Hiscox Annual Report 2014

← All annual reports

FY2014 Annual Report · Hiscox

Loading PDF…

Hiscox Ltd

4th Floor

Wessex House

45 Reid Street

Hamilton HM 12

Bermuda

T +1 441 278 8300

F +1 441 278 8301

E enquiries@hiscox.com

www.hiscoxgroup.com

13800 03/15

Hiscox Ltd
Report and Accounts
2014

Contents

Strategic report
2
3
4
6
14
16
17

Corporate highlights
Corporate highlights
Why invest in Hiscox?
Why invest in Hiscox?
Chairman’s statement
Chairman’s statement
Chief Executive’s report
Chief Executive’s report
Hiscox business structure
Hiscox business structure
Actively managed business mix
Actively managed business mix
Actively managed key
Actively managed key
underwriting exposures
underwriting exposures
Managing the insurance cycle
Managing the insurance cycle
Capital
Capital
Group financial performance
Group financial performance
Group investments
Group investments

18
20
22
24

Governance
27
33
36
40
42
43
47

Risk management
Risk management
Corporate responsibility
Corporate responsibility
Insurance carriers
Insurance carriers
Board of Directors
Board of Directors
Hiscox Partners
Hiscox Partners
Corporate governance
Corporate governance
Audit Committee report
Audit Committee report

Remuneration
49
51
60

Letter to shareholders
Letter to shareholders
Remuneration policy report
Remuneration policy report
Annual report on remuneration 2014
Annual report on remuneration 2014

69
71

Directors’ report
Directors’ responsibilities statement

Financial summary
74
75
75

Independent auditors’ report
Independent auditors’ report
Consolidated income statement
Consolidated income statement
Consolidated statement of
Consolidated statement of
comprehensive income
comprehensive income
Consolidated balance sheet
Consolidated balance sheet
Consolidated statement
Consolidated statement
of changes in equity
of changes in equity
Consolidated statement of cash flows
Consolidated statement of cash flows
Notes to the consolidated
Notes to the consolidated
financial statements
financial statements
Five-year summary
Five-year summary

76
77

78
79

128

To view the Hiscox

corporate brochure visit

app.hiscoxbrochure.com

Design: Browns

www.brownsdesign.com

Print: Pureprint

www.pureprint.com

Photography:

Cover © John Ross

This report has been printed

in the UK by Pureprint Group,

a CarbonNeutral® company,

using their environmental

printing technology.

Vegetable-based inks were

used throughout. The paper

is FSC mixed sources and

the pulp is bleached using

a totally chlorine free (TCF)

process. Both printer and

paper mill are ISO14001 and

registered to EMAS.

Cover image:
Cover image:
Smoke from our ‘elements
Smoke from our ‘elements
of risk’ series, looking at
of risk’ series, looking at
the causes of destruction
the causes of destruction
in what we believe is a
in what we believe is a
thought-provoking and
thought-provoking and
beautiful way.
beautiful way.

Our ambition is to be a highly
respected specialist insurer with
a diverse portfolio by product
and geography. We believe
that building balance between
catastrophe-exposed business
and less volatile local specialty
business gives us opportunities
for profitable growth throughout
the insurance cycle.

Our strategy is:
– to use our underwriting
expertise in London and
Bermuda to write high-margin
volatile or complex risks;
– to build distribution for our

specialist retail products;

– to protect and nurture our

distinctive culture and ethos by
recruiting the best people, and
by focusing on organic growth.

Strategic focus
Total Group controlled income for 2014

21%

Reinsurance

Large property

Global casualty

12%

Specialty – terrorism,
contractors’ equipment
FTC, political risks,
aerospace

Marine and energy

100% = £1,983m

Local casualty
and commercial

21%

Tech and
media casualty

Art and
private client

15%

Specialty – kidnap and ransom,
contingency, personal accident

Small property

Corporate highlights

Group key performance indicators

Gross premiums written (£m)

Net premiums earned (£m)

Profit before tax (£m)

Profit after tax (£m)

Earnings per share (p)

Total dividend per share for year (p)

Special distribution (p)

Net asset value per share (p)

Group combined ratio (%)

Group combined ratio excluding foreign exchange (%)

Return on equity (%)

Investment return (%)

Reserve releases (£m)

Capital return

2014

2013

1,756.3

1,699.5

1,316.3

1,283.3

231.1

216.2

67.4

22.5

45.0

244.5

237.8

66.3

21.0

36.0

462.5

402.2

83.9

84.7

17.1

1.8

83.0

82.1

19.3

1.9

172.2

140.3

Capital return of 60.0p per share, approximately £192 million, by way of E/F Share Scheme
and share consolidation.

This comprises a special distribution of 45.0p per share and final dividend equivalent of 15.0p per
share, taking the total dividend for the year to 22.5p, an increase of 7.1% (2013: 21.0p).

Operational highlights

Strong premium growth in insurance of 8.8%, including 24.1% for Hiscox USA.

Record profits in Hiscox UK and Europe of £73.3 million (2013: £56.4 million).

Retail businesses now over half the Group’s gross premiums written, with retail profits now covering
the standard dividend.

Hiscox London Market profit before tax of £62.6 million (2013: £63.1 million), growing with
consistent profitability.

Hiscox Re reducing premiums as planned by 13.9% and delivered good profits, with new products
and Kiskadee ILS funds on track to reach $500 million by mid-year.

Long-term investment in brand, product and distribution provides opportunities for profitable growth
throughout the cycle.

Net asset value p per share

Dividend p per share

Profit before tax (£m)

462.5

402.2

21.0

22.5

244.5

231.1

2013

2014

2013

2014

2013

2014

Strategic report Hiscox Ltd Report and Accounts 2014

Specialist expertise that is valued by
our customers
We are market leaders in many of the risks
we underwrite and our customers value the
expertise and innovative cover we provide*.
– In France, 95% of small business customers

are satisfied with our services.
– In the USA, 96% of small business

customers surveyed would recommend us.

– In the UK, 99.54% of Hiscox Home

Insurance customers who have made a
claim would recommend us. Overall, we
were awarded the ‘Gold Trusted Merchant’
status for achieving a 95% service rating
by Feefo.

Hiscox UK was awarded Best Small Business
Insurer by Start Your Business Magazine for the
sixth year in a row. In the US, Hiscox was named
a Top 100 Champion at the Small Business
Influencer Awards. Fairer Finance awarded
Hiscox UK Gold for home insurance, recognising
our commitment to provide high-quality
customer service. In IT, we were awarded
Digital Insurance Project Team of the year at the
Digital Insurance and Technology Awards, where
Stéphane Flaquet was also named CIO of the
year. Reactions Magazine awarded Hiscox
Insurer of the Year. Stuart Bridges was presented
with CFO of the year at the Insurance Insider
Awards and Bronek Masojada was awarded
Personality of the Year at the British Insurance
Awards 2014. Our Hong Kong team for
DirectAsia were awarded Silver for Inbound
Contact Centre of the year where the Head of
Customer Care, Gratiano Yeung, also received
the Gold award for Inbound Contact Centre
Manager of the Year. In Singapore, Loh Kaiyun
Joey won Best Contact Centre Trainer of the
Year (for offices between 20 and 100 seats).

*Results from customer reviews collated and managed by independent third-parties.

Our people
The excellence of our people has been a key
ingredient in our success. Our reputation for
innovation and dynamism is built on the energy,
professionalism, commitment and expertise of
our employees. In return we strive to provide
them with a working environment in which
they can flourish. In September 2014, Hiscox
conducted its seventh global employee
engagement survey. Open to all permanent
members of staff, it looks at how connected
employees feel to Hiscox, their managers, their
teams and their role. Hiscox enjoys very high
employee engagement, which averages in the
top quartile of over 200 companies worldwide.
Of our employees, 91% said they are proud to
work for us, while 95% said they believed in our
corporate values.

Why invest in Hiscox?

We are one of the world’s leading specialist
insurers. Our success is due to a long-term
strategy that strives to build:
– balance and diversity, generating

opportunities throughout the cycle;

–a strong financial performance;
– underwriting discipline and a transparent

approach to risk;

– market-leading expertise that is valued

by our customers;

– teams of energetic, professional
and well-respected people.

Our business
Our Group comprises three counterbalancing
divisions that give us options throughout the
market cycle. For more than 30 years, Hiscox’s
strategy has been to balance our more volatile
catastrophe-exposed big-ticket insurance and
reinsurance with smaller-ticket retail insurance.
The diversity we have created within our overall
business, both in product and geography,
gives us great flexibility, particularly in a tough
commercial environment. We are able to grow or
shrink the catastrophe-exposed lines according
to market conditions. Our local specialty
insurance businesses, which tend to perform
consistently across the insurance cycle, have
grown by 9.1% year-on-year over the last
five years.

Our performance
Strong financial results
Hiscox has a strong record for top-line growth
with a focus on shareholder value. Between
2010 and 2014 the Group:
– increased gross written premiums

by 22.6% to £1.76 billion;

– posted a healthy combined ratio

averaging 88.2%;

– delivered average return on equity of 14.3%;
– maintained a progressive dividend policy

with compound growth of 8.1%;
– returned £422 million of extra capital

to shareholders.

Our expertise
A transparent approach to risk
The very business of insurance is managing risk.
Understanding risk is intrinsic to every level
of decision making in the Group. We devote
a great deal of expertise to understanding the
impact of major global disasters on our business.
We have developed our own sophisticated risk
model, which draws on our many years of
experience as well as the leading industry
forecasting tools. All of our underwriting
decisions on catastrophe exposures are based
on this bespoke model. Every six months, we
update analysts and investors on what the
Group’s potential exposure could be to major
catastrophes, such as hurricanes or earthquakes.

20 YEARS

Between 2010
and 2014 Hiscox
returned £422m
of extra capital
to shareholders.

Strategic report Hiscox Ltd Report and Accounts 2014

TRUSTED MERCHANT2015Robert Childs
Chairman

Chairman’s statement

I am able to report another strong result for the
Hiscox Group, a pre-tax profit of £231.1 million
(2013: £244.5 million). We have done well in
difficult markets by maintaining discipline in
both our underwriting and investment portfolio,
and pursuing our strategy of building balance
through diversity of product, geography
and distribution.

While the double whammy of burgeoning
capital and fewer losses has put pressure on
bigger ticket rates, we have continued to invest
in the retail businesses in the UK, Europe, the
US, Guernsey and more recently in Asia. Our
London Market team has dug out nuggets of
profitable business against tough competition.
Hiscox Re, our reinsurance arm, has adapted
swiftly, developing new products and
opportunities to engage customers.

Results
The results for the year ending 31 December
2014 were a profit before tax of £231.1 million
(2013: £244.5 million). Gross written premium
increased by 3.3% to £1,756.3 million
(2013: £1,699.5 million). The combined ratio
was 83.9% (2013: 83.0%). Earnings per share
increased to 67.4p (2013: 66.3p) and the net
asset value per share increased by 15%
to 462.5p (2013: 402.2p). Return on equity
was 17.1% (2013: 19.3%).

Dividend, balance sheet and
capital management
The Board has proposed that a special
distribution be made of 60.0p per share
(amounting to approximately £192.0 million)
to include 15.0p per share instead of a final
dividend. The total dividend for 2014 is equal
to 22.5p per share (2013: 21.0p), an increase
of 7.1%. The return of capital will be made using
a similar scheme to last year and will again
be accompanied by a share consolidation.
Full details will be set out in a circular to be
despatched to Hiscox shareholders on or around
3 March 2015. This is now the third successive
year in which we have been able to return
capital to shareholders and again I say that this
is a tactic for the circumstances we are in, not
a long-term strategy to return capital every year.

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.

Our performance was improved by our risk
assets, which produced a pleasing return
of 7.6%. However, we do not believe it is
appropriate to take excessive risks in search
of higher yields, as our investments are mainly
earmarked to pay claims and support our
business, although we continue to look for
appropriate opportunities in the equity markets.
In 2015, we are planning for a continuation of the
same market conditions that have produced low,
but still positive, returns for us in recent years.

The changing market
The ongoing low interest rates and benign claims
experience continues to attract new capital to
our markets, putting pressure on brokers and
insurers. In my opinion, the new sources
of capital are here to stay. They have become
accustomed to operating in our business, so
I think they are unlikely to move on (as perhaps
some hope they will) when rewards improve in
other parts of the capital markets.

Squeezed margins and consolidation have put
pressure on old relationships. Our response has
been to support brokers through collaborative
product innovation and improved processes,
focusing on expertise and service to help their
clients. We also continue to explore and support
new distribution channels. Over many years
we have built a powerful direct-to-consumer
business, which we are replicating in different
countries. Alongside this, our broker e-trading
capabilities, our involvement in specialist
underwriting agency White Oak, our support of
new facilities and our recent bolt-on acquisitions,
all give us access to a broader portfolio of risks.

In the face of strong headwinds, one can see a
clear divergence of strategy in the market, with
some companies growing big-ticket business
and some contracting. Our underwriting strategy
combines underwriting rigour with an eye for
opportunity and is designed to manage all
stages of the insurance cycle: we plan for the
soft market conditions we are experiencing. We
believe that when margins reduce you take your
foot off the accelerator and when they increase
you push down hard. We also believe that our
strategy of persistently investing and building
the retail businesses as a counterweight to the
more volatile lines continues to be the right one.

The Board
It has been nearly nine years since we created
the Hiscox Ltd Board, and according to UK
corporate governance directors potentially cease
to be independent after nine years’ service. As
such, a number of our original Board members
will be stepping down during the year. These
include Dr James King, Andrea Rosen and Dan
Healy. I am particularly pleased our businesses
in Bermuda and the US will continue to benefit
from James and Dan’s sage counsel as they
continue to serve the Group on our subsidiary
Boards. I would also like to express my deep
gratitude to Andrea for the many valuable
contributions she has made to the Company
over the last nine years.

Strategic report Hiscox Ltd Report and Accounts 2014

In preparation for this we have conducted
an external search to recruit two replacements
and are recommending to shareholders
the appointment of Lynn Carter and Anne
MacDonald to our Board. Lynn Carter will bring
38 years’ experience in the banking industry,
most recently as President of Capital One Bank,
while Anne held the position of Chief Marketing
Officer at four different Fortune 100 companies
including Travelers and PepsiCo. These
appointments support our focus on retail
growth and brand building.

In addition, Senior Independent Director
Richard Gillingwater, who joined the Board
in 2010, will step down after the AGM due to
his new commitments at Scottish and Southern
Energy as well as Henderson Global Investors.
The Group has benefited greatly from Richard’s
acumen and measured approach and I wish
him all the best in his new role at SSE.

Finally
We continue to recruit, train and motivate the
best people. Their desire to do the right thing,
however hard, is what makes our customers
want to do business with us. I am thankful to
everyone at Hiscox for their diligence and for
the ongoing support of our customers.

I recently visited our York office, having the week
before returned from visiting our new office in
Singapore. I was inspired by the enthusiasm and
drive of the young teams and the commitment
and intellect of the leadership in both places. It
is pleasing to see that Hiscox businesses, from
Singapore to Atlanta and York all reflect the same
values and determination to succeed.

During my time at Hiscox I have seen our strategy,
those same values and that determination tested
in battle – and prevail. In turbulent times we have
delivered profitable organic growth and returned
extra capital to shareholders. I expect the strong
headwinds to continue but our course will not
change; it has already brought the business, our
staff and our shareholders success, and I believe
will bring greater rewards in the future.

Robert Childs
2 March 2015

It is pleasing to
see that Hiscox
businesses, from
Singapore to
Atlanta and York
all reflect the
same values and
determination
to succeed.

Strategic report Hiscox Ltd Report and Accounts 2014

Bronek Masojada
Chief Executive

Chief Executive’s report

I am pleased to report a profit before tax
of £231.1 million (2013: £244.5 million),
a return on equity of 17.1% (2013: 19.3%)
and revenue growth of 3.3% to £1,756 million
(2013: £1,699 million) – a credible performance
in current market conditions. This result
reflects the continued good progress of
our retail businesses which, for the first time
account for over half of Hiscox Ltd’s gross
written premiums. Our US business
contributed materially to this, growing
organically by 24.1% to over $360 million.
Hiscox UK and Europe both delivered record
profits. Our London Market business has
made a good margin and grown in a difficult
market. Our reinsurance business has had
a tremendous year and acquitted itself well
in challenging pricing circumstances, receiving
ongoing support from our quota share partners
and attracting new investors to our insurance
linked funds which are now on track to reach
$500 million in assets under management.

With these results, we have announced a capital
return of 60.0p per share, comprising a special
distribution of 45.0p per share and a further
15.0p per share instead of a final dividend. The
total capital return is equal to approximately
£192 million. I am pleased that for another year
our business is strong enough to allow this return
of capital and at the same time we are able to
invest in talent, infrastructure, small acquisitions
and new opportunities.

Market challenges remain – pricing pressure due
to the absence of large losses, a flood of capital
into reinsurance, technological change putting
pressure on infrastructure, and low investment
returns due to ongoing financial repression. Our
long-term strategy is showing its mettle, and
our options – in terms of products, distribution
routes and geographies – allow us to adapt and
continue to deliver good returns to shareholders.

Hiscox Retail
We began growing our specialty retail business
outside Lloyd’s in 1989, with an initial focus
on high net worth homes. It reached £2 million
in its first year. Since then we have broadened
the product offering, entered new countries
and built new distribution channels. Hiscox
Retail now comprises over half of the Group’s
gross written premium – £891.1 million in total
(2013: £819.4 million). Over the last ten years it
has grown at 12.8% compound, and yet we are
still a small participant in most of the segments
we target. In 2014 it contributed profits of
£78.1 million (2013: £61.2 million), enough to cover
the equivalent of the final dividend for the Group.
The combined ratio improved slightly to 93.5%
(2013: 94.3%). The scale, steady profits and
brand value of this segment truly differentiate

Hiscox in the insurance marketplace. Hiscox
Retail comprises Hiscox UK and Europe, and
Hiscox International. I review them in turn below:

Hiscox UK and Europe
This division provides personal lines cover – from
high-value households, fine art and collectibles
to luxury motor – and commercial insurance for
small- and medium-sized businesses, typically
operating in white-collar industries. These
products are distributed via brokers, through
a growing network of partnerships, and direct
to the consumer.

Our retail businesses in the UK and Europe
delivered record profits of £73.3 million
(2013: £56.4 million) despite serious floods
in the UK – and hailstorms, windstorms and
floods in Europe.

Hiscox UK and Ireland
Hiscox UK and Ireland increased gross
written premiums by 5.5% to £435.0 million
(2013: £412.4 million) with strong growth in areas
where margins are good and reductions in less
profitable business. It achieved a combined
ratio of 88.6%, at the better end of our
normal expectations.

The first half of the year was dominated by
floods in south-east England where we have
a concentration of customers. As always, our
claims team delivered an exceptional service,
meaning we were able to close 92% of claims
on average within eight weeks of being
reported. The floods highlighted issues with
the Government’s Flood Re scheme, which
was particularly unfavourable for many of our
insureds. We led an active campaign throughout
the year to change this and were pleased that
some of our concerns have been addressed.

In the second half of the year we launched
a series of new and refreshed products including
data and cyber risks, and personal accident
cover, which are showing positive early signs.
These innovations have contributed to a
particularly good year for the UK broker business.

We always look at opportunities to develop
a market-leading position in our chosen areas
of specialism and we have made a series of
small acquisitions to this end. We acquired
Event Assured in September, consolidating our
position as market leaders in insurance for small
events, conferences and exhibitions. Today we
announce completion of our acquisition of R&Q
Marine Services, a managing general agent
specialising in yachts and general marine leisure
which underwrites on behalf of other insurers.
We will now combine their knowledge with our
distribution and marketing capability to serve
more customers in our target segments.

We are seeing some success with Hiscox
Private Client, our tied agency through which
we sell high net worth home insurance direct
to customers. This complements our highly
successful direct-to-consumer mid net worth

Strategic report Hiscox Ltd Report and Accounts 2014

Hiscox UK
and Europe
both delivered
record profits.

home and small commercial business
products. Through these direct operations
we serve over 124,000 customers and we still
have plenty of room to grow.

A major achievement in the year was the
delivery (on time and relatively close to budget)
of the first phase of our £50 million programme
to renew the IT infrastructure that underpins
our retail operations. We are already seeing
benefits in improved customer experience and
higher sales for phase one which supports our
direct home business. We are now working on
phase two which will renew the infrastructure for
our direct commercial business. This should be
completed by the end of 2015. At the same time
we have in-sourced our home and commercial
customer experience centres – all of which
will improve service and customer retention,
accelerating our growth. We now have over
120 staff in York, and by the end of 2015 they
will be housed in a new office which has room
to cater for further expansion.

In the autumn, after a two-year break, we returned
to TV with a new home advertisement supported
by cinema, print and poster campaigns. This has
generated a great deal of new interest with calls,
website visits and sales all increasing by over
30% during the campaign.

Hiscox Europe
Our European business had an excellent year,
growing gross written premiums by 8.5% to
€190.8 million (2013: €175.8 million). It delivered
a combined ratio of 94.1%, including marketing
costs of €4 million (or 2% on the combined ratio)
as we begin the process of building a direct
business in Europe. This is a good performance
in the toughest economy in which we operate.

Each part of our European operation has
performed well, benefiting from a focused
business plan and improved expense
management. Our partnerships with other
financial services providers such as BBVA,
Crédit Agricole, ABN AMRO and Generali
who distribute our specialist products to
their customers have helped our commercial
business grow to almost €100 million. We have
also invested in expertise, allowing us to develop
products for software developers, radiologists,
laboratories and equestrian centres.

Europe is benefiting from improving scale. We
continue steadily to improve our expense ratio
through our EuroFit project, which involves local
process improvements and the concentration of
functions in our shared service centre in Lisbon.
A success during the year was the in-sourcing
of our escape of water claims (a particular
challenge in France) from a third-party to our
team in Lisbon, resulting in lower costs and
higher client satisfaction.

Our direct-to-consumer small business
products in France and Germany are benefiting
from more investment as they follow our direct
strategy in the UK and USA. Although the French
and German direct businesses are still relatively
in their infancy, with a total premium of only
€4 million, we think the market opportunity
is there and that with the right sustained
investment we will build good direct businesses.

Hiscox International
This division comprises Hiscox Guernsey,
Hiscox USA and DirectAsia. Its revenues grew
by 15.7% to £301.1 million (2013: £260.3 million)
and it achieved a combined ratio of 100.1%
(2013: 98.5%). This good growth demonstrates
there are still many opportunities for us across
the world.

Hiscox Guernsey
During the year we formed the Hiscox Special
Risks division, bringing together different teams
from across the Group that focus on special
risks, including kidnap and ransom, private
client, fine art and executive security, in
a structure designed to boost local and global
collaboration. Led from Hiscox Guernsey,
Hiscox Special Risks has additional teams
in London, Munich, Paris, New York,
Los Angeles and Miami. We also underwrite
personal accident, terrorism and fine art risks
from Guernsey. In December 2014, we expanded
our Miami operation, recruiting additional staff
and acquiring the renewal rights to a book of
Latin American business.

Despite operating in highly competitive lines,
Hiscox Special Risks has a well-earned reputation
for expertise and service giving an element of
stability to this business. Clients also benefit from
our exclusive arrangement with security experts
Control Risks.

Our art and private client business in Europe
has had a welcome return to growth and
remained profitable despite the most severe
weather-related claims for the past five years.
Hailstorms, windstorms and severe rain
particularly affected Belgium and Netherlands,
but we now have the scale to absorb
these losses.

Germany performed especially well, reflecting
the benefits of a consistent strategy, stable
team and established broker relationships.
Spain also had a good year, despite its ongoing
economic difficulties thanks to committed,
ambitious leadership.

Hiscox USA
Our US business had another year of strong
growth. Gross written premiums increased by
24.1% to $367.6 million (2013: $296.2 million)
with the broker business making a profit for the
second year in a row. The professional liability
products were a growth engine and provide
a counterweight to other areas still in the
investment stage.

Commercial property is under pressure, with
double-digit rate reductions, so we remain
disciplined in this area. In all other lines, rates
remain broadly flat. Media and entertainment
is an area where we are investing, with IT

Strategic report Hiscox Ltd Report and Accounts 2014

Chief Executive’s report
continued

infrastructure and an enhanced suite of products.
The small business direct and partnerships
division continue to forge ahead, with
year-on-year growth of 75% and over 80,000
policies now in force. It is approaching scale.

The team has also been busy bringing other new
products to market. New financial services and
general liability lines, a new cyber deception
endorsement and the roll-out of Hiscox Pro –
the overarching name for our suite of profession’s
products – all give us opportunities. These have
been welcomed by the market and are delivering
promising early results.

Our investment in marketing and focus on
differentiation in a crowded marketplace remain
important to us, and during the year we launched
a brand building campaign under the theme
of ‘Encourage Courage’. Celebrating Hiscox
as an insurer that understands the challenges
of building a business and the value in taking risk,
the campaign is already resonating well with
staff, brokers and customers. We expect to make
a multi-year investment in the brand to support
and drive the growth of our business in the US.

DirectAsia
Early in the year, Hiscox completed the
acquisition of DirectAsia, a direct-to-consumer
operation in Singapore, Hong Kong and Thailand.
DirectAsia sells predominantly motor insurance
with ancillary lines in travel. The business was
acquired for $55 million, plus an earn-out we
would be happy to achieve, and brought with it
net assets of $23 million. DirectAsia uses the
same IT platform that we are installing elsewhere
in the Group and has good underwriting
capabilities and customer service ability. We
recognised a challenger business similar to
Hiscox in a geography we are keen to explore.

The business is progressing as expected.
Gross written premiums for the year were
US$29.5 million, a 15.2% increase year-on-year
(2013: US$25.6 million). The premium income for
the period of our ownership was US$22 million.

Our key contribution to DirectAsia so far has
been to bring our broader marketing knowledge.
We have seconded staff and hired a new
Chief Marketing Officer. We have also laid
the groundwork for TV advertising for the first
time in Thailand, part of a sustained campaign
supported by print and social media marketing.
It launched in January 2015 and initial results
are encouraging.

Hiscox London Market
This segment uses the global licenses, distribution
network and credit rating available through
Lloyd’s to insure clients throughout the world.

Our London Market businesses delivered
a profit of £62.6 million (2013: £63.1 million),
and increased gross written premiums by
9.0% to £510.8 million (2013: £468.6 million).
It achieved a combined ratio of 84.2%
(2013: 81.4%), with good underwriting and
a favourable claims environment combining
to generate another strong result.

All areas contributed to growth and we were
able to maintain our core renewal book while
finding new business opportunities. We remain
restlessly ambitious, considering new lines of
business and distribution routes at the same time
as navigating the choppy waters that come with
squeezed margins, a changing distribution
landscape and an influx of apparently insatiable
capital. The current consolidation phase among
our competitors will create opportunity, either as
brokers seek to avoid over-concentration of their
placements or individuals seek to build their
careers in human-sized businesses.

Looking at each division in turn:

Hiscox Retail

2014
£m

2013
£m

Gross premiums written

891.1

819.4

Net premiums earned

790.7

711.1

Underwriting profit

Investment result

Foreign exchange

Profit before tax

57.3

46.0

25.9

19.1

(5.1)

(3.9)

78.1

61.2

Combined ratio

93.5% 94.3%

Combined ratio excluding
foreign exchange

92.9% 93.7%

Hiscox London Market

2014
£m

2013
£m

Gross premiums written

510.8 468.6

Net premiums earned

332.5 303.2

Underwriting profit

44.9

58.7

Investment result

Foreign exchange

8.7

9.0

6.3

(1.9)

Profit before tax

62.6

63.1

– Property: Our property division includes

Combined ratio

84.2% 81.4%

Combined ratio excluding
foreign exchange

87.2% 80.3%

US and international commercial property,
power and mining risks and US catastrophe
exposed personal lines traded in the
London Market.

Growth in property was led by small-ticket
household and commercial business which
is written through binding authorities with
long-standing US partners. It benefited
from the allocation of additional catastrophe
aggregate as we reduced our exposure in
our reinsurance business. It is not without
risk however, and we paid a number of
claims on homes affected by Hurricane
Odile which hit the Mexican Baja Peninsula
in September. Big-ticket property business
remains challenging, with a competitive
renewal season, and we expect these
conditions to worsen over time. As a result
we will remain selective in the risks we write.

– Marine and energy: Against a backdrop of

challenging trading conditions, the team has
worked hard to maintain the account. Within
upstream energy, ratings have been strained
due to a lack of meaningful losses, while
within marine lines our disciplined approach
enabled us still to seek out reasonable
margins despite rates being broadly flat.
The Costa Concordia saga reflects the
challenges of large claims. The cost to the
industry grew above expectations during the
claim, so we were pleased to make a small
release at the year-end, vindicating our
cautious initial reserving.

London is the global centre for marine and
energy risks, but we cannot assume this
will continue forever. The team has taken
important steps towards realising new
opportunities in emerging markets including
hiring an on-the-ground agent in Brazil
to build a local Hiscox marketing presence.

Strategic report Hiscox Ltd Report and Accounts 2014

Hiscox Re

2014
£m

2013
£m

Gross premiums written

354.3

411.5

Net premiums earned

193.0

269.0

Underwriting profit

93.6

117.9

Investment result

Foreign exchange

Profit before tax

Combined ratio

9.3

2.7

14.4

(3.3)

105.6

129.0

49.8% 58.9%

Combined ratio excluding
foreign exchange

51.6% 57.3%

It has also participated on the Willis
Global 360 facility. This facility allows us
to see a broader spread of business while
maintaining underwriting integrity, and
we aim to grow it in 2015.

– Casualty: The casualty division continues to
be a bright spot, performing well and growing,
albeit from a small base. We bolstered
the team during the year with some hires
within directors and officers’ and casualty
reinsurance, and they are now producing
a steady stream of business. It has also been
pleasing to see stable rates in errors and
omissions, a core part of the casualty account
after many years of deterioration. We expect
this area to become a significant pillar of the
portfolio in time, so it is encouraging to see
our investment in talent paying off.

– Aerospace and specialty: This division

includes our aviation, space, contingency,
terrorism, kidnap and ransom, political risks
and personal accident business.

communicating. The role of the alternative
distribution division is to facilitate innovation,
drawing on all the resources of the London
Market business. Its biggest business is
the underwriting of specialist automotive
and equipment, including extended
warranty. In this we support White Oak,
a specialist in this area. This relationship
has grown over time to now represent 25%
of our London Market insurance revenues.
Our acquisition of a 10% stake in White Oak
and appointment of our Chief Underwriting
Officer to its Board underscores the
significance of this business to us.

We are also grasping new opportunities,
including multi-lines Lloyd’s consortia,
quota-share treaties and binding authorities.
Such arrangements give partners access
to our capital and expertise in exchange
for access to business we might not have
otherwise seen. We remain open to other
non-traditional ways of distributing products
underwritten by our teams in London.

An unprecedented number of claims – from
the tragic losses of Malaysian Airlines flights
MH17 and MH370 and AirAsia flight QZ8501,
to the damage and destruction of 18 aircraft
at Libya’s Tripoli airport – kept the aviation
market in the headlines over the year,
with industry losses exceeding $1 billion.
A combination of good luck and careful
underwriting meant that we avoided many
of the non-war losses, though events at
Tripoli airport did cost us £2.3 million.
Despite industry expectations that the
market would harden, the year concluded
with rates in broadly the same place as they
were at the start of 2014. In 2015, we expect
to maintain the account, while being ready
to explore any opportunities that may arise.

In the rest of the division, we achieved good
margins, despite the rating environment
being variable. In some lines this has been
no mean feat. For example the political
unrest surrounding Russia and the Ukraine
and the subsequent impact of sanctions
has been keenly felt within our political
risks book. We have invested in people,
expanding both our personal accident
and contingency teams.

In terrorism, intense competition and a
move towards facilities (bundling risks to
facilitate placement) are having a negative
effect. We were happy to step into the gap
that was created by the US Congress’s
failure to promptly renew its Terrorism Risk
Insurance Programme Reauthorisation Act
(TRIPRA), providing certainty to customers
with material city-centre property exposures.

– Alternative distribution: The ways in which
business reaches our London teams
continue to change and evolve as brokers
seek greater efficiency and technology
allows different, more effective means of

Hiscox Re
The Hiscox Re segment comprises the Group’s
reinsurance businesses across the world. It has
had a tremendous year, not only in terms of its
contribution to the Group’s profits, but also in
the way it has adapted to the changing dynamic
in the global reinsurance industry. Profits were
£105.6 million (2013: £129.0 million) despite our
revenues declining by 13.9% to £354.3 million
(2013: £411.5 million) as we continued our
disciplined response to the challenging pricing
environment. The combined ratio was 49.8%
(2013: 58.9%). The last two years reflect an
almost complete absence of large losses due
not only to low industry-wide losses, but also
good risk selection by our teams.

We formed the Hiscox Re division in mid-2013,
bringing teams in London, Paris and Bermuda
under common leadership. Since then they have
forged a strong identity in the eyes of clients
and brokers, reflecting the reality of a business
which can commit over $200 million to the right
risk. The team has developed innovative new
products, setting them apart from the industry.
Popular products have included risk aggregate
protection, second event catastrophe aggregate
trigger covers, quarterly aggregate protection
and cyber aggregate excess of loss. These have
created more opportunities for conversations
with clients, brought in over $30 million in new
premium and enhanced existing relationships.
The team will continue to develop new products
as it charts a course through a market where
pricing is challenging.

The way capital is deployed in the reinsurance
industry is changing. For many years we have
used quota share support from industry partners
to increase our ability to commit material sums
to support clients within traditional structures.
We expect this to continue for many years as
clients value the stability the traditional approach
brings. At the same time we are adapting to

Strategic report Hiscox Ltd Report and Accounts 2014

Chief Executive’s report
continued

changing sources of capital. Our Kiskadee family
of insurance linked funds will, in its second year
of operation, attract $500 million in capital. We
see opportunities to grow these funds, and other
ILS products, further as investors become more
comfortable with taking both insurance and
reinsurance risks. Hiscox Re has also broadened
its focus by continuing to invest in specialty,
healthcare and casualty reinsurance. These
three lines of business are growing steadily,
with the right degree of caution. Combined,
they exceeded $60 million premium income
in 2014 and we expect this growth to continue.

Looking forward, the critical uncertainty is
catastrophe reinsurance pricing. Rates fell at the
important 1/1 renewals by approximately 12.5%,
in line with our expectations. This marks the third
consecutive year that prices have reduced. The
great advantage that Hiscox Re has over its
competitors is that the Hiscox Group is not over-
reliant on this piece of the pie. This means that our
reinsurance team can remain disciplined, reducing
volume if necessary, secure in the knowledge that
as a Group we have many opportunities elsewhere.
For instance, we have already re-allocated
catastrophe aggregate from reinsurance to our
small-ticket property insurance team where pricing
is now more attractive. It also means that cedants
see Hiscox as a secure partner that will pay claims
in adverse circumstances. The reinsurance
industry has had three years without any material
claims, over six years since a major Gulf of Mexico
windstorm, and almost ten years without a major
Florida hurricane. This will inevitably change and
when it does, Hiscox Re has a full team of talented
people and diverse sources of capital to expand
as the opportunity presents itself.

Claims
2014 is a year that will be remembered for its
devastating aviation losses. Our exposure to these
events – from the loss of Malaysia Airlines MH370
and MH17, AirAsia flight QZ8501 and the Air
Algérie flight to Mali, to the destruction at Libya’s
Tripoli airport – was limited, reserved at net
$6.8 million. We also reserved $6.8 million for the
passenger ferry that caught fire in the Adriatic
Sea, resulting in tragic loss of life.

It was a relatively benign year for large-scale
natural catastrophes, and a quiet hurricane
season resulted in no material losses outside
of the $12.5 million reserved for Hurricane Odile
which hit the Mexican peninsula in September.
In Europe, severe floods, windstorms and
hailstone events during the first half of the year
affected our customers in the UK, Belgium and
the Netherlands. Our reserving for these events
stands at £8.8 million for the UK and €5.3 million
for Belgium and the Netherlands. We also reserved
$7.2m for February’s severe snowstorms in Japan.

We are here to pay claims when the worst happens,
so it is always pleasing to receive external
recognition for the quality of our teams and the fair
and fast treatment that our customers experience.
Nine out of ten people that insure their property
with us in the UK say they would recommend us to
their friends and family, and in the London Market
Gracechurch survey we achieved the second
highest ranking for overall customer satisfaction.
We do not rest on our laurels however and
continue to strive for ways to work better, faster
and even more effectively for our customers.

Reserve releases of £172 million were up
from £140 million last year, as we maintain
a cautious approach.

Marketing
During 2014 we increased marketing spend
across the Group by 3.9% to £31.8 million
(2013: £30.6 million). The vast majority of
our marketing efforts are focused on our
direct-to-customer operations in the UK,
the US and Europe. We have also invested
significantly in marketing our newly acquired
Asian operations, DirectAsia. Our investment
in broker channel marketing continued, where
we marketed direct to brokers, or we helped
them market to their customers. A small amount
was also spent on corporate sponsorships,
mainly supporting art-related activities but
also growing our presence in York.

Our marketing has been instrumental in building
the Hiscox brand, communicating what we do
to an ever-wider audience, building awareness
of Hiscox and ultimately driving sales. We felt
the benefits mostly in the UK where it has had
a positive impact on the direct, retail broker and
even our Lloyd’s activities. As we spend more
in other locations I believe we will see similar
broad business benefits.

Operations and IT
Our operations and IT capability have benefited
greatly from investment and effective leadership,
and we have made good progress in several
important areas. Our project to replace the core
underwriting, policy administration and claims
systems supporting our retail businesses
continues. The first phase of implementation, for
our UK direct home system, launched successfully
on time and almost on budget in October and
this has already doubled our online conversion
rates and increased sales. The next stage is the
migration of our direct commercial activities.

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.

In the US our operations team has focused on
building scalable infrastructure, streamlining
operational processes and automating some
simple underwriting. A major focus was smaller

Strategic report Hiscox Ltd Report and Accounts 2014

In 2014, for
the first time,
our aggregate
specialist retail
business will
account for over
50% of Hiscox
Ltd’s gross
written premiums.

directors and officers’ risks, where we halved
the question set, and in 2015 we will be rolling
this out to other areas.

In the London Market, we have become more
engaged in driving market-wide improvements.
The most notable success was our involvement
in the London Market Group’s London Matters
report which quantified the market’s position,
its opportunities and threats in a way that had
not been done before. The report garnered
government interest and gave new direction to
the market modernisation programme. We are
also seeing value in our participation on several
key project boards, focused on the delivery of a
single electronic trading platform for the market
and an overhaul of back office functions for
improved efficiency.

At the Digital Insurance and Technology Awards,
our IT team was recognised with four awards –
Digital Project Team of the Year, Outsourcing
Partner of the Year, Green Insurance IT Initiative
and CIO of the Year for Stéphane Flaquet. This
is well-deserved recognition of a team which has
done well.

Investments
As in 2013 the expectations for the year’s
investment result were relatively modest and,
given a cautious approach, we are content with
the performance for 2014. Our investments before
derivatives made £56.4 million (2013: £58.9 million)
equating to a return of 1.8% (2013: 1.9%). A bias
to short duration bond portfolios, driven by a
desire not to lose money when yields rise as well
as the short tail nature of our liabilities, meant that
at 1.5% the return from the bond allocation was
quite low. Once again the Dollar and Sterling bond
markets, where the majority of our assets are
invested, confounded expectation and, with the
benefit of hindsight, it would have been a good
year to own longer dated securities. Our returns
were boosted however by the performance of our
risk assets. In the context of volatile and challenging
markets they produced a more than acceptable
return of 7.6%. 2014 saw very divergent
performance within stock markets and sectors
and it is gratifying that on average the funds that
we supported avoided many of the pitfalls and
beat their benchmarks by a good margin.

The wait for higher interest rates is proving to
be longer than expected. However, to the extent
that we have learned to live with low but positive
returns of late, we are planning for the same in
2015. We remain unconvinced that now is the
time to stretch for yield in the fixed income arena
and, if anything, recent bouts of illiquidity have
re-affirmed this view. The majority of our cash
and bonds are there to pay claims and support
our business and, although we are prepared to
take investment risk, as in underwriting we seek
to do so at the right price. We continue to see the
best opportunities for this in the equity market
from time to time.

share with these results, approximately equal
to £192 million in total. Including this amount,
in the past ten years Hiscox has returned a net
total of £857 million to shareholders through
progressive dividends, share buy-backs and
capital returns. At the same time we have
grown shareholder’s funds from £369 million
to £1,262 million, post this capital return. Over
the same time period we have grown our top
line by a compound 8.0% per annum.

We far prefer to invest in opportunities
to support organic growth or make small
acquisitions. Over the past 12 months we have
made four acquisitions to support areas as
diverse as contingency, yachts and kidnap and
ransom. This includes our announcement today
of the acquisition of R&Q Marine Services. We
are always on the look-out for opportunities
which strengthen our position in specialty areas.

Outlook
At Hiscox we have pursued a strategy of
diversification for over 20 years. Our mantra
of steadily building our retail business (through
product innovation, geographic expansion and
occasional small acquisition) – to allow our big-
ticket businesses to expand and shrink in line
with their market opportunities – has worked and
we believe will continue to work. In 2014, for the
first time, our aggregate specialist retail business
will account for over 50% of Hiscox Ltd’s gross
written premium. Its growth, combined with
growth in the London Market insurance business,
has offset the declining income in our reinsurance
business. As a result, our Group profits, while
heavily influenced by big-ticket insurance and
reinsurance results (and we love it that they can
do so well) are not wholly dependent on these
areas as the only source of profits. Our retail
businesses make material profits as well.

At the same time, we have been successful
at adapting to the changing market. The way
capital is provided to reinsurance is changing.
Our response to this change, the Kiskadee
Funds, have grown to almost $500 million, from
nothing two years ago. Our US business is on
course to reach $500 million in revenues by
2016, making us a recognised contender in the
US specialty market. The brand building we have
done in the UK, which is now slowly extending
to Europe and the US, means we have an identity
few other insurers can match. We have taken the
bold step (and delivered on phase one) of ripping
out old technology to replace it with new, rather
than papering over the cracks. We are not
standing still.

Thanks to all these efforts we have the fire
power to set our own course, and are not being
blown around by industry headwinds. It means
that we have credible opportunities to develop
our business and make money even in the
tough times that lie ahead for some parts
of our business.

Capital management
We have announced a capital return of 60.0p per

Bronek Masojada
2 March 2015

Strategic report Hiscox Ltd Report and Accounts 2014

The Hiscox Group
has over 1,800 staff
in 14 countries.

North America

Bermuda
Hamilton

Asia
Bangkok
Hong Kong
Singapore

Europe
Amsterdam
Bordeaux
Brussels
Cologne
Dublin
Hamburg
Lisbon
Lyon
Madrid
Munich
Paris

Guernsey
St Peter Port

Latin American
gateway
Miami

UK
Birmingham
Colchester
Glasgow
Leeds
London
Maidenhead
Manchester
York

USA
Atlanta
Chicago
Los Angeles
New York City
San Francisco
White Plains (New York)

Europe

Strategic report Hiscox Ltd Report and Accounts 2014

Asia

Building a balanced business
Gross premiums written at 100% level (£m)

Hiscox Reinsurance

Hiscox London Market – Volatile
Hiscox London Market – Retail
Hiscox UK
Hiscox Europe
Hiscox Guernsey
Hiscox USA
DirectAsia

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

1,983

1,924

1,792

1,713

1,671

1,664

1,476

1,407

1,390

1,083

1,111

1,105

941

780

603

514

480

379

378

422

403

413

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Strategic report Hiscox Ltd Report and Accounts 2014

Hiscox business structure

Hiscox Retail

Hiscox UK and Europe

Steve Langan
CEO Hiscox Insurance
Company
Chief Marketing Officer
CEO DirectAsia Group

Hiscox UK and Europe is led
by Steve Langan, previous
UK and Ireland Managing
Director. As a combined unit,
the two markets will benefit
from greater sharing of
knowledge, expertise and
resource as Hiscox focuses
on its stretching ambitions
and continued drive for
profitable growth next year
and beyond.

Hiscox UK and Ireland
(headed by Kate Markham
and Ross Dingwall) and
Hiscox Europe (headed
by Pierre-Olivier Desaulle),
are sub-divisions of Hiscox
UK and Europe.

Hiscox International

Hiscox UK and Ireland

Hiscox Europe

DirectAsia

Bob Thaker
Managing Director

Established in Singapore
in 2010 before opening in
Hong Kong and Thailand,
DirectAsia sells predominantly
motor insurance with ancillary
lines in travel, healthcare and
life. It distributes business
through online sales
alongside its call centres.

Products include
Motor, travel, healthcare, life.

Kate Markham
Managing Director
Hiscox UK Direct

Ross Dingwall
Managing Director
Hiscox UK and Ireland Broker

Pierre-Olivier Desaulle
Managing Director

Hiscox began writing insurance outside of Lloyd’s in 1989
and now has nine offices in the UK and Ireland. Hiscox
specialises in art, private client and luxury motor insurance,
as well as professional liability and property insurance for
small- and medium-sized businesses. Hiscox UK also provides
home and small business insurance directly to consumers.

Products include
D&O, E&O, household, fine art, direct-to-consumer home and
small business insurance.

Security
Hiscox Insurance Company Limited has an A (Excellent) rating
from A.M. Best, an A (Strong) rating from Standard & Poor’s
and an A+ (Strong) rating from Fitch.

In 1993, Hiscox opened its
first overseas office in Paris,
and now operates from
11 regional centres across
Europe. Hiscox Europe
provides art and private
client insurance as well as
professional liability, specialty
and property insurance for
small- and medium-sized
businesses. Hiscox France
and Hiscox Germany provide
small business insurance
directly to consumers.

Products include
D&O, E&O, household,
fine art, kidnap and ransom,
direct-to-consumer small
business insurance.

Security
Hiscox Insurance Company
Limited has an A (Excellent)
rating from A.M. Best, an
A (Strong) rating from
Standard & Poor’s and an A+
(Strong) rating from Fitch.

Strategic report Hiscox Ltd Report and Accounts 2014

Hiscox Retail

Hiscox International

Hiscox Guernsey

Hiscox USA

Hiscox London Market

Hiscox Re

Hiscox London
Market

Hiscox Re

Steve Camm
Managing Director

Ben Walter
Chief Executive Officer

Paul Lawrence
Chief Underwriting Officer

Jeremy Pinchin
Chief Executive Officer

Since 1998 Hiscox has
been providing specialist
insurance and expertise
for global risks through
its Guernsey office. Led from
Hiscox Guernsey, Hiscox
Special Risks brings together
teams from across the Group
that focus on special risks
including kidnap and ransom
and executive security.

Hiscox has been insuring
US customers for over 40
years, and opened a local
insurance company in 2006.
Hiscox USA operates
from six locations, offering
professional liability, specialty
and property insurance.
Hiscox USA also provides
small business insurance
directly to consumers.

Products include
Executive security,
household, fine art, kidnap
and ransom, personal
accident, terrorism.

Security
Hiscox Insurance Company
(Guernsey) Limited has an
A (Excellent) rating from A.M.
Best and an A+ (Strong) rating
from Fitch.

Products include
D&O, E&O, property,
kidnap and ransom,
media and entertainment,
direct-to-consumer small
business insurance.

Security
Hiscox Insurance Company
Inc. has an A (Excellent)
rating from A.M. Best. It also
benefits from Lloyd’s own
ratings, A (Excellent) from
A.M. Best, A+ (Strong) from
Standard & Poor’s and
AA- (Very strong) from Fitch.

