This strategy provides opportunities throughout the insurance cycle, allowing us to deliver in the short, medium and long term.
Operational highlights 6 Hiscox Ltd Report and Accounts 2017 2 Strategic report Why invest in Hiscox?
In our annual global employee engagement survey we looked at how connected employees feel to Hiscox, their managers, their teams and their roles. Hiscox enjoys very high employee engagement, which averages in the top quartile of over 200 companies worldwide. Of our employees, 88% said they are proud to work for us, while 93% said they believe in our corporate values.
Small business insurance is now the biggest single product line for the Group, delivering almost £1 billion in gross written premiums, and the profits from Hiscox Retail have exceeded £100 million for the second year in a row.
to be a standout performer within the Group, delivering excellent growth of 28.8% in constant currency to US$701.6 million (2016: US$544.8 million), with all lines contributing. Hiscox USA withstood the impact of the Q3 hurricanes well, testament to the scale and resilience we have built into the business.
London Market return to growth, but not by as much as originally expected. We continue to press for rate rises and the underwriting discipline we exert now will flow though to our bottom line over time.
Energy lines continue to experience the knock-on effects of oil price depression, and the impact of more capacity than buyers. We continue to seek out opportunities where the terms are attractive.
We continued to activate a range of sponsorship and partnership activity across the Group, predominantly focused on our core interest areas of art, classic cars and technology. We set the marketing and sponsorship budget for the direct and partnership businesses by reference to the acquisition costs in the broker channel for similar products. This means that as these businesses grow, we expect to increase their marketing budgets as well. There are economies of scale, but we believe that at the moment our long-term interests are served by continuing on this path.
Our retail businesses now account for 56% of our income and, as this year’s results have shown, are substantial contributors to our profits and bring welcome resilience to our balance sheet. Evolution of leadership
Our bond portfolios have been positioned accordingly and while those in Sterling and Euros start from very low levels, we are investing our US Dollar cash flow at much higher yields than we have been used to for some time. Portfolios such as ours will be beneficiaries if interest rates move higher in 2018 as we expect. The so-called risk-free returns that we enjoyed pre-crisis are still some way away but at least we are taking steps in the right direction. In the meantime, we continue to resist the temptation to take more risk and lower the quality of the portfolio.
Change in reporting currency As previously announced, the functional currency of some of our subsidiaries including Syndicate 33, and the reporting currency of the Group, will change to US Dollars effective 1 January 2018. This change will significantly reduce the volatility of the Group’s earnings due to foreign exchange movements, in particular due to translation of foreign currency balances. We will report to the market on this new basis when disclosing the Q1 Interim Management Statement in
Retail business A Smaller premium, locally traded, less volatile business written mainly through Hiscox Retail. A Growth between 5-15% per annum. A Pays dividends.
Hiscox London Market Gross premiums written reduced by 19.9% to £581.7 million (2016: £726.0 million), in line with expectations as we continued to navigate ongoing soft market conditions. This represents a 23.1% decline (2016: 14.2% growth) in local currency. The quota share arrangements with Syndicate 6104 remained in place. The net claims ratio increased to 70.1% (2016: 57.4%) as a result of the hurricane activity. This also impacted on the combined ratio which, excluding foreign exchange movements, increased to 108.7% (2016: 99.4%). The expense ratio reduced to 38.6% (2016: 42.0%). The loss before tax for the year was £36.2 million (2016: profit of £44.0 million) or, excluding foreign exchange losses, was a loss of £24.5 million (2016: profit of £9.0 million).
The positive result of 1.2% from our bond portfolios therefore can be seen as good. As ever, our bond returns are driven largely by our holdings in the US markets which comprise 70.7% of our fixed income assets. Our managers there performed well with gains of 1.5%. Given the low, or in the case of Euros, negative yields at the start of the year, it was always going to be hard to make money elsewhere. The reality, despite outperforming benchmarks, is that the Sterling and Euro portfolios (nearly 9.8% of our bonds) delivered negligible returns. The outperformance against the benchmarks has been due to a focus on income and the allocation to non-government bonds where a further compression in credit spreads added value. While the move up in yields has crimped returns recently, it is encouraging for the future as new money is invested at higher rates. The yield to maturity on the bond portfolio for example has increased from 1.3% at the end of 2016 to 1.6% at the end of last year.
