Hiscox Ltd
Report and Accounts
2017
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Financial highlights
2
3 Why invest in Hiscox?
8
Chairman’s statement
10 Chief Executive’s report
Building a balanced
18
business
Actively managed
business mix
Actively managed key
underwriting exposures
20
21
22 Capital
24
Group financial
performance
26 Group investments
28
Additional performance
measures
Ten good reasons to
work at Hiscox
29
38 Risk management
48 Corporate responsibility
52 Board of Directors
Chairman’s letter
54
to shareholders
55 Corporate governance
60 Audit Committee report
64
Letter from Chairman
of the Remuneration
Committee
66 Remuneration summary
Annual report on
68
remuneration 2017
Remuneration policy
76
85 Directors’ report
87
Directors’ responsibilities
statement
90
96
96
97
98
99
Independent auditor’s
report
Consolidated income
statement
Consolidated statement
of comprehensive
income
Consolidated balance
sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
100 Notes to the consolidated
financial statements
152 Five-year summary
Hiscox is a diversified international insurance group with a
powerful brand, strong balance sheet and plenty of room
to grow. We are listed on the London Stock Exchange,
headquartered in Bermuda and currently have over 2,700
staff across 14 countries and 32 offices. We can trace our
roots back to 1901 and have grown organically over time
from our beginnings in the Lloyd’s market.
Our ambition is to be a respected specialist insurer in key
geographies and product lines, valued by our customers,
business partners and shareholders. Our values define
our business, with a focus on quality, courage, excellence
in execution and our people.
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Strategic report
37 Governance
63 Remuneration
89 Financial summary
Ten good reasons to work at Hiscox
Recently, we have been thinking a lot about what makes Hiscox a great
place to build a career. We have been talking to our people, newcomers
and old-timers; reading our reviews, both good and bad; and seeing how
we stack up against the competition. We have distilled this into ten points
which we think uncover one of our best-kept secrets – what it’s really like
to be part of our remarkable team.
See page 29.
Hiscox Ltd Report and Accounts 2017
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Strategic report
37 Governance
63 Remuneration
89 Financial summary
Financial highlights
98.8%
29.0p
Combined ratio excluding FX in a year
of historic catastrophes.
Total ordinary dividend per share
up by 5.5%.
£2,549.3m
Gross premiums written increased
by 6.1%.
Combined ratio excluding FX (%)
Ordinary dividend (p per share)
Gross premiums written (£m)
90.6
98.8
27.5
29.0
2,402.6
2,549.3
2016
2017
2016
2017
2016
2017
Group key performance indicators*
Gross premiums written (£m)
Net premiums earned (£m)
Profit before tax (£m)
Profit before tax excluding foreign exchange (£m)
Profit after tax (£m)
Earnings per share (p)
Total ordinary dividend per share for year (p)
Net asset value per share (p)
Combined ratio (%)
Combined ratio excluding foreign exchange (%)
Return on equity (%)
Investment return (%)
Reserve releases (£m)
*Additional performance measures are discussed on page 28.
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Hiscox Ltd Report and Accounts 2017
2017
2016
2,549.3
1,874.5
30.8
93.6
26.3
9.3
29.0
618.6
99.9
98.8
1.5
2.0
251.5
2,402.6
1,675.0
354.5
202.1
337.0
119.8
27.5
649.9
84.2
90.6
23.0
1.9
213.0
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Strategic report
37 Governance
63 Remuneration
89 Financial summary
Why invest in Hiscox?
Hiscox is a diversified international insurance group with a consistent,
long-held strategy that provides opportunity throughout the insurance
cycle. We are a uniquely balanced insurer with a powerful brand,
strong balance sheet and plenty of room to grow.
Our strategy
Building balance – a symbiotic relationship
Total Group controlled income for 2017 (%)
Our success is due to our long-held strategy:
A to use our underwriting expertise
in Bermuda and London to write
larger premium, volatile or
complex risks;
A to build distribution in the UK,
Europe, USA and Asia for our
specialist retail products;
A to protect and nurture our
distinctive culture by recruiting
the best people, and by focusing
on organic growth.
This strategy provides opportunities
throughout the insurance cycle, allowing
us to deliver in the short, medium and
long term.
Long-term shareholder value
Hiscox has always had a focus on
creating long-term shareholder value
with a progressive dividend policy.
Over the last five years ROE averaged
15%, well above the FTSE All-Share
average of 9%. This performance has
enabled the Company to distribute
£742 million to shareholders since
2013, and deliver a total shareholder
return of 280% – well above the FTSE
All-Share of 74%.
Big-ticket business
A Larger premium, globally traded,
Retail business
A Smaller premium, locally traded,
catastrophe exposed business
written mainly through Hiscox
London Market and Hiscox Re & ILS.
A Shrinks and expands according
to pricing environment.
A Excess profits allow further
investment in retail development.
less volatile business written mainly
through Hiscox Retail.
A Growth between 5-15% per annum.
A Pays dividends.
A Specialist knowledge differentiates
us and investment in brand builds
strong market position.
A Profits act as additional capital.
45%
55%
Hiscox Ltd Report and Accounts 2017
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Strategic report
Why invest in Hiscox?
37 Governance
63 Remuneration
89 Financial summary
The Hiscox Group employs more than 2,700 people across 14
countries and 32 offices. Our operations span every continent and
we are not overly reliant on any one of our divisions for the Group’s
overall profits.
Operational highlights
A track record
of profitable growth
Hiscox Retail
Now the single biggest segment in the
Group, driving growth and profits and
covering the dividend for the second
year in a row.
Hiscox Retail
Standout performance from
Hiscox USA, with premium growth
of 29% in constant currency.
29%
Hiscox London Market
Taken decisive action in areas like political
risks, healthcare, extended warranty and
auto physical damage business, where
results were marginal.
Hiscox London Market
Focus on growth in investment lines such
as cyber, product retail, general liability
and flood – where our award-winning
FloodPlus product differentiates us.
Over the last five years the Hiscox
Group has:
increased gross written premiums by
50% to
£2.55bn
8.4%
achieved compound dividend growth of
returned capital to shareholders of
£742m
Hiscox Re & ILS
Increasingly material ILS player, now with
US$1.5 billion assets under management.
US$1.5bn
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Hiscox Ltd Report and Accounts 2017
Hiscox Re & ILS
Launch of new US flood product,
FloodXtra, positions us well in a
deregulating US flood market.
delivered an average combined ratio of
87.2%
reported average return on equity of
15.4%
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Strategic report
Why invest in Hiscox?
37 Governance
63 Remuneration
89 Financial summary
We have invested significantly in creating a unique culture that
reflects our values and customer-focused ethos, and a powerful,
differentiated brand which our target clients can identify with.
A unique culture
The excellence of our people has been a
crucial factor in our continuing success.
Their expertise, courage and dedication
continue to drive our reputation for quality
and professionalism. In return, we strive to
provide them with a working environment
in which they can flourish.
In our annual global employee
engagement survey we looked at how
connected employees feel to Hiscox,
their managers, their teams and their
roles. Hiscox enjoys very high employee
engagement, which averages in the
top quartile of over 200 companies
worldwide. Of our employees, 88% said
they are proud to work for us, while 93%
said they believe in our corporate values.
Hiscox Ltd Report and Accounts 2017
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Strategic report
Why invest in Hiscox?
37 Governance
63 Remuneration
89 Financial summary
We are market leaders in many of the sectors in which we operate,
while our commitment to provide clients with quick responses,
clear coverage and superb service is at the heart of everything
we do. In 2017 it resulted in us receiving a number of accolades.
Award wins
Hiscox Group
A Robert Childs received the Judges’
Award for Contribution to the
Industry at the Reactions London
Market Awards 2017.
A Bronek Masojada received the
CEOs’ CEO award at the Insurance
Times Awards 2017 and Insurance
CEO of the Year at the Reactions
London Market Awards 2017.
A One of Management Today’s
Top 12 Most Admired Companies
in Britain.
A Glassdoor’s 8th Best Places
to Work 2018, as voted by
employees in the UK.
A Bronze Award for Best Places to
Interview in the UK from Glassdoor.
Big-ticket business
A Marketing Campaign of the Year for
Retail business
A UK Insurer of the Year, as voted for
the Hiscox Cyber Risk Protection
Campaign at the Reactions London
Market Awards 2017.
A Underwriting Initiative of the Year for
FloodPlus, and Young Underwriter
of the Year award for Daniel Alpay,
at the Insurance Insider Honours
Awards 2017.
A ILS Fund Manager of the Year at
the Reactions London Market
Awards 2017.
by Bluefin brokers.
A Hiscox Spain was voted Top Specialist
Insurer for Claims Service by members
of ADECOSE, the country’s largest and
most influential broker association.
A UK Consumer Intelligence Award
for claims in 2017, as voted for by
UK householders.
A Hiscox USA was recognised as
Best in Class for Audio Advertising
at the Financial Communications
Society’s 23rd Annual Portfolio
Awards in New York for its six-part
podcast series, Points of Courage.
A Hiscox USA’s I’mpossible
campaign received top honours
for integrated marketing at the
Business Marketing Association’s
Global Ace Awards 2017.
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Hiscox Ltd Report and Accounts 2017
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Strategic report
Why invest in Hiscox?
37 Governance
63 Remuneration
89 Financial summary
Our core 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.
Our ethos
Courage
Do the right thing,
however hard
Challenging convention
Our values define our
business. At their heart
is a restless spirit to
challenge convention in
our industry and ourselves
to always do better.
Human
Fair, firm and
inclusive
Quality
World-class where
it matters
Excellence
in execution
Consistent, timely,
efficient delivery
Integrity
True to our word
Hiscox Ltd Report and Accounts 2017
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Chairman’s statement
Hiscox delivered a profit before
tax excluding foreign exchange of
£93.6 million (2016: £202.1 million)
in the most expensive year for natural
catastrophes ever, as hurricanes,
earthquakes and wildfires battered
insurers’ balance sheets. A solid
investment return and the balance
in our business mix sustained us.
Good underwriting and profits from
the retail businesses countered
the volatility of the big-ticket lines.
Our strategy is working.
Our retail businesses had a great year
and provided the lion’s share of profit
at £109.9 million (2016: £158.0 million).
Pleasingly, profits from Hiscox Retail
have exceeded £100 million for the
second consecutive year. Retail is
also the current growth engine of the
Group at 20.5%, with Hiscox USA
the standout performer increasing
gross written premiums by 29% in
constant currency.
In big-ticket lines, an extended
period of benign claims activity and
a flood of capacity had diminished
margins across the industry and we
reduced as planned in Hiscox London
Market and Hiscox Re & ILS. However,
following the catastrophes in the third
quarter, we adjusted course and
reworked our business plans to grow
as prices rose. On the whole we have
achieved good price rises in property,
casualty and catastrophe-exposed
lines, particularly in loss-affected
areas, and it is my opinion that
this momentum will continue
through 2018.
Our balance sheet remains strong
and the options we have mean we are
well placed to seize the opportunities
that this changing market is bringing.
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Hiscox Ltd Report and Accounts 2017
Financial performance
The result for the year ending
31 December 2017 was a profit before
tax excluding foreign exchange of
£93.6 million (2016: £202.1 million). Gross
written premium increased by 6.1% to
£2,549.3 million (2016: £2,402.6 million).
The combined ratio was 99.9%
(2016: 84.2%). Earnings per share
decreased to 9.3p (2016: 119.8p) and the
net asset value per share decreased to
618.6p (2016: 649.9p). Return on equity
was 1.5% (2016: 23.0%). We made a
good investment return of £87.3 million
(2016: £74.8 million), before derivatives
and fees, which equates to a return
of 2.0% (2016: 1.9%) on total assets
under management.
I am pleased to announce a final
dividend of 19.5p, a step up in the full
year ordinary dividend to 29p, which is
an increase of 5.5%. The record date for
the dividend will be 11 May 2018 and
the payment date will be 12 June 2018.
The Board proposes to offer a scrip
alternative subject to the terms and
conditions of Hiscox Ltd’s 2016 Scrip
Dividend Scheme. The last date for
receipt of scrip elections will be
18 May 2018 and the reference price
will be announced on 29 May 2018.
Market
Back in January 2017 we tested the
London Market’s ability to withstand major
catastrophes with an industry-wide ‘dry
run’ exercise, which turned out to be timely.
We learnt a number of valuable lessons,
and at Hiscox we updated some of our
large loss processes, which stood us in
good stead for the events of the second half
of the year. It is the speed and agility of the
London Market to respond to major loss
events that makes or breaks its reputation,
and regulators are pivotal to that process.
We were pleased with the responsiveness
of Lloyd’s and other regulators.
People
I am also pleased with the progress we
have made at Board level in the past
three years. In 2017, we saw a number of
changes to both the Hiscox Ltd Board and
our Executive Committee, and both were
boosted by new skills and experience.
Following nine years of service, at which
point the UK Corporate Governance
Code deems them not independent,
Ernst Jansen and Gunnar Stokholm
stepped down from the Hiscox Ltd Board
in November. I would like to thank them
for their trusted counsel and wisdom,
which will be sorely missed by the Hiscox
Ltd Board. Our three new Non Executive
Directors on the Hiscox Ltd Board,
Michael Goodwin, Thomas Hürlimann
and Costas Miranthis, bring impressive
insurance industry experience gained
across Asia, Europe and Bermuda,
which will be valuable to our business.
Our Executive Committee was also
strengthened with two new members;
Kate Markham, who has moved from
our direct-to-consumer business into
Hiscox London Market where she is CEO,
and Mike Krefta, who began his career
with us in reinsurance operations 15 years
ago, and is now CEO of Hiscox Re & ILS.
It was especially pleasing to recruit from
within for these roles; people build
careers here.
It is our people who differentiate us
and our focus on building remarkable
teams is evident right across the Group.
Their enthusiasm, commitment and
fearlessness to challenge convention
drives us forward and I would like to
thank them for their focus and hard
work over the year.
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Chairman’s statement
37 Governance
63 Remuneration
89 Financial summary
Our big-ticket businesses
have a renewed vigour,
and our retail businesses
continue to shine.
Outlook
Our big-ticket businesses have a renewed
vigour, and our retail businesses continue
to shine. The balanced business we
have been building for over 20 years
continues to give us options throughout
the insurance cycle and there is significant
headroom to increase market share
across all our retail businesses. We see
plenty of opportunity to deliver profitable
growth and further value to shareholders.
Robert Childs
26 February 2018
Hiscox Ltd Report and Accounts 2017
9
Regulatory burden
It’s hard not to feel tormented by
regulation. On the one hand we were
delighted by the response of our
regulators to our requests to grow
after recent catastrophes. However,
on the other hand, like many businesses
we are working hard to navigate
geopolitical issues such as Brexit, US
tax reform, General Data Protection
Regulation (GDPR) and New York’s
Cybersecurity regulation. At the same
time, insurers are managing the impact
of other incoming European regulations
such as the Insurance Distribution
Directive (IDD). On top of these important
and complex customer safeguards, our
industry has seen a host of new thematic
reviews. I’m all for progress, in fact one
of the Hiscox maxims is ‘there is always
a better way’, but implementing these
changes in tandem drains resource from
the day-to-day endeavours of paying
claims, collecting premiums, serving
our customers and investing in building
our business. I’m sure I am not alone in
appealing for some reprieve from the
regulatory leapfrog while we deal with
so many sizable global issues.
Outlook
The $140 billion of catastrophe
losses across the sector led to
capital destruction and reserve
deficits, and as a result the market
is turning. This is not an immediate
process; it comes about through
each difficult conversation, each
new quotation and each renewal.
We have been waiting for this, and
the good teams we have built and
innovative products we have developed
mean we are well placed to serve the
needs of more customers. Being an
underwriter in a changing market
brings out the battler in us, and I have
been proud of the resolve of our teams.
Robert Childs
Chairman
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63 Remuneration
89 Financial summary
Chief Executive’s report
In 2017, the global insurance industry
was tested by hurricanes, earthquakes,
wildfires and more, and the estimated
US$140 billion insured loss makes it
the most expensive year for natural
catastrophes ever. After reserving net
US$225 million for these events, our profit
before tax excluding foreign exchange of
£93.6 million (2016: £202.1 million) reflects
the robustness of the strategy we have
pursued for many years. The steady
growth of our retail businesses and their
underlying profitability balanced the
thunder and lightning of the big-ticket lines.
2017 was another important lesson in the
need for flexibility in business, and I have
been proud of our resilience. The year
turned out to be an historic one for natural
catastrophes and it is at times like this that
reputations are won or lost. Paying valid
claims fast is what our business was built
for; if there were no claims, there would be
no need for insurance. Our teams around
the world have served our customers well.
Looking forward, we have seen rate rises
in big-ticket areas, though not as much
as we might have liked, but which have
allowed us to grow in areas such as flood
and property. Our retail businesses will
continue on their steady path. Across the
business we will invest to modernise our
infrastructure and offering for the digital
era, continue to build our brand and make
sure we adapt to a seemingly never-ending
set of regulatory and politically driven
changes. We have a zest for what lies
ahead, and see opportunities for profitable
growth in each of our business units.
I review each part of our business in
turn below.
Hiscox Retail
Hiscox Retail continues to grow in
significance and this year generated 56%
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Hiscox Ltd Report and Accounts 2017
of the Group’s gross written premiums
at £1,423.9 million (2016: £1,181.4 million).
Comprising of Hiscox UK & Ireland, Hiscox
Europe and Hiscox International, it is the
single biggest segment in the Group, a
strong profit contributor, and differentiates
us from our peers. We continue to invest
heavily in our brand and our ongoing
investment in IT infrastructure in both the
UK and USA will support our ambitious
growth plans.
Our retail businesses delivered profits of
£109.9 million (2016: £158.0 million) and
a combined ratio of 94.6% (2016: 88.0%).
Growth in the USA remains impressive,
Hiscox UK & Ireland has done well at the
top and bottom line, and Hiscox Europe
had its best year ever – despite the
distraction of preparing for Brexit.
Small business insurance is now the
biggest single product line for the Group,
delivering almost £1 billion in gross written
premiums, and the profits from Hiscox
Retail have exceeded £100 million for
the second year in a row.
Hiscox UK & Europe
This division provides commercial
insurance for small- and medium-sized
businesses, typically operating in
white-collar industries, and personal lines
cover, including high-value household,
fine art and collectibles, and luxury
motor. These products are distributed via
brokers, through a growing network of
partnerships, and direct to consumers.
performing particularly well. We still have
plenty of room for growth in our existing
product areas. We have attracted new
business with our broadened appetite for
larger risks, and have also expanded the
range of professions we cover to include
milliners and other specialist retailers.
In the high net worth space, we agreed a
transfer deal with Aon for its high net worth
book of household insurance. In personal
lines we also focused on embedding the
products we launched in 2016, including
our renovations and extensions product
and our UK flood product, which have both
performed well. We have suffered from an
increase in escape of water claims arising
from burst pipes, which is a trend affecting
the industry. We are working with others
to see how we can help policyholders
mitigate this risk.
In the direct-to-consumer channel,
our investment in IT infrastructure and
expanded underwriting appetite for
bigger risks are having a positive effect.
There is good organic growth in our core
direct commercial business, where we
are taking on more businesses at the
‘medium’ end of SME, and in direct home,
where we are taking on larger properties.
We established a new partnership with
Barclays, where we are providing home
insurance products to their Premier
customers, and are pleased to be the
insurance service provider for Plexal,
the new technology innovation centre in
London’s Queen Elizabeth Olympic Park.
Hiscox UK & Ireland
Our most mature retail operation, Hiscox
UK & Ireland, increased gross written
premiums by 11.6% to £556.3 million
(2016: £498.6 million), with every region
contributing. The broker channel remains
a key driver, with the professional risks
and specialty commercial business
The power and distinctiveness of the
Hiscox brand is an important driver
of our growth. We have seen good
improvements in all key brand measures
as the long-term benefits of a consistent
strategy and ongoing investment continue
to pay off. In the UK, we returned to TV
with a sponsored ten-part property
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Strategic report
Chief Executive’s report
37 Governance
63 Remuneration
89 Financial summary
2017 was another
important lesson in the
need for flexibility in
business, and I have been
proud of our resilience.
Hiscox Retail
Gross premiums written
Net premiums earned
Underwriting profit
Investment result
Foreign exchange and other*
Profit before tax
Combined ratio
Combined ratio excluding foreign exchange
*Includes impairments and accelerated amortisation.
2017
£m
2016
£m
1,423.9
1,229.9
89.0
22.8
(1.9)
109.9
94.6%
94.5%
1,181.4
1,020.5
100.4
30.4
27.2
158.0
88.0%
91.8%
Bronek Masojada
Chief Executive
series on Channel 4, ‘Best Laid Plans’,
to support our renovations and
extensions product.
I am pleased to say that the migration of
our commercial broker channel business
to a new IT platform is complete, with art
and private client business scheduled for
2018. The commercial team is already
benefiting from improved conversion,
pricing and service, and our underwriters
now have more time to spend with brokers
and work on complex risks. We have also
been able to insource our broker channel
back-office functions to our shared service
centre in Lisbon, which is already delivering
benefits in terms of quality and control.
Hiscox Europe
Hiscox Europe had its best year
ever in both growth and profitability,
delivering gross written premiums of
€245.3 million (2016: €218.4 million),
up 12.3% in constant currency. All
countries contributed to the underwriting
performance, with strong new business
and retention. Cyber, specialty commercial
and management liability products
continue to be key drivers of growth
and we continue to invest in them.
Germany and Spain performed particularly
well. In Germany, a focus on cyber and
classic car continues to deliver and the
business is achieving impressive 95%
retention rates. We also extended our
reach with a new sales branch in Frankfurt.
In Spain, we have focused on growing our
existing partnerships, through innovation in
products and services. We also launched
our new cyber product, Cyber Clear, with
promising early signs.
Hiscox France returned to growth after a
challenging 2016, driven by the professions
book and a focus on specialty commercial
schemes. New leadership is also having
a positive effect. In Benelux, we continue
to focus on professionals and specialty
commercial business, and to invest in
our market-leading cyber offering.
Our mainland Europe business is
supported by our shared service centre
in Lisbon, where we now have a team of
about 230 people. Operations support
is mostly integrated with each individual
country to ensure as close an alignment
as possible, to overcome the tyranny
of distance.
Having initiated technology transformation
programmes in our retail businesses in the
UK and the USA, our attention will soon
turn to Europe. In 2018, we will begin the
planning for this task, with an expectation
that this will move to execution in 2019
when the UK programme is largely
complete. In the meantime, we are
re-launching our broker extranet sites
under the rubric ‘my Hiscox’ with
additional products and self-service
features to drive sales and service.
We have also deployed a state-of-the-art
CRM solution across our broker and direct
channels, as well as Robotics Process
Automation (RPA) to automate back-end
processing and even further improve our
service levels to brokers and partners.
Hiscox International
This division comprises Hiscox USA,
Hiscox Special Risks and DirectAsia.
Its revenues grew by 28.8% to
£654.3 million (2016: £508.1 million),
24.8% at constant currency.
Hiscox USA
Hiscox USA underwrites small- to
mid-market commercial risks through
brokers, partnerships and directly
to businesses online and over the
telephone. The business continues
Hiscox Ltd Report and Accounts 2017
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37 Governance
63 Remuneration
89 Financial summary
Hiscox USA withstood
the impact of the Q3
hurricanes well,
testament to the scale
and resilience we have
built into the business.
Hiscox USA
£544.1m
Hiscox USA gross premiums written,
an increase of 29% in constant currency.
to be a standout performer within
the Group, delivering excellent growth
of 28.8% in constant currency to
US$701.6 million (2016: US$544.8 million),
with all lines contributing. Hiscox USA
withstood the impact of the Q3 hurricanes
well, testament to the scale and resilience
we have built into the business.
Our direct and partnerships division,
the fastest-growing segment of
Hiscox USA, had another strong year.
We expanded our underwriting appetite
within partnerships into adjacent small
business segments, such as food
trucks and insurance agents. Our small
business operations continue to go from
strength to strength and we now have
more than 250,000 policies in force.
Growth in our broker channel business
was driven predominantly by professional
risks and general liability, where we are
seeing continued success in selling it
both as a stand-alone product and as
additional cover to existing clients.
New market participants in cyber have
led to increased competition and some
downward pressure on pricing, but
we are staying relevant through our
products and our expertise. We have
walked away from unprofitable business
in our programmes book, and will
remain opportunistic when it comes
to new business. Our entertainment
business is now established and
achieving scale, and our directors and
officers’ line has benefited from a sharper
focus on the most promising industries
and geographies.
We remain a small player in the US
insurance market, and the opportunity
is substantial. Our US team has done
extremely well to build a lead in the small
business segment, particularly online,
and has established strong partnerships.
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Competition is increasing, but we will be
relentless in our investment in the brand,
our systems, products and teams.
The IT infrastructure project we are
undertaking to replace the existing
policy and claims administration system
is progressing well, and our direct
operations will be the first to benefit
from it. Much like the IT projects we
have completed in our UK business
though, these are multi-year programmes
that will create some operational stretch
for our teams.
Hiscox Special Risks
This business underwrites special risks
including kidnap and ransom, fine art and
executive security from offices in Cologne,
London, Los Angeles, Miami, Munich,
New York, Paris and St Peter Port.
The business delivered gross written
premiums of US$127.3 million
(2016: US$128.8 million), a decline of
1.2% in constant currency or a small
increase of 3.7% in Sterling terms,
which is a good result in intensely
competitive trading conditions.
The Security Incident Response product
we launched at the start of the year in
the UK, and have since rolled out to the
USA, Spain and Japan, differentiates
us and is creating a market where
none existed previously. It gives us
opportunities with a wider range of clients
who are focused on broader security
issues beyond kidnap exposure, such
as criminal threats, workplace violence,
corporate espionage and cyber extortion.
It also enables us to leverage additional
distribution channels such as directors
and officers’ brokers, and has been
very well received so far. We will look
at other opportunities to build on this
success in 2018.
The Special Risks underwriting centre we
established is delivering material benefits
to the business by enabling underwriters
to spend more time underwriting
complex risks and pursuing new
business. The operating model is being
refined further with a focus on the USA
and technological innovation, which we
expect will provide further benefits.
DirectAsia
DirectAsia is a direct-to-consumer
business in Singapore and Thailand that
sells predominantly motor insurance.
Hiscox acquired the business in April
2014. Its premiums reduced to
£11.4 million (2016: £13.0 million), in
line with management expectations,
following the sale of our business in
Hong Kong in 2016. Our Thai business
operates as an agency and therefore is
not reflected in these figures.
Despite the extremely competitive
environment in Singapore the team is
attracting new business thanks to ongoing
investment in the brand, improving
conversion rates in our contact centres
and a more targeted approach to pricing.
We also extended our distribution in
conjunction with a local aggregator, and
established new partnerships with a
major vehicle inspection centre and with
Shell – both of which are already yielding
encouraging results. Product innovations
including cover for motorcycle delivery
riders and NCD60, a rewards system
for customers, have also enhanced
our proposition.
In Thailand, where we see significant
opportunity, we launched a new TV
campaign to raise brand awareness
among our target customers. We
continue to focus on marketing, including
a new social media campaign to leverage
the fact that Thais are among the
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Hiscox London Market
Gross premiums written
Net premiums earned
Underwriting loss
Investment result
Foreign exchange and other*
(Loss)/profit before tax
Combined ratio
Combined ratio excluding foreign exchange
*Includes impairment.
2017
£m
581.7
435.7
(35.7)
11.3
(11.8)
(36.2)
111.6%
108.7%
2016
£m
726.0
443.1
(2.3)
12.3
34.0
44.0
90.7%
99.4%
Losses from hurricanes Harvey,
Irma and Maria affected our hull and
cargo accounts in the second half.
To date, rate increases in these lines
have not been at the level expected,
so we will need to remain disciplined.
Marine liability had a good year,
with international performing
particularly well and rates increasing
slightly. We will look to increase our
position in this line as the business
renews throughout 2018.
biggest Facebook users in the world
on a per-capita basis.
The incremental gains we are making
in this business are as we expected,
and positive indicators of the direct and
partnership business we are building
in Asia.
Hiscox London Market
In a year severely affected by natural
catastrophes, it is no surprise that
Hiscox London Market, which has a
focus on catastrophe exposed risks,
delivered a loss of £36.2 million
(2016: profit of £44.0 million), equal
to a combined ratio of 111.6%.
The market conditions facing Hiscox
London Market have been deteriorating
for some time, so in 2017 we shrank
our premium by almost £150 million to
£581.7 million (2016: £726.0 million).
This was not an across the board retreat,
but focused on lines like political risks,
healthcare and extended warranty/auto
physical damage where our results
were marginal. We worked hard to hold
market share in our core lines including
terrorism, household and commercial
property binders, and to progress in
our investment lines of cyber, US flood,
general liability, product recall and cargo.
We believe that this discipline is the key
to long-term outperformance.
Our original business plan for 2018 was to
continue to shrink, but the accumulation
of natural catastrophes caused a change
of plan. Our revised plan called for an
increase of Syndicate 33’s capacity from
2017 levels by £450 million to £1.6 billion.
Rate increases to date, while good for
loss-affected lines like US and Caribbean
property and elements of casualty, have
not been as strong as we anticipated, so
we will expand and expect to see Hiscox
London Market return to growth, but
not by as much as originally expected.
We continue to press for rate rises and the
underwriting discipline we exert now will
flow though to our bottom line over time.
Looking at each business area in turn:
Property
Our property division includes USA and
international commercial property, power
and mining risks, and USA catastrophe
exposed personal and small commercial
lines traded in the London Market.
The year started in a soft and softening
market for our property team, so we
reduced our big-ticket property account
while maintaining our personal and small
commercial lines where rates were under
less pressure. The losses of the second
half are driving up property pricing,
particularly in loss-affected accounts, and
we expect to grow materially here in 2018.
A new initiative in 2016 and 2017 was
our FloodPlus product which is a
commercial market alternative to the
government-backed National Flood
Insurance Program. Our underwriting
resolve and risk selection was tested
in Hurricane Harvey which caused
extensive flooding in Houston. We paid
losses, which is after all the product we
sell, but we see opportunities ahead.
We created a Lloyd’s consortium with
other leading players and in 2018 the
consortium will seek to grow this
award-winning product materially.
Marine and energy
Our marine and energy division includes
upstream energy, marine and energy
liability, cargo and hull risks.
All lines were impacted by an ever
softening market in the first half of the year.
Energy lines continue to experience
the knock-on effects of oil price
depression, and the impact of more
capacity than buyers. We continue
to seek out opportunities where the
terms are attractive.
Casualty
Our casualty division includes our
directors and officers’, cyber, professional
indemnity and general liability lines.
We have reduced in healthcare and
miscellaneous professional indemnity,
focusing instead on our investment lines of
directors and officers’, general liability and
cyber, where our market-leading teams
and products are having a positive effect.
Directors and officers’ and general liability
are seeing a welcome uptick in pricing,
and the cyber market continues to grow
substantially as global demand increases.
Specialty
This division includes our aviation,
contingency, terrorism, personal accident
and product recall business. The space
business moved into Hiscox MGA over the
course of the year, and we stopped writing
political risks business during 2017.
The soft market prevailed, particularly in
terrorism and personal accident, and we
were selective in these lines. Terrorism
remains a profitable class of business and
our market-leading position continues to
stand us in good stead.
Product recall is still a relatively new
line of business and there is some
overcapacity, but it remains an attractive
specialty area where we can add value
with niche expertise. Market losses have
helped to curtail rate reductions and we
have achieved good growth. We agreed
to buy the renewal rights to Liberty’s
London Market product recall book,
and we launched an aviation-focused
product that has been endorsed by the
Aircraft Builders Council as the product
recall policy of choice for its members.
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Catastrophe reinsurance
pricing into the key
1 January renewal
season saw average
prices increase by 9%.
Hiscox Re & ILS
£53.6m
Investment in marketing and
brand building in 2017.
In 2018, we will focus on increasing our
cross-sell opportunities, particularly in
marine and energy.
It was another difficult year for aviation,
where rates continued to fall, eroding
an already non-existent margin. We
significantly reduced our exposure to this
line during 2017 and in 2018 will withdraw
from aviation hull and liability underwriting.
Alternative risk
Last year I said we would materially
reduce our involvement with underwriting
agency White Oak in 2017, and we
kept to this plan – exiting the extended
warranty and auto physical damage
business. With the benefit of hindsight
our expansion into this area was a
mistake as we failed to achieve the
margins we expected.
We are now focused on portfolio
business, where we match our capacity
and experience with the expertise
of underwriters in niche lines that
complement our core appetite.
Hiscox MGA
Hiscox MGA underwrites and
distributes products where customers’
requirements for capacity exceed
Hiscox’s own risk appetite, or where
the team’s distribution focus allows
us to access business in local markets
around the world. It operates out of
London, Paris and Miami.
We focused on four core lines of
business in 2017: yachts and mega
yachts, South American-focused
property facultative reinsurance, space
(which moved into the MGA in 2017)
and terrorism. The team is steadily
developing the business and we think
that this will become a material
distribution arm for the Group.
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Hiscox Re & ILS
Hiscox Re & ILS comprises the Group’s
reinsurance businesses across the world
and ILS activity through our flagship ILS
funds. Our strategy of underwriting on
behalf of Hiscox and third-party capital,
whether they are insurance companies,
other syndicates or capital market
investors, is working well.
Gross written premiums for Hiscox Re
& ILS grew by 4.5% in local currency to
US$700.2 million (2016: US$670.0 million).
Net of cessions to supporting capital partners,
premiums reduced to US$293.6 million
(2016: US$306.2 million). The business
delivered a profit of US$25.5 million
(2016: US$155.9 million) and a 101.3%
combined ratio (2016: 53.0%), a good
result in the face of challenging trading
conditions. We benefited from our
non-catastrophe lines, fees on our
management of third-party funds and
some releases from catastrophes in
prior years.
Hiscox Re expanded its product suite
in 2017, with new cyber and flood
offerings. FloodXtra, a new product
developed using detailed topological
and weather analytics, allows us to
target the deregulating US flood market.
We see real opportunity to partner with
US personal lines carriers who wish
to enter this market. The product has
been in development for some time but
Q3 weather events have enabled us to
generate good, early interest. We will
continue to focus on these growing
lines of business in 2018.
Growth in US catastrophe reinsurance
has been especially pleasing, and helped
to offset the closure of our healthcare
business and reductions in retro and
casualty lines, where rates were under
more pressure. Property catastrophe
reinsurance makes up approximately
60% of gross written premium for Hiscox
Re & ILS. The team’s gross underwriting
performance was exceptional and
as a result we were able to retain our
quota share support from insurers and
syndicates, and to replace those whose
appetite changed.
Hiscox Re ILS, our manager of capital
market funds which invest in insurance,
had a good year. We were able to attract
additional qualified investors and we
entered 2018 with US$1.5 billion of assets
under management. The professionalism
of the team was recognised when they
were awarded ILS Fund Manager of the
Year at the Reactions London Market
Awards 2017.