Hiscox has operated in the
Lloyd’s Market since 1901.
It provides insurance for
customers around the world,
using Lloyd’s portfolio of
licences and its network
of brokers. Hiscox London
Market covers a large range
of hazards and leads many
of the risks it underwrites.

Products include
Aerospace, global casualty,
contingency, marine and
energy, personal accident,
political risks, property,
kidnap and ransom, terrorism.

Capacity
For 2015, Hiscox’s
capacity for:
– Syndicate 33 is £1bn
– Syndicate 6104 is £65m
– Syndicate 3624 is £350m.

Security
Hiscox Syndicate 33 has
an A (Excellent) Syndicate
rating from A.M. Best. Hiscox
Syndicates also benefit
from Lloyd’s own ratings,
A (Excellent) from A.M. Best,
A+ (Strong) from Standard &
Poor’s and AA- (Very strong)
from Fitch.

Our long-established
reinsurance teams in
London, Bermuda and Paris
commenced trading as
Hiscox Re in January 2014.
Hiscox Re provides market-
leading expertise and a wide
range of reinsurance products
to high-quality insurers around
the world. It has a combined
line size of over US$200m.

Hiscox Re includes the
Group’s insurance linked
securities (ILS) activity
under the Kiskadee brand.
Additional capacity is
available through Kiskadee.

Products include
Property reinsurance and
retrocession; specialty
including: marine, aviation,
crop and terrorism; casualty.

Security
Hiscox Insurance Company
(Bermuda) Limited and
Syndicate 33 at Lloyd’s are
both rated A (Excellent) by
A.M. Best.

Strategic report Hiscox Ltd Report and Accounts 2014

Actively managed business mix

Total Group controlled premium 2014: £1,983m
(Period-on-period in local currency)

(+16.9%)
£503m

Professional
liabilities

Errors and
omissions

Directors
and officers’
liability

Commercial
small package

Small
technology
and media

Healthcare
related

Media and
entertainment

(-6.3%)
£419m

Non-marine

Marine

Aviation

Casualty

Specialty

(+3.2%)
£358m

Kidnap and
ransom

Contingency

Terrorism

Specie

Personal
accident

Political risks

(+8.2%)
£285m

Home and
contents

Aerospace

Fine art

Contractors’
equipment FTC

Extended
warranty

Classic car

Luxury motor

Asian motor

(+13.0%)
£238m

Commercial
property

Onshore energy

USA
homeowners

Managing
general agents

International
property

(+6.0%)
£126m

Marine hull

Energy liability

Offshore energy

Marine liability

D&O liability

Healthcare

Professional
indemnity

(+28.3%)
£54m

Local casualty
and commercial

Reinsurance

Specialty

Art and
private client

Property

Marine
and energy

Global casualty

Strategic report Hiscox Ltd Report and Accounts 2014

Actively managed key underwriting exposures

Boxplot and whisker diagram of modeled Hiscox Ltd net loss ($m)
January 2015

Upper 95%/lower 5%
Modeled mean loss

Hiscox Ltd loss ($m)

s
s
o

t
e
k
r
a
m
n
b
0
2
$

–

y
d
n
a
S
m
r
o
t
s
r
e
p
u
S

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
7

s
s
o

t
e
k
r
a
m
n
b
6
$

e
k
a
u
Q
a
t
e
i
r
P
a
m
o
L

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y

5
1

s
s
o

t
e
k
r
a
m
n
b
0
5
$

a
n
i
r
t
a
K
e
n
a
c
i
r
r
u
H

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
1
2

s
s
o

t
e
k
r
a
m
n
b
0
1
$

J
7
8
9
1

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
5
1

s
s
o

t
e
k
r
a
m
n
b
5
2
$
e
k
a
u
Q
u
k
o
h
o
T
1
1
0
2

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
5
4

s
s
o

t
e
k
r
a
m
n
b
4
2
$
e
k
a
u
Q
e
g
d
i
r
h
t
r
o
N

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
0
4

s
s
o

t
e
k
r
a
m
n
b
6
5
$
w
e
r
d
n
A
e
n
a
c
i
r
r
u
H

d
o
i
r
e
p
n
r
u
t
e
r

r
a
e
y
5
2

700

600

500

400

300

200

100

JP
EQ

US
EQ

EU
WS

US
WS

JP
EQ

US
EQ

EU
WS

US
WS

JP
EQ

US
EQ

EU
WS

US
WS

JP
EQ

US
EQ

EU
WS

US
WS

JP
EQ

US
EQ

EU
WS

US
WS

Industry loss
return period
and peril

Mean industry
loss $bn

5–10 year

10–25 year

25–50 year

50–100 year

100–250 year

106

158

This chart shows a modeled range of net loss the Group might expect from any one castastrophe event.
The white line between the bars depicts the modeled mean loss.

The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur.
For example, an event with a return period of 20 years would be expected to occur on average five times in 100 years.

JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm

Realistic disaster scenarios, Hiscox Ltd
The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2015 and
industry data. Given the nature of the risks underwritten, the loss estimates may be materially different than those that arise
depending on the size and nature of the event.

Japan earthquake
Gulf of Mexico windstorm
Florida windstorm
European windstorm
San Francisco earthquake

Gross loss
US$m

Net loss
US$m

Gross loss
as a % of
total equity

Net loss
as a % of
total equity

Net loss as %
of insurance
industry loss

511
976
683
699
972

108
107
105
174
115

22.5
43.0
30.1
30.8
42.8

4.7
4.7
4.6
7.7
5.1

0.2
0.1
0.1
0.6
0.2

Industry
loss size
US$bn

50
107
125
30
50

Return period
years

240
80
100
200
110

Strategic report Hiscox Ltd Report and Accounts 2014

What is the insurance cycle?
The insurance market witnesses
periodic ‘soft’ and ‘hard’ phases.
The market softens when an
increase in capital and competition
– often coupled with a period of
lower claims – causes premiums
and therefore profits to fall.
Eventually the market will reach
a turning point, when capital
declines – often as a result of
a catastrophe – and underwriters
push up prices and tighten terms
and conditions. Thus a hard market
ensues, in which profits improve.

Managing the
insurance cycle

Every industry experiences cycles of fluctuating
supply and demand. The insurance industry
is no different; however, the supply of capital
to the industry and the willingness to underwrite
against it, can be very reactive to major natural
catastrophes or other infrequent, large loss events,
making it hard to forecast when the cycle will
change. As well as covering major catastrophes,
insurance also covers people from all walks of life
and all industries, so even during the soft phase
of the cycle, not all lines of business, in all
geographies, experience difficult conditions.

Hiscox’s well-established strategy of balance
and diversity was designed with the aim of
providing opportunities and choices throughout
the cycle that maximise shareholder returns.
To that end, all the Group’s divisions follow three
fundamental tenents:
– always underwrite for profit, not

market share;

– actively manage the mix of business;
–grow and shrink according to conditions;
– focus on finding future opportunities

and specialist lines.

Every risk we underwrite is priced to make an
underwriting profit, no matter what the prevailing
competitive conditions or investment climate. We
do not bet the business on any single event and
are not overly reliant on any one of our divisions
for the Group to make a profit. We have three
separate divisions that complement each other
well – big-ticket insurance, reinsurance, and retail
insurance – and which have provided an effective
hedge to protect the Group balance sheet against
large catastrophe losses and market fluctuations.

We explain below how we execute the Group’s
cycle-management strategy across each of our
individual divisions.

Retail
– Steady, disciplined growth and

consistent pricing.

–Investment in a differentiated brand.
–Delivering superb service.

We are a specialist brand working in specific
niches and in many areas we are acknowledged
market experts. We work hard to differentiate
ourselves from the competition and try to create
products and services that customers value. In
these specialist lines, our market penetration can
be low and we believe there is considerable room
for disciplined growth.

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 rock-
bottom introductory prices, only to hike them

at renewals), backed by a commitment to pay
all legitimate claims quickly and fairly.

We have invested significantly in marketing,
to develop a powerful, differentiated brand with
which our target clients can identify. That brand
is based on our values and customer service
ethos, not on price.

We also want to offer superb service that exceeds
clients’ expectations. Our claims commitment
has won us awards as well as praise from our
customers, which supports our belief that a
policy’s value for money goes far beyond its cost.
– Small business customers in the UK have
rated service satisfaction 4.5 out of a
possible 5.

– 96% of our small business customers
in the US would recommend us.

– 98% of customers in France have found

Hiscox service to be excellent or good.

Our commitment to underwriting, marketing
and service has been a powerful magnet for
new clients, as well as our existing customers,
helping to protect us from the prevailing
competitive conditions.

We seek to create diversity across our retail
businesses to give us choices should markets
prove challenging. Our UK and European units
balance commercial and private client risks. We
cover many small- and medium-sized businesses,
as well as a number of larger businesses. We
also insure the property risks of a wide range
of individuals, from middle-income professionals
to the extremely wealthy. Following Hiscox UK’s
direct-to-consumer small business insurance
success, we launched a similar offering in the US
in 2010, and Europe in 2013. This rapidly growing
business balances our specialty insurance
products sold through brokers including
professional liability, privacy/data breach,
executive risks coverage and other products.
In 2014 we invested further in the direct model,
with the purchase of DirectAsia.

The use of data and analytics is an important
way to improve underwriting processes across
the Group. In 2015, we will launch a major
initiative in our UK business: a sophisticated tool
that analyses individual customers to provide
a price that reflects their unique risk. It will
eliminate excess cost from the underwriting
process, while also freeing up our underwriters’
time to spend on more complex risks.

London Market Insurance
–Take measured bets with a long-term view.
–Foster market-leading teams.
–Adapt to new distribution challenges.

Although there is rating pressure in a number of
our big-ticket lines, like energy or large industrial
property risks, we can still find profitable
opportunities to grow elsewhere. For example,
our property binder business, which comprises
small US commercial and personal lines risks,
remains an attractively rated book. We have

Strategic report Hiscox Ltd Report and Accounts 2014

Focus on
finding future
opportunities and
specialist lines.

many strong relationships with select managing
general agents, built across many years and
difficult markets, which allow us to push for
growth as we see incremental rate growth
producing attractive margins.

We are always looking for ways to diversify,
by using external performance data and our
own experience to identify new sectors in
markets that look attractive, but in which we
are currently underweight. We will then hire the
best available people working in those target
areas to ensure we make an immediate impact.
Those underwriters are expected to use their
knowledge, business acumen and broker
contacts to grow their business quickly, but
responsibly. Our new casualty and personal
accident teams are a good example of this.

Brokers are seeking to make the risk-transfer
process more efficient, in part by focusing
on developing deeper trading relationships
with fewer insurers. To ensure we are one of
those few we need to be responsive, to offer
significant capacity in emerging risks and to
work as a partner with our brokers. Hiscox’s
name and underwriting reputation give us an
invaluable advantage.

Much has been said about underwriting
facilities, but we believe they offer us the
prospect of a broader portfolio of risks than
we would otherwise have had, which makes
our business better balanced. They also enable
us to take a fixed share of every risk, with the
opportunity to take a bigger portion of the most
attractive risks through the open market. We are
not afraid of the trend towards facilities. Lloyd’s
has thrived for more than 300 years on the
system where an acknowledged market leader
sets the rate, terms and conditions for a risk, to
which other underwriters pledge their support
once satisfied the leader has done a competent
job. Facilities are simply an evolution in the
subscription market.

Hiscox Re
– Leveraging infrastructure and underwriting

expertise.

– Opportunity through multiple capital bases

and a diversified portfolio.

– Innovate and build creative partnerships

with insurers and investors.

The reinsurance business has changed
profoundly in recent years and it is important
that we evolve with it. In 2013, we amalgamated
our reinsurance platforms in London, Bermuda
and Paris to create Hiscox Re to deliver bigger
capacity, faster decisions and more creative
solutions. It can write lines of over $200 million,
meeting clients’ growing desire for meaningful
risk capacity from fewer carriers.

We do not view reinsurance to be a commodity
and we believe that finding innovative solutions
to clients’ changing needs is as important as
price – if not more so. So we ask clients what
challenges they face rather than simply trying

to sell them a one-size-fits-all solution, where
the only discussion is price.

This approach has produced new products,
such as risk aggregate protection, which
provides an effective way for clients to manage
their attritional losses, and second event
catastrophe aggregate trigger (SECAT) which
cost effectively reduces the client’s catastrophe
trigger after a series of retained losses. These
have generated a lot of interest, as has our ability
to help our clients develop their own businesses
by sharing our knowledge and experience.

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.

Our reinsurance underwriting performance has
consistently surpassed our peer group, across
the cycle. In reinsurance, Syndicate 33 has
outperformed the Lloyd’s Market every year
since 2001 in underwriting losses. For the 2013
underwriting year, for example, the average
reinsurance loss ratio among Lloyd’s syndicates
was 25.4%; by contrast, Hiscox’s was just
over 9.3%.

Along with exercising discipline, we also have
a strategy of finding balance and diversity. Our
healthcare team, created several years ago in
Bermuda, has rapidly developed a growing book
of business. We intend to repeat this success in
casualty and specialty reinsurance, where we
have recently invested in new teams.

The final element of our cycle-management
strategy is Kiskadee Re, our special purpose
vehicle formed in 2013 to write collateralised
reinsurance. Kiskadee provides our clients with
broader solutions and complementary products,
while enabling us to deploy extra capacity on risks
we favour, and providing another stable and
attractive source of fee income. Kiskadee enables
outside investors to leverage our underwriting
expertise and exploit their lower cost of capital to
satisfy their appetite for uncorrelated reinsurance
risk. Kiskadee is the latest milestone in our lengthy
history of innovation in working with third-party
capital – we were the first Lloyd’s business to set
up a sidecar and have long worked with quota
share partners.

ILS is impacting the shape of the cycle due
to cost of capital and speed of deployment.
Kiskadee enables us to tap into that capability
alongside other forms of capital. Whichever
way the pendulum swings in terms of client
preference over product, pricing etc. we
can respond.

Strategic report Hiscox Ltd Report and Accounts 2014

Capital

Capital management
Hiscox believes in managing its capital. The
Board monitors the capital strength of the Group
and ensures its insurance carriers are suitably
capitalised for regulatory and ratings purposes,
taking into account future needs including growth
where opportunities arise. As discussed in the
Chairman’s statement, once again as a result
of our strong performance in 2014 the Board has
reviewed the Group’s capital level and proposed
that a special distribution of 45.0p per share
(approximately £144 million), should be made.

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.

Capital requirements
The Group monitors its capital requirements
based on both external risk measures, set by
regulators and the ratings agencies, and its
own internal guidelines of risk appetite. A full
description of the requirements set by the
regulators for the most significant insurance
carriers is included in note 3.3 to the financial
statements. A brief explanation of the primary
internal and external capital constraints at
a Group level is given below.

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.

However, the Group can source additional
funding through a revolving credit and Letter
of Credit facility. Additional funding from
these sources comprised $875 million
at 31 December 2014 (2013: $875 million),
of which $441.5 million was drawn at
31 December 2014 (2013: $333 million).

A.M. Best, Standard & Poor’s and Fitch have
shared their capital models with management.
These models calculate a capital adequacy
score by measuring available capital, after
making various balance sheet adjustments,
as a proportion of required capital which
incorporates charges for premium, reserve,
investment and catastrophe risk. Management’s
interpretation of A.M. Best’s ‘Best Capital
Adequacy Ratio’ (BCAR) model indicates the
Group has a healthy surplus above the minimum
capital required to maintain the carriers’ A
ratings. On a similar basis the Standard & Poor’s
modeled result indicates a surplus in excess
of the mid-point of the required A range with
additional headroom above the minimum
requirement. Finally, Hiscox’s own assessment
of capital requirements arising from Fitch’s new
‘Prism’ factor-based model places the Group’s
capital in the ‘very strong’ range, comfortably
above that necessary to maintain the current
Fitch A rating. Projections indicate a reasonable
level of flexibility would be maintained following
the £144 million special distribution. The rating
agency requirements shown in the chart on
page 21 are consistent with our own internal
projections of rating agency capital requirements
based upon the Group’s 2014 consolidated
financial statements.

Group regulators
As a Bermudian-registered holding company,
the Bermuda Monetary Authority (BMA) has
been assessed as the Group’s regulator under
the Bermuda Group Supervisory Framework.
The BMA requires the Group to monitor its Group
solvency capital requirement under which the
Group provides a solvency return in accordance
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 GSSA is based
on Hiscox’s own internally assessed capital
requirements and is informed by the Group’s
Capital Model (GCM) which, together with the
BSCR, forms part of the BMA’s annual solvency
assessment. The GCM provides a holistic view
of the Group capital requirements and draws
upon the Group’s key underlying risk models.

The proposed return of capital will leave the
Group with a comfortable surplus above
Hiscox’s internal projections of both the BSCR
and GSSA for the 2015 business plan.

Rating agencies
The ability of the Group to attract business,
particularly reinsurance, is dependent upon the
maintenance of appropriate financial strength
ratings from the leading rating agencies,
Standard & Poor’s, A.M. Best and Fitch. These
ratings are assigned individually to the insurance
carriers of the Group, but capital adequacy is
also monitored by the rating agencies at the
consolidated Group level.

Internal capital requirements
The Group sets risk limits and tolerances which
reflect the amount of risk it is willing to accept as
a business. As part of good risk management,
our current exposure by the key risk types is
monitored against these pre-defined measures
throughout the year. The largest driver of our
capital is underwriting risk; the Group manages
the underwriting portfolio so that in a 1 in 200
aggregate bad year it will lose no more than

Strategic report Hiscox Ltd Report and Accounts 2014

Capital return of
60.0p per share.

12.5% of core capital plus 100% of buffer
capital (£100 million) with an allowance for
expected investment income. This underwriting
risk limit reflects a slight redefinition in how
the underwriting risk preference is expressed
compared to previous years but is not materially
different quantitatively. A market loss at this
remote return period would be very big indeed
and would certainly bring about positive market
changes. The Group would be well positioned
in the resulting strong market with capital
in the order of £1 billion in addition to its
LOC facilities and its now well-developed
reinsurance partnerships. If the return of capital
is approved by the shareholders on 25 March,
the available capital will reduce to approximately
£1,262 million, comfortably meeting the current
regulatory, rating agency and internal capital
requirements. The Board believes that this level
of capital gives sufficient flexibility to achieve its
desired business growth whilst maintaining the
Group’s current capital strength.

Projected capital requirement

£1.45bn available capital

£1.26bn available capital (post return)

Economic

Regulatory

A.M. Best
(catastrophe
stressed)

Standard
& Poor’s

Fitch ratings

Group
capital
model
(economic)

Group
capital
model
(regulatory)

Bermuda
solvency
capital
requirement

Rating agency assessments shown are internal Hiscox projections of the agency capital requirements on the basis of 2014 year-end results.
Hiscox uses the internally developed Group capital model to assess its own capital needs on both a trading (economic) and purely regulatory basis.
All capital requirements have been normalised, with respect to variations in the allowable capital in each assessment for comparison to a consistent
available capital figure.

Strategic report Hiscox Ltd Report and Accounts 2014

Group financial
performance

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).

Net asset value per share increased by 15%
to 462.5p (2013: 402.2p). The Group continues
to maintain a progressive dividend policy and
total dividend per share rose by 7.1% to 22.5p
(2013: 21.0p), subject to shareholder approval
of the final dividend equivalent. The Group is
proposing, for the third consecutive year, to
make a special distribution of 45.0p per share,
subject to shareholder approval. Following the
distribution, the Group’s capital levels will be
similar to those of the opening balance sheet,
post the 2014 capital return.

Gross premiums written of £1.76 billion were up
3.3% year-on-year. Strong growth in insurance
lines was offset by a decline in reinsurance.

Group key performance indicators

The Group’s combined ratio including foreign
exchange was 83.9% (2013: 83.0%). An
investment return of 1.8% (2013: 1.9%) was
a good result given the ongoing challenging
conditions in the market. All asset classes
outstripped their benchmarks for a consecutive
second year.

The underwriting performance for each
operating segment is detailed as follows.

Hiscox Retail
Hiscox Retail now accounts for 51% of the
Group’s gross premiums written at £891.1 million
(2013: £819.4 million). Gross premiums written
for the UK were up 5.5% at £435.0 million, driven
primarily by the specialty commercial and global
media, entertainment and events lines. Europe
grew gross premiums written by 5.7% to
£155.1 million with contributions from all
countries. The US continued its strong year-on-
year growth with a 17.7% improvement in top
line, with the direct-to-consumer business
growing by 75%. Guernsey’s premium income
decreased by 8.9%, or 4.0% in local currency.
Additional contributions in premiums were made
from DirectAsia, which we acquired during the
year, at £13.5 million.

Both the net claims ratio and expense ratio
remained constant at 40.9% (2013: 41.6%)
and 52.0% (2013: 52.1%) respectively. The
net combined ratio improved slightly to 93.5%
(2013: 94.3%). Both the UK and Europe divisions
recorded their best ever result.

Gross premiums written (£m)

891.1

510.9

354.3

– 1,756.3

819.4

468.6

411.5

– 1,699.5

Hiscox
Retail

Hiscox
London
Market

Hiscox Re

Corporate
Centre

2014

Total

Hiscox
Retail

Hiscox
London
Market

Hiscox
Re

Corporate
Centre

2013

Total

Net premiums written (£m)

Net premiums earned (£m)

Investment result (£m)

Profit/(loss) before tax (£m)

Claims ratio (%)

Expense ratio (%)

Foreign exchange impact (%)

825.9

336.9

180.6

– 1,343.4

751.2

359.9

260.0

–

1,371.1

790.7

332.5

193.0

– 1,316.2

711.1

303.2

269.0

– 1,283.3

8.7

9.4

12.2

56.2

19.1

6.3

14.4

20.0

59.8

62.6

105.6

(15.2)

231.1

61.2

63.1

129.0

(8.8 )

244.5

25.9

78.1

40.9

52.0

0.6

47.4

39.8

22.0

29.6

(3.0)

(1.8)

Group combined ratio (%)

93.5

84.2

49.8

Financial assets and cash† (£m)

Other assets (£m)

Total assets (£m)

Net assets (£m)

Net asset value per share (p)

Net tangible asset value per share (p)

Adjusted number of shares in issue (m)

† Excluding derivative assets, investments in insurance linked funds and third-party assets managed by Kiskadee Investment Managers.

Strategic report Hiscox Ltd Report and Accounts 2014

–

39.8

44.9

(0.8)

41.6

52.1

0.6

43.5

36.8

1.1

30.9

26.4

1.6

83.9

94.3

81.4

58.9

2014

3,244.9

1,734.2

4,979.1

1,454.2

462.5

428.8

314.4

–

39.8

42.3

0.9

83.0

2013

3,129.5

1,306.1

4,435.6

1,409.5

402.2

381.4

350.5

of products to market. Marketing expenses
remained similar at £31.8 million in the year
(2013: £30.6 million).

The Group maintains relationships with a limited
number of banks, whose credit status and ability
to meet day-to-day banking requirements are
monitored by the Group. There was no cash
drawn down on the banking facility during the
year. At 31 December 2014, $441.5 million
(2013: $333 million) had been drawn by way
of Letter of Credit against this facility.

There were no impairments recorded against
cash or cash equivalents and no issues
regarding recoverability have been identified
on these assets.

Hiscox London Market
Gross premiums written increased by 9.0%
to £510.9 million (2013: £468.6 million) driven
by strong growth in the alternative distribution
and casualty divisions. Reinsurance purchased
was at a higher level than the prior year at 34.0%
of gross premiums written (2013: 23.2%), as a
result of a new quota share arrangement on the
alternative distribution business. The quota
share arrangements with Syndicate 6104 and
others remained in place.

The net claims ratio was up in the year to
47.4% (2013: 43.5%), with minimal impact from
catastrophes. The combined ratio increased
to 84.2% (2013: 81.4%) driven from the increase
in claims ratio and an increase in the expense
ratio to 39.8% (2013: 36.8%).

Profit before tax for the year remained constant
at £62.6 million (2013: £63.1 million).

Hiscox Re
Gross premiums written reduced by 13.9%
to £354.3 million (2013: £411.5 million), in
a very challenging environment. The healthcare
business written in Bermuda, however, had 37%
growth year-on-year. With a second consecutive
year of minimal catastrophe activity, the net
claims ratio remained low at 22.0% (2013: 30.9%).
This drove an improvement in the net combined
ratio to 49.8% (2013: 58.9%).

Hiscox Corporate Centre
The centrally held investment portfolio had
a lower, but still respectable, return in 2014
of £12.2 million (2013: £20.0 million) following
an excellent 2013. This was offset by operational
expenses of £21.4 million (2013: £23.6 million).
The loss before tax was £15.2 million (2013: loss
£8.8 million), with £0.8 million additional foreign
exchange losses.

Cash and liquidity
The Group’s primary source of liquidity is from
premium and investment income. These funds
are used predominantly to pay claims, expenses,
reinsurance costs, dividends and taxes, and
to invest in more assets. In addition, during
2014 the Group decided to return excess capital
to its shareholders of £128 million on top of
standard dividends, additionally the Employee
Benefit Trust purchased net £10.6 million of
shares during the year into the Trust. At the end
of the year, the Group received £170 million for
subscriptions received in advance of investment
by the Kiskadee Select and Diversified funds.
In all, inflows for the year were £93.0 million
(2013: outflow of £92.8 million). The Group paid
£62.6 million of tax during the year compared
to £39.7 million in 2013. The Group had cash
outflows from investing activities of £43.6 million
(2013: inflow of £7.4 million), incorporating
the acquisition of DirectAsia and further
IT investment.

The Group has continued its investment in IT
infrastructure during the year, in particular for
the UK, as we seek to strengthen our delivery

Strategic report Hiscox Ltd Report and Accounts 2014

Group investments

The Group’s invested assets at 31 December
2014 totaled £3.46 billion (2013: £3.13 billion).
This includes £211 million of third-party assets
held in our insurance linked strategies funds
managed by Kiskadee Investment Managers,
a wholly-owned subsidiary of the Group.
These are consolidated for reporting purposes.
Excluding this and allowing for the £197 million
that was returned to shareholders by way of
dividend and capital distribution, assets under
management grew slightly during the year.
The investment result, excluding derivatives,
amounted to £56.4 million (2013: £58.9 million)
equating to a return of 1.8% (2013: 1.9%).
Whilst the outcome was similar to the previous
year a more positive environment for bonds
tilted the balance of the contribution towards
the fixed income allocation.

We started 2014 in the belief that a recovery was
gaining traction in the US and the UK and that
the worst may be over in other parts of the world.
Our portfolio was positioned accordingly. As it
turned out this optimism marked yet another
false dawn as various deflationary forces
exerted themselves, especially in the Eurozone,
producing weaker growth and lower inflation
than anticipated. These pressures gathered
steam toward the end of the year and, with the
Bank of Japan embarking on an aggressive
package to revive their economy and the ECB
expected to do the same, longer dated bond
yields in developed markets fell sharply. The
prospect of an official increase in interest rates
in the US and the UK in 2015 therefore fell further

Group investment performance

into doubt but was not completely discounted
in the US whose economic performance proved
to be more robust than elsewhere in the world.
As a result US short dated bond yields in the
two-three-year maturity actually rose during the
year, in notable contrast to those in the UK and
the Eurozone. Given the duration and currency of
our liabilities, short dated Dollar bonds constitute
a large proportion of our fixed income portfolios
which, whilst earning more than 2013, did not
benefit from the fall in yields of longer dated
bonds. Whilst our returns in 2013 relied heavily
on the performance of the risk assets portfolio,
in 2014 we expected more modest returns from
this source accompanied by bouts of volatility,
both of which occured. It was however a year of
divergent performance between various markets
and sectors and in that context our risk assets
made a useful contribution.

Despite some headwinds at the short end of
the yield curve, the contribution from the bond
portfolios was double that of 2013 but, at 1.5%,
still low in absolute terms. This represented an
outperformance to the short duration
benchmarks which govern the majority of our
segregated mandates. The excess returns in
the Dollar bond portfolios were achieved largely
through allocations to credit. The higher spreads
and the benefits of a positive yield curve
outweighed the increase in underlying yields.
Successful duration management contributed
more in the Sterling and Euro portfolios, but the
exposure to credit there also added value. Yields
in the Euro portfolio have declined to extremely
low levels (they are negative on the underlying
benchmarks) but fortunately represent less
than 10% of our overall asset allocation. At the
beginning of 2015 bond yields have declined
further to levels that seemed improbable
12 months ago.

Bonds

Bonds total

Equities

Deposits and cash equivalents

Actual return

Group invested assets*

US$

Other

31 December 2014

31 December 2013

Asset allocation
%

Return
%

Return
£000

Asset allocation
%

15.1

52.6

10.1

77.8

7.8

14.4

16.3

48.5

9.9

74.7

7.1

18.2

2.1

1.2

1.9

1.5

7.6

0.4

1.8

36,714

17,604

2,037

56,355

£3,245m

Return
%

0.7

0.6

0.7

Return
£000

17,105

18.3

39,289

0.5

1.9

2,530

58,924

£3,129m

* Excluding derivative assets, investments in insurance linked funds and third-party assets managed by Kiskadee Investment Managers.

Strategic report Hiscox Ltd Report and Accounts 2014

Whilst down on 2013, the 7.6% return from our
risk assets was a very satisfactory outcome. By
most accounts 2014 was a tough year for active
equity fund managers trying to beat an index.
It is therefore pleasing that our allocation to UK
and global equity funds and equity based hedge
funds all beat their respective benchmarks.
Successful sector and geographic allocations
lay behind much of the outperformance, with
healthcare and other defensive sectors being
favoured and mining and commodity stocks
being underrepresented. In the global equity
funds there was a bias to the US with managers
tending to underweight Europe, Japan and
emerging markets. Hedge funds have generally
performed poorly of late but our allocation there
posted good returns. Our risk assets portfolio
at the end of the year comprised 7.8% of the
overall portfolio, up from last year due to
appreciation and a modest addition during
the volatile period in October.

The outlook for investment markets in 2015
remains uncertain as the impact of the financial
crisis in 2008 lingers on. There is some sign of
recovery in the US but much of the rest of the
world remains at risk of deflation and reliant on
monetary stimulus. Quantitative easing in its
various forms has resulted in most asset prices,
particularly bonds, appearing to be overvalued
and recent sharp movements in currencies, oil
and various commodities are a reminder that
plenty of imbalances exist. Very few of these
were predicted last year and the implications
and impact of such moves are far from clear.

There is still an expectation that the US economy
will continue to decouple from other areas and
that the Fed will begin to increase interest rates
at some stage during the year. This prospect
leads us to remain cautious on duration in the US
bond markets in particular. Given the prevailing

Asset allocation

7.8%

Risk assets

14.4% Cash

77.8% Bonds

low level of yields in our bond portfolios more
generally we expect another year of low returns
from them. Any yield from cash is increasingly
hard to come by with negative yields on offer
in many European bond and cash markets.
We have allocated to less traditional areas
of the bond market in the past when we could
see attractive valuations but retaining a strong
liquid balance sheet is currently preferred. Many
areas of fixed income have recently suffered from
bouts of volatility including even the US treasury
market last October, and with liquidity becoming
an increasingly fickle friend we are restricting any
additional credit exposure to investment grade
securities. We have learnt to live with low but
positive returns in recent years and that remains
the plan in 2015. Whilst our priority remains
to avoid losing money, we do have some
appetite for risk within the investment portfolios
and of late this has been mostly expressed in
the allocation to equities. This is an area where
we still see opportunities from time-to-time.

High-quality, conservative portfolio
Investment portfolio: £3.245 billion
as at 31 December 2014

Strategic report Hiscox Ltd Report and Accounts 2014

Group investments
continued

Bond credit quality

1.8%

BB and below

9.4%

BBB

16.7% AA

19.9% A

22.4% AAA

29.8% Government

Bond currency split

1.3%

CAD and other

11.7% EUR

19.4% GBP

67.6% USD

Strategic report Hiscox Ltd Report and Accounts 2014

One of our Executive Directors – either the
Chief Executive Officer, Chief Financial Officer
or Chief Underwriting Officer – chairs each of
these forums. The responsibilities of our senior
management are clearly defined, as are our
reporting lines, and where responsibilities are
delegated the Board and its committees closely
monitor their activity, aided by financial and
non-financial management information.

This monitoring assesses the level of risk being
taken by the Group in pursuing its objectives,
and ensures that this level of risk remains within
the parameters set by the Board. A dedicated
team reports to the Risk Committee of the Board
which monitors and reviews the risk profile and
the effectiveness of our risk management
activities. This team has a wide range of tools
to measure risks and is organised centrally so
we can share best practice on managing risks
across the Group.

Risk management

Our core business is to take risk and our
strategy is to maximise return on equity within
a defined risk appetite. Our ongoing success
depends on how well we understand and
manage the significant exposures we face.
It is therefore crucial that our knowledge of
those risks underpins every important decision
we make across the Group.

The risks from our core business of insurance
and reinsurance represent many of our most
significant exposures. We are also exposed
to a number of other risks: investment, credit,
operational, liquidity, and strategic. To identify
and manage these we have developed a risk
management framework, which we regularly
review and improve in the light of the changing
risk environment and evolving best practice
on risk management. Our risk management
framework is designed to oversee a culture
of innovative and prudent underwriting.

The Group risk management framework
The Risk Committee of the Board oversees the
risk management framework and advises the
Board on how best to manage the Group’s risk
profile. Our risk appetite is set by the Board and
cascaded down to the Group’s operating
entities, and the risk exposures are monitored
both locally and centrally, by risk type and in the
aggregate. In addition to the Hiscox Ltd Board
and its Committees, the risk management
framework includes several Group-wide and
local forums focusing on specific risk types such
as underwriting, reserving, investments, cash
flow and reinsurance security. The framework
is supported by a central risk team that reports
to the Risk Committee.

Governance Hiscox Ltd Report and Accounts 2014

Risk management
continued

Principal risks

What is the risk?

Why do we have it?

How is it managed?

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
(such as terrorism), which
can cause heavy underwriting
losses that could have a
material impact on the
Group’s earnings.

Though volatile and
potentially costly, this
business is compelling
for us, as it is capable of
earning good margins over
the medium- to long-term.

Competition and the
insurance cycle

Hiscox competes against
major international insurance
and reinsurance groups. At
times, some of these groups
may choose to underwrite
risks at prices that fall below
the break-even technical
price. Prolonged periods
when premium levels are low
or when competition is intense
are likely to have a negative
impact on the Group’s
financial performance.

We operate in open,
aggressively competitive
markets in which barriers
to entry for new players are
low and where competitors
may choose to differentiate
themselves by undercutting
their rivals. As a result,
capacity levels in these
markets will rise and fall,
causing prices to go up
and down, creating volatile
market cycles.

Governance Hiscox Ltd Report and Accounts 2014

– Diversified portfolio: Hiscox has a well-diversified portfolio by

product and geography to help balance any catastrophe exposure.

– Risk appetite: We clearly define our risk appetite for underwriting

risk, which dictates our business plan. To ensure that we do not
exceed our risk appetite, we monitor our exposures closely and
take mitigating actions to maintain business plan. This enables us
to maximise the expected risk return profile on the whole portfolio
and offset the potential losses on more volatile accounts.
– Underwriting discipline: Underwriters are incentivised to make

sound decisions that are aligned with Group’s overall strategic
objectives and risk appetite. Clear limits are placed on their
underwriting authority. Policy wordings are regularly reviewed in
the light of legal developments to ensure the Group’s exposure is
restricted, as far as possible, to those risks identified in the policy
at the time of issue.

– 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.

– Stress and scenario testing: We run stress and scenario tests for
a range of specific events for each of our business units as well as
the Group as a whole, so we can estimate our potential losses from
a major catastrophe.

– Reinsurance: We buy reinsurance for our business carriers and
the Group as a whole, to mitigate the effect of catastrophes and
unexpected concentrations in risk. The scope and type of
protection we buy may change from year-to-year depending on the
extent and competitiveness of cover available in the market. The
Group is exposed to the risk that the reinsurance protection it has
bought is inadequate or inappropriate, but this is monitored and
managed using modeling techniques, supervised by a dedicated
Reinsurance Purchase Group.

– Pricing discipline: We are firmly resolved to reject business that
is unlikely to generate underwriting profits. Accepting risks below
their technical price is detrimental to the industry as it can drive
market rates down to a point where underwriting losses mount,
insurers’ capital is destroyed causing some businesses to fail,
customers to receive poor service and the industry to suffer
negative publicity.

– Remuneration: Hiscox incentivises underwriters on return on

equity, rewarding staff for profit not revenue.

– Risk appetite: Our appetite for certain lines of business changes
according to market conditions and the risk appetite of the Group.

– Monitoring: We regularly monitor pricing levels, producing

detailed monthly reports grouping current prices with exposure
and trends over the past 12 months. This ensures that we quickly
identify and control any problems created by adverse changes
in market conditions.

Principal risks

What is the risk?

Why do we have it?

How is it managed?

Competition and the
insurance cycle continued

Reserving for
insurance risks

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 make sufficient
provision for our exposures,
which could affect the Group’s
earnings, capital and possibly
even its survival.

Investment risk

The premiums and technical
funds we hold for the payment
of future claims are inevitably
exposed to investment risk.

As an insurance company
we are required to hold
claims reserves.

We invest the cash we
receive from our clients
and the capital on our
balance sheet until it might
be needed to be paid
as claims.

– Lead insurer: We frequently act as the lead insurer in the

coinsurance programmes required to cover significant high-value
assets, so we have some ability to set market rates rather than
follow them.

– Historical data and actuarial analysis: The provisions we make
to pay claims reflect our own experience and the industry’s view
of similar business; historical trends in reserving patterns, loss
payments and pending levels of unpaid claims and awards, as well
as any potential changes in historic rates arising from market or
economic conditions. Details of the actuarial and statistical methods
and assumptions used to calculate reserves are set out on note 26
to the consolidated financial statements. The provisions we make
are set above the actuarial mid-point to reduce the risk that actual
claims exceed the amount that has been set aside.

– Senior management and Board approval: Our provision estimates
are subject to rigorous review by senior management from all areas
of the business including independent actuaries. The final provision
is approved by the relevant boards on the recommendation of
dedicated reserving committees.

– Conservative policy: Our overriding concern is to not lose money
or to put at risk the Group’s capacity to underwrite. Our policy
is designed to maximise returns within an overall risk appetite.

– Technical funds: Those funds held for reserves are invested

primarily in high-quality bonds and cash. The high quality and short
duration of these funds allows the Group to meet its aim of paying
valid claims quickly.

– 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.

– Duration: As many of our insurance and reinsurance liabilities have
short time spans, we do not aim to match exactly the duration of
our assets and liabilities.

– Benchmarks: Our fixed income fund managers are set

benchmarks that approximate the payment profile of our claims
while still providing them with some flexibility to enhance returns.
– Equities: A proportion of the Group’s assets is allocated to riskier
assets, principally equities. For these assets we take a long-term
view so we can achieve the best risk-adjusted returns. The
proportion of funds we invest in risk assets will depend on the
outlook for investment and underwriting markets. We make an
allocation to less volatile, absolute return strategies within our risk
assets, so as to balance our desire to maximise returns with the
need to ensure capital is available to support our underwriting
throughout any downturn in financial markets.

– 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.

Governance Hiscox Ltd Report and Accounts 2014

Risk management
continued

Principal risks continued

What is the risk?

Why do we have it?

How is it managed?

Liquidity risk

We are unable to meet our
liabilities to customers or
other creditors when they
fall due. Also the risk that
we incur excessive costs
by selling assets or raising
finance quickly to meet
our obligations.

We provide cover against a
range of catastrophes, so if
one occurs we may be faced
with large, unplanned cash
demands. This situation could
be exacerbated if we have
to fund a large portion of
claims pending recovery
from our reinsurers.

Regulatory change

The insurance industry
is undergoing a period of
unprecedented regulatory
change, which may impact
the capital we are required
to hold.

Insurance is a regulated
industry. While regulations
typically evolve on an ongoing
basis, there may be times
where the regulatory
landscape undergoes
a significant shift.

– Risk management: We believe the likelihood that we may be unable

to meet our liabilities, or that we incur excessive costs in doing so,
is extremely remote, because of our risk management measures.

– Forecasting: Most of our cash inflows and outflows are routine and
can be forecast well in advance. Our primary source of inflows is
insurance premiums while our outflows are largely expenses and
payments to policyholders through claims. We forecast our cash flow
for the week, month, quarter or up to two years ahead, depending on
the source.

– Cash: Available cash is invested according to the Group’s investment

policy and our cash requirements can normally be met through our
regular income streams: premiums, investment income, existing cash
balances or by realising investments that have reached maturity.

– Stress tests: We run tests to estimate the impact of a major

catastrophe on our cash position in order to identify potential issues.
We also run scenario analysis that considers the impact on our
liquidity should a number of adverse events occur simultaneously,
such as an economic downturn and declining investment returns
combined with unusually high insurance losses.

– Credit: We maintain extensive borrowing facilities. These

arrangements have been made with a range of major international
banks to minimise the risk of one or more of the institutions being
unable to honour their commitments to us.

– Liquid assets: Our investment policy recognises the demands

created by our underwriting strategy, so that some investments may
need to be realised before maturity or at short notice. Hence a high
proportion of our investments are in liquid assets, which reduces our
risk of making losses because we may have to sell assets quickly.

– We constantly monitor new regulation and review our internal

arrangements, operating under the guidance of the Group CFO.

Governance Hiscox Ltd Report and Accounts 2014

Major risks: secondary

What is the risk?

Why do we have it?

How is it managed?

Insurance risk:
binding authorities

Hiscox generates
considerable premium
income through agents to
whom binding authority is
given to underwrite insurance
policies on our behalf.
Agents may underwrite
business outside of our
normal guidelines.

Credit risk:
reinsurance counterparties

We buy reinsurance to protect
us from large single claims as
well as the aggregate effect of
many claims resulting from
catastrophes. The risk is that
our reinsurers are unable to
meet their obligations to us,
which would put a strain on
our earnings and capital.

Investment risk:
foreign exchange risk

Our reporting currency is
Sterling, but a significant
proportion of our underwriting
activity is located in the
US and Europe. In addition
the capital bases of our
insurance companies in
Bermuda, Guernsey and
US are in US Dollars.
Therefore, movements in
foreign exchange rates may
have a material adverse effect
on our financial performance
and position.

Binding authorities give the
Group access to a greater
volume of business.

– 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.

We cover clients against
a range of catastrophes
and protect ourselves
through reinsurance. We
face credit risk where we
seek to recover sums from
other reinsurers.

– Careful selection: We buy reinsurance only from companies that
we believe to be strong. Every reinsurer we use must be approved
by a dedicated Reinsurance Security Committee, based on an
assessment of financial strength, trading record, payment history,
outlook, organisational structure, plus its external credit ratings.

– Monitoring: Our credit exposures to these companies are closely

monitored. The companies are continuously monitored so that
we are able to identify any potential problems. The committee
considers public information, experience of the companies
concerned, their behaviour in the marketplace and analysis
from external consultants and from rating agencies.
– Guidelines: We set guidelines for exposure to each of our

approved reinsurers.

We are an international
insurance and reinsurance
group that operates in
numerous markets around
the world.

– Currency matching: As the US Dollar is the Group’s largest
underwriting currency, our policy is to match our US Dollar
insurance liabilities with investments held in that currency to
minimise any losses from currency fluctuations. We will hold a
percentage of our capital in the matching currency of that part
of our underlying business, where it is deemed appropriate.
– Currency hedging: We closely monitor our net currency positions
and will enter into currency hedges if we anticipate adverse
movements in exchange rates. Further details of the Group’s
investment profile and its management of currency risks
are provided in notes 3 and 19 to the consolidated
financial statements.

Governance Hiscox Ltd Report and Accounts 2014

Risk management
continued

Major risks: secondary continued

What is the risk?

Why do we have it?

How is it managed?

Strategic risk:
Hiscox credit rating

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.

Operational risk:
IT continuity

We are unable to transact with
intermediaries and customers
due to an IT failure.

Emerging risks

We are exposed to new and
emerging risks, primarily
through legal or political
decisions. For example,
a change in US legislation
may result in exposures being
included within our coverage
that had not been intended
by our underwriters, or may
require us to cease business
in certain US states.

The business in which we
operate is determined largely
by financial strength ratings
issued by the major credit
rating agencies.

– Careful management: We have identified the key aspects of our

business that are critical to maintaining our ratings. These are closely
managed to minimise the risk of an event, or change in strategy, that
might jeopardise our ratings.

– Communication: Regular and open communication with the

major credit rating agencies helps to ensure we continue to meet
their expectations.

Like every other business
we are reliant on data
and computer systems
in order to go about our
everyday business.

– Disaster recovery planning: A formal disaster recovery plan is
in place to deal with workspace recovery and the retrieval of
communications, IT systems and data should a major problem occur.
These procedures would enable us to move the affected operations
to alternative facilities quickly. The plan is tested regularly and
includes simulation tests.

Our business is taking risk,
which by its nature is
inherently uncertain.

– Risk assessment: Identifying, planning for and controlling emerging

risks is an important part of our risk management activity across all
aspects of our business, including underwriting, operations and
strategy. We make a significant effort to identify material emerging
threats to the Group. It is a core responsibility of each of our risk
committees and we believe we take all reasonable steps to minimise
the likelihood and impact of emerging risks and to prepare for them
in case they occur.

Governance Hiscox Ltd Report and Accounts 2014

In 2014, Hiscox
In 2014, Hiscox
In 2014, Hiscox
Group-wide
Group-wide
Group-wide
operations
operations
operations
became carbon
became carbon
became carbon
neutral.
neutral.
neutral.

Corporate responsibility

in headcount, a rise in occupied floor space and
more travel due to increased business activity.

The chart below depicts our carbon emissions
year-on-year since 2012.

In 2014, Hiscox Group operations became
carbon neutral, offsetting the emissions
we could not reduce through award-winning
climate and sustainable development experts,
ClimateCare. LifeStraw Carbon for Water
project provides simple gravity-fed water
filters for 4.5 million people in Western Kenya,
minimising exposure to waterborne diseases.
This project also cuts carbon emissions by
reducing the need to boil water to make it safe
to drink. For more information, please go to
www.hiscoxgroup.com.

Hiscox is a founding member of ClimateWise,
which aims to leverage the insurance industry’s
expertise to understand, communicate and act
on the risks associated with climate change.
Hiscox is independently assessed against
a commitment to six key principles, including
risk analysis, public policy, influencing our
customers, investment strategies, managing
our own impact and reporting on our direct
emissions. In 2014 Hiscox was ranked joint
second. More information is available at
www.climatewise.org.uk.

The Hiscox London office was awarded Platinum
at the Clean City Awards for the third year in
a row. Hiscox remains a member of the Carbon
Disclosure Project (CDP), an initiative that
provides a global system for companies to
measure, disclose, manage and share vital
environmental information. In November 2014,
Hiscox IT was awarded Green Insurance IT
Initiative at the Digital Insurance and Technology
awards 2014, for transforming the London
Market business with a new paperless system.

The marketplace
In 2014, Hiscox UK was awarded Investing in
the Profession at the British Insurance Awards,
Hiscox London Market was awarded Insurer

At Hiscox several core values guide our
business. These are: to challenge convention,
to have courage, to provide quality products,
to excel in the service we provide and be
human in our approach. These values underpin
a reputation we have earned for integrity and
decent behaviour in everything we do, which
we firmly believe is good for the morale of staff
and for the results of the business.

