Hiscox has had the same strategy for the 30 years I have been here. We continue to grow the retail businesses between 5% and 15% on average each year, whilst managing the more volatile London Market and reinsurance businesses more aggressively up and down as the opportunity and conditions dictate. This strategy has resulted in our transformation from a niche Lloyd’s underwriter to an international insurance group with a strong consumer brand. This has required discipline and persistence by an experienced management team led by our CEO, Bronek Masojada. Our retail business, outside of the London Market and Bermuda, now delivers 45% of profits (60% excluding foreign exchange gains), 49% of income and again its profits cover the dividend.
Outlook In 2016 we saw favourable foreign exchange movements produce increased profits despite declining margins. We are very happy to take the exchange gain but are equally aware it can go the other way. Margins are under pressure in big-ticket business and are not likely to improve next year. This is where our retail strategy comes into its own. We have plenty of room for growth in all retail segments as our penetration in professional lines and homeowners is far from complete.
Our bond portfolios, which traditionally deliver the majority of our returns, all benefited from the dramatic decline in yields following the UK referendum outcome. However, in the US Dollar market, where the bulk of our assets are invested, yields soon rose again, which created a particularly difficult end to the year, although we were somewhat protected by our focus on investment grade credit and short-duration investments. Our risk assets portfolio also made a useful contribution in absolute terms over the year, but lagged our benchmark.
In partnership with global risk consultants Control Risks, we have developed a broader security-based offering for corporate and private clients, beyond our traditional kidnap and ransom product. The Security Incident Response product includes cover for criminal threats, workplace violence, corporate espionage and cyber extortion, and so responds to the changing needs of our clients. We expect these initiatives will return the business to growth in 2017.
Hiscox MGA Hiscox MGA underwrites and distributes products where customers’ requirements for capacity exceed Hiscox’s own risk appetite. It operates out of London, Paris and Miami.
2 Strategic report Chief Executive’s report 35 Governance 73 Remuneration 101 Financial summary
The Board has declared a final dividend of 19.0p per share, to be paid on 20 June 2017 to shareholders on the register at 12 May 2017, taking the total ordinary dividend per share for the year to 27.5p, an increase of 14.6% (2015: 24.0p). The Group continues to maintain a progressive dividend policy.
Matthew is Group Head of Cyber at Hiscox, and the peril of which he speaks is one that has over the past few years exploded into the consciousness of politicians, journalists, TV drama writers and CEOs, and caused alarm to anyone whose financial and personal data is stored in digital form on the servers of a corporation or institution – which, in the developed world at least, is just about everyone. And it’s a peril that until the late 1980s simply didn’t exist.
To make the most of increasing demand, Hiscox has spent the past few years carefully refining its value proposition. Hiscox cyber insurance is now designed both to compensate for losses and, where possible, limit those losses in the first place. “Part of the purchase for customers is the financial limit of indemnity that they’re buying, but we’ll dovetail that with a panel of experts for the breach response,” explains Matthew. “We’ve gone out and partnered with law firms, IT forensics companies, credit monitoring companies and PR companies, so that when you discover you’ve been breached – in about 70% of cases you’ll be told by your customer or supplier, your bank or your regulator, rather than you discovering it yourself – you’ve got a response panel set up and ready to go.”
Catastrophic and systemic insurance losses We insure individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (e.g. hurricanes, earthquakes) and man-made (i.e. terrorism), which can cause heavy underwriting losses with material impacts on the Group’s earnings and financial condition.
Underwriting large, volatile and complex risks can be potentially costly, but can also earn good margins over the medium to long term.
Reserve risk We make financial provisions for unpaid claims, defence costs and related expenses to cover our ultimate liability both from reported claims and from ‘incurred but not reported’ (IBNR) claims. There is the possibility that we do not put enough money aside for our exposures, which could affect the Group’s earnings, capital and future.