Catastrophe reinsurance pricing into
the key 1 January renewal season saw
average prices increase by 9%. There
were clear variations within this, with
loss-affected accounts seeing larger
increases. The increases were less than
we had expected and our aggregate
book will grow less than initially planned.
It is clear though that rate decreases are
few and far between, so we think that
2018 will offer a better risk/reward
trade-off than 2017.
Growing in non-catastrophe lines will
be a focus for 2018, with opportunities
in cyber and casualty. The ILS team will
also be working with their insurance
colleagues to see how we can utilise our
access to both capital market investors
and primary insurance to create new
products and opportunities.
Claims
2017 will be remembered as one of the
most costly years in history for natural
catastrophes as a result of hurricanes
Harvey, Irma, Maria and Nate, Mexico
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Hiscox Re and ILS
Gross premiums written
Net premiums earned
Underwriting profit
Investment result
Foreign exchange and other*
Profit before tax
Combined ratio
Combined ratio excluding foreign exchange
*Includes finance cost.
2017
£m
2016
£m
543.7
209.0
3.5
21.7
(5.4)
19.8
101.3%
98.9%
495.2
211.4
84.1
10.1
21.3
115.5
53.0%
64.9%
earthquakes and California wildfires.
The total cost of these events to the
industry is estimated at in excess of
US$140 billion, and Hiscox established
net reserves of US$225 million to cover
the expected losses from them. We try
to take a prudent view when we create
these reserves, but as with many matters
in insurance, uncertainties remain. The
prudence of our team in reserving prior
catastrophes and individual claims
was demonstrated with the release of
£252 million (2016: £213 million) from
prior years. Shocks in insurance are
normally negative, so it was pleasing
to demonstrate past prudence.
In retail lines, claims activity increased
to a more normal level after a very benign
2016. In the UK, in line with others in the
industry, we faced a veritable epidemic
of escape of water claims. It seems that
modern plumbing is not as robust as
older methods. Across the world we
are investing in retail claims capabilities.
We received over 74,000 claims
notifications (2016: over 63,000) and
paid out £294 million (2016: £248 million).
This ongoing increase is a welcome
by-product of the success of our
retail businesses.
Paying claims well is a core part of our
value proposition, so we are pleased
that our net promoter scores from
those who have had claims remain very
strong. In 2018, we are developing a
claims 2.0 plan to ensure we can scale
our claims and move to more digital
processes, without losing the personal
touch which is so important to our
customers who are going through
what is often a traumatic experience.
Marketing
At Hiscox we see marketing as a way
of amplifying the reputation we get from
dealing with each customer and broker
in a fair and reliable way. This amplification
is not cheap and in 2017 the Group
spent £54 million on marketing and
brand-building activity (2016: £42 million).
Our initiatives include the ‘I’mpossible’
brand idea which ran on digital, press,
event, radio and even ‘in elevator’
mediums in the USA. Our US brand
awareness peaked at 44% during the
year (2016: 38%) and our ambition is to
reach the 70% we have in the UK. Our
new UK brand idea of ‘ever onwards’
was also launched in the year. This small
commercial-focused marketing drove a
double-digit increase in premiums.
We continued to activate a range of
sponsorship and partnership activity
across the Group, predominantly
focused on our core interest areas of art,
classic cars and technology. We set the
marketing and sponsorship budget for
the direct and partnership businesses
by reference to the acquisition costs in
the broker channel for similar products.
This means that as these businesses
grow, we expect to increase their
marketing budgets as well. There are
economies of scale, but we believe that
at the moment our long-term interests
are served by continuing on this path.
IT
We are continuing on our path of
replacing all our core retail systems.
In 2017, our UK broker channel moved
to the new system and in 2018 we expect
the high net worth business to follow
suit. The new system is allowing greater
automation of the underwriting process,
with attendant efficiency gains whose
benefit will begin to be seen in 2018.
We expect the programme to wind
down in 2019 at which time core
members of the team will switch
focus to Hiscox Europe.
In 2017, Hiscox USA began the preparatory
phase of its system replacement, entering
phase one in 2018. We now have over
250,000 small commercial customers,
so the move to a more robust and digital
friendly platform is well timed.
As if all of these core systems
replacements were not enough,
we are also readying Hiscox for the
implementation of the General Data
Protection Regulation (GDPR), the New
York Insurance Department’s new cyber
regulations, achieving the UK’s cyber
essentials plus standard across the
Group, adapting our systems to Brexit
and supporting a finance transformation
process. Like all businesses today,
Hiscox cannot trade and grow profitably
without robust modern infrastructure, so
we are committed to completing these
programmes and other linked initiatives
even though, as previously stated, they
are increasing our expense ratio by 1%
in the short term.
Investments
The main objectives of our investment
portfolio, those of providing the liquidity
to pay claims and capital to support the
underwriting business, have come to
the fore this year. Having a conservative
approach has ensured that both these
aims have been comfortably met.
However, while we have steered a pretty
steady course with the portfolio since
the financial crisis, accepting the low
returns that have been available in the
safer part of the bond markets, we were
always prepared to take some risk,
mostly through an allocation to equities.
Following this strategy our investments
in 2017, before derivatives and fees,
made £87.3 million (2016: £74.8 million)
equating to a return of 2.0% (2016: 1.9%).
Conventional wisdom always had it that
a negative environment for bonds would
be positive for equities and vice versa.
This correlation held true last year.
With our major government bond
benchmarks producing negative or very
low returns the contribution from fixed
income was predictably unexciting.
However, a strong year for equities
saw our modest allocation to risk
assets provide a significant portion of
our overall investment performance.
This is a good result that exceeded
our expectations.
The recovery from the crisis has taken
much longer than we expected but it
does seem that 2017 may prove to be a
turning point and that a return to a more
normal level of interest rates has started.
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Our retail businesses
now account for 56%
of our income and, as
this year’s results have
shown, are substantial
contributors to our
profits and bring
welcome resilience
to our balance sheet.
Evolution of leadership
Our bond portfolios have been positioned
accordingly and while those in Sterling
and Euros start from very low levels, we
are investing our US Dollar cash flow at
much higher yields than we have been
used to for some time. Portfolios such as
ours will be beneficiaries if interest rates
move higher in 2018 as we expect. The
so-called risk-free returns that we enjoyed
pre-crisis are still some way away but
at least we are taking steps in the right
direction. In the meantime, we continue
to resist the temptation to take more risk
and lower the quality of the portfolio.
Capital and external environment
Hiscox’s capital requirement is driven
by a mixture of the level needed to
provide the required security to our
customers and brokers, the expectations
of regulators around the world and
political decisions in the countries in
which we operate. Over the past two
years these factors have conspired
to drive an atomisation of our capital,
resulting in a consequent reduction of
diversification and increased capital
needs and cost. These trends
look likely to continue into 2018.
It will also lead to a temporary increase
in required capital of approximately
£50 million, with only 75% of this
moderating over time, due to the loss
of diversification in our capital base.
The second driver of atomisation is the
USA’s recent Base Erosion Anti-Abuse
Tax (BEAT). The headline of this new law
is tax, but the bigger implication is the
difficulty Hiscox, and all other insurers not
headquartered in the USA, will have in
diversifying US risk with UK, European
and Asian risks. This leads to higher USA
capital requirements, and a longer term
likely increase in cost to consumers. Hiscox
will experience an increased US capital
requirement of US$75 million as a result of
BEAT. In addition Hiscox has written down
its deferred tax asset by net US$4 million.
The third driver of capital is our collective
regulators. The financial crisis of 2008/09
continues to cast a long shadow, so each
stress test or model improvement seems
to result in a small incremental increase in
regulatory capital requirement. There is
little incentive for a regulator to say ‘we feel
you are more than adequately capitalised’.
The first driver of atomisation and
increased cost is Brexit. We continue
to assume that freedom of services will
not last beyond Brexit date, and were
pleased that in January, Luxembourg’s
Commissariat aux Assurances approved
a licence for Hiscox S.A., our new
EU-27 insurance company. We have
begun preparations for a Part VII transfer
of relevant policies and their associated
liabilities to this new entity. We aim to have
completed this by December 2018 to
provide continuity of cover to our clients
across Europe. This adaptation to
Brexit will cost Hiscox approximately
£12.5 million in one-off cost, and an
expected ongoing €2 million per annum.
The final driver is the rating agencies.
Hiscox is often referred to as a Lloyd’s
business, which is a fair reflection of
where we came from, but not of the shape
of our business today. Rating agencies
looked at us in the same category as pure
catastrophe writers, not giving credit to
the benefits of diversification that our
now substantial retail business brings.
I am pleased to report that in 2017, S&P
had a fresh look at Hiscox and moved us
from a high risk category to a medium risk
category. I hope that they, and the other
rating agencies, feel their judgement is
vindicated with Hiscox being profitable
in a year of US$140 billion of catastrophe
losses. This was a great piece of work by
our capital team using our new capital
model, and results in a lower capital
requirement for an unchanged rating.
Most of these influencers on capital levels
are not unique to Hiscox as they affect
all firms. In the short term the gradual
ratcheting up of capital requirements
depresses returns, but as economic
forces work through it is inevitable that
consumers’ costs will increase. That may
be a price worth paying for ever greater
protection of the government and the
taxpayer. At the macro level the taxpayer
and consumer are the same person, so
I hope that higher costs do not lead to
lower insurance penetration, thereby
causing other problems for the
government and taxpayer.
It is testament to the strength and
flexibility of our business that Hiscox
is capable of paying the losses from
the 2017 hurricanes, of providing the
incremental capital driven by political
decisions, and funding the planned
increases in underwriting all from our
own resources. In 2018, we will continue
to review our capital and funding strategy
to ensure we retain significant financial
flexibility to react, adapt and take
advantage of opportunities that
arise from changing conditions.
Change in reporting currency
As previously announced, the functional
currency of some of our subsidiaries
including Syndicate 33, and the reporting
currency of the Group, will change to
US Dollars effective 1 January 2018.
This change will significantly reduce
the volatility of the Group’s earnings
due to foreign exchange movements,
in particular due to translation of foreign
currency balances. We will report to the
market on this new basis when disclosing
the Q1 Interim Management Statement in
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Officer for the Group will this year move
to take up the role of CEO Hiscox USA,
while retaining his Group marketing role.
Our ambition is to build a brand equal in
presence to what Hiscox has achieved in
the UK, and with Steve’s background in
consumer marketing and his experience
of leading the creation of our UK brand, he
is the best person to lead us to achieving
this ambition.
We welcomed two new appointments
to the Executive Committee, and it
was pleasing to recruit from within
for these roles. Mike Krefta joined the
Executive Committee in September
on his promotion to Hiscox Re & ILS
CEO, and Kate Markham, UK Head of
Direct, followed suit in November on her
appointment to the newly created role
of Hiscox London Market CEO. Mike
and Kate both bring fresh thinking and
technical and consumer expertise to the
Executive Committee. Jeremy Pinchin
returned to the UK from Bermuda,
relinquishing his roles as the founding
CEO of Hiscox Re & ILS and Group
Company Secretary to focus on his roles
of Group Claims Director and Executive
Committee member. He has also taken
on chairmanship of the Hiscox pension
scheme and Hiscox Special Risks. During
his time in Bermuda, Jeremy brought
together our London and Bermuda
reinsurance teams, drove the creation
of our ILS business and established
Hiscox Re & ILS as an innovative force
in the reinsurance industry.
Some Hiscox pioneers have left the
business. After 23 years of service to
Hiscox, Steve Camm, Hiscox Special
Risks CUO, retired. Steve established
our Guernsey operations in 1998,
beginning with just one colleague in a
basement office, growing it to the centre
of our Special Risks operation. He was
relentless in his pursuit of a retail approach
to our kidnap and ransom underwriting
in the face of strong market opposition.
We will continue to benefit from his
experience as a Non Executive Director
to Hiscox Special Risks. Kevin Henry,
who has been underwriting kidnap and
ransom risks with Hiscox for nine years,
has stepped into his shoes.
David Astor has spent 15 years as our
Chief Investment Officer and is retiring
in March 2018. David’s steady nerve
during the financial crisis helped us
navigate turbulent markets and a low
interest rate environment. His measured
insight and expertise, dry humour and
understatement will be missed.
Alex Veys joined Hiscox in December
as the new CIO for the Group. Alex
brings a wealth of experience in
managing large and complex asset
management portfolios from 30 years
in investment management.
Just as Hiscox grows and evolves, so
do our people and our achievements
this year are down to their combined
efforts. I would like to thank all 2,700
of my colleagues for their endeavours
throughout the year. They have delivered
in challenging circumstances and their
collective desire to go the extra mile is
what drives Hiscox forward.
Outlook
2017 was a challenge for Hiscox and
the industry. Our balance, in product
and geography, has benefited our
policyholders and our shareholders.
As we look forward, this diversity,
from direct-to-consumer products,
to big-ticket and reinsurance lines as
well as insurance-linked strategies,
gives us the kind of options that we
didn’t have even ten years ago.
We have growth ambitions for all
our business units, but will remain
disciplined if prices are inadequate,
as demonstrated by the reductions
in Hiscox London Market in 2017. We
continue to see great opportunities in
retail, and our big-ticket businesses are
expected to return to growth as they
benefit from the current waves of market
dislocation and improvement in the pricing
environment. It is now more evident
than ever that the balanced business
we have been building for the last 20
years continues to give us opportunities
throughout the insurance cycle.
The business continues to work on major
projects; some we have chosen such
as the IT infrastructure upgrades, but
others, such as Brexit, GDPR, IDD and
new US cyber security regulations are
driven by external forces. The aggregation
of these projects is placing significant
demands on the business but they are all
necessary. I hope that 2018 will see these
reach a crescendo which will subside in
subsequent years.
Our investments in people, products,
infrastructure and brand make a difference.
We will continue to leverage the opportunities
that come with a changing market and to
serve more customers.
Bronek Masojada
26 February 2018
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May 2018, and ahead of our interim results
we will publish comparative restated data
for our final and interim results of 2017.
Evolution of leadership
It is a common market misconception
that the structure and leadership of
Hiscox is unchanging. This is not the
case. We seek to have a steady evolution
of our structure and leadership as we
look to marry personal plans with what
is needed to achieve our ambitions.
This year our organisation’s structure
has evolved, some of our pioneers are
departing and we have filled their roles
and created new roles with a mix of
internal talent and judicious external
recruitment. Our retail businesses now
account for 56% of our income and,
as this year’s results have shown, are
substantial contributors to our profits and
bring welcome resilience to our balance
sheet. Reflecting this, and recognising
their common challenges of creating a
compelling customer experience, driving
product innovation, creating scale ,and
leveraging expenses and digitising for the
modern age, we appointed Ben Walter,
CEO Hiscox USA to the newly created
role of CEO Hiscox Global Retail. Ben
will relocate to the UK in July and Hiscox
UK & Ireland, Hiscox Europe, Hiscox USA
and Hiscox Special Risks will report to him.
He will work alongside Joanne Musselle,
Chief Underwriter of Hiscox UK who was
promoted to the newly created role of
Chief Underwriter, Hiscox Global Retail
in January. Together they will work to
drive forward our retail businesses
across the world.
The next phase of growth for our US
businesses will depend on how we build
our presence and brand in the US market,
which is why Steve Langan, CEO of
Hiscox UK & Europe, and Chief Marketing
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Building a balanced business
Hiscox enjoys a symbiotic relationship between more catastrophe
exposed, globally traded business, and less volatile, smaller premium,
retail business which gives us opportunities throughout the
insurance cycle.
Total Group controlled income for 2017
100% = £2,833 million
Big-ticket business
A Larger premium, globally traded, catastrophe exposed
business written mainly through Hiscox London Market
and Hiscox Re & ILS.
A Shrinks and expands according to pricing environment.
A Excess profits allow further investment in retail development.
Retail business
A Smaller premium, locally traded, less volatile business
written mainly through Hiscox Retail.
A Growth between 5-15% per annum.
A Pays dividends.
A Specialist knowledge differentiates us and investment
in brand builds strong market position.
A Profits act as additional capital.
Reinsurance
22%
Small commercial
29%
Large property
6%
Casualty
5%
Specialty – terrorism,
product recall
7%
Marine and energy
5%
18
Hiscox Ltd Report and Accounts 2017
Tech and
media casualty
5%
Art and private client
12%
Specialty – kidnap and ransom,
contingency, personal accident
6%
Small property
3%
2
Strategic report
Building a balanced
business
37 Governance
63 Remuneration
89 Financial summary
Gross premiums written at 100% level
(£m)
Hiscox Re & ILS
Hiscox London Market
Hiscox UK & Ireland
Hiscox Europe
Hiscox Special Risks
Hiscox USA
DirectAsia
2,833
2,673
2,165
1,983
1,924
S
L
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1,792
1,713
1,671 1,664
1,476
1,407
1,390
1,111 1,105
1,083
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
2015
2016
2017
Hiscox Ltd Report and Accounts 2017
19
3,000
2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Actively managed business mix
Total Group controlled premium 2017: £2,833 million
(Period-on-period in local currency)
Small
commercial
+23.0%
£972m
Professional
liabilities
Errors and
omissions
Private directors
and officers’
liability
Cyber
Commercial
small package
Small
technology
and media
Healthcare
related
Media and
entertainment
Reinsurance
Specialty
+8.9%
-33.2%
Art and
private client
+4.4%
Property
-9.3%
Marine
and energy
+5.2%
Global
casualty
+7.3%
£609m
Non-marine
Marine
Aviation
Casualty
Specialty
£367m
Kidnap and
ransom
Contingency
Terrorism
Product recall
Personal
accident
£331m
Home and
contents
Fine art
Classic car
Luxury motor
Asian motor
£273m
Commercial
property
Onshore energy
USA
homeowners
Managing
general agents
International
property
£141m
Cargo
Marine hull
Energy liability
Offshore energy
Marine liability
£140m
Public D&O
Errors and
omissions
Large cyber
General liability
20
Hiscox Ltd Report and Accounts 2017
1000
900
800
700
600
500
400
300
200
100
0
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Actively managed key underwriting exposures
Boxplot and whisker diagram of Hiscox Ltd net loss (US$m) for certain modeled losses
January 2018
800
700
600
500
400
300
200
100
0
Upper 95%/lower 5%
Modeled mean loss
Hiscox Ltd loss (US$m)
800
700
600
500
400
300
200
100
0
Industry loss return
period and peril
s
s
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2
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
5–10 year
10–25 year
25–50 year
50–100 year
100–250 year
Mean industry loss US$bn
02
02
06
19
06
07
10
43
17
19
15
67
26
39
20
100
36
67
27
145
This chart shows a modeled range of net loss the Group might expect from any one catastrophe 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 2018 and industry
data. Given the nature of the risks underwritten, the loss estimates may be materially different from 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$m
879.3
1,709.3
1,339.5
588.6
1,258.8
Net loss
US$m
111.7
201.1
179.8
79.9
180.4
Gross loss
as a % of
total equity
Net loss
as a % of
total equity
Net loss as a %
of insurance
industry loss
Industry
loss size
US$bn
37.1
72.2
56.6
24.9
53.1
4.7
8.5
7.6
3.4
7.6
0.2
0.2
0.1
0.3
0.4
50
107
125
30
50
Return
period
years
240
80
100
200
110
Hiscox Ltd Report and Accounts 2017
21
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Capital
Hiscox monitors its capital requirements based on external risk
measures and internal risk appetite.
Capital management
The Board is responsible for monitoring
the capital strength of the Hiscox Group
and ensuring that its insurance carriers
are suitably capitalised for regulatory
and ratings purposes, taking into account
future needs including growth where
opportunities arise.
We will continue to maintain a progressive
core dividend policy despite the significant
event losses incurred during 2017. It is
testament to the Group’s strategy of
balance between the big-ticket and retail
businesses that we are able to do this.
The Group has proposed to increase the
final dividend by 2.6% to 19.5p, resulting
in a full year ordinary dividend of 29.0p
(2016: 27.5p), up 5.5%. Our focus on
efficient capital management means
the business remains well-positioned
to support growth in areas expected
to be profitable.
Capital requirements
Monitoring of the Group’s capital
requirements is based on both external
risk measures, set by regulators and rating
agencies, and our own internal guidelines
for 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 Group level is given below,
and presented in the chart on page 23.
The Group measures its capital
requirements against its available
capital. Available capital is defined by
the Group as the total of net tangible
asset value and subordinated debt.
The subordinated debt issued by the
Group is hybrid in nature, which means
it counts towards regulatory and
22
Hiscox Ltd Report and Accounts 2017
rating agency capital requirements.
At 31 December 2017 available capital
was £1,892 million (2016: £1,970 million),
comprising net tangible asset value
of £1,617 million (2016: £1,695 million)
and subordinated debt of £275 million
(2016: £275 million).
The Group can source additional funding
from revolving credit and Letter of Credit
(LOC) facilities. Standby funding from these
sources comprised US$500 million at
31 December 2017 (2016: US$500 million),
of which US$10 million was utilised at
31 December 2017 (2016: US$10 million).
Rating agencies
Our ability to attract business, particularly
reinsurance, is dependent upon the
maintenance of appropriate financial
strength ratings from the leading rating
agencies: A.M. Best, S&P and Fitch.
These ratings are assigned based on
a range of factors, including business
model, risk management, framework
and financial strength. They 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.
A.M. Best, S&P and Fitch have shared
their capital models with the Group. These
models calculate capital adequacy by
measuring available capital, after making
various balance sheet adjustments, and
comparing it with required capital, which
incorporates charges for premium, reserve,
investment and catastrophe risk. Our
interpretation of the results of each of these
models indicates we are comfortably able
to maintain our current ratings as set out
in note 3.3 to the financial statements.
The rating agency requirements shown
in the chart on page 23 are consistent
with the Group’s own internal projections
of rating agency capital requirements.
Group regulators
As a Bermudian-registered holding
company, the Group is regulated by the
Bermuda Monetary Authority (BMA)
under the Bermuda Group Supervisory
Framework. The BMA requires Hiscox
to monitor its Group solvency capital
requirement and provide a solvency return
in accordance with 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 the Group’s own
internally assessed capital requirements
and is informed by the newly introduced
Group-wide Hiscox Integrated Capital
Model (HICM), which, together with the
BSCR, forms part of the BMA’s annual
solvency assessment. The HICM provides
a consistent view of capital requirements
for all segments of the business and at
Group level.
We are also required to publish a Financial
Condition Report (FCR), which sets out
details of the measures governing the
Group’s business operations, corporate
governance framework, solvency and
financial performance. The FCR is also
intended to provide additional information
about the Group’s business model,
enabling the public to make an informed
assessment on whether the business is
run in a prudent manner.
Internal capital requirements
The Group sets risk limits and tolerances
that reflect the amount of risk it is willing to
accept. To ensure good risk management,
our current exposure by key risk type
is monitored against these predefined
measures throughout the year.
2
Strategic report
Capital
37 Governance
63 Remuneration
89 Financial summary
£1,892m
Available capital as at 31 December 2017.
We will continue to
maintain a progressive
core dividend policy
despite the significant
loss events incurred
during 2017.
Capital management
Projected capital requirement
£1.89 billion available capital
£1.83 billion available capital (post-final dividend)
Pre-S&P risk re-classification
Post-risk re-classification
Economic
Regulatory
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 12.5% of core capital plus
100% of buffer capital (£100 million) with
an allowance for expected investment
income. A market loss at this remote
return period would be very large indeed
and would be expected to bring about
increases in the pricing of risk. Our capital
strength and financial flexibility following
this scenario mean the Group would be
well positioned to take advantage of any
opportunities that might arise. After the
payment of the final dividend on 12 June
2018, the available capital will reduce to
approximately £1,836 billion, comfortably
meeting the current regulatory, rating
agency and internal capital requirements.
Our estimate of the year-end 2017 BSCR
solvency ratio is to exceed 225%. The
Group continues to operate with a strong
solvency position. In addition, each of the
subsequent insurance carriers hold
appropriate capital positions on a local
regulatory basis.
A.M. Best
S&P
Fitch
Hiscox
integrated
capital model
(economic)
Hiscox
integrated
capital model
(regulatory)
Bermuda
enhanced
solvency
capital
requirement
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements
on the basis of year-end 2017 results. Hiscox uses the internally developed Hiscox integrated 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. The available capital figure comprises net tangible assets
and subordinated debt.
Hiscox Ltd Report and Accounts 2017
23
2.0
1.5
1.0
0.5
0.0
2
Strategic report
37 Governance
63 Remuneration
89 Financial summary
Group financial performance
The strong performance of our retail businesses and solid
investment returns helped to offset catastrophe claims of
US$225 million and foreign exchange losses of £63 million.
The Hiscox Group delivered profit
before tax for the year of £30.8 million
(2016: £354.5 million), or £93.6 million
(2016: £202.1 million) excluding foreign
exchange gains/losses. This is a good result
given the number of natural catastrophes
that occurred in the second half of the
year, including the first Category 5 storm
to make US landfall in 25 years, with
hurricanes Harvey, Irma and Maria
generating net losses for the Group of
US$225 million. The Group will be reporting
in US Dollars from 1 January 2018, following
a change in functional currency of subsidiary
entities, which will reduce impact of the
volatility in the foreign exchange movement
in future periods. The investment return
improved slightly at 2.0% (2016: 1.9%).
The Group recorded a post-tax return on
equity of 1.5% (2016: 23.0%) and earnings
per share of 9.3p (2016: 119.8p).
Net asset value per share decreased
by 4.8% to 618.6p (2016: 649.9p),
with net tangible asset value at 570.0p
(2016: 605.7p). The Board has declared
a final dividend of 19.5p per share, to be
paid on 12 June 2018 to shareholders on
the register at 11 May 2017, taking the
total ordinary dividend per share for
the year to 29.0p, an increase of 5.5%
(2016: 27.5p). The Group continues to
maintain a progressive dividend policy.
Gross premiums written of £2.5 billion
increased 6.1% year-on-year or, on a
constant exchange rate basis, 1.9%.
Strong growth continued in Hiscox
Retail, up 20.5% for the year, and now
accounts for 56% of the Group’s gross
premiums written – helping to offset the
expected decline in gross premiums
written in Hiscox London Market. The
Group’s combined ratio including foreign
exchange movements was 99.9%
(2016: 84.2%), or 98.8% (2016: 90.6%)
excluding the impact of foreign exchange.
24
Hiscox Ltd Report and Accounts 2017
The underwriting performance for each
operating segment is detailed as follows.
Hiscox Retail
Hiscox Retail accounts for 56% (2016: 49%)
of the Group’s gross premiums written at
£1,423.9 million (2016: £1,181.4 million).
Gross premiums written for Hiscox UK
& Ireland were up a healthy 11.6% at
£556.3 million (2016: £498.6 million).
Hiscox Europe’s gross premiums written
also grew, up 22.1% to £213.3 million
(2016: £174.7 million), or 12.3% in constant
currency. Hiscox USA was once again a
standout performer, with gross premiums
written up 36.0% to £544.1 million
(2016: £400.0 million), or 28.8% in
constant currency. Gross premiums
written within Hiscox Special Risks were
up to £98.7 million (2016: £95.2 million),
however down 1.2% in constant currency,
and DirectAsia contributed £11.4 million of
gross premiums written (2016: £13.0 million).
The net claims ratio increased to 45.2%
(2016: 38.4%) with increases in USA and
Special Risks after good returns in the
prior year. The increased claims ratio
also resulted in an increase to the net
combined ratio which, excluding the
impact of foreign exchange, grew to
94.5% (2016: 91.8%). Careful expense
management resulted in the expense
ratio reducing to 49.3% (2016: 53.4%).
Profit before tax is £109.9 million
(2016: £158.0 million), but before foreign
exchange remains more consistent at
£110.3 million (2016: £120.7 million).
This result validates our long-held
strategy of building retail businesses
that provide balance to the more volatile,
catastrophe-exposed big-ticket lines.
Hiscox London Market
Gross premiums written reduced by 19.9%
to £581.7 million (2016: £726.0 million),
in line with expectations as we continued
to navigate ongoing soft market
conditions. This represents a 23.1%
decline (2016: 14.2% growth) in
local currency. The quota share
arrangements with Syndicate 6104
remained in place. The net claims
ratio increased to 70.1% (2016: 57.4%)
as a result of the hurricane activity.
This also impacted on the combined
ratio which, excluding foreign exchange
movements, increased to 108.7%
(2016: 99.4%). The expense ratio
reduced to 38.6% (2016: 42.0%).
The loss before tax for the year was
£36.2 million (2016: profit of £44.0 million)
or, excluding foreign exchange losses,
was a loss of £24.5 million (2016: profit
of £9.0 million).
Hiscox Re & ILS
Gross premiums written increased by
9.8% to £543.7 million (2016: £495.2 million),
or 4.5% in constant currency. The claims
ratio increased to 71.0% (2016: 39.1%) as
a result of the hurricane activity, as did the
combined ratio which, excluding foreign
exchange movements, increased to
98.9% (2016: 64.9%). Foreign exchange
had much less impact on the segment in
2017, but provided a positive impact of
11.9% to the combined ratio in 2016.
The expense ratio declined to 27.9%
(2016: 25.8%). Profit before tax reduced
to £19.8 million (2016: £115.5 million).
Hiscox Corporate Centre
The central investment portfolio returned
£25.5 million (2016: £17.9 million) during
the year. Foreign exchange movements
resulted in a loss of £46.5 million
(2016: profit of £57.2 million), due to the
Corporate Centre holding a significant
proportion of US Dollar assets to support
the underwriting activities of the managed
syndicates. As a result, the loss before
tax was £62.6 million (2016: profit of
£37.0 million).
2
Strategic report
Group financial
performance
37 Governance
63 Remuneration
89 Financial summary
Strong growth continued
in Hiscox Retail, up
20.5% for the year, and
now accounts for 56%
of the Group’s gross
premiums written.
98.8%
Combined ratio excluding
foreign exchange.
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.
During 2017, the Group returned capital
to its shareholders of £76 million
(2016: £113 million).
Outflows for the year were £2.4 million
(2016: outflow of £123.8 million).
The Group paid £32.1 million of
tax during the year compared with
£6.1 million in 2016.
Group key performance indicators
The Group had net cash inflows from
investing activities of £3.0 million
(2016: outflow of £31.0 million), with
continued underwriting software
development. Marketing expenses
remained a major component of our
expense base at £53.6 million during
the year (2016: £42.1 million).
Non-financial reporting statement
The details that relate to our non-financial
reporting statement can be found in the
corporate responsibility section on pages
48 to 51.
Gross premiums written (£m)
Net premiums written (£m)
Net premiums earned (£m)
Investment result (£m)
Profit/(loss) before tax (£m)
Claims ratio (%)
Expense ratio (%)
Foreign exchange impact (%)
Group combined ratio (%)
Hiscox
Retail
1,423.9
1,298.9
1,229.9
22.8
109.9
45.2
49.3
0.1
94.6
Hiscox
London
Market
581.7
376.2
435.7
11.3
(36.2)
70.1
38.6
2.9
111.6
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 and insurance-linked securities funds.
Hiscox
Re & ILS
Corporate
Centre
2017
Total
Hiscox
Retail
543.7
189.1
208.9
21.7
19.8
71.0
27.9
2.4
101.3
– 2,549.3
1,181.4
– 1,864.2 1,092.0
– 1,874.5 1,020.5
30.4
158.0
81.3
30.8
25.5
(62.6)
–
–
–
–
54.9
43.9
1.1
99.9
38.4
53.4
(3.8)
88.0
2017
4,412.7
2,794.6
7,207.3
1,754.4
618.6
570.0
283.6
Hiscox
Re & ILS
Corporate
Centre
2016
Total
495.2
226.8
211.4
10.0
115.5
39.1
25.8
(11.9)
53.0
– 2,402.6
–
1,787.9
– 1,675.0
70.6
354.5
17.9
37.0
–
–
–
–
44.2
46.4
(6.4)
84.2
Hiscox
London
Market
726.0
469.1
443.1
12.3
44.0
57.4
42.0
(8.7)
90.7
2016
4,409.7
2,232.1
6,641.8
1,818.4
649.9
605.7
279.8
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Group investments
Insurance events in 2017 have served as a reminder that the priority
for the investment portfolio is to provide liquidity to pay claims and
capital to support the business.
Group investment performance
Bonds (£)
Bonds (US$)
Bonds (Other)
Bonds total
Equities
Deposits and cash equivalents
Actual return
Group invested assets
31 December 2017
31 December 2016
Asset allocation
%
13.4
54.2
10.2
77.8
7.6
14.6
Return
%
1.2
1.5
(0.1)
1.2
12.9
0.5
2.0
Return
£000
Asset allocation
%
Return
%
Return
£000
14.1
54.6
8.7
77.4
6.9
15.7
2.7
1.7
1.1
1.9
6.2
0.3
1.9
55,709
17,246
1,881
74,836
£4,410m
42,079
41,453
3,755
87,287
£4,413m
Before fees, derivative positions and investments in insurance-linked securities funds.
The Group’s invested assets at
31 December 2017 totalled £4.41 billion
(2016: £4.41 billion). A weaker US Dollar
and an increased level of claims
payments following the active storm
season left the assets under management
largely unchanged over the year. The
investment result, excluding derivatives
and fees, amounted to £87.3 million
(2016: £74.8 million) equating to a return
of 2.0% (2016: 1.9%). Investors took
the variety of political outcomes and
heightened geopolitical tensions during
the year in their stride focusing instead
on the positive development of global
growth which was generated without
any real signs of inflation. While a
prolonged absence of volatility
provided a supportive background
for equity markets, further moves by
Central Banks towards normalising
monetary policy led to a more
challenging environment for bond
investors. Given that bonds always
form a large part of our portfolio,
we are pleased with the eventual
outcome which, boosted by a strong
return from our risk assets, exceeded
our original expectations.
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Hiscox Ltd Report and Accounts 2017
Bond markets in 2017 increasingly
had to contend with Central Bankers
withdrawing their monetary stimulus to
varying degrees. In the USA, Canada and
the UK there were a series of official rate
rises. The Federal Reserve increased the
federal funds rate three times as expected,
while the Bank of Canada and Bank of
England surprised markets somewhat with
their respective increases. Additionally,
there was a move by major central banks,
apart from the Bank of Japan, to prepare
investors for a reduction in their balance
sheets – so-called quantitative tightening.
The impact of the above in government
bond markets was for short-term yields
to rise over the year and yield curves
generally to flatten. The move to higher
yields gained traction in the second half
of the year as the two-year US Treasury
yield jumped from 1.3% to 1.9% with
equivalent UK gilt yields increasing from
0.1% to 0.5%. Against this background
short-dated government benchmarks
in Sterling, Euros and Canadian Dollars
delivered negative returns for the year
while the one- to three-year US
government benchmark returned
just 0.4%.
The positive result of 1.2% from our
bond portfolios therefore can be seen
as good. As ever, our bond returns are
driven largely by our holdings in the
US markets which comprise 70.7% of
our fixed income assets. Our managers
there performed well with gains of 1.5%.