The concerns over valuations in equity markets that prevailed 12 months ago 37 Governance 63 Remuneration 89 Financial summary
“Saving through work took away the temptation to be frivolous, and nothing beat the excitement of picking up the keys to my first home.” Four years with Hiscox
“We spend a lot of time working, so being able to grab an hour boxing with a personal trainer in the basement not only helps me stay fit, but means family time is family time.” 18 years with Hiscox
Risk management across the business The Group coordinates risk management roles and responsibilities across three lines of defence. These are set out in the table to the left.
When underwriting risks, we estimate both the likelihood of them occurring and their cost. Our actual claims experience could exceed our expectations, requiring us to increase our levels of reserves held.
an annual series of events around diversity and inclusion that takes place across 17 countries and 32 cities.
Thomas Hürlimann Independent Non Executive Director (Aged 54) 16 November 2017*
The Nominations Committee monitors the composition of the Board and considers its diversity, balance of skills, experience, independence and knowledge to ensure that it remains appropriate. The composition of the Board was also reviewed as part of the Board evaluation described on page 57.
The Remuneration Committee The Remuneration Committee comprises Lynn Carter, Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Colin Keogh, Anne MacDonald, Bob McMillan and Costas Miranthis. It is chaired by Colin Keogh. The Committee operates according to Terms of Reference published on the Group’s website and generally meets three times a year. The Remuneration Committee takes care to recognise and manage conflicts of interest when receiving views from Executive Directors or senior management, or consulting the Chief Executive about its proposals. No Executive is permitted to be present when the Committee discusses his or her remuneration. The Committee’s role in remuneration is described in the remuneration section on page 65. The overall aim is to attract and retain high-calibre individuals and incentivise them to deliver long-term success for the Company. Executive Directors are subject to malus and clawback provisions in relation to their remuneration and the circumstances in which these would apply are described on page 82.
#2. Be part of a strong culture that challenges the status quo 37 Governance
The net result of the above, is that the remuneration packages and single figure results reported for the three Executive
In determining the size of the Executive Director bonuses, the Committee uses the following framework to support its decision-making process. When setting targets, the Committee seeks to motivate strong performance but in a manner which encourages sustainable behaviours in line with the defined risk appetite of the business: Pre-tax return on equity Indicative bonus range (% of max)
PSP awards granted during the 2017 financial year On 7 April 2017, BE Masojada, RC Watson and HA Hussain were granted awards under the PSP.
Increase/ (decrease) in transfer value of accrued pension during the year £000
CEO remuneration – short-term vs long-term weighting Fixed pay – salary and benefits Annual bonus PSP – value at vesting
R McMillan – – C Miranthis – – *Restated to include 1,744 shares.
Remuneration for the wider workforce The Remuneration Committee is mindful of pay practices in the wider Group, and during the course of the year is kept informed of trends and changes in practices for the wider employee population.
Annual bonus The maximum opportunity and overall bonus structure for the year ending 31 December 2018 will remain unchanged.
2 Strategic report 37 Governance 63 Remuneration Remuneration policy 89 Financial summary
p prevailing competitive pay levels for the role; p experience and skills of the candidate; p awards (shares or earned bonuses) and other elements which will be forfeited by the candidate; p transition implications on initial appointment.
Note 23 to the consolidated financial statements on employee share schemes (page 135)
The four full scope audit components were: (i) Hiscox Dedicated Corporate Member Syndicate No. 33, (ii) Hiscox Dedicated Corporate Member Syndicate No. 3624, (iii) Hiscox Insurance Company Limited, and (iv) Hiscox Insurance Company Inc. For other components, we identified certain account balances which were considered to be significant in size or audit risk at the financial statement line item level in relation to the Group’s consolidated financial statements, and scoped the audit of these by performing specified procedures. Analytical procedures over the remaining components that were not inconsequential were performed by the Group engagement team.
2 Basis of preparation The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA) and in accordance with the provisions of the Bermuda Companies Act 1981.