20%� Our business target of a real-term reduction in carbon emissions of 20% Scope 1 and 2 per FTE by 2020.
Insurance brokers are important stakeholders in our business, and we wish to build strong relationships with them to create a competitive advantage in the marketplace. Hiscox UK and Ireland has instigated a ‘superb service’ ethos, developing a greater understanding of individual brokers’ needs. Hiscox UK and Ireland and Hiscox London Market have Chartered Insurer status from the Chartered Insurance Institute, which recognises the professionalism and expertise of staff and helps to attract business partners looking to work with high-quality insurers.
Dealing with customers Our ethos of outstanding customer service has earned Hiscox a reputation as a trusted insurer. 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 Consumer Intelligence 2016 Best Claims Award where the Hiscox UK and Ireland direct business was named one of the top ten insurer claims teams following an annual survey of over 24,000 consumers who rated their insurance/claims service. It was also recognised by Hiscox’s Kieran Giddons picking up Insurance Insider Honours Award, Young Claims Professional of the Year.
50 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary
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 the growing small-ticket E&O account of Hiscox USA written through our US service company Hiscox Inc.. The Syndicate also underwrites FTC (fire, theft and collision), auto extended warranty, property, technology and media, healthcare and aviation, some of which is sourced through other service companies in the Group.
Caroline Foulger joined Hiscox in January 2013 having retired from a partnership at PwC on 31 December, 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 Professional Accountants of Bermuda and Canada and a member of the Institute of Directors. Caroline is a Non Executive Director of the Bank of N.T. Butterfield & Son Limited, Catalina Holdings (Bermuda) Ltd, Oakley Capital Investments Limited and the Bermuda Business Development Agency.
Gunnar Stokholm Independent Non Executive Director (Aged 68) 20 November 2008*
Michael Krefta Chief Underwriting Officer, Hiscox Re and ILS and Joint Active Underwriter, Syndicate 33
Notwithstanding the uncertainties arising from the risks summarised on pages 40 to 45 there is a statement at page 93 which confirms that for the 2016 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 2019. 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 2019.
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.
The global picture has evolved too. The flood of capital into other markets in the wake of 9/11 has seen other insurance markets, particularly Bermuda, challenging London’s position as the world’s pre-eminent specialist insurance
We have now formally incorporated these restrictions into the policy. Other than these, the attached policy is largely unchanged. The Remuneration Committee is confident that this remuneration approach continues to support the strategic ambitions of the Group and is aligned with shareholders’ interests. Our recent consultations with shareholders have confirmed this view.
Balance of bonus split 50% to be paid after year two (i.e. 24 months after the start of the bonus year), and 50% after year three (i.e. 36 months after the start of the bonus year).
To encourage share ownership amongst participants and align interests with shareholders.
Where the Committee considers it appropriate to do so, under the plan rules the Committee is able to modify performance criteria for outstanding awards on the occurrence of certain events (e.g. major disposal).
Political and charitable contributions The Group made no political contributions during the year (2015: £nil). Information concerning the Group’s charitable activities is contained in the report on corporate responsibility on page 48 to 49.
– Allotment of shares for cash pursuant to employee share schemes
However, there are also some major differences between the two markets – not least because classic cars are often taken out to be driven on roads or racetracks and not simply stored away in environmentally controlled rooms. “It is wonderful that you still see these things racing, moving, doing what they were built to do – most classic car owners buy them because they love them and they want to see them live and breathe,” says Justin. “But that brings with it some significant risks and underwriting challenges.”
Rationale for the materiality benchmark applied 5% of the average profit before tax over the past three years.