Given the low, or in the case of Euros,
negative yields at the start of the year,
it was always going to be hard to make
money elsewhere. The reality, despite
outperforming benchmarks, is that
the Sterling and Euro portfolios (nearly
9.8% of our bonds) delivered negligible
returns. The outperformance against
the benchmarks has been due to a
focus on income and the allocation to
non-government bonds where a further
compression in credit spreads added
value. While the move up in yields has
crimped returns recently, it is encouraging
for the future as new money is invested at
higher rates. The yield to maturity on the
bond portfolio for example has increased
from 1.3% at the end of 2016 to 1.6% at
the end of last year.
The concerns over valuations in equity
markets that prevailed 12 months ago
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Asset allocation
7.6% Risk assets
14.7% Cash
77.7% Bonds
Bond currency split
1.9% CAD and other
9.7%
EUR
18.7% GBP
69.7% USD
Bond credit quality
0.8% BB and below
13.2% BBB
19.6% A
18.3% AA
13.7% AAA
34.4% Government
gave way during the year to optimism
that they would be justified by improved
earnings growth. This was driven by a
broad-based economic recovery and
reinforced latterly, in the USA at least, by
the potential benefits of tax reform. The
subsequent strength of equity markets
has seen our risk assets generate a 13%
return and contribute a significant portion
of the overall result. With less diversity in
sector performance our range of actively
managed funds have done better on an
absolute and relative basis than last year.
Our allocation to global funds produced
strong results and our selection of hedge
funds also bounced back from a period of
underperformance, beating the relevant
hedge fund index and contributing
usefully to the return. The performance
of funds investing in the UK market has
been more mixed but stayed in touch with
the benchmark which had a particularly
strong end to the year. At today’s levels,
concerns about equity valuations persist
but momentum remains in their favour.
Insurance events in 2017 have served
as a reminder that the priority for the
investment portfolio is to provide liquidity
to pay claims and capital to support
the business. Our conservative stance
ensures that it has been in a good
position to fulfil both roles. Our secondary
objective is to maximise our investment
result in the prevailing market conditions
subject to a prudent risk appetite. Meeting
this objective has been increasingly
challenging in a world where asset prices
have been inflated by the extraordinary
levels of monetary support provided by
central banks. In recent years we have
resisted the temptation to stretch for
yield in the lower quality tranches of the
fixed income world but have retained an
allocation to equities which has served
us well in enhancing our investment
income. In bonds we have also
approached duration with caution to
protect us against the effect of rising
yields. It is easy to forget that two-year
US yields have been rising steadily over
the last five years from a low of 0.18% to
1.9% at the end of December 2017. Our
US Dollar bond portfolios have made
positive annual returns throughout this
period and are now well positioned to earn
higher yields in 2018. Results from Sterling
and Euro portfolios are likely to remain
muted though. Overall, however, with
the tailwinds of liquidity beginning to
disappear, our current focus on quality
will remain. There will be better chances
ahead to take more investment risk.
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Additional performance measures (APMs)
APMs are commonly used measures to allow comparison across
peer companies.
policy report in the Annual Report
and Accounts. The ROE is shown in
note 6, along with an explanation of
the calculation.
A Net asset value (NAV) pence
per share
The Group uses NAV pence per
share as one of its key performance
metrics. This is a widely used key
measure for management and also
for users of the financial statements
to provide comparability across
peers in the market. NAV pence per
share is shown in note 5, along with
an explanation of the calculation.
A Reserve releases
Reserve releases are a measure of
favourable development on claims
reserves that existed at the prior
balance sheet date. It enables the
users of the financial statements
to compare and contrast our
performance relative to peer
companies. The Group maintains
a prudent approach to reserving,
to help mitigate the uncertainty
within the reserve estimates.
The release is calculated as the
movement in ultimate losses on
prior accident years between the
current and prior-year balance
sheet date, as shown in note 25, as
the result of better than expected
outcomes of the estimates booked
at the prior period close.
The Group has identified additional
performance measures (APMs) that are
not defined in accordance with Generally
Accepted Accounting Principles (GAAP),
being International Financial Reporting
Standards (IFRS), and may not necessarily
have standardised meanings for ease of
comparability across other organisations
in the industry. These non-GAAP measures
are used within the financial statements.
The APMs are: profit excluding foreign
exchange gains/(losses), GWP growth
in local currency, combined claims and
expense ratios, return on equity, net
asset value pence per share and reserve
releases. These are commonly used
measures across the industry, and
allow the reader of the Annual Report
to compare across peer companies.
A Profit excluding foreign exchange
gains/(losses)
This represents the profit for the
period after deducting foreign
exchange gains or adding back
foreign exchange losses in the
relevant period. This enables the
reader of these financial statements,
and the Group, to measure the
comparability of underlying
profitability without the volatility
of these positions. To obtain the
value, the reader of these financial
statements should remove the
foreign exchange gains/(losses), as
identified in the income statement,
from the profit for the period.
A GWP growth in local currency
Gross written premium, as
reported in the consolidated income
statement, is measured in the
underlying currency and compared
to prior years on a constant currency
rate basis. This eliminates the impact
exchange fluctuations has on the
result and therefore allows a direct
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Hiscox Ltd Report and Accounts 2017
comparison between the years.
This is performed on a business
unit basis and gives an accurate
indication of premium growth
compared to prior years.
A Combined claims and
expense ratios
The combined claims and expense
ratios are common measures
enabling comparability across the
insurance industry that measure the
relevant underwriting profitability of
the business by reference to its costs
as a proportion of its net earned
premium. The Group calculates the
combined ratio as if we owned all
of the business, including the 27.4%
of Syndicate 33 that the Group does
not own. The Group does this to
enable comparability from period
to period as the business mix may
change in a segment between
insurance carriers, and this enables
us to measure all of our underwriting
businesses on an equal measure.
The calculation is discussed further
in note 4, operating segments.
The combined ratio excluding
foreign exchange gains is calculated
as the sum of the claims ratio and
the expense ratio.
A Return on equity (ROE)
As is common within the financial
services industry, the Group uses
ROE as one of its key performance
metrics. While the measure enables
the Company to compare itself
against other peer companies in
the immediate industry, it is also a
key measure internally where it is
used to compare the profitability of
business segments, and underpins
the performance-related pay and
shared-based payment structures,
as discussed within the remuneration
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Ten good reasons to work at Hiscox
Through talking to our people (newcomers and old-timers), reading
our reviews (both good and bad), and seeing how we stack up
against the competition, we have created our very own ten good
reasons to work at Hiscox. Here’s what it’s really like to be part of
our remarkable team.
#1.
Work with smart people.
#2.
#3.
Be part of a strong culture that
challenges the status quo.
Work for a business that cares
about people.
#4.
#5.
#6.
Take risks and grasp opportunities.
Drive your own learning
and development.
Enjoy a balanced life, inside and
outside of work.
#7.
#8.
#9.
Work in an environment that inspires.
Earn benefits that help you plan for
the future.
Improve your well-being.
#10.
Work hard and have fun.
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Ten good reasons to work at Hiscox
We work hard and are
proudly high-achieving,
and we care about
what Hiscox stands for.
We expect our people to question things
rather than just passively conform, and
we believe it’s this spirit that keeps
employees interested, motivated and
engaged. A high proportion of our people
are here for the long term, and even when
others have left for pastures new, a good
number have found their way back to us.
“You’ll love it if you enjoy being
empowered, want accountability,
are able to take ideas and make them
happen, and have passion for what
you do. You’ll hate it if you like to
be told what to do and don’t have
passion for your work.”
21 years with Hiscox
#3. Work for a business that cares
about people
Hiscox people are treated as exactly that:
people. We asked new recruits (people
who had worked with us for less than
two years) what surprised them most
about working here and they told us it
was our approachable senior leaders
and the intelligent, friendly, caring nature
of our teams.
If you think working in insurance is about
being dictated to by large spreadsheets
and complex calculations, the way we do
business here might surprise you – the
numbers are important, of course, but
human thoughts, feelings and intuition
rule supreme.
“Although it can get a little hectic,
I’ve never felt like I’m on my own.”
One year with Hiscox
#1. Work with smart people
Let’s start with a common perception of
insurance: that it’s dull; a career for men
with university degrees, grey suits and
the lifelong ambition to sell insurance
policies; that you’ll go to lots of meetings
and if you aren’t in one of those, you’ll
be glued to a desk nine-to-five, all day.
Every. Single. Day.
While we admit there can be a fair bit of
desk time for many of us, that’s where
the accuracy of this insurance stereotype
ends. If we do have a ‘type’, it’s one
that’s based on attitude: Hiscox people
genuinely care for customers, for the
business and for each other. To thrive
here, you have to do the right thing no
matter how hard it might feel at the time,
and have the courage to challenge each
other and the status quo. We work hard
and are proudly high-achieving, and
we care about what Hiscox stands for.
While we all work in insurance now, we
have arrived from many different walks
of life and brought with us ideas and
influences from far beyond the industry.
“We share the same morals, but
different opinions; believe in the
same fundamentals, but practice
in an individual manner.”
Ten years with Hiscox
#2. Be part of a strong culture that
challenges the status quo
That distinctive Hiscox attitude stems
directly from our long-held and practised
values: courage, quality, integrity,
excellence in execution and human.
In our most recent employee survey,
94% of employees said that they believe
in these values. That first one – courage
– is at the heart of our corporate culture:
a restless urge to challenge convention
and push for continuous improvement,
however high the hurdles.
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#1. Work with smart people
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#6. Enjoy a balanced life, inside and outside of work
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Ten good reasons to work at Hiscox
#4. Take risks and grasp opportunities
As a business, Hiscox is flatter and leaner
than many of its competitors – and that
brings with it significant challenges.
But there are two sides to every coin:
our people are able to make their job
their own; they are empowered to run
with ideas and spot opportunities.
And while they’ll be given plenty of
support if they need it, no one is going
to hold their hand while they’re getting
on with the job. We want to grow our own
leaders, so we actively encourage our
people to apply for new roles in Hiscox
offices around the world to help broaden
their experiences and develop their
leadership skills.
Our business model is one that looks
beyond just hitting the numbers on a
quarterly basis. We invest for the long
term too, and that means taking big
bets when it feels right. We find that this
approach works as well for people as it
does for business. We invest in people
who have the courage to take bets
on themselves.
“Hiscox doesn’t have room for those
who do just enough to get by – what
we call ‘the 51 percenters’.”
Ten years with Hiscox
#5. Drive your own learning
and development
We’re a growing company, and our
employees need to grow with us. The
onus is on them to drive their own learning
and development, but we make sure
they’re well-supported, with two formal
opportunities each year to discuss
their development needs and potential
– whether that’s in their current role,
taking the next step up or moving across
the organisation to try something new.
There’s a lot of learning ‘on the job’, but
we also offer people the chance to gain
professional qualifications such as CII,
CIPD and CIMA. We also provide in-house
courses with specialist external facilitators
on topics such as people management,
personal impact and presentation skills.
Our early careers programme includes
opportunities for graduates, apprentices
and interns. Our two-year graduate
programme offers immediate hands-on
exposure and includes three secondments,
including a spell abroad in one of our
offices in the USA, Bermuda, Singapore,
the UK or Europe. We also offer a small
number of apprenticeships for school
leavers and summer internships to
those returning to study.
“The encouragement to develop and
grow is not just evident, but expected,
and I really respect that.”
One year with Hiscox
#6. Enjoy a balanced life, inside and
outside of work
We understand that people have lives
outside of work. They might be parents
or carers; they may want time for
hobbies or improving their well-being;
they may want to attend the school
play or sports day; they might have a
long commute from which they
sometimes need a break. We’re all
grown-ups here, so we manage our
own time – if we need to visit the dentist
or watch our children perform in a play,
we’re trusted to make it work around
work. Hiscox also has a flexible working
policy, which we want people to use –
nearly all of our flexible working requests
have been approved in full.
We have recently launched new
employee network guidelines and are
encouraging employees to start
their own networks within Hiscox.
We believe this is one way we can
encourage the growth of a truly inclusive
workplace culture.
“We’re treated like adults here; we’re
given responsibility to run our lives.”
Eight years with Hiscox
#7. Work in an environment that inspires
A giant rocket in York. A café and
meeting area overlooking a spacious
atrium in Lisbon. Scenic views of
Manhattan skyscrapers from Madison
Avenue. The iconic Lloyd’s of London
building. With 32 offices across 14
countries (plus the box at Lloyd’s), our
workspaces are inviting and designed
to spark discussion.
Each location provides a home to part
of our extensive art collection, which
includes unusual contemporary works
by renowned international artists such
as David Hockney, Candida Hofer and
Vik Muniz. Every piece demands you
take a second look. Rather than being
shut away, they are on display in the
areas where we meet and work, providing
visual stimulation and breaking the
conventions of a typical office space in
the same way that we’re expected to
challenge those of the insurance industry.
As well as all the art, there are places to
break out and think, or to catch up with
colleagues and guests. Each office has
its own distinct personality and features:
our London art café, the bees we keep on
the roof in York, on-site massage therapy
in Bermuda, weekly pilates classes in
Colchester or working treadmills in offices
throughout the USA.
“The art is awesome, kind of makes
you realise that the Company is far from
short-sighted; art is both an investment
in value and an investment in staff
morale and long-term happiness.”
Five years with Hiscox
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We’re not a business
that feels the need to say
thank you for every little
thing, but when people
excel at their jobs, their
efforts are rewarded.
There’s fruit on offer in lots of our offices
(or biscuits in some if you’d rather!). Others
have toast and local jams. We also have a
confidential employee assistance phone
line that can offer support with personal
and professional issues.
“We spend a lot of time working, so
being able to grab an hour boxing with
a personal trainer in the basement not
only helps me stay fit, but means family
time is family time.”
18 years with Hiscox
#10. Work hard and have fun
Whether working closely with our teams
on challenging projects, celebrating
good work or fundraising for the things we
care about, we aim to enjoy each other’s
company. There’s usually a lot going
on in our offices around the world – from
social committees organising still life art
classes, wine tastings and pop-up nail
bars, to low-key team outings and
celebrations and, of course, the annual
office Christmas party. Lots of people
around the Hiscox Group take part in
fundraising initiatives to support Group
or local projects and charities, too.
On top of their day jobs, we’ve got
sky-divers, dragon boat racers, bakers
and decorators and more beyond, all
raising money for important causes.
“I have had a brilliant time and I
have laughed.”
27 years with Hiscox
#8. Earn benefits that help you plan for
the future
We offer a competitive salary and
benefits such as: profit-related and
personal performance-based bonus.
We’re not a business that feels the need
to say thank you for every little thing, but
when people excel at their jobs, their
efforts are rewarded.
A major aim of our benefits package
is to enable employees to plan for the
future, which is why it includes generous
retirement benefits and life, personal
accident and health insurances. We
also offer a ‘save as you earn’ scheme,
so that employees can save for the
things that are important to them – we’ve
heard stories of deposits for first homes,
major home renovations, holidays and
weddings. Many of our employees
also keep fit with our subsidised gym
memberships, and enjoy some downtime
at Christmas with our Christmas gift
(in the UK, we particularly love our food
and wine hampers!). The specifics vary
from country to country, based on local
labour laws and customs, but we try to
ensure our packages are equal wherever
you work.
“Saving through work took away the
temptation to be frivolous, and nothing
beat the excitement of picking up the
keys to my first home.”
Four years with Hiscox
#9. Improve your well-being
We offer sports club memberships as
part of our benefits packages. And in
some of our offices – such as London
and York – there are also subsidised
therapies on offer, including sports
massage, acupuncture and osteopathy.
For those who wish to cycle or run to work
or exercise during their lunch break, there
are showers and lockers for their things.
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#9. Improve your well-being
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#7. Work in an environment that inspires
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Financial highlights
2
3 Why invest in Hiscox?
8
Chairman’s statement
10 Chief Executive’s report
Building a balanced
18
business
Actively managed
business mix
Actively managed key
underwriting exposures
20
21
22 Capital
24
Group financial
performance
26 Group investments
28
Additional performance
measures
Ten good reasons to
work at Hiscox
29
38 Risk management
48 Corporate responsibility
52 Board of Directors
Chairman’s letter
54
to shareholders
55 Corporate governance
60 Audit Committee report
64
Letter from Chairman
of the Remuneration
Committee
66 Remuneration summary
Annual report on
68
remuneration 2017
Remuneration policy
76
85 Directors’ report
87
Directors’ responsibilities
statement
90
96
96
97
98
99
Independent auditor’s
report
Consolidated income
statement
Consolidated statement
of comprehensive
income
Consolidated balance
sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
100 Notes to the consolidated
financial statements
152 Five-year summary
Governance
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Risk management
Our core business is to take risk where it is adequately rewarded,
guided by a strategy that aims to maximise return on equity within
a defined risk appetite.
Risk management framework
Our continuing success depends on how well we understand and manage the
significant exposures we face.
R i s k governance
Risk definition
Risk owner
O R S A process
Risk reporting
Risk appetite
Risk monitoring
Risk measurement
Risk mitigation
The Group’s success depends on
how well we understand and manage
our exposures across key risk types.
These consist of strategic risk, insurance
(underwriting and reserve) risk, market
risk, credit risk, operational risk,
regulatory and legal risk and group risk.
Our collective risk knowledge informs
every important decision we make.
Risk strategy
Our robust risk strategy positions us to
capture the upside of the risks we pursue
and effectively manage the downside of
the risks to which we are exposed. Our risk
strategy is based upon three key principles:
s we maintain underwriting discipline;
s we seek balance and diversity
through the underwriting cycle;
s we are transparent in our approach
to risk, which allows us to continually
improve awareness and hone
our response.
Risk management framework
The Group takes an enterprise-wide
approach to managing risk. The risk
management framework provides a
controlled system for how risk is identified,
measured, mitigated, monitored and
reported across the Group. It supports
innovative and disciplined underwriting
across many different classes of
insurance by guiding our appetite
and tolerance for risk.
Exposures are monitored and evaluated
both within the business units and at Group
level to assess the overall level of risk being
taken and risk mitigation approaches.
We consider how different exposures and
risk types interact, and whether they may
result in correlations, concentrations or
dependencies. The overall objective is to
optimise risk-return decision-making while
ensuring total exposure remains within the
parameters set by the Board.
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Risk management
Three lines of defence model
The risk management framework is
underpinned by the system of internal
control, which provides a consistent
approach for the design and operation of
internal controls to manage our key risks.
The risk management framework is
regularly reviewed and enhanced to
reflect changes to the Group’s risk profile,
the external environment and evolving
practice on risk management and
governance. During 2017, we have
commenced a refresh of our system of
internal control in light of recent growth.
Risk appetite
Risk appetite sets out the nature
and degree of risk the Group is
prepared to take to meet its strategic
objectives and business plan. It forms
the basis of our real-time exposure
management and is monitored
throughout the year.
Our risk appetite is set out in two ways:
s in qualitative terms through risk
appetite statements, which outline
the level of risk we are willing to
assume by risk type and overall;
s in quantitative terms through risk
limits and tolerances, which act
as boundaries where actual risk
exposure is more actively monitored.
Risk tolerance is the maximum
threshold we do not want to exceed;
nearing it would represent a ‘red
alert’ for senior management and
the Board.
Risk appetite, which is set for each of
our insurance carriers and for the Group
as a whole, is reviewed annually. It is
flexed to respond to internal and external
factors such as the growth or shrinkage
of an area of the business, or changes in
the underwriting cycle impacting upon
capacity and rates.
1
First line of defence
Owns risk
The first line of defence is responsible
for ownership and management of
risks on a day-to-day basis, and
consists of everyone at every level
in the organisation, as all have
responsibility for risk management
at an operational level.
2
Second line of defence
Assesses, challenges and advises on
risk objectively
The second line of defence provides
independent oversight, challenge
and support to the first line of defence.
Functions in the second line of defence
include the Group risk team and the
compliance team.
3
Third line of defence
Provides independent assurance
of risk control
The third line of defence provides
independent assurance to the Board
that risk control is being managed in
line with approved policies, appetite,
frameworks and processes. It also
helps verify that the system of internal
control is operating effectively.
Risk management across the business
The Group coordinates risk management
roles and responsibilities across three
lines of defence. These are set out in
the table to the left.
Risk is also overseen and managed by
formal and informal committees and
working groups across the first and
second lines of defence. These focus
on specific risks such as catastrophe,
reserve, investment, credit and
emerging risk. The Group Risk and
Capital Committee and the Group
Underwriting Review Committee
make wider decisions on risk.
The role of the Board in risk management
The Board is at the heart of risk
governance and is responsible for
setting the Group’s risk strategy
and appetite, and for overseeing
risk management (including the risk
management framework).
The Risk Committee of the Board
advises on how best to manage the
Group’s risk profile by reviewing the
effectiveness of risk management
activities and monitoring the Group’s
actual risk exposure, to inform Board
decisions. The Risk Committee relies
on frequent updates from within the
business and from independent
risk experts.
During 2017, the Board looked at a
number of risk-related matters.
s The Group’s risk profile, compared
with its Board-approved risk appetite.
s Independent second line of
defence model validation
findings on the Group’s risk
and capital models.
s Risk reporting focused on topical
live issues with actions and
mitigation plans.
s Regular reporting on the risks
determined by the Board to be
critical to the Group.
s Stress and scenario testing,
performed to identify and
measure the likelihood and
impact of potential plausible
but extreme events. The Board
considered and challenged the
findings and associated action
plans for the scenarios, which had
been designed to test the resilience
of the business plan to major and
minor shocks.
s Specific risk reviews, providing
a deeper understanding of key
risks and potential exposures to
the business.
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Risk management
s Updates to the risk and control
register, which summarises the
Group’s material risk exposures
and the key controls in place to
mitigate them, as agreed with
risk owners.
s Updates to Group risk policies,
addressing the Group’s main risks.
s The Group Solvency Self-Assessment
(GSSA) report, which builds on many
of the components described above
to summarise the Group’s Own Risk
and Solvency Assessment (ORSA),
which is described further below.
ORSA process
Hiscox’s ORSA process is an evolution
of its long-standing risk management
and capital assessment processes. It is
the self-evaluation of the risk mitigation
and capital resources needed to achieve
the Group’s and individual insurance
carriers’ strategic objectives on a current
and forward-looking basis, given their
risk profiles.
The structure of the GSSA report and
the insurance carriers’ ORSA reports
have been further refined in 2017 to
streamline the documents and strengthen
the narrative relating to conclusions,
with procedure-related supporting
documentation maintained in an
ORSA record.
Role of the Group risk team
The Group risk team is responsible
for designing and overseeing the
implementation of the risk management
framework and continually improving
it. The team works with the business
units to understand how they maintain
the first line of defence and whether
they need to make changes in their
approach. The team is also responsible
for monitoring that the business
meets regulatory expectations
around enterprise risk management
and reporting on risk to the Board
and the Risk Committee.
The Group risk team is led by the Group
Chief Risk Officer, who reports to the
Group Chief Executive Officer and
Chair of the Group Risk Committee.
During 2017, the Group has invested
significantly in further strengthening
the breadth of the Group risk team,
with the recruitment of a number of
additional team members.
Principal risks
The principal risks facing the organisation
are described on the following pages.
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The ORSA reports have
been further refined
in 2017 to streamline
the documents and
strengthen the narrative
relating to conclusions,
with procedure-related
supporting documentation
maintained in an
ORSA record.
ORSA process
Hiscox Own Risk and Solvency Assessment (ORSA) process
R i s k m a n a gement framework
s i n e s s p l a nning and risk profi le
B u
Initial capital
assessment
Risk
appetite
review
Forward-
looking
assessment
Initial
business plan
usines s p l a
B
t
h
ig
s
r
e
v
o
d
r
a
o
B
ORSA
process/
report
Final
ORSA capital
t
n
r a cking and ref
o
r
e
c
a
s
t
Final
business plan
Stress,
scenario,
reverse-stress
testing
Model
validation
V
a
l
i
d
a
t
i
o
n
Solvency
assessment
Rating
agency
requirement
Regulatory
capital
C
a
pital and solvency assessment
Internal
capital
assessment
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Risk management
Strategic risk
The risks associated with strategic decisions and objectives taken or not taken by the Group, including uncertainties and
opportunities in the internal and external environments.
What is the risk?
Why do we have it?
How is it managed?
Strategy evolution
and execution
The Group’s continuing
success depends on how
well we understand our
clients, markets and the
various external factors
affecting our business.
Having an ineffective strategy
could have widespread
repercussions on profitability,
capital, market share, growth
and reputation.
Setting the right course,
particularly in a sector as
hazardous as insurance,
is essential for our
long-term success.
New risks could arise, which
might transform the industry.
A key pillar of the Group’s strategy is to balance the underwriting
of high-margin, volatile, complex global risks by also selling
stable, local specialist retail products.
The Group invests in growth areas that offer the potential of a
good return on investment. To ensure individual and aggregate
exposure remains within set parameters, the business plan is
aligned to the Group risk appetite set by the Board.
The Group’s emerging risk forum assesses risks and opportunities
that could potentially affect the business, including geopolitical
changes such as Brexit or US trading and taxation relationships.
Stress testing and scenario analysis help identify unanticipated
dependencies and correlations between risks, which could
impact upon the Group’s strategy.
Hiscox’s ORSA process focuses on the changes, opportunities
and threats that may affect the business in the future.
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Risk management
Insurance risk – underwriting
The risks related to our core business of providing insurance products and services to clients, and to the management of our net
exposure to losses.
What is the risk?
Why do we have it?
How is it managed?
We operate in open,
aggressively competitive
markets in which barriers
to entry for new players are
relatively low. Competitors
may choose to differentiate
themselves by undercutting
their rivals. As a result,
capacity levels in these
markets rise and fall, causing
prices to go up and down,
creating volatile market cycles.
We adapt our desire to write certain lines of business according
to market conditions and the Group’s overall risk appetite.
We reject business unlikely to generate underwriting profits
and regularly monitor pricing levels, producing detailed
monthly reports on how pricing and exposures are developing.
This allows us to quickly identify and control any problems
created by deteriorating market conditions. Hiscox frequently
acts as the lead insurer in the co-insurance programmes
needed to cover high-value assets, so we have some ability
to set market rates.
The Group rewards its staff for producing profit not revenue.
This helps to maintain underwriting discipline in soft markets.
Pricing
Hiscox competes against
major international insurance
and reinsurance groups.
At times, competitors may
choose to underwrite risk at
prices below the break-even
technical price. Prolonged
periods in which premium
levels are low or competition
is intense are likely to have
a negative impact on the
Group’s financial performance.
Accepting risks below their
technical price is detrimental
to the industry. It can drive
market rates down to a point
where underwriting losses
mount, insurers’ capital is
reduced and some businesses
fail. Customers could receive
poor service and the industry
could suffer negative publicity.
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Insurance risk – underwriting
The risk related to our core business of providing insurance products and services to clients, and to the management of our net
exposure to losses.
What is the risk?
Why do we have it?
How is it managed?
Underwriting large, volatile
and complex risks can be
potentially costly, but can also
create strong returns over the
medium to long term.
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.
Underwriting exposure
management
Hiscox insures individual
customers, businesses and
other insurers for damage
caused by a range of
catastrophes, both natural
(for example, hurricanes or
earthquakes) and man-made
(for example, terrorism), which
can cause heavy underwriting
losses that materially impact
upon the Group’s earnings
and financial condition if the
insured event materialises.
The Group buys reinsurance
protection to manage
catastrophe risk and reduce
the volatility that major losses
could have on our financial
position. If the Group’s
reinsurance protection were
proven to be inadequate
or inappropriate, it could
significantly affect our
financial condition.
Binding authorities
Hiscox generates considerable
premium income through
third parties authorised to
underwrite insurance policies
on the Group’s behalf.
Binding or delegated
authorities give the Group
access to a greater volume of
business and can contribute
significantly to our profitability
and market share.
Third parties may accept
risk outside of agreed
parameters or normal
guidelines, exposing us to
financial and operational risks.
The Group underwrites catastrophe risk in a carefully managed,
controlled manner. Our strategy of creating and maintaining a
diversified portfolio, both by product and geography, helps limit
our overall catastrophe exposure.
The Group’s business plan is underpinned by a clearly-defined
appetite for underwriting risk. We closely monitor our risk
exposure to maximise the expected risk-return profile of our
entire portfolio and offset any potential losses from more
volatile accounts.
Underwriters are incentivised to make sound decisions that are
aligned with the Group’s strategic objectives and risk appetite
and clear limits are placed on their underwriting authority. In
response to legal developments, policy wordings are regularly
reviewed to ensure that, as far as possible, exposure to those
risks identified in the policy at the time of issue is maintained.
Our modeling resources are tailored to support insurance
and reinsurance plans and ensure that exposure matches
expectations. Risk aggregation and modeling resources are
shared across the Group.
Stress and scenario testing is performed by the Group and by
individual insurance carriers to assess our potential exposure
to certain catastrophes.
We buy reinsurance to reduce our risk exposure and mitigate
the impact of catastrophes based upon a clear outwards
reinsurance strategy and centralised reinsurance programme
that enables us to minimise gaps in coverage across the
business and get the right deal by leveraging our size.
Decisions about the type and amount of reinsurance we
buy are supervised by a dedicated reinsurance purchasing
team using modeling techniques.
Authorities granted by Hiscox are closely controlled through
strict underwriting guidelines, contractual restrictions and
obligations. A Group-wide delegated authority policy sets out
clear standards and principles for managing the delegation of
authority to external third parties. We vet all third parties prior
to appointment and monitor and audit them regularly to ensure
they meet our standards.
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Risk management
Insurance risk – reserve
The risks of managing the adequacy and volatility of claim provision reserves set aside to pay for existing and future claims.
What is the risk?
Why do we have it?
How is it managed?
Reserve risk
The Group makes financial
provisions for unpaid claims,
defence costs and related
expenses to cover liabilities
both from reported claims
and from ‘incurred but not
reported’ (IBNR) claims.
If insufficient reserves were put
aside to cover our exposures,
this could affect the Group’s
future earnings and capital.
When underwriting risks, we
estimate both the likelihood
of them occurring and their
cost. Our actual claims
experience could exceed
our expectations, requiring
us to increase our levels of
reserves held.
The provisions we make to pay claims reflect our own experience
and the industry’s view of similar business. They are also
influenced by loss payments, pending levels of unpaid claims,
historic trends in reserving patterns and potential changes in
rates arising from market or economic conditions. Provisions
are set above the actuarial mid-point to reduce the risk that
actual claims may exceed the amount we have set aside.
Our provision estimates are subject to rigorous review by all
areas of the business, as well as by independent actuaries on
the managed Syndicates. The relevant boards approve the
amount of the final provision, on the recommendation of
dedicated reserving committees.
Details of the actuarial and statistical methods and assumptions
used to calculate reserves are set out in note 25 to the
consolidated financial statements.
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Risk management
Market risk – investment
The risk of financial loss or adverse movements in the value of Hiscox’s assets resulting from adverse movements in market prices
and our exposure from trading and/or the risk of exposure to inappropriate assets/asset classes.
What is the risk?
Why do we have it?
How is it managed?
Asset value
Money received from our
clients in premiums and the
capital on our balance sheet
is invested until it is needed
to pay claims. These funds
are inevitably exposed to
investment risk.
The investment of Hiscox’s
assets generates an
investment return. Our
investment portfolio is
exposed to a number of risks
related to changes in interest
rates, credit spreads and
equity prices, among others.
Investment risk also
encompasses the risk
of default of investment
counterparties, who are
primarily the issuers of
bonds in which we invest.
Liquidity
A failure of our liquidity strategy
could leave us unable to meet
cash requirements to pay
liabilities to customers or other
creditors when they fall due.
We might also incur high costs
in selling assets or raising
money quickly in order to
meet our obligations.
Such a failure could have a
material adverse effect on the
Group’s financial condition
and cash flows.
If a catastrophe occurs, the
Group may be faced with large,
unplanned cash demands.
This could be exacerbated by
having to fund a large number
of claims pending recovery
from our reinsurers.
Although our investment
policies stress the conservation
of principal and liquidity,
our investments are subject
to market-wide risks
and fluctuations.
Our objective is to maximise investment returns in the prevailing
financial, economic and market conditions, without creating
undue risk to the Group’s capacity to underwrite. Funds held for
reserves are invested primarily in high-quality bonds and cash.
To reduce foreign exchange risk, these are usually maintained
in the currency of the original premiums for which they were set
aside. As many of our insurance and reinsurance liabilities have
short timespans, we do not aim to match exactly the duration of
our assets and liabilities.
The Group’s fixed-income fund managers operate within clear
guidelines as to the type and nature of bonds in which they can
invest. These prioritise the need to pay claims while providing
sufficient flexibility to enhance returns.
A proportion of funds is allocated to riskier assets, principally
equities. By taking a long-term view on these assets, we seek
to achieve the best possible risk-adjusted returns. Within our
risk assets, we make an allocation to less volatile, absolute
return strategies, which balance our desire to maximise returns
with the need to ensure capital is available to support our
underwriting throughout any downturn in financial markets.
The Group’s investment policy recognises the demands
created by our underwriting strategy, so that some investments
may need to be sold before maturity or at short notice.
A high proportion of our investments are in liquid assets,
which reduces the risk of losses being incurred if a quick sale
is needed. Funds held for reserves are invested primarily in
high-quality, short duration bonds and cash so the Group
can meet its aim of paying valid claims quickly.
The Group’s cash requirements can normally be met through
regular income streams: premiums, investment income, existing
cash balances or by realising investments that have reached
maturity. 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 three years ahead, depending
on the source.
To identify potential issues, we run stress tests to estimate the
impact of a major catastrophe on our cash position. We also
consider the impact on our liquidity of other adverse events
occurring, such as an economic downturn and declining
investment returns.
The Group maintains extensive borrowing facilities with a range
of major international banks. This minimises the risk of one or
more institutions being unable to honour commitments to us.
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Risk management
Credit risk
The risk of loss or adverse financial impact due to counterparty default or failure to meet obligations with agreed terms.
What is the risk?
Why do we have it?
How is it managed?
Credit risk – reinsurance
The Group buys reinsurance to
protect us, but if our reinsurers
were unable to meet their
obligations to us it could put
a strain on our earnings and
capital, and harm our financial
condition and cash flows.
We cover clients against a
range of catastrophes and
protect ourselves through
reinsurance. We face credit
risk when we seek to recover
sums from our reinsurers.
We buy reinsurance only from companies we believe to be
strong. A dedicated Group Credit Committee must approve
the use of every reinsurer, based on an assessment of their
financial strength, trading record, payment history, outlook,
organisational structure and external credit ratings.
Our credit exposures to these companies are closely monitored,
as are the companies themselves, so we can quickly identify
any potential problems. We consider public information, our
experience of the companies, their behaviour in the marketplace
and consultants’ and rating agencies’ analysis.
Credit risk – brokers
If a broker fails to pass
premiums to us or fails to
pass the claims payment
on to a policyholder, this can
result in us losing money.
The vast majority of our
business is written through
brokers. We face credit risk
when money is transferred to
and from brokers for premiums
or claims.
