the wider workforce can hold each other to account. During the year, a comprehensive process was undertaken to consult employees across the Group, at all levels of the Company, on the purpose and values and these were approved by the Board and subsequently updated and published in September 2019. For more information see pages 4 to 5.
Division of responsibilities The Chairman is responsible for the leadership and overall effectiveness of the Board. He recognises the importance of creating a boardroom culture which encourages openness and debate and ensures constructive relations between Executive and Non Executive Directors. There is a clear division of responsibilities between the Chairman, Chief Executive and Senior Independent Director to ensure that no individual has unfettered powers of decision, which is outlined on page 49.
The Nominations and Governance Committee also ensures a formal, rigorous and transparent procedure for the appointment of new Directors and is responsible for Board succession planning, regularly assessing the balance of skills, experience, diversity and capacity required to oversee
Direct reports to the Executive Committee 51% 49% Hiscox Partners* 77% 23% All employees** 50% 49%
In relation to financial reporting, the primary role of the Audit Committee (the Committee) is to monitor the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance, and review significant financial reporting judgements contained within them. Working with both management and the external auditor, the Committee reviewed the appropriateness of the half-year and annual financial statements, concentrating on, among other matters: s the quality and acceptability of accounting policies and practices; s the clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements; s material areas in which significant judgements and estimates have been applied or where there has been discussion with the external auditor; s any correspondence from third parties in relation to our financial reporting.
During the year, a number of large natural catastrophes occurred which impacted the Group, including Hurricane Dorian and Typhoons Faxai and Hagibis. It is important that the Company can quickly and with a reasonable degree of reliability, estimate the gross and net losses arriving for these events. The Committee received presentations from the Chief Actuary and management on the process undertaken and the judgments arrived at to establish these key estimates. In addition to the
— increasing the maximum opportunity under the PSP by 50% of salary.
Directors’ shareholding and share interests To align their interests with those of Hiscox shareholders, senior managers are expected to own a minimum number of Hiscox shares. Executive Directors are required to hold Hiscox shares valued at 200% of salary within five years of becoming an Executive Director. Bronek Masojada and Richard Watson have over 20 and 30 years’ service respectively, so their shareholdings far exceed the guidelines. Aki Hussain was appointed to the Board in September 2016 and has met his minimum shareholding requirement.
Number of awards granted Number of awards lapsed Number of awards exercised
Arrangements tailored to roles and responsibilities are operated for selected positions. Bonuses for more junior employees are calculated using a more formulaic approach. Further details are set out on page 69.
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. 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 maximum level of variable remuneration (excluding any buy-outs) is capped at the maximum level set out in the policy table on pages 85 to 87. Within these limits and where appropriate the Committee may tailor the award (for example, time frame, form, performance criteria) based on the commercial circumstances. Shareholders would be informed of the terms for any such arrangements. Ordinarily, it would be expected that the package on recruitment would be consistent with the usual ongoing Hiscox incentive arrangements.
Deferred bonus awards will vest in full. Outstanding awards under all-employee share plans will be treated in accordance with the relevant plan rules.
The Committee consulted with major shareholders during 2019 and took shareholders feedback into account when finalising the revised 2020 policy.
Fixed reward plus variable pay for the purpose of illustration as follows. p Annual incentive: maximum bonus equivalent to 300% of salary for the CEO and CFO and 400% of salary for the CUO. p PSP: vesting of 100% of the maximum award plus assumed share price growth of 50%.
Major interests in shares The Company has been notified of the interests of 5% or more of voting rights in its ordinary shares, which are outlined in the table above, right.
Power of Directors The powers given to the Directors are contained in the Company’s Bye-laws and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in a general meeting. At the Annual General Meeting in 2019, the Directors were granted authorities to allot and issue shares and to make market purchases of shares and intend to seek renewal of these authorities in 2020.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: A identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
Total equity and liabilities 12,550.8 10,836.3 9,729.8 *See note 2.2 for further details.