Hiscox’s commitment to responsible business
practices is reflected in:

The environment
In the last year we have increased our support
for climate change research and analysis
both with educational bodies and through
collaborations within the business community.
We also continue to factor climate change into
our business decisions in order to ensure we
are responding effectively and appropriately
to the challenges it poses.

We believe in identifying, then minimising the
environmental impacts of our business activities,
including the direct impact of our own business
operations. We seek to reduce the amount of
waste our activities produce, and the amount
of resources we consume. We are committed
to reducing our carbon footprint, and for the
business to operate more sustainably by:
measuring our use of water, energy and other
products in order to reduce consumption over
time; buying sustainably-sourced or energy-
efficient products where we can; and minimising
waste by recycling products where we can. We
have, as a result, also generated significant cost
and energy savings. Our Global scope 1 and 2
per full-time employee has gone from 1.27 in
2013 to 1.16 in 2014, which is an overall decrease
of 9%. During the year there has been growth

GHG emissions*

Year 2012
UK only

Year 2013
UK only

Year 2013
Global

Year 2014
Global

Scope 1 – company car use, onsite gas,
combustion and refrigerant loss

204.00

233.00

478.25

452.15

Scope 2 – purchased electricity

969.00

976.00

1,629.68

1,849.89

Total (scope 1 and 2)

1,173.00

1,209.00

2,107.93

2,302.04

Total tonnes CO2e per FTE (Scope 1 and 2)

1.20

1.17

1.27

1.16

Scope 3 – air, rail, and personal car
business travel

2,128.00

2,233.00

3,588.06

4,906.32

Total (all scopes 1, 2 and 3)

3,301.00

3,442.00

5,695.99

7,208.36

Tonnes CO2e per FTE (all scopes 1, 2 and 3)

3.39

3.33

3.44

3.65

* Global emissions data have been collated and reported in line with Defra’s environmental reporting
guidelines and the requirements of the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013 on mandatory GHG reporting. This is the second year Hiscox is reporting its global GHG
data. Historical emissions data for 2012 relate to UK operations with 2013 and 2014 figures covering global
operations (including figures for DirectAsia in 2014 only). The data has been collected from all offices under
Hiscox’s direct operational control and the global GHG data has been independently verified.

Governance Hiscox Ltd Report and Accounts 2014

£0.9m donated
to charities.

Corporate responsibility
continued

of the Year at the Reactions Awards and Hiscox
USA was named A Top 100 Champion at the
Small Business Influencer Awards 2014.

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 has
instigated a ‘superb service’ ethos, developing
a greater understanding of individual brokers’
needs. Hiscox UK 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 investors
We have a policy of open and transparent
communication with our shareholders. Hiscox
reports both its half- and full-year results to
investors via a series of presentations, as well as
ensuring all relevant Group financial information
is available on the corporate website. Senior
management and key employees also regularly
meet investors and analysts throughout the year
to explain and answer questions on our financial
performance and business strategy.

Dealing with customers
Our ethos of outstanding customer service has
earned Hiscox a reputation as an insurer whose
word can be trusted, which sets us apart in our
industry. 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. In 2014, for the sixth
year in a row, Hiscox UK was awarded Best
Insurer by Start Your Business Magazine. Our
Hong Kong team for DirectAsia were awarded
Silver for Inbound Contact Centre for the Year.

The workplace
Culture
The Hiscox culture is underpinned by a set of core
values that determine a standard of behaviour
that we expect all our employees to follow. We
firmly believe that, through high standards of
conduct, we are more likely to achieve business
success and, therefore, create additional value
for shareholders. We aim to have the highest
standards of corporate governance while striving
to remain, in essence, a non-bureaucratic
organisation. An effective and firm system of
internal controls ensures that risks are managed
within acceptable limits, but not at the expense
of innovation or a speedy response. We believe
that we have the balance right and, furthermore,
that this is one of our greatest strengths. We
seek to follow the best practices in managing
our people and to be a fair and professional
employer. Hiscox aims to maintain a culture that

encourages employees to raise any concerns
relating to malpractice or wrongdoing without
threat of unfair treatment as a result. If an
employee has a serious concern relating
to the operation of the business, we have
a whistleblowing policy that enables that person
to confidentially raise their misgivings with Group
Compliance and Audit Director, Chief Executive
or Chairman. Employees also have the option
to raise a concern with the Chairman of the Audit
Committee. Hiscox also subscribes to Public
Concern at Work, which provides free legal
advice to any employee with a concern about
possible danger or malpractice in the workplace.

Hiscox wants to employ the best people and to
provide them with the means and the motivation
to excel. This is achieved with fair rewards and by
providing staff with an environment in which they
can enjoy their work and reach their full potential.
Hiscox recognises how important it is for
employees to maintain a healthy work/life
balance and it gives them the option of flexible
and home working wherever possible.

Equal opportunities
Hiscox is committed to providing equal
opportunities to all employees and potential
employees in all aspects of employment,
regardless of disability, sex, race, religion,
sexual inclination or background.

Rewards and benefits
We encourage our employees to share in the
Group’s success through performance-related
pay: bonus, savings-related share option
schemes and executive share option schemes.
We also offer competitive benefits packages,
which contain health and fitness perks and
opportunities for flexible working and career
breaks. We benchmark our salary packages
against the financial services industry as a whole
and against the Lloyd’s market specifically (where
applicable) and our salaries are also considered
on a country-by-country basis.

Training and development
Hiscox is committed to training and developing
our employees to help them maximise their
potential. Each permanent member of staff is
provided with a tailored personal development
programme. Their training and development
needs are reviewed twice a year, as well as their
performance against clearly set objectives.

Communication and participation
Employees are kept informed of business
developments through formal briefings, team
meetings, intranet bulletins, video conferences
and other more informal routes. Management
take these opportunities to listen to staff and
involve them in taking the business forward.

The community
Hiscox Bermuda continues to sponsor the
Women’s Resource Centre, providing support,
education and counselling for women and
children in the community, as well as the
Kaleidoscope Arts Foundation enrichment

Governance Hiscox Ltd Report and Accounts 2014

extra social and professional skills to help them
get a job at the end.

For more detail on
corporate responsibility
see hiscoxgroup.com

Supporting the arts, science and technology
Hiscox continues to support the arts, science
and technology, through its work with the Royal
Academy Schools, providing a bursary for two
second-year students; sponsorship of the
Collections exhibitions at the Whitechapel
Gallery and the Smiljan Radic´ design at the
Serpentine Gallery Pavilion. Hiscox supports
the City of London’s Sculpture in the City project,
designed to transform the local landscape with
unique and well-known pieces of modern
sculpture. Hiscox employees volunteered
to work with students from St Paul’s Way Trust
and other local schools to bring the sculptures
to life. Hiscox supports the Royal Institution (RI)
with a loan and corporate sponsorship. The RI
is the oldest independent research body in the
world, dedicated to connecting people with
the world of science for over 200 years. For
the fourth year running, Hiscox is title sponsor
of the Sunday Times Hiscox Tech Track 100,
charting the fastest growing private technology,
telecoms and digital media companies.

In the summer of 2014, Hiscox Germany was
awarded the Goldener Bulle by the publishing
house Finanzen Verlag. The team received
special mention for their contribution to art
and culture. Projects included ‘Add art’,
a scheme based in Hamburg, which
encourages companies to open their office
doors to the general public to present their
corporate collection, as well as ‘Kunstresidenz
Bad Gastein’ which encourages 14 young
contemporary artists to show their work during
a four-week public festival in Bad Gastein.

The Hiscox Foundation
The Hiscox Foundation is a charity, funded
by an annual contribution from the Group,
which gives priority to any charity in which
a member of staff is involved. In 2014, Hiscox
supported a group of employees in raising
£50,000 for MIND. The Foundation contributed
£27,500 during the year to the fundraising totals
of Hiscox employees and continues to support
the Humanitarian Aid Relief Trust (HART) and
Richard House Children’s Hospice. HART helps
some of the poorest and most abused people
in the world.

programme for students at Prospect Primary
School. In 2014, Hiscox staff provided the
funding necessary for weekly riding lessons
for one young student through the Riding for
the Disabled programme at Windreach, and
the Education and Recreation programme
for sufferers of Alzheimer’s and Dementia.
Hiscox Bermuda continues to support SCARS
(Saving Children and Revealing Secrets) which
trains people who work with children at risk
to prevent, recognise and react responsively
to those who suffer from sexual abuse.
Donations have been made to the Women’s
Resource Centre for food vouchers for women
and families in need, and to the Eliza Dolittle
Society and the Lady Cubitt Compassionate
Association for their Medipendent programme
for seniors.

Hiscox USA is dedicated to serving charities
that aid and improve education, medical science,
advancement of the arts and culture, and provide
services to disadvantaged and vulnerable
members of society. In 2014, the Hiscox USA
Foundation matched donations and pledged
money for hours volunteered by Hiscox
employees with partner charities throughout
the US – The Drake House in Atlanta, Friends of
Karen in New York, the Ronald McDonald House
in Chicago, Project Angel Food in LA and Food
Runners in San Francisco. The Foundation
continues to support the Parris foundation, an
organisation dedicated to helping disenfranchised
communities by teaching children about science,
technology, engineering and mathematics.

In London, staff members continue to support
pupils at the Elizabeth Selby Infants School in
Tower Hamlets through the Reading Partners’
Scheme via the Lloyd’s Community Programme.
Staff regularly volunteer in the gardens of
Richard House Children’s Hospice and in 2014
raised just under £2,000 by racing the 21.6 miles
of the Thames as part of the Great London River
race. In Colchester, staff raised over £25,000
for charities such as the Essex & Herts Air
Ambulance Trust, East Anglia Children’s Hospice,
MS-UK and the Alzheimer’s Society. Staff raised
over £6,000 through their participation in the
London Marathon and a cycle ride from
Colchester to the York office. Hiscox UK
supports Action for AT, helping speed the
process of identifying cures for Ataxia-
Telangiectasia as well as treatments that delay
or prevent the disabling effects of childhood
conditions. Since opening the office in York, staff
have helped raise around £5,000 for St Leonards
Hospital via numerous activities such as the
Yorkshire Marathon and the annual Dragon
Boat Race.

In the summer of 2014, Hiscox worked with
The Brokerage Citylink, participating for the first
time in The City of London Business Traineeship
Programme, which offered two young students
from inner London the chance to work in the
business for eight weeks. The scheme helps
inner-city school leavers gain experience
of working in a big City firm, as well as to learn

Governance Hiscox Ltd Report and Accounts 2014

Insurance carriers

The chart below shows the gross premiums
written of Syndicate 33 for the last 13 years.

Syndicate 33
Hiscox can trace its origins in the Lloyd’s Market
to 1901. Today, Hiscox Syndicate 33 is one of
the largest composite syndicates at Lloyd’s,
and has an A.M. Best syndicate rating of A
(Excellent). Syndicate 33 underwrites a mixture
of reinsurance, property and energy business,
as well as a range of specialty lines including
contingency and terrorism risks among others.
Syndicate 33 trades through the Lloyd’s
worldwide licences and ratings. It also benefits
from the Lloyd’s brand. Lloyd’s has an A
(Excellent) rating from A.M. Best, an A+ (Strong)
from Standard & Poor’s, and an AA- (Very strong)
rating from Fitch.

The geographical and currency splits are shown
on page 37. One of the main advantages of trading
through Lloyd’s is the considerably lower capital
ratios that are available due to the diversification
of business written in Syndicate 33 and in Lloyd’s
as a whole. The size of the Syndicate is increased
or reduced according to the strength of the
insurance environment in its main classes.
At present, Hiscox owns approximately 72.5%
of the Syndicate, with the remainder owned by
third-party Lloyd’s Names. Hiscox receives a fee
and a profit commission of approximately 20%
of profit on the element it does not own. For the
2015 year of account, Syndicate 33’s capacity
has remained at £1 billion.

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 FTC
(fire, theft and collision), auto extended
warranty, E&O, property, construction,
technology and media, healthcare and aviation.
The diversification of the Syndicate from both
an exposure and geographical perspective
means the Syndicate is well balanced to grow
in a controlled way. Total underwriting capacity
of Syndicate 3624 has increased to £350 million
for the 2015 year of account.

Syndicate 6104
Syndicate 6104 was set up under a limited
tenancy agreement for the 2008 year of account.
It is wholly backed by external Names and takes
a pure year of account quota share of Syndicate
33’s property catastrophe reinsurance account.
The arrangement has been extended through
to the 2015 year of account and Syndicate 6104’s
capacity was decreased to £65 million, from
£72 million. Syndicate 6104 pays an overrider
and profit commission to Syndicate 33.

Hiscox Insurance Company
Hiscox purchased Hiscox Insurance Company
Limited in 1996, in keeping with its aim of
diversifying its activities outside of Lloyd’s and
writing a focused book of regional specialist
risks. The Group has reshaped the Company’s
original portfolio to concentrate on high-value
household and smaller premium commercial

Syndicate 33
Capacity and Hiscox ownership (£m)

Capacity
Hiscox Ltd ownership
Qualifying quota share*

Syndicate 33
Gross premiums written (£m)

1,200

1,000

800

600

400

200

5
2

6
4
8

8
4

2
4
8

4
7
7

7
8

4
7
2 8
3
8

7
4
5

0
5
5

4
0
6

4
3

0
0
7

5
3
6

7
5

0
5
7

4
4
5

8
0
5

1
0
2

4
0
5

7
7
2

9
3

0
5
9

6
6

0
5
9

7
5

0
0
0
1,

7
3

0
0
9

5
2
7

2
7

0
0
0
1,

5
6

0
0
0
,
1

5
2
7

9
8
3 6
5
6

9
8
6

1,200

1,000

800

722

1,024

994

1,034

827 844 830

885

872

825 823

832

786

600

400

200

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

* Quota share reinsurance policies, which Lloyd’s allows in certain circumstances, that enable a syndicate to write gross premium

in excess of its capacity.

Governance Hiscox Ltd Report and Accounts 2014

Syndicate 33
Gross premiums written geographical split (%)

9% Asia

53% North America

2% UK

31% Rest of world

5% Europe

Syndicate 33
Gross premiums written currency split (%)

77% USD

8% EUR

12% GBP

3% CAD

Governance Hiscox Ltd Report and Accounts 2014

Hiscox Bermuda has an A.M. Best rating of A
(Excellent) and an A+ (Strong) rating from Fitch.
At the end of 2014, net assets exceeded $895
million (2013: $945 million).

Hiscox Insurance Company Inc.
Hiscox Insurance Company Inc. was acquired
by the Group in 2007 through the purchase of
the then parent holding company ALTOHA, Inc.
Hiscox Insurance Company Inc. is based in
Chicago, Illinois and is an admitted insurance
company with licences in all 50 US states and the
District of Columbia. Its main business is property
and liability cover sold through insurance brokers.
In November 2010, the Company launched
a direct commercial business. Hiscox Insurance
Company Inc. is rated A (Excellent) by A.M. Best.
At the end of 2014, net assets exceeded
$60 million (2012: $59 million).

DirectAsia
In March 2014, the Group acquired Direct Asia
Insurance (Holdings) Pte Ltd (‘DirectAsia’).
DirectAsia underwrites through subsidiaries
in Singapore and Hong Kong, and an agency
in Thailand. Its primary business is motor
insurance, with ancillary lines in travel, personal
accident and healthcare. At the end of 2014,
the insurance company subsidiaries have
net assets exceeding SGD$16 million and
HK$134 million.

Insurance carriers
continued

business. Hiscox Insurance Company Limited
has licences throughout Europe. It is the primary
insurance vehicle used by the UK and mainland
Europe offices for their business. The success
of the portfolio can be seen in the chart below
right. Hiscox Insurance Company Limited has
achieved average compound growth in gross
premiums written of 11.9% from 1997 to 2014,
despite discontinuing almost all of its original
business. It has also significantly improved its
combined ratio.

Hiscox Insurance Company Limited has an
A.M. Best rating of A (Excellent), a Standard
& Poor’s rating of A (Strong) and an A+ (Strong)
rating from Fitch. At the end of 2014, net assets
exceeded £243 million (2013: £250 million).

Hiscox Insurance Company (Guernsey)
Formed by Hiscox in 1998, Hiscox Insurance
Company (Guernsey) Limited writes mainly
kidnap and ransom and fine art insurance.
Hiscox Guernsey has an A.M. Best rating
of A (Excellent) and an A+ (Strong) rating from
Fitch. At the end of 2014, net assets exceeded
$8 million (2013: $9 million).

Hiscox Insurance Company (Bermuda)
Formed by Hiscox in late 2005, Hiscox Insurance
Company (Bermuda) Limited was set up as
an expansion of the reinsurance operations of
Hiscox and as an internal reinsurer of the Group.

Hiscox Insurance Company (Bermuda) Limited
Gross premiums written ($m) external business

350

300

250

200

150

100

297

299

263

271

250

212

171

2006

2007

2008

2009

2010

2011

2012

2013

2014

Governance Hiscox Ltd Report and Accounts 2014

Hiscox Insurance Company Limited
Gross premiums written geographical split by origin (%)

Belgium

Netherlands

Other Europe

Germany

11%

France

72%

Hiscox Insurance Company Limited
Gross premiums written (£m)

600

500

400

300

200

127

100

509

465

419

404

381

325

284

231

233

219

242

176

164

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Governance Hiscox Ltd Report and Accounts 2014

Board of Directors

Chairman

Executive Directors

Robert Simon Childs
Non Executive
Chairman (Aged 63)
26 February 2013*

Robert Childs joined
Hiscox in 1986,
served as the Active
Underwriter of
the Hiscox Lloyd’s
Syndicate 33 between
1993 and 2005, and
was the Group’s Chief
Underwriting Officer
until February 2013.
In 2012 Robert joined
the Council of Lloyd’s.
Robert was Chairman
of the Lloyd’s Market
Association from
January 2003 to May
2005. He is a Trustee
of Enham (a charity
for the disabled),
former Chairman of
the Advisory Board
of the School of
Management of Royal
Holloway University
of London, and
Chairman of The
Bermuda Society.

Bronislaw Edmund
Masojada
Chief Executive
(Aged 53)
12 December 2006*

Stuart John Bridges
Chief Financial Officer
(Aged 54)
12 December 2006*

Richard Colin Watson
Chief Underwriting
Officer (Aged 51)
16 May 2013*

Stuart Bridges joined
Hiscox in 1999. He is a
Chartered Accountant
and has held posts in
various financial service
companies in the UK
and US, including
Henderson Global
Investors. During the
year he was a member
of the Prudential
Financial and Taxation
Committee of the
Association of British
Insurers and a member
of the audit committee
of the Institute of
Chartered Accountants
in England and Wales.
He is a Non Executive
Director of Caledonia
Investments plc.

Bronek Masojada
joined Hiscox in 1993.
From 1989 to 1993
he was employed by
McKinsey and Co.
Bronek served as
a Deputy Chairman
of Lloyd’s from 2001
to 2007, was a Non
Executive Director
of Ins-sure Holdings
Limited from 2002 to
2006 and Chairman of
the Lloyd’s Tercentenary
Research Foundation
from 2008 to 2014. He
is a past President of
The Insurance Institute
of London and
immediate Past Master
of The Worshipful
Company of Insurers.
He is currently a
member of the Board
of the Association
of British Insurers.

Richard Watson joined
Hiscox in 1986, having
previously worked for
Sedgwick’s and Hogg
Robinson. In 2005,
he was appointed
Managing Director of
Hiscox Global Markets,
the largest division
of Hiscox by premium
income, and was
the Underwriter
of Syndicate 33 from
2006 to 2009. In 2009,
Richard moved to
New York and served
as the Chief Executive
Officer for Hiscox USA
for three years. He
returned to London in
2012 and became Chief
Underwriting Officer for
the Hiscox Group. He
is a Non Executive
Director of White
Oak Underwriting
Agency Limited.

Independent Non
Executive Directors

Caroline Foulger
Independent Non
Executive Director and
Chairman of the Risk
Committee (Aged 54)
01 January 2013*

Caroline Foulger joined
Hiscox in January 2013
having retired from
a partnership at PwC
on December 31, 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
Accountants of
Bermuda and a
member of the Institute
of Directors. Caroline
is a Non Executive
Director of the Bank
of N.T.Butterfield &
Son Limited.

Governance Hiscox Ltd Report and Accounts 2014

Secretary
Jeremy Pinchin

Registered office
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda

Registered number
38877

Auditors
KPMG Audit Limited
Crown House
4 Par-la-Ville Road
Hamilton HM 08
Bermuda

Bankers
HSBC Bank Bermuda
Limited
6 Front Street
Hamilton HM 11
Bermuda

Registrars
Capita Registrars
(Jersey)
Limited
PO Box 532
St Helier
Jersey JE4 5UW

Solicitors
Appleby
Canon’s Court
22 Victoria Street
PO Box HM 1179
Hamilton
HMEX Bermuda

Stockbrokers
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
United Kingdom

Member of the
Audit Committee

Member of the
Conflicts Committee

Member of the
Remuneration
Committee

Member of the
Nominations
Committee

Chairman of
Committee is
highlighted in solid.

*Effective date of
Hiscox Ltd contract

Richard Gillingwater
Senior Independent
Director and Chairman
of the Remuneration
Committee (Aged 58)
18 November 2010*

Daniel Maurice Healy
Independent Non
Executive Director and
Chairman of the Audit
Committee (Aged 72)
11 October 2006*

Ernst Robert Jansen
Independent Non
Executive Director
(Aged 66)
20 November 2008*

Daniel Healy joined
Hiscox in 2006. He was
appointed Executive
Vice President and
Chief Financial
Officer of North Fork
Bancorporation in 1992
and a member of its
Board of Directors in
2000. He was a partner
with KPMG LLP before
joining North Fork.
He was the Managing
Partner of the San
José, California and
Long Island, New York
offices and held other
positions in that firm
during his tenure. He
holds a Board position
at Bond Street Holdings.

Ernst Jansen joined
Hiscox in 2008. He
held several Managing
Director positions in
the European chemical
industry between 1980
and 1990. He was an
Executive Director
then Vice Chairman
of Eureko B.V. (now
Achmea BV) between
1992 and 2007 and
following retirement he
became an adviser to
the Executive Board
and is director of two
investment vehicles
of Achmea.

Richard Gillingwater
joined Hiscox in
December 2010.
He is the Chairman
of Henderson Group
plc. He spent a decade
at Kleinwort Benson,
before moving to and
eventually becoming
joint Head of Corporate
Finance for BZW,
a division of Barclays
Bank. When that
became Credit Suisse
First Boston, he
became Chairman
of European Investment
Banking. In 2003
he became Chief
Executive and later
Chairman of the
Shareholder Executive.
In 2007 he became
Dean of Cass Business
School, retiring at the
end of 2012. Richard
is Deputy Chairman
of SSE plc and a Non
Executive Director
of Helical Bar plc,
and Wm Morrison
Supermarkets PLC.

Dr James Austin
Charles King
Independent Non
Executive Director
and Chairman of the
Conflicts Committee
(Aged 76)
11 October 2006*

Dr James King joined
Hiscox in 2006. He was
Chairman of the Bank
of N.T. Butterfield & Son
Limited until April 2007
and the Establishment
Investment Trust, a UK
listed company, until
August 2011. Dr King
retired as Chairman
of Keytech Limited
and The Bermuda
Telephone Company
Ltd in July 2013. He
currently chairs Grotto
Bay Properties Ltd and
is a Director of Castle
Harbour Limited.
Dr King is a fellow of
the Royal College of
Surgeons, Canada and
the American College
of Surgeons.

Robert McMillan
Independent Non
Executive Director
(Aged 62)
01 December 2010*

Andrea Sarah Rosen
Independent Non
Executive Director
(Aged 60)
11 October 2006*

Gunnar Stokholm
Independent Non
Executive Director
(Aged 65)
20 November 2008*

Gunnar Stokholm
joined Hiscox in 2008.
He worked for Zurich
Financial Services
between 1995 and
2004, in a number
of roles including CEO
for Australia and Asian
markets. He spent the
majority of his career at
Topdanmark Insurance
and held the position of
Managing Director of
Topdanmark Holding
from 1986 to 1995.

Andrea Rosen joined
the Hiscox Ltd Board in
2006. She is a Director
of Alberta Investment
Management
Corporation, Emera
Inc. and Manulife
Financial Corporation.
She was previously
Vice Chair of TD
Financial Group and
President of TD
Canada Trust from
2002 to 2005. Prior to
this she held various
positions within the TD
Financial Group from
1994 to 2002, including
Executive Vice
President of TD
Commercial Banking
and Vice Chair of TD
Securities. She was
Vice President of Varity
Corporation from
1991 to 1994 and held
various positions with
Wood Gundy Inc. from
1981 to 1990.

Robert (Bob) McMillan
joined the Hiscox Ltd
Board in December
2010. He spent
24 years with the
Progressive Insurance
Corporation where
he served in various
positions including
National Director of
Product Development,
then Claims before
becoming National
Director of Marketing.
He led Progressive’s
initiatives in multi-
channel distribution,
financial responsibility-
based rating, and
immediate response
claims. He has received
two United States
patents related to
motor insurance
pricing. He has lectured
on business innovation
at the University of
Virginia’s Darden
School of Business and
at the Harvard Business
School. He has been a
Non Executive Director
of Hiscox Inc. since
March 2007.

Governance Hiscox Ltd Report and Accounts 2014

Hiscox Partners

‘Hiscox Partner’ is an honorary title
given to employees who make significant
contributions to the development and
profitability of the Group.

The Hiscox Partnership numbers up to 5%
of the total staff. A Partner’s contribution can
be in a variety of ways: through the leadership
or development of an important area or line
of business, or through technical and
operational expertise that benefits the
business significantly. Most have taken a risk
in their careers and many have made personal
sacrifices for Hiscox, whether it be moving into
an unproven or new area for the Group or
relocating themselves and their families. The
Partners are the leaders of our business and
individually and collectively influence our
Group’s development and success.

Along with the opportunity to shape the future
of the Group comes responsibility. We expect
Hiscox Partners to act as proprietors of the
business, bringing attention to areas where
they feel that Hiscox is not pursuing the correct
course – not only in top-level strategy, but
also day-to-day business behaviour in every
area. Partners are expected to encourage
and exemplify the Hiscox values and lead at
all levels.

Name

David Astor

David Bailey

Reeva Bakhshi

Rory Barker

Helen Bennett

Neil Bolton

Sasa Brcerevic

Stuart Bridges*

Amanda Brown*

Steve Camm

Rob Caton

Robert Childs

Robert Davies

Job title

Chief Investment Officer

Finance Director, Hiscox UK and Europe

Chief Financial Officer, Hiscox Re

Group Reinsurance Manager

HR Director, Hiscox UK and Europe

Head of Casualty, Hiscox London Market

Chief Operating Officer, Hiscox London Market

Chief Financial Officer

Group Human Resources Director

Managing Director, Hiscox Guernsey

Head of Catastrophe Modelling

Chairman

Global Head, Kidnap and Ransom

Pierre-Olivier Desaulle*

Managing Director, Hiscox Europe

Robert Dietrich

Ross Dingwall

Charles Dupplin

Guy Ellis

Managing Director, Hiscox Germany

Managing Director, Hiscox UK and Ireland Broker

Director of Mergers and Acquisitions

Head of Marine and Aviation Reinsurance, Hiscox Re

Stéphane Flaquet

Group IT Director

Bob Gadaleta

Nicole Goodwin

Peter Gower

Gary Head

Southeast Regional Executive, Hiscox USA

Head of US Claims

Marine Liability Line Underwriter, Hiscox London Market

Chief Underwriting Officer, Hiscox USA

David Henderson

National Sales Leader, Hiscox UK

Robert Hiscox

Honorary President

Michael Jedraszak

Director of Insurance Linked Securities, Hiscox Re

Jason Jones

Suzanne Kemble

Kevin Kerridge

Ian King

Michael Krefta

Steve Langan*

Paul Lawrence*

Ben Love

Ian Martin

Group Compliance and Audit Director

Global Head, Media and Entertainment

Head of Direct, Hiscox USA

Reinsurance Underwriter, Hiscox London Market

Chief Underwriting Officer, Hiscox Re and Joint Active Underwriter,
Syndicate 33

CEO Hiscox Insurance Company, Chief Marketing Officer and
CEO DirectAsia Group

Chief Underwriting Officer, Hiscox London Market and
Joint Active Underwriter, Syndicate 33

Head of Business Development, Hiscox Re

Finance Director, Hiscox London Market

Bronek Masojada*

Chief Executive

Stuart Middleton

Chief Underwriting Officer, Hiscox Europe

Eric Mignot

Alan Millard

Simon Morgan

Joanne Musselle

Kylie O’Connor

Jeremy Pinchin*

Managing Director, Hiscox France

Chief Operating Officer, Hiscox UK

Divisional Head of Property, Hiscox London Market

Chief Underwriting Officer, Hiscox UK

Head of Communications

Chief Executive Officer, Hiscox Re, Group Company Secretary
and Group Claims Director

Derrick Potton

Head of Professions and Specialty Commercial, Hiscox UK

Steve Quick

Tony Rai

Robert Read

Global Head, Broker Relations

Head of London Market Claims

Global Head of Art and Private Clients

Joanne Richardson

Practice Leader, Media and Entertainment, Hiscox USA

Adam Rushin

Brett Sadoff

Kalpana Shah

David Slevin

Damien Smith

Bevis Tetlow

Bob Thaker

Ian Thompson

Director of Operations, Hiscox London Market

Head of Field, Hiscox USA

Chief Actuary

Divisional Head Specialty, Hiscox London Market

Director of Underwriting, Hiscox Bermuda, Hiscox Re

Head of North American Underwriting Bermuda, Hiscox Re

Managing Director, DirectAsia

Head of Casualty, Bermuda

Nicholas Thomson

Retired Chief Underwriting Officer

Andrew Underwood

Group Head of Underwriting Management and Review

Ben Walter*

Gavin Watson

Richard Watson*

Simon Williams

* Hiscox Executive Committee

Chief Executive Officer, Hiscox USA

Chief Financial Officer, Hiscox USA

Chief Underwriting Officer

Head of Marine and Energy, Hiscox London Market

Governance Hiscox Ltd Report and Accounts 2014

Corporate governance

Overview and basis of reporting
Hiscox Ltd (‘the Company’) is the Bermuda
incorporated holding company for the Group.
The Company has a premium listing on the
London Stock Exchange. The corporate
governance framework for the Company
is derived from its constitution together with
Bermuda Companies Act legislation.

The Listing Rules require the Company to report
against the UK Corporate Governance Code
published in September 2012 (the Code). During
2014, and up to the date of this report and
accounts, the Group has complied with the
provisions of the Code in all material respects.
A revised 2014 UK Corporate Governance Code
was published in September 2014 and the Group
intends to report against this version for the year
ending 31 December 2015.

The Board of Directors
As at the date of this Report, the Board comprises
the Non Executive Chairman, three Executive
Directors, and eight independent Non Executive
Directors, including a Senior Independent
Director. Biographical details for each member
of the Board are provided on pages 40 to 41. The
Nominations Committee monitors the composition
of the Board and considers the diversity, balance
of skills, experience, independence and
knowledge of the Board to ensure that it remains
appropriate. The composition of the Board was
also reviewed as part of the external Board
evaluation described on page 45.

There is a formal induction process for new
Directors. The needs of a new Director joining
the Board are assessed and appropriate training
arranged. Existing Directors are provided with
the opportunity to attend training sessions.
Directors received briefings on solvency
requirements during the year. Directors’ training
requirements were also assessed as part of the
external Board evaluation described on page 45.

The roles and activities of the Chairman and
Chief Executive are distinct and separate. The
Chairman is responsible for running an effective
Board including oversight of corporate governance
and overall strategy and meets periodically with
the Senior Independent Director. The Chief
Executive has responsibility for running the
Group’s business.

In accordance with the Code those Directors
who are not retiring submit themselves for re-
appointment, at the Annual General Meeting
of the Company. The external commitments
of the Chairman and the Executive Directors
are disclosed in their profiles on page 40. Non
Executive Directors are appointed for a specified
term. Their terms of appointment state that their

continuation in office is contingent upon their
satisfactory performance and prescribe the
time commitment required of them in order to
discharge their duties. The terms also state that
appropriate preparation time is required ahead
of each meeting. A review of the remuneration
of the Non Executive Directors, which does not
include performance-related elements, was
carried out in respect of the 2014 financial year
and no changes were required.

Whilst 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.
Daniel Healy, Dr James King and Andrea Rosen
were all appointed to the Board in 2006. In
accordance with the criteria set out in the
Code these Directors potentially cease to be
independent if they continue to serve beyond nine
years. Accordingly, Dr King will retire from the
Board and not seek re-appointment at the 2015
Annual General Meeting. Andrea Rosen and
Daniel Healy will both leave the Board on
reaching nine years’ service in October 2015.
In addition, Richard Gillingwater, who joined
the Board in 2010, will not seek re-appointment
at the 2015 Annual General Meeting. Details
of the Board succession planning arrangements
are set out below in the section describing
the Nominations Committee.

All Directors are entitled to seek independent
professional advice at the Company’s expense.
A copy of any such advice would be provided
to the Company Secretary who would then
circulate it to all Directors. The appointment and
removal of the Company Secretary is a matter
for the Board as a whole.

The Board meets at least four times a year
and operates within established Terms of
Reference. It is supplied with appropriate and
timely information to enable it to review business
strategy, trading performance, business risks
and opportunities. As part of the external
Board evaluation Directors were asked about
the information provided to the Board and
the conclusions are referred to in the section
headed ‘performance evaluation’ on page 45.

The Board of Hiscox Ltd met four times
during 2014. The Code does not require the
independence or otherwise of a Non Executive
Chairman to be considered subsequent to their
appointment. The Board considers all other
Non Executive Directors to be independent
within the meaning of the Code as there are
no relationships or circumstances which
would interfere with the exercise of their
independent judgement.

The Board’s Terms of Reference include
a Schedule of Matters Reserved for Board

Governance Hiscox Ltd Report and Accounts 2014

Corporate governance
continued

Decision, a copy of which can be found on
the Group’s website: www.hiscoxgroup.com.

Aside from the opportunity which the Non
Executive Directors have to challenge and
contribute to the development of strategy in
the regular Board meetings, the Non Executive
Directors also attended the annual Hiscox
Partners’ meeting. The Board retains ultimate
authority for high-level strategic and management
decisions including: setting Group strategy,
approving significant mergers or acquisitions,
approving the financial statements, declaration
of the interim dividend and recommendation
for the final dividend, approving Group business
plans and budgets, approving major new areas
of business, approving capital raising, approving
any bonus issues or rights issues of share capital,
setting Group investment guidelines, approving
the Directors’ remuneration, approving significant
expenditure or projects, and approving the issue
of share options. The Board has appointed an
Executive Committee (described on page 45)
and authorised the boards of the trading entities
and business divisions to manage their respective
operational affairs, to the extent that Board or
Executive Committee approval is not required.

The Board’s Committees
The Board has appointed and authorised
a number of committees to manage aspects
of the Group’s affairs including financial
reporting, internal control and risk management.
Each committee operates within established
written terms of reference and each committee
Chairman reports directly to the Board.

The Audit Committee
The Audit Committee of Hiscox Ltd is chaired
by Daniel Healy and in addition comprises
Caroline Foulger, Richard Gillingwater, Ernst
Jansen, Dr James King, Bob McMillan, Andrea
Rosen and Gunnar Stokholm. The Chairman
of the Committee and Caroline Foulger are
considered by the Board to have recent and
relevant financial experience. The Committee
operates according to Terms of Reference
published on the Group’s website. The
Committee meets at least three times a year
to assist the Board on matters of financial
reporting, risk management and internal control.
The Committee monitors the scope, results
and cost effectiveness of the internal and
external audit functions, the independence
and objectivity of the external auditors, and the
nature and extent of non-audit work undertaken
by the external auditors together with the level
of related fees.

The Board has accepted the advice of the
Committee with regard to the requirement for
FTSE 350 companies to put the external audit

out to tender and details are set out in the Audit
Committee report on page 48.

The internal and external auditors have
unrestricted access to the Committee. All non-
audit work undertaken by the Group’s external
auditors with fees greater than £50,000 must
be pre-approved by the Committee. KPMG has
confirmed to the Committee that in its opinion
it remains independent. The Committee is
satisfied that this is the case. In respect of the
2014 financial year the Committee reported
to the Board on how it had discharged its
responsibilities and provided advice to the Board
on how the Annual Report and Accounts were
fair, balanced and understandable and provided
the information necessary for shareholders
to assess the Company’s business model and
strategy. Further information on the activities
of the Committee is included in the Audit
Committee report on page 47.

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 Nominations Committee
The Nominations Committee comprises Robert
Childs, Caroline Foulger, Richard Gillingwater,
Daniel Healy, Ernst Jansen, Dr James King, Bob
McMillan, Andrea Rosen and Gunnar Stokholm.
It is chaired by Robert Childs. It operates
according to Terms of Reference published on
the Group’s website and meets as and when
the Chairman determines appropriate but at
least once a year.

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

Governance Hiscox Ltd Report and Accounts 2014

Committee in the search briefs were aimed
at balancing the existing skills, experience,
independence and knowledge on the Board.
Each candidate was interviewed by the
Chairman, the Chief Executive and the Group
Human Resources Director. As a result of the
search a shortlist was produced and from that
shortlist two candidates, Anne MacDonald
and Lynn Carter, were nominated by the
Committee. In February 2015 the Board
agreed to recommend their appointment
to shareholders and a separate resolution
for the appointment of each of them will
be put to the 2015 Annual General Meeting.
Biographical details of both prospective Non
Executive Directors and the reasons why the
Board believe they should be appointed will
be set out in the circular which will accompany
the notice of Annual General Meeting. The
appointment of both candidates would
increase the level of gender diversity on
the Board.

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.

The Investment Committee
The Investment Committee comprises
Robert Childs, Caroline Foulger, Richard
Gillingwater, Daniel Healy, Ernst Jansen,
Dr James King, Bob McMillan, Andrea Rosen,
Gunnar Stokholm, the Chief Executive and
the Chief Financial Officer and is chaired by
Robert Childs. The Investment Committee
has oversight of the Group’s investments.

The Conflicts Committee
The Group has a Conflicts Committee which
is chaired by Dr James King and comprises
Caroline Foulger, Richard Gillingwater, Daniel
Healy, Ernst Jansen, Dr James King, Bob
McMillan, Andrea Rosen, and Gunnar Stokholm.
It meets as and when required. Conflicts of
interest may arise from time to time because
Syndicate 33, Syndicate 3624 and Syndicate
6104 are managed by a Hiscox-owned Lloyd’s
Managing Agency. 27.5% of the Names on
Syndicate 33 are third-parties and 72.5%
of Syndicate 33 is owned by a Hiscox Group
company. 100% of Syndicate 3624 is owned
by a Hiscox Group company. 100% of Syndicate
6104 is owned by third-parties. The Committee
serves to protect the interests of the third-party
Syndicate Names. There is also potential for
similar conflicts to arise as a result of the Group’s
insurance linked securities (ILS) activity. Should
a potential conflict of interest arise, there is
a formal procedure to refer the matter to
this Committee.

The Risk Committee
The Risk Committee of the Board oversees
the risk management framework and advises
the Board on how best to manage the Group’s
risk profile. The Committee normally meets
three times per year. The Committee comprises
Robert Childs, Caroline Foulger, Richard
Gillingwater, Daniel Healy, Ernst Jansen,
Dr James King, Bob McMillan, Andrea Rosen
and Gunnar Stokholm. It is chaired by Caroline
Foulger. The risk management framework
is described in the risk management section
on pages 27 to 32.

The Executive Committee
The Executive Committee was established
as a committee of the Board in February 2015.
It is comprised of senior executives as listed
on page 42 and will normally meet every six
weeks. It will make recommendations to the
Board on those matters referred to it, and
approve various matters (some of which may
also require Board approval). The Commitee will
approve senior appointments and remuneration
outside the scope of the Remuneration
Committee or Nominations Committee, approve
operational policy for the Group, take decisions
on annual budgets and business plans, mergers
and acquisitions, consider significant issues
raised by management and approve exceptional
spend within the limits established by the Board.
Below this there are local management teams
that drive the local businesses.

Performance evaluation
During the year, in line with the Code
requirement, the Company undertook an
evaluation of the Board and its Committees
which was externally facilitated by Mr Geoffrey
Shepheard of ICSA Board Evaluation, a division
of the Institute of Chartered Secretaries and
Administrators. The last external evaluation was
carried out in 2011. Mr Shepheard has no other
connection to the Group. The areas covered
by the evaluation were Board responsibilities,
oversight, Board meetings, support for the
Board, Board composition, the Board working
together (as a unit) and the outcomes
and achievements.

The external evaluation involved one-to-one
interviews with the Chairman and individual
Directors.

The results of the evaluation were positive
and it was concluded that the Board and its
Committees continue to be effective. It was
found that the Board has a clear understanding
of its role, discussion at meetings is open and
rigorous and there is enough time to discuss
strategic issues. A written report of the
evaluation was produced by the independent
evaluator and circulated to all Directors. The key
themes and the areas for further development
were then discussed at a Board meeting in
February 2015.

In addition to the external evaluation of the
Board, the Senior Independent Director met

Governance Hiscox Ltd Report and Accounts 2014

the Company’s assets, and for reviewing
its effectiveness.

The risk management systems are set out in
detail in the risk management report on pages
27 to 32.

The Board has reviewed the effectiveness
of its risk management and internal controls
during 2014, including financial, operational and
compliance controls. The Board confirms there
is an ongoing process for identifying, evaluating
and managing the significant risks faced by the
Company, which has been in place throughout
the year and up to the date of approval of the
Annual Report and Accounts and accords with
the guidance in the document ‘Internal Control’:
Revised Guidance for Directors on the
Combined Code.

The Company is reviewing the ‘Guidance
on Risk Management, Internal Control and
Related Financial and Business Reporting’
published by the Financial Reporting Council
in September 2014, and considering whether
any enhancements can be made to its
present processes.

The head of each business area is responsible
for implementing the risk management
programme in their area of operations. The Risk
function collates risk management information
and works with the risk committees to monitor
significant risks and movements, and review
the relevant internal controls. The Group also
has an internal audit function which has direct
access to the Audit Committee and reports
to each meeting.

The Board acknowledges that it is neither
possible, nor desirable, to eliminate risk
completely. The system is designed to manage
rather than eliminate the risk of failure to achieve
business objectives, and can only provide
reasonable and not absolute assurance against
material misstatement or loss. The constant
aim is to be fully aware of the risks to which
the business is exposed and to manage these
risks to acceptable levels.

Corporate governance
continued

with the other Non Executives without the
Chairman present to appraise the performance
of the Chairman. During the year, the Non
Executives also periodically met without the
Executive Directors to discuss a wide range of
issues concerning the Company. The Chairman
held one-to-one meetings with each of the Non
Executive Directors during the year to review
their performance including their attendance,
contribution and preparation for meetings and
to discuss any training and development needs.
No issues arose which would prevent the
Chairman from recommending the re-
appointment of a Non Executive Director. The
Chairman met with the Chief Executive and the
Chief Executive met with each of the Executive
Directors, to discuss their performance over
the year and to set targets for the year ahead.

Shareholder communications
During the year Richard Gillingwater, Chairman
of the Remuneration Committee and Senior
Independent Director, led an engagement
process with the largest shareholders on
proposed changes to the Company’s
remuneration practices in relation to its
Executive Directors. This had led to restrictions
being applied to the Company’s remuneration
policy. Further details are set out on page 49.

The Executive Directors communicate and
meet directly with shareholders and analysts
throughout each year, and do not limit this
to the period following the release of financial
results or other significant announcements.
The Executive Director most recently appointed
to the Board, Richard Watson, attended
meetings with shareholders during the year.
All Directors attended the Annual General
Meeting in 2014. The Company commissions
independent research on feedback from
shareholders and analysts on a regular basis
following the Company’s results announcements.
This research, together with the analysts’
research notes, are copied to the Non Executive
Directors in full. The Chairman attends a number
of meetings with shareholders as well as
speaking at the analysts’ presentations.

In addition, any specific items covered in letters
received from major shareholders are reported
to the Board. Major shareholders are invited to
request meetings with the Senior Independent
Director and/or the other Non Executive
Directors. An alert service is available on
www.hiscoxgroup.com to notify any stakeholder
of new stock exchange announcements.

Accountability and internal control
The Directors are responsible for maintaining
a sound system of internal control to safeguard
the investment made by shareholders and

Governance Hiscox Ltd Report and Accounts 2014

Audit Committee report

Financial reporting
The primary role of the Audit Committee
in relation to financial reporting is to monitor
the integrity of the financial statements of
the Company and any formal announcements
relating to the Company’s financial performance
and review significant financial reporting
judgements contained in them. In carrying
out its role the Committee reviewed with both
management and the external auditor the
appropriateness of the half-year and annual
financial statements, concentrating on,
amongst other matters:
– the quality and acceptability of

accounting policies and practices;

– the clarity of the disclosures and

compliance with financial reporting
standards and relevant financial and
governance reporting requirements;

– material areas in which significant

judgements have been applied or there
has been discussion with the external
auditor; and

– any correspondence from third-parties
in relation to our financial reporting.

To aid the review, the Committee considered
the report of the key judgements in the financial
statements from the Chief Financial Officer
as well as reports from the external auditor
on the outcomes of their annual audit. The
Committee is supportive of KPMG in displaying
the necessary professional scepticism their
role requires. The primary areas of judgement
considered by the Committee in relation to
the 2014 Annual Report and Accounts were:

i) Reserving for insurance losses
As set out in our significant accounting policies
on page 85, the reserving for losses, in particular
losses incurred but not reported, is the most
critical estimate in the Company’s consolidated
balance sheet. The Chief Actuary presented
a Group reserving report to the Committee
and the Committee reviewed the approach
taken by management when making their
selection of reserving estimates and is satisfied
with the judgements taken and the reporting
and disclosure of the estimate.

ii) The carrying value of deferred tax arising
from losses in foreign subsidiaries
As fully explained in note 29, a deferred tax
asset has been established relating to operating
losses arising in foreign subsidiaries. The
recoverability of this asset is dependent upon
the future profitability of these subsidiaries.
The Committee has reviewed the methodology
used by management to assess the projected
profitability and the carrying amount of
the deferred tax asset and is satisfied with
the methodology.

iii) The valuation of the investment portfolio
The Group reports its assets at fair value.
As discussed in note 2.22, during periods
of economic stress, the resulting diminished
liquidity means estimating fair value involves
a higher level of judgement. The Committee has
evaluated the process which management has
used to estimate the fair value of the investment
portfolio and is satisfied with their conclusions.

iv) Accounting for the defined benefit scheme
As explained in note 2.15, the Group recognises
the present value of the defined benefit
obligation less the fair value of plan assets at
the balance sheet date. The Audit Committee
has reviewed the report of the key judgements
in the financial statements from the Chief
Financial Officer and is satisfied that the
assumptions used to measure the deficit
are reasonable.

UK Corporate Governance Code
In accordance with the 2012 UK Corporate
Governance Code the Board requested that
the Committee advise on whether it believes
the Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable
and provides the information necessary
for shareholders to assess the Company’s
performance, business model and strategy.
The Committee has provided such advice
to the Board.