We monitor our exposure to brokers on an ongoing basis and
have a continuing dialogue with our core brokers to quickly
identify and resolve any credit issues that arise. Such monitoring
takes into account a number of factors, which can include credit
rating, financial position, financial performance, payment history
and market factors.
In the case of some large losses, we pay policyholders directly
to reduce broker credit risk on material transactions.
Operational risk
The risks of direct or indirect losses involving people, processes, systems and external events, resulting from the running of
the business.
What is the risk?
Why do we have it?
How is it managed?
Information security
(including cyber security)
A failure to properly protect
information could compromise
the confidentiality, availability
or integrity of our data.
Cyber security risk is the
threat to the Group from
globally connected networks
such as the internet. It differs
from the exposure posed
by underwriting cyber risks,
which is considered an
insurance risk.
As well as causing financial
losses, information security
risk can have legal, regulatory
and reputational consequences.
Our business is based on
trust from customers and
partners, and that trust
depends on our ability to
keep their information secure.
We operate in a world in which
the volume of sensitive data
and the number of connected
devices and applications have
increased exponentially, while
cyber attacks are increasingly
frequent and sophisticated.
Our business depends on
the integrity and timeliness
of the information and data
we maintain, own and use.
Information security risk is managed as a business risk, not an
IT responsibility. We employ an information security policy and
a cyber security risk strategy.
The Group employs information security resources, which
provide advice on information security design and standards.
We also have an information security group, including experts
from around the business who assess and manage these threats
in line with risk appetite. Our cyber strategy combines industry
standard perimeter security with protection for specific, highly
confidential information.
The Group constantly deploys and evolves systems, policies
and procedures to mitigate internal and external threats to our
IT infrastructure. We conduct Group-wide mandatory training
on information and cyber security, which is also mandatory for
all third parties and contractors.
Our stress testing and scenario analysis considers the impact
and likelihood of information security exposures and assesses
management actions, including response plans.
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Risk management
Operational risk
The risks of direct or indirect losses involving people, processes, systems and external events, resulting from the running of
the business.
What is the risk?
Why do we have it?
How is it managed?
Information technology and
systems failure
A major IT, systems or service
failure could have a significant
impact on our business.
Our information technology
and systems are critical to
conducting business and
providing continuity of service
to our clients, including
supporting underwriting
and claims processes.
We operate in an ever-
changing environment, with
technological advancements,
customer behaviour and
external expectations evolving
rapidly in recent years.
To remain relevant we must
continue to evolve how we
conduct our business.
Project risk and
change management
The risks that projects and/
or change initiatives are not
delivered to plan, budget or
specification, or that the risks
inherent in projects are not
appropriately managed.
Where this occurs, there may
be not only direct financial
losses but also indirect losses
through distraction risks
and inefficiencies.
We have dedicated IT resources that support the Group’s
technology needs and oversee critical systems and applications.
Our stress testing and scenario analysis considers the impact
and likelihood of an IT or systems failure and assesses how
management actions could be taken to mitigate the risk.
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 incident occur. These
procedures would enable us to quickly move the affected
operations to alternative facilities. The plan is tested regularly
and includes simulation tests.
All major programmes have dedicated project governance
structures to oversee the delivery of the programme, including
risk management aspects. Programme sponsors also provide
updates to the Board and Risk Committee as appropriate.
The newly-formed Programme Assurance Office provides
oversight across all major programmes. It provides senior
management with an independent view of the progress, risks
and issues within the programmes as well as the linkages
between them.
Specialist resource is used to augment project resources,
either in a contractor or advisory capacity, as needed.
Regulatory and legal risk
The risk of financial loss, regulatory censure, reputational damage and/or other adverse impact as a result of non-compliance with
all relevant regulations and/or legislation in all relevant jurisdictions.
What is the risk?
Why do we have it?
How is it managed?
Regulatory change
The insurance industry is
exposed to continuous
regulatory change, which may
affect the level of capital we
are required to hold or require
changes to how we are set up
operationally from time to time.
Insurance is a highly regulated
industry. There may be
times when the regulatory
landscape undergoes a
significant shift that directly
impacts our business.
The Group understands that sound, prudent regulation is key to
the stability and sustainability of the insurance and wider financial
markets. We continuously monitor new regulation and review
our internal processes to facilitate compliance. Our approach is
to combine local expertise with a globally consistent framework
to manage regulatory change and provide effective compliance
with the varied and evolving requirements.
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Corporate responsibility
Our values underpin every aspect of our business and have earned
us a reputation for decency and integrity. They are reflected in our
work around the environment, the marketplace, the community
and in our workplace culture.
The environment*
Hiscox is committed to a policy of reducing
the environmental impact of our work.
By 2020, we aim to complete a 15%
real-term reduction in our Scope 1, 2
and 3 carbon emissions per full-time
equivalent (FTE), relative to 2014.
We are ahead of target. The table far
right depicts the Group’s global carbon
emissions year-on-year since 2014.
We also remain fully committed to being
a carbon neutral business. Our global
emissions are currently being offset
through a pioneering collaboration with
Carbon Footprint Ltd in the Great Rift
Valley in Kenya, which uses carbon
finance to fund tree planting and support
the developing community. We review
our collaborations every year and in
2016 offset 7,383 tonnes in carbon
emissions through this scheme.
Hiscox is one of the founding members
of ClimateWise, a global network of over
20 leading insurance companies united
by their concerns over climate change
and their ability to understand and
communicate the risks associated with it.
Since the network’s launch in 2008, our
progress in meeting a set of principles
outlined by ClimateWise has been subject
to annual independent review. In 2017,
we were given a score of 69%, ranking
us seventh among the participants. The
Hiscox ClimateWise Report is available
at www.hiscoxgroup.com/responsibility.
This commitment to the environment has
a commercial imperative as well as a moral
one. Hiscox is a constituent of indexes
including CDP and the FTSE4Good
Index Series, a series of benchmark
and tradable indexes designed to help
investors integrate environmental, social
and governance (ESG) factors into their
investment decisions.
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The marketplace
In its dealings with the marketplace,
the Group aims to demonstrate the
highest levels of professionalism,
expertise and ethical practice. In
recognition of these qualities, Hiscox
UK & Ireland and Hiscox London Market
both have the Chartered Insurance
Institute’s Chartered Insurer status –
an important marker for attracting
partners that are looking to work with
high-quality insurers.
Dealing with brokers
Insurance brokers are important
stakeholders in our business. For us to
create a competitive advantage in the
marketplace, it is essential that we build
strong and lasting relationships with
brokers that share our values. To these
ends, the Group has instigated a ‘superb
service’ ethos, designed to develop a
greater understanding of brokers’ needs,
and also runs annual broker summit
events for our broker partners and the
rising stars in their businesses.
Dealing with investors
Hiscox communicates openly and
transparently with its shareholders.
The Group reports both its half- and
full-year results to investors via a series
of presentations, and all relevant
financial information is available on the
corporate website. Senior managers
and key employees meet regularly with
investors and analysts to explain the
Group’s business strategy and financial
performance and answer any questions.
Dealing with customers
Hiscox has built its reputation upon
outstanding customer service. Our
belief is that insurance is a promise to
pay: should a loss occur, we aim to fully
support our customers and pay every
valid claim as quickly as possible.
Employees and workplace culture*
It is Hiscox’s policy to require all staff
to meet standards of behaviour that
reflect the core values of the Group.
By consistently demonstrating these
high levels of conduct, we believe we are
more likely to achieve business success
and create value for shareholders.
Hiscox aims to provide its staff with
both the means and the motivation to
excel. This is achieved through a fair
system of rewards and an environment
in which employees can enjoy their
work and reach their full potential.
Hiscox recognises the importance of
maintaining a healthy work/life balance,
so offers the option of flexible and
homeworking wherever possible.
While achieving the highest standards
of corporate governance, we strive to
remain, in essence, a non-bureaucratic
organisation. An effective system of
internal controls ensures that risks
are managed within acceptable limits,
but not at the expense of innovation
or speed of response. Our ability to
strike this balance is one of the
Group’s greatest strengths.
Diversity and inclusion
Diversity and inclusion (D&I) was a
Group-wide priority in 2017, and we
made important progress in this area.
We appointed a D&I expert to lead on
this work, agreed a set of KPIs for each
of our business units, and established
a nine-point plan to address the gender
imbalance at senior levels. Our flexible
working and maternity leave policies
were enhanced, and we completed
a comprehensive pay gap analysis in
preparation for the new requirements
to publish a gender pay gap report from
2018. We also sponsored the Dive In
Festival for the third consecutive year,
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4.6%
Carbon footprint per FTE has fallen for
the fourth consecutive year, down 4.6%
year-on-year.
Global emissions
Year
2014
Year
2015
†
Year
2016
Year
2017
590
2,113
2,703
446
1,916
2,362
Scope 1 – company car use, on-site gas
combustion and refrigerant loss
Scope 2 – purchased electricity
Total (scope 1 and 2)
Tonnes CO2e per FTE (Scope 1 and 2)
Scope 3 – air, rail and personal
car business travel
Total (all scopes 1, 2 and 3)
Tonnes CO2e per FTE (all scopes 1, 2 and 3)
† The 2016 baseline has been re-stated. This is as a result of more accurate actual electricity data available
where estimates were previously used: Bordeaux, Cologne, Hamburg, Munich and Dublin.
612
2,175
2,787
4,905
7,269
4,596
7,383
4,538
7,241
3.22
3.68
3.02
1.20
1.20
1.14
742
1,889
2,631
0.97
5,151
7,782
2.88
more specific and targeted action, and
ensure D&I is firmly on the management
agenda of each of our business units. We
will also complete important analysis work
to better understand the extent to which
we are supporting and retaining women
returning to work from maternity leave.
Rewards and benefits
The Group encourages employees to share
in its success through performance-related
pay, bonuses, savings-related share
option schemes and executive
performance share plans. We also offer
competitive benefits packages, which
contain health and fitness benefits and
opportunities for flexible working and
career breaks. Salary packages are
benchmarked against the financial
services industry as a whole and against
the Lloyd’s market specifically (where
applicable), and are also considered
on a country-by-country basis.
Training and development
Hiscox is committed to training and
developing employees to help them
maximise their potential. Every permanent
member of staff has the opportunity to
pursue training and development, with
training and development needs reviewed
twice a year as part of our Group-wide
performance management and review
process, which is also when performance
is measured against clearly-set objectives.
Communication and participation
We listen to the views of our people
and encourage them to contribute new
ideas. Employees are kept informed of
business developments through formal
briefings, town hall events, team meetings,
intranet bulletins, video conferences
and other more informal routes. Once
settled into their job at Hiscox, staff at
all levels of the business are also invited
to lunch with members of the Executive
Committee, who want to hear their ideas
for improvement and innovation and views
on Hiscox as a place to work.
Social and community matters*
The Group is fully committed to
supporting the communities within
which it operates, through donations,
professional support and the volunteer
work of its employees.
s In 2017, Hiscox Bermuda supported
organisations working with local
young people, the elderly and the
most vulnerable members of the
community. These groups included
The Family Centre, The Reading
Clinic, the Eliza Dolittle Society,
The Bermuda Society for the Blind,
Big Brothers Big Sisters, Meals on
Wheels, Purvis Primary School PTA
and the Adult Education School.
We continued to support various
environmental groups including
Greenrock, Bermuda Environmental
Sustainability Taskforce, Reef
Watch and Groundswell, and
inclusive sports programmes such
as Beyond Rugby, Bermuda Tennis
Association Grassroots programme,
Boccia Bermuda and the Hiscox
Under-11 Cricket League. We were
also pleased to take part in Keep
Bermuda Beautiful’s clean-up
campaign, Adopt a Spot.
s Hiscox USA supported charities local
to its offices that focus on education,
medical science, advancement of
the arts and culture or provision
of services to disadvantaged and
vulnerable communities.
s Hiscox Iberia continued to participate
in the annual 1kg of Help campaign,
working with brokers and other
business partners to donate
food to those in need during
the festive season.
Hiscox Ltd Report and Accounts 2017
49
Carbon
Neutral
Organisation
an annual series of events around
diversity and inclusion that takes place
across 17 countries and 32 cities.
Building on the success of the Women in
Leadership training programme in 2016,
the programme’s reach was extended to
include more employees in lower bands.
We continue to reap the benefits of our
Women at Hiscox employee network,
which since March 2016 has completed
a range of networking events and
established a number of successful
mentoring relationships. We have also
launched employee network guidelines to
empower our people to create additional
employee networks, with initial interest in
parents and carers, mental health and
well-being, LGBT and millennials networks.
Our focus on D&I as a strategic priority
continues in 2018 as we broaden the
scope of activities beyond gender, drive
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Corporate responsibility
Some examples of our support for the
communities in which we operate, clockwise
from left: the Hiscox Under-11 Cricket League
in Bermuda; a member of staff in York attends
to the Hiscox bees; some of our York team take
part in the city’s annual dragon boat race;
our London team enjoy some dodge ball;
table tennis tournaments in our Atlanta office.
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Corporate responsibility
For more detail on
corporate responsibility
see hiscoxgroup.com
£182,000
The Hiscox Foundation donated
£182,000 to charities in the UK
and USA during 2017.
s Hiscox Benelux supported the
community during Christmas by
offering food cheques to the elderly.
s Community work was also
undertaken across many of our UK
offices. In Colchester, the team raised
over £32,000 for Mid and North East
Essex Mind, and continued its
reading partnership programme
with local schools. In York, the
team raised nearly £6,000 for
The Samaritans, and continued
to cultivate the colony of bees that
we have installed on the roof of our
office. In London, we contributed
£25,000 to the Evening Standard’s
Grenfell Tower fund and took the
first steps towards establishing
Hiscox Gives, a charity committee
to coordinate the charitable activity
of our teams in London.
Supporting the arts, science
and technology
The Group is a passionate supporter
of the arts, science and technology.
In 2017, Hiscox supported the City of
London’s Sculpture in the City project
for the seventh consecutive year, and
continued to be the insurance partner of
the Whitechapel Gallery, a free-to-access
gallery close to its London office that
champions contemporary art. Hiscox
also became The National Gallery’s first
Contemporary Art Partner as part of
an exciting multi-year partnership, and
supported Art Night – a free contemporary
arts festival that puts art into extraordinary
locations around London for one night a
year, encouraging the public to experience
art and their city through fresh eyes.
Hiscox remained title sponsor of The
Sunday Times Hiscox Tech Track 100,
which charts the fastest-growing private
technology, telecoms and digital media
companies, and supported the prize
fund of the Aesthetica Art Prize, which
celebrates emerging artists. Hiscox
Germany continued to support promising
young artists, presenting a €7,500 prize
to the best young artist selected by a jury
at Hamburg’s renowned university of fine
art, HFBK, and supporting another artist
with an artist-in-residence scholarship.
Hiscox France worked with FIAC, France’s
premier art fair.
The Hiscox Foundation
The Hiscox Foundation is a charity,
funded by an annual contribution from the
Group, which makes grants to social and
humanitarian initiatives and contributes
to the fundraising activities of Hiscox
employees. In total, the Hiscox Foundation
in the UK and USA donated £182,000
during 2017.
In the UK, the Foundation contributed over
£51,000 to the charitable endeavours of
Hiscox staff. It also continued its support
for the Richard House Children’s Hospice,
which provides care to children and young
people with life-limiting health conditions,
and Humanitarian Aid Relief Trust, which
works with marginalised, oppressed and
exploited communities around the world.
The Hiscox Foundation USA provided
similar backing to the charitable work of
Hiscox staff. This included donations to the
Romeo Milio Lynch Syndrome Foundation,
which supports those with a hereditary
predisposition to certain types of cancers;
Special Olympics Unified Sports, which
promotes social inclusion through sport;
Volunteers of America in Greater New
York’s Operation Backpack, which in 2017
provided 17,000 children living in a New
York City shelter with a new, full backpack
in time for the first day of school; and the
American Red Cross for its Hurricane
Maria Disaster Relief appeal. The Hiscox
Foundation USA also continued its
support for the Parris Foundation, an
organisation dedicated to teaching
children in deprived communities
about science, technology, engineering
and mathematics.
Respect for human rights*
Maintaining a positive, open and inclusive
culture that respects our colleagues’
human rights is fundamental to the
Group’s strategy, and we are guided
by the principles of the UN’s Universal
Declaration of Human Rights and the
International Labour Organisation’s core
labour standards. In light of this, and the
nature of our business, we do not maintain
a standalone human rights policy.
Anti-bribery and anti-corruption*
Our anti-bribery and anti-corruption
policy applies to all employees and
entities in the Hiscox Group. It outlines
that all employees, entities and associated
firms of the Hiscox Group shall not make
any payment or provide anything of
value, to any person, with the intention
to improperly influence that person to
create a business advantage for Hiscox.
The policy is reviewed on an annual basis.
All individual incidents are reported using
the suspicious transactions/anti-fraud
procedure. In 2017, no incidents in
relation to anti-bribery were reported.
As part of our induction process,
individuals are requested to complete
six regulatory assignments within three
months of joining: Hiscox conduct risk
and treating customers fairly; Hiscox
introduction to the FCA; Hiscox money
laundering and how you can prevent it;
what whistleblowing is and why we need
it; Hiscox data protection training and
business ethics.
Whistleblowing
Our Group-wide whistleblowing policy
ensures employees feel empowered to
raise concerns relating to malpractice
or wrongdoing without fear of unfair
treatment. If an employee has a serious
concern relating to the operation of the
business, our whistleblowing procedures
enable them to confidentially raise their
concerns with senior management or,
if they choose, with the Chair of the
Hiscox Ltd Audit Committee. All Hiscox
staff can also access free, confidential
advice from the whistleblowing charity
Public Concern at Work.
* Part of our non-financial reporting statement under
ss.414CA and CB of the Companies Act 2006.
Hiscox Ltd Report and Accounts 2017
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Board of Directors
Robert Simon Childs
Non Executive Chairman (Aged 66)
26 February 2013*
Hamayou Akbar Hussain
Chief Financial Officer (Aged 45)
12 September 2016*
Bronislaw Edmund Masojada
Chief Executive (Aged 56)
12 December 2006*
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, Chairman of
The Bermuda Society and, in 2017, became
Deputy Chairman of Lloyd’s.
Aki Hussain joined Hiscox in 2016 from Prudential
plc, where he spent seven years; latterly as Chief
Financial Officer of Prudential UK and Europe.
Prior to his time with Prudential, Aki held a number
of senior roles in the financial services, telecoms
and media sectors. He was Finance Director for
the Consumer Bank division at Lloyds Banking
Group until 2009, before which he was Finance
Director for the Consumer division of ntl (now
Virgin Media). Aki is a Chartered Accountant,
having trained with KPMG.
Bronek Masojada joined Hiscox in 1993 as Group
MD and he became CEO in 2000. From 1989 to
1993 he was employed by McKinsey & Company.
Bronek served as a Deputy Chairman of Lloyd’s
from 2001 to 2007 and was Chairman of the
Lloyd’s Tercentenary Research Foundation from
2008 to 2014. He is currently a member of the
Board of the Association of British Insurers and
a Director of Pool Reinsurance Company Limited.
Richard Colin Watson
Chief Underwriting Officer (Aged 54)
16 May 2013*
Lynn Carter
Independent Non Executive Director (Aged 61)
20 May 2015*
Caroline Foulger
Independent Non Executive Director (Aged 57)
1 January 2013*
Richard Watson joined Hiscox in 1986, having
previously worked for Sedgwick 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.
Lynn Carter joined Hiscox in May 2015. Lynn has
38 years’ experience in the banking industry,
most recently as President of Capital One Bank.
Prior to Capital One, Lynn was President of Bank
of America’s Small Business Banking division, a
US$2.1 billion revenue business, with oversight of
110,000 business clients and 2,000 employees.
Dividing her time between California and
Connecticut, Lynn currently serves on the private
Board of American Express Centurion Bank and
Phoenix House Foundation, and on Bankwork$
Advisory Board.
Caroline Foulger joined Hiscox in January 2013
having retired from a partnership at PwC on
31 December 2012. Until May 2012, Caroline led
PwC’s Insurance and Reinsurance practice in
Bermuda. Caroline is a Fellow of the Institute of
Chartered Accountants in England and Wales, a
member of the Institute of Chartered 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 and
Oakley Capital Investments Limited.
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Hiscox Ltd Report and Accounts 2017
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Board of Directors
Hiscox Ltd
Secretary
Marc Wetherhill
Registered office
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
Registered number
38877
Auditors
PricewaterhouseCoopers Ltd.
Washington House
4th Floor, 16 Church Street
Hamilton HM 11
Bermuda
Solicitors
Appleby
Canon’s Court
22 Victoria Street
PO Box HM 1179
Hamilton HM EX
Bermuda
Bankers
HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Stockbrokers
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
United Kingdom
Registrars
Link Market Services
(Jersey) Limited
PO Box 532
St Helier
Jersey JE4 5UW
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.
Michael Goodwin
Independent Non Executive Director (Aged 59)
16 November 2017*
Thomas Hürlimann
Independent Non Executive Director (Aged 54)
16 November 2017*
Colin Keogh
Independent Non Executive Director (Aged 64)
19 November 2015*
Michael Goodwin joined Hiscox in November
2017. He has over 25 years’ experience in the
insurance industry having worked for QBE
Insurance between 1992 and 2012. He held a
number of roles for QBE in the Australian and Asia
Pacific markets and was the CEO for QBE Asia
Pacific from 2007 to 2012. Michael is a Fellow
of the Institute of Actuaries of Australia.
Thomas Hürlimann joined Hiscox in November
2017. Thomas has 28 years’ experience in
banking, reinsurance and insurance. Most
recently as CEO Global Corporate at Zurich
Insurance Group, a business with US$9 billion
premiums and a network in over 200 countries.
Before that he worked at Swiss Re and started
his career with National Westminster Bank.
He holds an MBA from IMD.
Colin Keogh joined Hiscox in November 2015.
Colin has spent his career in financial services,
principally at Close Brothers Group plc, where
he worked for 24 years and was CEO from 2002
until 2009. He is a Non Executive Director of
Virgin Money Holdings (UK) plc and certain of
its subsidiaries. He is also a Non Executive
Director of M&G Group Limited and Chairman
of specialist financial services business Premium
Credit Limited.
Anne MacDonald
Independent Non Executive Director (Aged 62)
20 May 2015*
Robert McMillan
Independent Non Executive Director (Aged 65)
1 December 2010*
Constantinos Miranthis
Independent Non Executive Director (Aged 54)
16 November 2017*
Anne MacDonald joined Hiscox in May 2015.
Anne has held the position of Chief Marketing
Officer at four different Fortune 100 companies,
marketing some of the most recognisable
corporate names in the world – from Citigroup
and Travelers to Macy’s and PepsiCo. With an
MBA from Bath University, Anne was formerly a
Director of NASDAQ-listed Rentrak Corporation,
stepping down from the Board on completion of
its merger with comScore, Inc.
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 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.
Costas Miranthis joined Hiscox in November
2017. He was President and CEO of PartnerRe
a position from which he stepped down in 2015.
Prior to joining PartnerRe in 2002 he was a
Principal of Tillinghast-Towers Perrin in its London
office with responsibility for the European non-life
practice. He is a Fellow of the Institute and Faculty
of Actuaries and a member of the American
Academy of Actuaries. He is also a past Chair of
the European Reinsurance Association Board.
Hiscox Ltd Report and Accounts 2017
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Chairman’s letter to shareholders
Key developments on corporate governance throughout the year.
In 2017 we carried out an external Board
evaluation using an independent facilitator,
Lintstock. The recommendations in the
report were characterised as potential
refinements to existing practices and the
overall composition of the Board was
rated very highly. One of the findings of the
report was that Non Executive Directors
could maximise the value of their time
spent outside of formal meetings by
visiting the Group’s sites to gain exposure
to second- and third-tier management
with a view to identifying leadership talent,
providing written reports back to the
Board on their insights. We are currently
putting in place a timetable to incorporate
these meetings throughout the year.
Robert Childs
Chairman
Dear Shareholder
The Hiscox Group continues to grow and,
in turn, the robust governance framework
which underpins our business model
continues to evolve. We focus on more
than simply compliance with codes,
ensuring we have the right culture, a
balanced Board with independent Non
Executives and a well-defined network
of committees.
During the year the Financial Reporting
Council (FRC) issued its substantial
revision to the UK Corporate Governance
Code, reflecting the FRC’s aim to make
the code shorter and sharper. We are
currently reviewing this and may submit
comments on the proposed revisions in
due course.
The arrangements we have in place are
described in detail within this corporate
governance statement but it is worth
highlighting a few notable events from
this year.
s Ernst Jansen and Gunnar Stokholm
stepped down from the Hiscox Ltd
Board in November 2017, following
nine years of service, at which point
the UK Corporate Governance
Code deems them not independent.
s The Nominations Committee led the
search for three new Non Executive
Directors for the Hiscox Ltd Board,
culminating in the appointment of
Michael Goodwin, Costas Miranthis
and Thomas Hürlimann in
November 2017.
s During the year, Jeremy Pinchin
stepped down as CEO of Hiscox
Re & ILS and Group Company
Secretary to return to London,
where he remains our Group Claims
Director. Marc Wetherhill was
appointed by the Board as Group
Company Secretary and General
Counsel in September 2017.
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Corporate governance
As the size and shape of the Hiscox Group continues to grow
and develop it is vital that we have in place a robust governance
framework which underpins our business model.
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 April 2016 (the Code).
During 2017, and up to the date of this
Report and Accounts, the Group has
complied with the provisions of the Code
in all material respects. The FRC has
published a revised UK Corporate
Governance Code, which is expected to
apply to accounting periods beginning
on or after 1 January 2019.
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 52 to 53.
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 strategy. The Chief Executive
has responsibility for running the
Group’s business.
The Nominations Committee monitors
the composition of the Board and
considers its diversity, balance of skills,
experience, independence and
knowledge to ensure that it remains
appropriate. The composition of the
Board was also reviewed as part of
the Board evaluation described on
page 57.
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.
In accordance with the Company’s
Bye-Laws, Michael Goodwin, Thomas
Hürlimann and Costas Miranthis will
seek re-appointment at the 2018 Annual
General Meeting. In accordance with the
Code, the remaining Directors will also
submit themselves for re-appointment.
The Board have set voluntary restrictions
on the number of other Directorships
a Non Executive Director is permitted
to hold. The external commitments
of the Chairman and the Executive
Directors are disclosed in their profiles
on page 52. The remuneration of the
Non Executive Directors does not
include performance-related elements
and is reviewed annually.
While 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.
The Chairman, Robert Childs, did not meet
the independence criteria set in the Code
on appointment. However, the Code
does not require the independence or
otherwise of a Non Executive Chairman
to be considered subsequent to their
appointment. Caroline Foulger is a former
partner of PwC, the Company’s auditors,
but retired from the firm on 31 December
2012, prior to PwC’s appointment
as auditor, and is considered to be
independent. 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.
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. As part of the
Board evaluation conducted during the
year, Directors were asked to assess
the quality of the support they receive
from the Company Secretary and the
responses were all positive. 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. The Board of Hiscox Ltd
held four scheduled meetings during 2017.
The Board and Committee meetings
usually take place over two days when
all of the Directors convene in Bermuda.
There is a formal induction process for
new Directors and induction training was
provided to our three new Hiscox Ltd Board
members: Michael Goodwin, Thomas
Hürlimann and Costas Miranthis, during
the year. The needs of a new Director
joining the Board are assessed and
appropriate training arranged. Directors’
training requirements were assessed as
part of the Board evaluation undertaken by
Lintstock. Existing Directors are provided
with the opportunity to attend training
Hiscox Ltd Report and Accounts 2017
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Corporate governance
Prior to the Board and
Committee meetings
taking place, the Board
and the Executive
Committee together
hold in-focus sessions
exploring specific aspects
of the Hiscox Group.
The Board of Directors
sessions. During the year Directors also
received briefings on the new Group-wide
Hiscox Integrated Capital Model (HICM)
and attended a number of in-focus sessions
on specific areas of the business.
Prior to the Board and Committee meetings
taking place, the Board and the Executive
Committee together hold in-focus
sessions exploring specific aspects of
the Hiscox Group. These presentations
are sometimes made by members of the
Executive Committee, or other members
of the management team, or in some
cases by individuals with particular
expertise in certain markets. During
these sessions the Board has explored
matters including a major IT programme
for the USA, portfolio underwriting, cyber
underwriting, the US business and ILS
strategic options. In addition, the Board
and Executive Committee received a
presentation on developments in the
FinTech and InsureTech markets from
external experts in this field.
The Board’s Terms of Reference include
a Schedule of Matters Reserved for
Board Decision, a copy of which can
be found on the Group’s website:
www.hiscoxgroup.com. Aside from the
opportunity that Non Executive Directors
have to challenge and contribute to the
development of strategy in regular Board
meetings, Non Executive Directors also
attended the annual Hiscox Partners’
meeting held during the year.
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 interim
dividends and recommendation of the
final dividend, approving Group business
plans and budgets, approving major
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Hiscox Ltd Report and Accounts 2017
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 awards.
The Board has appointed an Executive
Committee 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
comprises Lynn Carter, Caroline Foulger,
Michael Goodwin, Thomas Hürlimann, Colin
Keogh, Anne MacDonald, Bob McMillan
and Costas Miranthis. Caroline Foulger is
considered by the Board to have recent
and relevant financial experience and is
Chair of the Committee. The Committee as
a whole is considered to have competence
relevant to the sector in which the
Company operates. Further information
on the background and experience of
the Committee members is included
in their profiles on pages 52 and 53.
The Committee operates according to
Terms of Reference published on the
Group’s website and met four times during
the year to assist the Board on matters
of financial reporting, risk management
and internal control, and to determine the
external auditor’s fees. 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 Audit Committee receives reports from
the auditors who also attend meetings of
the Committee to report on the status of
their audit and any findings. This allows the
Committee to monitor the effectiveness
of the auditors during the year.
PwC was appointed as the Company’s
auditor at the 2016 Annual General
Meeting. There are currently no plans
to re-tender the audit. 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.
PwC 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 2017 financial year,
the Committee reported to the Board on
how it had discharged its responsibilities,
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
position and performance, business
model and strategy. Further information
on the activities of the Committee is
included in the Audit Committee report
on pages 60 and 61. The arrangements
by which staff may, in confidence, raise
concerns about possible improprieties are
described in the corporate responsibility
statement on page 48. The arrangements
were reviewed and updated and reissued
to all employees across the Group in
September 2016.
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Corporate governance
The Group believes
that opportunity should
be limited only by an
individual’s ability and
drive, and the Committee
considers diversity –
including gender diversity
– when recommending
appointments to the Board.
The Nominations Committee
The Remuneration Committee
The Remuneration Committee
comprises Lynn Carter, Caroline Foulger,
Michael Goodwin, Thomas Hürlimann,
Colin Keogh, Anne MacDonald, Bob
McMillan and Costas Miranthis. It is
chaired by Colin Keogh. The Committee
operates according to Terms of
Reference published on the Group’s
website and generally meets three
times a year. The Remuneration
Committee takes care to recognise
and manage conflicts of interest when
receiving views from Executive Directors
or senior management, or consulting
the Chief Executive about its proposals.
No Executive is permitted to be present
when the Committee discusses his or
her remuneration. The Committee’s
role in remuneration is described in
the remuneration section on page 65.
The overall aim is to attract and retain
high-calibre individuals and incentivise
them to deliver long-term success for
the Company. Executive Directors are
subject to malus and clawback provisions
in relation to their remuneration and the
circumstances in which these would
apply are described on page 82.
The Nominations Committee
The Nominations Committee comprises
Lynn Carter, Robert Childs, Caroline
Foulger, Michael Goodwin, Thomas
Hürlimann, Colin Keogh, Anne
MacDonald, Bob McMillan and Costas
Miranthis. 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, and 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.
More information on the Group’s diversity
polices and work during the year can
be found in the corporate responsibility
report on page 48.
During 2017, the external search
consultancy firm JCA Group was
commissioned to identify suitable
candidates for the role of Independent
Non Executive Director. Other than
undertaking search assignments, JCA
has no connection to the Group. The
search brief was aimed at balancing
the existing skills, diversity, experience,
independence and knowledge on the
Board. Each candidate was interviewed
by the Chairman, the Chief Executive and
the Group Human Resources Director.
This process produced a shortlist and,
from that shortlist, Michael Goodwin,
Thomas Hürlimann and Costas Miranthias
were nominated by the Committee.
In July 2017, the Board approved these
appointment on the recommendation
of the Committee. The three new Non
Executive Directors bring additional
international experience and diversity
to the Board. Michael Goodwin has
experience in the Asia-Pacific markets,
Thomas Hürlimann has experience
working in Europe and Costas Miranthis
has a background in Bermudian
and US reinsurance operations.
The Committee also has a role in
considering the succession planning
for Executive Directors and senior
management, and a remit to make
recommendations on future leaders.
The Investment Committee
The Investment Committee has
oversight of the Group’s investments
and comprises Lynn Carter, Robert
Childs, Caroline Foulger, Michael
Goodwin, Thomas Hürlimann, Colin
Keogh, Anne MacDonald, Bob McMillan,
Costas Miranthis, the Chief Executive
and the Chief Financial Officer and
is chaired by Robert Childs. At each
meeting the Committee receives an
update from the Chief Investment Officer
on the performance of the Company’s
investment portfolio. It operates according
to Terms of Reference and meets as
and when the Chairman determines
appropriate, but at least once a year.
The Conflicts Committee
The Group has a Conflicts Committee
which comprises Lynn Carter, Caroline
Foulger, Michael Goodwin, Thomas
Hürlimann, Colin Keogh, Anne MacDonald,
Bob McMillan and Costas Miranthis and
is chaired by Bob McMillan, following the
retirement of Ernst Jansen in November
2017. 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
Hiscox Ltd Report and Accounts 2017
57
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Corporate governance
An alert service
is available on
hiscoxgroup.com to
notify any stakeholder
of new stock exchange
announcements.
Shareholder communications
Managing Agency. 27.4% of the Names on
Syndicate 33 are third parties and 72.6%
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
and the Committee serves to protect the
interests of the external investors in the
ILS funds.
The Risk Committee
The Risk Committee oversees the risk
management framework and advises the
Board on how best to manage the Group’s
risk profile. The Committee normally
meets four times a year. The Committee
comprises Lynn Carter, Robert Childs,
Caroline Foulger, Michael Goodwin,
Thomas Hürlimann, Colin Keogh, Anne
MacDonald, Bob McMillan and Costas
Miranthis. It is chaired by Lynn Carter.
The risk management framework is
described in the risk management
section on pages 38 to 47.
The Group has a dedicated risk team
led by the Chief Risk Officer, which
reports to both the Risk Committee of the
main Board and to those of the relevant
subsidiary boards. At each of its meetings
during the year the Risk Committee
reviews and discusses a risk dashboard
and critical risk tracker that monitor
the most significant exposures to the
business, including emerging risks and
risks that have emerged but are evolving.
