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Investments Given the continued challenging markets, and relatively cautious approach, we are content with our investment result of £56.4 million (2013: £58.9 million), which equates to a return of 1.8% (2013: 1.9%).
Our bias towards short-term bond investments provides something of a constraint in current markets but it is driven by the desire not to suffer losses when bond yields rise.
– Aerospace and specialty: This division includes our aviation, space, contingency, terrorism, kidnap and ransom, political risks and personal accident business.
In Europe our ‘EuroFit’ programme is still succeeding in accelerating growth whilst driving down the combined expense ratio. We continue to expand our European Service Centre in Lisbon and to implement changes that simplify our business and processes. This includes investing in our online quoting platforms for brokers.
Steve Langan CEO Hiscox Insurance Company Chief Marketing Officer CEO DirectAsia Group
Products include Aerospace, global casualty, contingency, marine and energy, personal accident, political risks, property, kidnap and ransom, terrorism.
Security Hiscox Insurance Company (Guernsey) Limited has an A (Excellent) rating from A.M. Best and an A+ (Strong) rating from Fitch.
Boxplot and whisker diagram of modeled Hiscox Ltd net loss ($m) January 2015
Our aim is to offer customers certainty in an uncertain world: clear coverage (which often goes much further than that offered by our rivals), consistent prices (rather than offering rockbottom introductory prices, only to hike them
The absence of major catastrophes and the influx of new capital have put increasing pressure on reinsurers. Buyers now expect more cover for less, and we are concerned by a further softening of the market, created by some reinsurers effectively giving away extra cover by relaxing their terms and conditions. With no change in the current market conditions in sight, disciplined underwriting is now about applying deft touches on the accelerator and brake pedals, enabling us to keep up the momentum that we want while being able to avoid the potholes in the road ahead.
A further amount of 15.0p per share is proposed instead of payment of a final dividend. This return of capital will align the Group’s available capital with the rating agencies’ minimum capital requirements to remain in the A range. The impact of this distribution and how it compares to the Group’s capital requirements is presented in the chart on page 21.
Management compares the capital requirements of the Group against its available capital. Available capital is defined by the Group as shareholders’ equity which was £1,454 million at 31 December 2014 (2013: £1,409 million). Debt or preference shares are not defined as available capital by the Group as they do not absorb losses, should they occur, ahead of or alongside ordinary shareholders.
Profit before tax for the year was £231.1 million (2013: £244.5 million). This was due in part to the lack of major catastrophe activity for the second year running. The investment return remained constant at 1.8% (2013: 1.9%). Foreign exchange gains in 2014 were £5.0 million (2013: £9.9 million losses) as the US Dollar strengthened balanced by a weakening Euro. The Group recorded a post-tax return on equity of 17.1% (2013: 19.3%) and earnings per share were 67.4p (2013: 66.3p).
– Modeling: We have tailored our modeling resources to assist insurance and reinsurance plans and ensure that the exposure we write matches expectations. The risk aggregation and modeling resources are shared across the Group to ensure everyone uses the same modeling tools.
– Currency matching: These funds, as far as possible, are maintained in the currency of the original premiums for which they are set aside to reduce foreign exchange risk.
– Guidelines: Investment risk also encompasses the risk of default of counterparties, which is primarily with issuers of bonds in which we invest. Our third-party investment managers are issued guidelines as to the type and nature of bonds in which to invest.
– Vetting and auditing: All binding authorities we grant are closely controlled through tight underwriting guidelines. We vet all our agents prior to appointment and monitor and audit them regularly. Agents are frequently audited to ensure they meet our standards.
The external ratings assigned to the Group and its subsidiaries are essential to our profitability, particularly for our reinsurance business, and to manage our financing costs and access to capital. A reduction in these external ratings may impact the Group’s ability to generate business and/or access finance.
Dr James Austin Charles King Independent Non Executive Director and Chairman of the Conflicts Committee (Aged 76) 11 October 2006*
Robert McMillan Independent Non Executive Director (Aged 62) 01 December 2010*
The Remuneration Committee The Remuneration Committee comprises Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. It is chaired by Richard Gillingwater. The Committee operates according to Terms of Reference published on the Group’s website and generally meets three times a year. The Committee’s role in remuneration is described in the remuneration policy report on page 51.
The Committee’s role is to monitor the structure, size and composition of the Hiscox Ltd Board and, when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Group believes that opportunity should be limited only by an individual’s ability and drive. The Committee considers diversity, including gender diversity, when recommending appointments to the Board. The Committee has a policy in place to ensure that the candidate pool for each new appointment includes at least one female but does not consider it appropriate to set quotas for diversity. As referred to earlier in this report several of the present Non Executive Directors are approaching nine years’ service and will be retiring from the Board during 2015. With this in mind early in 2014 the external search consultancy firm, Egon Zehnder, was commissioned by the Committee to identify suitable independent non executive candidates. Other than undertaking search assignments Egon Zehnder has no connection to the Group. The qualities and experience specified by the
The Committee also has a role to consider the succession planning for Executive Directors and senior managers, and has a remit to make recommendations on the succession planning for the Chairman and the Chief Executive. When considering candidates for Board roles, the Committee will ensure that an appropriate process is followed to ensure that an objective review of the skills, background and time available is undertaken. The Committee will take external advice as appropriate.