External auditor
The external auditors are invited to attend all
meetings of the Committee. It is the responsibility
of the Committee to monitor the performance,
objectivity and independence of the external
auditors. 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 external auditors provide reports at each
Committee meeting on topics such as the
control environment, key accounting matters
and mandatory communications. The
Committee also received a comprehensive
presentation from the auditors demonstrating
to its satisfaction how their independence and
objectivity is maintained when providing non-
audit services. Any contracts with the auditors,
KPMG, for non-audit services in excess of
£50,000 must be approved by the Committee
in advance. Approval will not be given for any
contract which may impair the auditors’
independence or objectivity. During the year
the value of non-audit services provided by
KPMG amounted to £88,000 (2013: £88,000).
There were no circumstances where KPMG
was engaged to provide services which might
have led to a conflict of interests, nor does the
Audit Committee consider the quantum of the
fees impacts the independence of the auditors.
During the year the Non Executive Directors
met with the external and internal auditors

Governance Hiscox Ltd Report and Accounts 2014

Audit Committee report
continued

without the Executive Directors present
so as to provide a forum to raise any matters
of concern in confidence.

Internal audit
The Group Compliance and Audit Director is
invited to attend all meetings of the Committee.
It is the responsibility of the Audit Committee
to monitor and review the effectiveness of the
Group’s internal audit function and to consider
reports prepared by internal audit on the
effectiveness of systems of internal control.

Audit tender
KPMG have been auditors to the Group since it
was admitted to the main market of the London
Stock Exchange in 1997. The auditors are
required to rotate the audit partner responsible
for the Group every five years and the rotation
cycle of the current partner will end following the
conclusion of the 2015 audit. In this report last
year it was stated that we expected an audit
tender process to be aligned with the rotation
of the current audit partner but intended to keep
this under review, given the ongoing legal and
regulatory developments in this area including
the proposed European legislation.

At a meeting in November 2014, the Committee
took the decision to begin a tender process with
the aim of having the successful firm in place for
the year ending 31 December 2016. One of the
members of the Committee, Caroline Foulger,
is a former partner of PwC and therefore took
no part in that meeting and has absented herself
from the tender process.

Meetings and attendance table

Director

RS Childs

BE Masojada

SJ Bridges

RC Watson

C Foulger

RD Gillingwater

DM Healy

ER Jansen

Dr J King

R McMillan

AS Rosen

G Stokholm

Governance Hiscox Ltd Report and Accounts 2014

The Committee agreed that in light of the
longevity of KPMG’s appointment, they would
not be invited to tender for the audit. The
Committee thanked KPMG for their many years
of service as auditors to the Group and for the
consistent high quality of their work. A list of
attributes required in the successful firm were
drawn up and agreed by the Committee. These
included experience, quality, innovation and
judgement. In particular, global coverage and
presence in Bermuda were identified as key
attributes. A number of firms were approached
including a mid tier firm. I was joined by the
Chief Financial Officer for initial meetings with
the potential candidates. It became apparent
that it would not be possible to identify a suitable
mid tier firm with sufficient global coverage
and experience.

At the date of the Report, invitations to tender
have been issued to two candidate firms and
dates scheduled for them to have access
to senior management and finance teams.
The views of the Group’s major shareholders
will be sought during the course of the process.
It is planned that a decision will be taken in
time for a shareholder vote on the Auditor
appointment at the 2016 AGM.

Chairman of Audit Committee
Daniel Healy

Board

Audit
Committee

Remuneration
Committee

Nominations
Committee

Attended

4/4

3/4

4/4

N/A

4/4

N/A

4/4

3/3

N/A

3/3

Letter to shareholders

Dear Shareholder

The Hiscox remuneration policy report and the
2014 annual remuneration report are presented
in the following pages. In this letter I would like
to explain the remuneration decisions which have
been made by the Remuneration Committee
and how we have taken account of both our
remuneration policy and the business context.

At Hiscox our objective is to deliver strong
shareholder returns across the cycle and
consistently grow dividends and net asset value
per share. We aim to achieve this by building
a diversified business which gives us flexibility
throughout the cycle. Our reward practices
reflect this strategy and aim to give clear and
transparent alignment with shareholders.

Linking executive pay with business objectives
and shareholder returns
We align executive incentives with the creation
of value for our shareholders in three ways.
– Annual incentive payments for Executive

Directors are paid only when the Company
has achieved a Return on Equity for the year
in excess of a pre-established Hurdle Rate.
If the Hurdle Rate is not met, we simply do
not pay bonuses to the Directors. In other
words, like shareholders, we are focused
on results, not inputs or effort or other
measures often used to justify bonus
payments. Once the Hurdle Rate is
achieved the aggregate size of the bonus
pool relates to the level of profits delivered.

– Our long-term incentive Performance

Share Plan (PSP) is also linked to achieving
a pre-established annual Hurdle Rate.
This ensures that all shares granted under
the plan vest only to the extent that Hiscox
has delivered the minimum three-year
returns reflected in the agreed hurdle.

– Executive shareholdings at Hiscox

are extensive and meaningful. Hiscox
encourages all employees to have a stake
in the business and shareholding guidelines
apply to senior managers. We are pleased
that the personal Hiscox shareholdings
of the Hiscox Executive Directors far exceed
these guidelines. With such a considerable
amount of their personal wealth invested
in Hiscox shares, we believe the Directors
are indeed aligned with our shareholders
and thus focused on net asset growth, total
shareholder return and risk management.
As at the year end the Chief Executive had
a holding equivalent to over 44 times his
base salary.

Comments on the Hiscox remuneration
policy report
In the 2013 Report and Accounts we published

our remuneration policy report as part of the
new disclosure regulations. Our annual report
on remuneration attracted a vote for of 97%,
reflecting shareholder approval that what we
paid to our Executive Directors was appropriate.
The remuneration policy report was approved
by the majority of shareholders however
concerns were raised by many shareholders
over certain structural elements.

Following extensive consultation with our
shareholders we have listened to their concerns
and responded by making the following four
changes to our approach for future years.
These changes include adoption of features
from evolving best practice.

Annual bonuses will be capped
We will be capping the Executive Directors’
individual opportunity under the annual bonus
plan. In setting the level of these caps we
considered competitor practice and historical
bonus payment levels. We also took account
of the fact the caps represent maximum
incentive levels, not expected, and our
disciplined approach of paying for results
will continue unchanged.

Regular variable pay on recruitment to
be capped
The theoretical maximum level of regular
variable pay awards under the recruitment
policy for Executive Directors will be capped
to be in line with the maximum for the bonus
and performance share plan.

New clawback arrangements
For future bonus awards to Executive Directors
a clawback provision will be introduced. This
will complement the existing malus provisions.

Addition of holding period for PSP
For future PSP awards, Executive Directors will
be required to retain (net of tax charges) any
shares vesting at the end of the performance
period for a further two years (i.e. five years post
the date of the start of the performance period).

We have disclosed these changes in the
opening page of the attached remuneration
policy. Following feedback from shareholders,
we have treated the changes as restrictions
to our current remuneration policy and the next
time we will put our remuneration policy forward
for a shareholder vote is expected to be at the
2017 Annual General Meeting.

Comments on 2014 performance and
Executive Director reward
You will see from the statements of the Chairman
and the Chief Executive that in 2014, against
a challenging reinsurance market, we have
delivered a return on equity of 17.1% and an
increase in net asset value per share of 15.0%.
Our retail businesses have delivered just over
half of the Group’s gross written premium whilst
our reinsurance and London Market businesses
have adapted appropriately to market
conditions. The compensation for Executive

Remuneration Hiscox Ltd Report and Accounts 2014

49
49

Letter to shareholders
continued

Directors reflects this strong performance
but also takes account of the absolute profit
and ROE performance.

The salary increases for the three Executive
Directors which will take effect on 1 April 2015
will be consistent with the overall UK-based
employee salary increases.

Bonus awards: Bonus awards for the Executive
Directors were set as described in the policy.
Aggregate bonuses have reduced from last
year’s awards by 9% which reflects a profit and
ROE performance which is extremely strong but
below 2013.

Performance Share Plan: The 2012 PSP grant
was subject to performance conditions for the
2012, 2013 and 2014 financial results. I am
delighted to say that as a result of a combined
three-year average ROE of 17.7%, earning in
excess of £660 million post-tax profit, the 2012
awards will vest in full. Annual grants of 194%
of salary were made to the three Executive
Directors in 2014 which will vest in 2017 subject
to the normal performance conditions.

The Executive Directors continue to execute
a business strategy which has delivered
a strong set of results in 2014. This, combined
with the changes made in our approach to our
remuneration policy will, I hope, give shareholders
the confidence that we continue to operate
remuneration practices which reward superior
performance but are also disciplined and
aligned with delivery of absolute results.

Richard Gillingwater
Chairman of Remuneration Committee

50
50

Remuneration Hiscox Ltd Report and Accounts 2014

clawback in the event of a retrospective
material restatement of the results, or
gross misconduct leading to the Company
suffering significant reputational or
financial damage.

– Addition of holding period for PSP
For PSP awards granted from 2015
onwards, any shares which vest based
on performance at the end of the three-year
performance period will have to be retained
(net of any taxes) by Executive Directors
for a further two years.

Remuneration
policy report

A core function of the Remuneration
Committee’s role is to determine:
– the overall remuneration strategy, policy

and cost for the Group;

– the levels and make-up of remuneration

for the Executive Directors;

– the award of sizeable bonuses to individuals
other than the Executive Directors; and
– the awards and operation of the Company’s
share plans, including the Performance
Share Plan.

The Company’s intended forward-looking
remuneration policy for Board members is set
out on pages 52 to 59. The remuneration policy
set out in this report took effect on 15 May 2014.

The policy is unchanged from 2014 with the
exception of some minor amendments to reflect
the restrictions defined below.

From January 2015 we intend to operate the
following restrictions to our remuneration policy:

– Annual bonuses will be capped

From the year ended 31 December 2015
the cap on the annual bonus which can
be earned by the CEO and CFO for any
one year will be 400% of salary. The cap
for the Chief Underwriting Officer will be
500% of salary, reflecting the commercial
nature of the role.

– Regular variable pay on recruitment

to be capped
The maximum level of regular variable pay
on recruitment of an Executive Director
will be in line with maximum for the annual
bonus and the maximum for the current
Performance Share Plan (which is limited
to 200% of salary in respect of any
one financial year). As announced to
shareholders prior to the AGM in 2014,
our intention will always be to put externally
hired Executive Directors on a remuneration
package which is consistent with our overall
remuneration policy. Discretion may be
exercised under the policy to transition an
individual into our structure, however the
maximum level of variable pay (excluding
buy-outs) would now be subject to the cap
set out above.

– New clawback arrangements

In addition to the existing malus provisions,
all future bonus (including the deferred
element) and PSP awards will be subject
to clawback provisions that will apply for
up to two years after the end of the relevant
performance period. As with our existing
malus provisions the Remuneration
Committee would have the ability to apply

Remuneration Hiscox Ltd Report and Accounts 2014

Remuneration policy report
continued

Future policy table
Executive Director remuneration

Element

Purpose and link to strategy

Operation

Base salary

Retirement benefits

Other benefits

Base salary, benefits and
retirement benefits represent
fixed payments for undertaking
the role.

Fixed pay elements enable the
Company to be competitive in
the recruitment market when
looking to employ individuals
of the calibre required by
the business.

Base salary is normally reviewed annually taking into account a range of
factors including inflation rate movements by country, relevant market data
and the competitive position of Hiscox salaries by role.

Individual salaries are set by taking into account the above information as
well as the individual’s experience, performance and skills, increases to
salary levels across the wider Group and overall business performance.

By exception an individual’s salary may be amended outside of the annual
review process.

These vary by local country practice but all open Hiscox retirement
schemes are based on defined contributions. This approach will be generally
maintained for any new appointments other than in specific scenarios
(e.g. local market practice dictates other terms).

For current Executive Directors, a cash allowance (which is currently 10%
of salary, less an offset for the employer’s National Insurance contribution)
is provided in lieu of the standard employer pension contribution.

Selected Board members retain legacy interests in closed defined benefit
schemes. However, there is no entitlement to any further accrual under
these plans.

Benefits are set within agreed principles but reflect normal practice for each
country. Hiscox benefits include, but are not limited to, health insurance, life
insurance, long-term disability schemes and participation in all-employee
share plans such as the Sharesave Scheme.

For new hires and changes in role, the Committee may provide reasonable
additional benefits based on the circumstances (e.g. travel allowance and
relocation expenses).

Annual incentive

To reward for performance
against key objectives and
achievement of financial
results over the financial year.

Executive Directors participate in profit-related bonus pools.

Bonus pools are calculated at a business unit level and for the Group as
a whole on the basis of Group financial results.

Provides a direct link between
reward and performance.

For 2015, the bonus pool will be funded by a set percentage of profits on
achievement of a Hurdle Rate of ROE. The bonus for 2014 was determined
on a similar basis. Further detail is set out on page 61.

To provide competitive
compensation packages.

For Executive Directors, individual allocations from the pool are
determined by the Remuneration Committee based on a judgement
of various factors including:
–size of the Group bonus pool;
–results of business area (where relevant); and
– individual performance.

Amounts are paid in accordance with the bonus deferral mechanism
described below.

Bonus awards are non-pensionable.

Remuneration Hiscox Ltd Report and Accounts 2014

Future policy table

Executive Director remuneration

Operation

Maximum potential value

Performance metrics

Application to broader
employee population

Base salary is normally reviewed annually taking into account a range of

factors including inflation rate movements by country, relevant market data

The salaries for current Executive Directors are set out
on page 60.

Individual and business performance is taken
into account when setting salary levels.

Process for review of salaries
is consistent for all employees.

and the competitive position of Hiscox salaries by role.

Individual salaries are set by taking into account the above information as

well as the individual’s experience, performance and skills, increases to

salary levels across the wider Group and overall business performance.

By exception an individual’s salary may be amended outside of the annual

review process.

These vary by local country practice but all open Hiscox retirement

schemes are based on defined contributions. This approach will be generally

maintained for any new appointments other than in specific scenarios

(e.g. local market practice dictates other terms).

For current Executive Directors, a cash allowance (which is currently 10%

of salary, less an offset for the employer’s National Insurance contribution)

is provided in lieu of the standard employer pension contribution.

Selected Board members retain legacy interests in closed defined benefit

schemes. However, there is no entitlement to any further accrual under

these plans.

Benefits are set within agreed principles but reflect normal practice for each

country. Hiscox benefits include, but are not limited to, health insurance, life

insurance, long-term disability schemes and participation in all-employee

share plans such as the Sharesave Scheme.

For new hires and changes in role, the Committee may provide reasonable

additional benefits based on the circumstances (e.g. travel allowance and

relocation expenses).

Executive Directors participate in profit-related bonus pools.

Bonus pools are calculated at a business unit level and for the Group as

a whole on the basis of Group financial results.

For 2015, the bonus pool will be funded by a set percentage of profits on

achievement of a Hurdle Rate of ROE. The bonus for 2014 was determined

on a similar basis. Further detail is set out on page 61.

For Executive Directors, individual allocations from the pool are

determined by the Remuneration Committee based on a judgement

of various factors including:

–size of the Group bonus pool;

–results of business area (where relevant); and

– individual performance.

Amounts are paid in accordance with the bonus deferral mechanism

described below.

Bonus awards are non-pensionable.

Executive Directors’ salary increases will normally be in line
with overall employee salary increases in the relevant location.

Increases above this level may be considered in other
circumstances as appropriate (e.g. address market
competitiveness, development in the role, or a change
in role size, scope or responsibility).

Set at an appropriate level by reference to the local
market practice.

None.

Executive Directors’ benefits
are determined on a basis
consistent with all employees.

Set at an appropriate level by reference to local market
practice and reflecting individual and family circumstances.

The Company has a robust track record of paying bonuses
which are proportionate to financial results, see page 61 of
this report for further details. Where performance is deemed
to be below a pre-determined hurdle, payouts will be nil.

The total of individual bonuses paid to Executive Directors
for a year will not normally exceed 15% of the total pool.
If the number of Executive Directors increased in the future,
this percentage would be adjusted as required.

Performance is measured over one
financial year.

Bonus pools are determined based on
financial performance, therefore this is the
main determinant of overall bonus payouts.

A hurdle of financial performance is
set annually.

Performance above this hurdle is rewarded
and where performance falls below this
hurdle, payouts will be nil.

The operation of the annual
incentive is consistent for
employees across the Group.

Bonuses for more
junior employees are
calculated using a more
formulaic approach.

Further details are set out on
page 61.

Remuneration Hiscox Ltd Report and Accounts 2014

Remuneration policy report
continued

Future policy table
Executive Director remuneration

Element

Purpose and link to strategy

Operation

Bonus deferral

Retention of employees.

Larger bonuses are deferred over a three-year period and paid subject to
continuing service as explained in the table below.

Facilitate and encourage
share ownership in order to
align senior employees with
Hiscox shareholders.

Performance Share Plan
(PSP)

To motivate and reward for
the delivery of long-term
objectives in line with
business strategy.

To encourage share
ownership amongst
participants and align
interests with shareholders.

To provide competitive
compensation packages
for senior employees.

Deferral points are determined based on the currency in which the
Executive Director’s salary is paid and are normally as follows:

Bonus of £50,000, €75,000,
$100,000 and below

Paid shortly after the end of the financial
year in which the bonus was achieved.

Bonus above £50,000 and
below £100,000
Bonus above €75,000 and
below €150,000
Bonus above $100,000 and
below $200,000

Bonus above £100,000,
€150,000, $200,000

£50,000, €75,000, $100,000 paid shortly
after the end of the financial year in which
the bonus was achieved.
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).

50% of bonus paid shortly after the end of
the financial year.
Balance of bonus split 50% to be paid after
year two, and 50% after year three.

Participants are able to (subject to any local tax/legal/regulatory
restrictions) draw deferred bonuses early for the following reasons:
–payment of the exercise price on the exercise of employee share options;
– payment of tax on share awards (e.g. on exercise of performance shares);
– purchase of shares; and
–payment of debt due on share purchases.

The Remuneration Committee can agree to early payment of deferred
bonuses to Executive Directors on an exceptional basis at their discretion.

Deferred awards are subject to a malus provision. Further details on the
malus provision are set out on page 57 of this report.

Awards are granted under the Performance Share Plan, originally
implemented in 2006. Awards are governed by the rules of this plan.

Share awards (typically structured as either contingent awards or nil cost
options) are made to Executive Directors and other senior employees at the
discretion of the Remuneration Committee.

Awards normally vest after a three-year period subject to the achievement
of performance conditions.

Awards are generally subject to continued employment, however awards
may vest to leavers in certain scenarios (e.g. ‘good’ leaver circumstances).

Dividends (or equivalents) may accrue on vested shares prior to release.
Further details on this are set out on page 57. Unvested awards are subject
to a malus provision. Further details on the malus provision are set out on
page 57 of this report. The PSP rules also enable the Company to grant
market value options, however there are currently no plans to use this for
regular awards.

Shareholding guidelines

To ensure Executive
Directors are aligned with
shareholder interests.

Within five years of becoming an Executive Director, individuals will
normally be expected to own Hiscox shares valued at 150% of salary.

Remuneration Hiscox Ltd Report and Accounts 2014

Future policy table

Executive Director remuneration

Operation

Maximum potential value

Performance metrics

Larger bonuses are deferred over a three-year period and paid subject to

N/A

continuing service as explained in the table below.

Application to broader
employee population

Approach is consistent for
all employees across the
Group who are awarded a
sizeable bonus.

Maximum annual grant of up
to 200% of salary in respect
of any one financial year.

The performance conditions for awards are set to align with the long-term
objectives of the Company.

The Committee reviews the targets prior to each grant to ensure that they
remain appropriate.

Currently, the performance measures are linked to the achievement of
ROE performance over an agreed hurdle, during the performance period.
Details of targets for awards to be granted in 2015 are set out on page 62.

For delivery of the threshold hurdle up to 25% of the relevant award will
vest. For full vesting, the stretch hurdle needs to be met in full. Usually,
there will be straight-line vesting for performance between the threshold
and stretch hurdle.

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), provided that such adjustment is fair and reasonable and the
adjusted condition is no more difficult to satisfy.

Participation in this plan
is restricted to Executive
Directors and other
senior individuals.

The approach is consistent
for all participants under
the plan.

Within five years of becoming an Executive Director, individuals will

normally be expected to own Hiscox shares valued at 150% of salary.

N/A

Executive Directors are
required to hold more shares
than other senior managers.

Remuneration Hiscox Ltd Report and Accounts 2014

Deferral points are determined based on the currency in which the

Executive Director’s salary is paid and are normally as follows:

Bonus of £50,000, €75,000,

Paid shortly after the end of the financial

$100,000 and below

year in which the bonus was achieved.

Bonus above £50,000 and

£50,000, €75,000, $100,000 paid shortly

below £100,000

after the end of the financial year in which

Bonus above €75,000 and

the bonus was achieved.

below €150,000

Balance of bonus split 50% to be paid after

Bonus above $100,000 and

year two (i.e. 24 months after the start of the

below $200,000

bonus year), and 50% after year three (i.e.

36 months after the start of the bonus year).

Bonus above £100,000,

50% of bonus paid shortly after the end of

€150,000, $200,000

the financial year.

Balance of bonus split 50% to be paid after

year two, and 50% after year three.

Participants are able to (subject to any local tax/legal/regulatory

restrictions) draw deferred bonuses early for the following reasons:

–payment of the exercise price on the exercise of employee share options;

– payment of tax on share awards (e.g. on exercise of performance shares);

– purchase of shares; and

–payment of debt due on share purchases.

The Remuneration Committee can agree to early payment of deferred

bonuses to Executive Directors on an exceptional basis at their discretion.

Deferred awards are subject to a malus provision. Further details on the

malus provision are set out on page 57 of this report.

Awards are granted under the Performance Share Plan, originally

implemented in 2006. Awards are governed by the rules of this plan.

Share awards (typically structured as either contingent awards or nil cost

options) are made to Executive Directors and other senior employees at the

discretion of the Remuneration Committee.

Awards normally vest after a three-year period subject to the achievement

of performance conditions.

Awards are generally subject to continued employment, however awards

may vest to leavers in certain scenarios (e.g. ‘good’ leaver circumstances).

Dividends (or equivalents) may accrue on vested shares prior to release.

Further details on this are set out on page 57. Unvested awards are subject

to a malus provision. Further details on the malus provision are set out on

page 57 of this report. The PSP rules also enable the Company to grant

market value options, however there are currently no plans to use this for

regular awards.

Remuneration policy report
continued

The Committee may make minor changes to this remuneration policy to aid in its
operation or implementation without seeking shareholder approval (e.g. for regulatory
or administrative purposes), provided that any such change is not to the material
advantage of Directors. For the avoidance of doubt the Committee may continue to
operate the PSP in accordance with the rules (e.g. the treatment of awards in the context
of a change of control or other forms of corporate restructure).

Non Executive Director remuneration
Approach

General approach

The total aggregate fees payable are set within the limit specified by the Company’s
Bye-laws. The fees paid are determined by reference to the skills and experience
required by the Company as well as the time commitment associated with the role.
The decision-making process is informed by appropriate market data. Non Executive
Directors are not eligible for participation in the Company’s incentive plans.
Travel and other reasonable expenses incurred in the course of performing their
duties are reimbursed to Non Executive Directors. Non Executive Directors are
included on the directors and officers’ indemnity insurance.

Chairman

The Chairman typically receives an all-inclusive fee in respect of the role. In addition
to his fees the Chairman may be provided with incidental benefits (e.g. private
healthcare and life assurance). The remuneration of the Chairman is determined
by the Committee.

Non Executive Directors

Non Executive Directors receive an annual fee in respect of their Board appointments
together with additional compensation for further duties (e.g. Board Committee
membership and chairmanship). The fees for the Non Executive Directors (excluding
the Chairman) are determined by the Chairman.

The current fees payable to Non Executive Directors are set out on page 63.

Notes to the policy table
Performance measure targets and target setting
The performance targets for the annual bonus and share plan awards to Executive
Directors are intended to be closely aligned with the Company’s short-term and
long-term objectives. The intention is to provide a direct link between reward levels
and performance. The Company operates a bonus pool approach for the annual
incentive. This ensures that both individual bonus levels and overall spend are
commensurate with the performance of the Company. The Committee applies
judgement based on a range of factors (as described in the table above) to ensure
that outcomes for Executive Directors are based on performance in-the-round rather
than based on a formulaic outcome. The profit pool approach currently used ensures
that overall bonus amounts are aligned to the performance of the Company and
remain appropriate and affordable.

The PSP performance measures are intended to motivate and reward to deliver
long-term Company success. The Committee considers performance metrics and
targets prior to the grant of each to ensure that these remain suitable and relevant.
Recent awards have been based on ROE performance – a key indicator of the
Company’s long-term success.

Remuneration Hiscox Ltd Report and Accounts 2014

Malus provision
In respect of unvested compensation,
specifically deferred bonuses and unvested
performance share awards, granted following
the introduction of this policy report, the
Committee may, in its absolute discretion,
determine at any time prior to the vesting of
an award to reduce, cancel or impose further
conditions in the following circumstances:
– a retrospective material restatement of the
audited financial results of the Group for a
prior period error in accordance with IAS 8;

– actions of gross misconduct, including

fraud, by the participant or their team
leading to the Company suffering significant
reputational or financial damage.

This provision was introduced in 2014, and will
apply to future grants.

Dividend equivalents
As part of our objective to align senior managers
with total shareholder return, the recipient of the
PSP award is provided with the equivalent of the
dividend either in shares or cash. Dividends (or
amounts equal to dividends) on shares granted
under the PSP roll up in the form of shares
between the grant and vesting.

Where awards are granted in the form of nil-cost
options, at the end of the performance period
the employee would have an option over the
proportion of the share grant which vests by
reference to the satisfaction of the applicable
performance target as well as over the number
of shares representing the rolled-up dividends
on those shares. Participants in selected
jurisdictions (subject to tax/legal/regulatory
restrictions) after vesting but before exercise,
may receive amounts equal to dividends paid
on the total number of shares that have vested.

Legacy arrangements
The Committee may continue to satisfy
remuneration payments and payments for loss
of office (including the exercise of any discretions
available to the Committee in connection with
such payments) where the terms of the payment
were agreed before the policy came into effect
or at a time when the relevant individual was not
a Director of the Company and, in the opinion
of the Committee, the payment was not in
consideration for the individual becoming
a Director of the Company. For these purposes,
such payments include the Committee satisfying
awards of variable remuneration.

Illustration of application of the remuneration policy
(£000s)

Long-term variable remuneration

Annual variable remuneration
Fixed remuneration

Chief Executive

Chief Financial Officer

Chief Underwriting Officer

Remuneration Hiscox Ltd Report and Accounts 2014

5757

MinOn targetMaximumMinOn targetMaximumMinOn targetMaximum3,4051,515465100%30%13%42%28%62%25%2,9851,515465100%30%16%42%28%56%28%6242,037100%30%16%42%28%56%28%4,014
Remuneration policy report
continued

The charts on page 57 have been compiled using the following assumptions:

Fixed remuneration

Fixed reward (i.e. base salary, benefits and retirement benefit).
–Salary with effect from 1 April 2014
– Benefits as received during 2014, as disclosed in the Executive Director remuneration

table on page 60.

– Retirement benefit as received during 2014, as disclosed in the Executive Director

remuneration table on page 60.

Variable remuneration

Assumptions have been made in respect of the annual incentive and the PSP for the
purpose of these illustrations.
– Annual incentive: the amounts shown in the scenarios are for illustration only. In practice
the award would be determined based on a range of performance factors, and therefore
vary depending on the circumstances. The maximum award reflects the incentive caps
described at the beginning of this report.

– PSP: scenario analysis assumes awards are granted at the maximum level set out in

the policy table on page 54. In practice, award levels are determined annually and are not
necessarily granted at the plan maximum every year.

Performance scenarios

Below target performance
Fixed reward only

On target performance
Fixed reward plus variable pay for the purpose of illustration as follows.
–Annual incentive: assume a bonus equivalent to 150% of salary.
–PSP: assume vesting of 50% of the maximum award.

Above target performance
Fixed reward plus variable pay for the purpose of illustration as follows.
– Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and CFO

and 500% of salary for the CUO.

–PSP: assumes vesting of 100% of the maximum award.

Recruitment policy
A new hire will ordinarily be remunerated in accordance with the policy described in the
table on the previous pages. In order to define the remuneration for an incoming Executive
Director, the Committee will take account of:
– prevailing competitive pay levels for the role;
– experience and skills of the candidate;
– awards (shares or earned bonuses) and other elements which will be forfeited

by the candidate;

– transition implications on initial appointment.

The Committee will always aim to provide a remuneration package which is consistent
with the overall Hiscox approach.

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. Where relevant, the Committee will
review the likelihood of achievement of performance conditions based on the track record
of payments and relevant performance of the candidate’s current employer within the
testing period. The objective of the Committee will be to suitably limit any buy-out to the
commercial value forfeited by the individual.

Remuneration Hiscox Ltd Report and Accounts 2014

3. Release of any deferred bonuses
All outstanding bonuses deferred from the annual
incentive scheme will normally be paid in full.

4. Unvested Performance Share Plan
(PSP) awards
Treatment would be in accordance with the
plan rules and relevant grant documentation.
The intended approach is summarised below:
– awards will vest in line with the normal

scheme vesting date (unless the Committee
determines otherwise). Awards vest to the
extent that the relevant performance target
is considered to have been met;

– the award will normally be pro-rated to reflect
the period which has elapsed from the
commencement of the award to the date
of termination unless the Committee
determines otherwise.

If the departing Executive Director does not
sign a release of claims, they would normally be
entitled to payments defined under point 1 only.
In the event that the Executive is dismissed for
gross misconduct, they would forfeit any
payments under UK employment law. In the
event of a voluntary resignation to join another
company, no payments would normally be
made other than remaining on the payroll,
with associated benefits during the contractual
notice period of six months.

Consideration of shareholder views
Hiscox regularly discusses remuneration policy
matters with major shareholders.

The Remuneration Committee takes into
consideration the range of views expressed
in making its decisions.

On initial appointment (including interim Director
appointments) the Committee recognises that
there may be a need to offer more bespoke
arrangements in order to facilitate recruitment.
In such circumstances, the Committee may
opt to vary the approach set out in the policy
as it considers appropriate and necessary
at the time. The exact structure of any
such awards, including the mode of delivery
(e.g. cash or shares), the timeframe for payment
or vesting, and the detail of performance
measures and targets (if any) would be tailored
as appropriate but would remain consistent
with the overall Hiscox approach to pay. In
all circumstances, any movement from the
ongoing policy would only be considered where
there is a strong commercial rationale to do
so and where the Committee felt this was in the
best interests of the Company and shareholders.
The Company would seek to clearly disclose
and explain any such arrangements to
shareholders as appropriate.

On the appointment of a new Chairman or
Non Executive Director, the fees will normally
be consistent with the policy. Fees to Non
Executives will not include share options
or other performance-related elements.

Service contracts
It is the Company’s policy that Executive
Directors should have service contracts with
an indefinite term which can be terminated by
the Company by giving notice not exceeding
12 months or the Director by giving notice of
six months.

Non Executive Directors are appointed for a
three-year term, which is renewable, with three
months’ notice on either side, no contractual
termination payments being due and subject
to retirement pursuant to the Bye-laws at the
Annual General Meeting. The contract for the
Chairman is subject to a six-month notice
provision on either side.

Policy on payment for loss of office
Subject to the execution of an appropriate
general release of claims, an Executive Director
may receive on termination of employment by
the Company:

1. Notice period of 12 months
Executive to remain on the payroll but may be
placed on gardening leave for the duration of the
notice period (or until they leave early by mutual
agreement, whichever is sooner). During this
period they will be paid as normal, therefore this
will include base pay, pension contributions (or
benefits allowance as appropriate) and other
benefits (e.g. healthcare).

2. Bonus payment for the financial year of exit
The Committee may pay a bonus calculated
in line with the normal bonus scheme timings
and performance metrics. The bonus amount
would normally be pro-rated depending on the
proportion of the financial year which has been
completed by the time of the termination date.

Remuneration Hiscox Ltd Report and Accounts 2014

Annual report on remuneration 2014

This report explains how the remuneration policy was implemented for the financial
year ending 31 December 2014 and how it will be applied for the 2015 financial year.
KPMG has audited the report to the extent required by the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2013, being the sections
in the annual report on remuneration 2014 below entitled ‘Executive Director
remuneration’, ‘Details of pension entitlements’, ‘Non Executive Director remuneration’,
‘Payments for loss of office and payments to past Directors’ and ‘Directors’ shareholding
and share interest’.

Executive Director remuneration
The table below sets out the remuneration received by current Executive Directors for
the financial years ending 31 December 2014 and 31 December 2013.

SJ Bridges
Chief Financial Officer

BE Masojada
Chief Executive

RC Watson5
Chief Underwriting Officer

Year

2014
2013

Salary
£

Benefits
£

3
Bonus
£

Long-term
4
incentives
£

Retirement
benefits
£

Total
remuneration
£

415,000
387,500

558,750
519,375

415,000
252,055

6,899
6,818

8,237
8,046

6,899
4,481

750,000
850,000

912,802
476,605

37,729
35,116

2,122,430
1,756,039

1,000,000
1,100,000

1,277,920
667,246

50,792
47,070

2,895,699
2,341,737

800,000
850,000

912,802
476,605

37,729
22,792

2,172,430
1,605,933

1 Salaries are reviewed from 1 April, further detail on April 2014 increase can be found below.
2 Benefits for Executive Directors include cover under the Company healthcare scheme, life insurance, income protection insurance

and critical illness policies as well as gym membership and a Christmas gift hamper.
3 A proportion of the bonus amount is deferred as set out on page 54 of the policy report.
4 2014 long-term incentives relate to performance share awards granted in 2012 where the performance period ends on 31 December
2014. The award is due to vest on 19 March 2015. The amount also includes dividend equivalents accrued on this award. For the
purpose of this table the performance share award has been valued based on the average share price during the three-month period
to 31 December 2014 of 671.84p. The 2013 long-term incentive award relates to performance share awards granted in 2011 where
the performance period ends on 31 December 2013. The amount also includes dividend equivalents accrued on this award. For the
purpose of this table the performance share award has been valued based on the average share price during the three-month period
to 31 December 2013 of 670.00p.
5RC Watson appointment as Executive Director commenced on 16 May 2013. The 2013 amounts shown are pro-rata based on
qualifying services with the exception of bonus and long-term incentive which are shown in full.

Additional notes to the Executive Director remuneration table
Salary
The current salaries for the Executive Directors are as follows:

SJ Bridges

BE Masojada

RC Watson

420,000

565,000

420,000

Executive Director salaries increased by 5% as part of the annual April 2014 review.
This was consistent with overall UK-based employee salary increase. Salaries will next
be reviewed as part of the annual April 2015 review and will be in line with the overall
UK-based employee salary increases.

Remuneration Hiscox Ltd Report and Accounts 2014

In 2014 the Group achieved a pre-tax profit
of £231.1 million compared with £244.5 million
in 2013. This resulted in a pre-tax return
on equity of 18.2% and as such aggregate
bonuses awarded to the Executive Directors
have reduced from last year’s awards by 9%
which reflects a profit and ROE performance
which is extremely strong but below 2013.

The following table shows the average Executive
Director bonus as a percentage of salary versus
return on equity performance and demonstrates
how we have applied our policy of paying
bonuses which are proportionate to results.
As can be seen from the table, the bonuses vary
significantly with performance from year-to-year.

Bonus
Hiscox’s approach to remuneration is
underpinned by the belief that a reasonable
portion of total remuneration should be attained
through incentive awards, thereby linking
rewards directly with performance.

In line with the remuneration policy, the Executive
Directors, along with other employees across
the Group, participated in the 2014 profit-related
bonus pools. These pools were calculated at
a business unit level and for the Group as a
whole on the basis of a set percentage of profits
on achievement of a return on allocated equity
hurdle (‘Hurdle Rate’). The Hurdle Rate is set
annually by using an investment benchmark
rate which takes account of one- to three-year
gilt and treasury yields, cash returns and the
general investment environment. The return
on equity Hurdle Rate for the 2014 financial
year was set at 7%, which was 5% above the
investment benchmark rate.

Individual employee profit bonuses were
determined based on the results of the
relevant business area, individual performance
and the size of the relevant bonus pool. The
Remuneration Committee determined the
profit bonuses to be paid to the Executive
Directors based on judgement regarding the
performance of the Group and an assessment
of individual performance.

Junior and mid-level employees also participated
in a Personal Performance Bonus scheme.
Awards under this scheme are based entirely
on individual performance ratings. It is designed
to ensure that employees in these roles continue
to be motivated to perform their roles well,
irrespective of overall Group performance.
The benefit is up to 10% of relevant salaries.
For the avoidance of doubt, Executive Directors
did not participate in the Personal Performance
Bonus Scheme.

Executive Directors’ cash incentives and ROE

Pre-tax return
on equity
%

Average bonus as a
percentage of salary
%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

274

372

287

108

183

209

181

Remuneration Hiscox Ltd Report and Accounts 2014

Annual report on remuneration 2014
continued

In line with the remuneration policy, 50% of the 2014 bonus will be deferred over
a period of two years. Receipt of these deferred amounts is normally subject to
continued service.

Bonus awards for the 2015 financial year
The bonus return on equity Hurdle Rate has been reviewed as described above and
will remain unchanged for the 2015 financial year at 7%.

Long-term incentives
Performance Share Plan (PSP) awards where the performance period ends with
the 2014 financial year
Executive Directors were granted awards under the PSP in 2012 for the three-year
performance period 1 January 2012 to 31 December 2014. The performance conditions
for this award were set at the start of the performance period and are as follows:

Minimum threshold vesting

Maximum vesting

Straight-line vesting between these points

Required average post-tax ROE over
the three-year performance period
%

Proportion of
PSP vesting
%

17.5

100

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.

PSP awards granted during the 2014 financial year
On 17 March 2014 the Executive Directors were granted awards under the PSP
as follows:

SJ Bridges

BE Masojada

RC Watson

The performance conditions for this award are as follows:

Minimum threshold vesting

Maximum vesting

Straight-line vesting between these points

Number
of awards
granted

Market price at
date of grant
£

Market value at
date of grant
£

110,000

156,000

110,000

6.91

760,100

6.91

1,077,960

6.91

760,100

Required average post-tax ROE over
the three-year performance period
%

Proportion of
PSP vesting
%

14.5

100

PSP awards to be granted during 2015
In the coming year, the Committee intends to grant awards to Executive Directors and
the performance conditions and targets will be unchanged from the 2014 awards.

Remuneration Hiscox Ltd Report and Accounts 2014

Details of pension entitlements
All open Hiscox retirement schemes are based on defined contributions.

SJ Bridges, BE Masojada and RC Watson hold lifetime allowance protection certificates
and have therefore opted out of the Company pension scheme. They receive a 10%
cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu
of the standard employer pension contribution. The value of this benefit is shown in the
Executive Director remuneration table on page 60.

The table below details the legacy entitlements from the Defined Benefit Pension Plan.
There are no further accruals under this plan.

Pensions

SJ Bridges

BE Masojada

RC Watson

Increase
in accrued
pension
during the
year
£000

Normal
retirement
age

Transfer accrued
annual pension
at 31 Dec 14
£000

Transfer value
of increase
in accrued
pension
£000

Transfer value
of accrued
pension at
1 Jan 14
£000

Transfer value
of accrued
pension at
31 Dec 14
£000

147

–

754

976

1,139

1,563

3,503

4,757

1,254

Increase/
(decrease) in
transfer value of
accrued benefit
during the year
£000

222

424

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.

Ltd
Board fee
£

Ltd
3
Committee fees
£

Subsidiary
4
Board fees
£

2
Benefits
£

2014

Total
Hiscox fees
£

Ltd
Board fee
£

Ltd
Committee fees
£

Subsidiary
Board fees
£

2
Benefits
£

2013

Total
Hiscox fees
£

RS Childs1

137,500

–

137,500

2,730

277,730

116,404

–

116,404

2,459

235,267

RD Gillingwater

50,364

32,834

–

C Foulger

DM Healy

ER Jansen

Dr J King

R McMillan

AS Rosen

50,364

21,276

54,476

50,364

25,485

50,364

19,417

–

50,364

22,451

38,228

50,364

19,417

47,330

50,364

22,660

–

G Stokholm

50,364

20,014

56,447

–

83,198

51,875

29,375

–

126,116

51,875

20,000

46,144

75,849

51,875

26,250

69,781

51,875

20,000

–

111,043

51,875

23,125

39,375

117,111

51,875

20,000

48,750

73,024

51,875

25,938

–

126,825

51,875

24,375

45,000

–

81,250

118,019

78,125

71,875

114,375

120,625

77,813

121,250

2014 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.648.
2013 fees that are paid in US Dollars have been converted to Great British Pounds using an exchange rate of 1.60.
1RS Childs was appointed Non Executive Chairman of Hiscox Ltd, Hiscox Syndicates Ltd and Hiscox Insurance Company Ltd
on 26 February 2013. The 2013 amounts are pro rata in relation to remuneration paid for qualifying services in these roles.
2RS Childs remains covered under the Company healthcare and life insurance schemes.
3Ltd Committee fee changes reflect changes in Chairmanship responsibility during 2014.
4Subsidiary Board fees changes reflect new appointments during 2014.

Non Executive Directors receive an annual fee in respect of their Hiscox Ltd and
subsidiary board appointments. Fees were reviewed for the 2014 financial year
but were not increased. Where 2014 fees differ from 2013 it is due to either an exchange
rate conversion or a change in role as described in the notes section above. Fees are
currently being reviewed for the 2015 financial year and any changes will be disclosed
in the 2015 annual report on remuneration.

Remuneration Hiscox Ltd Report and Accounts 2014

Annual report on remuneration 2014
continued

Payments for loss of office and payments to past Directors
There were no payments made to past Directors during 2014.

As detailed in last year’s Director’s remuneration report, the outstanding performance
share awards for RS Childs from 2012 will vest in line with the scheme rules following
the end of the three-year performance period ending 31 December 2014. This award
relates to the period when RS Childs served as an Executive Director and Chief
Underwriting Officer.

Directors’ shareholding and share interests
We strongly believe that senior managers within Hiscox should be aligned with Hiscox
shareholders by owning a minimum number of Hiscox shares. Formal shareholding
guidelines are in place which mean that within five years of becoming an Executive
Director, the Director will be expected to own Hiscox shares valued at 150% of salary.
The holdings of our Executive Directors far exceed the shareholding guidelines.

Directors

Executive Directors

BE Masojada

SJ Bridges

R Watson

Non Executive Directors

RS Childs

C Foulger

R Gillingwater

D Healy

ER Jansen

Dr J King

R McMillan

A Rosen

G Stokholm

31 December 2014
6p* Ordinary Shares
number of shares beneficial

31 December 2013
5 55/89p* Ordinary Shares
number of shares beneficial

3,477,214

942,488

921,888

1,718,031

8,900

4,450

79,210

79,678

–

71,027

–

3,329,160

1,045,765

842,876

1,930,375

10,000

5,000

89,000

77,019

–

67,699

–

*Following the share capital consolidation on 19 March 2014, the nominal value of the Ordinary Shares changed from 5 55/89p to 6p.

Share options
The interests of current Executive Directors under the approved and unapproved share option scheme are set out below:

SJ Bridges

RC Watson

Total

Number of
options at
1 January
2014

154,578

128,815

283,393

Number of
options
granted

Number of
options
lapsed

Number of
options
exercised

Number of
options at
31 December
2014

Exercise price
£

Market price
at date of
exercise
£

Date from
which
exercisable

Expiry date

–

(154,578)

(128,815)

(283,393)

–

1.499 6.933-7.219 06-Apr-08

05-Apr-15

1.499 6.402-6.431 06-Apr-08

05-Apr-15

Remuneration Hiscox Ltd Report and Accounts 2014

Share options
The interests of current Executive Directors under the Sharesave Schemes are set out below:

SJ Bridges

BE Masojada

RC Watson

Total

Number of
options at
1 January
2014

2,017
–
1,744
–
2,933
–

6,694

Number of
options
granted

–
1,649
–
1,649
–
3,299

6,597

Number of
options
lapsed

–
–
–
–
–
–

–

Number of
options
exercised

–
–
–
–
(2,933)
–

Number of
options at
31 December
2014

2,017
1,649
1,744
1,649
–
3,299

(2,933)

10,358

Exercise price
£

4.460
5.456
5.160
5.456
3.077
5.456

Performance Share Plan
The interests of current Directors under the Performance Share Plan are set out below:

Market price
at date of
exercise
£

Date from
which
exercisable

Expiry date

31-Oct-16
– 01-May-16
–
01-Jun-17 30-Nov-17
– 01-Dec-16 31-May-17
01-Jun-17 30-Nov-17
–
31-Oct-14
01-Jun-17 30-Nov-17

–

6.995 01-May-14

Number
of awards
granted

Number
of awards
adjusted

SJ Bridges

RS Childs

BE Masojada

RC Watson

Number of
awards at
1 January 2014

121,934
188,709
65,040
125,000
125,000
125,000
–
212,298
75,880
125,000
125,000
193,986
259,475
108,400
175,000
175,000
175,000
–
221,047
125,000
125,000
125,000
–

–
–
–
6,778
–
–
110,000
–
–
6,778
–
–
–
–
9,490
–
–
156,000
–
6,778
–
–
110,000

Total

2,971,769

405,824

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

Number
of awards
lapsed

–
–
–
(59,125 )
–
–
–
–
–
(59,125 )
–
–
–
–
(82,775 )
–
–
–
–
(59,125 )
–
–
–

Number
of awards
exercised

Number of
awards at
31 December 2014

Market price at
date of exercise
£

Date
from which
released

–
–
–
–
–
–
–
(212,298 )
(75,880 )
–
–
(193,986 )
(259,475 )
(108,400 )
–
–
–
–
(221,047 )
(72,653 )
–
–
–

121,934
188,709
65,040
72,653
125,000
125,000
110,000

07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
19-Mar-15
–
02-Apr-16
–
17-Mar-17
–
– 6.416-6.495 02-Apr-12
07-Apr-13
–
6.460
07-Apr-14
72,653
–
19-Mar-15
125,000
–
07-Apr-11
–
6.560
6.560 02-Apr-12
–
07-Apr-13
6.560
–
07-Apr-14
–
101,715
19-Mar-15
–
175,000
02-Apr-16
–
175,000
17-Mar-17
156,000
–
6.870 12-Jan-09
–
07-Apr-14
6.870
–
19-Mar-15
–
125,000
02-Apr-16
–
125,000
17-Mar-17
–
110,000

(260,150 )

(1,143,739 ) 1,973,704

Remuneration Hiscox Ltd Report and Accounts 2014

Annual report on remuneration 2014
continued

External Non Executive Directorships
No external appointments may be accepted by an Executive Director where such
appointment may give rise to a conflict of interest. The consent of the Chairman is
required in any event. During the year BE Masojada held directorships on the Board of
the Association of British Insurers, Bajka Investments (Pty) Ltd and Heptagon Assets Ltd.
He was not remunerated for his services. SJ Bridges held directorships on the Board of
Caledonia Investments plc, he does not retain the annual fee of £45,500 for his services.
He also sits on the Audit Committee of the Institute of Chartered Accountants in
England and Wales and is not remunerated for his services. RC Watson was appointed
as a Director of White Oak Underwriting Agency Limited on 11 June 2014. He is not
remunerated for his services.

Performance graph and table
The graph below shows the total shareholder return of the Group against the FTSE
All Share and FTSE Non Life Insurance indices. These reference points have been
shown to assess performance against reference points from the general market
and industry peers.