The Risk Committee also engages in
focused reviews, a recent topic being
information cyber security. Stress tests
and reverse stress tests (scenarios which
could potentially give rise to business
failure as a result of a lack of viability or
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Hiscox Ltd Report and Accounts 2017
capital depletion) are also performed
and reported on to the Risk Committee.
In light of these arrangements the
Directors are satisfied that a robust
assessment of the principal risks facing
the Company, including those that would
threaten its business model, future
performance, solvency or liquidity,
has been carried out during the year.
The Executive Committee
The Executive Committee comprises
Senior Executives and normally
meets every six weeks. It makes
recommendations to the Board and
approves various matters (some of
which may also require Board approval).
The Committee approves senior
appointments and remuneration
outside the scope of the Remuneration
Committee or Nominations Committee,
approves operational policy, takes
decisions on annual budgets, business
plans, mergers and acquisitions,
considers significant issues raised by
management and approves 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 Committee
which was externally facilitated by
Lintstock. The last external evaluation
was carried out in 2014. Other than
carrying out this evaluation, Lintstock has
no other connection to the Group. The
external evaluation involved one-to-one
interviews with the Chairman and
individual Directors. Most of the
recommendations in the evaluation
report were characterised as potential
refinements to existing practices rather
than material changes in approach.
The top priorities for the Board in 2018
were identified as supporting the
Company in a changing environment,
managing succession and transition,
maximising the contribution of the Non
Executive Directors and continuing with
the in-focus session on certain areas
of the business.
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 2018.
In addition to the external evaluation
of the Board, the Senior Independent
Director, Colin Keogh, met with the other
Non Executive Directors without the
Chairman present to appraise the
performance of the Chairman. During
the year, the Non Executive Directors
also periodically met without the
Executive Directors to discuss a wide
range of issues concerning the Company.
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 engagement
During the year the Company has
engaged with its largest shareholders on
proposed changes to the implementation
of the remuneration policy as outlined on
pages 76 to 84.
The views expressed by shareholders
have been reported back to the Board
through its committees. The Executive
Directors communicate and meet
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Corporate governance
The three new Non
Executive Directors bring
additional international
experience and diversity
to the Board.
The Nominations Committee
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. All Directors attended
the Annual General Meeting in 2017.
The Company also 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, is
copied to the Non Executive Directors in
full. The Chairman attends a number of
meetings with shareholders and analysts.
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
Risk is at the heart of any insurance
organisation and the management of
risk is fundamental to the success of its
business model. The principal risks facing
this organisation are described on pages
41 to 47 together with an explanation of
how they are managed or mitigated.
These risks are managed dynamically
in response to changing circumstances.
For example, since last year, regulatory
and legal risks has been separated
from operational risk in recognition of
its increasing pertinence across the
Group. Emerging risks often influence
our strategic approach, and are
considered holistically as part of the
wider risk landscape. These principal
risks comprise the Group’s ‘critical risks’,
or exposures which materially threaten
financial strength, severely impact
business operations or significantly affect
strategy. Critical risks often develop over
a short time, or offer limited time to react,
respond or recover, thereby requiring
continuous focus. The Group is subject
to regulatory requirements aimed at
ensuring its continuing solvency and
has established arrangements to assess
and manage its principal risks continually.
Risk and solvency assessments are
conducted and the Group is required to
assess the capital resources necessary
to achieve its strategic business objectives
over the coming year while remaining
solvent, given its risk profile. This includes
a forward-looking assessment which
considers the business plan over a
three-year period.
Notwithstanding the uncertainties arising
from the risks summarised on pages 38 to
47 there is a statement at page 85 which
confirms that for the 2017 financial year
the Directors considered it appropriate
to adopt the going concern basis of
accounting. For the reasons explained
above, the prospects of the Company
are assessed over a longer period than
the 12 months required by the Code.
The Group calculates and projects
forward the capital requirements of its
regulators and those of the rating agencies
to ensure that it will continue to meet any
applicable solvency requirements and
achieve the ratings it feels are necessary
to conduct its business profitably. While
the Board has no reason to believe the
Group’s business model will not be viable
over a longer period, the period over
which the Board considers it possible
to form reasonable expectations as
to its position is the three years to
31 December 2020. This corresponds
to the forward-looking element of the
Group’s regulatory solvency assessments
and allows reliance to be placed on the
output from those assessments as well as
the other arrangements described above.
On the basis of its robust assessment of
the principal risks, and on the assumption
that they can continue to be managed or
mitigated as described (and taking account
of the most recent solvency assessments,
together with the results of the stress tests
and focused risk reviews), the Board has a
reasonable expectation that the Company
will be able to continue in operation and
meet its liabilities as they fall due over the
period to 31 December 2020.
As part of our internal controls, the internal
audit function provides objective and
independent assurance and advice to the
Audit Committee and the Board over the
processes and systems of internal control
and risk management operating in the
Group. It achieves this through carrying
out an annual risk-based programme of
reviews, the scope of which considers an
independent view of the risks facing the
Group, as well as other factors such as
strategic initiatives, emerging risks and
change. It includes an annual review of
the Group’s compliance with the
governance requirements emanating
from its regulators and the Code. The
findings of these internal audit reviews
are reported to the Audit Committee.
Taken together the risk and internal audit
activities described here enable the Board
to monitor the Group’s risk management
and internal control systems.
Hiscox Ltd Report and Accounts 2017
59
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Audit Committee report
Financial reporting
In relation to financial reporting, the
primary role of the Audit Committee 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 within them.
Working with both management and the
external auditor, the Committee reviewed
the appropriateness of the half-year and
annual financial statements, concentrating
on, among other matters:
s the quality and acceptability of
accounting policies and practices;
s the clarity of the disclosures and
compliance with financial reporting
standards and relevant financial and
governance reporting requirements;
s material areas in which significant
judgements have been applied or
there has been discussion with the
external auditor;
s any correspondence from third parties
in relation to our financial reporting.
To aid the review, the Committee
considered the key judgements found
in the financial statements by the Chief
Financial Officer, as well as reports from
the external auditor on the outcomes of
its annual audit and half-year review. The
Committee supported the auditor, PwC,
in displaying the necessary professional
scepticism its role requires. The primary
areas of judgement considered by the
Committee in relation to the 2017 Annual
Report and Accounts were:
i) The reserving for insurance losses
As set out in our significant accounting
policies on page 107, the reserving for
insurance losses, in particular losses
incurred but not reported, is the most
critical estimate in the Company’s
consolidated balance sheet.
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Hiscox Ltd Report and Accounts 2017
Meetings and attendance table
All Directors attended all meetings.
Director
RS Childs
BE Masojada
HA Hussain
RC Watson
LA Carter
C Foulger
M Goodwin*
T Hürlimann*
C Keogh
A MacDonald
R McMillan
C Miranthis*
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
Attended
Attended
Attended
Attended
4/4
4/4
4/4
4/4
4/4
4/4
1/1
1/1
4/4
4/4
4/4
1/1
N/A
N/A
N/A
N/A
4/4
4/4
1/1
1/1
4/4
4/4
4/4
1/1
N/A
N/A
N/A
N/A
4/4
4/4
1/1
1/1
4/4
4/4
4/4
1/1
4/4
N/A
N/A
N/A
4/4
4/4
1/1
1/1
4/4
4/4
4/4
1/1
* Michael Goodwin, Thomas Hürlimann and Costas Miranthis were appointed as Directors with effect from
16 November 2017.
The Chief Actuary presented a Group
reserving report to the Committee,
which reviewed the approach taken by
management when making their selection
of reserving estimates. The Committee is
satisfied with the judgements taken and the
reporting and disclosure of these estimates.
During the year, a number of natural
catastrophes occurred, with hurricanes
Harvey, Irma and Maria (HIM) in particular
causing devastation and significantly
contributing to the largest annual
catastrophe losses in history. The
Committee received an update on the
large loss processes that the Company
conducts when significant events such
as these arise. It is imperative that the
Company can quickly, and to a reasonable
degree of accuracy, estimate the gross
and net losses arising from such events.
The Committee is satisfied with the way
that the process was conducted.
ii) The carrying value of deferred tax
As fully explained in note 2.22, a deferred
tax asset has been established relating
to operating losses arising in foreign
subsidiaries. The recoverability of these
assets is dependent upon the future
profitability of these subsidiaries. The
Committee 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.
The Committee was briefed on the US
Tax Bill H.R.1 and the introduction of
a Base Erosion Anti-Abuse Tax. The
Committee is satisfied of the approach
being undertaken by the Group.
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
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Audit Committee report
During the year an
external evaluation
of the Audit Committee
was conducted
by Lintstock. The
performance of the
Audit Committee
was rated highly.
External committee evaluation
diminished liquidity means that
estimating fair value involves a higher
level of judgement. The Committee
has evaluated the process used by
management 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 2.16, 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 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.
v) The recoverability of reinsurance assets
As as result of the hurricane activity in the
year, the level of exposure to reinsurers
has increased. The Committee received
an update on the process to monitor
the levels of recoverability and the
regular contact with counterparties.
The Committee is satisfied with the
approach taken and the recoverability
of those assets.
Finance Transformation Programme
The Company has embarked on a
Finance Transformation Programme
(FTP), which involves a wide-ranging
transformation of the Finance IT systems
and controls. The head of the FTP project
provides a quarterly update to the
Committee on the status of the project.
Functional currency reporting
The Company previously announced that
the functional currency of Syndicate 33,
Hiscox Dedicated Corporate Member
Limited, Hiscox Syndicates Limited and
Hiscox Capital Ltd and the reporting
currency of the Group would change to
US Dollars with effect from 1 January 2018.
The Committee reviewed the proposed
change to functional currency which
will significantly reduce the volatility of
the Group’s earnings due to foreign
exchange movements, in particular due
to translation of foreign currency balances
(noting that a significant majority of Group
earnings are denominated in US Dollars).
The proposed change will give investors
and stakeholders a clearer understanding
of Hiscox’s performance over time, and
The Committee was comfortable in
recommending it to the Board.
UK Corporate Governance Code
In accordance with the 2016 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
position and performance, business
model and strategy. The Committee
has provided such advice to the Board.
External auditor
PwC was appointed as the Group’s
auditor at the 2016 Annual General
Meeting following a tender exercise that
commenced in 2014 and was reported on
in the 2015 Annual Report and Accounts.
External auditors are invited to attend all
meetings of the Committee and it is the
responsibility of the Committee to monitor
their performance, objectivity and
independence. The Committee discusses
and agrees with the auditors the scope
of the audit plan for the full year and the
review plan for the interim statement. The
Audit Committee receives reports from
external auditors at regular intervals
during the audit process, including those
relating 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. Any contracts with
PwC 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 that may
impair the auditor’s independence or
objectivity. During the year, the value
of non-audit services provided by PwC
amounted to £200,000 (2016: £315,000).
There were no circumstances in which
PwC was engaged to provide services
that 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. To provide a forum in which
any matters of concern could be raised
in confidence, the Non Executive
Directors met with the external and
internal auditors throughout the year
without the Executive Directors present.
Internal audit
The Group Head of Internal Audit is
invited to attend all meetings of the
Committee. It is the responsibility of the
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.
Group Risk Officer
The Group Risk Officer is also invited to
attend all meetings of the Committee. The
Company has in place a Risk Committee
and the items discussed by the two
Committees can overlap, therefore the
attendance of the Group Risk Officer aids
in facilitating discussions relating to risk.
External committee evaluation
During the year an external evaluation
of the Committee was conducted
by Lintstock. The performance of
the Committee was rated highly and
a number of priorities were identified
for 2018. These included developing
the information that the Committee
receives to become more succinct,
in particular: highlighting key items
in lengthy reports; making more
use of private sessions to enable
conversations without non-members
present; and continuing to ensure
that any issues or concerns are
raised as early as possible.
Caroline Foulger
Chairman of the Audit Committee
Hiscox Ltd Report and Accounts 2017
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#2. Be part of a strong culture that challenges the status quo
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Financial highlights
2
3 Why invest in Hiscox?
8
Chairman’s statement
10 Chief Executive’s report
Building a balanced
18
business
Actively managed
business mix
Actively managed key
underwriting exposures
20
21
22 Capital
24
Group financial
performance
26 Group investments
28
Additional performance
measures
Ten good reasons to
work at Hiscox
29
38 Risk management
48 Corporate responsibility
52 Board of Directors
Chairman’s letter
54
to shareholders
55 Corporate governance
60 Audit Committee report
64
Letter from Chairman
of the Remuneration
Committee
66 Remuneration summary
Annual report on
68
remuneration 2017
Remuneration policy
76
85 Directors’ report
87
Directors’ responsibilities
statement
90
96
96
97
98
99
Independent auditor’s
report
Consolidated income
statement
Consolidated statement
of comprehensive
income
Consolidated balance
sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
100 Notes to the consolidated
financial statements
152 Five-year summary
Remuneration
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Letter from Chairman of the Remuneration Committee
Dear fellow Shareholder
At Hiscox we have a very clear strategy
which aims to deliver strong returns across
the insurance cycle and create sustainable
long-term value for our shareholders.
We want to employ and keep good people
and provide them with the means and
motivation to excel.
Although the remuneration structure
has naturally evolved over time to reflect
market and best practice, the simple
framework and main design features
have been in place for more than 15
years. The underlying philosophy is
that base remuneration should be
competitive but not excessive, and
that outperformance will be rewarded
through variable pay. We expect all
employees to meet or exceed their
non-financial targets such as delivering
great service to customers, adhering
to regulation and playing their part in
building a business for the long-term.
However, in order for executives to be
eligible for a bonus, Hiscox must also
deliver profits in excess of a specified
return threshold.
Rewarding results and not effort is
integral to Hiscox’s high performance
culture which, in the Board’s opinion,
is a key element of the Company’s
success. Hiscox has consistently
delivered market-leading performance.
Over the last five years ROE averaged
15%, well above the FTSE All-Share
average of 9%. This performance has
enabled the Company to distribute
£742 million to shareholders since 2013,
and deliver a total shareholder return of
280% – well above the FTSE All-Share
of 74%. As a consequence Executive
Directors and employees have been
well rewarded over this period. We believe
this philosophy works well for investors
and employees.
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Hiscox Ltd Report and Accounts 2017
The following principles define our
approach to remuneration.
— Simple, and strictly results driven,
with variable rewards only if Hiscox
delivers profits in excess of a
specified return threshold.
— Incentivise Executive Directors
appropriately, over the short and
long term.
— Align Executive Directors’ interests
with those of our shareholders,
focusing on effective risk
management, ROE, and net
asset value growth which drives
total shareholder return over time.
Listening to shareholders
The Remuneration Committee believes
that the general remuneration structure
continues to work well and therefore
no changes to the remuneration policy
approved by shareholders at the 2017
AGM are proposed this year. However,
through conversations with shareholders
during the last AGM season, some
themes emerged on how we could
improve our approach and the
Committee is proposing to make a
number of changes to how the policy
will be implemented in the future.
1. Greater transparency over
bonus outcomes
Although shareholders recognised that
bonuses at Hiscox are closely aligned to
performance, with performance below
threshold leading to zero bonuses twice
in the last ten years, we have taken on
board requests for greater transparency
over the bonus outcomes. In this year’s
remuneration report we provide more
detail on bonus structure, including both
retrospective and prospective disclosure
of pre-tax return on equity (ROE) targets
applicable to the bonus. In years where
bonuses are paid, we will provide
enhanced retrospective disclosure
of individual performance factors used
to determine outcomes.
2. Additional metrics for the Performance
Share Plan (PSP)
In relation to the long-term PSP award,
some shareholders requested alternative
financial metrics be considered in
addition to ROE, to avoid an overlap
with the annual bonus scheme.
Recognising that growth in net asset
value is a key strategic goal, and is
clearly linked to the delivery of long-term
shareholder returns, we have replaced
ROE with growth in net asset value plus
dividends measured on a per share
basis as the performance target for
2018 PSP awards. This approach
provides a simple measure of growth
which complements the ROE measure
used for the short-term incentive and
adds further diversity to the overall
performance assessment. We have also
reduced the vesting level for achievement
of threshold performance from 25% of
award to 20% of the maximum award.
3. Increased shareholding guidelines
for senior executives
Hiscox has a long-standing culture
of share ownership among senior
executives, with the CEO and CUO
currently owning shares valued
at more than 7,000% and 2,000% of
salary respectively. Whilst acknowledging
this, some shareholders noted that the
current minimum shareholding guidelines
of 150% of salary could be increased
in line with evolving market practice.
Accordingly, we have increased this
to 200%. The CFO was appointed in
September 2016 and will continue to
build his shareholding in Hiscox shares.
We have consulted with our major
shareholders and received support
for the direction we are taking.
2
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89 Financial summary
Letter from Chairman
of the Remuneration
Committee
The core function of the
Remuneration Committee
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 awards 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.
Performance and remuneration outcomes
Hiscox reserved US$225 million in
catastrophe claims in 2017, a year which
saw the highest insured losses ever. The
Group was also impacted by foreign
exchange losses of £63 million. However,
a strong investment return and a good
performance by Hiscox Retail meant we
were able to deliver a profit of £30.8 million
(2016: £354.5 million).
The significant contribution of the retail
businesses continues to demonstrate
the value of the business strategy and
the overall balance sheet remains strong.
Hiscox also made good progress on a
number of operational initiatives during
2017, including setting up a European
carrier in response to Brexit, rolling out
a core IT system in the UK, and investing
over £50 million in marketing across the
Group. Notwithstanding the excellent
contributions made by a number of
senior executives across the business,
the Committee has once again stuck to
the principles of rewarding for outputs
and not inputs. ROE for the year was 1.5%,
which was below the minimum threshold
set. Therefore for 2017, no bonus will be
payable to the three Executive Directors
and for a significant number of senior staff.
At a junior level we paid bonuses relative to
personal performance.
Despite the challenges in 2017, the
performance trend over the longer term is
more positive. Based on a strong average
ROE performance of 13.5% over the
last three years (1.5% in 2017, 23.0% in
2016 and 16.0% in 2015), the long-term
incentive plan (LTIP) award granted in
2015 will vest at 85% of maximum.
The net result of the above, is that the
remuneration packages and single figure
results reported for the three Executive
Directors are significantly lower than in
recent years. In 2017, the CEO’s single
figure reduced by 42% to £2.3 million.
Our remuneration approach seeks to
encourage management to build a business
over the long term, whilst delivering
shareholder results in the short term. This is
demonstrated by the value of vested PSPs
being the material element of the CEO’s
remuneration, as illustrated on page 71.
Looking ahead
Overall, the Remuneration Committee is
satisfied that our practices are aligned
with the interests of shareholders and
incentivise Directors appropriately over
the short and long term.
Over the past year, we have listened to our
shareholders and responded to feedback.
During 2018, the Committee will pay close
attention to any reforms implemented
by the Government and will review our
general approach following the publication
of the revised Corporate Governance
Code which is expected later in the year.
Looking further ahead we remain
committed to the principles which have
underpinned our remuneration strategy
for a number of years.
We value the views of our shareholders
and we will seek to maintain dialogue
to ensure there is clarity regarding the
decision-making of the Committee.
We have refreshed our approach to
disclosure this year and I trust that this
expanded report provides you with a
helpful summary of our approach to
remuneration at Hiscox. I look forward
to receiving your approval and hearing
your feedback at our 2018 AGM.
Colin Keogh
Chairman of the Remuneration Committee
Hiscox Ltd Report and Accounts 2017
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Remuneration summary
Key principles underpinning
remuneration at Hiscox
The following principles have driven
a culture of high performance at Hiscox,
creating sustainable long-term value
for shareholders.
— The remuneration policy must be
simple, and strictly results-driven
with variable rewards only if
Hiscox delivers profits in excess
of a specified return threshold.
— Remuneration should aim to
incentivise Executive Directors
appropriately over both the
short and long term.
— Remuneration should align
Directors’ interests with our
shareholders’ by focusing on
effective risk management, ROE,
and net asset growth which drives
total shareholder returns over time.
Remuneration outcomes for 2017
2017 was a historic year for catastrophes,
and this impacted our financial results.
While the Company’s balance sheet
remains strong and Hiscox is in a good
position to capitalise on opportunities,
incentive outcomes for 2017 will be
significantly lower than in recent years.
No bonus for Executive
Directors as ROE was
below the threshold
performance level.
Strong long-term
performance with
three-year average ROE
of 13%. PSP awards
granted in 2015 vested
at 85% of maximum.
Single figure of
£2,287,729 for CEO,
is 42% lower than
last year.
66
Hiscox Ltd Report and Accounts 2017
Summary of remuneration arrangements for 2018
A summary of the remuneration
arrangements for Executive Directors is
provided opposite, the full remuneration
policy approved by shareholders at the
2017 AGM is detailed on pages 76 to 84.
Base salary
Competitive but not excessive.
As detailed in the Remuneration
Committee Chairman’s letter,
certain changes have been made
to implementation in response to
shareholder feedback.
76-84
Benefits
Same as majority of employees.
Annual bonus
Aligned to shareholder interests.
Performance Share Plan
(PSP)
Aligned to long-term shareholder interests
and performance.
Shareholding guidelines
Aligned to shareholder interests.
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Remuneration summary
Implementation policy
for 2017
Implementation policy
for 2018
Salaries for 2017:
— BE Masojada: £599,625
— HA Hussain: £461,250
— RC Watson: £461,250
Salary increase of 2.5%, in line with average UK employee increase of 2.6%.
Salaries for 2018:
— BE Masojada: £620,000
— HA Hussain: £477,000
— RC Watson: £477,000
Salary increase of 3.4%, the same as
the average UK employee increase.
Benefits can include health insurance, life insurance, long-term disability schemes and participation in all-employee share
schemes. Retirement benefits are delivered via a cash allowance of 10% of salary paid in lieu of the standard pension
contribution, the same as most other employees in the organisation.
Maximum opportunity:
— up to 400% of salary for CEO and CFO;
— up to 500% of salary for CUO.
Over the past ten years, the average bonus to the CEO has been equivalent
to c.40% of the current maximum opportunity.
Performance metrics: combination of ROE and individual performance
delivered against set objectives approved by the Board.
Deferral: part deferral of amounts in excess of £50,000.
2017 actual as percentage of salary:
— BE Masojada: 0%
— HA Hussain: 0%
— RC Watson: 0%
Maximum opportunity unchanged.
Enhanced transparency of outcomes:
full disclosure of prospective ROE target
ranges upon which bonus outcomes
are determined.
We will also provide enhanced disclosure
around the individual performance factors
used to support the determination of
outcomes in future years.
Award subject to three-year performance period and two-year holding period.
Maximum opportunity: 200% of salary for all Executive Directors.
Vesting subject to: ROE performance hurdle. 25% vests for achievement
of threshold performance, 100% for maximum.
2017 actual as percentage of salary:
— BE Masojada: 200%
— HA Hussain: 186%
— RC Watson: 186%
Awards continue to be released after
five years.
Maximum opportunity unchanged.
Vesting subject to: net asset value
per share growth plus dividends. 20%
vests for achievement of threshold
performance, 100% for maximum.
Share ownership guidelines of 150% of salary for all Executive Directors,
after five years in role.
2017 actual:
— BE Masojada: 7,000%
— HA Hussain: 60%*
— RC Watson: 2,000%
*HA Hussain was appointed in September 2016.
Share ownership guidelines increased to
200% of salary for all Executive Directors,
after five years in role.
Hiscox Ltd Report and Accounts 2017
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Annual report on remuneration 2017
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2017 and how it
will be applied for the 2018 financial year. PwC has been engaged to audit the sections in the annual report on remuneration 2017
below entitled ‘Executive Director remuneration’ and additional notes, ‘annual bonus’, ‘long-term incentives’, ‘details of pension
entitlements’, ‘Non Executive Director remuneration’, and ‘Directors’ shareholding and share interest’ to the extent that would be
required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
Executive Director remuneration
Year
£
Salary
£
Benefits
£
1
Bonus
£
Long-term
2
incentives
£
Retirement
benefits
£
Total
remuneration
£
BE Masojada
CEO
RC Watson
CUO
HA Hussain3
CFO
2017 595,969
2016 582,500
2017 458,438
2016 445,000
2017 458,438
2016 138,068
9,720
0 1,629,670
8,839 1,500,000 1,826,470
0 1,218,482
9,367
10,095 1,350,000 1,287,894
481,349
549,515
0
800,000
7,128
1,727
52,370 2,287,729
52,657 3,970,466
41,674 1,727,961
40,453 3,133,442
41,674
988,589
12,551 1,501,861
1 A proportion of the bonus amount is deferred as set out on page 79 of the policy report.
2 2017 long-term incentives relate to performance share awards granted in 2015, or on joining in the case of HA Hussain, where the performance period ends on
31 December 2017. The award is due to vest on 13 April 2018. 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 2017 of 1392.63p. The 2016 long-term
incentive award relates to performance share awards granted in 2014 where the performance period ends on 31 December 2016. The amount also includes dividend
equivalents accrued on this award (HA Hussain’s amount has been restated based on dividends received). For the purpose of this table the performance share award
has been valued based on the share price on 17 March 2017 of 1082.00p.
3 Appointed 12 September 2016. Details of his joining package are in the 2016 remuneration report.
Additional notes to the Executive Director remuneration table
Salary
Salary reviews take place in the first quarter of the year, effective from 1 April. As noted in last year’s remuneration report, Executive
Directors’ salaries were increased by 2.5% from April 2017, which was in line with the average UK-based employee salary increase
of 2.6%. Base salaries for Executive Directors from 1 April 2017 were as follows:
BE Masojada
RC Watson
HA Hussain
April 2017
£599,625
£461,250
£461,250
Benefits
For 2017, benefits provided for Executive Directors included the Company healthcare scheme, life insurance, income protection
insurance and critical illness policies as well as a Christmas gift hamper.
Variable pay
The Hiscox approach to remuneration places emphasis on alignment with performance and the shareholder experience. Therefore, a
significant portion of total remuneration is delivered via incentive awards which can vary significantly based on the level of performance
achieved. At Hiscox, variable pay consists of an annual bonus and share awards under the Performance Share Plan.
Although the remuneration structure has naturally evolved over time to reflect market and best practice, the simple framework has
been in place for more than 15 years. The approach has reinforced the strong performance culture across the business as bonuses
are only paid if results exceed the specified threshold, and not for effort alone.
Annual bonus
In response to shareholder feedback the Committee has sought to improve the transparency around the process for determining bonuses.
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Structure of bonus
The bonus is structured so that there can be significant variability in outcomes, including years where no bonus is paid. The
Remuneration Committee continues to believe that the most appropriate measure for the calculation of the bonus pool is pre-tax
return on equity as it aligns management’s interests most effectively with shareholders’ interests and minimises the possibility of
anomalous results. It enables the Committee to ensure that Executive Directors’ and other employees’ incentives are aligned with
the Company’s profit performance.
The Executive Directors, along with other employees across the Group, participate in profit-related bonus pools. These pools are
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.
Individual bonuses are based on the results of the relevant business area, individual performance and the size of the relevant bonus
pool. The Remuneration Committee determines the bonuses to be paid to the Executive Directors based on judgement regarding the
performance of the Group and a robust assessment of individual performance including adherence to specific risk management
objectives. Bonuses are not paid if actual performance does not exceed the threshold, irrespective of individual performance.
In determining the size of the Executive Director bonuses, the Committee uses the following framework to support its decision-making
process. When setting targets, the Committee seeks to motivate strong performance but in a manner which encourages sustainable
behaviours in line with the defined risk appetite of the business:
Pre-tax return on equity
Less than RFR* +<5%
RFR +5% to RFR +12.5%
RFR +10% to RFR +17.5%
RFR +15% to RFR +22.5%
RFR +20% to RFR +25%
Greater than RFR +22.5%
*Risk-free rate.
Indicative bonus range (% of max)
Nil
0-15%
15-40%
30-60%
50-70%
60-100%
These ranges enable the Committee to exercise judgement and flex payments (including downwards) based on the delivery of
specific objectives and context in which performance has been delivered.
Where performance is below the specified threshold, no bonus is paid. Over the last ten years, on the two occasions when the
Group has delivered pre-tax ROE below the required threshold, no bonuses were paid to Executive Directors.
Junior and mid-level employees also participate in a personal performance bonus scheme. Awards under this scheme are based
entirely on individual performance ratings. It is designed to ensure that junior and mid-level employees continue to be motivated to
perform well, irrespective of overall Group performance. The benefit is up to 10% of salary.
Pay for performance – track record
The chart below shows the relationship between the Group ROE performance and bonus awards for Executive Directors over an
extended period. It demonstrates the strong link between Company performance and bonus outcomes.
Executive Directors’ cash incentives and return on equity
Bonus as a percentage of salary
400
350
300
250
200
150
100
50
0
2007
2016
2009
2006
2013
2015
2012
2014
2003
2004
2002
2008
2010
2005
2001
2011 2017
Below zero
0%
5%
10%
15%
20%
25%
30%
35%
40%
Return on equity
Hiscox Ltd Report and Accounts 2017
69
400
350
300
250
200
150
100
50
0
0
5
10
15
20
25
30
35
40
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Annual report on
remuneration 2017
Outcomes for 2017
In assessing outcomes for 2017, the Remuneration Committee reviewed a number of objectives in areas of individual
performance including:
— for CEO, BE Masojada: delivering the strategic plan (which in 2017 meant growing Hiscox Retail and Hiscox Re & ILS,
while pulling back in the London Market), and embedding a culture of risk management across the organisation;
— for CUO, RC Watson: driving product innovation in key markets as well as ensuring risk limits and controls are followed;
— for CFO, HA Hussain: improving capital management and driving cost efficiencies across the business to realise economies.
Despite delivering good progress against these objectives, the pre-tax return on equity for 2017 was 1.7% (2016: 24.2%) and the
resulting profit of £30.8 million was driven by an expensive year for catastrophe claims and large foreign exchange losses. In line with
the assessment framework set out on page 69, no bonus pool was allocated to the Executive Directors as the final pre-tax ROE level
for the year was below the specified threshold.
Hiscox is committed to providing clear disclosure regarding bonus outcomes. To the extent that bonuses are paid in future years,
the Committee intends to provide suitable disclosure in future reports regarding the individual performance factors taken into
account when determining individual annual bonus outcomes.
Long-term incentives
Performance Share Plan awards (PSP) where the performance period ends with the 2017 financial year
BE Masojada and RC Watson were granted awards under the PSP in 2015 for the three-year performance period 1 January 2015
to 31 December 2017. As outlined in the 2016 Directors remuneration report, HA Hussain was granted a buy-out award under his
appointment terms which is based on performance over the same period.
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 three-year performance period
%
Proportion of PSP vesting
%
Expected investment return + 5 = 7
Expected investment return + 12.5 =14.5
25
100
Performance outcome
Based on the three-year average post-tax return on equity of 13.5%, the awards ending with the 2017 performance year will vest at
85% on 13 April 2018. 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 68.
PSP awards granted during the 2017 financial year
On 7 April 2017, BE Masojada, RC Watson and HA Hussain were granted awards under the PSP.
BE Masojada
RC Watson
HA Hussain
The performance conditions for these awards are as follows:
Number of
awards granted
Market price at
date of grant
Market value at
date of grant
105,000
75,000
75,000
11.19 1,174,950
11.19 839,250
11.19 839,250
Minimum threshold vesting
Maximum vesting
Required average post-tax ROE
over three-year performance period
%
Proportion of PSP vesting
%
Expected investment return + 5 = 7
Expected investment return + 12.5 =14.5
25
100
The ROE targets are set in order to outperform investment expectations and are reviewed annually to ensure they continue to motivate
and drive the right behaviours within the management team.
Executive Directors will be required to retain any shares vesting (net of tax charges) at the end of the performance periods for a further
two years (five years post the start of the performance period).
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CEO remuneration – short-term vs long-term weighting
2017
29% or £658,059
Fixed pay – salary and benefits
Annual bonus
PSP – value at vesting
71% or £1,629,670
2016
16% or £643,996
38% or £1,500,000
46% or £1,826,470
2015
19% or £633,469
XXX27% or £900,000
54% or £1,825,425
2014
20% or £617,779
32% or £1,000,000
48% or £1,512,756
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Balance between pay elements
The chart above shows the balance between fixed pay, annual variable pay and long-term variable pay for the CEO over the past four years.
The value of vested PSPs has been the material element of the CEO’s remuneration. Good performance and share price appreciation
has increased the value of PSPs over time. For example, the PSP award with a performance period ending in 2016 had a value at grant
of £1,082,640 and at vesting was £1,826,470.
40
60
20
80
100
Details of pension entitlements
All open Hiscox retirement schemes are based on defined contributions. BE Masojada, RC Watson and HA Hussain 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 68.
0
The table below details the legacy entitlements from the defined benefit pension plan. There are no further accruals under this plan.
Pensions
BE Masojada
RC Watson
Normal retirement
age
Increase
in accrued
pension during
the year
£000
Total accrued
annual pension
at 31 December
2017
£000
Increase in
accrued pension
net of inflation
£000
Transfer value
of accrued
pension at
31 December
2016
£000
Transfer value
of accrued
pension at
31 December
2017
£000
Increase/
(decrease) in
transfer value of
accrued pension
during the year
£000
60
60
2
6
52
166
–
–
1,961
6,604
2,073
6,978
112
374
In the event of early retirement the Directors receive a reduced pension to reflect early payment in accordance with the scheme rules.
Non Executive Director remuneration
The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2017
and 31 December 2016.
Ltd
Board fee
£
Ltd Committee
fee
£
Subsidiary
Board fee
£
L Carter
RS Childs
C Foulger
M Goodwin**
T Hürlimann**
ER Jansen†
C Keogh
A MacDonald
R McMillan
C Miranthis**
G Stokholm†
65,167
140,000
65,167
8,146
8,146
57,198
77,580
65,167
65,167
8,146
57,198
31,808
–
– 140,000
86,126
–
–
–
–
–
62,064
–
46,000
34,135
3,297
3,297
26,556
32,196
26,377
26,877
3,297
23,151
2017
Total
Hiscox fees
£
Ltd
Board fee
£
Ltd Committee
fee
£
Subsidiary
Board fee
£
96,975
67,742
291,203 140,000
67,742
185,428
–
11,443
–
11,443
67,742
83,754
80,645
109,776
67,742
91,544
67,742
154,108
–
11,443
67,742
126,349
32,052
–
36,356
–
–
31,452
33,468
27,419
27,419
–
27,419
–
140,000
83,984
–
–
–
–
–
64,516
–
69,387
Benefits
£
–
11,203*
–
–
–
–
–
–
–
–
–
2016
Total
Hiscox fees
£
99,794
289,430
188,082
–
–
99,194
114,113
95,161
159,677
–
164,548
Benefits
£
–
9,430*
–
–
–
–
–
–
–
–
–
*Benefits include life assurance and healthcare.
**Appointed effective 16 November 2017.
†Resigned effective 16 November 2017.
2017 fees that were paid in USD have been converted to GBP using an exchange rate of 1.289. 2016 fees were converted using 1.24.
Non Executive Director fees were reviewed in 2018, having been unchanged for the last three years. RS Childs’ fee increased by 3.6%.