Total claims incurred but not reported for the year ended 31 December 2016 are £1.59 billion. The methodologies and assumptions utilised to develop incurred but not reported reserves involve a significant degree of judgment as there is generally less information available with the related claims. The liabilities are based on the estimated ultimate cost of all claims incurred but not settled at a given date, whether reported or not, together with the related claims handling costs. In addition, classes of business where there is a greater length of time between initial claim event and settlement (such as professional indemnity and other liability classes) also tend to display greater variability between initial estimates and final settlements. A range of methods may be used to determine these provisions.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or component audit teams within the PwC Bermuda, PwC United Kingdom and PwC United States firms operating under our instruction. Where the work was performed by component audit teams, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained. The Group engagement team has regular interaction with the component teams, and the engagement leader visited the United Kingdom during the audit process. The engagement leader and senior members of the Group engagement team reviewed all reports with regards to the audit approach and findings of the component auditors in detail. This together with additional procedures performed at the Group level, as described above, gave us the evidence we needed for our opinion on the Group’s financial statements as a whole.
Directors’ remuneration The Company voluntarily prepares a report on Directors’ remuneration in accordance with the provisions of the UK Companies Act 2006. The Directors have requested that we audit the part of the report on directors’ remuneration specified by the UK Companies Act 2006 to be audited as if the Company were a UK registered company.
Government issued bonds and instruments 30 33 Agency and government supported debt 13 12 Asset-backed securities 5 8 Mortgage-backed instruments – agency 5
Debt and fixed income securities 19 631,414 1,577,814 651,362 554,359 3,414,949
Debt and fixed income securities 19 603,086 1,160,692 460,922 390,314 2,615,014
At 31 December 2016 and 2015 the Group held no material debt or fixed income assets that were past due or impaired beyond their reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities.
Claims and claim adjustment expenses, net of reinsurance (396,137) (260,468) (83,167) – (739,772) (343,391) (180,765) (48,297) – (572,453) Expenses for the acquisition of insurance contracts (262,545) (137,177) (10,118) – (409,840) (234,110) (104,581) (5,592) – (344,283)
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to the smallest identifiable unit to which cash flows are generated. £5,480,000 (2015: £5,480,000) is allocated to the Lloyd’s corporate member entity CGU and £2,092,000 (2015: £2,255,000) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value less cost to sell or value in use.
14 Goodwill and intangible assets continued 138 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Long-term debt 274,019 273,909 Accrued interest on long-term debt 1,800 1,754 Total financial liabilities carried at amortised cost 275,819 275,663
Total investments 3,744,883 2,881,403 20 Loans and receivables including insurance receivables
Foreign exchange forward contracts 11,610 81 (16) 65 Interest rate futures contracts 31,031 56 – 56 Equity index futures – – – –
Creditors arising out of direct insurance operations 27,997 20,208 Creditors arising out of reinsurance operations 319,494 210,654
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 5.0% (2015: 2.9%). A reconciliation of the difference is provided below: Profit before tax 354,543 216,100 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2015: 0%) – – Effects of Group entities subject to overseas tax at different rates 17,104 2,688 Impact of overseas tax rates on: Effect of rate change (832) (1,098) Expenses not deductible for tax purposes 7,487 1,999 Tax losses for which no deferred tax asset is recognised 2,155 6,936
The weighted average duration of the defined benefit obligation at 31 December 2016 was 23 years (2015: 20.5 years).
30 Employee retirement benefit obligations continued 158 Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
Effect of an increase in inflation Use of RPI inflation assumption of 3.45% 56,139 62,718 (6,579) Use of RPI inflation assumption of 2.95% 56,139 49,943 6,196 30 Employee retirement benefit obligations continued 159Hiscox Ltd Report and Accounts 2016 2 Strategic report 35 Governance 73 Remuneration 101 Financial summary Notes to the consolidated financial statements
When determining the level of dividend each year, the board considers the ability of the group to generate cash; the availability of that cash in the Group, while considering constraints such as regulatory capital requirements; and the level required to invest in the business. This is a progressive policy and is expected to be maintained for the foreseeable future.
(d) The Council of Lloyd’s has the discretion to call a contribution of up to 3% of capacity if required from the managed Syndicates.