Total shareholder return (%)

Hiscox
FTSE Non Life Insurance
FTSE All Share

160

140

120

100

-20

D ec 09

M ar 10

Jun 10

S ep 10

D ec 10

M ar 11

Jun 11

S ep 11

D ec 11

M ar 12

Jun 12

S ep 12

D ec 12

M ar 13

Jun 13

S ep 13

D ec 13

M ar 14

Jun 14

S ep 14

D ec 14

Remuneration Hiscox Ltd Report and Accounts 2014

Table of historic data
The table below shows the single total remuneration figure for the Chief Executive for the
past six years.

CEO Single figure
of remuneration (£)

Annual bonus as %
of salary

PSP vesting as % of
maximum opportunity

2009

2010

2011

2012

2013

2014

2,536,943 1,759,123

1,509,248

1,938,759

2,341,737 2,895,699

286

100

114

100

–

186

204

177

100

Percentage change in remuneration of Director undertaking the role of Chief Executive
The table below shows the percentage change in base salary, benefits, pension
and annual bonus of the Chief Executive between the 2013 and 2014 financial years
compared with the average UK-based employee. We have chosen UK-based employees
rather than Group-wide employees as the comparator group as this is where the
Chief Executive is based and this allows for the closest comparison in terms of salary
increases which take into account country inflation and the benefits package provided.
The change is based on UK employees who were employed and eligible for a salary
review and bonus in both financial years.

% Change
2013 to 2014

CEO

Employee

(9)

(7)

Base salary

Benefits (including retirement benefits)

Bonus

Relative importance of the spend on pay
The chart below shows the relative movement in profit, shareholder returns and
employee remuneration for the current and prior financial year. Shareholder return
for the year incorporates the distribution made on behalf of that year. Employee
remuneration includes salary, benefits, bonus, long-term incentives and
retirement benefits.

Profit before tax (£m)
-5.5 (% change)

Dividend and capital returns
to shareholders (£m)
+6.3 (% change)

Total employee
remuneration (£m)
+12.8 (% change)

244

231

Capital distribution
Dividend equivalent

215

144

202

128

180

160

2013

2014

2013

2014

2013

2014

Remuneration Hiscox Ltd Report and Accounts 2014

Annual report on remuneration 2014
continued

Membership of the Remuneration Committee
The Committee members for 2014 were, C Foulger, R Gillingwater (Chairman),
DM Healy, ER Jansen, Dr J King, R McMillan, AS Rosen and G Stokholm.

No Director or Committee member was involved in determining their own remuneration
during the year.

External advisors
The Committee received independent advice from Deloitte, an independent firm of
remuneration consultants appointed by the Committee. Deloitte is a founder member
of the Remuneration Consultants Group and, as such, voluntarily operates under its
code of conduct in relation to executive remuneration consulting in the UK. During the
year, Deloitte’s executive compensation advisory practice advised the Committee on
developments in market practice, corporate governance and institutional investor views
and in the development of the Company’s incentive arrangements. Total fees for advice
provided to the Committee during the year were £23,150. The Committee is satisfied
that the advice they have received has been objective and independent. During the year,
Deloitte also provided other consulting and tax services.

Statement of shareholder voting
At the last AGM, the Directors’ remuneration policy and annual report on remuneration
received the following votes from shareholders:

For
%

Against
%

Withheld

Remuneration policy

Annual report on remuneration

145,421,031
57.95

105,514,775
42.05

491,869

243,722,264
97.13

7,213,562
2.87

491,869

Total votes cast

250,935,806

250,935,826

6868

Remuneration Hiscox Ltd Report and Accounts 2014

Directors’ report

The Directors have pleasure in submitting
their Annual Report and consolidated
financial statements for the year ended
31 December 2014.

The Company is a holding company for
subsidiaries involved in the business of
insurance and reinsurance in Bermuda,
the US, the UK, Guernsey, Europe and Asia.
The information that fulfils the requirements
of the management report as referred to in
Disclosure and Transparency Rule 4 can be
found on pages 6 to 11 and 27 to 32. The key
performance indicators are shown on page 2.
Details of the use of financial instruments
are set out in note 21 to the consolidated
financial statements. An analysis of the
development and performance of the business
during the financial year, its position at the end
of the year, any important events since the end
of the year and the likely future development
can be found within the Chief Executive’s
report on pages 6 to 11. The Chief Executive’s
report also describes the main trends and
factors likely to affect the future development,
performance and position of the Company’s
business and includes a description of the
Company’s strategy and business model.
The Company’s strategy is also described
on page 1. A description of the principal risks
and uncertainties can be found in the risk
management section on pages 27 to 32. In
addition, note 3 to the consolidated financial
statements provides a detailed explanation
of the principal risks which are inherent to
the Group’s business and how those risks
are managed.

Corporate responsibility
Information on environmental, employee
and community issues including details of the
Company’s policies are set out in the corporate
responsibility statement on pages 33 to 35.
This also includes disclosure of greenhouse
gas emissions.

Corporate governance statement
The information that fulfils the requirements
of the corporate governance statement as
referred to in Disclosure and Transparency
Rule 7.2 can be found on pages 43 to 46 and
in this report.

Diversity
The composition of the Board and the Senior
Executive structure are described on pages
14, 15, 40, 41 and 42. The role of a Hiscox
Partner is described on page 42. The percentage
of persons of each gender who were (i) Hiscox
Partners and (ii) employees of the Hiscox
Group, excluding the Board, is set out in the
following table.

Hiscox Partners

Employees

Male
%

84.2

52.8

Female
%

15.8

47.2

Financial results
The Group achieved a pre-tax profit for the year
of £231.1 million (2013: £244.5 million). Detailed
results for the year are shown in the consolidated
income statement on page 75, and also within
the Group financial performance section on
pages 22 and 23.

Going concern
A review of the financial performance of the
Group is set out on pages 22 and 23. The
financial position of the Group, its cash flows
and borrowing facilities are included therein.
The Group has considerable financial resources
and a well-balanced book of business.

After making enquiries, the Directors have
an expectation that the Company and the
Group have adequate resources to continue
in operational existence for the foreseeable
future. For this reason they continue to adopt
the going concern basis in preparing the
consolidated financial statements.

Dividends
An interim dividend of 7.5p (net) per ordinary
6p share (2013: 7p, per ordinary 5 55/89p share
(net)) was paid on 17 September 2014 in respect
of the year ended 31 December 2014. The
Directors are recommending the return of capital
to shareholders through an issue of E/F Shares
and this will be considered at an Extraordinary
General Meeting to be held on 25 March 2015.
It is proposed that in place of a final dividend
a sum equal to 15.0p per ordinary share will be
payable to shareholders as part of the return
of capital. An amount equivalent to 14.0p per
ordinary share was paid in lieu of a final dividend
as part of the previous return of capital, the
details of which were set out in the circular
to shareholders issued on 25 February 2014.

Bye-laws
The Company’s Bye-laws contain no specific
provisions relating to their amendment and any
such amendments are governed by Bermuda
Company Law and subject to the approval of
shareholders in a general meeting. A copy of
the Company’s Bye-laws is available for
inspection at the Company’s registered office.

Share capital
Details of the structure of the Company’s share
capital and changes in the share capital during
the year are disclosed in note 24 to the
consolidated financial statements. The ordinary
shares of 6p each are the only class of shares
presently in issue and carry voting rights. There
is power under Bye-law 45 of the Company’s
Bye-laws for voting rights to be suspended if
calls on shares are unpaid. However, there are
no nil or partly paid shares in issue on which calls
could be made. The Bye-laws also allow the

Remuneration Hiscox Ltd Report and Accounts 2014

Any acquisitions or disposals of major
shareholdings notified to the Company
in accordance with Disclosure and
Transparency Rule 5.1 are announced and
those announcements are available on the
Company’s website, www.hiscoxgroup.com.

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 circumstance
(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 2014 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 2015.

Disclosure under LR 9.8.4
The information that fulfils the reporting
requirements relating to the following matters
can be found at the pages identified below.

– Details of long-
term incentive
schemes

– Allotment of

shares for cash
pursuant to
employee share
schemes

Annual report on
remumeration
(page 52)

Note 24 to
the consolidated
financial statements
on employee share
schemes (page 113)

Annual General Meeting
The notice of the Annual General Meeting,
to be held on 20 May 2015, will be contained
in a separate circular to be sent to shareholders.
This will be despatched following the
Extraordinary General Meeting to be held
on 25 March 2015. The deadline for submission
of proxies is 48 hours before the meeting.

By order of the Board
Jeremy Pinchin, Secretary,
Wessex House, 45 Reid Street
Hamilton HM12, Bermuda
2 March 2015

Directors’ report
continued

Company to investigate interests in its shares
and apply restrictions including suspending
voting rights where information is not provided.
No such restrictions are presently in place. The
Company was authorised by shareholders at
the 2014 Annual General Meeting to purchase
in the market up to 10% of the Company’s issued
ordinary shares. No shares have so far been
bought back under this authority.

Directors
The names and details of the individuals who
served as Directors of the Company during
the year are set out on pages 40 to 41. Details
of the Chairman’s professional commitments
are included in his biography on page 40 and
there were no changes during the year. The
Bye-laws of the Company govern the
appointment and replacement of Directors.
Richard Gillingwater and Dr James King will
not be submitting themselves for re-appointment
at the Annual General Meeting and will retire
as Directors with effect from the close of the
meeting. In accordance with the UK Corporate
Governance Code, all other Directors will submit
themselves for re-appointment at the Annual
General Meeting.

Separate resolutions for the appointment of
Lynn Carter and Anne MacDonald as additional
Non Executive Directors will be put to
shareholders at the Annual General Meeting.
The process surrounding these appointments
is described on page 44. Biographical details
of the two prospective Non Executive Directors
and the reasons why the Board believe they
should be appointed will be set out in the circular
which will accompany the notice of Annual
General Meeting.

Political and charitable contributions
The Group made no political contributions
during the year (2013: £nil). Information
concerning the Group’s charitable activities
is contained in the report on corporate
responsibility on page 35.

Major interests in shares
As at the year end, the Company had been
notified of the following interests of 5% or more
of voting rights in its ordinary shares:

% of issued
share capital
as at 31
*
December
2014

†
Number
of shares

Invesco Limited1

42,798,000

13.41

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.

Directors’ report Hiscox Ltd Report and Accounts 2014

Directors’
responsibilities
statement

The Board is responsible for ensuring the
maintenance of proper accounting records
which disclose with reasonable accuracy
the financial position of the Company. It is
required to ensure that the financial statements
present a fair view for each financial period.

We confirm that to the best of our knowledge:
– the financial statements, prepared in
accordance with the applicable set
of accounting standards, present fairly,
in all material respects, the assets, liabilities,
financial position and profit or loss of the
Company and the undertakings included
in the consolidation taken as a whole; and
– the Directors’ report includes a fair review
of the development and performance
of the business and the position of the
Company and the undertakings included
in the consolidation taken as a whole,
together with a description of the principal
risks and uncertainties that they face.

The Directors responsible for authorising the
responsibility statement on behalf of the Board
are the Chairman and the Chief Financial Officer.
The statements were approved for issue on
2 March 2015.

The Directors consider that the Annual
Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides
the information necessary for shareholders
to assess the Company’s and the Group’s
performance, business model and strategy.

Directors’ responsibilities statement Hiscox Ltd Report and Accounts 2014

Financial summary

74
Independent auditors’ report
75 Consolidated income statement
Consolidated statement of
75
comprehensive income
76 Consolidated balance sheet
Consolidated statement
77
of changes in equity
Consolidated statement of cash flows
Notes to the consolidated
financial statements
128 Five-year summary

78
79

Financial summary Hiscox Ltd Report and Accounts 2014

performance and its consolidated
cash flows for the year then ended in
accordance with International Financial
Reporting Standards as adopted by
the EU; and

– the part of the annual report on

remuneration 2014 which we were
engaged to audit has been properly
prepared in accordance with 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 as if those requirements were to
apply to the Company.

KPMG Audit Limited
Hamilton, Bermuda
2 March 2015

Independent
auditors’ report to
the Board of Directors
and the shareholders
of Hiscox Ltd

We have audited the accompanying
consolidated financial statements of
Hiscox Ltd (‘the Company’) on pages
75 to 127 which comprise the consolidated
balance sheet as at 31 December 2014,
and the consolidated income statement,
consolidated statement of comprehensive
income, consolidated statement of changes
in equity and consolidated statement of
cash flows for the year then ended, and
a summary of significant accounting
policies and other explanatory notes.

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.

Management’s responsibility for the
consolidated financial statements
Management is responsible for the
preparation and fair presentation of
these consolidated financial statements
in accordance with International Financial
Reporting Standards as adopted by
the EU and for such internal control
as management determines is necessary
to enable the preparation of consolidated
financial statements that are free from
material misstatement whether due
to fraud or error.

Auditors’ responsibility
Our responsibility is to express an
opinion on these consolidated financial
statements based on our audit and,
under the terms of our engagement letter,
to audit the part of the annual report on
remuneration 2014 that is described as
having been audited.

annual report on remuneration 2014 to be
audited are free from material misstatement.

An audit involves performing procedures
to obtain audit evidence about the amounts
and disclosures in the consolidated financial
statements and the part of the annual
report on remuneration 2014 to be audited.
The procedures selected depend on our
judgement, including the assessment of
the risks of material misstatement of the
consolidated financial statements and the
part of the annual report on remuneration
2014 to be audited, whether due to fraud
or error. In making those risk assessments,
we consider internal control relevant to the
entity’s preparation and fair presentation
of the consolidated financial statements
and the part of the annual report on
remuneration 2014 to be audited in order to
design audit procedures that are appropriate
in the circumstances, but not for the
purpose of expressing an opinion on the
effectiveness of the entity’s internal control.
An audit also includes evaluating the
appropriateness of accounting policies
used and the reasonableness of accounting
estimates made by management, as well
as evaluating the overall presentation of the
consolidated financial statements and the
part of the annual report on remuneration
2014 to be audited.

We believe that the audit evidence we
have obtained is sufficient and appropriate
to provide a basis for our audit opinion.

We review whether the corporate
governance statement reflects the
Company’s compliance with the ten
provisions of the 2012 UK Corporate
Governance Code specified for our
review by those rules, and we report if it
does not. We are not required by the terms
of our engagement to consider whether
the Board’s statements on internal control
cover all risks and controls, or to form an
opinion on the effectiveness of the Group’s
corporate governance procedures or its
risk and control procedures.

We also read the other information
contained in the Report and Accounts and
consider whether it is consistent with the
audited consolidated financial statements.
We consider the implications for our report
if we become aware of any apparent
misstatements or material inconsistencies
with the consolidated financial statements.
Our responsibilities do not extend to any
other information.

We conducted our audit in accordance
with International Standards on Auditing.
Those standards require that we comply
with ethical requirements and plan and
perform the audit to obtain reasonable
assurance whether the consolidated
financial statements and the part of the

Opinion
In our opinion:
– the consolidated financial statements
present fairly, in all material respects,
the consolidated financial position of
the Company as at 31 December 2014,
and of its consolidated financial

Independent auditors’ report to the Board of Directors and the shareholders of Hiscox Ltd Hiscox Ltd Report and Accounts 2014

Consolidated income statement
For the year ended 31 December 2014

Income
Gross premiums written
Outward reinsurance premiums

Net premiums written

Gross premiums earned
Premiums ceded to reinsurers

Net premiums earned

Investment result
Other revenues

Revenue

Expenses
Claims and claim adjustment expenses
Reinsurance recoveries

Claims and claim adjustment expenses, net of reinsurance
Expenses for the acquisition of insurance contracts
Operational expenses
Foreign exchange gains/(losses)

Total expenses

Results of operating activities
Finance costs
Share of profit/(loss) from associates after tax

Profit before tax
Tax expense

Profit for the year (all attributable to owners of the Company)

Earnings per share on profit attributable to owners of the Company
Basic
Diluted

Consolidated statement of comprehensive income
For the year ended 31 December 2014, after tax

Profit for the year
Other comprehensive income
Items never reclassified to profit or loss:

Remeasurements of the net defined benefit liability
Income tax relating to components of other comprehensive income

Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations
Income tax relating to components of other comprehensive income

Other comprehensive income net of tax

Total comprehensive income for the year (all attributable to owners of the Company)

The notes on pages 79 to 127 are an integral part of these consolidated financial statements.

Note

2014
Total
£000

2013
Total
£000

4 1,756,260 1,699,478
(328,364)

(412,850)

4 1,343,410

1,371,114

1,674,982 1,598,879
(315,568)
(358,723)

4 1,316,259 1,283,311

56,212
19,956

59,809
20,905

1,392,427 1,364,025

26.2

(645,145)
113,477

(572,440)
53,161

(531,668)
(318,616)
(310,853)
4,974

(519,279)
(305,777)
(276,965)
(9,890)

(1,156,163)

(1,111,911)

236,264
(6,418)
1,229

252,114
(7,176)
(400)

231,075
(14,923)

244,538
(6,780)

216,152

237,758

67.4p
64.5p

66.3p
63.5p

2014
Total
£000

2013
Total
£000

216,152

237,758

(22,759)
5,470

9,775
(2,865)

(17,289)

6,910

34,019
–

(2,030)
–

34,019

(2,030)

16,730

4,880

232,882

242,638

Independent auditors’ report to the Board of Directors and the shareholders of Hiscox Ltd Hiscox Ltd Report and Accounts 2014

Consolidated income statement/Consolidated statement of comprehensive income Hiscox Ltd Report and Accounts 2014

Consolidated balance sheet
At 31 December 2014

Assets
Intangible assets
Property, plant and equipment
Investments in associates
Deferred tax
Deferred acquisition costs
Financial assets carried at fair value
Reinsurance assets
Loans and receivables including insurance receivables
Current tax asset
Cash and cash equivalents

Total assets

Equity and liabilities
Shareholders’ equity
Share capital
Share premium
Contributed surplus
Currency translation reserve
Retained earnings

Total equity (all attributable to owners of the Company)

Non-controlling interest

Total equity

Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables

Total liabilities

Total equity and liabilities

Note

2014
£000

2013
£000

105,946
29,497
10,670
33,490
230,373

72,720
20,219
7,754
32,123
197,628
17
19 2,828,847 2,585,054
458,822
493,419
3,530
564,375

525,345
556,259
8,031
650,651

18, 26

4,979,109 4,435,644

19,913
10,417
89,864
56,700

20,854
4,953
89,864
22,681
25
25 1,276,446 1,271,109

1,453,340 1,409,461

866

–

1,454,206 1,409,461

32,166
26,390

4,366
75,946
29
26 2,835,199 2,609,121
229
32,383
304,138

7,109
32,379
591,660

3,524,903 3,026,183

4,979,109 4,435,644

The notes on pages 79 to 127 are an integral part of these consolidated financial statements.

The consolidated financial statements were approved by the Board of Directors on 2 March 2015 and signed on its behalf by:

RS Childs
Chairman

SJ Bridges
Chief Financial Officer

Consolidated balance sheet Hiscox Ltd Report and Accounts 2014

Consolidated statement of changes in equity

Balance at 1 January 2013

20,703

41,313

245,005

24,711 1,033,634 1,365,366

– 1,365,366

Note

Share
capital
£000

Share
premium
£000

Contributed
surplus
£000

Currency
translation
reserve
£000

Retained
earnings
£000

Total equity
attributable to
owners of the
Company
£000

Non-
controlling
interest
£000

Total
£000

Profit for the year (all attributable
to owners of the Company)
Other comprehensive income/
(expense) net of tax (all attributable
to owners of the Company)
Employee share options:

Equity settled share-based
payments
Proceeds from shares issued
Deferred and current tax on employee
share options
B Share Scheme:

Return of capital, special
distribution
Final dividend equivalent

Shares issued in relation to
Scrip Dividend
Dividends paid to owners of
the Company

24, 32

–

–
133

–

–
–

–

–
3,990

–

–
–

–

(42,453
)
–

(107,718
)
(47,423)

2,103

–

237,758

(2,030

)

6,910

4,880

–
–

–

–
–

–

12,523
–

12,523
4,123

5,030

–
–

–

(150,171
)
(47,423)

2,121

(24,746

)

(24,746

)

–

–
–

–

–
–

–

237,758

4,880

12,523
4,123

5,030

(150,171
)
(47,423)

2,121

)
(24,746

Balance at 31 December 2013

20,854

4,953

89,864

22,681 1,271,109 1,409,461

– 1,409,461

Profit for the year (all attributable
to owners of the Company)
Other comprehensive income/
(expense) net of tax (all attributable
to owners of the Company)
Employee share options:

Equity settled share-based
payments
Proceeds from shares issued
Deferred and current tax on employee
share options
C/D Share Scheme:

Return of capital,
special distribution
Final dividend equivalent

Share consolidation and sub-division
Shares purchased by Trust
Acquisition of DirectAsia
Shares issued in relation to
Scrip Dividend
Dividends paid to owners of
the Company

24, 32

–

–
74

–

–
–
(1,032)
–
–

–

–
2,669

–

)

(35
–
1,032
–
–

1,798

–

–
–

–

–
–
–
–
–

–

216,152

34,019

(17,289

)

16,730

–
–

–

–
–
–
–
–

–

14,439
–

14,439
2,743

1,874

(126,049
)
(49,728)
–
(10,593)
–

(126,084
)
(49,728)
–
(10,593)
–

–

1,815

(23,469

)

(23,469

)

–

–
–

–

216,152

16,730

14,439
2,743

1,874

–
–
–
–
866

(126,084
)
(49,728)
–
(10,593)
866

–

1,815

(23,469

)

Balance at 31 December 2014

19,913

10,417

89,864

56,700 1,276,446 1,453,340

866 1,454,206

The notes on pages 79 to 127 are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity Hiscox Ltd Report and Accounts 2014

Consolidated statement of cash flows
For the year ended 31 December 2014

Profit before tax
Adjustments for:
Interest and equity dividend income
Interest expense
Net fair value gains on financial assets
Depreciation, amortisation and impairment
Charges in respect of share-based payments
Profit from sale of subsidiaries
Other non-cash movements
Effect of exchange rate fluctuations on cash presented separately

Changes in operational assets and liabilities:
Insurance and reinsurance contracts
Financial assets carried at fair value
Financial liabilities carried at fair value
Other assets and liabilities

Cash flows from operations
Cash paid to the defined benefit pension scheme
Interest received
Equity dividends received
Interest paid
Current tax paid
Cash flows from subscriptions received in advance

Net cash flows from operating activities

Cash flows from the acquisition and sale of subsidiaries
Cash flows from the sale and purchase of associates
Cash flows from the purchase of property, plant and equipment
Cash flows from the purchase of intangible assets

Net cash flows from investing activities

Proceeds from the issue of ordinary shares
Shares repurchased
Distributions made to owners of the Company

Net cash flows from financing activities

Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at 1 January
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents

Cash and cash equivalents at 31 December

Note

2014
£000

2013
£000

231,075

244,538

14, 15

9, 24

(45,146)
6,418
(12,121)
12,857
14,439
–
(497)
6,740

174,158
(171,076)
6,880
(27,943)

195,784
(200)
43,292
1,702
(5,990)
(62,563)
169,928

(42,571)
7,176
(14,847)
9,650
12,523
(1,536)
925
491

70,576
(170,817)
(72)
(527)

115,509
(1,800)
41,494
789
(5,229)
(39,712)
4,848

341,953

115,899

(2,627)
(1,687)
(11,727)
(27,580)

20,940
600
(4,545)
(9,594)

(43,621)

7,401

24, 32

2,743
(10,593)
(197,466)

4,123
–
(220,219)

(205,316)

(216,096)

93,016

(92,796)

564,375
93,016
(6,740)

657,662
(92,796)
(491)

650,651

564,375

The purchase, maturity and disposal of financial assets is part of the Group’s insurance activities and is therefore classified as an operating
cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow.

Included within cash and cash equivalents held by the Group are balances totaling £142,617,000 (2013: £113,312,000) not available for
immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, cash and cash equivalents includes
£169,928,000 (2013: £4,848,000) for subscriptions received in advance by the Kiskadee Diversified and Select Funds that remain
uninvested at 31 December 2014.

The notes on pages 79 to 127 are an integral part of these consolidated financial statements.

Consolidated statement of cash flows Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements

1 General information
The Hiscox Group, which is headquartered
in Hamilton, Bermuda, comprises Hiscox
Ltd (the parent Company, referred to herein
as the ‘Company’) and its subsidiaries
(collectively, the ‘Hiscox Group’ or the
‘Group’). For the period under review the
Group provided insurance and reinsurance
services to its clients worldwide. It has
operations in Bermuda, the UK, Europe,
Asia and the US with over 1,800 staff.

The Company is registered and domiciled
in Bermuda and on 12 December 2006 its
ordinary shares were listed on the London
Stock Exchange. As such it is required
to prepare its annual audited financial
information in accordance with Section
4.1 of the Disclosure and Transparency
Rules and the Listing Rules, both issued
by the Financial Conduct Authority (FCA),
in addition to the Bermuda Companies Act
1981. The first two pronouncements issued
by the FCA require the Group to prepare
financial statements which comprise
the consolidated income statement, the
consolidated statement of comprehensive
income, the consolidated balance sheet, the
consolidated statement of changes in equity,
the consolidated statement of cash flows
and the related notes 1 to 38 in accordance
with a recognised set of Generally Accepted
Accounting Principles (GAAP).

The consolidated financial statements for
the year ended 31 December 2014 include
all of the Group’s subsidiary companies
and the Group’s interest in associates. All
amounts relate to continuing operations.

The financial statements were approved
for issue by the Board of Directors on
2 March 2015.

2 Significant accounting policies
The principal accounting policies applied
in the preparation of these consolidated
Group financial statements are set
out below. The most critical individual
components of these financial statements
that involve the highest degree of judgement
or significant assumptions and estimations
are identified at note 2.22.

2.1 Statement of compliance
The consolidated financial statements
have been prepared in accordance with
International Financial Reporting Standards
(IFRS) as adopted by the European Union

and in accordance with the provisions
of the Bermuda Companies Act 1981.

Since 2002, the standards adopted by the
International Accounting Standards Board
(IASB) have been referred to as IFRS. The
standards from prior years continue to bear
the title ‘International Accounting Standards’
(IAS). Insofar as a particular standard is not
explicitly referred to, the two terms are used
in these financial statements synonymously.
Compliance with IFRS includes the adoption
of interpretations issued by the International
Financial Reporting Interpretations
Committee (IFRIC).

The Group currently applies IFRS 4
Insurance Contracts which specifies the
financial reporting for insurance contracts
by an insurer. The standard was issued by
the IASB as the first phase in their project
to develop a comprehensive standard for
insurance contracts. Accordingly, to the
extent that IFRS 4 does not specify the
recognition or measurement of insurance
contracts, transactions reported in these
consolidated financial statements have
been prepared in accordance with another
comprehensive body of accounting
principles for insurance contracts, namely
accounting principles generally accepted
in the UK.

In June 2013, the IASB issued their second
exposure draft for Phase II of the insurance
contracts project. The exposure draft in
its current form will require a number of
significant changes to the measurement
of insurance contracts and as such adoption
of a final standard in a form similar to the
exposure draft will likely have a significant
impact on the results of the Group. In
addition, the IASB has stated they will allow
approximately three full years from the date
of any final standard to actual implementation,
therefore 2019 is likely to be the earliest date
for the adoption of a new standard.

The Group continues to monitor the progress
of the project.

2.2 Basis of preparation
The financial statements are presented
in Pounds Sterling and are rounded to the
nearest thousand unless otherwise stated.
They are compiled on a going concern basis
and prepared on the historical cost basis
except that pension scheme assets included
in the measurement of the employee
retirement benefit obligation, and certain
financial instruments including derivative
instruments, are measured at fair value.
Employee retirement benefit obligations
are determined using actuarial analysis.
The balance sheet of the Group is presented
in order of increasing liquidity.

The accounting policies have been applied
consistently by all Group entities, to all

periods presented, solely for the purpose
of producing the consolidated Group
financial statements.

The Group has financial assets and cash
of over £3.2 billion, excluding the assets
held by the Kiskadee Diversified and Select
Funds. The portfolio is predominantly
invested in liquid short-dated bonds and
cash to ensure significant liquidity to the
Group and to reduce risk from the financial
markets. In addition the Group has
significant borrowing facilities in place.

The Group writes a balanced book of
insurance and reinsurance business spread
by product and geography. The Directors
believe that the Group is well placed to
manage its business risk and continue
to trade successfully.

As explained in note 4, during 2013 the
Group restructured its reinsurance business
written by the London, Bermuda and
Paris teams and combined them into one
operating unit, Hiscox Re. In addition we
introduced a single management structure
for UK and Europe and brought all retail
business under one umbrella. From January
2014 the Group commenced reporting and
monitoring its performance along these new
reporting lines. The results of 2013 have
been restated in the appropriate notes to
the consolidated financial statements.

A review of the financial performance of
the Group is set out on pages 22 to 23.
The financial position of the Group, its cash
flows and borrowing facilities are included
therein. In addition, note 3 to the financial
statements provides a detailed discussion
on the insurance and financial risks which
are inherent to the Group’s business and
how those risks are managed.

The Directors have an expectation that the
Company and the Group have adequate
resources to continue in operational
existence for the foreseeable future.
Accordingly, they continue to adopt the
going concern basis in preparing the
Annual Report and Accounts.

Except as described below, the accounting
policies adopted are consistent with those
of the previous financial year.

A number of new standards, amendments to
standards and interpretations, as adopted by
the European Union, are effective for annual
periods beginning on or after 1 January
2014, and have been applied in preparing
these consolidated financial statements.

Changes in accounting policies
IFRS 7: Offsetting Financial Assets and
Financial Liabilities (amendments to IAS 32)
The amendments clarify that the rights of
set-off must not only be legally enforceable

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

2 Significant accounting policies continued
2.2 Basis of preparation continued
Changes in accounting policies continued

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.

IFRIC 21: Levies Charged by Public
Authorities on Entities that Operate in
a Specific Market
IFRIC 21 provides guidance on when to
recognise a liability for a levy imposed by a
government, both for levies that are accounted
for in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets
and those where the timing and amount of
the levy is certain. The adoption of the
interpretation has not had a material impact
on the financial statements.

The following new standards, amendments
to standards and interpretations are effective
for annual periods beginning on or after
1 January 2015 and have not been applied
in preparing these financial statements.

The Group is in the process of analysing
the impact of these standards on its
consolidated financial statements.
–IFRS 9: Financial Instruments
– IFRS 9: Amendment: Financial
Instruments, regarding general
hedge accounting

– IFRS 15: Revenue from contracts

with customers

– IAS 16: Amendment: Property, plant

and equipment, regarding depreciation
and amortisation

– IAS 19: Amendment: Employee

benefits, regarding defined benefit plans
– IAS 27: Amendment: Separate financial
statement, regarding the equity method
– IAS 38: Amendment: Intangible assets,
regarding depreciation and amortisation

– Annual Improvements to IFRSs

2010 – 2012 cycle

– Annual Improvements to IFRSs

2011 – 2013 cycle

2.3 Basis of consolidation
(a) Subsidiaries
Subsidiaries are those entities controlled

by the Group. Control exists when the
Group has power over an entity, exposure or
rights to variable returns from its involvement
with the investee and ability to use its power
to affect those returns. The consolidated
financial statements include the assets,
liabilities and results of the Group up to
31 December each year. The financial
statements of subsidiaries are included in
the consolidated financial statements only
from the date that control commences until
the date that control ceases.

Hiscox Dedicated Corporate Member
Limited (‘HDCM’) underwrites as a corporate
member of Lloyd’s on the main Syndicates
managed by Hiscox Syndicates Limited
(the ‘main managed Syndicates’ numbered
33 and 3624). As at 31 December 2014,
HDCM owned 72.5% of Syndicate 33 (2013:
72.5%). In view of the several but not joint
liability of underwriting members at Lloyd’s
for the transactions of syndicates in which
they participate, the Group’s attributable
share of the transactions, assets and
liabilities of these Syndicates has been
included in the financial statements.

The Group manages the underwriting of,
but does not participate as a member of,
Syndicate 6104 at Lloyd’s which provides
reinsurance to Syndicate 33 on a normal
commercial basis. Consequently, aside
from the receipt of managing agency fees,
defined profit commissions as appropriate
and interest arising on effective assets
included within the experience account, the
Group has no share in the assets, liabilities
or transactions of Syndicate 6104, nor is it
controlled. The position and performance
of that Syndicate is therefore not included
in the Group’s financial statements.

Kiskadee Diversified Fund and Kiskadee
Select Fund (‘Kiskadee Funds’) provide
investment opportunities in property
catastrophe reinsurance and insurance-
linked strategies. All of the Kiskadee Funds
exposures to reinsurance risk are obtained
through investments in two Special Purpose
Insurers (‘SPI’), Kiskadee Reinsurance 1 Ltd
and Kiskadee Reinsurance 2 Ltd. The Group
has determined in accordance with IFRS 10
that control exists and as a result the
financial statements of the Kiskadee Funds
as well as the two SPIs have been included
in the consolidated financial statements of
the Group. The third-party investment in the
Funds is recognised as a financial liability
in accordance with IAS 32.

The Group uses the acquisition method
of accounting to account for the acquisition
of subsidiaries. At the date of acquisition,
the Group recognises the identifiable
assets acquired and liabilities assumed
as part of the overall business combination
transaction at their acquisition date fair
value. Recognition of these items is subject

to the definitions of assets and liabilities
in the Framework for the Preparation and
Presentation of Financial Statements. The
Group may also recognise intangible items
not previously recognised by the acquired
entity such as customer relationships.

(b) Associates
Associates are those entities in which the
Group has significant influence but not
control over the financial and operating
policies. Significant influence is generally
identified with a shareholding of between
20% and 50% of an entity’s voting rights.
The consolidated financial statements
include the Group’s share of the total
recognised gains and losses of associates
on an equity-accounted basis from the date
that significant influence commences until
the date that significant influence ceases.
The Group’s share of its associates’ post-
acquisition profits or losses after tax is
recognised in the income statement for each
period, and its share of the movement in
the associates’ net assets is reflected in the
investments’ carrying values in the balance
sheet. When the Group’s share of losses
equals or exceeds the carrying amount
of the associate, the carrying amount is
reduced to nil and recognition of further
losses is discontinued except to the extent
that the Group has incurred obligations
in respect of the associate.

(c) Transactions eliminated
on consolidation
Intragroup balances, transactions and any
unrealised gains arising from intragroup
transactions are eliminated in preparing
the consolidated financial statements.
Unrealised losses are also eliminated
unless the transaction provides evidence
of an impairment of the asset transferred.
In accordance with IAS 21, foreign currency
gains and losses on intragroup monetary
assets and liabilities may not fully eliminate
on consolidation when the intragroup
monetary item concerned is transacted
between two Group entities that have
different functional currencies. Unrealised
gains arising from transactions with
associates are eliminated to the extent of
the Group’s interest in the entity. Unrealised
losses are eliminated in the same way
as unrealised gains, but only to the extent
that there is no evidence of impairment.

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

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

2 Significant accounting policies continued
2.4 Foreign currency translation continued
(a) Functional currency continued

Euros, those subsidiary entities operating
from the US and Bermuda whose functional
currency is US Dollars, Hiscox Insurance
Company (Guernsey) Limited and Syndicate
3624 whose functional currency is also US
Dollars. Functional currencies of entities
operating in Asia include US Dollars,
Hong Kong Dollars, Singapore Dollars
and Thai Baht.

(b) Transactions and balances
Foreign currency transactions are translated
into the functional currency using the
exchange rates prevailing at the dates of
the transactions. Foreign exchange gains
and losses resulting from the settlement of
such transactions and from the retranslation
at year-end exchange rates of monetary
assets and liabilities denominated in foreign
currencies are recognised in the income
statement, except when deferred in equity
as IAS 39 effective net investment hedges
or when the underlying balance is deemed
to form part of the Group’s net investment
in a subsidiary operation and is unlikely
to be settled in the foreseeable future.
Non-monetary items carried at historical
cost are translated in the balance sheet at
the exchange rate prevailing on the original
transaction date. Non-monetary items
measured at fair value are translated using
the exchange rate ruling when the fair value
was determined.

(c) Group companies
The results and financial position of all
the Group entities that have a functional
currency different from the presentation
currency are translated into the presentation
currency as follows:
– assets and liabilities for each balance
sheet presented are translated at
the closing rate at the date of that
balance sheet;

– income and expenses for each income
statement are translated at average
exchange rates (unless this average is
not a reasonable approximation of the
cumulative effect of the rates prevailing
on the transaction dates, in which case
income and expenses are translated
at the date of the transactions); and
– all resulting exchange differences are
recognised as a separate component
of equity.

When a foreign operation is sold, such
exchange differences are recognised in the
income statement as part of the gain or loss
on sale.

Goodwill and fair value adjustments arising on
the acquisition of a foreign entity are treated
as the foreign entity’s assets and liabilities
and are translated at the closing rate.

For each business combination, the Group
measures any non-controlling interest in the
acquiree at the non-controlling interest’s
proportionate share of the acquiree’s
identifiable net assets.

2.5 Property, plant and equipment
Property, plant and equipment are stated
at historical cost less depreciation and any
impairment loss. Historical cost includes
expenditure that is directly attributable to
the acquisition of the items. Subsequent
costs are included in the asset’s carrying
amount or recognised as a separate
asset, as appropriate, only when it is
probable that future economic benefits
associated with the item will flow to the Group
and the cost of the item can be measured
reliably. All other repairs and maintenance
items are charged to the income statement
during the financial period in which they
are incurred.

of its deemed cost, which represents the
amount recorded under previous generally
accepted accounting principles.

Goodwill on acquisition of subsidiaries
is included in intangible assets. Goodwill
on acquisition of associates is included
in investments in associates. Goodwill is
not amortised but is tested at least annually
for impairment and carried at cost less
accumulated impairment losses.

The impairment review process examines
whether or not the carrying value of the
goodwill attributable to individual cash
generating units exceeds its recoverable
amount. Any excess of goodwill over the
recoverable amount arising from the review
process indicates impairment. Gains and
losses on the disposal of an entity include
the carrying amount of goodwill relating to
the entity sold.

Land and artwork assets are not depreciated
as they are deemed to have indefinite useful
economic lives. The cost of leasehold
improvements is amortised over the
unexpired term of the underlying lease or the
estimated useful life of the asset, whichever
is shorter. Depreciation on other assets is
calculated using the straight-line method to
allocate their cost or revalued amounts, less
their residual values, over their estimated
useful lives. The rates applied are as follows:
–buildings
–vehicles
– leasehold improvements

50 years
3 years

(b) Syndicate capacity
The cost of purchasing the Group’s
participation in the Lloyd’s insurance
syndicates is not amortised but is tested
annually for impairment and is carried at
cost less accumulated impairment losses.
Having considered the future prospects
of the London insurance market, the
Board believes that the Group’s ownership
of syndicate capacity will provide economic
benefits over an indefinite number of future
periods. This assumption is reviewed
annually to determine whether the asset
continues to have an indefinite life.

including fixtures
and fittings
– furniture, fittings

and equipment

10–15 years

3–15 years

The assets’ residual values and useful lives
are reviewed at each balance sheet date and
adjusted if appropriate.

An asset’s carrying amount is written down
immediately to its recoverable amount if the
asset’s carrying amount is greater than its
estimated recoverable amount. Gains and
losses on disposals are determined by
comparing proceeds with carrying amount.
These are included in the income statement.

2.6 Intangible assets
(a) Goodwill
Goodwill represents amounts arising on
acquisition of subsidiaries and associates.
In respect of acquisitions that have occurred
since 1 January 2004, goodwill represents
the excess of the fair value of consideration
of an acquisition over the fair value of the
Group’s share of the net identifiable assets
and contingent liabilities assumed of the
acquired subsidiary or associate at the
acquisition date.

In respect of acquisitions prior to this
date, goodwill is included on the basis

(c) US state authorisation licences
State authorisation licences acquired
in business combinations are recognised
initially at their fair value. The asset is not
amortised, as the Board considers that
economic benefits will accrue to the Group
over an indefinite number of future periods
due to the stability of the US insurance
market. The licences are tested annually
for impairment, and any accumulated
impairment losses recognised are deducted
from the historical cost amount to produce
the net balance sheet carrying amount.
This assumption is reviewed annually to
determine whether the asset continues
to have an indefinite life.

(d) Rights to customer contractual
relationships
Costs directly attributable to securing
the intangible rights to customer
contractual relationships are recognised
as an intangible asset where they can be
identified separately and measured reliably
and it is probable that they will be recovered
by directly related future profits. These costs
are amortised on a straight-line basis over
the useful economic life which is deemed
to be 20 years and are carried at cost
less accumulated amortisation and
impairment losses.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

2 Significant accounting policies continued
2.6 Intangible assets continued

(e) Computer software
Acquired computer software licences are
capitalised on the basis of the costs incurred
to acquire and bring into use the specific
software. These costs are amortised over the
expected useful life of the software of between
three and ten years on a straight-line basis.

Internally developed computer software
is only capitalised when it is probable that
the expected future economic benefits that
are attributable to the asset will flow to the
Group and the cost of the asset can be
measured reliably. Amortisation of internally
developed computer software begins
when the software is available for use and
is allocated on a straight-line basis over the
expected useful life of the asset.

The useful life of the asset is reviewed annually
and, if different from previous estimates, is
changed accordingly with the change being
accounted for as a change in accounting
estimates in accordance with IAS 8.

2.7 Financial assets including loans
and receivables
The Group has classified financial assets
as a) financial assets designated at fair value
through profit or loss, and b) loans and
receivables. Management determines the
classification of its financial investments at
initial recognition. The decision by the Group
to designate all financial investments,
comprising debt and fixed income securities,
equities and shares in unit trusts and deposits
with credit institutions, at fair value through
profit or loss reflects the fact that the
investment portfolios are managed, and their
performance evaluated, on a fair value basis.
Regular way purchases and sales of
investments are accounted for at the date
of trade. Financial assets are initially
recognised at fair value. Subsequent to initial
recognition financial assets are measured
as described below.

Financial assets are derecognised when the
right to receive cash flows from them expires
or where they have been transferred and the
Group has also transferred substantially all
risks and rewards of ownership.

Fair value for securities quoted in active
markets is the bid price exclusive of
transaction costs. For instruments where no

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.

(a) Financial assets at fair value through
profit or loss
A financial asset is classified into this
category at inception if it is managed and
evaluated on a fair value basis in accordance
with documented strategy, if acquired
principally for the purpose of selling in the
short-term, or if it forms part of a portfolio
of financial assets in which there is evidence
of short-term profit taking.

(b) Loans and receivables
Loans and receivables are non-derivative
financial assets with fixed or determinable
payments that are not quoted on an active
market. Receivables arising from insurance
contracts are included in this category and
are reviewed for impairment as part of the
impairment review of loans and receivables.
Loans and receivables are carried at
amortised cost less any provision for
impairment in value.

2.8 Cash and cash equivalents
The Group has classified cash deposits
and short-term highly liquid investments
as cash and cash equivalents. These
assets are readily convertible into known
amounts of cash and are subject to
inconsequential changes in value. Cash
equivalents are financial investments with
less than three months to maturity at the
date of acquisition.

and products; and

– the disintegration of the active market(s)

to which the asset is related.

(b) Financial assets
Objective factors that are considered when
determining whether a financial asset or
group of financial assets may be impaired
include, but are not limited to, the following:
– negative rating agency announcements

in respect of investment issuers,
reinsurers and debtors;

– significant reported financial difficulties
of investment issuers, reinsurers
and debtors;

– actual breaches of credit terms such as

persistent late payments or actual default;
– the disintegration of the active market(s)
in which a particular asset is traded
or deployed;

– adverse economic or regulatory

conditions that may restrict future cash
flows and asset recoverability; and
– the withdrawal of any guarantee from
statutory funds or sovereign agencies
implicitly supporting the asset.

(c) Impairment loss
An impairment loss is recognised for the
amount by which the asset’s carrying
amount exceeds its recoverable amount.
The recoverable amount is the higher of
an asset’s fair value less costs to sell and
value in use. For the purpose of assessing
impairment, assets are grouped at the
lowest levels for which there are separately
identifiable cash flows (cash generating units).

For financial assets, the amount of the
impairment loss is measured as the
difference between the asset’s carrying
amount and the value of the estimated future
cash flows discounted at the financial
asset’s original effective interest rate.

2.9 Impairment of assets
Assets that have an indefinite useful life are
not subject to amortisation and are tested
annually or whenever there is an indication
of impairment. Assets that are subject to
amortisation are reviewed for impairment
whenever events or changes in circumstances
indicate that the carrying amount may not
be recoverable.

(a) Non-financial assets
Objective factors that are considered when
determining whether a non-financial asset
(such as goodwill, an intangible asset or item
of property, plant and equipment) or group
of non-financial assets may be impaired
include, but are not limited to, the following:
– adverse economic, regulatory or

environmental conditions that may
restrict future cash flows and asset
usage and/or recoverability;
– the likelihood of accelerated

obsolescence arising from the
development of new technologies

Where an impairment loss subsequently
reverses, the carrying amount of the asset
is increased to the revised estimate of
its recoverable amount, but so that the
increased carrying amount does not exceed
the carrying amount that would have been
determined had no impairment loss been
recognised for the asset in prior periods.
A reversal of an impairment loss is
recognised as income immediately.
Impairment losses recognised in respect
of goodwill are not subsequently reversed.

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

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

2 Significant accounting policies continued
2.10 Derivative financial instruments
continued

the derivative is designated as a hedging
instrument and, if so, the nature of the item
being hedged. For derivatives not formally
designated as a hedging instrument, fair
value changes are recognised immediately
in the income statement. Changes in the
value of derivatives and other financial
instruments formally designated as hedges
of net investments in foreign operations are
recognised in the currency translation
reserve to the extent they are effective;
gains or losses relating to the ineffective
portion of the hedging instruments are
recognised immediately in the consolidated
income statement.

The Group had no derivative instruments
designated for hedge accounting during
the current and prior financial year (see
note 2.17).

2.11 Own shares
Where any Group company purchases
the Parent Company’s equity share capital
(own shares), the consideration paid,
including any directly attributable
incremental costs (net of income taxes),
is deducted from equity attributable to the
Company’s owners on consolidation. Where
such shares are subsequently sold, reissued
or otherwise disposed of, any consideration
received is included in equity attributable
to the Company’s owners, net of any directly
attributable incremental transaction costs
and the related tax effects.

2.12 Revenue
Revenue comprises insurance and
reinsurance premiums earned on the
rendering of insurance protection, net of
reinsurance, together with profit commission,
investment returns, agency fees and other
income inclusive of fair value movements
on derivative instruments not formally
designated for hedge accounting treatment.
The Group’s share of the results of associates
is reported separately. The accounting
policies for insurance premiums are outlined
below. Profit commission, investment income
and other sources of income are recognised
on an accruals basis net of any discounts and
amounts such as sales-based taxes
collected on behalf of third-parties. Profit
commission is calculated and accrued based
on the results of the managed syndicate.

2.13 Insurance contracts
(a) Classification
The Group issues short-term casualty and
property insurance contracts that transfer
significant insurance risk. Such contracts may
also transfer a limited level of financial risk.

(b) Recognition and measurement
Gross premiums written comprise

premiums on business incepting in the
financial year together with adjustments
to estimates of premiums written in prior
accounting periods. Estimates are included
for pipeline premiums and an allowance is
also made for cancellations. Premiums are
stated before the deduction of brokerage
and commission but net of taxes and
duties levied. Premiums are recognised as
revenue (premiums earned) proportionally
over the period of coverage. The portion
of premium received on in-force contracts
that relates to unexpired risks at the balance
sheet date is reported as the unearned
premium liability.