The other Non Executive Directors’ basic fees increased by 2.4%. The Remuneration Committee Chair fee increased by US$2,000
to US$17,000 and member fees by US$1,000 to US$8,500. The Risk Committee fees increased by US$2,000 (Chair US$17,000,
member US$10,000).
Hiscox Ltd Report and Accounts 2017
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Directors’ shareholding and share interests
We 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 and were increased in 2017 to reflect our long-standing culture of share
ownership among Executives. Executive Directors are now expected to own Hiscox shares valued at 200% of salary (previously
150%) within five years of becoming an Executive Director. BE Masojada and RC Watson have over 20 and 30 years’ service
respectively and as such their shareholdings far exceed the guidelines. HA Hussain was appointed to the Board in September 2016
and will be expected to a build a shareholding in the Company over the course of his tenure. There have been no changes in the
Director share interests between 31 December 2017 and 26 February 2018.
Directors
Executive Directors
BE Masojada
RC Watson
HA Hussain
Non Executive Directors
L Carter
RS Childs
C Foulger
M Goodwin
T Hürlimann
C Keogh
A MacDonald
R McMillan
C Miranthis
*Restated to include 1,744 shares.
31 December 2017
6.5p ordinary shares
number of shares beneficial
31 December 2016
6.5p ordinary shares
number of shares beneficial
3,064,702
691,973
19,700
–
1,379,610
8,077
4,950
–
17,016
22,185
–
–
3,212,777*
700,000
–
–
1,511,866
7,894
–
–
11,242
14,450
–
–
Performance Share Plan (PSP)
The interests of Executive Directors under the PSP are set out below:
HA Hussain
BE Masojada
RC Watson
Total
Number of
awards at
1 January 2017
Number of
awards
granted
Number of
awards
lapsed
Number of
awards
exercised
Number of
awards at
31 December
2017
Market price at
date of grant
£
50,787
39,709
75,000
–
156,000
130,000
120,000
–
110,000
97,200
82,800
–
–
–
–
75,000
12,450 *
–
–
105,000
8,779 *
–
–
75,000
861,496 276,229
–
–
–
–
–
–
–
–
–
–
–
–
–
50,787
–
39,709
–
75,000
–
75,000
–
168,450
–
130,000
–
–
120,000
– 105,000
10,000
97,200
82,800
75,000
(108,779) 1,028,946
(108,779 )
–
–
–
10.46†
10.46†
10.46†
11.19
6.94
8.82
9.56
11.19
6.94
8.82
9.56
11.19
Market price
at date of exercise
£
Date
from which
released
17-Mar-17
13-Apr-18
08-Apr-19
07-Apr-20
17-Mar-17
13-Apr-18
08-Apr-19
07-Apr-20
11.22 - 11.34 17-Mar-17
13-Apr-18
08-Apr-19
07-Apr-20
* Accrued dividends.
†Grants made on 12 September 2016. Details of HA Hussain’s joining package are in the 2016 remuneration report.
Share options
The interests of Executive Directors under the Sharesave Schemes are set out below:
HA Hussain
BE Masojada
RC Watson
Total
Number of
options at
1 January 2017
Number of
options
granted
–
1,649
–
3,299
4,948
2,081
–
1,040
–
3,121
Number of
options
lapsed
–
–
–
(3,299)
(3,299)
Number of
options
exercised
–
(1,649)
–
–
(1,649)
Number of
options at
31 December
2017
*
Exercise price
£
Market price at
date of exercise
£
2,081
–
1,040
–
3,121
8.648
5.456
8.648
5.456
12.34
Date from
which exercisable
1-Jun-20
1-Jun-17
1-Jun-20
1-Jun-17
Expiry date
30-Nov-20
30-Nov-17
30-Nov-20
30-Nov-17
* The Scheme offers a three-year savings contract where the excise price of the options are calculated based on an average share price over five days prior to the
invitation date, with a 20% discount.
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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, Heptagon Assets Ltd, Heptagon BIR Ltd and Pool Reinsurance Company Limited.
He was not remunerated for his services. RC Watson held a Directorship at White Oak Underwriting Agency Limited. He was not
remunerated for his services.
Table of historic data
The table below shows the single total remuneration figure for the Chief Executive for the past nine years.
CEO single figure
of remuneration (£)
Annual bonus as percentage
of maximum opportunity*
PSP vesting as percentage
of maximum opportunity
2009
2010
2011
2012
2013
2014
2015
2016
2017
2,536,943 1,759,123 1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,287,729
71
29
100
100
0
85
46
39
51
53
44
100
39
100
64
100
0
85
*Prior to 2015 annual bonus was operated on an uncapped basis. In order to facilitate comparison, the current 400% salary cap has been applied retrospectively.
Total shareholder return performance
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 the general market and industry peers. Between December
2008 and 2017, Hiscox delivered total shareholder return of 400% – well above the FTSE All-Share and FTSE Non-Life Insurance indices.
Total shareholder return
(%)
Hiscox
FTSE All-Share
FTSE Non-Life Insurance
450
400
350
300
250
200
150
100
50
0
-50
D ec 08
M ar 09
Jun 09
Sep 09
D ec 09
M ar 10
Jun 10
Sep 10
D ec 10
M ar 11
Jun 11
Sep 11
D ec 11
M ar 12
Jun 12
Sep 12
D ec 12
M ar 13
Jun 13
Sep 13
D ec 13
M ar 14
Jun 14
Sep 14
D ec 14
M ar 15
Jun 15
Sep 15
D ec 15
M ar 16
Jun 16
Sep 16
D ec 16
M ar 17
Jun 17
Sep 17
D ec 17
Percentage change in remuneration of Director undertaking the role of Chief Executive
The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the 2016
and 2017 financial years. We have chosen UK-based employees as the comparator group for base salary and benefits 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. For bonus we have used Group employees as the comparator. The percentage change
is based on employees who were employed and eligible for a salary review and bonus in both financial years.
Base salary
Benefits (including retirement benefits)
Bonus
% change 2016 to 2017
% change 2015 to 2016
CEO
Employee
CEO
Employee
2.5
3.4
(100.0)
3.0
8.0
(77.8)
1.7
1.3
66.7
3.0
2.9
27.1
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450
400
350
300
250
200
150
100
50
0
-50
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Profit before tax (£m)
-91.3 (% change)
Dividend and return of
capital to shareholders (£m)
+6.4 (% change)
Total employee remuneration (£m)
-6.1 (% change)
355
2016
231
217
78
83
31
2017
2016
2017
2016
2017
Relative importance of the spend on pay
The charts above show the relative movement in profit, shareholder returns and employee remuneration for the 2017 and prior
financial year. Shareholder return for the year incorporates the distribution made in respect of that year. Employee remuneration
includes salary, benefits, bonus, long-term incentives and retirement benefits. Profit is the ultimate driver behind the performance
metrics of the bonus and long-term incentive schemes. Profit before tax can be located on page 96.
Remuneration for the wider workforce
The Remuneration Committee is mindful of pay practices in the wider Group, and during the course of the year is kept informed
of trends and changes in practices for the wider employee population.
To support the Committee’s deliberations, these updates include reference to a range of metrics including forecast and actual
bonus pool analysis, levels of share plan participation and pay ratios between Executives and average employees. The Committee
recognises that this is an area where new legislation or regulation may be published in the coming months which may impact
reporting in future years. The Committee intends to comply with any new requirements applicable to UK companies in future years.
Implementation of remuneration policy for 2018
Salary
Annual salary reviews take effect from April each year. For 2018, salaries for Executive Directors will be increased by 3.4% in line with
other UK-based employees. Salaries from April 2018 will be as follows:
BE Masojada
RC Watson
HA Hussain
April 2018
£
620,000
477,000
477,000
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Annual bonus
The maximum opportunity and overall bonus structure for the year ending 31 December 2018 will remain unchanged.
In determining the size of the Executive Director bonuses, the Committee uses the following framework to supports its decision
making process:
Pre-tax return on equity
Less than RFR* +<5%
RFR +5% to RFR +12.5%
RFR +10% to RFR +17.5%
RFR +15% to RFR +22.5%
RFR +20% to RFR +25%
Greater than RFR +22.5%
*Risk-free rate.
Indicative bonus range (% of max)
Nil
0-15%
15-40%
30-60%
50-70%
60-100%
These ranges enable the Committee to exercise judgement and flex payments (including downwards) based on the delivery
achievement of specific objectives and context in which performance has been delivered. Individual bonuses are determined
based on the results of the relevant business area, individual performance and the size of the relevant bonus pool. The Remuneration
Committee determines the bonuses to be paid to the Executive Directors based on judgement regarding the performance of the
Group and a robust assessment of individual performance. In our 2018 Directors remuneration report, we will provide further
disclosure of the individual performance factors considered for the determination of outcomes.
Long-term incentives
For 2018, PSP awards will be measured against growth in net asset value (NAV) plus dividends, measured on a per share basis.
The Committee deems growth in NAV to be the most appropriate metric for the PSP given that our strategy is built around the
objective of generating long-term shareholder value and NAV is aligned with shareholder value creation.
Awards will be subject to growth in net asset value plus dividends measured on a per share basis.
Minimum threshold vesting
Maximum vesting
Straight-line vesting between these points
Growth in net asset value plus dividend
measured on a per share basis
%
Proportion of PSP vesting
%
RFR + 6 = 7
RFR + 14 = 15
20
100
The maximum opportunity for all Executive Directors will be 200% of salary. We expect that risk-free rate (RFR) will not drop below
1% before the Hiscox remuneration policy is next due for renewal in 2020.
Membership of the Remuneration Committee
The Committee members at 31 December 2017 were C Foulger, R McMillan, L Carter, A MacDonald, T Hürlimann, M Goodwin,
C Miranthis and C Keogh (Chairman). 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 in 2013, following a competitive tender process. 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 on the development of the Company’s incentive arrangements. Total fees for advice
provided to the Committee during the year were £57,150. The Committee regularly reviews advice received and is satisfied it has been
objective and independent. During the year Deloitte also provided the Company with other tax and consulting services.
Statement of shareholder voting
At the AGM on 18 May 2017, the Directors’ annual report on remuneration received the following votes from shareholders:
For
%
Against
%
Withheld
Total votes
Remuneration policy
177,072,418
84.46
32,579,285
15.54
1,016,024
210,667,727
Annual report
on remuneration
164,615,533
80.74
39,277,567
19.26
6,774,627
210,667,727
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Remuneration policy
Hiscox has a forward-looking remuneration policy for its Board
members. The policy was last approved at the 2017 AGM
and is replicated below. For clarity we have updated the content
to reference how arrangements will be implemented in the
coming year; these are shown in italics. The original policy
can be viewed in the 2016 Annual Report and Accounts at
www.hiscoxgroup.com.
Future policy table
Executive Director remuneration
Base salary
Purpose and link to strategy
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.
Operation
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.
Maximum potential value
The salaries for current Executive Directors are set out on page 68.
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 (for example,
address market competitiveness, development in the role, or a change in role size, scope
or responsibility).
Performance metrics
Individual and business performance is taken into account when setting salary levels.
Application to broader
employee population
Process for review of salaries is consistent for all employees.
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Executive Director remuneration
Benefits (including retirement benefits)
Purpose and link to strategy
Employee benefits enable the Company to be competitive in the recruitment market when looking
to employ individuals of the calibre required by the business.
Operation
Retirement benefits
These vary by local country practice but all open Hiscox retirement schemes are based on
defined contributions or an equivalent cash allowance. This approach will be generally maintained
for any new appointments other than in specific scenarios (for example, local market practice
dictates other terms). For current Executive Directors, a cash allowance of up to 10% of salary
is paid in lieu of the standard employer pension contribution.
Certain Board members retain legacy interests in closed defined benefit schemes. However,
there is no entitlement to any further accrual under these plans.
Other benefits
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 (for example, travel allowance and relocation expenses).
Maximum potential value
Set at an appropriate level by reference to the local market practice and reflecting individual and
family circumstances.
Performance metrics
None.
Application to broader
employee population
Executive Directors’ benefits are determined on a basis consistent with all employees.
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Future policy table
Executive Director remuneration
Annual bonus
Purpose and link to strategy
To reward for performance against key objectives and achievement of financial results over the
financial year.
Provides a direct link between reward and performance.
To provide competitive compensation packages.
Operation
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 2018, the bonus pool will be funded by a set percentage of profits on
achievement of a hurdle rate of ROE. The bonus for prior years was determined on a similar basis.
Further detail is set out on page 69.
For Executive Directors, individual allocations from the pool are determined by the Remuneration
Committee based on a judgement of various factors including:
p size of the Group bonus pool;
p results of business area (where relevant); and
p individual performance.
Amounts are paid in accordance with the bonus deferral mechanism described opposite.
Bonus awards are non-pensionable.
Bonus awards are subject to malus and clawback provisions as described in the notes to the
policy table on page 82.
Maximum potential value
The maximum bonus opportunity for the Executive Directors will be as follows:
p CEO and CFO – 400% of salary;
p CUO – up to 500% of salary.
The Company has a robust track record of paying bonuses which are proportionate to financial
results, see page 69 of this report for further details. Where performance is deemed to be below
a predetermined 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 metrics
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.
Application to broader
employee population
The operation of the annual incentive is consistent for the majority of employees across the Group.
Arrangements tailored to roles and responsibilities are operated for selected positions. Bonuses
for more junior employees are calculated using a more formulaic approach. Further details are set
out on page 69.
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Executive Director remuneration
Bonus deferral
Purpose and link to strategy
Retention of employees.
Facilitate and encourage share ownership in order to align senior employees with Hiscox
shareholders.
Operation
Larger bonuses are normally deferred over a three-year period and paid subject to continuing
service as explained in the table below.
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, US$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
£50,000, €75,000, US$100,000, paid shortly
after the end of the financial year in which the
bonus was achieved.
Bonus above US$100,000 and below
US$200,000
Balance of bonus split 50% to be paid after
year two (24 months after the start of the bonus
year), and 50% after year three (36 months
after the start of the bonus year).
Bonus above £100,000, €150,000, US$200,000
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 in certain circumstances in order to enable the acquisition of Hiscox shares.
Such amounts remain subject to continued employment.
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 malus and clawback provisions as described in the notes to the
policy table on page 82.
N/A.
N/A.
Approach is consistent for all employees across the Group who are awarded a sizeable bonus.
Maximum potential value
Performance metrics
Application to broader
employee population
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Future policy table
Executive Director remuneration
Performance Share Plan (PSP)
Purpose and link to strategy
To motivate and reward for the delivery of long-term objectives in line with business strategy.
To encourage share ownership among participants and align interests with shareholders.
To provide competitive compensation packages for senior employees.
Operation
Awards are granted under the PSP approved by shareholders in 2016 (with previous awards
granted under the equivalent plan implemented in 2006). All awards are governed by the rules
of the relevant plan under which they are granted.
Share awards (typically structured as either conditional awards or nil cost options) are made
at the discretion of the Remuneration Committee.
Awards normally vest after a three-year period subject to the achievement of performance
conditions. An additional holding period, which is currently two years, may also apply.
Awards are generally subject to continued employment, however awards may vest to leavers
in certain scenarios (for example, ‘good’ leaver circumstances).
Dividends (or equivalents) may accrue on vested shares prior to release. Awards are subject
to malus and clawback provisions as described in the notes to the policy table on page 82.
Maximum potential value
Maximum annual grant of up to 200% of salary in respect of any one financial year.
Performance metrics
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. The 2018 PSP awards will be measured against
growth in net asset value plus dividends measured on a per share basis. Further details are set out
on page 75.
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. The minimum threshold vesting will be 20%, rather
than 25%, for 2018 PSP awards.
Where the Committee considers it appropriate to do so, under the plan rules the Committee is
able to modify performance criteria for outstanding awards on the occurrence of certain events
(for example, major disposal).
Application to broader
employee population
Participation in this plan is restricted to Executive Directors and other senior individuals.
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Future policy table
Executive Director remuneration
Shareholding guidelines
Purpose and link to strategy
To ensure Executive Directors are aligned with shareholder interests.
Operation
Within five years of becoming an Executive Director, individuals will normally be expected to own
Hiscox shares valued at 150% of salary. In 2018 this is increasing to 200%.
Maximum potential value
Performance metrics
Application to broader
employee population
N/A.
N/A.
Executive Directors are required to hold more shares than other senior managers.
Future policy table
Non Executive Director remuneration
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.
The current fees payable to Non Executive Directors are set out on page 71.
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 (for example, 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 (for example, Board Committee membership and
chairmanship). The fees for the Non Executive Directors (excluding the Chairman) are determined
by the Chairman.
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of Directors. For the avoidance of doubt
the Committee may continue to operate
the share awards under the 2006 and 2016
Performance Share Plan in accordance
with the rules (for example, the treatment of
awards in the context of a change of control
or other forms of corporate restructure).
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:
i) agreed before 15 May 2014 when the
first approved remuneration policy came
into effect; ii) agreed before the policy
set out above came into effect, provided
that the terms of the payment were
consistent with the shareholder-approved
Directors’ remuneration policy in force at
the time they were agreed; or iii) agreed
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.
Malus and clawback provisions
In respect of unvested compensation,
specifically deferred bonuses and
unvested Performance Share Plan
(PSP) awards, 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:
p a retrospective material restatement
of the audited financial results of
the Group for a prior period error
in accordance with IAS 8;
p actions of gross misconduct,
including fraud, by the participant or
their team leading to the Company
suffering significant reputational or
financial damage.
For awards granted in respect of 2015
and future years, in the circumstances
described above, annual bonus and PSP
awards granted to Executive Directors
shall also be subject to clawback
provisions for up to two years after the
end of the relevant performance period.
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:
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 on pages
76 to 81) to ensure that outcomes
for Executive Directors are based on
performance in-the-round rather than
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
– the key indicator of the Company’s
long-term success.
Detailed provisions
The Committee may make minor changes
to this remuneration policy to aid in its
operation or implementation without
seeking shareholder approval (for
example, for regulatory or administrative
purposes), provided that any such
change is not to the material advantage
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.
Performance measure targets
and target setting
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has been completed by the time of the
termination date.
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 awards
Treatment would be in accordance
with the plan rules and relevant grant
documentation. The intended approach
is summarised below.
p 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.
p 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 and Bermudian
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 a selection of
shareholders. The Remuneration
Committee takes into consideration
the range of views expressed in making
its decisions.
Through conversations with shareholders
during the last AGM season, some themes
emerged on how we could improve our
approach and the Committee is proposing
to make a number of changes to how the
policy will be implemented in the future.
These are summarised in the Chairman’s
letter on page 54.
Hiscox Ltd Report and Accounts 2017
83
p prevailing competitive pay levels
for the role;
p experience and skills of
the candidate;
p awards (shares or earned bonuses)
and other elements which will
be forfeited by the candidate;
p transition implications on
initial appointment.
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.
The objective of the Committee will be to
suitably limit any buy-out to the commercial
value forfeited by the individual.
On initial appointment (including interim
Director appointments) the maximum
level of variable remuneration (excluding
any buy-outs) is capped at the maximum
level set out in the policy table on pages
76 to 81. Within these limits and where
appropriate the Committee may tailor
the award (for example, time frame,
form, performance criteria) based on the
commercial circumstances. Shareholders
would be informed of the terms for any
such arrangements. Ordinarily, it would be
expected that the package on recruitment
would be consistent with the usual
ongoing Hiscox incentive arrangements.
On the appointment of a new Non
Executive 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 up to 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, including base pay, pension
contributions (or cash allowance as
appropriate) and other benefits (for
example, 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
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89 Financial summary
Remuneration policy
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
4,259
28%
56%
2,161
28%
41%
662
100%
31%
16%
000
646
1,665
31%
28%
512
100%
41%
31%
3,739
25%
61%
000
646
3,280
28%
56%
000
646
1,663
28%
41%
16%
510
100%
31%
14%
Below target
On target
Maximum
Below target
On target
Maximum
Below target
On target
Maximum
The charts above have been compiled using the following assumptions.
Fixed remuneration
Variable remuneration
Fixed reward (base salary, benefits and retirement benefit).
p Salary with effect from 1 April 2017.
p Benefits as received during 2017, as disclosed in the Executive Director remuneration table
on page 68.
p Retirement benefit as received during 2017, as disclosed in the Executive Director
remuneration table on page 68.
Assumptions have been made in respect of the annual incentive and the PSP for the purpose of
these illustrations.
p 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.
p PSP: scenario analysis assumes awards are granted at the maximum level set out in the
policy table on page 80. 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.
p Annual incentive: assume a bonus equivalent to 150% of salary.
p PSP: assume vesting of 50% of the maximum award.
Maximum performance
Fixed reward plus variable pay for the purpose of illustration as follows.
p Annual incentive: maximum bonus equivalent to 400% of salary for the CEO and CFO and
500% of salary for the CUO.
p PSP: assumes vesting of 100% of the maximum award.
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Directors’ report
The Directors have pleasure in submitting their Annual Report
and consolidated financial statements for the year ended
31 December 2017.
Management report
The Company is a holding company for
subsidiaries involved in the business of
insurance and reinsurance in Bermuda,
the USA, the UK, Guernsey, Europe and
Asia. The information that fulfils the
requirements of the management report
as referred to in Chapter 4 of the Disclosure
Guidance and Transparency Rules
(DTR), including additional explanation
of amounts included in the financial
statements and the branches of the Group
in different countries, can be found on
pages 10 to 17, 38 to 47 and 96 to 151.
The key performance indicators are
shown on page 2. Details of the use of
financial instruments are set out in note 20
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 10 to
17. 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 3.
A description of the principal risks and
uncertainties and how they are managed
or mitigated can be found in the risk
management section on pages 38 to 47.
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 non-financial reporting
disclosures including environmental,
employee and community issues,
anti-corruption, human rights and
anti-bribery are set out in the corporate
responsibility statement on pages 48
to 51. 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 DTR 7.2 can be found
on pages 55 to 59 and in this report.
Diversity
The composition of the Board is described
on pages 52 and 53. 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 table to the right. Hiscox’s
approach to inclusion and diversity is
outlined on pages 48 and 49.
Financial results
The Group achieved a pre-tax profit for the
year of £30.8 million (2016: £354.5 million).
Detailed results for the year are shown
in the consolidated income statement
on page 96, and also within the Group
financial performance section on pages
24 to 25.
Going concern
A review of the financial performance of
the Group is set out on pages 24 to 25.
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.
The confirmation required by C.2.1 of the
UK Corporate Governance Code can be
found on page 59.
After making enquiries, the Directors have
an expectation that the Company and the
Group have adequate resources to
Diversity
Hiscox Partners*
Employees
Male
%
77.6
50.9
Female
%
22.4
49.1
* Hiscox Partner is an honorary title given to
employees who make significant contributions
to the development and profitability of the Group.
The Partnerships encourages a proprietorial
attitude, and up to 5% of the total workforce
are Hiscox Partners.
29.0p
Total dividend payment for the year ended
31 December 2017.
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89 Financial summary
continue in operational existence for the
foreseeable future, a period of at least
12 months from the date of this report.
For this reason they continue to adopt
the going concern basis in preparing
the consolidated financial statements.
Viability
The statement required to be included
in the Annual Report under C.2.2 of the
UK Corporate Governance Code can
be found on page 59.
Dividends
An interim dividend of 9.5p (net) per
ordinary 6.5p share (2016: 8.5p (net),
per ordinary 6.5p share) was paid on
13 September 2017 in respect of the
year ended 31 December 2017. The
Directors are proposing payment of
a final dividend in respect of the year
ended 31 December 2017 of 19.5p
which will be paid on 12 June 2018
to shareholders on the register at
11 May 2018. In the previous year a final
dividend of 19p was paid. The Directors
have decided to offer a scrip alternative.
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 23 to the consolidated financial
statements. The ordinary shares of 6.5p
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 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 2017
Annual General Meeting to purchase in
the market up to 10% of the Company’s
issued ordinary shares. No shares have
been bought back under this authority
as at the date of this report.
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Hiscox Ltd Report and Accounts 2017
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:
Invesco Limited1
Massachusetts Financial Services Company1
FMR LLC1
BlackRock, Inc.1,2
Number
of shares
37,662,240
27,742,612
15,157,829
14,535,256
% of issued
share capital
as at
31 December
*
2017
13.12
9.67
5.28
5.07
* Per RNS announcement there were 286,961,264 shares in issue (excluding Treasury shares) as at
31 December 2017.
1Indirect holdings.
2Notified on 29 January 2018.
Directors
The names and details of all Directors of the
Company who served during the year and
up to the date of this report are set out on
pages 52 and 53. Details of the Chairman’s
professional commitments are included in
his biography on page 52 and there were
no changes during the year. The Bye-laws
of the Company govern the appointment
and replacement of Directors. Thomas
Hürlimann, Michael Goodwin and
Costas Miranthis were appointed by
the Board with effect from 16 November
2017 and they will submit themselves for
appointment as a Director by shareholders
at the Annual General Meeting. In
accordance with the UK Corporate
Governance Code, all other Directors
will submit themselves for re-appointment
at the Annual General Meeting.
Biographical details of the Directors are set
out on pages 52 and 53 and the reasons
why the Board believes they should be
appointed or re-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 (2016: £nil). Information
concerning the Group’s charitable
activities is contained in the report on
corporate responsibility on page 48 to 51.
Major interests in shares
As at the year end, the Company had been
notified of the interests of 5% or more of
voting rights in its ordinary shares outlined
in the table above.
Power of Directors
The powers given to the Directors
are contained in the Company’s
Bye-laws and are subject to relevant
legislation and, in certain circumstances
(including in relation to the issuing and
buying back by the Company of its
shares), approval by shareholders in a
general meeting. At the Annual General
Meeting in 2017, 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 2018.
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 remuneration
(page 80)
Note 23 to the
consolidated
financial statements
on employee share
schemes (page 135)
Annual General Meeting
The notice of the Annual General
Meeting, to be held on 17 May 2018,
will be contained in a separate circular
to be sent to shareholders. The deadline
for submission of proxies is 48 hours
before the meeting.
By order of the Board
Marc Wetherhill
Secretary
Any acquisitions or disposals of major
shareholdings notified to the Company
in accordance with DTR 5.1 are
announced and those announcements
are available on the Company’s website,
www.hiscoxgroup.com.
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
26 February 2018
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Directors’ responsibilities statement
The Directors responsible for
authorising the responsibility statement
on behalf of the Board are the Chairman,
Robert Childs, and the Chief Financial
Officer, Hamayou Akbar Hussain.
The statements were approved
for issue on 26 February 2018.
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 position and performance,
business model and strategy.
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. The
Directors explain in the Annual Report
their responsibility for preparing the
Annual Report and Accounts.
We confirm that to the best of
our knowledge:
p 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
p the management 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.
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#4. Take risks and grasp opportunities
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Financial highlights
2
3 Why invest in Hiscox?
8
Chairman’s statement
10 Chief Executive’s report
Building a balanced
18
business
Actively managed
business mix
Actively managed key
underwriting exposures
20
21
22 Capital
24
Group financial
performance
26 Group investments
28
Additional performance
measures
Ten good reasons to
work at Hiscox
29
38 Risk management
48 Corporate responsibility
52 Board of Directors
Chairman’s letter
54
to shareholders
55 Corporate governance
60 Audit Committee report
64
Letter from Chairman
of the Remuneration
Committee
66 Remuneration summary
Annual report on
68
remuneration 2017
Remuneration policy
76
85 Directors’ report
87
Directors’ responsibilities
statement
90
96
96
97
98
99
Independent auditor’s
report
Consolidated income
statement
Consolidated statement
of comprehensive
income
Consolidated balance
sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
100 Notes to the consolidated
financial statements
152 Five-year summary
Financial summary
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Independent auditor’s report to the Board of Directors and
the shareholders of Hiscox Ltd
We believe that the audit evidence
we have obtained is sufficient and
appropriate to provide a basis for
our opinion.
Independence
We are independent of the Group in
accordance with the International Ethics
Standards Board for Accountants’
Code of Ethics for Professional
Accountants (IESBA Code) and the
ethical requirements of the Chartered
Professional Accountants of Bermuda
Rules of Professional Conduct (CPA
Bermuda Rules) that are relevant to
our audit of the consolidated financial
statements in Bermuda. We have fulfilled
our other ethical responsibilities in
accordance with the IESBA Code
and the ethical requirements of the
CPA Bermuda Rules.
Report on the audit of the consolidated
financial statements
Our opinion
In our opinion, the consolidated
financial statements present fairly, in
all material respects, the consolidated
financial position of Hiscox Ltd (the
Company) and its subsidiaries (together
‘the Group’) as at 31 December 2017,
and their consolidated financial
performance and their consolidated
cash flows for the year then ended in
accordance with International Financial
Reporting Standards (IFRS) as adopted
by the EU.
What we have audited
The Group’s consolidated financial
statements comprise:
A the consolidated income
statement for the year ended
31 December 2017;
A the consolidated statement of
comprehensive income for the
year then ended;
A the consolidated balance sheet
as at 31 December 2017;
A the consolidated statement
of changes in equity for the
year then ended;
A the consolidated statement
of cash flows for the year then
ended; and
A the notes to the consolidated
financial statements, which
include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance
with International Standards on Auditing
(ISAs). Our responsibilities under those
standards are further described in the
Auditor’s responsibilities for the audit
of the consolidated financial statements
section of our report.
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Independent auditor’s
report
Our audit approach
Materiality
Audit
scope
Key audit
matters
Overview
A Overall group materiality: £19 million, which represents 0.75% of the gross
earned premium for the year ended 31 December 2017.
A The Group is a global specialist insurer and reinsurer. The Group’s financial
reporting is based on financial information from subsidiary entities which we
treat as ‘components’.
A We performed full scope audit procedures over four financially significant
components based in the United Kingdom and the United States.
A For other components, we identified certain account balances which were
considered to be significant in size or audit risk at the financial statement
line item level in relation to the Group’s consolidated financial statements,
and scoped the audit of these by performing specified procedures.
A For the remaining components that were not inconsequential analytical
procedures were performed by the Group engagement team.
A Valuation of incurred but not reported (IBNR) loss reserves and the
associated reinsurers share of IBNR loss reserves.
Audit scope
As part of designing our audit, we
determined materiality and assessed
the risks of material misstatement in
the consolidated financial statements.
In particular, we considered where
management made subjective judgements;
for example, in respect of significant
accounting estimates that involved
making assumptions and considering
future events that are inherently uncertain.
As in all of our audits, we also addressed
the risk of management override of
internal controls, including among other
matters consideration of whether there
was evidence of bias that represented a
risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced
by our application of materiality. An
audit is designed to obtain reasonable
assurance whether the consolidated
financial statements are free from material
misstatement. Misstatements may arise
due to fraud or error. They are considered
material if individually or in aggregate,
they could reasonably be expected to
influence the economic decisions of
users taken on the basis of the
consolidated financial statements.
Based on our professional judgement,
we determined certain quantitative
thresholds for materiality, including
the overall group materiality for the
consolidated financial statements as a
whole as set out in the table below. These,
together with qualitative considerations,
helped us to determine the scope of our
audit and the nature, timing and extent
of our audit procedures and to evaluate the
effect of misstatements, both individually
and in aggregate on the financial
statements as a whole.
We agreed with the Audit Committee that
we would report to them misstatements
identified during our audit above £959,000
as well as misstatements below that
amount that, in our view, warranted
reporting for qualitative reasons.
Overall Group materiality
£19 million
How we determined it
0.75% of gross earned premium
Rationale for the materiality
benchmark applied
In determining our materiality, we have
considered financial metrics which we
believe to be relevant to the primary
users of the Group’s consolidated
financial statements. We concluded
gross earned premium was the most
relevant benchmark to these users.
Gross earned premium provides a good
representation of the size and complexity
of the business and it is not distorted by
insured catastrophe events to which the
Group is exposed or the levels of external
reinsurance purchased by the Group.
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Key audit matter
Valuation of incurred but not reported
(IBNR) loss reserves and the associated
reinsurers share of IBNR loss reserves
Total gross IBNR loss reserves and the
associated reinsurers’ share of IBNR
loss reserves are material estimates
in the Group’s consolidated financial
statements and as at 31 December 2017
amount to £2,018 million and £744 million
respectively as set out in note 25. The
methodologies and assumptions used to
develop gross IBNR loss reserves and the
reinsurers’ share of IBNR loss reserves
involves a significant degree of judgement.
The valuation can be materially impacted
by numerous factors including:
A the underlying volatility attached
to estimates for the larger classes
of business, such as errors and
omissions, upstream energy and
professional indemnity, where
small changes in assumptions
can lead to large changes in the
levels of the estimate held and the
reported profit;
A the risk of inappropriate
assumptions used in determining
current year estimates. Given that
limited data is available, especially
for ‘long-tailed’ classes of business,
there is greater reliance on expert
judgement in their estimation;
A the judgements made in significant
areas of uncertainty, for example,
liability and casualty classes
of business;
A the risk that IBNR loss reserve
estimates in respect of natural
catastrophes and other large
claims losses are inappropriate.
There is significant judgement
involved in the estimation of such
loss estimates, particularly as
they are often estimated based
on limited data.
Independent auditor’s
report
How our audit addressed the key
audit matter
We have understood, evaluated and
tested the design and operational
effectiveness of key controls in place in
respect of the valuation of gross IBNR loss
reserves and the associated reinsurers’
share of IBNR loss reserves, which
included controls over the reconciliation
of data from the underlying systems and
the review and approval of the IBNR loss
reserves as components of insurance
liabilities and associated reinsurance
assets. On a sample basis we have
agreed the underlying source data
back to supporting documentation.
In performing our detailed audit work over
the valuation of gross IBNR loss reserves
and the associated reinsurers’ share of
IBNR loss reserves we used actuarial
specialists. Our procedures included
the following.
A Developing independent point
estimates for classes of business
considered to be higher risk,
particularly focusing on the largest
and most uncertain estimates, as at
30 September 2017 and performing
roll-forward testing to 31 December
2017. For these classes, we compared
our re-projected estimates to
those booked by management
to form part of our determination
as to whether the overall estimate
of gross IBNR loss reserves
represented a reasonable estimate.
A Testing for the other classes of
business (including those impacted
by natural catastrophes and other
large claims), the methodology and
assumptions used by management
to derive the gross IBNR loss
reserve estimates and assessing
whether these produced reasonable
estimates based on underlying
facts and circumstances.
A Performing analytical review
procedures over the remaining
classes of business to ascertain
the reasonableness of the gross
IBNR loss reserves.
A Applying gross to net ratios
against the estimated gross
IBNR loss reserves to calculate
the estimated reinsurer’s share
of IBNR loss reserves.
Based on the work performed, we found
that the IBNR loss reserves and the
associated reinsurers’ share of IBNR loss
reserves were supported by the evidence
we obtained.
Key audit matters
Key audit matters are those matters that,
in our professional judgment, were of
most significance in our audit of the
consolidated financial statements of
the current period. These matters were
addressed in the context of our audit
of the consolidated financial statements
as a whole, and in forming our opinion
thereon, and we do not provide a
separate opinion on these matters.