(b) Other intangible assets Intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business combination is recognised outside of goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Customer relationships, syndicate capacity and software acquired are capitalised at cost, being the fair value of the consideration paid. Software is capitalised on the basis of the costs incurred to acquire and bring it into use.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total gross estimate as at 31 December 2017 is £2,018 million (2016: £1,588 million) and is included within total insurance liabilities on the balance sheet.
Debt and fixed income securities 18 600,567 1,635,200 691,056 503,420 3,430,243
At 31 December 2017 and 2016 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.
The main focus of the investment portfolio is on high-quality short-duration debt and fixed income securities and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows: Fair values at balance sheet date analysed by contractual maturity
Employee retirement benefit obligations 47,492 – – – 47,492 Deferred tax – – – – – Insurance liabilities 885,937 3,045,456 438,397 80,392 4,450,182 Financial liabilities carried at fair value 275,944 13,770 – – 289,714 Current tax – – 6,951 53 7,004 Trade and other payables 177,487 401,544 45,137 34,289 658,457 Total liabilities 1,386,860 3,460,770 490,485 114,734 5,452,849 Total equity 235,924 1,347,716 111,301 59,486 1,754,427 3 Management of risk 3.2 Financial risk 115Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
(g) Limitations of sensitivity analysis The sensitivity information given in notes 3.2(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 29 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.
From the 2016 year end, the Group has been required to publish a financial condition report, as part of its regulatory filing with the BMA. This is a public document and sets out the financial performance and solvency position of the Group in accordance with the economic balance sheet return filed with the BMA.
Unrealised translation gains/(losses) on intragroup borrowings 8,146 (8,146) – Total gains/(losses) recognised 8,146 (8,146) –
131Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
21 Fair value measurements 133Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
During the year, there were no transfers made between Level 1 and Level 2 of the fair value hierarchy.
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Financial asset
The claim reserves are estimated on a best estimate basis, taking into account current market conditions and the nature of risks being underwritten.
Included within accruals and deferred income is £8.1 million (2016: £9.6 million) of deferred gain on retroactive reinsurance contracts.
A reconciliation of the difference is provided below: Profit before tax 30,798 354,543 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2016: 0%) – – Effects of Group entities subject to overseas tax at different rates (3,407) 17,104 Impact of overseas tax rates on: Effect of rate change 1,108 (832) Expenses not deductible for tax purposes 1,675 7,487 Tax losses for which no deferred tax asset is recognised 5,176 2,155
The UK Finance Act 2015 introduced a new tax with effect from 1 April 2015, the Diverted Profits Tax (DPT), which in certain situations applies a tax of 25% on income which would not otherwise be chargeable to UK tax. The Group is currently in discussions with HMRC as to the scope of the new tax in the context of the Group’s operations. No provision for DPT has been made in 2017 or 2016.
28 Deferred tax 143Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 214,933 199,045 Interest income 5,689 7,910 Cash flows Contribution by the employer – – Benefit payments (8,213) (5,671) Administration expenses (237) (166) Increase due to plan combinations – 1,613 Remeasurements Return on plan assets (excluding interest income) 14,139 12,202 Closing fair value of scheme assets 226,311 214,933 29 Employee retirement benefit obligations continued 145Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
148 Hiscox Ltd Report and Accounts 2017 2 Strategic report 37 Governance 63 Remuneration 89 Financial summary Notes to the consolidated financial statements
(e) As Hiscox Insurance Company (Bermuda) Limited (Hiscox Bermuda) is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox Bermuda to provide Letters of Credit or other terms of collateral to clients. Hiscox Bermuda has in place a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies and other jurisdictions, and also Letter of Credit 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 US$400 million in Letters of Credit (2016: US$400 million). Letters of Credit issued under these facilities are collateralised by cash, US government and corporate securities of Hiscox Bermuda. Letters of Credit under these facilities totalling US$100.7 million were issued with an effective date of 31 December 2017 (2016: US$95.9 million on a US$400 million facility) and these were collateralised by US government and corporate securities with a fair value of US$115.8 million (2016: US$109.1 million). In addition, Hiscox Bermuda holds US$659.5 million (2016: US$468.0 million) of restricted cash and marketable securities collateralising reinsurance obligations.
Net asset value per share (p) 618.6 649.9 545.0 462.5 402.2 Key statistics