Claims and associated expenses are
charged to profit or loss as incurred,
based on the estimated liability for
compensation owed to contract holders
or third-parties damaged by the contract
holders. They include direct and indirect
claims settlement costs and arise from
events that have occurred up to the balance
sheet date even if they have not yet been
reported to the Group. The Group does
not discount its liabilities for unpaid claims.
Liabilities for unpaid claims are estimated
using the input of assessments for individual
cases reported to the Group and statistical
analysis for the claims incurred but not
reported, and an estimate of the expected
ultimate cost of more complex claims that
may be affected by external factors e.g.
court decisions.

(c) Deferred acquisition costs (DAC)
Commissions and other direct and indirect
costs that vary with and are related to
securing new contracts and renewing
existing contracts are capitalised as
deferred acquisition costs. All other
costs are recognised as expenses when
incurred. DAC are amortised over the terms
of the insurance contracts as the related
premium is earned.

(d) Liability adequacy tests
At each balance sheet date, liability
adequacy tests are performed by each
segment of the Group to ensure the
adequacy of the contract liabilities net of
related DAC. In performing these tests,
current best estimates of future contractual
cash flows and claims handling and
administration expenses, as well as
investment income from assets backing
such liabilities, are used. Any deficiency is
immediately charged to profit or loss initially
by writing-off DAC and by subsequently
establishing a provision for losses arising
from liability adequacy tests (‘the unexpired
risk provision’). Any DAC written-off as
a result of this test cannot subsequently
be reinstated.

(e) Outwards reinsurance contracts held
Contracts entered into by the Group,
with reinsurers, under which the Group

is compensated for losses on one or more
insurance or reinsurance contracts and
that meet the classification requirements
for insurance contracts, are classified as
insurance contracts held. Contracts that do
not meet these classification requirements
are classified as financial assets.

The benefits to which the Group is entitled
under outwards reinsurance contracts are
recognised as reinsurance assets. These
assets consist of short-term balances
due from reinsurers (classified within loans
and receivables) as well as longer-term
receivables (classified as reinsurance
assets) that are dependent on the expected
claims and benefits arising under the related
reinsured insurance contracts.

Reinsurance liabilities primarily comprise
premiums payable for outwards reinsurance
contracts. These amounts are recognised in
profit or loss proportionally over the period
of the contract. Receivables and payables
are recognised when due.

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.

(f) Receivables and payables related
to insurance contracts
Receivables and payables are recognised
when due. These include amounts due
to and from agents, brokers and insurance
contract holders.

If there is objective evidence that the
insurance receivable is impaired, the Group
reduces the carrying amount of the insurance
receivable accordingly and recognises the
impairment loss in profit or loss.

(g) Salvage and subrogation
reimbursements
Some insurance contracts permit the
Group to sell property acquired in settling
a claim (i.e. salvage). The Group may also
have the right to pursue third-parties for
payment of some or all costs (i.e. subrogation).
Estimates of salvage recoveries are included
as an allowance in the measurement of the
insurance liability for claims and salvage
property is recognised in other assets when
the liability is settled. The allowance is the
amount that can reasonably be recovered
from the disposal of the property. Subrogation
reimbursements are also considered
as an allowance in the measurement of
the insurance liability for claims and are
recognised in other assets when the liability
is settled. The allowance is the assessment
of the amount that can be recovered from
the action against the liable third-party.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

2 Significant accounting policies continued

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.

2.15 Employee benefits
(a) Pension obligations
The Group operated both defined
contribution and defined benefit pension
schemes during the year under review.
The defined benefit scheme closed
to future accrual with effect from
31 December 2006 and active members
were offered membership of the defined
contribution scheme from 1 January 2007.
A defined contribution plan is a pension
plan under which the Group pays fixed
contributions into a separate entity and
has no further obligation beyond the agreed
contribution rate. A defined benefit plan is
a pension plan that defines an amount of
pension benefit that an employee will receive
on retirement, usually dependent on one or
more factors such as age, years of service
and compensation.

For defined contribution plans, the Group
pays contributions to publicly or privately
administered pension insurance plans on
a contractual basis. The contributions are
recognised as an employee benefit expense
when they are due. Prepaid contributions

are recognised as an asset to the extent
that a cash refund or a reduction in future
payments is available.

The amount recognised in the balance
sheet in respect of defined benefit pension
plans is the present value of the defined
benefit obligation at the balance sheet
date less the fair value of plan assets,
together with adjustments for unrecognised
actuarial gains or losses. Plan assets
exclude any insurance contracts issued
by the Group. The calculation of the defined
benefit obligation is performed annually
by a qualified actuary using the projected
unit method. As the plan is closed to all
future benefit accrual, each participant’s
benefits under the plan are based on their
service to the date of closure or earlier
leaving, their final pensionable earnings
at the measurement date and the service
cost is the expected administration cost
during the year. Past service costs are
recognised immediately in income.

Remeasurements of the net defined benefit
liability, which comprise actuarial gains and
losses, the return on plan assets (excluding
interest) and the effect of the asset ceiling
(if any, excluding interest), are recognised
immediately in other comprehensive
income. The Group determines the net
interest expense (income) on the net defined
benefit liability (asset) for the period by
applying the discount rate used to measure
the defined benefit obligation at the
beginning of the annual period to the then
net defined benefit liability (asset), taking
into account any changes in the net defined
benefit liability (asset) during the period as a
result of contributions and benefit payments.
Net interest expense and other expenses
related to defined benefit plans are
recognised in profit or loss through
operating expenses.

To the extent that a surplus emerges on
the defined benefit obligation, it is only
recognisable on the asset side of the
balance sheet when it is probable that future
economic benefits will be recovered by the
scheme sponsor in the form of refunds or
reduced future contributions.

(b) Other long-term employee benefits
The Group provides sabbatical leave to
employees on completion of a minimum
service period of ten years. The present
value of the expected costs of these benefits
is accrued over the period of employment.
In determining this liability, consideration
is given to future increases in salary levels,
experience with employee departures
and periods of service.

(c) Share-based compensation
The Group operates a number of
equity settled share-based employee
compensation plans. These include both

the approved and unapproved share option
schemes, and the Group’s performance
share plans, outlined in the Directors’
remuneration report together with the
Group’s Save as You Earn (SAYE) schemes.

The fair value of the employee services
received, measured at grant date, in
exchange for the grant of the awards
is recognised as an expense, with the
corresponding credit being recorded in
retained earnings within equity. The total
amount to be expensed over the vesting
period is determined by reference to the fair
value of the awards granted, excluding the
impact of any non-market vesting conditions
(e.g. profitability or net asset growth targets).
Non-market vesting conditions are included
in assumptions about the number of awards
that are expected to become exercisable. At
each balance sheet date, the Group revises
its estimates of the number of awards that
are expected to vest.

It recognises the impact of the revision
of original estimates, if any, in the income
statement, and a corresponding adjustment
to equity, over the remaining vesting period.
When the terms and conditions of an
equity settled share-based employee
compensation plan are modified, and the
expense to be recognised increases as
a result of the modification, then the increase
is recognised evenly over the remaining
vesting period. When a modification reduces
the expense to be recognised, there is
no adjustment recognised and the pre-
modification expense continues to be
applied. The proceeds received net of any
directly attributable transaction costs are
credited to share capital and share premium
when the options are exercised.

(d) Termination benefits
Termination benefits are payable when
employment is terminated before the
normal retirement date, or whenever an
employee accepts voluntary redundancy
in exchange for these benefits. The Group
recognises termination benefits when it is
demonstrably committed to either:
terminating the employment of current
employees according to a detailed formal
plan without possibility of withdrawal;
or providing termination benefits as a
result of an offer made to encourage
voluntary redundancy.

(e) Profit sharing and bonus plans
The Group recognises a liability and an
expense for bonuses and profit sharing,
based on a formula that takes into
consideration the profit attributable to
the Company’s shareholders after certain
adjustments. The Group recognises a
provision where a contractual obligation
to employees exists or where there
is a past practice that has created
a constructive obligation.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

2 Significant accounting policies continued
2.15 Employee benefits continued

that an outflow of economic benefits will
be required to settle that obligation.

(f) Accumulating compensation benefits
The Group recognises a liability and an
expense for accumulating compensation
benefits (e.g. holiday entitlement), based
on the additional amount that the Group
expects to pay as a result of the unused
entitlement accumulated at the balance
sheet date.

2.16 Financial liabilities
All borrowings drawn are measured at
amortised cost at each balance sheet
date using the effective interest method.
Any difference between the remeasured
amortised cost carrying amount and the
ultimate redemption amount is recognised
in the income statement over the period
of the borrowings.

The third-party investment in the Kiskadee
Funds is measured at fair value.

2.17 Net investment hedge accounting
In order to qualify for hedge accounting,
the Group is required to document in
advance the relationship between the item
being hedged and the hedging instrument.
The Group is also required to document
and demonstrate an assessment of the
relationship between the hedged item and
the hedging instrument, which shows that
the hedge will be highly effective on an
ongoing basis. This effectiveness testing
is reperformed at each period end to
ensure that the hedge remains highly
effective. The Group hedged elements of
its net investment in certain foreign entities
through foreign currency borrowings that
qualified for hedge accounting from
3 January 2007 until their replacement
on 6 May 2008; accordingly gains or losses
on retranslation are recognised in equity to
the extent that the hedge relationship was
effective during this period. Accumulated
gains or losses will be recycled to the
income statement only when the foreign
operation is disposed of. The ineffective
portion of any hedge is recognised
immediately in the income statement.

2.18 Finance costs
Finance costs consist of interest charges
accruing on the Group’s borrowings and
bank overdrafts together with commission
fees charged in respect of Letters of Credit.
Arrangement fees in respect of financing
arrangements are charged over the life
of the related facilities.

2.19 Provisions
The Group is subject to various insurance-
related 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

2.20 Leases
(a) Hiscox as lessee
Leases in which significantly all of the risks
and rewards of ownership are transferred
to the Group are classified as finance leases.
At the commencement of the lease term,
finance leases are recognised as assets
and liabilities at the lower of the fair value
of the asset and the present value of the
minimum lease payments. The minimum
lease payments are apportioned between
finance charges and repayments of the
outstanding liability, finance charges being
charged to each period of the lease term
so as to produce a constant rate of interest
on the outstanding balance of the liability.
All other leases are classified as operating
leases. Payments made under operating
leases (net of any incentives received from
the lessor) are charged to the income
statement on a straight-line basis over
the period of the lease.

(b) Hiscox as lessor
Rental income from operating leases is
recognised on a straight-line basis over the
term of the relevant contractual agreement.

2.21 Dividend distribution
Dividend distribution to the Company’s
shareholders is recognised as a liability
in the Group’s financial statements in the
period in which the dividends are approved.

2.22 Use of critical estimates, judgements
and assumptions
The preparation of financial statements
requires the use of significant estimates,
judgements and assumptions. The
Directors consider the accounting policies
for determining insurance liabilities, the
valuation of investments, the valuation
of retirement benefit scheme obligations
and the determination of deferred tax assets
and liabilities as being most critical to
an understanding of the Group’s result
and position.

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 2014
is £1,143 million (2013: £1,024 million) and
is included within total insurance liabilities
on the balance sheet.

Estimates of losses incurred but not
reported are continually evaluated, based
on entity-specific historical experience
and contemporaneous developments
observed in the wider industry when
relevant, and are also updated for
expectations of prospective future
developments. Although the possibility
exists for material changes in estimates
to have a critical impact on the Group’s

reported performance and financial
position, it is anticipated that the scale
and diversity of the Group’s portfolio of
insurance business considerably lessens
the likelihood of this occurring. The overall
reserving risk is discussed in more detail
in note 3.1 and the procedures used in
estimating the cost of settling insured
losses at the balance sheet date including
losses incurred but not reported are detailed
in note 26.

The Group carries its financial investments
at fair value through profit or loss, with fair
value determined using published price
quotations in the most active financial markets
in which the assets trade, where available.
During periods of economic distress and
diminished liquidity, the ability to obtain quoted
bid prices may be reduced and as such a
greater degree of judgement is required in
obtaining the most reliable source of valuation.
Note 3.2 to the financial statements discusses
the reliability of the Group’s fair values.

With regard to employee retirement benefit
scheme obligations, the amounts disclosed
in these consolidated financial statements
are sensitive to judgemental assumptions
regarding mortality, inflation, investment
returns and interest rates on corporate
bonds, many of which have been subject
to specific recent volatility. This complex
set of economic variables may be expected
to influence the liability obligation element
of the reported net balance amount to a
greater extent than the reported value of
the scheme assets element. As shown in
2014, official UK interest rates are replicated
with lower yields emerging in UK corporate
bond indices, a significant uplift has
occurred in the reported net scheme deficit
through the reduced effect of discounting
outweighing any expected appreciation
in asset values, as described along with
a sensitivity analysis in note 30.

Legislation concerning the determination
of taxation assets and liabilities is complex
and continually evolving. In preparing the
Group’s financial statements, the Directors
estimate taxation assets and liabilities after
taking appropriate professional advice.
To the extent that taxable losses carried
forward by the Group exceed taxable
temporary differences relating to the
same taxation authority and taxable entity,
which will result in amounts against which
the losses can be utilised, the Group uses
estimates of probable future taxable profits
available to determine whether recognition
of a deferred tax asset is appropriate. The
determination and finalisation of agreed
taxation assets and liabilities may not
occur until several years after the balance
sheet date and consequently the final
amounts payable or receivable may differ
from those presently recorded in these
financial statements.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

2 Significant accounting policies continued

2.23 Reporting of additional
performance measures
The Directors consider that the claims
ratio, expense ratio and combined ratio
measures reported in respect of operating
segments and the Group overall at note
4 provide useful information regarding
the underlying performance of the Group’s
businesses. These measures are widely
recognised by the insurance industry and
are consistent with internal performance
measures reviewed by senior management
including the chief operating decision-
maker. However, these three measures are
not defined within the IFRS framework and
body of standards and interpretations and
therefore may not be directly comparable
with similarly titled additional performance
measures reported by other companies. Net
asset value per share and return on equity
measures, disclosed at notes 5 and 6,
are likewise considered to be additional
performance measures.

3 Management of risk
The Group’s overall appetite for accepting
and managing varying classes of risk is
defined by the Group’s Board. The Board has
developed a governance framework and has
set Group-wide risk management policies and
procedures which include risk identification,
risk management and mitigation and risk
reporting. The objective of these policies
and procedures is to protect the Group’s
shareholders, policyholders and other
stakeholders from negative events that could
hinder the Group’s delivery of its contractual
obligations and its achievement of sustainable
profitable economic and social performance.

The Board exercises oversight of the
development and operational implementation
of its risk management policies and
procedures, and ongoing compliance
therewith, partially through its own enquiries
but primarily through a dedicated internal
audit function, which has operational
independence, clear terms of reference
influenced by the Board’s Non Executive
Directors and a clear upwards reporting
structure back into the Board. The Group, in
common with the non-life insurance industry
generally, is fundamentally driven by a desire
to originate, retain and service insurance
contracts to maturity. The Group’s cash
flows are funded mainly through advance
premium collections and the timing of such

premium inflows is reasonably predictable.
In addition, the majority of material cash
outflows are typically triggered by the
occurrence of insured events non-correlated
to financial markets, and not by the inclination
or will of policyholders.

The principal sources of risk relevant
to the Group’s operations and its financial
statements fall into two broad categories:
insurance risk and financial risk, both of
which are described in notes 3.1 and 3.2
below. The Group also actively manages
its capital risks as detailed in note 3.3.
Additional unaudited information is also
provided in the corporate governance, risk
management and capital sections of this
Report and Accounts.

3.1 Insurance risk
The predominant risk to which the Group
is exposed is insurance risk which is
assumed through the underwriting process.
Insurance risk can be sub-categorised into
i) underwriting risk including the risk of
catastrophe and systemic insurance losses
and the insurance competition and cycle,
and ii) reserving risk.

i) Underwriting risk
The Board sets the Group’s underwriting
strategy for accepting and managing
underwriting risk, seeking to exploit identified
opportunities in the light of other relevant
anticipated market conditions. Specific
underwriting objectives such as aggregation
limits, reinsurance protection thresholds,
geographical disaster event risk exposures
and line of business diversification parameters
are prepared and reviewed by the Chief
Underwriting Officer in order to translate the
Board’s summarised underwriting strategy
into specific measurable actions and
targets. These actions and targets are
reviewed and approved by the Board in
advance of each underwriting year. The
Board continually reviews its underwriting
strategy throughout each underwriting year
in light of the evolving market pricing and
loss conditions and as opportunities present
themselves. The Group’s underwriters and
management consider underwriting risk at
an individual contract level, and also from
a portfolio perspective where the risks
assumed in similar classes of policies are
aggregated and the exposure evaluated in
light of historical portfolio experience and
prospective factors. To assist with the process
of pricing and managing underwriting risk the
Group routinely performs a wide range of
activities including the following:
– regularly updating the Group’s

risk models;

– documenting, monitoring and reporting
on the Group’s strategy to manage risk;

– developing systems that facilitate
the identification of emerging
issues promptly;

– utilising sophisticated computer

modeling tools to simulate catastrophes
and measure the resultant potential
losses before and after reinsurance;

– monitoring legal developments

and amending the wording of policies
when necessary;

– regularly aggregating risk exposures

across individual underwriting portfolios
and known accumulations of risk;
– examining the aggregated exposures

in advance of underwriting further large
risks; and

– developing processes that continually
factor market intelligence into the
pricing process.

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.

The Group’s insurance contracts include
provisions to contain losses, such as the
ability to impose deductibles and demand
reinstatement premiums in certain cases.
In addition, in order to manage the Group’s
exposure to repeated catastrophic events,
relevant policies frequently contain payment
limits to cap the maximum amount payable
from these insured events over the
contract period.

The Board requires all underwriters to operate
within an overall Group appetite for individual
events. This defines the maximum exposure
that the Group is prepared to retain on its own
account for any one potential catastrophe
event or disaster. The Group’s underwriting
risk appetite seeks to ensure that it should
not lose more than 12.5% of core capital plus
100% of buffer capital (£100 million) with an
allowance for expected investment income, as
a result of a 1 in 200 bad underwriting year.

The Group compiles estimates of losses
arising from realistic disaster events using
statistical models alongside input from its
underwriters. These require significant
management judgement. Realistic disaster
scenarios, shown on page 17, are extreme
hypothetical events selected to represent
major events occurring in areas with large
insured values.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued

They also reflect the areas that represent significant exposures for Hiscox. The selection of realistic disaster scenario events is adjusted each
year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and as yet untested, and as
such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodeled risks. This
means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates
modeled by management.

The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection, such as excess of loss cover, is purchased
at an entity level and is also considered at an overall Group level to mitigate the effect of catastrophes and unexpected concentrations of risk.
However, the scope and type of reinsurance protection purchased may change depending on the extent and competitiveness of cover
available in the market.

Below is a summary of the gross and net insurance liabilities for each category, split by region of risk.

Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2014

UK and Ireland

Europe

United States

Other territories

Multiple territory coverage

Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net

Reinsurance
inwards
£000

1,062
597
6,847
4,257
140,396
75,508
88,526
70,028
278,842
218,032

Property –
marine and
major assets
£000

19,258
12,984
3,437
2,931
83,686
34,341
33,361
26,600
219,939
177,820

Property –
other
assets
£000

Casualty –
professional
indemnity
£000

138,727
117,505
86,757
74,997
159,758
85,594
52,401
37,373
94,604
61,043

361,541
347,246
145,288
144,173
322,116
309,998
22,519
22,491
41,639
41,089

Casualty –
other risks
£000

5,030
4,911
24,905
23,724
75,562
68,715
19,310
15,490
141,497
120,861

Types of insurance risk in the Group

*
Other
£000

Total
£000

19,808
13,459
26,059
24,169
28,031
24,120
108,143
86,725
86,150
63,073

545,426
496,702
293,293
274,251
809,549
598,276
324,260
258,707
862,671
681,918

Total

Gross

515,673

359,681

532,247

893,103

266,304

268,191 2,835,199

Net

368,422

254,676

376,512

864,997

233,701

211,546 2,309,854

Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2013

UK and Ireland

Europe

United States

Other territories

Multiple territory coverage

Total

Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net

Gross

Net

Reinsurance
inwards
£000

1,679
1,235
3,638
2,138
165,428
101,493
88,241
78,758
315,511
239,631

Property –
marine and
major assets
£000

Property –
other
assets
£000

Casualty –
professional
indemnity
£000

13,223
7,516
14,200
10,753
84,443
40,009
22,282
17,751
191,673
154,024

154,126
114,104
62,036
60,749
139,710
87,314
34,703
31,156
63,849
55,929

343,210
338,088
142,713
141,142
290,165
276,044
48,728
48,227
1,169
1,111

Casualty –
other risks
£000

6,460
6,408
16,141
14,021
45,374
38,460
8,760
8,666
110,563
89,441

Types of insurance risk in the Group

*
Other
£000

Total
£000

22,413
15,186
36,270
28,692
36,434
32,383
77,531
53,167
68,448
56,703

541,111
482,537
274,998
257,495
761,554
575,703
280,245
237,725
751,213
596,839

574,497

325,821

454,424

825,985

187,298

241,096 2,609,121

423,255

230,053

349,252

804,612

156,996

186,131 2,150,299

*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.

The estimated liquidity profile to settle these net claims liabilities is given in note 3.2 (e).

The specific insurance risks accepted by the Group fall broadly into the following main categories: reinsurance inwards, marine and major
asset property, other property risks, professional indemnity casualty and casualty other insurance risks. These specific categories are
defined for risk review purposes only, as each contains risks specific to the nature of the cover provided. They are not exclusively aligned
to any specific reportable segment in the Group’s operational structure or the primary internal reports reviewed by the chief operating
decision-maker. The following describes the policies and procedures used to identify and measure the risks associated with each
individual category of business.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued

Reinsurance inwards
The Group’s reinsurance inwards
acceptances are primarily focused on large
commercial property, homeowner and
marine and crop exposures held by other
insurance companies predominantly in
North America and other developed
economies. This business is characterised
more by large claims arising from individual
events or catastrophes than the high-
frequency, low-severity attritional
losses associated with certain other
business written by the Group. Multiple
insured losses can periodically arise out
of a single natural or man-made occurrence.
The main circumstances that result in
claims against the reinsurance inwards
book are conventional catastrophes,
such as earthquakes or storms, and other
events including fires and explosions.
The occurrence and impact of these
events are very difficult to model over the
short-term which complicates attempts to
anticipate loss frequencies on an annual
basis. In those years where there is a low
incidence of severe catastrophes, loss
frequencies on the reinsurance inwards
book can be relatively low.

A significant proportion of the reinsurance
inwards business provides cover on an
excess of loss basis for individual events.
The Group agrees to reimburse the cedant
once their losses exceed a minimum level.
Consequently the frequency and severity
of reinsurance inwards claims are related not
only to the number of significant insured
events that occur but also to their individual
magnitude. If numerous catastrophes
occurred in any one year, but the cedant’s
individual loss on each was below the
minimum stated, then the Group would have
no liability under such contracts. Maximum
gross line sizes and aggregate exposures
are set for each type of programme.

The Group writes reinsurance risks for periods
of mainly one year so that contracts can be
assessed for pricing and terms and adjusted
to reflect any changes in market conditions.

Property risks – marine and major assets
The Group directly underwrites a diverse
range of property risks. The risk profile
of the property covered under marine

and major asset policies is different to
that typically contained in the other
classes of property (such as private
households and contents insurance)
covered by the Group.

Typical property covered by marine and
other major property contracts includes
fixed and moveable assets such as ships
and other vessels, cargo in transit, energy
platforms and installations, pipelines, other
subsea assets, satellites, commercial
buildings and industrial plants and
machinery. These assets are typically
exposed to a blend of catastrophic and
other large loss events and attritional claims
arising from conventional hazards such as
collision, flooding, fire and theft. Climatic
changes may give rise to more frequent and
severe extreme weather events (for example
earthquakes, windstorms and river flooding
etc.) and it may be expected that their
frequency will increase over time.

For this reason the Group accepts major
property insurance risks for periods of
mainly one year so that each contract
can be repriced on renewal to reflect
the continually evolving risk profile. The
most significant risks covered for periods
exceeding one year are certain specialist
lines such as marine and offshore
construction projects which can typically
have building and assembling periods
of between three and four years. These
form a small proportion of the Group’s
overall portfolio.

Marine and major property contracts
are normally underwritten by reference
to the commercial replacement value of
the property covered. The cost of repairing
or rebuilding assets, of replacement or
indemnity for contents and time taken
to restart or resume operations to original
levels for business interruption losses are
the key factors that influence the level of
claims under these policies. The Group’s
exposure to commodity price risk in
relation to these types of insurance contracts
is very limited, given the controlled extent of
business interruption cover offered in the
areas prone to losses of asset production.

Other property risks
The Group provides home and contents
insurance, together with cover for artwork,
antiques, classic cars, jewellery, collectables
and other assets. The Group also extends
cover to reimburse certain policyholders
when named insureds or insured assets
are seized for kidnap and a ransom demand
is subsequently met. Events which can
generate claims on these contracts include
burglary, kidnap, seizure of assets, acts
of vandalism, fires, flooding and storm
damage. Losses on most classes can be
predicted with a greater degree of certainty
as there is a rich history of actual loss

experience data and the locations of the
assets covered, and the individual levels
of security taken by owners, are relatively
static from one year to the next. The losses
associated with these contracts tend to
be of a higher frequency and lower severity
than the marine and other major property
assets covered above.

The Group’s home and contents insurance
contracts are exposed to weather and
climatic risks such as floods and windstorms
and their consequences. As outlined earlier
the frequency and severity of these losses
do not lend themselves to accurate
prediction over the short-term. Contract
periods are therefore not normally more
than one year at a time to enable risks
to be regularly repriced.

Contracts are underwritten by reference
to the commercial replacement value
of the properties and contents insured.
Claims payment limits are always included
to cap the amount payable on occurrence
of the insured event.

Casualty insurance risks
The casualty underwriting strategy attempts
to ensure that the underwritten risks are
well diversified in terms of type and amount
of potential hazard, industry and geography.
However, the Group’s exposure is more
focused towards marine and professional
and technological liability risks rather than
human bodily injury risks, which are only
accepted under limited circumstances.
Claims typically arise from incidents
such as errors and omissions attributed
to the insured, professional negligence
and specific losses suffered as a result
of electronic or technological failure of
software products and websites.

The provision of insurance to cover
allegations made against individuals acting
in the course of fiduciary or managerial
responsibilities, including directors and
officers’ insurance, is one example of a
casualty insurance risk. However the
Group’s specific exposure to this specific
risk category is relatively limited. The
Group’s casualty insurance contracts mainly
experience low severity attritional losses.
By nature, some casualty losses may take
longer to settle than the other categories
of business.

The Group’s pricing strategy for casualty
insurance policies is typically based upon
historical claim frequencies and average
claim severities, adjusted for inflation
and extrapolated forwards to incorporate
projected changes in claims patterns.
In determining the price of each policy
an allowance is also made for acquisition
and administration expenses, reinsurance
costs, investment returns and the Group’s
cost of capital.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.1 Insurance risk continued

ii) Reserving risk
The Group’s procedures for estimating the
outstanding costs of settling insured losses
at the balance sheet date, including claims
incurred but not yet reported, are detailed
in note 26.

The majority of the Group’s insurance
risks are short-tail and, based on historical
claims experience, significant claims are
normally notified and settled within 12 to
24 months of the insured event occurring.
Those claims taking the longest time to
develop and settle typically relate to casualty
risks where legal complexities occasionally
develop regarding the insured’s alleged
omissions or negligence. The length of time
required to obtain definitive legal judgements
and make eventual settlements exposes
the Group to a degree of reserving risk
in an inflationary environment.

The majority of the Group’s casualty
exposures are written on a claims-made
basis. However the final quantum of these
claims may not be established for a number
of years after the event. Consequently
a significant proportion of the casualty
insurance amounts reserved on the balance
sheet may not be expected to settle within
24 months of the balance sheet date.

Certain marine and property insurance
contracts, such as those relating to
subsea and other energy assets and the
related business interruption risks, can
also take longer than normal to settle. This
is because of the length of time required
for detailed subsea surveys to be carried
out and damage assessments agreed
together with difficulties in predicting
when the assets can be brought back
into full production.

For the inwards reinsurance lines, there is
often a time lag between the establishment
and re-estimate of case reserves and reporting
to the Group. The Group works closely with
the reinsured to ensure timely reporting and
also centrally analyses industry loss data
to verify the reported reserves.

3.2 Financial risk
Overview
The Group is exposed to financial
risk through its ownership of financial
instruments including financial liabilities.
These items collectively represent a
significant element of the Group’s net
shareholder funds. The Group invests in
financial assets in order to fund obligations
arising from its insurance contracts and
financial liabilities.

The key financial risk for the Group is
that the proceeds from its financial assets

and investment result generated thereon
are not sufficient to fund the obligations.
The most important entity and economic
variables that could result in such an
outcome relate to the reliability of fair
value measures, equity price risk, interest
rate risk, credit risk, liquidity risk and
currency risk. The Group’s policies and
procedures for managing exposure to
these specific categories of risk are
detailed below.

(a) Reliability of fair values
The Group has elected to carry all financial
investments at fair value through profit
or loss as they are managed and evaluated
on a fair value basis in accordance with
a documented strategy. With the exception
of unquoted equity investments and the
insurance linked fund, all of the financial
investments held by the Group are available
to trade in markets and the Group therefore
seeks to determine fair value by reference
to published prices or as derived by pricing
vendors using observable quotations
in the most active financial markets in which
the assets trade. The fair value of financial
assets is measured primarily with reference
to their closing bid market prices at the
balance sheet date. The ability to obtain
quoted bid market prices may be reduced
in periods of diminished liquidity. In addition,
those quoted 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.

At 31 December 2014, the Group holds
asset-backed and mortgage-backed
fixed income instruments in its investment
portfolio, but has minimal direct exposure
to sub-prime asset classes. Together
with the Group’s investment managers,
management continues to monitor the
potential for any adverse development
associated with this investment exposure
through the analysis of relevant factors such
as credit ratings, collateral, subordination
levels and default rates in relation to
the securities held. The Group did not
experience any material defaults on debt
securities during the year.

Valuation of these securities will continue
to be impacted by external market factors
including default rates, rating agency
actions, and liquidity. The Group will make
adjustments to the investment portfolio
as appropriate as part of its overall portfolio

strategy, but its ability to mitigate its risk
by selling or hedging its exposures may
be limited by the market environment.
The Group’s future results may be
impacted, both positively and negatively,
by the valuation adjustments applied to
these securities.

Note 22 provides an analysis of the
measurement attributes of the Group’s
financial instruments.

(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

2014
% weighting

2013
% weighting

Directly held equity
securities
Units held in funds –
traditional long only
Units held in funds –
long and short and
special strategies

Geographic focus
Specific UK mandates
Global mandates

47
53

42
58

The allocation of equity risk is not heavily
confined to any one market index so as
to reduce the Group’s exposure to individual
sensitivities. A 10% downward correction
in equity prices at 31 December 2014
would have been expected to reduce
Group equity and profit after tax for the
year by approximately £22.6 million (2013:
£19.9 million) assuming that the only area
impacted was equity financial assets.
A 10% upward movement is estimated
to have an equal but opposite effect.

(c) Interest rate risk
Fixed income investments represent
a significant proportion of the Group’s
assets and the Board continually monitors
investment strategy to minimise the risk
of a fall in the portfolio’s market value which
could affect the amount of business that
the Group is able to underwrite or its ability
to settle claims as they fall due. The fair
value of the Group’s investment portfolio
of debt and fixed income securities is
normally inversely correlated to movements
in market interest rates. If market interest
rates rise, the fair value of the Group’s debt
and fixed income investments would tend

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

3 Management of risk continued
3.2 Financial risk continued
(c) Interest rate risk continued

to fall and vice versa if credit spreads
remained constant.

Debt and fixed income assets are
predominantly invested in high-quality
corporate, government and asset-backed
bonds. The investments typically have
relatively short durations and terms to
maturity. The portfolio is managed to
minimise the impact of interest rate risk
on anticipated Group cash flows.

The Group may also, from time-to-time,
enter into interest rate future contracts
in order to minimise the interest rate risk
on specific longer duration portfolios.
The fair value of debt and fixed income
assets in the Group’s balance sheet at
31 December 2014 was £2,526 million
(2013: £2,336 million). These may be
analysed below as follows:

Nature of debt and
fixed income holdings

2014
% weighting

2013
% weighting

Government issued bonds
and instruments
Agency and government
supported debt
Asset-backed securities
Mortgage-backed
instruments – agency
Mortgage-backed
instruments – non-agency
Mortgage-backed
instruments – commercial
Corporate bonds
Lloyd’s deposits and
bond funds

12
9

6
34

9
10

3
26

One method of assessing interest rate
sensitivity is through the examination of
duration-convexity factors in the underlying
portfolio. Using a duration-convexity-based
sensitivity analysis, if market interest rates
had risen by 100 basis points at the balance
sheet date, the Group equity and profit after
tax for the year might have been expected
to decrease by approximately £36 million
(2013: £31 million) assuming that the only
balance sheet area impacted was debt and
fixed income financial assets.

flow stream to be recovered, where the
weightings involved are based on the
discounted present values of each cash
flow. A closely related concept, modified
duration, measures the sensitivity of the
instrument’s price to a change in its yield
to maturity. Convexity measures the
sensitivity of modified duration to changes
in the yield to maturity.

Using these three concepts, scenario
modeling derives the above estimated impact
on instruments’ fair values for a 100 basis
point change in the term structure of market
interest rates.

Insurance contract liabilities are not directly
sensitive to the level of market interest rates,
as they are undiscounted and contractually
non-interest-bearing. The Group’s debt
and fixed income assets are further detailed
at note 19.

At 31 December 2014, no amounts were
outstanding on the Group’s borrowing
facility (2013: £nil). The Group has no other
significant borrowings or other assets or
liabilities carrying interest rate risk, other
than the facilities and Letters of Credit
outlined in note 34.

(d) Credit risk
The Group has exposure to credit risk, which
is the risk that a counterparty will suffer a
deterioration in perceived financial strength
or be unable to pay amounts in full when due.

The concentrations of credit risk exposures
held by insurers may be expected to be
greater than those associated with other
industries, due to the specific nature of
reinsurance markets and the extent of
investments held in financial markets. In both
markets, the Group interacts with a number
of counterparties who are engaged in similar
activities with similar customer profiles,
and often in the same geographical areas
and industry sectors. Consequently,
as many of these counterparties are
themselves exposed to similar economic
characteristics, one single localised or
macroeconomic change could severely
disrupt the ability of a significant number
of counterparties to meet the Group’s
agreed contractual terms and obligations.

Key areas of exposure to credit risk include:
– reinsurers’ share of insurance liabilities;
– amounts due from reinsurers in respect

of claims already paid;

– amounts due from insurance contract

holders; and

– counterparty risk with respect to cash
and cash equivalents, and investments
including deposits, derivative
transactions and catastrophe bonds.

Duration is the weighted average length
of time required for an instrument’s cash

The Group’s maximum exposure to credit
risk is represented by the carrying values

of financial assets and reinsurance
assets included in the consolidated balance
sheet at any given point in time. The Group
does not use credit derivatives or other
products to mitigate maximum credit risk
exposures on reinsurance assets. The
Group structures the levels of credit risk
accepted by placing limits on their exposure
to a single counterparty, or groups of
counterparties, and having regard to
geographical locations. Such risks are
subject to an annual or more frequent
review. There is no significant concentration
of credit risk with respect to loans and
receivables, as the Group has a large
number of internationally dispersed debtors
with unrelated operations. Reinsurance is
used to contain insurance risk. This does
not, however, discharge the Group’s liability
as primary insurer. If a reinsurer fails to pay
a claim for any reason, the Group remains
liable for the payment to the policyholder.
The creditworthiness of reinsurers is
therefore continually reviewed throughout
the year.

The Group Reinsurance Security Committee
assesses the creditworthiness of all
reinsurers by reviewing credit grades
provided by rating agencies and other
publicly available financial information
detailing their financial strength and
performance. The financial analysis of
reinsurers produces an assessment
categorised by Standard & Poor’s (S&P)
rating (or equivalent when not available
from S&P).

Despite the rigorous nature of this
assessment exercise, and the resultant
restricted range of reinsurance
counterparties with acceptable strength
and credit credentials that emerges
therefrom, some degree of credit risk
concentration remains inevitable.

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.
This information is used to update the
reinsurance purchasing strategy. Individual
operating units maintain records of the
payment history for significant brokers and
contract holders with whom they conduct
regular business. The exposure to individual
counterparties is also managed by other
mechanisms, such as the right of offset,
where counterparties are both debtors
and creditors of the Group, and obtaining
collateral from unrated counterparties.
Management information reports detail
provisions for impairment on loans and
receivables and subsequent write-off.
Exposures to individual intermediaries
and groups of intermediaries are collected
within the ongoing monitoring of the controls
associated with regulatory solvency.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.2 Financial risk continued
(d) Credit risk continued

The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in highly liquid instruments,
including a particular emphasis on government bonds issued mainly by North American countries and the European Union. The Group
has a £9.2 million exposure to sovereign debt in Spain and Italy.

An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s
or equivalent rating, is presented below:

As at 31 December 2014

Debt and fixed income securities
Deposits with credit institutions
Reinsurance assets
Cash and cash equivalents

Total

Amounts attributable to largest single counterparty

As at 31 December 2013

Debt and fixed income securities
Deposits with credit institutions
Reinsurance assets
Cash and cash equivalents

Total

Note

AAA
£000

AA
£000

A
£000

Other/
non-rated
£000

Total
£000

726,822
–
53,960
64,260

999,298
3,482
182,558
5,050

508,734
19,296
262,520
577,834

291,325 2,526,179
26,385
525,345
650,651

3,607
26,307
3,507

845,042 1,190,388 1,368,384

324,746 3,728,560

164,004

335,676

256,758

12,475

AAA
£000

AA
£000

A
£000

Other/
non-rated
£000

Total
£000

654,602 1,143,308
4,292
149,759
86,436

–
12,020
132,415

310,642
1,802
269,353
344,868

227,277 2,335,829
6,240
458,822
564,375

146
27,690
656

799,037 1,383,795

926,665

255,769 3,365,266

Amounts attributable to largest single counterparty

115,430

517,997

110,198

7,050

The largest counterparty exposure within the AAA rating at 31 December 2014 and 2013 is the German Government. For the AA rating it
is with the US Treasury at both 31 December 2014 and 2013. A significant proportion of other/non-rated assets are rated BBB and BB at
both 31 December 2014 and 2013.

At 31 December 2014 and 2013 the Group held no material debt or fixed income assets that were past due or impaired beyond their reported
fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not
experience any material defaults on debt securities.

Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are
exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with
its investment managers, closely manages its geographical exposures across government issued and supported debt.

The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2014 and 2013.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the consolidated financial statements
continued

3 Management of risk continued
3.2 Financial risk continued

(e) Liquidity risk
The Group is exposed to daily calls on its available cash resources, mainly from claims arising from insurance and reinsurance contracts.
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the
minimum level of cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities that should
be in place to cover unexpected levels of claims and other cash demands.

A significant proportion of the Group’s investments is in highly liquid assets which could be converted to cash in a prompt fashion and at
minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which
the Group can easily access. The Group’s exposure to equities is concentrated on shares and funds that are traded on internationally
recognised stock exchanges.

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

Less than one year
Between one and two years
Between two and five years
Over five years

Sub-total

Lloyd’s deposits

Total

Debt and
fixed income
securities
£000

465,868
529,526
1,052,013
421,616

Deposits
with credit
institutions
£000

25,507
–
878
–

Cash
and cash
equivalents
£000

2014
Total
£000

2013
Total
£000

650,651 1,142,026 1,129,902
517,064
–
529,526
846,583
– 1,052,891
332,822
421,616
–

2,469,023

26,585

650,651 3,146,059 2,826,371

57,156

–

57,156

80,073

2,526,179

26,385

650,651 3,203,215 2,906,444

The Group’s equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be
liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.

The available headroom of working capital is monitored through the use of a detailed Group cash flow forecast which is reviewed
by management monthly or more frequently as required.

Average contractual maturity analysed by
denominational currency of investments as at 31 December

Pound Sterling
US Dollar
Euro
Canadian Dollar

2014
Years

2.76
6.43
2.33
1.86

2013
Years

2.35
5.86
2.25
1.79

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.2 Financial risk continued
(e) Liquidity risk continued

The following is an analysis by liability type of the estimated timing of net cash flows based on the net claims liabilities held. The Group does
not discount claims liabilities. The estimated phasing of settlement is based on current estimates and historical trends and the actual timing
of future settlement cash flows may differ materially from that disclosure below.

Liquidity requirements to settle estimated
profile of net claim liabilities on balance sheet

Reinsurance inwards
Property – marine and major assets
Property – other assets
Casualty – professional indemnity
Casualty – other risks
Other*

Total

Liquidity requirements to settle estimated
profile of net claim liabilities on balance sheet

Reinsurance inwards
Property – marine and major assets
Property – other assets
Casualty – professional indemnity
Casualty – other risks
Other*

Total

Within
one year
£000

Between one
and two years
£000

Between two
and five years
£000

Over
five years
£000

2014
Total
£000

143,946
79,272
86,444
165,465
43,700
47,906

71,902
46,400
56,704
173,795
35,999
16,078

71,750
50,942
18,449
220,867
64,639
19,214

24,377
17,770
4,924
92,612
31,183
15,207

311,975
194,384
166,521
652,739
175,521
98,405

566,733

400,878

445,861

186,073 1,599,545

Within
one year
£000

Between one
and two years
£000

Between two
and five years
£000

Over
five years
£000

2013
Total
£000

166,697
58,849
90,546
138,587
33,359
51,992

84,103
33,052
43,530
107,378
26,731
19,133

82,144
40,302
18,577
308,010
55,147
25,150

20,486
13,657
2,686
45,128
16,999
10,873

353,430
145,860
155,339
599,103
132,236
107,148

540,030

313,927

529,330

109,829 1,493,116

*Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.

Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 21 and 27.

(f) Currency risk
The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling
and the Euro. These exposures may be classified in two main categories:
1)

Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within
the Group results; and
Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group
of international insurance entities serving international communities, where rights and obligations are denominated in currencies
other than each respective entity’s functional currency.

The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operations
in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net
investments made in European operations. 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. Exchange rate derivatives are used when
appropriate to shield the Group against significant movements outside of a defined range.

At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between Group companies where
one party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to
relate to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain
a fuller understanding of the Group’s financial performance (note 13).

The Group has the ability to draw on its current borrowing facility in any currency requested, enabling the Group to match its funding
requirements with the relevant currency.

Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are
generally invested in the same currencies as their underlying insurance and investment liabilities, intended to produce a natural hedge.
Due attention is paid to local regulatory solvency and risk-based capital requirements.

Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative
transactions with external parties are managed centrally. Included in the tables on pages 94 and 95 are net non-monetary liabilities of
£197 million (2013: £196 million) which are denominated in foreign currencies.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the consolidated financial statements
continued

3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued

As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during
a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded at
original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs
and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium
recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date.
The Group considers this to be a timing issue which can cause significant volatility in the income statement. Further details of the impact
of the accounting treatment are provided in note 12.

The currency profile of the Group’s assets and liabilities is as follows:

Sterling
£000

US Dollar
£000

Euro
£000

Other
£000

Total
£000

95,542
23,145
10,125
–
62,792

7,259
4,456
–
32,250
132,742
653,160 1,846,260
406,073
55,790
311,111
179,638
–
–
355,229
130,829

–
886
545
1,240
29,467
295,219
40,534
40,802
7,981
87,500

3,145
1,010
–
–
5,372

105,946
29,497
10,670
33,490
230,373
34,208 2,828,847
525,345
22,948
556,259
24,708
8,031
50
650,651
77,093

1,211,021 3,095,380

504,174

168,534 4,979,109

Sterling
£000

US Dollar
£000

Euro
£000

Other
£000

Total
£000

32,166
26,390

–
–
675,086 1,695,425
7,033
–
409,741

–
31,455
143,528

–
–
356,092
–
924
14,342

–
–

32,166
26,390
108,596 2,835,199
7,109
32,379
591,660

76
–
24,049

908,625 2,112,199

317,358

132,721 3,524,903

As at 31 December 2014

Intangible assets
Property, plant and equipment
Investments in associates
Deferred tax
Deferred acquisition costs
Financial assets carried at fair value
Reinsurance assets
Loans and receivables including insurance receivables
Current tax asset
Cash and cash equivalents

Total assets

Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables

Total liabilities

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued

As at 31 December 2013

Sterling
£000

US Dollar
£000

Euro
£000

Other
£000

Total
£000

66,412
15,198
7,648
–
59,263

6,308
4,023
–
30,526
106,386
633,631 1,638,455
348,888
256,103
–
250,121

58,885
157,583
–
162,746

–
998
106
1,597
27,168
273,732
39,149
57,427
3,530
103,539

–
–
–
–
4,811

72,720
20,219
7,754
32,123
197,628
39,236 2,585,054
458,822
11,900
493,419
22,306
3,530
–
564,375
47,969

Total assets

1,161,366 2,640,810

507,246

126,222 4,435,644

Sterling
£000

US Dollar
£000

Euro
£000

Other
£000

Total
£000

Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables

Total liabilities

4,366
75,946

–
–
670,049 1,499,514
229
–
159,734

–
32,332
115,136

–
–
345,130
–
51
23,542

–
–

4,366
75,946
94,428 2,609,121
229
32,383
304,138

–
–
5,726

897,829 1,659,477

368,723

100,154 3,026,183

Sensitivity analysis
As at 31 December 2014, the Group used closing rates of exchange of £1:€1.28 and £1:$1.56 (2013: £1:€1.20 and £1:$1.65). The Group
performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis
assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities
in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements
of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling
functional currency financial statements. During the year, the Group transacted in a number of over-the-counter forward currency derivative
contracts. The impact of these contracts on the sensitivity analysis is negligible.

As at 31 December 2014

Strengthening of US Dollar
Weakening of US Dollar
Strengthening of Euro
Weakening of Euro

Effect on equity
after tax
£m

Effect on profit
before tax
£m

112.1
(91.4)
15.7
(12.8)

41.7
(33.8)
16.3
(13.2)

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the
consolidated
financial statements
continued

3 Management of risk continued
3.2 Financial risk continued

(g) Limitations of sensitivity analysis
The sensitivity information given in notes
(a) to (f) above 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 at note 30 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.

The sensitivity analysis does not take into
consideration that the Group’s assets and
liabilities are actively managed. Additionally,
the financial position of the Group may vary
at the time that any actual market movement
occurs. For example, the Group’s financial
risk management strategy aims to manage
the exposure to market fluctuations. As
investment markets move past various
trigger levels, management actions could
include selling investments, changing
investment portfolio allocation and taking
other protective action.

3.3 Capital risk management
The Group’s primary objectives when
managing its capital position are:
– to safeguard its ability to continue
as a going concern, so that it can
continue to provide long-term growth
and progressive dividend returns
for shareholders;

– to provide an adequate return to

the Group’s shareholders by pricing
its insurance products and services
commensurately with the level of risk;
–to maintain an efficient cost of capital;
– to comply with all regulatory
requirements by a significant
margin; and

– to maintain financial strength ratings

of A in each of its insurance entities.