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How we tailored our Group audit scope
We tailored the scope of our audit in
order to perform sufficient work to
enable us to provide an opinion on the
consolidated financial statements as a
whole, taking into account the structure
of the Group, the accounting processes
and controls, and the industry in which
the Group operates.
Hiscox Ltd is the parent of a group of
entities. The financial information of
this Group is included in the consolidated
financial statements of Hiscox Ltd.
The Group is structured into four segments
(see Note 4 to the consolidated financial
statements) and is a consolidation of
over 50 separate legal entities.
The Group is a global specialist insurer
and reinsurer. The Group’s operations
primarily consist of the legal entity
operations in the United Kingdom, United
States and Bermuda. A full scope audit
was performed for four components
located in the United Kingdom and United
States. Specified audit procedures were
also performed in the United Kingdom and
Bermuda. Taken together this work gave
us over 90% coverage of the Group’s total
assets and 90% of gross earned premium.
The four full scope audit components
were: (i) Hiscox Dedicated Corporate
Member Syndicate No. 33, (ii) Hiscox
Dedicated Corporate Member Syndicate
No. 3624, (iii) Hiscox Insurance Company
Limited, and (iv) Hiscox Insurance
Company Inc. For other components, we
identified certain account balances which
were considered to be significant in size
or audit risk at the financial statement
line item level in relation to the Group’s
consolidated financial statements, and
scoped the audit of these by performing
specified procedures. Analytical procedures
over the remaining components that were
not inconsequential were performed by
the Group engagement team.
In establishing the overall approach to
the Group audit, we determined the type
of work that needed to be performed at
the reporting units by us, as the Group
engagement team, or component audit
teams within the PwC United Kingdom,
PwC United States and PwC Bermuda
firms operating under our instruction.
Where the work was performed by
component audit teams, we determined
the level of involvement we needed to
have in the audit work at those reporting
units to be able to conclude whether
sufficient appropriate audit evidence had
been obtained. The Group engagement
Independent auditor’s
report
team had regular interaction with the
component teams, and the engagement
leader visited the United Kingdom and
Bermuda during the audit process.
The engagement leader and senior
members of the Group engagement
team reviewed all reports with regards
to the audit approach and findings of
the component auditors in detail. This
together with additional procedures
performed at the Group level, as
described above, gave us the evidence
we needed for our opinion on the Group’s
consolidated financial statements as
a whole.
Other information
Management is responsible for the
other information. The other information
comprises the Annual Report (but does
not include the consolidated financial
statements and our auditor’s report
thereon), which we obtained prior to
the date of this auditor’s report.
Except as noted in the Report on other
legal and regulatory requirements
section, our opinion on the consolidated
financial statements does not cover
the other information and we do not
and will not express any form of
assurance conclusion thereon.
In connection with our audit of the
consolidated financial statements,
our responsibility is to read the other
information identified above and, in
doing so, consider whether the other
information is materially inconsistent
with the consolidated financial
statements or our knowledge
obtained in the audit, or otherwise
appears to be materially misstated.
If, based on the work we have performed
on the other information that we obtained
prior to the date of this auditor’s report,
we conclude that there is a material
misstatement of this other information,
we are required to report that fact. We
have nothing to report in this regard.
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Independent auditor’s
report
Responsibilities of management and
those charged with governance for
the consolidated financial statements
Management is responsible for the
preparation and fair presentation of
the consolidated financial statements
in accordance with IFRS 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.
In preparing the consolidated financial
statements, management is responsible
for assessing the Group’s ability to
continue as a going concern, disclosing,
as applicable, matters related to going
concern and using the going concern
basis of accounting unless management
either intends to liquidate the Group or
to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are
responsible for overseeing the Group’s
financial reporting process.
Auditor’s responsibilities for the audit of
the consolidated financial statements
Our objectives are to obtain reasonable
assurance about whether the consolidated
financial statements as a whole are free
from material misstatement, whether
due to fraud or error, and to issue an
auditor’s report that includes our opinion.
Reasonable assurance is a high level of
assurance, but is not a guarantee that an
audit conducted in accordance with ISAs
will always detect a material misstatement
when it exists. Misstatements can arise
from fraud or error and are considered
material if, individually or in the aggregate,
they could reasonably be expected to
influence the economic decisions of users
taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with
ISAs, we exercise professional judgment
and maintain professional scepticism
throughout the audit. We also:
A Identify and assess the risks of
material misstatement of the
consolidated financial statements,
whether due to fraud or error, design
and perform audit procedures
responsive to those risks, and obtain
audit evidence that is sufficient and
appropriate to provide a basis for our
opinion. The risk of not detecting a
material misstatement resulting from
fraud is higher than for one resulting
from error, as fraud may involve
collusion, forgery, intentional
omissions, misrepresentations,
or the override of internal control.
A Obtain an understanding of internal
control relevant to the audit 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 Group’s internal control.
A Evaluate the appropriateness of
accounting policies used and the
reasonableness of accounting
estimates and related disclosures
made by management.
A Conclude on the appropriateness
of management’s use of the going
concern basis of accounting and,
based on the audit evidence
obtained, whether a material
uncertainty exists related to
events or conditions that may cast
significant doubt on the Group’s
ability to continue as a going
concern. If we conclude that a
material uncertainty exists, we
are required to draw attention in
our auditor’s report to the related
disclosures in the consolidated
financial statements or, if such
disclosures are inadequate, to
modify our opinion. Our conclusions
are based on the audit evidence
obtained up to the date of our
auditor’s report. However, future
events or conditions may cause
the Group to cease to continue
as a going concern.
A Evaluate the overall presentation,
structure and content of the
consolidated financial statements,
including the disclosures, and
whether the consolidated financial
statements represent the underlying
transactions and events in a manner
that achieves fair presentation.
A Obtain sufficient appropriate audit
evidence regarding the financial
information of the entities or
business activities within the
Group to express an opinion
on the consolidated financial
statements. We are responsible
for the direction, supervision and
performance of the Group audit.
We remain solely responsible for
our audit opinion.
We communicate with those charged
with governance regarding, among other
matters, the planned scope and timing
of the audit and significant audit findings,
including any significant deficiencies in
internal control that we identify during
our audit.
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We also provide those charged with
governance with a statement that we
have complied with relevant ethical
requirements regarding independence,
and to communicate with them all
relationships and other matters that
may reasonably be thought to bear
on our independence, and where
applicable, related safeguards.
From the matters communicated with
those charged with governance, we
determine those matters that were of
most significance in the audit of the
consolidated financial statements of
the current period and are therefore
the key audit matters. We describe
these matters in our auditor’s report
unless law or regulation precludes
public disclosure about the matter or
when, in extremely rare circumstances,
we determine that a matter should not
be communicated in our report because
the adverse consequences of doing
so would reasonably be expected to
outweigh the public interest benefits
of such communication.
Report on other legal and
regulatory requirements
Going concern
The Directors have concluded that
it is appropriate to adopt the going
concern basis in preparing the financial
statements, as explained on pages
85 and 86. The going concern basis
presumes that the Group has adequate
resources to remain in operation, and that
the Directors intend it to do so, for at least
one year from the balance sheet date. As
part of our audit we have concluded that
the Directors’ use of the going concern
basis is appropriate. However, because
not all future events or conditions can be
predicted, these statements are not a
guarantee as to the Group’s ability to
continue as a going concern.
Directors’ remuneration
The Company voluntarily prepares a
report on Directors’ remuneration in
accordance with the provisions of the
UK Companies Act 2006. The Directors
have requested that we audit the part
of the report on Directors’ remuneration
specified by the UK Companies Act 2006
to be audited as if the Company were a
UK registered company.
In our opinion, the part of the report
on Directors’ remuneration to be
audited has been properly prepared
in accordance with the UK Companies
Act 2006.
Independent auditor’s
report
Corporate governance statement
Under the United Kingdom’s Listing
Rules we are required to review the part
of the Corporate Governance Statement
on pages 55 to 59 relating to eleven
provisions of the UK Corporate
Governance Code and the Directors
have requested that we also review their
statements on going concern and the
longer-term viability of the Company as
required for UK registered companies
with a premium listing on the London
Stock Exchange. Our review was
substantially less in scope than an audit
and only consisted of making inquiries
and considering the Directors’ process
supporting their statements; checking
that the statements are in alignment with
the relevant provisions of the Code; and
considering whether the statements are
consistent with the knowledge acquired
by us in the course of performing our
audit. We have nothing to report having
performed our review.
The engagement partner on the audit
resulting in this independent auditor’s
report is Arthur Wightman.
PricewaterhouseCoopers Ltd.
Chartered Professional Accountants
Hamilton, Bermuda
26 February 2018
Hiscox Ltd Report and Accounts 2017
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Financial summary
Consolidated income statement
For the year ended 31 December 2017
Income
Gross premiums written
Outward reinsurance premiums
Net premiums written
Gross premiums earned
Premiums ceded to reinsurers
Net premiums earned
Investment result
Other income
Total income
Expenses
Claims and claim adjustment expenses
Reinsurance recoveries
Claims and claim adjustment expenses, net of reinsurance
Expenses for the acquisition of insurance contracts
Reinsurance commission income
Operational expenses
Net foreign exchange gains
Total expenses
Results of operating activities
Finance costs
Share of profit 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
*Reclassification of investment fees, see note 2.1.
Consolidated statement of comprehensive income
For the year ended 31 December 2017
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss:
Remeasurements of the net defined benefit obligation
Income tax on the remeasurement of other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations
Income tax on the remeasurement of other comprehensive income
Other comprehensive (expense)/income net of tax
Total comprehensive (expense)/income for the year (all attributable to owners of the Company)
The notes on pages 100 to 151 are an integral part of these consolidated financial statements.
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Hiscox Ltd Report and Accounts 2017
Note
2017
Total
£000
*
2016
Total
£000
4 2,549,279 2,402,579
(614,636)
1,787,943
(685,046)
4 1,864,233
2,556,993 2,220,853
(545,840)
1,675,013
(682,512)
1,874,481
81,263
41,955
1,997,699
70,630
37,594
1,783,237
(1,931,417)
914,416
(1,017,001)
(619,704)
163,599
(410,380)
(62,753)
(1,946,239)
(1,004,601)
264,829
(739,772)
(538,467)
128,627
(411,358)
152,408
(1,408,562)
51,460
(20,863)
201
30,798
(4,488)
26,310
374,675
(20,266)
134
354,543
(17,557)
336,986
9.3p
9.0p
119.8p
116.0p
4
7
9
25.2
25.2
25.2
16
16
9
10
15
27
30
30
2017
Total
£000
2016
Total
£000
26,310
336,986
8,661
(1,768)
6,893
(46,531)
9,502
(37,029)
(53,483)
–
(53,483)
(46,590)
(20,280)
111,094
–
111,094
74,065
411,051
2
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89
Financial summary
Consolidated balance sheet
At 31 December 2017
Assets
Goodwill and 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
Equity 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
2017
£000
2016
£000
13
14
15
28
16
18
137,814
48,614
7,943
39,602
330,466
123,724
48,425
13,835
41,392
346,592
3,807,143 3,792,033
805,649
802,906
2,406
664,816
6,641,778
17, 25 1,357,966
830,704
4,235
642,789
7,207,276
22
19
23
23
23
19,141
27,128
89,864
148,789
19,060
18,035
89,864
202,272
24
24 1,468,639 1,488,306
1,817,537
1,753,561
866
866
1,818,403
1,754,427
56,139
47,492
17,030
–
28
25 4,450,182 3,852,976
276,293
18
21,735
599,202
5,452,849 4,823,375
6,641,778
7,207,276
289,714
7,004
658,457
26
29
The notes on pages 100 to 151 are an integral part of these consolidated financial statements.
The consolidated financial statements were approved by the Board of Directors on 26 February 2018 and signed on its behalf by:
HA Hussain
Chief Financial Officer
BE Masojada
Chief Executive Officer
Hiscox Ltd Report and Accounts 2017
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Financial summary
Consolidated statement of changes in equity
Balance at 1 January 2016
Profit for the year (all attributable
to owners of the Company)
Other comprehensive income 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
Shares purchased by Trust
Shares issued in relation to
Scrip Dividend
Dividends paid to owners of
the Company
Balance at 31 December 2016
Profit for the year (all attributable
to owners of the Company)
Other comprehensive income 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
Net movements of treasury
shares held by Trust
Shares issued in relation to
Scrip Dividend
Dividends paid to owners of
the Company
Balance at 31 December 2017
23
28
23, 31
23
28
23, 31
Note
Share
capital
£000
Share
premium
£000
Contributed
surplus
£000
Currency
translation
reserve
£000
Retained
earnings
£000
Equity
attributable to
owners of the
Company
£000
Non-
controlling
interest
£000
Total
equity
£000
19,030
15,231
89,864
91,178 1,312,660 1,527,963
866 1,528,829
–
336,986
336,986
–
336,986
–
–
–
22
–
–
8
–
–
–
1,534
–
–
1,270
–
–
–
–
–
–
–
111,094
(37,029)
74,065
–
–
–
–
–
26,274
–
26,274
1,556
1,907
(38,558)
1,907
(38,558)
–
1,278
31
–
19,060
–
18,035
–
(113,934)
89,864 202,272 1,488,306 1,817,537
(113,934)
–
–
–
–
58
–
–
–
–
–
4,681
–
–
23
4,412
–
–
–
–
–
–
–
–
26,310
26,310
(53,483)
6,893
(46,590)
–
–
–
–
–
25,186
–
25,186
4,739
5,300
5,300
(2,900)
(2,900)
–
4,435
–
–
–
–
–
–
74,065
26,274
1,556
1,907
(38,558)
1,278
–
(113,934)
866 1,818,403
–
–
–
–
–
–
–
26,310
(46,590)
25,186
4,739
5,300
(2,900)
4,435
31
–
19,141
–
27,128
–
89,864
–
(80,456)
(80,456)
148,789 1,468,639 1,753,561
–
(80,456)
866 1,754,427
The notes on pages 100 to 151 are an integral part of these consolidated financial statements.
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Financial summary
Consolidated statement of cash flows
For the year ended 31 December 2017
Profit before tax
Adjustments for:
Net foreign exchange losses/(gains)
Interest and equity dividend income
Interest expense
Net fair value losses/(gains) on financial assets
Depreciation, amortisation and impairment
Charges in respect of share-based payments
Changes in operational assets and liabilities:
Insurance and reinsurance contracts
Financial assets carried at fair value
Financial liabilities carried at fair value
Financial liabilities carried at amortised cost
Other assets and liabilities
Interest received
Equity dividends received
Interest paid
Current tax paid
Cash flows from subscriptions (paid)/received in advance
Net cash flows from operating activities
Cash flows from the sale of subsidiaries
Cash flows from the purchase of associates
Cash flows from sale 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 decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Net decrease in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at 31 December
Note
2017
£000
*
2016
£000
30,798
354,543
62,753
(63,296)
20,863
(26,656)
21,651
25,186
(152,408)
(54,789)
20,266
(13,786)
28,162
26,274
9, 13, 14
9, 23
223,794
(183,532)
13,311
110
(53,780)
55,940
554
(19,910)
(32,139)
(6,918)
68,729
14,571
–
23,770
(6,721)
(28,575)
3,045
4,739
(2,900)
(76,021)
(74,182)
(2,408)
251,836
(431,324)
458
156
3,687
55,273
505
(21,852)
(6,108)
(4,000)
56,893
(3,881)
(450)
2
(5,770)
(20,909)
(31,008)
1,556
(38,558)
(112,656)
(149,658)
(123,773)
15
23
23
23, 31
664,816
(2,408)
(19,619)
642,789
727,880
(123,773)
60,709
664,816
22
*£17,477,000 of cash derecognised on loss of control has been reclassified to cash flows from the sale of subsidiaries in 2016.
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 totalling £132 million (2016: £136 million) not
available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, £11 million
(2016: £38 million) is pledged cash held against Funds at Lloyd’s, and £5 million (2016: £13 million) held within trust funds
against reinsurance arrangements.
The notes on pages 100 to 151 are an integral part of these consolidated financial statements.
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Financial summary
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 2,700 staff.
The Company is registered and domiciled
in Bermuda and on 12 December 2006
its ordinary shares were listed on the
London Stock Exchange. The address
of its registered office is: 4th Floor,
Wessex House, 45 Reid Street,
Hamilton HM 12, Bermuda.
2 Basis of preparation
The consolidated financial statements
have been prepared and approved by the
Directors in accordance with International
Financial Reporting Standards (IFRS) as
adopted by the European Union, Section
4.1 of the Disclosure and Transparency
Rules and the Listing Rules, both issued
by the Financial Conduct Authority (FCA)
and in accordance with the provisions of
the Bermuda Companies Act 1981.
The consolidated financial statements
have been prepared under the
historical cost convention, except that
pension scheme assets included in the
measurement of the employee retirement
benefit obligation which is determined
using actuarial analysis, and certain
financial instruments including derivative
instruments, are measured at fair value.
In accordance with IFRS 4 Insurance
Contracts, the Group continues to apply
the existing accounting policies that
100
Hiscox Ltd Report and Accounts 2017
were applied prior to the adoption of
IFRS (‘grandfathered’) or the date of the
acquisition of the entity. IFRS accounting
for insurance contracts in UK companies
was grandfathered at the date of transition
to IFRS and determined in accordance
with accounting principles generally
accepted in the UK.
Items included in the financial statements of
each of the Group’s entities are measured
in the currency of the primary economic
environment in which that entity operates
(the functional currency). The consolidated
financial statements are presented in
Pounds Sterling and are rounded to the
nearest thousand unless otherwise stated.
The balance sheet of the Group is presented
in order of increasing liquidity. All amounts
presented in the income statements and
statement of comprehensive income
relate to continuing operations.
The financial statements were approved
for issue by the Board of Directors on
26 February 2018.
2.1 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 in note 2.22.
Except as described below and overleaf,
the accounting policies adopted are
consistent with those of the previous
financial year.
Changes in accounting policies
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 2017. They have been
applied in preparing these consolidated
financial statements. There were no new
standards, amendments or interpretations
that had a material impact on the Group.
The amendments included minor changes
to the following standards:
– Amendments to IAS 7 Statement
of Cash Flows: Disclosure Initiative.
The amendments require entities
to provide disclosure of changes in
their liabilities arising from financing
activities including both changes
arising from cash flows and non-cash
changes (such as foreign exchange
gains or losses). The Group has
provided the information for both
the current and the comparative
period in the consolidated
statement of cash flows.
– Amendments to IAS 12 Income
Taxes: Recognition of Deferred Tax
Assets for Unrealised Losses. The
amendments clarify the accounting
for deferred tax assets on unrealised
losses and state that deferred tax
assets should be recognised when
an asset is measured at fair value
and that fair value is below the asset’s
tax base. It also provides further
clarification on the estimation of
probable future taxable profits that
may support the recognition of
deferred tax assets. The adoption
of this amendment has no impact on
the consolidated financial statements
as the clarifications are consistent
with our existing interpretation.
The following new standards,
amendments to standards and
interpretations are effective for annual
periods beginning after 1 January 2018
and have not been applied in preparing
these financial statements.
– IFRS 15 Revenue from Contracts
with Customers replaces IAS 18 and
establishes principles for revenue
recognition that apply to all contracts
with customers except for insurance
contracts, financial instruments,
and lease contracts. It requires an
entity to recognise revenue when a
customer obtains control of a good or
service and thus has the ability to
direct the use and obtain the benefits
from the good or service. In particular,
it specifies that variable consideration
is only recognised to the extent that it
is highly probable that a significant
reversal will not occur. The Group will
adopt this standard on 1 January
2018 and expects no significant
impact on the Group’s financial
statements. IFRS 15 has been
endorsed by the EU.
– IFRS 9 Financial Instruments
incorporates new classification and
measurements requirements for
financial assets, the introduction of
an expected credit loss impairment
model which will replace the incurred
loss model of IAS 39 and new hedge
accounting requirements. Under
IFRS 9, all financial assets will be
measured at either amortised cost or
fair value. The basis of classification
depends on the entity’s business
model and the contractual cash flow
characteristics of the financial asset.
The hedge accounting requirements
2 Basis of preparation
2.1 Significant accounting policies
Changes in accounting policies continued
are more closely aligned with risk
management practices and follow
a more principle-based approach.
The amendments to IFRS 4
Insurance Contracts issued in
2016 address the accounting
consequences of applying IFRS 9
to insurers prior to the adoption of
IFRS 17 Insurance Contracts. The
amendments include an optional
temporary exemption from applying
IFRS 9 that is available to companies
whose predominant activity is to
issue insurance contracts until the
earlier of the effective date of IFRS 17
or 2021. The Group meets the
eligibility criteria and will adopt this
approach. Based on a high-level
impact assessment using currently
available information, the Group
expects no significant impact on its
balance sheet and equity, except
for the effect of applying the new
impairment requirements. The Group
expects a recognition of an earlier
and higher loss allowance resulting
in a slightly lower equity and will
perform a detailed assessment in
the future to determine the extent.
IFRS 9 has been endorsed by the EU.
– IFRS 16 Leases replaces IAS 17
Leases and addresses the
definition of a lease, recognition
and measurement of leases.
Leasee will be required to account
for all operating leases in a similar
manner to the current financial lease
accounting recognising lease assets
and liabilities on balance sheet. In
addition, the current rental charge
in the income statement will be
replaced with a depreciation charge
for the lease assets and the interest
expense for the lease liabilities. The
Group is currently assessing the
impact of adopting the standard
and will adopt it on 1 January 2019.
IFRS 16 has been endorsed by
the EU.
– IFRS 17 will replace IFRS 4 and
sets out requirements relating to
the measurement, presentation
and disclosure of insurance
contracts. It prescribes a general
measurement model based on the
discounted current estimates of
future cash flows including an explicit
risk adjustment and a contractual
service margin which represents the
unearned profit of the contracts.
Application of a simplified premium
allocation approach, which is similar
to the current unearned premium
approach, is permitted if it provides
a measurement that is not materially
different from the general model or
if the coverage period is one year or
less. IFRS 17 requires any expected
losses arising from loss-making
contracts to be accounted for
in income statement when the
entity determines that losses are
expected. The Group plans to adopt
the new standard on the required
effective date of 1 January 2021.
The Group is evaluating the impact
of adopting IFRS 17 on the Group’s
financial statements. IFRS 17 has
not been endorsed by the EU.
In 2017, the Group changed the
presentation of investment result in
the consolidated income statement to
be investment result net of investment
management fees. The prior year figures
have been reclassified accordingly by an
amount of £4.4 million from operational
expenses to investment results.
2.2 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.
The Group applies the acquisition method
to account for business combinations.
The consideration transferred for the
acquisition of a subsidiary is the fair value
of the assets transferred, the liabilities
incurred to the former owners of the
acquiree and the equity interests
issued by the Group. The consideration
transferred also includes the fair value
of any asset or liability resulting from a
contingent consideration arrangement.
Identifiable assets acquired, liabilities
and contingent liabilities assumed in a
business combination are measured initially
at their fair values at the acquisition date.
The Group recognises any non-controlling
interest in the acquiree on an acquisition-
by-acquisition basis, either at fair value or at
the non-controlling interest’s proportionate
share of the recognised amounts of
acquiree’s identifiable net assets.
Transactions with non-controlling
interests that do not result in loss of
control are accounted for as equity
transactions – that is, as transactions
with the owners in their capacity as
owners. The difference between fair
value of any consideration paid and the
relevant share acquired of the carrying
value of net assets of the subsidiary is
recorded in equity. Gains or losses on
disposals to non-controlling interests
are also recorded in equity.
(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.
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2.3 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’). Entities operating in France,
Germany, The Netherlands, Spain,
Portugal, Ireland and Belgium have
functional currency of Euros; those
subsidiary entities operating from the US,
Bermuda, Guernsey and Syndicate 3624
have functional currency of US Dollars.
Functional currencies of entities operating
in Asia include US Dollars, Singapore
Dollars and Thai Baht. All other entities
have functional currency of Sterling.
– 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 acquiring entity’s
assets and liabilities and are translated
at the rate at acquisition. 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.
(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
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2.4 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.
Land is not depreciated as it is deemed
to have an indefinite useful economic life.
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, less their residual values, over
their estimated useful lives.
The rates applied are as follows:
– buildings
– vehicles
– leasehold improvements
20–50 years
3 years
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.
2.5 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 1 January
2004, goodwill is included on the basis
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.
Goodwill is allocated to the Group’s cash
generating units identified according to
the smallest identifiable unit to which
cash flows are generated.
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.
Any impairment charges are presented
as part of operational expenses. Gains
and losses on the disposal of an entity
include the carrying amount of goodwill
relating to the entity sold.
(b) Other intangible assets
Intangible assets acquired separately
from a business are carried initially at
cost. An intangible asset acquired as
part of a business combination is
recognised outside of goodwill if the
asset is separable or arises from
contractual or other legal rights and
its fair value can be measured reliably.
Customer relationships, syndicate
capacity and software acquired are
capitalised at cost, being the fair value
of the consideration paid. Software is
capitalised on the basis of the costs
incurred to acquire and bring it into use.
2 Basis of preparation
2.5 Intangible assets
(b) Other intangible assets continued
Intangible assets with infinite lives such
as syndicate capacity are subsequently
valued at cost and are subject to annual
impairment assessment.
Intangible assets with finite useful
lives are consequently carried at cost,
less accumulated amortisation and
impairment. The useful life of the asset
is reviewed annually. Any changes in
estimated useful lives are accounted
for prospectively with the effect of the
change being recognised in the current
and future periods, if relevant.
Amortisation is calculated using the
straight-line method to allocate the
cost over the estimated useful lives
of the intangible assets.
Subsequent expenditure on other
intangible assets is capitalised only
when it increases the future economic
benefits embodied in the specific asset
to which it relates. All other expenditure
is expensed as incurred.
These intangible assets with finite
lives will be assessed for indicators
of impairment at each reporting
date. Where there is an indication of
impairment then a full impairment test
is performed. An impairment loss
recognised for an intangible asset
in prior years should be reversed if,
and only if, there has been a change
in the estimates used to determine
the asset’s recoverable amount
since the last impairment loss
was recognised.
2.6 Fair value
Fair value is the price that would be
received to sell an asset or paid to
transfer a liability in an orderly transaction
between market participants at the
measurement date, regardless of
whether that price is directly observable
or estimated using another valuation
technique. This presumes that the
transaction takes place in the principal
(or most advantageous) market under
current market conditions. Fair value
is a market-based measure and in the
absence of observable market prices
in an active market, it is measured
using the assumptions that market
participants would use when pricing
the asset or liability.
The fair value of a non-financial asset
is determined based on its highest and
best use from a market participant’s
perspective. When using this approach,
the Group takes into account the asset’s
use that is physically possible, legally
permissible and financially feasible.
The best evidence of the fair value of a
financial instrument at initial recognition
is normally the transaction price, i.e. the
fair value of the consideration given
or received.
If an asset or a liability measured at fair
value has a bid price and an ask price,
the price within the bid-ask spread that
is most representative of fair value in the
circumstances is used to measure fair
value. An analysis of fair values of financial
instruments and further details as to
how they are measured are provided
in note 21.
2.7 Financial assets and liabilities
including loans and receivables
The Group classifies its 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 assets based on the purpose
for which the financial assets at initial
recognition. The decision by the Group
to designate 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.
Purchases and sales of investments
are accounted for at the trade date.
Financial assets and liabilities are
initially recognised at fair value.
Subsequent to initial recognition
financial assets and liabilities 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.
(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 a 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.
(c) Long-term debt
All borrowings are initially recognised
at fair value. Subsequent to initial
recognition, borrowings are measured at
amortised cost. Any difference between
the value recognised at initial recognition
and the ultimate redemption amount
is recognised in the income statement
over the period to redemption using
the effective interest method.
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.
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.
2.10 Derivative financial instruments
(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
and products; and
– the disintegration of the active
market(s) to which the asset is related.
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2.10 Derivative financial
instruments continued
(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. Where
an impairment loss subsequently
reverses, the carrying amount of the
asset is increased to the revised
estimate of its recoverable amount,
but only to the extent 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.
2.11 Derivative financial instruments
Derivatives are initially recognised
at fair value on the date on which a
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derivative contract is entered into and
are subsequently valued at 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 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).
2.12 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.
2.13 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. 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.
2.14 Insurance contracts
(a) Classification
Insurance contracts are defined as
those containing significant insurance
risk if, and only if, an insured event
could cause an insurer to make
significant additional payments in any
scenario, excluding scenarios that lack
commercial substance, at the inception
of the contract. Such contracts remain
insurance contracts until all rights and
obligations are extinguished or expire.
The Group issues short-term casualty
and property insurance contracts that
transfer significant insurance risk.
Such contracts may also transfer
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 determined
based on the best estimate of the
cost of future claim payments plus an
allowance for risk and uncertainty. Any
estimate represents a determination
within a range of possible outcomes
using, as inputs, the assessments for
individual cases reported to the Group,
statistical analysis for the claims incurred
but not reported, an estimate of the
expected ultimate cost of more complex
claims that may be affected by external
factors, for example, court decisions and
an allowance for quantitive uncertanties
not otherwise approved.
2 Basis of preparation
2.14 Insurance contracts continued
(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
business unit 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 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. Amounts recoverable
from or due to reinsurers are measured
consistently with the amounts associated
with the reinsured insurance contracts
and in accordance with the terms of
each reinsurance contract.
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) Retroactive reinsurance transactions
Reinsurance transactions that transfer
risk but are retroactive are included
in reinsurance assets. The excess of
estimated liabilities for claims and
claim expenses over the consideration
paid is established as a deferred credit
at inception. The deferred amounts
are subsequently amortised using the
recovery method over the settlement
period of the reserves and reflected
through the claims and claim adjustment
expenses line. In transactions where
the consideration paid exceeds the
estimated liabilities for claims and claim
adjustment expenses a loss is recognised
immediately. If the adverse development
exceeds the original loss, deferred gains
are recorded. The deferred gains are
subsequently recognised into earnings
over the settlement period of the reserves.
(g) Reinsurance commission income
Reinsurance commission income
represents commission earned from
ceding companies which is earned over
the terms of the underlying reinsurance
contracts and presented separately in
the consolidated income statement.
(h) 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 the income statement.
(i) 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.
2.15 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.
2.16 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.
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2.16 Employee benefits
(a) Pension obligations continued
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.
Plan assets include 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 the income statement
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.
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(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
the 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 (for example, 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.
The Group 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.
(f) Accumulating compensation benefits
The Group recognises a liability
and an expense for accumulating
compensation benefits (for example,
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.
2.17 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 Basis of preparation continued
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
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
that an outflow of economic benefits
will be required to settle that obligation.
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 significant 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
2017 is £2,018 million (2016: £1,588 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 25.
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.
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,
as shown in note 28. 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.
2.23 Reporting of additional
performance measures
The Directors consider that the profit
excluding foreign exchange gains/
(losses), the claims ratio, expense ratio
and combined ratio measures reported
in respect of operating segments and
the Group overall in 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 four 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 in notes 5 and
6, are likewise considered to be additional
performance measures.
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 note 29.
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
107
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 3 Management of risk continued
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 through the
Risk Committee and ongoing compliance
therewith, 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, 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 and tax risks as
detailed in note 3.4. 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 and risk appetite seeking to exploit
identified opportunities in the light of other
relevant anticipated market conditions.
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
108
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 aggregate
bad underwriting year.
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. Regular 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 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 21,
are extreme hypothetical events selected
to represent major events occurring in
areas with large insured values. 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 unprecedented, 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’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 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.
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 3 Management of risk
3.1 Insurance risk
i) Underwriting risk continued
Below is a summary of the gross and net insurance liabilities for each category of business.
Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2017
Total
Gross
Net
Reinsurance
inwards
£000
1,109,392
346,899
Property –
marine and
major assets
£000
235,541
187,936
Property –
other
assets
£000
Casualty –
professional
indemnity
£000
Casualty –
other risks
£000
*
Other
£000
Total
£000
853,195 1,389,679
543,136 1,292,317
474,753
385,597
387,622 4,450,182
336,331 3,092,216
Types of insurance risk in the Group
Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2016
Gross
Total
Net
Reinsurance
inwards
£000
669,697
414,442
Property –
marine and
major assets
£000
351,355
257,926
Property –
other
assets
£000
Casualty –
professional
indemnity
£000
Casualty –
other risks
£000
*
Other
£000
Total
£000
800,738 1,217,956
540,040 1,162,338
455,021
373,776
358,209 3,852,976
298,805 3,047,327
Types of insurance risk in the Group
*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 the gross 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.
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.
109
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 2
Strategic report
37 Governance
63 Remuneration
89
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.1 Insurance risk
i) Underwriting risk continued
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) 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.
110
Hiscox Ltd Report and Accounts 2017
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.
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.
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 25.
The Group’s provision estimates are
subject to rigorous review by senior
management from all areas of the
business. The managed syndicates
receive a review of their estimates
from independent actuaries. The final
provision is approved by the relevant
boards on the recommendation of
dedicated reserving committees.
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
3 Management of risk
3.1 Insurance risk
ii) Reserving risk continued
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 elements 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 loans
and receivables at amortised cost and
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
funds shown in note 21, 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 2017, 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 21 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 2017 was £334 million
(2016: £305 million). These may be
analysed as follows:
Nature of equity and
unit trust holdings
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
2017
% weighting
2016
% weighting
3
67
30
43
57
3
66
31
41
59
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. 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. A 10% downward
correction in equity prices at 31 December
2017 would have been expected to
reduce Group equity and profit after tax
for the year by approximately £30.5 million
(2016: £28.0 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 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.
111
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Strategic report
37 Governance
63 Remuneration
89
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(c) Interest rate risk continued
The Group may also, from time to time,
enter into interest rate future contracts
in order to reduce interest rate risk on
specific portfolios. The fair value of debt
and fixed income assets in the Group’s
balance sheet at 31 December 2017
was £3,430 million (2016: £3,415 million).
These may be analysed below as follows:
Nature of debt and fixed
income holdings
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
2017
%
weighting
2016
%
weighting
34
14
3
4
1
1
40
3
30
13
5
5
2
1
41
3
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 £53 million
(2016: £61 million) assuming that the only
balance sheet area impacted was debt
and fixed income financial assets. Duration
is the weighted average length of time
required for an instrument’s cash 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 18.
112
Hiscox Ltd Report and Accounts 2017
At 31 December 2017, no amounts
were outstanding on the Group’s
borrowing facility (2016: £nil). At
31 December 2017, the Group had
long-term debt of £275 million
(2016: £275 million) being fixed-to-floating
rate notes, as explained in note 18. The
floating rate becomes effective from
November 2025. 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 32.
(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.
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, but collateral may be requested
to be held against these 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 Credit 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 as
well as detailed analysis from our internal
credit analysis team. The financial analysis
of reinsurers produces an assessment
categorised by 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.