Deferred and current tax on employee share options – – – – 4.2 4.2 – 4.2 Net movements of treasury shares held by Trust – – – – (76.5) (76.5) – (76.5) Shares issued in relation to Scrip Dividend 22, 29 – 7.8 – – – 7.8 – 7.8 Dividends paid to owners of the Company 29 – – – – (113.5) (113.5) – (113.5)
Liabilities Increase in trade and other payables 78.8 Analysed as lease liabilities 78.8
In addition to those balances, loans and receivables also includes due from brokers, agents and intermediaries and other financial assets which are within the scope of IFRS 9. Under IFRS 9, these assets continue to be recognised at amortised cost less impairment, with the measurement of impairment reflecting expected as well as incurred credit losses. The Group expects a recognition of an earlier and higher loss allowance under this approach compared to current approach resulting in a negative impact on equity and will perform a detailed assessment in the future to determine the extent. IFRS 9 has been endorsed by the EU.
2 Basis of preparation continued 116 Hiscox Ltd Report and Accounts 2019
The fair value of a non-financial asset is determined based on its highest and best use from a market participant’s perspective. When using this approach, the Group takes into account the asset’s use that is physically possible, legally permissible and financially feasible. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received.
Reinsurance liabilities primarily comprise premiums payable for outwards reinsurance contracts. The Group assesses its reinsurance assets on a regular basis and, if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
Claims and associated expenses are charged to profit or loss as incurred, based on the estimated liability for compensation 2 Basis of preparation 2.11 Derivative financial instruments continued 119Hiscox Ltd Report and Accounts 2019
2 Basis of preparation 2.20 Leases (a) Hiscox as lessee continued
3 Management of risk 3.2 Financial risk (a) Reliability of fair values continued
Government issued bonds and instruments 28 33 Agency and government supported debt 6 10 Asset-backed securities 1 2 Mortgage-backed instruments – agency 5 3 Mortgage-backed instruments – non-agency 1 1 Mortgage-backed instruments – commercial – – Corporate bonds 57 49 Lloyd’s deposits and bond funds 2 2
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.
For the current period and prior period, the Group did not experience any material defaults on debt securities. The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2019 and 2018.
Structural currency risk The Group’s exposure to structural currency risks mainly relates to Sterling and the Euro net investments in businesses operating in the UK and Europe. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. However, the Group does not ordinarily seek to use derivatives to mitigate the structural risk because: – the currency translation gains and losses are accounted for in the currency translation reserve (a component of equity)
Employee retirement benefit obligations – 35.8 – – 35.8 Deferred tax – 9.1 – – 9.1 *See note 2.2 for further details. ** Following a review of the underlying currency of the debt and fixed income securities, an amount of $67.9 million has been reclassified from US Dollars and Sterling to
Sensitivity analysis As at 31 December 2019, the Group used closing rates of exchange of $1:£0.76 and $1:€0.89 (2018: $1:£0.79 and $1:€0.87). The Group performs sensitivity analysis based on a 10% strengthening or weakening of the US Dollar against Sterling and the Euro.
3 Management of risk 3.3 Capital risk management continued 133Hiscox Ltd Report and Accounts 2019
At 100% level (note 4b) 1% change in claims or expense ratio 19.3 7.2 2.5 18.6 7.2 3.0 At Group level 1% change in claims or expense ratio 19.0 5.3 2.1 18.2 5.5 2.6 136 Hiscox Ltd Report and Accounts 2019
Claims and claim adjustment expenses, net of reinsurance (945.5) (478.6) (331.3) – (1,755.4) (816.1) (330.9) (249.8) 57.5 (1,339.3) Expenses for the acquisition of insurance contracts (509.2) (205.1) (20.7) – (735.0) (475.6) (213.9) (19.5) (0.4) (709.4)
Investment income including interest receivable 123.7 103.0 Net realised gains/(losses) on financial investments at fair value through profit or loss 34.4 (25.4) Net fair value gains/(losses) on financial investments at fair value through profit or loss 73.0 (35.1) Investment result – financial assets 8 231.1 42.5 Net fair value (losses)/gains on derivative financial instruments 19 (2.2) 1.3 Investment expenses (5.9) (5.7) Total result 223.0 38.1 138 Hiscox Ltd Report and Accounts 2019
(b) Special purpose insurers The Kiskadee Diversified Fund and Kiskadee Select Fund (the Funds) were launched in 2014 to provide investment opportunities to institutional investors in property catastrophe reinsurance and insurance-linked strategies. The Funds are managed by Hiscox Re Insurance Linked Strategies Ltd (formerly known as Kiskadee Investment Managers Ltd) which is a wholly owned subsidiary of the Group. The majority of the Funds’ exposures to reinsurance risk are fronted by the Group into two Bermuda Licensed Special Purpose Insurers (SPI), Kiskadee Reinsurance 1 Ltd and Kiskadee Reinsurance 2 Ltd which have been collateralised by the Funds.