The Group sets the amount of capital
required in its funding structure in proportion
to risk. The Group then manages the capital
structure and makes adjustments to it in the

light of changes in economic conditions
and the risk characteristics of the underlying
assets. In order to obtain or maintain an
optimal capital structure the Group may
adjust the amount of dividends paid to
shareholders, return capital to shareholders,
issue new shares, assume debt, or sell
assets to reduce debt.

The Group’s activities are funded by a
mixture of capital sources including issued
equity share capital, retained earnings,
Letters of Credit, bank debt and other
third-party insurance capital.

The Board ensures that the use and
allocation of capital are given a primary
focus in all significant operational actions.
With that in mind, the Group has developed
and embedded capital modeling tools within
its business. These join together short-term
and long-term business plans and link
divisional aspirations with the Group’s overall
strategy. The models provide the basis of the
allocation of capital to different businesses
and business lines, as well as the regulatory
and rating agency capital processes.

During the year the Group was in compliance
with capital requirements imposed by
regulators in each jurisdiction where the
Group operates.

There were no changes in the Group’s
approach to capital risk management during
the current or prior year under review.

Gearing
The Group currently utilises short- to
medium-term gearing as an additional
source of funds to maximise the
opportunities from strong markets and to
reduce the risk profile of the business when
the rating environment shows a weaker
model for the more volatile business. The
Group’s gearing is obtained from a number
of sources, including:
– Letter of Credit and revolving credit
facility – the Group’s main facility of
$875 million may be drawn as cash
(under a revolving credit facility), Letter
of Credit or a combination thereof,
providing that the cash portion does
not exceed $400 million. This facility
was re-secured during 2014 by the
Company’s subsidiary Hiscox plc.
The Letter of Credit availability period
ends on 31 December 2015. This
enables the Group to utilise the Letter
of Credit as Funds at Lloyd’s to support
underwriting on the 2014, 2015 and
2016 years of account. The revolving
credit facility has a maximum three-year
contractual period for repayment.
At 31 December 2014 US$441.5 million
was drawn by way of Letter of Credit
to support the Funds at Lloyd’s
requirement and there were no cash
drawings (2013: $333 million and

£nil million respectively) to support
general trading activities;

– external Names – 27.5% of Syndicate
33’s capacity is capitalised by
third-parties paying a profit share
of approximately 20%;

– Syndicate 6104 at Lloyd’s – with

a capacity of £72 million for the 2014
year of account (2013 year of account:
£66 million). This Syndicate is wholly
backed by external members and takes
pure years of account quota share
of Syndicate 33’s international property
catastrophe reinsurance account;

– gearing quota shares – historically

the Group has used reinsurance
capital to fund its capital requirement
for short-term expansions in the
volume of business underwritten
by the Syndicate; and

– qualifying quota shares – these are

reinsurance arrangements that allow
the Group to increase the amount
of premium it writes.

The funds raised through Letters of
Credit and loan facilities have been applied
to support both the 2014 year of account
for Syndicates 33 and 3624 and the capital
requirements of Hiscox Insurance Company
(Bermuda) Limited.

Financial strength
The financial strength ratings of the Group’s
significant insurance company subsidiaries
are outlined below:

Hiscox Insurance
Company Limited

Hiscox Insurance
Company (Bermuda)
Limited

Hiscox Insurance
Company (Guernsey)
Limited

Hiscox Insurance
Company Inc.

A.M. Best

Fitch

Standard
& Poor’s

A (Excellent)

A+ A (Strong)

A (Excellent)

A+

A (Excellent)

A+

A (Excellent)

–

Syndicate 33 benefits from an A.M. Best
rating of A (Excellent). In addition, the
Syndicate also benefits from the Lloyd’s
ratings of A (Excellent) from A.M. Best,
A+ (Strong) from Standard & Poor’s and
AA- (Very strong) from Fitch.

Capital performance
The Group’s main capital performance
measure is the achieved return on equity
(ROE). This marker best aligns the
aspirations of employees and shareholders.
As variable remuneration, the vesting of
options and longer-term investment plans
all relate directly to ROE, this concept is
embedded in the workings and culture of
the Group. The Group maintains its cost of
capital levels and its debt to overall equity
ratios in line with others in the non-life
insurance industry.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

3 Management of risk continued
3.3 Capital risk management continued

Capital modeling and regulation
The capital requirements of an insurance
group are determined by its exposure
to risk and the solvency criteria established
by management and statutory regulations.

The Group’s capital requirements are
managed both centrally and at a regulated
entity level. The assessed capital requirement
for the business placed through Hiscox
Insurance Company Limited, Hiscox
Insurance Company (Bermuda) Limited,
Hiscox Insurance Company (Guernsey)
Limited and Hiscox Insurance Company
Inc. is driven by the level of resources
necessary to maintain both regulatory
requirements and the capital necessary
to maintain financial strength of an A rating.

The Group’s regulatory capital is
supervised by the Bermuda Monetary
Authority (BMA). The BMA’s new regulatory
capital requirements became effective on
1 January 2013. The Group had sufficient
capital to meet these requirements.

The current capital regime in the UK requires
insurance companies to calculate their own
capital requirements through Individual
Capital Assessments (ICA). Hiscox Insurance
Company Limited and Hiscox’s Lloyd’s
operations maintain models in accordance
with this regime. Hiscox’s Lloyd’s operations
now use the internal model that has been
built to meet the requirements of the
forthcoming Solvency II regime to carry out
the ICA as part of Lloyd’s transition towards
Solvency II. The models are concentrated
specifically on the particular product lines,
market conditions and risk appetite of each
entity. The Group uses its own integrated
modeling expertise to produce the ICA
calculations. The results mirror those driving
the existing internal capital setting process.

For Syndicate 33 and Syndicate 3624, the
ICA process produces a result that is uplifted
by Lloyd’s to identify the capital required to
hold the A rating. The strong control and risk
management environment, together with the
sophistication of the modeling, have produced
a capital ratio below that suggested under the
previous risk-based capital regime. Another
key area of capital modeling for Hiscox is
to identify which insurance vehicle produces
the best return on capital employed for the
Group, given certain restraints from licences,
reinsurance and the regulatory environment.
This modeling takes into account
transactional costs and tax, in addition
to the necessary capital ratios. It proves the
capital efficiency of Lloyd’s, despite a tax
disadvantage against offshore entities, and
the cost advantage of processing smaller
premium business outside of Lloyd’s.
In addition to the ICA modeling process,

the EU Insurance Groups Directive of
1998, as amended by the Financial Groups
Directive (FGD), compels insurance companies
that are members of a group to consider
the solvency margin of their ultimate parent
company. This consideration must refer to the
surplus assets of the ultimate parent’s related
insurers, reinsurers, intermediate holding
companies and other regulated entities.

The FGD has been applied in the UK through
the Integrated Prudential Sourcebook for
Insurers (INSPRU) and General Prudential
Sourcebook (GENPRU). In accordance
with these provisions, the parent company’s
solvency margin consideration became
a minimum capital requirement for the
Group from 31 December 2006 onwards.
The Group complied with the requirement
for the current and prior year.

In the Group’s other geographical territories,
including the US and Asia, its subsidiaries
underwriting insurance business are required
to operate within broadly similar risk-based
externally imposed capital requirements
when accepting business.

4 Operating segments
The Group’s operating segment reporting
follows the organisational structure and
management’s internal reporting systems,
which form the basis for assessing the
financial reporting performance of, and
allocation of resource to each business
segment. During 2013 the Group
restructured its reinsurance business
written by the London, Bermuda and
Paris teams and combined them into one
operating unit, Hiscox Re. In addition we
introduced a single management structure
for UK and Europe and brought all retail
business under one umbrella. From January
2014 the Group commenced reporting
and monitoring its performance along
these new reporting lines.

The changes from the 2013 structure
comprised:
– separating the London Market business
unit into insurance and reinsurance lines,
forming the London Market Insurance
division and combining the reinsurance
business with Hiscox Bermuda to make
Hiscox Re;

– bringing together Hiscox UK and Europe
with Hiscox Guernsey, Hiscox US and
the newly acquired DirectAsia business
to form Hiscox Retail;

– the Corporate Centre division has

remained unchanged.

As a consequence of the change in
reportable segments, the corresponding
operating results and combined ratios for
earlier periods presented have been restated
on a comparable basis. There is no impact
to the overall profit before tax or the net asset
value of the Group for prior periods.

The Group’s four revised primary business
segments are identified as follows:
– Hiscox Retail brings together the
results of the UK and Europe, and
Hiscox International being the US,
Guernsey and Asia retail business
divisions. Hiscox UK and Europe
underwrite European personal and
commercial lines of business through
Hiscox Insurance Company Limited,
together with the fine art and non-US
household insurance business written
through Syndicate 33. In addition, the
UK includes elements of specialty and
international employees and officers’
insurance written by Syndicate 3624.
Hiscox International comprises the
specialty and fine art lines written
through Hiscox Insurance Company
(Guernsey) Limited, and the motor
business written via DirectAsia,
together with US commercial, property
and specialty business written by
Syndicate 3624 and Hiscox Insurance
Company Inc. via the Hiscox USA
business division.

– Hiscox London Market comprises
the internationally traded insurance
business written by the Group’s
London-based underwriters via
Syndicate 33, including lines in
property, marine and energy, casualty
and other specialty insurance lines.
In addition, the segment includes
elements of business written by
Syndicate 3624 being auto physical
damage, auto extended warranty and
aviation business.

– Hiscox Re is the reinsurance division

of the Hiscox Group, combining the
underwriting platforms in Bermuda,
London and Paris. The segment
comprises the performance of Hiscox
Insurance Company (Bermuda) Limited,
excluding the internal quota share
arrangements, with the reinsurance
contracts written by Syndicate 33. In
addition, the healthcare and casualty
reinsurance contracts written in the
Bermuda hub on Syndicate capacity
are also included. The segment also
captures the performance of Kiskadee,
the Hiscox Group’s Insurance Linked
Securities business.

– Corporate Centre comprises the
investment return, finance costs
and administrative costs associated
with Group management activities.
Corporate Centre also includes the
majority of foreign currency items on
economic hedges and intragroup
borrowings. These relate to certain
foreign currency items on economic
hedges and intragroup borrowings.
Further details of these can be found
in note 13. Corporate Centre forms
a reportable segment due to its
investment activities which earn
significant external returns.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the consolidated financial statements
continued

4 Operating segments continued

All amounts reported below represent transactions with external parties only. In the normal course of trade, the Group’s entities enter
into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are
not included within the results of the segments. This is consistent with the information used by the chief operating decision-maker when
evaluating the results of the Group. Performance is measured based on each reportable segment’s profit before tax.

(a) Profit before tax by segment

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

Year to 31 December 2014

Year to 31 December 2013 restated

Gross premiums
written
Net premiums
written
Net premiums
earned

Investment result
Other revenues

891,115

510,825

354,320

– 1,756,260

819,388

468,587

411,503

– 1,699,478

825,878

336,895

180,637

– 1,343,410

751,144

359,941

260,029

–

1,371,114

790,721

332,497

193,041

– 1,316,259

711,081

303,251

268,979

– 1,283,311

25,934
6,643

8,719
6,283

9,348
6,777

12,211
253

56,212
19,956

19,134
7,841

6,262
6,426

14,381
5,485

20,032
1,153

59,809
20,905

Revenue

823,298

347,499

209,166

12,464 1,392,427

738,056

315,939

288,845

21,185 1,364,025

Claims and claim
adjustment
expenses, net of
reinsurance
Expenses for
the acquisition
of insurance
contracts
Operational
expenses
Foreign exchange
gains/(losses)

(325,806)

(159,864)

(45,998)

–

(531,668)

(299,781)

(136,788)

(82,710)

–

(519,279)

(205,748)

(93,569)

(19,299)

–

(318,616)

(188,414)

(86,108)

(31,255)

–

(305,777)

(209,213)

(40,597)

(39,623)

(21,420)

(310,853)

(184,348)

(27,981)

(41,027)

(23,609)

(276,965)

(5,121)

9,044

2,682

(1,631)

4,974

(3,911)

(1,873)

(3,308)

(798)

(9,890)

Total expenses

(745,888)

(284,986)

(102,238)

(23,051) (1,156,163)

(676,454)

(252,750)

(158,300)

(24,407)

(1,111,911)

Results of operating
activities
Finance costs
Share of profit/(loss)
of associates
after tax

77,410
–

62,513
(46)

106,928
(1,365)

(10,587)
(5,007)

236,264
(6,418)

61,602
–

63,189
(45)

130,545
(1,563)

(3,222)
(5,568)

252,114
(7,176)

655

182

–

392

1,229

(423)

–

(400)

Profit before tax

78,065

62,649

105,563

(15,202)

231,075

61,179

63,144

128,982

(8,767)

244,538

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

4 Operating segments continued
(a) Profit before tax by segment continued

The following charges are included within the consolidated income statement:

Year to 31 December 2014

Year to 31 December 2013 restated

Depreciation
Amortisation of
intangible assets

Hiscox
Retail
£000

2,098

Hiscox
London
Market
£000

472

6,892

2,522

Hiscox
Re
£000

208

504

Corporate
Centre
£000

Total
£000

Hiscox
Retail
£000

2,874

1,917

Hiscox
London
Market
£000

444

9,983

4,232

1,820

Hiscox
Re
£000

205

818

Corporate
Centre
£000

Total
£000

2,651

6,934

The Group’s wholly-owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. The Group’s
percentage participation in Syndicate 33 can fluctuate from year-to-year and, consequently, presentation of the results at the 100% level
removes any distortions arising therefrom.

Year to 31 December 2014

Year to 31 December 2013 restated

Hiscox
Re

Corporate
Centre

100% ratio analysis

Claims ratio (%)
Expense ratio (%)

Combined ratio excluding
foreign exchange impact (%)
Foreign exchange impact (%)

Combined ratio (%)

Combined ratio excluding
non-monetary foreign
exchange impact (%)

Hiscox
Retail

40.9
52.0

92.9
0.6

93.5

Hiscox
London
Market

47.4
39.8

87.2
(3.0)

84.2

22.0
29.6

51.6
(1.8)

49.8

93.1

86.1

49.8

Total

39.8
44.9

84.7
(0.8)

83.9

Hiscox
Retail

41.6
52.1

93.7
0.6

94.3

Hiscox
London
Market

43.5
36.8

80.3
1.1

81.4

Hiscox
Re

30.9
26.4

57.3
1.6

58.9

84.5

94.4

80.8

58.9

Corporate
Centre

–
–

–

Total

39.8
42.3

82.1
0.9

83.0

82.8

–
–

–

The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned.
The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses, including
profit-related pay, as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains
or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact
ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the
expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred
acquisition costs at year-end rates of exchange. All ratios are calculated using the 100% results.

Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio. The impact
on profit before tax of a 1% change in each component of the segmental combined ratios is:

At 100% level (note 4b)
1% change in claims or expense ratio

At Group level
1% change in claims or expense ratio

Year to 31 December 2014

Year to 31 December 2013 restated

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

8,089

4,273

2,293

7,907

3,325

1,930

–

7,284

3,889

3,181

7,111

3,033

2,690

–

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Notes to the consolidated financial statements
continued

4 Operating segments continued

(b) 100% operating result by segment

Year to 31 December 2014

Year to 31 December 2013 restated

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

Gross premiums written
Net premiums written
Net premiums earned

914,372 647,094 421,599
844,471 434,133 215,534
808,876 427,342 229,343

– 1,983,065 841,251 595,932 486,938
– 1,494,138 768,518 447,819 303,520
– 1,465,561 728,361 388,867 318,086

– 1,924,121
– 1,519,857
– 1,435,314

Investment result
Other revenues
Claims and claim adjustment
expenses, net of reinsurance
Expenses for the acquisition
of insurance contracts
Operational expenses
Foreign exchange
(losses)/gains

Results of operating
activities

26,191
2,618

11,722
–

10,364
1,136

12,211
253

60,488
4,007

19,290
5,418

8,575
–

15,180
1,832

20,032
1,153

63,077
8,403

(330,554)

(202,670)

(50,434)

–

(583,658)

(303,326)

(168,990)

(98,379)

– (570,695)

(211,407)
(208,961)

(120,417)
(49,242)

(23,760)
(44,048)

–
(21,420)

(355,584)
(323,671)

(193,659)
(185,772)

(109,453)
(33,594)

(38,463)
(45,627)

–
(23,609)

(341,575)
(288,602)

(5,196)

12,713

4,080

(1,631)

9,966

(4,034)

(4,444)

(4,947)

(798)

(14,223)

81,567

79,448

126,681

(10,587

)

277,109

66,278

80,961

147,682

(3,222

)

291,699

Segment results at the 100% level presented above differ from those presented at the Group’s share at note 4(a) solely as a result of
the Group not owning 100% of the capacity of Syndicate 33 at Lloyd’s.

(c) Segmental analysis of assets and liabilities
The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows:

Intangible assets
Deferred acquisition costs
Financial assets
Reinsurance assets
Other assets

Total assets

Insurance liabilities
Other liabilities

Total liabilities

Capital expenditure

Intangible assets
Deferred acquisition costs
Financial assets
Reinsurance assets
Other assets

Total assets

Insurance liabilities
Other liabilities

Total liabilities

Capital expenditure

100

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

As at 31 December 2014

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

5,686
27,291
69,052
20,282
743,475 1,163,449
162,674
202,793
516,230
157,626

9,428
–

105,946
230,373
241,910 2,839,517
525,345
60,285 1,277,928

–

Hiscox
Retail
£000

63,541
141,039
690,683
159,878
543,787

1,598,928 1,200,237 1,868,321

311,623 4,979,109

1,258,729 1,015,742
130,832

174,730

560,728
360,055

– 2,835,199
689,704

24,087

1,433,459 1,146,574

920,783

24,087 3,524,903

20,914

3,137

519

14,692

39,262

As at 31 December 2013 restated

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

5,039
27,102
54,587
18,930
610,106 1,069,436
159,359
138,879
338,874
137,277

9,888
–

72,720
197,628
229,518 2,592,808
458,822
180,230 1,113,666

–

Hiscox
Retail
£000

30,691
124,111
683,748
160,584
457,285

1,456,419

967,951 1,591,638

419,636 4,435,644

1,167,121
113,985

842,453
110,810

599,547
152,250

– 2,609,121
417,062

40,017

1,281,106

953,263

751,797

40,017 3,026,183

10,162

2,757

1,603

2,860

17,382

4 Operating segments continued
(c) Segmental analysis of assets and liabilities continued

Segment assets and liabilities primarily consist of operating assets and liabilities, which represent the majority of the balance sheet.
Intragroup assets and liabilities that cross segments are presented under the separate category heading ‘Intragroup items and eliminations’.

Capital expenditure comprises expenditure on intangible assets (note 14) other than goodwill, and additions to property, plant and equipment
(note 15), but excluding assets acquired on business combinations.

(d) Geographical information
The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US,
Guernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal, Singapore and Hong Kong.

The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties:

Year to 31 December 2014

Year to 31 December 2013 restated

Gross premium revenues
earned from external parties

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

Total
£000

Hiscox
Retail
£000

Hiscox
London
Market
£000

Hiscox
Re
£000

Corporate
Centre
£000

UK and Ireland
Europe
United States
Rest of World

345,281
190,999
206,443
116,868

7,608
17,757
264,415
170,397

2,471
14,198
178,389
160,156

–
–
–
–

355,360
222,954
649,247
447,421

319,339
187,663
170,148
96,029

8,364
11,648
204,890
181,979

3,599
17,034
221,728
176,458

–
–
–
–

Total
£000

331,302
216,345
596,766
454,466

859,591

460,177

355,214

– 1,674,982

773,179

406,881

418,819

– 1,598,879

The Group’s largest external policyholder contributed less than 2% of total gross Group premium revenues earned and the details thereof
are not disclosed on the grounds of materiality.

The Group has not reported geographical segmental details of non-current assets excluding financial instruments and including loans
and receivables, rights and obligations under insurance and reinsurance contracts, investments in associates and subsidiaries as such
details are not used by the chief operating decision-maker to evaluate the performance of the Group.

5 Net asset value per share

Net asset value
Net tangible asset value

Net asset
value
)
(total equity
£000

2014

Net asset
value
per share
pence

Net asset
value
)
(total equity
£000

1,454,206
1,348,260

462.5 1,409,461
428.8 1,336,741

2013

Net asset
value
per share
pence

402.2
381.4

The net asset value per share is based on 314,419,567 shares (2013: 350,460,458 shares), being the adjusted number of shares in issue
at 31 December.

Net tangible assets comprise total equity excluding intangible assets.

6 Return on equity

Profit for the year (all attributable to owners of the Company)
Opening shareholders’ equity
Adjusted for the time-weighted impact of capital distributions and issuance of shares

Adjusted opening shareholders’ equity

Annualised return on equity (%)

2014
£000

2013
£000

216,152

237,758
1,409,461 1,365,366
(134,580)

(142,812)

1,266,649 1,230,786

17.1

19.3

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

101

Notes to the consolidated financial statements
continued

7 Investment result
The total result for the Group before taxation comprises:

Investment income including interest receivable
Net realised (losses)/gains on financial investments at fair value through profit or loss
Net fair value gains on financial investments at fair value through profit or loss

Investment result – financial assets
Fair value (losses)/gains on derivative financial instruments

Total result

Investment expenses are presented within other expenses (note 9).

Note

2014
£000

2013
£000

45,146
(1,055)
12,264

56,355
(143)

42,571
2,391
13,962

58,924
885

56,212

59,809

8 Analysis of return on financial investments
(a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was:

Sterling
US Dollar
Other

(b) Investment return

Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions/cash and cash equivalents

9 Other revenues and operational expenses

Agency-related income
Profit commission
Other underwriting income
Other income

Other revenues

Wages and salaries
Social security cost
Pension cost – defined contribution
Pension cost – defined benefit
Share-based payments
Marketing expenses
Investment expenses
Depreciation, amortisation and impairment
Other expenses

Operational expenses

£000

36,714
17,604
2,037

56,355

2014

1.5
7.6
0.4

1.8

2014
%

2.7
1.5
1.5

£000

17,105
39,289
2,530

58,924

2014
£000

8,060
9,965
1,136
795

2013
%

3.4
1.5
0.7

2013

0.7
18.3
0.5

1.9

2013
£000

7,100
9,161
1,832
2,812

19,956

20,905

108,622
19,551
8,112
660
14,439
31,829
4,192
12,857
110,591

101,780
20,498
6,593
1,000
12,523
30,550
3,833
9,650
90,538

310,853

276,965

102

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

10 Finance costs

Interest and expenses associated with bank borrowings
Interest and charges associated with Letters of Credit
Interest charges on experience account

Note

2014
£000

1,931
3,894
593

6,418

2013
£000

2,457
4,050
669

7,176

11 Auditors’ remuneration
Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following
amounts recorded in the consolidated income statement:

Group

Amounts receivable by the auditor and associates in respect of:
The auditing of the accounts of any associate of the Group
All audit-related assurance services
All non-audit-related assurance services

2014
£000

2013
£000

1,201
189
88

1,478

966
80
88

1,134

The full audit fee payable for the Syndicate audit has been included above, although an element of this is borne by the third-party
participants in the Syndicate.

12 Net foreign exchange gains/(losses)
The net foreign exchange gains/(losses) for the year include the following amounts:

Exchange gains/(losses) recognised in the consolidated income statement
Exchange gains/(losses) classified as a separate component of equity

Overall impact of foreign exchange-related items on net assets

2014
£000

2013
£000

4,974
34,019

(9,890)
(2,030)

38,993

(11,920)

The above excludes profit or losses on foreign exchange derivative financial instruments which are included within the investment result.

Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign
exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date
whereas resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.

Opening balance sheet impact of non-retranslation of non-monetary items
Gain/(loss) included within profit representing the non-retranslation of non-monetary items

Closing balance sheet impact of non-retranslation of non-monetary items

2014
£000

(4,790)
6,398

2013
£000

(2,674)
(2,116)

1,608

(4,790)

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

103

Notes to the consolidated financial statements
continued

13 Foreign currency items on intragroup borrowings
The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases,
as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses/(gains) arise
which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on
retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency
translation reserve within equity.

Impact as at 31 December 2014

Unrealised translation gains/(losses) on intragroup borrowings

Total gains/(losses) recognised

Impact as at 31 December 2013

Unrealised translation (losses)/gains on intragroup borrowings

Total (losses)/gains recognised

14 Intangible assets

At 1 January 2013
Cost
Accumulated amortisation and impairment

Consolidated
income
statement
2014
£000

Consolidated
other
comprehensive
income
2014
£000

677

(677)

Consolidated
income
statement
2013
£000

Consolidated
other
comprehensive
income
2013
£000

(849)

849

Total
impact on
equity
2014
£000

–

Total
impact on
equity
2013
£000

–

Goodwill
£000

Syndicate
capacity
£000

State
authorisation
licences
£000

Software and
development
costs
£000

Other
£000

Total
£000

10,405
(2,530)

24,505
–

6,308
–

34,086
(10,793)

9,982
(2,346)

85,286
(15,669)

Net book amount

7,875

24,505

6,308

23,293

7,636

69,617

Year ended 31 December 2013
Opening net book amount
Other additions
Amortisation charges
Impairment

Closing net book amount

At 31 December 2013
Cost
Accumulated amortisation and impairment

7,875
–
–
(65)

24,505
–
–
–

6,308
–
–
–

23,293
10,102
(6,434)
–

7,636
–
(500)
–

69,617
10,102
(6,934)
(65)

7,810

24,505

6,308

26,961

7,136

72,720

10,405
(2,595)

24,505
–

6,308
–

44,188
(17,227)

9,982
(2,846)

95,388
(22,668)

Net book amount

7,810

24,505

6,308

26,961

7,136

72,720

Year ended 31 December 2014
Opening net book amount
Acquisitions on purchase of subsidiary (note 33)
Other additions
Amortisation charges
Impairment

7,810
2,079
–
–
–

24,505
–
–
–
–

6,308
–
–
–
–

26,961
6,390
19,551
(8,947)
–

7,136
6,666
8,523
(1,036)
–

72,720
15,135
28,074
(9,983)
–

Closing net book amount

9,889

24,505

6,308

43,955

21,289

105,946

At 31 December 2014
Cost
Accumulated amortisation and impairment

12,319
(2,430)

24,505
–

6,308
–

70,129
(26,174)

25,171
(3,882)

138,432
(32,486)

Net book amount

9,889

24,505

6,308

43,955

21,289

105,946

104

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

14 Intangible assets continued

Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and 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.

All intangible assets have a finite useful life except for the Syndicate capacity and goodwill.

Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash
flow projections based on financial forecasts covering a five-year period. A discount factor, based on a Weighted Average Cost of Capital
(WACC) for the Group of 6.6% (2013: 6.8%), has been applied to the projections to determine the net present value. The outcome of the value
in use calculation is measured against the carrying value of the asset and, where the carrying value is in excess of the value in use, the asset is
written down to this amount.

In 2013, the £65,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement.
There was no impairment for 2014.

The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU,
being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which
is considered to be the higher of the asset’s fair value or its value in use. The fair value of Syndicate capacity can be determined from the
Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent autumn 2014 auction,
the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.

As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset has
been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting businesses. The
carrying value of this asset is tested for impairment based on its value in use to the Group’s US insurer. The value in use is calculated using
a discounted projected cash flow based on business plans approved by management, and discounted at the WACC rate. Key assumptions
include new business growth, retention rates, market cycle and claims inflation. The results of that test show no impairment is due.

Other intangible assets relate to the costs of acquiring rights to customer contractual relationships. These intangible assets are amortised on a
straight-line basis over their useful economic life. At the end of each reporting period we assess whether there is any indication that customer
contractual relationships may be impaired. Where indications of impairment are identified, the carrying value of customer contractual
relationships is tested for impairment based on the recoverable amount which is considered to be the higher of the fair value less costs to
sell or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated for
customer contractual relationships in the same manner as described above for goodwill and the same discount rate used. The results of this
testing show that no impairment is due.

Capitalised software and development costs are amortised when the assets become available for use on a straight-line basis over the
expected useful life of the asset. The carrying value of software and development costs is reviewed for impairment on an ongoing basis
by reference to the stage and expectation of a project. No impairment is due as at 31 December 2014.

The amortisation charge for the year includes £7,385,000 (2013: £6,434,000) relating to capitalised internally generated software costs
and is included in operational expenses in the consolidated income statement.

The net book value of capitalised internally generated software costs at 31 December 2014 was £37,565,000 (2013: £26,961,000).
There are no charges for impairment during the current or prior financial year.

At 31 December 2014 there were £17,672,000 of assets under development on which no amortisation has been charged
(2013: £9,647,000).

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

105

Notes to the consolidated financial statements
continued

15 Property, plant and equipment

At 1 January 2013
Cost
Accumulated depreciation

Net book amount

Year ended 31 December 2013
Opening net book amount
Additions
Disposals
Depreciation charge
Impairment
Foreign exchange movements

Closing net book amount

At 31 December 2013
Cost
Accumulated depreciation

Net book amount

Year ended 31 December 2014
Opening net book amount
Additions
Acquired purchase of subsidiary
Disposals
Depreciation charge
Impairment
Foreign exchange movements

Closing net book amount

At 31 December 2014
Cost
Accumulated depreciation

Net book amount

Land and
buildings
£000

Leasehold
improvements
£000

Vehicles
£000

5,498
(494)

5,004

5,004
848
(2,471)
(50)
–
103

3,434

3,834
(400)

3,434

3,434
6,947
–
–
(39)
–
–

10,342

3,816
(1,598)

2,218

2,218
1,064
–
(685)
–
(15)

2,582

4,820
(2,238)

2,582

2,582
302
179
–
(556)
–
121

2,628

114
(44)

70
83
(77)
(15)
–
–

120
(59)

61
38
1
–
(42)
–
–

Furniture
fittings and
equipment
and art
£000

Total
£000

43,743
(32,980)

53,171
(35,116)

10,763

18,055

10,763
5,285
(6)
(1,901)
–
1

18,055
7,280
(2,554)
(2,651)
–
89

14,142

20,219

40,253
(26,111)

49,027
(28,808)

14,142

20,219

14,142
3,901
590
(83)
(2,237)
–
156

20,219
11,188
770
(83)
(2,874)
–
277

16,469

29,497

10,781
(439)

5,573
(2,945)

159
(101)

44,932
(28,463)

61,445
(31,948)

10,342

2,628

16,469

29,497

The Group’s land and buildings assets relate to freehold property in the UK.

There was no impairment charge during the year (2013: £nil).

Assets with a net book value of £nil were held under finance leases (2013: £nil).

During the year, £7,795,000 was recognised in the carrying value of land and buildings that is under the course of construction
(2013: £848,000).

16 Investments in associates

Year ended 31 December

At beginning of year

Additions during the year
Disposals during the year
Net profit/(loss) from investments in associates

At end of year

2014
£000

2013
£000

7,754

9,054

2,103
(416)
1,229

–
(900)
(400)

10,670

7,754

106

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

16 Investments in associates continued

The Group’s interests in its principal associates, all of which are unlisted, were as follows:

2014
Associates incorporated in the UK
Associates incorporated in Europe

Total at the end of 2014

2013
Associates incorporated in the UK
Associates incorporated in Europe

Total at the end of 2013

% interest
held at
31 December

Assets
£000

Liabilities
£000

Revenues
£000

Profit after tax
£000

100% results

from 10% to 35%
from 10% to 49%

76,176
1,965

52,281
1,627

38,089
2,752

78,141

53,908

40,841

4,086
242

4,328

100% results

% interest
held at
31 December

Assets
£000

Liabilities
£000

Revenues
£000

Profit after tax
£000

from 25% to 35%
from 25% to 49%

67,657
1,935

48,671
1,114

28,540
2,625

69,592

49,785

31,165

2,589
257

2,846

During 2013, the Group disposed of its holding in Senior Wright Indemnity Ltd. During 2014, the Group acquired a 10.6% holding in White Oak
Underwriting Agency Limited as well as a 10% holding in Carl Rieck GmbH for a total consideration of £2,103,000 as referred to in note 33.

As at 31 December 2014, the Group had an amount receivable from Lark Ltd of £6,896,000 (2013: £6,896,000), and reported this within
other debtors.

The equity interests held by the Group in respect of associates do not have quoted market prices and are not traded regularly in any active
recognised market. The associates concerned have no material impact on the results or assets of the Group.

17 Deferred acquisition costs

Balance deferred at 1 January
Acquisition costs incurred in relation to insurance
contracts written
Acquisition costs expensed to the income statement
Foreign exchange adjustment

Gross
£000

Reinsurance
£000

2014

Net
£000

Gross
£000

Reinsurance
£000

2013

Net
£000

197,628

(23,479)

174,149

166,041

(18,340)

147,701

425,773
(399,658)
6,630

(87,328)
81,042
(450)

338,445
(318,616)
6,180

405,504
(371,663)
(2,254)

(71,401)
65,886
376

334,103
(305,777)
(1,878)

Balance deferred at 31 December

230,373

(30,215)

200,158

197,628

(23,479)

174,149

The deferred amount of insurance contract acquisition costs attributable to reinsurers of £30,215,000 (2013: £23,479,000) is not eligible
for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).

The amounts expected to be recovered before and after one year are estimated as follows:

Within one year
After one year

18 Reinsurance assets

Reinsurers’ share of insurance liabilities
Provision for non-recovery and impairment

Reinsurance assets

2014
£000

2013
£000

183,810
16,348

153,286
20,863

200,158

174,149

Note

2014
£000

2013
£000

526,085
(740)

459,603
(781)

525,345

458,822

The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows:

Within one year
After one year

287,528
237,817

229,060
229,762

525,345

458,822

Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables
(note 20). The Group recognised a gain during the year of £41,000 (2013: £217,000) in respect of previously impaired balances.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

107

Notes to the consolidated financial statements
continued

19 Financial assets and liabilities
Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through
the income statement.

Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions

Total investments
Insurance linked fund
Derivative financial instruments

Total financial assets carried at fair value

Third-party investment in Kiskadee Funds
Derivative financial instruments

Total financial liabilities carried at fair value

Note

2014
Fair value
£000

2013
Fair value
£000

2,526,179 2,335,829
223,024
6,240

252,916
26,385

2,805,480 2,565,093
19,917
44

22,888
479

2,828,847 2,585,054

Note

2014
Fair value
£000

7,033
76

7,109

2013
Fair value
£000

–
229

229

An analysis of the credit risk and contractual maturity profiles of the Group’s financial instruments is given in notes 3.2(d) and 3.2(e).

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.

In 2014 and 2013, the Group participated in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the
Fund. During the year, contracts with a premium of $2.1 million were ceded to the entity (2013: $3.3 million).

Investments at 31 December are denominated in the following currencies at their fair value:

2014
£000

2013
£000

Debt and fixed income securities

Sterling
US Dollars
Euro and other currencies

Equities and shares in unit trusts

Sterling
US Dollars
Euro and other currencies

Deposits with credit institutions

Sterling
US Dollars
Euro and other currencies

Total investments

108

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

490,440

510,769
1,707,643 1,512,992
312,068

328,096

2,526,179 2,335,829

137,179
115,737
–

118,991
104,033
–

252,916

223,024

25,507
–
878

26,385

3,871
1,469
900

6,240

2,805,480 2,565,093

20 Loans and receivables including insurance receivables

Gross receivables arising from insurance and reinsurance contracts
Provision for impairment

Net receivables arising from insurance and reinsurance contracts

Due from contract holders, brokers, agents and intermediaries
Due from reinsurance operations

Prepayments and accrued income
Other loans and receivables:

Net profit commission receivable
Accrued interest
Share of Syndicates’ other debtors’ balances
Other debtors including related party amounts

Total loans and receivables including insurance receivables

The amounts expected to be recovered before and after one year are estimated as follows:

Within one year
After one year

2014
£000

2013
£000

482,641
(2,131)

422,405
(1,282)

480,510

421,123

349,955
130,555

302,820
118,303

480,510

421,123

9,068

6,754

25,116
9,448
12,952
19,165

18,905
9,463
12,192
24,982

556,259

493,419

534,921
21,338

474,316
19,103

556,259

493,419

There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally
dispersed debtors. The Group has recognised a loss of £849,000 (2013: loss of £296,000) for the impairment of receivables during the year
ended 31 December 2014.

The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.

21 Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2014. The Group
had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2014 all mature
within one year of the balance sheet date and are detailed below:

31 December 2014
Derivative financial instruments included on balance sheet

Foreign exchange forward contracts

Interest rate futures contracts

Credit default swaps

Gross contract
notional amount
£000

25,875

31,421

1,639

Fair value
of assets
£000

479

–

Fair value
of liabilities
£000

Net balance
sheet position
£000

(76)

403

–

The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below:

Gross fair value of assets
Gross fair value of liabilities

31 December 2013
Derivative financial instruments included on balance sheet

Foreign exchange forward contracts

Interest rate futures contracts

Credit default swaps

19,596
(19,117)

3,003
(3,079)

22,599
(22,196)

479

(76)

403

Gross contract
notional amount
£000

Fair value
of assets
£000

Fair value
of liabilities
£000

Net balance
sheet position
£000

26,793

37,083

–

(229)

(185)

–

The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below:

Gross fair value of assets
Gross fair value of liabilities

All derivatives contracts settle within three months of the year end.

7,622
(7,578)

15,686
(15,915)

23,308
(23,493)

(229)

(185)

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

109

Notes to the consolidated financial statements
continued

21 Derivative financial instruments continued

Foreign exchange forward contracts
During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to secure
translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group
to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain
on these forward contracts of £1,941,000 (2013: loss of £77,000) as included in note 7. The opposite exchange gain is included within
financial investments. There was no initial purchase cost associated with these instruments.

Interest rate futures contracts
During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range
of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated
corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £2,078,000 (2013: gain of
£1,175,000) as included in note 7.

Equity index options
The Group did not purchase equity options during 2014. During 2013 the Group purchased and disposed of an equity index option to protect
against a decline in equity prices. The Group made a loss of £213,000 on this contract.

22 Fair value measurements
In accordance with IFRS 13: Fair Value Measurement, the fair value of financial instruments, based on a three-level fair value hierarchy that
reflects the significance of the inputs used in measuring the fair value, is provided below.

As at 31 December 2014

Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Insurance linked fund
Derivative instrument assets

Total

Financial liabilities
Third-party investment in Kiskadee Funds
Derivative financial instruments

Total

As at 31 December 2013

Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Insurance linked fund
Derivative instrument assets

Total

Financial liabilities
Derivative financial instruments

Total

Level 1
£000

Level 2
£000

Level 3
£000

Total
£000

682,940 1,843,239
239,238
–
–
479

–
26,385
–
–

– 2,526,179
252,916
26,385
22,888
479

13,678
–
22,888
–

709,325 2,082,956

36,566 2,828,847

–
–

–

–
76

7,033
–

7,033

7,033
76

7,109

Level 1
£000

Level 2
£000

Level 3
£000

Total
£000

875,882 1,459,947
208,960
–
–
44

–
6,240
–
–

– 2,335,829
223,024
6,240
19,917
44

14,064
–
19,917
–

882,122 1,668,951

33,981 2,585,054

–

229

–

229

The levels of the fair value hierarchy are defined by the standard as follows:
–Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments;
– Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant

inputs are based on market observable data;

–Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.

The fair values of the Group’s financial assets are based on prices provided by investment managers who obtain market data from numerous
independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have
quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing
models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings,
interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.

110

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

22 Fair value measurements continued

Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The
fair value of shares in unit trusts is based on the net asset value of the fund as reported by independent pricing sources or the fund manager.

Included within Level 1 of the fair value hierarchy are certain Government bonds, Treasury bills and exchange-traded equities which are
measured based on quoted prices in active markets.

Level 2 of the hierarchy contains certain Government bonds, US Government agencies, corporate securities, asset backed securities and
mortgage-backed securities. The fair value of these assets is based on the prices obtained from both investment managers and investment
custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods
including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external
parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions
for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level
2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over-the-counter derivatives.

Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance linked fund which have limited observable
inputs on which to measure fair value. Unquoted equities are carried at fair value. The effect of changing one or more inputs used in the
measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has
been performed. The Group invested into the insurance linked fund in December 2012, and it was subject to a two-year initial lock-up period.
The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the
fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund
which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have had a material impact on
the valuation of the fund. The fund was partially redeemed in January 2015 with remaining redemption shares issued which will pay out when
the underwriting contracts expire at 30 June 2015.

The third-party investment in the Kiskadee Funds consists of the third-party interest of investors in the Kiskadee Funds that is classified as a
financial liability in the Group consolidated financial statements in accordance with IAS 32. The fair value of the Kiskadee Funds is estimated to
be the net asset value reported to investors as at the balance sheet date by the external fund administrator. The net asset value is based on the
fair value of the underlying reinsurance contracts in the fund. Significant inputs and assumptions in calculating the fair value of the underlying
reinsurance contracts include the fair value of cash and cash equivalents as well as estimates of insurance assets and liabilities. The Group
has considered changes in the net asset valuation of the Kiskadee Funds if reasonably different inputs and assumptions were used and has
found no significant changes in the valuation.

In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value
hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant
to the fair value measurement.

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

Financial liability

31 December 2014

Balance at 1 January
Fair value gains or losses through profit or loss*
Foreign exchange gains/(losses)
Purchases
Settlements

Closing balance

Unrealised gains and losses in the year
on securities held at the end of the year

Equities and shares
in unit trusts
£000

Insurance
linked fund
£000

14,064
2,920
284
6
(3,596)

19,917
1,725
1,246
–
–

Total
£000

33,981
4,645
1,530
6
(3,596)

13,678

22,888

36,566

3,204

2,971

6,175

*Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance linked fund.

31 December 2013

Balance at 1 January
Fair value gains or losses through profit or loss*
Foreign exchange losses
Purchases
Settlements

Closing balance

Unrealised gains and losses in the year
on securities held at the end of the year

Equities and shares
in unit trusts
£000

13,535
575
(91)
522
(477)

Insurance
linked fund
£000

8,098
1,832
(762)
10,749
–

Total
£000

21,633
2,407
(853)
11,271
(477)

14,064

19,917

33,981

484

1,070

1,554

Third-party
investment in
Kiskadee Funds
£000

–
(589)
(408)
(6,036)
–

(7,033)

)
(589

Third-party
investment in
Kiskadee Funds
£000

–
–
–
–
–

–

*Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance linked fund.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

111

Notes to the consolidated financial statements
continued

23 Cash and cash equivalents

Cash at bank and in hand
Short-term deposits
Cash held by special purpose vehicle
Subscriptions received in advance

2014
£000

2013
£000

400,245
39,220
41,258
169,928

384,925
174,602
–
4,848

650,651

564,375

The Group holds its cash deposits with a well-diversified range of banks and financial institutions. Cash includes overnight deposits.
Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.

The cash held by special purpose vehicle consists of underlying interests held by the Kiskadee Funds which are consolidated by the
Group but in which the Group has an interest of less than 100%. The remaining interests are held by third-party investors and included
in the consolidated balance sheet as financial liabilities in accordance with IAS 32.

Subscriptions received in advance consist of cash received as at 31 December by the two Kiskadee Funds and not yet invested at the
balance sheet date. As a result the Group has recognised a liability under trade and other payables for the same amount.

24 Share capital

Group

Authorised ordinary share capital of 6p (2013: 5 55/89p)
Issued ordinary share capital of 6p (2013: 5 55/89p)

31 December 2014

31 December 2013

Share
capital
£000

40,000
19,913

Number
of shares

Share
capital
£000

666,666,667
331,873,654

40,000
20,854

Number
of shares

712,000,000
371,215,489

On 28 March 2013 the Company passed a special resolution to increase the authorised share capital by £200,000,000 (400,000,000
shares at a par value of 50.0p per share) to facilitate the capital distribution of the B Shares in 2013. There are no B Shares outstanding at
31 December 2014 as all shares have been redeemed or cancelled.

The authorised but unissued ordinary share capital was also used to create and issue the C/D Shares in 2014. There are no C/D Shares
outstanding or in issue at 31 December 2014 as all shares have been redeemed or cancelled.

The amounts presented in the equity structure of the Group above relate to Hiscox Ltd, the legal Parent Company.

Changes in Group share capital and contributed surplus

At 1 January 2013
Employee share option scheme – proceeds from shares issued
Issue of B Shares
Redemption of B Shares
Scrip dividends to owners of the Company

At 31 December 2013
Employee share option scheme – proceeds from shares issued
Issue of C/D Shares
Redemption of C/D Shares
Share consolidation and subdivision
Scrip dividends to owners of the Company

Ordinary
share
capital
£000

20,703
133
–
–
18

20,854
74
–
–
(1,032)
17

Share
premium
£000

Contributed
surplus
£000

B Shares
£000

C Shares
£000

D Shares
£000

41,313
3,990
(42,453)
–
2,103

245,005
–
(155,141)
–
–

–
–
197,594
(197,594)
–

–
–
–
–
–

4,953
2,669
(35)
–
1,032
1,798

89,864
–
–
–
–
–

–
–
–
–
–
–

–

–
–
128,988
(128,988)
–
–

–
–
46,824
(46,824)
–
–

–

At 31 December 2014

19,913

10,417

89,864

Contributed surplus is a distributable reserve and arose on the reverse acquisition of Hiscox plc on 12 December 2006.

On 24 February 2014, the Group announced its intention to return approximately £178 million of share capital, which included a final dividend
equivalent of 14.0p per share, £49,728,000, to shareholders by way of a C/D Share issue. This was also combined with a consolidation of
Hiscox’s existing shares as described overleaf and was subsequently approved by the shareholders at an Extraordinary General Meeting
held on 18 March 2014.

112

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

24 Share capital continued

C/D Shares were issued on 19 March 2014 to existing shareholders on the basis of one C/D Share (at the choice of the shareholder) for
each ordinary share held on 18 March 2014. Each C Share enabled the shareholder to receive a dividend of 50p per share at 9 April 2014.
Alternatively the shareholder could elect to receive a D Share which were sold for 50 pence each to UBS Limited, pursuant to the purchase
offer on 7 April 2014. Following the purchase of the D Shares by UBS Limited from shareholders, UBS exercised its put option
and the Group was required to purchase the D Shares for 50p per share.

There were no C/D Shares outstanding at 31 December 2014 as all shares have been redeemed and cancelled. Total capital of £175,812,000
has been returned to shareholders, of which £35,000 has been charged against share premium and the remaining £175,777,000 has been
charged against retained earnings. An additional £1,789,000 of C Shares were distributed to the Employee Benefit Trust. The amount is not
reported as a distribution as the trust forms part of the consolidated result.

To ensure the return of capital maintained the net tangible asset per share pre and post the return of capital, a share consolidation was also
performed. Each existing ordinary share in Hiscox Ltd was subdivided into 89 ordinary shares of par value 500/7921p each and then these
were further subdivided so that 100 of such shares were consolidated into one new share of 6 2474/7921p. Finally the 6 2474/7921p share
was split into one new ordinary share of 6p and one deferred share of 2474/7921p. The deferred shares carried almost no economic benefit
and no voting rights and had no value. The deferred shares were purchased and cancelled by the Group on 9 April 2014.

During the year, the Group offered its shareholders the option of receiving a scrip dividend alternative to the interim cash dividend. This
resulted in the Company paying the shareholders, who opted for a scrip dividend, in shares of equal value to the cash dividend at a specified
date. The full dividend was distributed from retained earnings, and the new shares issued for the scrip dividend were reflected in share
capital and share premium.