Based on the three-year average post-tax return on equity of 17.7%, the awards ending with the 2014 performance year will vest at 100% on 19 March 2015. Executive Directors will also receive dividend equivalents in the form of additional awards based on dividends paid during the three-year performance period. The estimated value of these awards is covered in the Executive Director remuneration table on page 60.
Non Executive Director remuneration The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2014 and 31 December 2013.
Massachusetts Financial Services Company1 31,525,696 9.88 *Per RNS announcement there were 319,228,022 shares in issue (excluding Treasury shares) as at 31 December 2014. †Adjusted for consolidation on 19 March 2014. 1Indirect holdings.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the annual report on remuneration 2014 that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the Companies Act 2006.
Gross premiums earned 1,674,982 1,598,879 Premiums ceded to reinsurers (358,723) (315,568)
Loans and receivables including insurance receivables 20 556,259 493,419 Current tax asset 8,031 3,530 Cash and cash equivalents 23 650,651 564,375
2.4 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands, Spain, Portugal, Ireland and Belgium whose functional currency is in the normal course of business, but must also be enforceable in the event of default and the event of bankruptcy or insolvency of all of the counterparties to the contract, including the reporting entity itself. The amendments also clarify that rights of set-off must not be contingent on a future event. The amendment has no material impact on the financial statements.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 22.
(c) Share-based compensation The Group operates a number of equity settled share-based employee compensation plans. These include both 2.14 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
2.19 Provisions The Group is subject to various insurancerelated assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable 2 Significant accounting policies continued 2.15 Employee benefits continued
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross premiums written and maximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief Underwriting Officer and a specialist team in order to monitor claim development patterns and discuss individual underwriting issues as they arise.
(b) Equity price risk The Group is exposed to equity price risk through its holdings of equity and unit trust investments. This is limited to a relatively small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are diversified over a number of companies and industries. The fair value of equity assets in the Group’s balance sheet at 31 December 2014 was £253 million (2013: £223 million). These may be analysed as follows: Nature of equity and unit trust holdings
The key financial risk for the Group is that the proceeds from its financial assets
At Group level 1% change in claims or expense ratio 7,907 3,325 1,930 – 7,111 3,033 2,690 –
At 31 December 2014 there were £17,672,000 of assets under development on which no amortisation has been charged (2013: £9,647,000).
Total at the end of 2014 78,141 53,908 40,841 4,328 100% results
The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund (‘the Fund’), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.8 million (2013: $2.9 million). The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund. The Group submitted a full redemption effective 1 January 2015, after notification was received that the Fund will be winding down. During January 2015, $12.7 million was received as the first redemption payment and the remaining $23.0 million was issued as redemption shares which will pay out when the underlying contracts expire at 30 June 2015.
Employee share option scheme – proceeds from shares issued 74 2,669 – – – – Issue of C/D Shares – (35) – – 128,988 46,824 Redemption of C/D Shares – – – – (128,988) (46,824) Share consolidation and subdivision (1,032) 1,032 – – – – Scrip dividends to owners of the Company 17 1,798 – – – –
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 1,222,165 498,017 – – – – – – – – 1,720,182 nine years later 1,212,717 – – – – – – – – – 1,212,717 Current estimate of cumulative claims
Insurance contracts – equalisation provision† (28,897) (1,436) – (30,333) Reinsurance premiums (45,079) 45,079 – –
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 185,666 156,513 Interest income 8,589 6,934 Cash flows Contribution by the employer 200 1,800 Benefit payments (5,389) (4,634) Administration expenses (444) (234) Remeasurements Return on plan assets (excluding interest income) 6,587 25,287
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 179,479 173,420 Interest expense 8,309 7,700 Cash flows Benefit payments (5,389) (4,634) Remeasurements Changes in demographic assumptions – 6,975 Changes in financial assumptions 44,976 (3,982) Impact of experience adjustments – –
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: years 2013 years
Weighted average number of ordinary shares for diluted earnings per share (thousands) 334,869 374,512
The goodwill shown above is primarily from acquiring the skilled workforce of DirectAsia who will provide strong insight into operating in these new territories. The Group incurred acquisition-related expenses of £1,259,000 on legal fees and due diligence costs. These expenses have been included in operational expenses.
During 2013, the Group disposed of its holding in Bracken Hill Specialty Insurance Company Inc. for $32.8 million, realising a gain of $2.4 million. In addition, the Group sold its interest in Senior Wright Indemnity Limited, an associate of the Group for £900,000, £300,000 of which was receivable at 31 December 2013. The sale realised a loss of £1.1 million on disposal.