Derivative financial instruments 19 0.6 1.1 Total financial liabilities carried at fair value 0.6 1.1 $m 2018 $m
20 Fair value measurements continued Investments in mutual funds, which are included in equities and investment funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of these investment funds are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.
Unrealised gains and (losses) in the year on securities held at the end of the year (0.1) 0.7 0.6 * Fair value gains/(losses) are included within the investment result in the income statement for equities and investment funds and through other income for the insurance-linked fund.
Cash at bank and in hand 903.2 1,124.3 Short-term deposits 212.7 164.5
Share repurchase The Trustees of the Group’s Employee Benefit Trust did not purchase shares to facilitate the settlement of vesting awards under the Group’s Performance Share Plan (2018: purchase of $76.5 million shares). 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.
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and Performance Share Plan award instruments issued to employees, over their vesting period through the income statement. The amount recognised in the consolidated income statement during the year was expense of $3.6 million (2018: income of $3.6 million). This comprises an expense of $2.7 million (2018: income of $4.6 million) in respect of Performance Share Plan awards and an expense of $0.9 million (2018: expense of $1.0 million) in respect of share option awards. The Group has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument.
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2019 and 2018 are not material.
Current estimate of cumulative claims 885.2 1,172.8 910.2 802.1 833.5 1,056.6 1,285.6 1,613.8 1,837.3 1,785.7 12,182.8 Less: attributable to external Names (127.5) (158.7) (96.5) (82.1) (84.1) (107.1) (129.4) (166.9) (184.4) (195.9) (1,332.6) Group’s share of current ultimate claims estimate 757.7 1,014.1 813.7 720.0 749.4 949.5 1,156.2 1,446.9 1,652.9 1,589.8 10,850.2
Total claims and claim adjustment expenses 3,206.7 (1,630.6) 1,576.1 2,326.6 (1,100.8) 1,225.8
Current tax Expense for the year 36.0 28.0 Adjustments in respect of prior years (7.0) 1.5 Total current tax expense 29.0 29.5
Uncertain tax positions Included within the current tax, a provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The weighted average duration of the defined benefit obligation at 31 December 2019 was 20.5 years (2018: 19.3 years).
The triennial valuation carried out as at 31 December 2017 resulted in a deficit position of £26.5 million ($35.8 million) on a funding basis. The Group and the scheme’s trustees have agreed a recovery plan to reduce the deficit and to eliminate the deficit by 2024. A funding contribution of £2.8 million ($3.6 million) was paid during 2019 and under the plan a further payment of £2.8 million ($3.6 million) will be made during 2020 and annually thereafter. The funding plan will be reviewed again following the next triennial funding valuation which will have an effective date of 31 December 2020.
Diluted Diluted earnings per share is calculated by adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
The final dividend for the year ended 31 December 2018 was either paid in cash or issued as a scrip dividend equivalent of 28.6¢ per share. The final dividend for the year ended 31 December 2018 was paid in cash of $75.2 million (2018: $71.5 million) and 296,044 shares for the scrip dividend (2018: 263,368).
– 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.