Share repurchase
The Trustees of the Group’s Employee Benefit Trust purchased Hiscox Ltd shares through the market during the period for £10,593,000 to
facilitate the settlement of vesting awards under the Group’s performance share plan. 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.

Equity structure of Hiscox Ltd

At 1 January

Employee share option scheme – ordinary shares issued
Scrip dividends to owners of the Company
Share consolidation as a result of the special capital distribution

At 31 December

Note

Number of
ordinary
shares in issue
)
(thousands
2014

Number of
ordinary
shares in issue
)
(thousands
2013

371,215

414,069

1,236
271
(40,848)

2,458
324
(45,636)

331,874

371,215

Up until 9 April 2014, the Group issued 5 55/89p ordinary shares. From this date, new ordinary shares of 6p each exist. All issued shares
are fully paid.

Share options and performance share plan awards
Performance share plan awards are granted to Directors and to senior employees. Up until 2005, share options were also granted.
The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant.
No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’
service (the vesting period) and the Group achieving targeted levels of returns on equity. Share options are also conditional on the
employees completing three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement
or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity;
the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options
in cash.

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 expense recognised in the consolidated
income statement during the year was £14,439,000 (2013: £12,523,000). This comprises charges of £13,968,000 (2013: £12,158,000)
in respect of performance share plan awards and £471,000 (2013: £365,000) 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,
and discounted cash flow methodology in respect of performance share plan awards.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

113

Notes to the consolidated financial statements
continued

24 Share capital continued
Share options and performance share plan awards continued

The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during the year
under review are:

Assumptions affecting inputs to fair value models

Annual risk-free rates of return and discount rates (%)
Long-term dividend yield (%)
Expected life of options (years)
Implied volatility of share price (%)
Weighted average share price (p)

2014

2013

1.09-1.32 0.32-0.78
4.67
3.25
27
570.5

4.46
3.25
20.5
684.9

The weighted average fair value of each share option granted during the year was 122.0p (2013: 112.9p). The weighted average fair value
of each performance share plan award granted during the year was 688.5p (2013: 568.0p).

Movements in the number of share options and performance share plan awards during the year and details of the balances outstanding
at 31 December 2014 for the Executive Directors are shown in the Directors’ remuneration report. The total number of options and
performance share plan awards outstanding is 12,460,938 (2013: 14,260,162) of which 3,723,170 are exercisable (2013: 4,702,962).
The total number of SAYE options outstanding is 2,013,508 (2013: 1,604,065).

The implied volatility assumption is based on historical data for periods of between five and ten years immediately preceding grant date.

For options issued after 1 January 2006 the assumptions regarding long-term dividend yield have been aligned to the progressive dividend
policy announced during the 2005 Rights Issue.

25 Retained earnings and other reserves

Currency translation reserve at 31 December

Retained earnings at 31 December

2014
£000

2013
£000

56,700

22,681

1,276,446 1,271,109

The currency translation reserve comprises qualifying net investment gains and losses and foreign exchange differences arising from
the translation of the financial statements of, and investments in, foreign operations.

The Group purchased its own shares during 2014 for a net amount of £10,593,000 and placed them in the Trust for future utilisation on
vesting of performance share plan awards (2013: £nil).

At 31 December 2014 Hiscox Ltd held 12,645,632 shares in Treasury (2013: 16,145,888). Additional details are shown in note 37 to these
financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.

26 Insurance liabilities and reinsurance assets

Gross
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums

Total insurance liabilities, gross

Recoverable from reinsurers
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums

Total reinsurers’ share of insurance liabilities

Net
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums

Total insurance liabilities, net

114

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

Note

2014
£000

2013
£000

825,017

829,548
1,142,847 1,023,514
756,059

867,335

2,835,199 2,609,121

129,134
239,185
157,026

146,946
213,000
98,876

525,345

458,822

695,883
903,662
710,309

682,602
810,514
657,183

2,309,854 2,150,299

26 Insurance liabilities and reinsurance assets continued

The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows:

2014
£000

2013
£000

1,222,114 1,123,849
1,087,740 1,026,450

2,309,854 2,150,299

that has been most appropriate to observed
historical developments. This often means
that different techniques or combinations
of techniques have been selected for
individual accident years or groups of
accident years within the same class of
business. Estimates of ultimate claims are
adjusted each reporting period to reflect
emerging claims experience. Changes
in expected claims may result in a reduction
or an increase in the ultimate claim costs
and a release or an increase in reserves
in the period in which the change occurs.

(b) Claims development tables
The development of insurance liabilities
provides a measure of the Group’s ability
to estimate the ultimate value of claims.
The Group analyses actual claims
development compared with previous
estimates on an accident year basis. This
exercise is performed to include the liabilities
of Syndicate 33 at the 100% level regardless
of the Group’s actual level of ownership,
which has increased significantly over the
last ten years. Analysis at the 100% level is
required in order to avoid distortions arising
from reinsurance to close arrangements
which subsequently increase the Group’s
share of ultimate claims for each accident
year, three years after the end of that
accident year.

The top half of each table, on the following
pages, illustrates how estimates of ultimate
claim costs for each accident year have
changed at successive year ends. The
bottom half reconciles cumulative claim
costs to the amounts still recognised as
liabilities. A reconciliation of the liability at
the 100% level to the Group’s share, as
included in the Group balance sheet, is
also shown.

Within one year
After one year

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 2014 and 2013
are not material.

26.1 Insurance contracts assumptions
(a) Process used to decide on assumptions
The risks associated with insurance
contracts are complex and subject
to a number of variables that complicate
quantitative sensitivity analysis. Uncertainty
over the timing and amount of future claim
payments necessitates the holding of
significant reserves for liabilities that may
only emerge a number of accounting
periods later.

For all risks, the Group uses several
statistical methods to incorporate
the various assumptions made into
the ultimate cost of claims. There is
close communication between the
actuaries involved in the estimation
process and the Group’s underwriters
to ensure that all parties are aware of
material factors relating to outstanding
claims reserves. Adjustments are made
within the claims reserving methodologies
to remove distortions in the historical
claims development patterns from large
or isolated claims not expected to
reoccur in the future. An allowance is
also made for the current rating and
inflationary environment.

Outstanding claims reserves are actuarially
estimated primarily using the Chain Ladder
and Bornhuetter-Ferguson methods.

The Chain Ladder method may be applied
to premiums, paid claims or incurred claims
(i.e. paid claims plus case estimates).
The basic technique involves the analysis
of historical claims development factors
and the selection of estimated development
factors based on this historical pattern.
Where losses in the earliest underwriting
years or years of account have yet to fully
develop, an adjustment is made to the
pattern to allow for further expected
development. The selected development
factors are then applied to cumulative claims
data for each accident year to produce an
estimated ultimate claims cost for each
accident year.

The Chain Ladder method is adopted for
mature classes of business where sufficient
claims development data is available. This
methodology produces optimal estimates
when a large claims development history
is available and the claims development
patterns throughout the earliest years are
stable. Chain Ladder techniques are less
suitable in cases in which the insurer does
not have developed claims history data
for a particular class of business (e.g. in
relation to more recent underwriting years
or years of account). In these instances
the Group’s actuaries make reference
to the Bornhuetter-Ferguson method.

The Bornhuetter-Ferguson method is based
on the Chain Ladder approach but utilises
estimated ultimate loss ratios. This method
uses a combination of a benchmark or
market-based estimate and an estimate
based on claims experience. The former
is based on a measure of exposure such
as premiums; the latter is based on the paid
or incurred claims to date. The two estimates
are combined using a formula that gives
more weight to the experience-based
estimate as time passes. This technique has
been used in situations in which developed
claims experience was not available for the
projection (recent accident years or new
classes of business).

Catastrophe events which are expected
to impact multiple business units in the
Group are analysed by the central analysis
team. They combine information from
underwriters, the claims team and past
experience of similar events to produce
gross and net estimates of the ultimate loss
cost to each part of the Group. These figures
are then incorporated by the actuarial team
into the quarterly reserving exercise. This
process ensures that a consistent approach
is taken across the Group.

In exceptional cases the required provision
is calculated with reference to the actual
exposures on individual policies. In addition,
the reserves determined for the managed
Syndicate are converted to annually
accounted figures using earnings patterns
that are consistent with those for the
underlying Syndicate business.

The choice of selected results for each
accident year of each class of business
depends on an assessment of the technique

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

115

Notes to the consolidated financial statements
continued

26 Insurance liabilities and reinsurance assets continued
26.1 Insurance contracts assumptions continued
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – gross at 100%

Accident year

Estimate of ultimate
claims costs as
adjusted for foreign
exchange* at end
of accident year
one year later
two years later
three years later
four years later
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative
payments to date

Liability recognised
at 100% level
Liability recognised
in respect of prior
accident years at
100% level

Accident year

Current estimate of
cumulative claims
Less: attributable
to external Names

Group’s share of
current ultimate
claims estimate

Cumulative
payments to date
Less: attributable
to external Names

Group’s share
of cumulative
payments

Liability for 2005 to
2014 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2005
recognised on
Group’s balance sheet

2005
£000

2006
£000

2007
£000

2008
£000

2009
£000

2010
£000

2011
£000

2012
£000

2013
£000

2014
£000

Total
£000

1,167,629
1,292,691
1,295,819
1,277,729
1,271,809
1,272,604
1,227,639
1,220,862
1,222,165
1,212,717

596,460
570,684
549,963
519,355
528,466
518,090
505,290
500,007
498,017
–

1,020,921

1,310,216
846,961
1,122,920
798,898
877,502 1,194,916
711,966 950,357 703,726
819,753 1,144,378
926,613 646,417
675,728
887,005 639,461 804,579 1,160,292
687,319
–
851,003 637,494
681,104
–
817,596 634,264
651,140
–
–
808,919
635,027
–
–
–
619,265
–
–
–
–
–
–
–
–

788,776
–
–
–
–
–

1,098,545

890,535
994,129 782,856
–
909,188
–
–
–
–
–
–
–
–
–
–
–
–
–
–

973,977

9,827,062
– 8,078,827
– 6,967,859
– 5,975,740
– 4,758,652
– 3,893,694
– 3,176,875
– 2,340,134
– 1,720,182
– 1,212,717

1,212,717

498,017

619,265

808,919

634,264

788,776

1,160,292

909,188

782,856

973,977

8,388,271

)
(1,152,561

(479,011

)

(575,065

)

)
(756,506

)
(542,770

)
(599,212

(886,585

)

(608,635

)

(353,858

)

(204,296

)

)
(6,158,499

60,156

19,006

44,200

52,413

91,494

189,564

273,707

300,553

428,998

769,681

2,229,772

Total gross liability to external parties at 100% level

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2014.

Reconciliation of 100% disclosures above to Group’s share – gross

2005
£000

2006
£000

2007
£000

2008
£000

2009
£000

2010
£000

2011
£000

2012
£000

2013
£000

2014
£000

Total
£000

1,212,717

498,017

619,265

808,919

634,264

788,776

1,160,292

909,188

782,856

973,977

8,388,271

(305,498

)

(104,346

)

(120,507

)

)
(153,263

)
(106,850

)
(121,195

(170,825

)

)
(121,309

(89,291

)

(116,704

)

(1,409,788

)

907,219

393,671

498,758

655,656

527,414

667,581

989,467

787,879

693,565

857,273

6,978,483

)
(1,152,561

(479,011

)

(575,065

)

)
(756,506

)
(542,770

)
(599,212

(886,585

)

(608,635

)

(353,858

)

(204,296

)

)
(6,158,499

290,777

99,672

111,280

143,000

91,789

86,102

129,113

80,922

33,848

18,738

1,085,241

(861,784

)

)
(379,339

(463,785

)

)
(613,506

(450,981

)

(513,110

)

(757,472

)

(527,713

)

)
(320,010

(185,558

)

(5,073,258

)

45,435

14,332

34,973

42,150

76,433

154,471

231,995

260,166

373,555

671,715

1,905,225

81,163

2,310,935

62,639

1,967,864

Total Group liability to external parties included in balance sheet – gross**

**This represents the claims element of the Group’s insurance liabilities.

116

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

2005
£000

2006
£000

2007
£000

2008
£000

2009
£000

2010
£000

2011
£000

2012
£000

2013
£000

2014
£000

Total
£000

786,744
698,091
532,264
524,676 633,994 702,569
507,481 612,562 698,422

685,378
787,487
778,302
753,207 465,362 583,458
742,700
481,091 579,524
742,865 468,562 553,421
721,424
461,897 549,315
712,801 462,098 535,957
–
705,063 460,028
–
–
690,705

702,058
587,981
562,157

805,898
1,021,869
817,612
721,122
718,326
953,477
679,913 904,975 664,831
–
–
–
–
–
–
–

657,951 563,239 662,563 898,983
–
624,453 556,338
–
551,806
617,493
–
–
610,784
–
–
–
–
–
–
–
–
–

652,763
–
–
–
–
–

777,594
687,551
–
–
–
–
–
–
–
–

809,047

7,636,555
– 6,317,183
– 5,408,643
– 4,584,763
– 3,636,869
– 2,934,147
– 2,343,420
– 1,710,856
– 1,165,091
690,705
–

690,705

460,028

535,957

610,784

551,806

652,763

898,983

664,831

687,551

809,047

6,562,455

)
(639,821

(441,326

)

)
(497,953

(562,757

)

(475,597

)

)
(505,060

(682,243

)

(445,918

)

)
(318,328

(180,042

)

(4,749,045

)

50,884

18,702

38,004

48,027

76,209

147,703

216,740

218,913

369,223

629,005

1,813,410

Total net liability to external parties at 100% level

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2014.

Reconciliation of 100% disclosures above to Group’s share – net

2005
£000

2006
£000

2007
£000

2008
£000

2009
£000

2010
£000

2011
£000

2012
£000

2013
£000

2014
£000

Total
£000

690,705

460,028

535,957

610,784

551,806

652,763

898,983

664,831

687,551

809,047

6,562,455

)
(166,979

(96,216

)

(104,194

)

)
(108,092

(85,754

)

(87,912

)

)
(118,219

)
(75,287

(71,306

)

(90,344

)

(1,004,303

)

523,726

363,812

431,763

502,692

466,052

564,851

780,764

589,544

616,245

718,703

5,558,152

)
(639,821

)
(441,326

)
(497,953

(562,757

)

(475,597

)

)
(505,060

(682,243

)

(445,918

)

)
(318,328

(180,042

)

(4,749,045

)

154,017

91,466

95,829

98,129

72,415

64,022

89,784

47,093

28,005

15,995

756,755

(485,804

)

(349,860

)

(402,124

)

(464,628

)

(403,182

)

)
(441,038

)
(592,459

(398,825

)

(290,323

)

(164,047

)

)
(3,992,290

37,922

13,952

29,639

38,064

62,870

123,813

188,305

190,719

325,922

554,656

1,565,862

45,736

1,859,146

33,683

1,599,545

Total Group liability to external parties included in the balance sheet – net**

**This represents the claims element of the Group’s insurance liabilities and reinsurance assets.

Accident year

Estimate of ultimate
claims costs as
adjusted for foreign
exchange* at end of
accident year
one year later
two years later
three years later
four years later
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative
payments to date

Liability recognised
at 100% level
Liability recognised
in respect of prior
accident years
at 100% level

Accident year

Current estimate of
cumulative claims
Less: attributable
to external Names

Group’s share of
current ultimate
claims estimate

Cumulative
payments to date
Less: attributable
to external Names

Group’s share
of cumulative
payments

Liability for 2005 to
2014 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2005
recognised on
Group’s balance sheet

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

117

Notes to the consolidated financial statements
continued

26 Insurance liabilities and reinsurance assets continued

26.2 Movements in insurance claims liabilities and reinsurance claims assets

Year ended 31 December

Total at beginning of year
Claims and claim adjustment expenses for year
Cash paid for claims settled in the year
Exchange differences and other movements

Gross
£000

Reinsurance
£000

2014

Net
£000

Gross
£000

Reinsurance
£000

2013

Net
£000

(1,853,062)
(645,145)
591,796
(61,453)

359,946 (1,493,116) (1,932,904)
(572,440)
(531,668)
113,477
640,505
467,602
(124,194)
11,777
(42,363)
19,090

453,439 (1,479,465)
(519,279)
492,579
13,049

53,161
(147,926)
1,272

Total at end of year

(1,967,864)

368,319 (1,599,545) (1,853,062)

359,946 (1,493,116)

Claims reported and claim adjustment expenses
Claims incurred but not reported

(825,017)
(1,142,847)

129,134
239,185

(695,883)
(829,548)
(903,662) (1,023,514)

146,946
213,000

(682,602)
(810,514)

Total at end of year

(1,967,864)

368,319 (1,599,545) (1,853,062)

359,946 (1,493,116)

The insurance claims expense reported in the consolidated income statement is comprised as follows:

Year ended 31 December

Current year claims and claim adjustment expenses
Over-provision in respect of prior year
claims and claim adjustment expenses

Gross
£000

Reinsurance
£000

2014

Net
£000

Gross
£000

Reinsurance
£000

2013

Net
£000

(845,086)

141,189

(703,897)

(761,179)

101,561

(659,618)

199,941

(27,712)

172,229

188,739

(48,400)

140,339

Total claims and claim adjustment expenses

(645,145)

113,477

(531,668)

(572,440)

53,161

(519,279)

27 Trade and other payables

Creditors arising out of direct insurance operations
Creditors arising out of reinsurance operations

Share of Syndicates’ other creditors’ balances
Social security and other taxes payable
Subscriptions received in advance
Other creditors

Reinsurers’ share of deferred acquisition costs
Accruals and deferred income

Total

The amounts expected to be settled before and after one year are estimated as follows:

Within one year
After one year

Note

2014
£000

2013
£000

11,969
248,267

15,364
130,814

260,236

146,178

3,212
9,782
169,928
11,968

8,230
14,764
4,848
8,052

194,890

35,894

30,215
106,319

23,479
98,587

591,660

304,138

563,663
27,997

277,386
26,752

591,660

304,138

The amounts expected to be settled after one year of the balance sheet date primarily relate to deferred bonuses and the Group’s provision
of sabbatical leave employee benefits.

Subscriptions received in advance consist of cash received as at 31 December by the two Kiskadee Funds and not yet invested at the
balance sheet date.

The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.

118

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

28 Tax expense
The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.
The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged
in the consolidated income statement comprise the following:

Current tax
Expense for the year
Adjustments in respect of prior years

Total current tax expense

Deferred tax
Credit for the year
Adjustments in respect of prior years
Effect of rate change

Total deferred tax credit

Total tax charged to the income statement

2014
£000

2013
£000

65,537
(3,365)

65,950
6,475

62,172

72,425

(45,633)
(811)
(805)

(49,865)
(7,500)
(8,280)

(47,249)

(65,645)

14,923

6,780

The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 6.5% (2013: 2.8%). A reconciliation
of the difference is provided below:

Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2013: 0%)
Effects of Group entities subject to overseas tax at different rates
Impact of overseas tax rates on:
Effect of rate change
Expenses not deductible for tax purposes
Tax losses for which no deferred tax asset is recognised
Other
S1013 CTA 2009 deduction and share-based payments
Non-taxable income
Prior year tax adjustments

Tax charge for the period

29 Deferred tax

Deferred tax assets

Trading losses in overseas entities

Net deferred tax liabilities

Deferred tax assets
Deferred tax liabilities

Total net deferred tax liability

2014
£000

2013
£000

231,075
–
14,703

244,538
–
8,729

(805)
2,911
4,218
(972)
(64)
(892)
(4,176)

(8,280)
4,460
3,532
721
3
(1,360)
(1,025)

14,923

6,780

2014
£000

2013
£000

33,490

32,123

2014
£000

2013
£000

33,804
(60,194)

16,055
(92,001)

(26,390)

(75,946)

Deferred tax assets and deferred tax liabilities relating to the same tax authority are presented net in the Group’s balance sheet.

(a) Group deferred tax assets analysed by balance sheet headings

At 1 January
Income statement credit
Transfer from equity

At 31 December

2014
£000

2013
£000

32,123
1,367
–

25,608
6,515
–

33,490

32,123

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

119

Notes to the consolidated financial statements
continued

29 Deferred tax continued

(b) Net Group deferred tax liabilities analysed by balance sheet headings

At 31 December

Tangible assets
Trading losses in UK entities
Trade and other payables
Intangible assets – Syndicate capacity
Retirement benefit obligations
Reinsurance premiums
Other items

Total deferred tax assets

Financial assets
Insurance contracts – equalisation provision†
Reinsurance premiums

Open years of account

Total deferred tax liabilities

Net total deferred tax liabilities

Income
statement
(charge)/credit
£000

2013
£000

Transfer from
equity
£000

1,178
789
4,363
2,328
1,200
–
6,197

(98)
589
(119)
(173)
(1,090)
13,675
1,289

–
–
–
–
5,470
–
(1,794)

2014
£000

1,080
1,378
4,244
2,155
5,580
13,675
5,692

16,055

14,073

3,676

33,804

(2,062)
(28,897)
(45,079)

(76,038)
(15,963)

(1,878)
(1,436)
45,079

41,765
(9,958)

(92,001)

31,807

–
–
–

–
–

–

(3,940)
(30,333)
–

(34,273)
(25,921)

(60,194)

(75,946)

45,880

3,676

(26,390)

† The solvency regulations in the UK require certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. The regulations prescribe that the provision is increased
every year by an amount that is calculated as a percentage of net premiums written for those lines of business during the financial year subject to a maximum percentage. The amount of each annual increase is a deductible expense for tax purposes,
and the equalisation provision is taxed when released. Equalisation provisions are not permitted under IFRS which therefore results in the temporary difference for tax purposes. Following a change in the legislation at the end of 2008, Lloyd’s Corporate
Members are also entitled to a tax deduction for claims equalisation losses although this is not a solvency requirement for Lloyd’s. The Group has provided for the deferred tax liability on its Corporate Members’ claims equalisation reserve during the year.

UK deferred income tax assets and liabilities are calculated at 20% for the year ended 31 December 2014 (2013: 20%).

Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of
changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax
relating to the employee retirement benefit obligation are recognised in the statement of changes in equity to the extent that the movement
corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of
changes in equity is £7,344,000, comprising £3,668,000 deferred tax and £3,676,000 current tax (2013: £603,000 deferred tax and
£2,768,000 current tax).

Deferred tax assets of £33,490,000 (2013: £32,123,000), relating to losses arising in overseas entities, which depend on the availability
of future taxable profits in excess of profits arising from the reversal of other temporary differences, are recognised above. Business
projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred
tax assets within seven years. £32,250,000 (2013: £30,526,000) of the tax losses to which these assets relate will expire after ten years
or later; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling
£12,926,000 (2013: £10,087,000) including £12,926,000 (2013: £10,087,000) in relation to losses in overseas companies of £40,359,000
(2013: £28,821,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred
tax asset expected to be recovered after more than 12 months is £33,490,000 (2013: £32,123,000).

30 Employee retirement benefit obligations
The Company’s subsidiary Hiscox plc operates a defined benefit pension scheme based on final pensionable salary. The scheme closed
to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from
1 January 2007. The funds of the defined benefit scheme are controlled by the Trustee and are held separately from those of the Group.
61% of any scheme surplus or deficit is recharged to Syndicate 33. The full pension obligation of the Hiscox defined benefit pension scheme
is recorded and the recovery from the third-party names for their share of the Syndicate 33 recharge is shown as a separate asset.

120

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

30 Employee retirement benefit obligations continued

The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows:

Present value of scheme obligations
Fair value of scheme assets

Deficit/(surplus) for funded plans
Effect of asset ceiling/onerous liability

Net amount recognised as a defined benefit obligation

2014
£000

2013
£000

227,375
(195,209)

179,479
(185,666)

32,166
–

32,166

(6,187)
10,553

4,366

The unrecognised net actuarial losses are the net cumulative gains and losses on both the scheme’s obligations and underlying assets.

As the fair value of scheme obligations exceeds the present value of the scheme assets, the scheme reports a deficit.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal
full actuarial valuation is performed on a triennial basis, most recently at 31 December 2011, and updated at each intervening balance sheet
date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using
interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the related pension liability.

The scheme assets are invested are as follows:

At 31 December

Managed fund pooled investment vehicles

UK equity funds
Emerging market equity funds
Global equity funds
Bond funds

US equities
Cash

2014
£000

2013
£000

81,163
8,340
43,974
43,542
14,770
3,420

74,959
7,996
37,258
39,048
13,173
13,232

195,209

185,666

All managed fund pooled investment vehicles and equity holdings have quoted prices in active markets.

The majority of the scheme’s debt and fixed income assets are held through the ownership of units in managed credit funds issued
by Standard Life Assurance Limited which invest in a broad spread of high-quality corporate bonds with derivatives used in controlled
conditions to extend durations in some cases.

The amounts recognised in total comprehensive income are as follows:

Note

2014
£000

2013
£000

Interest cost on defined benefit obligation
Interest income on plan assets
Interest expense on effect of onerous liability

Net interest cost
Administrative expenses and taxes

Total expense recognised in operational expenses in the income statement

Remeasurements

Effect of change in demographic assumptions
Effect of change in financial assumptions
Effect of experience adjustments
Return on plan asset (excluding interest income)

Changes in asset ceiling/onerous liability (excluding interest income)

Remeasurement of third-party Names share of defined benefit obligation

Total remeasurement included in other comprehensive income

Total defined benefit charge/(credit) recognised in comprehensive income

8,309
(8,589)
496

216
444

660

–
44,976
–
(6,587)
(11,049)
(4,581)

22,759

23,419

7,700
(6,934)
–

766
234

1,000

6,975
(3,982)
–
(25,287)
10,553
1,966

(9,775)

(8,775)

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

121

Notes to the consolidated financial statements
continued

30 Employee retirement benefit obligations continued

The movement in liability recognised in the Group’s balance sheet is as follows:

Group defined benefit liabilities at beginning of the year
Third-party Names’ share of liability

Net defined benefit liability at beginning of year
Defined benefit cost included in net income
(Charge)/recovery from third-party Names
Total remeasurement included in other comprehensive income
Employer contributions by Hiscox Group
Less contributions received by Hiscox Group from third-party Names

Net defined benefit liability at end of year
Third-party Names’ share of liability

Group defined benefit liability at end of year

A reconciliation of the fair value of scheme assets is as follows:

Opening fair value of scheme assets
Interest income
Cash flows

Contribution by the employer
Benefit payments
Administration expenses

Remeasurements

Return on plan assets (excluding interest income)

Closing fair value of scheme assets

A reconciliation of the present value of scheme obligations of the scheme is as follows:

Opening present value of scheme obligations
Interest expense
Cash flows

Benefit payments

Remeasurements

Changes in demographic assumptions
Changes in financial assumptions
Impact of experience adjustments

Closing present value of scheme obligations

2014
£000

2013
£000

4,366
(731)

3,635
660
(110)
22,759
(200)
–

26,744
5,422

32,166

16,907
(3,083)

13,824
1,000
85
(9,775)
(1,800)
301

3,635
731

4,366

2014
£000

2013
£000

185,666
8,589

156,513
6,934

200
(5,389)
(444)

1,800
(4,634)
(234)

6,587

25,287

195,209

185,666

2014
£000

2013
£000

179,479
8,309

173,420
7,700

(5,389)

(4,634)

–
44,976
–

6,975
(3,982)
–

227,375

179,479

Additional memorandum information at the end of the current and previous six accounting periods is presented below:

Present value of scheme obligations
Fair value of scheme assets

Present value of unfunded obligations/
(surplus scheme assets)
Effect of asset ceiling/onerous liability

Gross liability recognised on balance sheet

2014
£000

2013
£000

2012
£000

2011
£000

2010
£000

2009
£000

2008
£000

227,375
(195,209)

179,479
(185,666)

173,420
(156,513)

155,685
(140,517)

146,737
(144,056)

140,676
(118,391)

101,615
(115,166)

32,166
–

32,166

(6,187
)
10,553

16,907
–

15,168
–

4,366

16,907

–

2,681
–

–

22,285
–

(13,551)
–

–

Assumptions regarding future mortality experience are set based on professional advice, published statistics and actual experience.

122

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

30 Employee retirement benefit obligations continued

The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows:

Male
Female

The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date, is as follows:

Male
Female

The weighted average duration of the defined benefit obligation at 31 December 2014 was 26.2 years.

Other principal actuarial assumptions are as follows:

Discount rate
Inflation assumption (RPI)
Inflation assumption (CPI)
Pension increases

2014
years

28.9
30.3

2014
years

30.3
31.8

2014
%

3.7
3.0
2.0
3.0

2013
years

28.8
30.2

2013
years

30.2
31.7

2013
%

4.7
3.4
2.4
3.4

The triennial valuation carried out as at 31 December 2011 resulted in a deficit position of £19.7 million. The Group agreed to fund the
£19.7 million deficit paying instalments over five years. During the year the scheme was estimated to be fully funded on the trustee’s
statutory funding objective, as such the trustees and the Group agreed to put in place a new schedule of contributions effective from
20 August 2014. Under this Schedule no future deficit correction contributions are currently required, therefore the onerous obligation
for 31 December 2014 is nil. The Group paid £200,000 to the scheme for the expenses of the fund (2013: £200,000). The scheme
is currently in an overall surplus position, on an actuarial basis, at the balance sheet date.

The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. While
management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and
income statement. For example, an additional one year of life expectancy for all scheme members would increase the scheme obligations
by £6,987,000 at 31 December 2014 (2013: £4,892,000), and would increase the recorded net deficit on the balance sheet by £6,987,000
(2013: no impact).

The most sensitive and judgemental assumptions are the discount rate and inflation. These are considered further below.

CPI revaluation in deferment is used for contracted-out members. Contracted-in members are linked to RPI as well as for all pension
in payment increase.

The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these
assumptions at 31 December 2014 as follows:

Present value
of unfunded
obligations
before change
in assumption
£000

Present value
of unfunded
obligations
after change
£000

(Increase)
/decrease
in obligation
recognised on
balance sheet
£000

Effect of a change in discount rate
Use of discount rate of 3.95%
Use of discount rate of 3.45%

Effect of an increase in inflation
Use of RPI inflation assumption of 3.25%
Use of RPI inflation assumption of 2.75%

32,166
32,166

17,987
47,564

14,179
(15,398)

32,166
32,166

36,783
27,805

(4,617)
4,361

31 Earnings per share
Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number
of shares in issue during the year, excluding ordinary shares held by the Group and held in Treasury as own shares.

Basic

Profit for the year attributable to the owners of the Company (£000)
Weighted average number of ordinary shares (thousands)
Basic earnings per share (pence per share)

2014

2013

216,152
320,554
67.4p

237,758
358,652
66.3p

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

123

Notes to the consolidated financial statements
continued

31 Earnings per share continued

Diluted
Diluted earnings per share is calculated 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.

Profit for the year attributable to the owners of the Company (£000)

Weighted average number of ordinary shares in issue (thousands)
Adjustments for share options (thousands)

Weighted average number of ordinary shares for diluted earnings per share (thousands)

Diluted earnings per share (pence per share)

2014

2013

216,152

237,758

320,554
14,315

358,652
15,860

334,869

374,512

64.5p

63.5p

Diluted earnings per share has been calculated after taking account of 13,527,726 (2013: 15,131,711) options and awards under employee
share option and performance plan schemes and 787,419 (2013: 728,284) options under SAYE schemes.

32 Dividends paid to owners of the Company

Interim dividend for the year ended:

31 December 2014 of 7.5p (net) per share
31 December 2013 of 7.0p (net) per share

2014
£000

2013
£000

23,469
–

–
24,746

23,469

24,746

The final dividend equivalent for the year ended 31 December 2013 was paid as part of the C/D Share Scheme (2012: B Share Scheme),
see note 24. 261,555,693 C and 93,647,894 D Shares were issued, of which 14p per share was in lieu of a final dividend for 2013 of a cash
value of £49,728,000. During 2013, the final dividend equivalent for the year ended 31 December 2012 was settled as 395,188,526 B Shares
of 50p each, of which 12p per share was issued in lieu of a final cash dividend of £47,423,000.

The interim dividends for 2014 and 2013 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim
dividend for the year ended 31 December 2014 was paid in cash of £22,049,000 (2013: £22,625,000) and 270,917 shares for the scrip
dividend (2013: 324,261).

Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 25 March 2015, the Board proposes to pay 15.0p per
ordinary share instead of a final dividend for the year ended 31 December 2014. Together with the interim dividend of 7.5p per ordinary share,
this represents a total dividend for 2014 of 22.5p per ordinary share. In addition, the Board proposes to pay a special distribution of 45.0p
per ordinary share. Such amounts will be paid by way of a E/F Share Scheme. A scrip dividend alternative will not be offered to shareholders.

33 Business combinations
DirectAsia
On 31 March 2014, the Group acquired 100% of the share capital and voting rights of Direct Asia Insurance (Holdings) Pte Ltd (DirectAsia) for
US$24,575,000 (£14,804,000). In addition the Group purchased the outstanding debt of the company totalling US$31,750,000 (£19,127,000)
from the previous owners. DirectAsia’s primary business is motor insurance, with ancillary lines in travel, personal accident, healthcare
and term life products sold as an agent. This acquisition provides the Group with a distribution platform in Asia providing opportunities for
future growth.

Purchase consideration

Initial cash consideration
Contingent consideration

Total purchase consideration
Fair value of net assets acquired
Non-controlling interest

Goodwill

124

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

£000

14,334
470

14,804
(13,591)
866

2,079

33 Business combinations continued

The contingent consideration reflected on page 124 of £470,000 represents the current fair value estimate of the expected additional
consideration that may be payable to the seller. The contingent consideration is payable based on DirectAsia exceeding certain revenue
targets during the first four years post the acquisition.

Whilst the Group acquired 100% of the share capital and voting rights of the parent company Direct Asia Insurance (Holdings) Pte Ltd, within
the DirectAsia Group there exists an equity interest by a third-party. This has been accounted for as a non-controlling interest in accordance
with IFRS 3. The value of the interest is calculated on identifiable assets.

The assets and liabilities arising from the acquisition are as follows:

Intangible assets
Property, plant and equipment
Reinsurance assets
Loans and receivables, including insurance receivables
Cash and cash equivalents

Total assets

Insurance liabilities
Trade and other payables
Long-term loans

Total liabilities

Net assets acquired

Acquiree’s
carrying
amount
£000

3,257
670
4,678
5,113
32,184

45,902

17,437
5,546
19,127

42,110

Fair value and
accounting
policy
adjustments
£000

9,799
–
–
–
–

9,799

–
–
–

–

Fair value
£000

13,056
670
4,678
5,113
32,184

55,701

17,437
5,546
19,127

42,110

3,792

9,799

13,591

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.

DirectAsia contributed a loss of £11.4 million to the Group’s profit before tax for the period between 31 March 2014 and 31 December 2014.
If the acquisition of DirectAsia had been completed on the first day of the financial year, the Group result for the period would have been
a profit before tax of £229.2 million and the gross written premium would have been £1,760.7 million.

Applewell Ltd
On 8 August 2014 the Group acquired 100% of Applewell Ltd, an insurance broker specialising in events business for an amount that is not
considered to be material to the financial statements.

Associates
On 11 June 2014 the Group acquired a 10.6% stake in White Oak Underwriting Agency Limited (White Oak) for £1,700,000. White Oak
specialises in auto extended warranty and auto physical damage business. Additionally, on 28 May 2014, the Group acquired a 10% stake
in Carl Rieck GmbH, a German intermediary, for €500,000. Carl Rieck underwrites high net worth private clients, professional indemnity
and specialist commercial business.

On 14 February 2014 the Group disposed of its 25% holding in Barta & Partner – Versicherungsmaklergesellschaft m.b.H, for €500,000.
The investment previously had been fully impaired.

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.

34 Contingencies and guarantees
The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal
course of business.

The Group is subject to insurance solvency regulations in all the territories in which it issues insurance contracts. There are no contingencies
associated with the Group’s compliance or lack of compliance with these regulations.

The following guarantees have also been issued:
(a)

Hiscox Ltd and Hiscox Capital Ltd have entered into deeds of covenant in respect of a subsidiary, Hiscox Dedicated Corporate Member
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations)
amounts to £29 million (2013: £25 million) in respect of Hiscox Ltd supported by £29 million of investment securities (2013: £28 million)
and US$274 million (2013: US$258 million) in respect of Hiscox Capital Ltd supported by US$262 million of investment securities
(2013: US$271 million). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain
of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged
investments in circumstances where it considers there to be a risk that the covenant might need to be called.

(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks,
for a total US$875 million which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof,
providing that the cash portion does not exceed US$400 million. In addition, the terms also provide that upon request the facility may

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

125

Notes to the consolidated financial statements
continued

34 Contingencies and guarantees continued

be drawn in a currency other than US Dollar. At 31 December 2014 US$441.5 million (2013: US$333 million) was drawn by way of Letter
of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2013: £nil).

(c)

Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2013: £50,000) with NatWest Bank plc to support
its consortium activities with Lloyd’s, the arrangement is collateralised with cash of £50,000 (2013: £50,000).

(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.

(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. In 2012, Hiscox Bermuda renegotiated its 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 entered into new Letter of Credit
facility agreements with the Royal Bank of Scotland and Commerzbank AG. The agreements combined are a three-year secured facility
that allowed Hiscox Bermuda to request the issuance of up to US$350 million in Letters of Credit (2013: US$400 million). Letters of
Credit issued under these facilities are collateralised by US Government and Corporate Securities of Hiscox Insurance Company
(Bermuda) Limited. Letters of Credit under this facility totaling US$98.7 million were issued with an effective date of 31 December 2014
(2013: US$112.7 million on a US$400 million facility) and these were collateralised by US Government and Corporate Securities with a
fair value of US$115.6 million (2013: US$131.4 million).

35 Capital and lease commitments
Capital commitments
The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software
development was £1,976,000 (2013: £1,902,000).

Operating lease commitments
The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable
operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations
in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totaled £9,031,000
(2013: £8,677,000). Operating lease rental income for the year totaled £595,000 (2013: £547,000).

The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms,
are as follows:

No later than one year

Later than one year and no later than five years

Later than five years

Land and buildings
Office equipment
Land and buildings
Office equipment
Land and buildings

2014
£000

2013
£000

9,082
276
30,080
432
15,161

7,883
330
25,734
347
15,093

55,031

49,387

The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases
are as follows:

No later than one year
Later than one year and no later than five years
Later than five years

2014
£000

191
–
–

191

2013
£000

395
180
–

575

Obligations under finance leases
There were no finance lease arrangements in place at 31 December 2014 or 31 December 2013.

Finance lease interest expense for the year was £nil (2013: £nil).

36 Events after the balance sheet date
On 27 February 2015, the Group acquired R&Q Marine Services Ltd (‘RQMS’) for a consideration of £7,375,000 plus a further amount
contingent on the business generating levels of gross premiums written over the next 12 months. RQMS are a managing agent specialising
in yachts and general marine leisure which underwrites on behalf of other insurers.

126

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

37 Principal subsidiary companies of Hiscox Ltd at 31 December 2014

Company

Nature of business

Country

Hiscox plc*
Hiscox Insurance Company Limited
Hiscox Insurance Company (Guernsey) Limited*
Hiscox Holdings Inc.
ALTOHA, Inc.
Hiscox Insurance Company Inc.
Hiscox Inc.
Hiscox Insurance Company (Bermuda) Limited*
Hiscox Dedicated Corporate Member Limited
Hiscox Holdings Limited**
Hiscox Syndicates Limited
Hiscox ASM Ltd
Hiscox Underwriting Group Services Limited
Hiscox Capital Ltd*
Hiscox Underwriting Ltd
Hiscox Europe Underwriting Limited
Kiskadee Capital Ltd*
Kiskadee Reinsurance 1 Ltd
Kiskadee Reinsurance 2 Ltd
Direct Asia Insurance (Holdings) Pte Ltd
Direct Asia Insurance (Singapore) Pte Limited
Direct Asia Insurance (Hong Kong) Limited

*Held directly.
**Hiscox Holdings Limited held 43,216 shares in Hiscox Ltd at 31 December 2014 (2013: 48,558).

Holding company
General insurance
General insurance
Insurance holding company
Holding company
General insurance
Underwriting agent
General insurance and reinsurance
Lloyd’s corporate Name
Insurance holding company
Lloyd’s managing agent
Insurance intermediary
Service company
Reinsurance
Underwriting agent
Insurance intermediary
Holding company
Special purpose insurer
Special purpose insurer
Holding company
General insurance
General insurance

Great Britain
Great Britain
Guernsey
USA (Delaware)
USA (Delaware)
USA (Illinois)
USA (Delaware)
Bermuda
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Bermuda
Great Britain
Great Britain
Bermuda
Bermuda
Bermuda
Singapore
Singapore
Hong Kong

All companies are wholly-owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity shares held.

38 Related-party transactions
Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2014 on pages 60 to 68. A number
of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material
in nature.

The following transactions were conducted with related parties during the year.

(a) Syndicate 33 at Lloyd’s
Related-party balances between Group companies and Syndicate 33 are as follows.

Hiscox Syndicates Limited
Hiscox Group insurance carriers
Hiscox Group insurance intermediaries
Other Hiscox Group companies

Transactions in the income
statement for the year ended

Balances outstanding
(payable) at

31 December
2014
£000

31 December
2013
£000

31 December
2014
£000

31 December
2013
£000

42,368
33,576
5,365
–

39,136
25,924
11,246
–

55,623
55,070
(13,920)
(9,381)

36,271
23,654
(7,646)
(7,893)

81,309

76,306

87,392

44,386

(b) Transactions with associates
Certain companies within the Group conduct insurance and other business with associates. These transactions arise in the normal course
of obtaining insurance business through brokerages, and are based on arm’s length arrangements.

Gross premium income achieved through associates

Commission expense charged by associates

Amounts payable to associates at 31 December

Amounts receivable from associates at 31 December

Details of the Group’s associates are given in note 16.

2014
Total
£000

2013
Total
£000

102,396

14,474

9,099

2,520

3,557

52,230

9,769

(c) Internal reinsurance arrangements
During the current and prior year, there were a number of reinsurance arrangements entered into in the normal course of trade between
various Group companies. The related results of these transactions have been eliminated on consolidation.

Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2014

127

2014
£000

2013
£000

2012
restated
*
£000

2011
£000

2010
£000

1,756,260 1,699,478 1,565,819 1,449,219 1,432,674
1,174,011 1,131,627
1,343,410
1,371,114 1,268,140
1,131,158
1,316,259 1,283,311 1,198,621 1,145,007
211,366
17,271
178,800
21,272

217,454
208,026

244,538
237,758

231,075
216,152

72,720

69,617

105,946

64,108
2,828,847 2,585,054 2,406,269 2,368,636 2,459,107
336,017
657,662
564,375
(1,817,102)
(2,309,854) (2,150,299) (2,056,223)
223,984
288,041

516,547
(2,007,745)
310,909

650,651

178,616

337,611

67,552

1,454,206 1,409,461 1,365,366 1,255,899 1,266,114

462.5

402.2

346.4

323.5

332.7

67.4
64.5
83.9
17.1

22.5

66.3
63.5
83.0
19.3

21.0

53.1
51.0
85.5
17.1

18.0

5.5
5.3
99.5
1.7

17.0

47.2
45.4
89.3
16.5

16.5

735.0
624.5

695.0
453.6

489.4
369.3

424.7
340.5

381.4
317.0

Five-year summary

Results
Gross premiums written
Net premiums written
Net premiums earned
Profit before tax
Profit for the year after tax

Assets employed
Intangible assets
Financial assets carried at fair value
Cash and cash equivalents
Insurance liabilities and reinsurance assets
Other net assets

Net assets

Net asset value per share (p)

Key statistics
Basic earnings per share (p)
Diluted earnings per share (p)
Combined ratio (%)
Return on equity (%)

Dividends per share (p)

Share price – high† (p)
Share price – low† (p)

*The 2012 results have been restated to reflect the revised pension accounting standard.
†Closing mid-market prices.

128

Five-year summary Hiscox Ltd Report and Accounts 2014

To view the Hiscox
To view the Hiscox
corporate brochure visit
corporate brochure visit
app.hiscoxbrochure.com
app.hiscoxbrochure.com

Design: Browns
Design: Browns
www.brownsdesign.com
www.brownsdesign.com

Print: Pureprint
Print: Pureprint
www.pureprint.com
www.pureprint.com

This report has been printed
This report has been printed
in the UK by Pureprint Group,
in the UK by Pureprint Group,
a CarbonNeutral® company,
a CarbonNeutral® company,
using their environmental
using their environmental
printing technology.
printing technology.
Vegetable-based inks were
Vegetable-based inks were
used throughout. The paper
used throughout. The paper
is FSC mixed sources and
is FSC mixed sources and
the pulp is bleached using
the pulp is bleached using
a totally chlorine free (TCF)
a totally chlorine free (TCF)
process. Both printer and
process. Both printer and
paper mill are ISO14001 and
paper mill are ISO14001 and
registered to EMAS.
registered to EMAS.

Contents

Strategic report

Corporate highlights

Why invest in Hiscox?

Chairman’s statement

Chief Executive’s report

Hiscox business structure

Actively managed business mix

Actively managed key

underwriting exposures

Managing the insurance cycle

Capital

Group financial performance

Group investments

Governance

Risk management

Corporate responsibility

Insurance carriers

Board of Directors

Hiscox Partners

Corporate governance

Audit Committee report

Remuneration

Financial summary

Letter to shareholders

Remuneration policy report

Annual report on remuneration 2014

Directors’ report

Directors’ responsibilities statement

Independent auditors’ report

Consolidated income statement

Consolidated statement of

comprehensive income

Consolidated balance sheet

Consolidated statement

of changes in equity

Consolidated statement of cash flows

Notes to the consolidated

financial statements

128

Five-year summary

Cover image:

Smoke from our ‘elements

of risk’ series, looking at

the causes of destruction

in what we believe is a

thought-provoking and

beautiful way.

Hiscox Ltd

4th Floor
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda

T +1 441 278 8300
F +1 441 278 8301
E enquiries@hiscox.com
www.hiscoxgroup.com

To view the Hiscox
corporate brochure visit
app.hiscoxbrochure.com

Design: Browns
www.brownsdesign.com

Print: Pureprint
www.pureprint.com

This report has been printed
in the UK by Pureprint Group,
a CarbonNeutral® company,
using their environmental
printing technology.
Vegetable-based inks were
used throughout. The paper
is FSC mixed sources and
the pulp is bleached using
a totally chlorine free (TCF)
process. Both printer and
paper mill are ISO14001 and
registered to EMAS.

Contents

Strategic report

Corporate highlights

Why invest in Hiscox?

Chairman’s statement

Chief Executive’s report

Hiscox business structure

Actively managed business mix

Actively managed key

underwriting exposures

Managing the insurance cycle

Capital

Group financial performance

Group investments

Governance

Risk management

Corporate responsibility

Insurance carriers

Board of Directors

Hiscox Partners

Corporate governance

Audit Committee report

Remuneration

Financial summary

Letter to shareholders

Remuneration policy report

Annual report on remuneration 2014

Directors’ report

Directors’ responsibilities statement

Independent auditors’ report

Consolidated income statement

Consolidated statement of

comprehensive income

Consolidated balance sheet

Consolidated statement

of changes in equity

Consolidated statement of cash flows

Notes to the consolidated

financial statements

128

Five-year summary

Cover image:

Smoke from our ‘elements

of risk’ series, looking at

the causes of destruction

in what we believe is a

thought-provoking and

beautiful way.

13800 03/15

Hiscox Ltd

Report and Accounts

2014