3 Management of risk
3.2 Financial risk
(d) Credit risk continued
The Group also mitigates counterparty credit risk by concentrating debt and fixed income investments in high-quality instruments,
including a particular emphasis on government bonds issued mainly by North American countries and the European Union.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and unit trusts,
based on S&P or equivalent rating, is presented below:
As at 31 December 2017
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 2016
Debt and fixed income securities
Deposits with credit institutions
Reinsurance assets
Cash and cash equivalents
Total
Amounts attributable to largest single counterparty
Note
18
18
17
22
Note
18
18
17
22
AAA
£000
AA
£000
A
£000
Other/
non-rated
£000
Total
£000
–
365,071
117,544
600,567 1,635,200
1,892
214,635
33,700
691,056
2,595
774,749
472,547
1,083,182 1,885,427 1,940,947
87,357
929,153
177,715
AAA
£000
–
196,484
21,188
A
AA
£000
£000
651,362
631,414 1,577,814
5,252
5,194
419,598
165,708
531,178
87,641
849,086 1,836,357 1,607,390
179,857
793,654
155,887
833
503,420 3,430,243
5,320
3,511 1,357,966
642,789
526,762 5,436,318
18,998
16,602
Other/
non-rated
£000
Total
£000
554,359 3,414,949
24,592
14,146
805,649
23,859
664,816
24,809
617,173 4,910,006
23,756
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 largest counterparty exposure within the AAA rating at 31 December 2017 is a fully collateralised recoverable from Kiskadee
(2016: German government). For the AA rating it is with the US Treasury at both 31 December 2017 and 2016. Other/non-rated assets
include £462 million rated as BBB (2016: £511 million).
At 31 December 2017 and 2016 the Group held no material debt or fixed income assets that were past due or impaired beyond their
reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities.
The Group’s AAA rated reinsurance assets include fully collateralised positions at 31 December 2017 and 2016.
(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.
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3.2 Financial risk
(e) Liquidity risk continued
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
Total
Debt and
fixed income
securities
£000
Deposits
with credit
institutions
£000
Cash
and cash
equivalents
£000
2017
Total
£000
2016
Total
£000
796,587
1,065,768
1,174,164
393,724
3,430,243
4,030
1,290
–
–
5,320
642,789 1,443,406 1,392,555
– 1,067,058 1,007,139
– 1,174,164 1,183,179
521,484
–
393,724
642,789 4,078,352 4,104,357
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 quarterly 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
2017
Years
3.67
3.63
2.39
1.92
2016
Years
3.37
4.07
3.96
1.90
The following is an analysis by liability type of the estimated timing of net cash flows based on the gross 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 gross 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 gross 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
2017
Total
£000
434,435
85,099
264,684
299,922
115,755
149,488
1,349,383
270,428
52,171
154,113
287,940
86,990
38,322
889,964
205,379
43,371
70,514
266,957
140,687
27,333
754,241
46,879
11,385
8,251
101,673
54,471
6,393
957,121
192,026
497,562
956,492
397,903
221,536
229,052 3,222,640
Within
one year
£000
Between one
and two years
£000
Between two
and five years
£000
Over
five years
£000
2016
Total
£000
227,438
119,114
202,617
231,754
86,609
103,556
971,088
117,669
73,272
84,902
243,872
72,901
31,794
624,410
123,975
78,464
41,573
279,303
138,789
29,051
691,155
511,745
42,663
298,338
27,488
340,315
11,223
872,470
117,541
361,854
63,555
16,701
181,102
279,171 2,565,824
*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.
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 20 and 26.
(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:
– 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.
114
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
3 Management of risk
3.2 Financial risk
(f) Currency risk continued
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 and Asian 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 12).
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 20. All foreign currency derivative transactions with external parties
are managed centrally. Included in the tables below are net non-monetary liabilities of £205 million (2016: £249 million) which are
denominated in foreign currencies.
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.
The currency profile of the Group’s assets and liabilities is as follows:
As at 31 December 2017
Intangible assets
Property, plant and equipment
Investments in associates
Deferred income 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 carried at fair value
Current tax
Trade and other payables
Total liabilities
Total equity
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
123,762
40,445
7,387
5,084
12,328
4,136
153
33,917
98,557 179,461
797,714 2,610,476
120,261 1,172,615
267,667 466,335
–
–
3,035
403
601
45,766
331,724
41,853
67,392
25
157,697 329,065 110,987
601,786
4,210
1,622,784 4,808,486
1,724
998
–
–
137,814
48,614
7,943
39,602
6,682 330,466
67,229 3,807,143
23,237 1,357,966
29,310 830,704
4,235
45,040 642,789
174,220 7,207,276
–
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
–
–
47,492
–
–
–
885,937 3,045,456 438,397
–
13,770
275,944
6,951
–
–
45,137
177,487 401,544
1,386,860 3,460,770 490,485
111,301
235,924 1,347,716
–
–
47,492
–
80,392 4,450,182
– 289,714
7,004
34,289 658,457
114,734 5,452,849
59,486 1,754,427
53
115
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 3 Management of risk
3.2 Financial risk
(f) Currency risk continued
As at 31 December 2016
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
Total equity
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
114,853
38,997
13,383
–
97,133
6,647
6,006
452
40,572
200,277
786,614 2,618,118
601,705
454,752
–
281,687
1,631,208 4,210,216
91,211
254,612
2,180
232,225
–
2,327
–
820
39,918
323,460
60,473
59,517
226
94,131
580,872
2,224
1,095
–
–
9,264
123,724
48,425
13,835
41,392
346,592
63,841 3,792,033
805,649
52,260
802,906
34,025
2,406
–
664,816
56,773
219,482 6,641,778
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
56,139
17,030
–
–
847,600 2,480,997
–
276,176
17,986
–
303,595
200,905
1,415,836 2,784,592
215,372 1,425,624
–
–
402,105
117
3,749
45,688
451,659
129,213
–
–
56,139
17,030
122,274 3,852,976
276,293
–
21,735
–
49,014
599,202
171,288 4,823,375
48,194 1,818,403
Sensitivity analysis
As at 31 December 2017, the Group used closing rates of exchange of £1:€1.13 and £1:$1.35 (2016: £1:€1.17 and £1:$1.24). 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 2017
Strengthening of US Dollar
Weakening of US Dollar
Strengthening of Euro
Weakening of Euro
December 2017
effect on equity
after tax
£m
December 2017
effect on profit
before tax
£m
December 2016
effect on equity
after tax
£m
December 2016
effect on profit
before tax
£m
142.8
(116.8)
9.6
(7.9)
89.4
(73.1)
11.1
(9.1)
149.8
(122.6)
13.3
(10.9)
88.4
(72.3)
15.5
(12.7)
(g) Limitations of sensitivity analysis
The sensitivity information given in notes 3.2(a) to (f) demonstrates the estimated impact of a change in a major input assumption while
other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and
other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or
extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented in note
29 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as
instances when risk-free interest rates fall towards zero.
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.
116
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 3 Management of risk continued
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;
– to maintain financial strength
ratings of A in each of its insurance
entities; and
– to settle policyholders' claims as
they arise.
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,
long-term 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.
Gearing
The Group currently utilises 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
US$500 million may be drawn as
cash (under a revolving credit facility),
utilised as Letter of Credit or a
combination thereof. This facility
was reduced to $500 million from
US$875 million in December 2015
by the Company’s subsidiary
Hiscox plc with the maximum cash
portion reduced from US$400 million
to US$300 million. This enables the
Group to utilise the Letter of Credit
as Funds at Lloyd’s to support
underwriting on the 2016, 2017 and
2018 years of account. The revolving
credit facility has a maximum
three-year contractual period for
repayment. At 31 December 2017
US$10 million was utilised by way of
Letter of Credit to support the Funds
at Lloyd’s requirement and there
were no cash drawings outstanding
(2016: US$10 million and £nil
respectively) to support general
trading activities. The funds raised
through Letters of Credit and
loan facilities have been applied
to support both the 2017 year
of account for Syndicates 33
and 3624;
– £275 million of fixed-to-floating
rate subordinated notes that are
classified as Tier 2 debt. This was
raised in November 2015 and
matures in 2045. The debt is rated
BBB- by S&P and Fitch;
– external Names – 27.4% 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 £56 million for the
2018 year of account (2017 year
of account: £56 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.
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.
Hiscox Société
Anonyme
A.M. Best
Fitch
S&P
A (Excellent)
A+ A (Strong)
A (Excellent)
A+ A (Strong)
A (Excellent)
A+
A (Excellent)
–
–
–
–
– A (Strong)
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 S&P 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
seeks to maintain its cost of capital
levels and its debt to overall equity
ratios in line with others in the non-life
insurance industry.
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, Hiscox
Insurance Company Inc. and Hiscox
Société Anonyme 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.
117
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 3 Management of risk
3.3 Capital risk management
Capital modeling and regulation continued
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
at all times throughout the year to
meet these requirements. The BMA
is currently trialling changes to its
capital requirements. These are
expected to be phased in between
the 2019 and 2021 year-ends. We
are actively monitoring these changes
and will take any action necessary
to deal with those changes.
The Solvency II regime came into
force in the UK on 1 January 2016.
This requires insurance companies
to calculate their capital requirements
using either an internal model or a
standard formula. Hiscox Insurance
Company Limited uses the standard
formula to calculate its regulatory
capital requirement. Its risk profile
is sufficiently well represented by
the standard formula not to warrant
going through the internal model
approval process. Hiscox’s Lloyd’s
operations use the internal model
that has been built to meet the
requirements of the Solvency II
regime. The model is concentrated
specifically on the particular product
lines, market conditions and risk
appetite of each risk carrier.
For Syndicate 33 and Syndicate 3624,
internal model results are uplifted
by Lloyd’s to the level of capital required
to support its ratings. Capital models
are used more widely across the Group
to monitor exposure to key risk types,
inform decision-making and measure
ROE across different segments of
the business.
From the 2016 year end, the Group
has been required to publish a
financial condition report, as part
of its regulatory filing with the BMA.
This is a public document and sets
out the financial performance and
solvency position of the Group
in accordance with the economic
balance sheet return filed with
the BMA.
It is intended to provide the public
with certain information to be able
to make informed assessments
about the Group.
118
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.
3.4 Tax risk
The Group is subject to income taxes
levied by the various jurisdictions in which
the Group operates, and the division of
taxing rights between these jurisdictions
results in the Group tax expense and
effective rate of income tax disclosed in
these financial statements. Due to the
Group’s operating model, there is an
unquantifiable risk that this division of
taxing rights could be altered materially,
either by a change to the tax residence,
or permanent establishment profile, of
Hiscox Ltd or its principal subsidiaries; or
due to the re-pricing or re-characterisation
for tax purposes of transactions between
members of the Group, under local
transfer pricing or related tax legislation.
The Group seeks to manage this risk by:
– maintaining appropriate internal
policies and controls over its
operations worldwide;
– monitoring compliance with these
policies on an ongoing basis;
– adhering to internationally
recognised best practice in
determining the appropriate
division of profits between
taxing jurisdictions.
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.
The Group’s four primary business
segments are identified as follows:
– Hiscox Retail brings together the
results of the UK and Europe, and
Hiscox International being the
USA, Special Risks 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
and Hiscox Europe excludes the
kidnap and ransom business written
by Hiscox Insurance Company
Limited. 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. It
also includes the European kidnap
and ransom business written by
Hiscox Insurance Company Limited
and Syndicate 33.
– 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, excluding the
kidnap and ransom business. In
addition, the segment includes
elements of business written by
Syndicate 3624 being auto physical
damage and aviation business.
– Hiscox Re & ILS 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 included.
The segment also includes the
performance and fee income from
the ILS funds, along with the gains
or losses made as a result of our
investment in the funds.
– 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 12. Corporate Centre forms
a reportable segment due to its
investment activities which earn
significant external returns.
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements Gross premiums
written
Net premiums
written
Net premiums
earned
Investment result
Other income
Total income
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 of
associates after tax
Profit before tax
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 & ILS
£000
Corporate
Centre
£000
Total
£000
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Total
£000
Year to 31 December 2017
Year to 31 December 2016*
1,423,916
1,298,865
1,229,859
22,777
27,425
1,280,061
581,686
543,677
– 2,549,279 1,181,384
726,045
495,150
– 2,402,579
376,217
189,151
– 1,864,233 1,091,969
469,143
226,831
– 1,787,943
435,664
11,256
10,790
457,710
208,958
21,677
3,375
234,010
25,553
365
– 1,874,481 1,020,531
30,390
81,263
14,075
41,955
25,918 1,997,699 1,064,996
443,129
12,289
9,121
464,539
211,353
10,058
13,704
235,115
– 1,675,013
70,630
37,594
18,587 1,783,237
17,893
694
(560,008)
(310,495)
(146,498)
– (1,017,001)
(396,137)
(260,468)
(83,167)
–
(739,772)
(311,143)
(123,987)
(20,975)
–
(456,105)
(262,545)
(137,177)
(10,118)
–
(409,840)
(298,440)
(47,690)
(41,345)
(22,905)
(410,380)
(286,704)
(56,871)
(47,644)
(20,139)
(411,358)
(411)
(1,170,002)
(11,771)
(493,943)
(4,075)
(212,893)
(46,496)
(62,753)
(69,401)(1,946,239)
37,248
(908,138)
34,991
(419,525)
22,959
(117,970)
57,210
152,408
37,071 (1,408,562)
110,059
(8)
(36,233)
–
21,117
(1,331)
(43,483)
(19,524)
51,460
(20,863)
156,858
–
45,014
–
117,145
(1,654)
55,658
(18,612)
374,675
(20,266)
(192)
109,859
–
(36,233)
–
19,786
393
(62,614)
201
30,798
1,137
157,995
(1,003)
44,011
–
115,491
–
37,046
134
354,543
Profit before
tax and foreign
exchange gains
/(losses)
110,270
(24,462)
23,861
(16,118)
93,551
120,747
9,020
92,532
(20,164)
202,135
* Investment fees have been reclassified from operational expenses to investment result, to record investment result on a net basis.
The following charges are included within the consolidated income statement:
Year to 31 December 2017
Year to 31 December 2016
Hiscox
Retail
£000
3,882
Hiscox
London
Market
£000
756
Hiscox
Re & ILS
£000
589
Corporate
Centre
£000
Total
£000
Hiscox
Retail
£000
324
5,551
3,105
Hiscox
London
Market
£000
397
11,056
2,964
465
96
14,581
14,555
2,694
1,519
16,457
–
3,720
–
1,054
–
420
1,519
21,651
6,346
24,006
–
3,091
Hiscox
Re & ILS
£000
167
572
–
739
Corporate
Centre
£000
249
Total
£000
3,918
77
17,898
–
326
6,346
28,162
Depreciation
Amortisation of
intangible assets
Impairment of
intangible assets
Total
119
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 4 Operating segments
(a) Profit before tax by segment continued
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 2017
Year to 31 December 2016*
100% ratio analysis
Claims ratio (%)
Expense ratio (%)
Combined ratio excluding
foreign exchange impact (%)
Foreign exchange impact (%)
Combined ratio (%)
Hiscox
Retail
45.2
49.3
94.5
0.1
94.6
Hiscox
London
Market
70.1
38.6
108.7
2.9
111.6
Hiscox
Re & ILS
Corporate
Centre
71.0
27.9
98.9
2.4
101.3
–
–
–
–
–
Total
54.9
43.9
98.8
1.1
99.9
Hiscox
Retail
38.4
53.4
91.8
(3.8)
88.0
Hiscox
London
Market
57.4
42.0
99.4
(8.7)
90.7
Hiscox
Re & ILS
39.1
25.8
64.9
(11.9)
53.0
Corporate
Centre
–
–
–
–
–
Total
44.2
46.4
90.6
(6.4)
84.2
* Investment fees have been reclassified from operational expenses to investment return, to record investment return on a net basis.
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. 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 shown in the following table.
Any further ratio change is linear in nature.
Year to 31 December 2017
Year to 31 December 2016
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
12,585
5,459
2,438
12,299
4,357
2,090
–
–
10,468
5,502
2,425
10,205
4,431
2,114
–
–
At 100% level (note 4b)
1% change in claims or expense ratio
At Group level
1% change in claims or expense ratio
(b) 100% operating result by segment
Year to 31 December 2017
Year to 31 December 2016*
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Total
£000
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Total
£000
14,684
2,722
23,415
23,847
Gross premiums written 1,457,519 757,827 618,085
1,329,426 482,533 224,203
Net premiums written
1,258,474 545,894 243,759
Net premiums earned
22,645
Investment result
Other income
1,935
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
(320,516) (153,320)
(57,317)
(299,519)
(569,558) (382,623) (172,966)
(22,101)
(45,977)
(45,888)
(15,928)
115,274
(5,846)
21,449
(869)
– 2,833,431 1,212,774 894,825 565,006
– 2,036,162 1,119,546 581,322 263,452
– 2,048,127 1,046,838 550,229 242,462
11,174
8,754
86,297
28,869
31,428
8,693
16,190
2,331
25,553
365
– 2,672,605
– 1,964,320
– 1,839,529
76,685
20,472
17,893
694
– (1,125,147)
(402,508)
(315,951)
(94,819)
–
(813,278)
– (495,937)
(425,718)
(22,905)
(270,986)
(288,039)
(165,131)
(65,898)
(10,337)
(52,135)
– (446,454)
(426,211)
(20,139)
(46,496)
(69,139)
40,115
48,101
28,927
57,210
174,353
(43,483)
47,352
165,541
69,871 134,026
55,658
425,096
* Investment fees have been reclassified from operational expenses to investment return, to record investment return on a net basis.
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.
120
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 4 Operating segments continued
(c) 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 Thailand.
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from
external parties:
Gross premium revenues
earned from external parties
UK and Ireland
Europe
United States
Rest of world
Year to 31 December 2017
Year to 31 December 2016
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Total
£000
Hiscox
Retail
£000
Hiscox
London
Market
£000
Hiscox
Re & ILS
£000
Corporate
Centre
£000
Total
£000
482,679
17,191
8,169
9,988
43,291
271,892
515,191 493,244 396,657
64,632 115,047 139,012
1,334,394 668,773 553,826
508,039 414,060
325,171 202,358
–
3,505
10,572
–
– 1,405,092 398,678 377,945 312,762
–
86,351 243,292 143,339
– 2,556,993 1,101,447 649,228 470,178
4,999
22,992
318,691
–
422,564
235,922
–
– 1,089,385
–
472,982
– 2,220,853
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 following table provides an analysis of the Group's non-current assets by material geographical location excluding financial
instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts:
Non-current assets
UK and Ireland
Europe
United States
Rest of world
5 Net asset value per share
Net asset value
Net tangible asset value
2017
total
£000
2016
total
£000
3,617
16,421
2,729
171,604 167,065
2,921
12,333
3,665
194,371 185,984
2017
2016
Net asset value
)
(total equity
£000
Net asset value
per share
pence
Net asset value
)
(total equity
£000
Net asset value
per share
pence
1,754,427
1,616,613
618.6 1,818,403
570.0 1,694,679
649.9
605.7
The net asset value per share is based on 283,600,709 shares (2016: 279,805,393 shares), being the shares in issue at 31 December,
less those held in treasury and those held by the Group Employee Benefit Trust.
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 total equity
Adjusted for the time-weighted impact of capital distributions and issuance of shares
Adjusted opening total equity
Return on equity (%)
2017
£000
2016
£000
26,310
(33,766)
336,986
1,818,403 1,528,829
(60,742)
1,784,637 1,468,087
23.0
1.5
The return on equity is calculated by using profit for the period divided by the adjusted opening total equity. The adjusted opening
total equity represents the equity on 1 January of the relevant year as adjusted for time weighted aspects of capital distributions and
issuing of shares or treasury share purchases during the period. The time weighted positions are calculated on a daily basis with
reference to the proportion of time from the transaction to the end of the period.
121
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 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 (losses)/gains on financial investments at fair value through profit or loss
Investment result – financial assets
Net fair value (losses)/gains on derivative financial instruments
Investment expenses
Total result
* Investment fees have been reclassified from operational expenses.
Note
2017
£000
*
2016
£000
63,296
(3,980)
27,971
87,287
(1,315)
(4,709)
81,263
54,789
6,416
13,631
74,836
155
(4,361)
70,630
8
20
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 units in unit trusts
Deposits with credit institutions/cash and cash equivalents
Investment result – financial assets
9 Other income and operational expenses
Agency-related income
Profit commission
Other underwriting income
Other income
Other income
Wages and salaries
Social security cost
Pension cost – defined contribution
Pension cost – defined benefit
Share-based payments
Marketing expenses
Depreciation, amortisation and impairment
Other expenses
Operational expenses
2017
%
2.6
2.1
–
£000
42,079
41,453
3,755
87,287
2017
%
1.2
12.9
0.5
2.0
£000
55,709
17,246
1,881
74,836
2016
%
3.2
1.5
0.7
2016
%
1.9
6.2
0.3
1.9
2017
£000
*
2016
£000
12,549
9,113
(5,710)
26,003
41,955
130,517
23,291
9,903
1,756
25,186
53,607
21,651
144,469
410,380
11,743
11,720
3,666
10,465
37,594
145,997
23,288
8,243
172
26,274
42,051
28,162
137,171
411,358
* Investment fees have been reclassified to be shown within the investment result in note 7.
Wages and salaries have been shown net of transfers to acquisition and claims expenses.
Other expenses include, but not limited to, legal and professional costs, computer costs, contractor-based costs and property costs.
None of the items are individually material.
122
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 10 Finance costs
Interest charge associated with long-term debt
Interest and expenses associated with bank borrowing facilities
Interest and charges associated with Letters of Credit
Interest charges on experience account
Note
18
32
2017
£000
16,844
2,664
705
650
20,863
2016
£000
16,844
1,703
580
1,139
20,266
11 Auditor’s remuneration
Fees payable to the Group’s main external auditors, PwC, 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 regulatory services
All non-audit-related assurance services
2017
£000
2016
£000
1,934
206
200
2,340
1,349
196
315
1,860
The full audit fee payable for the Syndicate 33 audit has been included above, although an element of this is borne by the third-party
participants in the Syndicate.
12 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 2017
Unrealised translation (losses)/gains on intragroup borrowings
Total (losses)/gains recognised
Impact as at 31 December 2016
Unrealised translation gains/(losses) on intragroup borrowings
Total gains/(losses) recognised
Consolidated
income
statement
2017
£000
Consolidated
other
comprehensive
income
2017
£000
(37)
(37)
37
37
Consolidated
income
statement
2016
£000
Consolidated
other
comprehensive
income
2016
£000
8,146
8,146
(8,146)
(8,146)
Total
impact on
equity
2017
£000
–
–
Total
impact on
equity
2016
£000
–
–
123
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 13 Goodwill and intangible assets
At 1 January 2016
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2016
Opening net book amount
Acquisitions on purchase of subsidiary
Other additions
Amortisation charges
Impairment
Foreign exchange movements
Closing net book amount
At 31 December 2016
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2017
Opening net book amount
Other additions
Amortisation charges
Impairment
Foreign exchange movements
Closing net book amount
At 31 December 2017
Cost
Accumulated amortisation and impairment
Net book amount
Goodwill
£000
Syndicate
capacity
£000
State
authorisation
licences
£000
Software and
development
costs
£000
Other
£000
Total
£000
10,165
(2,430)
7,735
24,505
–
24,505
6,308
–
6,308
90,205
(39,529)
50,676
43,902
(6,904)
36,998
175,085
(48,863)
126,222
7,735
–
–
–
(163)
–
7,572
10,165
(2,593)
7,572
7,572
–
–
(1,245)
–
6,327
10,165
(3,838)
6,327
24,505
–
–
–
–
–
24,505
24,505
–
24,505
24,505
–
–
–
–
24,505
24,505
–
24,505
6,308
–
–
–
–
–
6,308
6,308
–
6,308
6,308
–
–
–
–
6,308
6,308
–
6,308
50,676
20,735
(333)
(9,766)
(1,901)
500
59,911
36,998
844
–
(8,132)
(4,282)
–
25,428
126,222
21,579
(333)
(17,898)
(6,346)
500
123,724
110,191
(50,280)
59,911
44,746
(19,318)
25,428
195,915
(72,191)
123,724
59,911
25,248
(10,731)
–
(303)
74,125
25,428
5,245
(3,850)
(274)
–
26,549
123,724
30,493
(14,581)
(1,519)
(303)
137,814
135,031
(60,906)
74,125
49,991
(23,442)
26,549
226,000
(88,186)
137,814
Goodwill
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to the smallest identifiable unit to which
cash flows are generated. £5,480,000 (2016: £5,480,000) is allocated to the Lloyd’s corporate member entity CGU and £847,000
(2016: £2,092,000) is allocated to the CGUs within the Hiscox Retail business segment. Goodwill is considered to have an indefinite
life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair
value less cost to sell or value in use.
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 6.7% (2016: 6.6%), 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 2017, the £1,245,000 impairment recognised in the year for goodwill and is included in operational expenses in the consolidated
income statement and relates to Hiscox UK as a CGU (2016: £163,000).
Intangible assets
All intangible assets have a finite useful life except for the Syndicate capacity and US state authorisation licences.
(a) 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.
124
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
13 Goodwill and intangible assets
(a) Syndicate capacity continued
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 less costs to sell 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 2017 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
(b) US state authorisation licences
US 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.
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 business.
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.
(c) Software and development costs
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.
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. Additionally, at the end of each reporting period, the Group reviews the positions for any indication
of impairment, and as a result of this no impairment was provided for (2016: £1,901,000 relating to the DirectAsia CGU).
At 31 December 2017 there were £18,322,000 of assets under development on which amortisation has yet to be charged
(2016: £24,797,000).
The assets are expected to be recovered or settled more than 12 months after the reporting date and as such are considered
to be non-current.
(d) Rights to customer contractual relationships (included in other)
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 ten years and
are carried at cost less accumulated amortisation and impairment losses.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships. 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 test led to £274,000 of impairment
(2016: £4,282,000) being recognised.
125
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 14 Property, plant and equipment
At 1 January 2016
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2016
Opening net book amount
Additions
Disposals
Depreciation charge
Foreign exchange movements
Closing net book amount
At 31 December 2016
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2017
Opening net book amount
Additions
Disposals
Depreciation charge
Foreign exchange movements
Closing net book amount
At 31 December 2017
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£000
Leasehold
improvements
£000
Vehicles
£000
Furniture
fittings and
equipment
and art
£000
Total
£000
22,874
(479)
22,395
22,395
–
–
(923)
–
21,472
22,874
(1,402)
21,472
21,472
–
–
(922)
–
20,550
22,874
(2,324)
20,550
6,738
(3,831)
2,907
2,907
742
–
(703)
406
3,352
8,549
(5,197)
3,352
3,352
971
(79)
(1,107)
(205)
2,932
8,727
(5,795)
2,932
146
(114)
32
52,032
(30,857)
21,175
81,790
(35,281)
46,509
32
80
(4)
(31)
2
79
146
(67)
79
79
24
(52)
(28)
–
23
35
(12)
23
21,175
3,991
(275)
(2,261)
892
23,522
46,509
4,813
(279)
(3,918)
1,300
48,425
46,691
(23,169)
23,522
78,260
(29,835)
48,425
23,522
5,420
(220)
(3,494)
(119)
25,109
48,425
6,415
(351)
(5,551)
(324)
48,614
51,325
(26,216)
25,109
82,961
(34,347)
48,614
The Group’s land and buildings assets relate to freehold property in the UK. There was no impairment charge during the year
(2016: £nil). Assets with a net book value of £nil were held under finance leases (2016: £nil).
The assets are expected to be recovered or settled more than 12 months after the reporting date and as such are considered
to be non-current.
126
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 15 Subsidiaries, associates and interests in other entities
This note provides details of the Syndicates and Special Purpose Insurers (SPI) managed by the Group, the acquisition and
disposal of subsidiaries and associates during the year, investments in associates, together with details of business held for
sale at the year-end.
(a) Subsidiaries
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 2017, HDCM owned 72.6% of Syndicate 33 (2016: 72.5%), and 100% of Syndicate 3624 (2016: 100%). 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.
(b) Special Purpose Insurers
The Kiskadee Diversified Fund and Kiskadee Select Fund (‘the Funds’) were launched in 2014 to provide investment opportunities to
institutional investors in property catastrophe reinsurance and insurance-linked strategies. The Group made an initial investment
of £30.2 million in the Funds. The Funds are managed by Hiscox Re Insurance Linked Strategies Ltd (formerly known as Kiskadee
Investment Managers Ltd) which is a wholly owned subsidiary of the Group. The majority of the Funds’ exposures to reinsurance risk
are fronted by the Group into two Bermuda Licensed Special Purpose Insurers (‘SPI’), Kiskadee Reinsurance 1 Ltd and Kiskadee
Reinsurance 2 Ltd which have been collateralised by the Funds.
Following a significant inflow of capital from third-party investors during 2015, the Group determined that it no longer met the criteria
for consolidation of the Funds and SPIs from 1 July 2015 and deconsolidated them.
As at 31 December 2017, the Group recognised a financial asset at fair value of £37.0 million (2016: £46.8 million) in relation to its
investment in the Funds (note 18). In assessing the maximum exposure to loss from its interest in the Funds and SPIs, the Group has
determined it is no greater than the fair value recognised as at the balance sheet date. The total size of the funds were £606 million at
31 December 2017 (2016: £683 million). In addition to the return on the financial asset, the Group also receives fee income through
Hiscox Re Insurance Linked Strategies Ltd and Hiscox Insurance Company (Bermuda) Ltd, both wholly owned subsidiaries, under
normal commercial terms.
The Group is exposed to credit risk associated with reinsurance recoverables on risks fronted for the SPIs. Note 3.2(d) discusses how
the Group manages credit risk associated with reinsurance assets. The operations of the Funds and SPIs are financed through the
issuance of preference shares to external investors. The Group does not intend to provide any further financial support to the Funds
or SPIs.
127
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 15 Subsidiaries, associates and interests in other entities continued
(c) Investments in associates
Year ended 31 December
At beginning of year
Additions during the year
Disposals during the year
Distributions received
Net profit from investments in associates
At end of year
The Group’s interests in its principal associates, all of which are unlisted, were as follows:
2017
£000
13,835
–
(5,592)
(501)
201
7,943
2016
£000
13,525
450
(2)
(272)
134
13,835
100% results
2017
Associates incorporated in the UK and USA
Associates incorporated in Europe
Total at the end of 2017
2016
Associates incorporated in the UK
Associates incorporated in Europe
Total at the end of 2016
% interest held at 31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
from 10% to 26%
from 17 to 35% 13,102
2,688
15,790
9,651
1,803
11,454
15,049
2,116
17,165
1,103
666
1,769
100% results
% interest held at 31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
from 17 to 35%
from 10% to 26%
53,731
2,323
56,054
30,456
1,821
32,277
43,037
2,060
45,097
3,905
727
4,632
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.
The assets are expected to be recovered or settled more than 12 months after the reporting date and as such are considered to be
non-current.
(d) Disposals
On 1 May 2017, the Group disposed of its subsidiary Blue Hill Specialty Insurance Company Inc. and on 18 September 2017,
the Group completed the sale of its investment in Lark (2012) Limited.
As a result of the disposals, the Group has derecognised the assets and liabilities relating to the companies. Below is a table
disclosing the impact to the consolidated financial statement following the disposal.
Total assets no longer recognised in the consolidated balance sheet
Total currency translation reserve no longer recognised in the consolidated balance sheet
Cash received on disposal
Profit recognised in the consolidated income statement
£000
(24,556)
1
38,341
13,786
128
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 16 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 and other adjustments
Balance deferred at 31 December
Gross
£000
Reinsurance
£000
2017
Net
£000
Gross
£000
Reinsurance
£000
2016
Net
£000
346,592
(66,681) 279,911
618,176 (168,419) 449,757
(619,704) 163,599 (456,105)
(11,101)
3,497
(68,004)
(14,598)
330,466
(33,211) 238,306
271,517
(157,738) 428,377
586,115
(538,467) 128,627 (409,840)
23,068
279,911
(4,359)
(66,681)
27,427
(262,462) 346,592
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £68,004,000 (2016: £66,681,000) is not
eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 26).
The amounts expected to be recovered before and after one year are estimated as follows:
Within one year
After one year
17 Reinsurance assets
Reinsurers’ share of insurance liabilities
Provision for non-recovery and impairment
Reinsurance assets
2017
£000
2016
£000
238,166
24,296
262,462
252,837
27,074
279,911
Note
2017
£000
2016
£000
1,358,547
(581)
25 1,357,966
806,245
(596)
805,649
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
685,781
672,185
1,357,966
466,041
339,608
805,649
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and
receivables (note 19). The Group recognised a gain during the year of £15,000 (2016: gain of £134,000) in respect of previously
impaired balances.
129
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 18 Financial assets and liabilities
Financial assets designated at fair value through profit or loss are measured at their bid price values, with all changes from one
accounting period to the next being recorded through the income statement.
Note
2017
£000
2016
£000
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
20
334,300
5,320
3,430,243 3,414,949
305,342
24,592
3,769,863 3,744,883
46,821
329
3,807,143 3,792,033
36,976
304
The effective maturity of the debt and fixed income securities due within and after one year are as follows:
Within one year
After one year
2017
£000
2016
£000
796,587
706,700
2,633,656 2,708,249
3,430,243 3,414,949
Equities and units in unit trusts do not have any maturity dates. The effective maturity of all other financial assets are due within
one year.
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).
Amounts owed to credit institutions
Derivative financial liabilities
Total financial liabilities carried at fair value
Long-term debt
Accrued interest on long-term debt
Total financial liabilities carried at amortised cost
Note
20
2017
£000
13,664
121
13,785
2017
£000
2016
£000
–
474
474
2016
£000
274,129
1,800
274,019
1,800
275,929 275,819
All of the financial liabilities carried at fair value are due within one year. The amounts owed to credit institutions relate to outstanding
investment trades in trust funds that are not available for offset against the same counterparty under cash and cash equivalents.
These positions would be rated A had they have been recorded under cash and cash equivalents. The long-term debt is due after
one year, with its accrued interest due within one year.
On 24 November 2015, the Group issued £275.0 million 6.125% fixed-to-floating rate callable subordinated notes due 2045, with a
first call date of 2025.
The notes bear interest from and including 24 November 2015 at a fixed rate of 6.125% per annum payable annually in arrears starting
24 November 2016 up until the first call date in November 2025, and thereafter at a floating rate of interest equal to three-month
LIBOR plus 5.076% payable quarterly in arrears on each floating interest payment date. The Group is exposed to cash flow interest
rate risk on its long-term debt.
On 25 November 2015 the notes were admitted for trading on the London Stock Exchange’s regulated market. The notes were rated
BBB- by S&P as well as by Fitch.
The fair value of the long-term debt is estimated at £317.4 million (2016: £292.3 million). The fair value measurement is classified within
Level 1 of the fair value hierarchy. The fair value is estimated by reference to the actively traded value on the London Stock Exchange.
The interest accrued on the long-term debt was £1.8 million (2016: £1.8 million) at the balance sheet date and is included in
financial liabilities.
Note 10 includes details of the interest expense for the year included in financing costs.
130
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 18 Financial assets and liabilities continued
Investments at 31 December are denominated in the following currencies at their fair value:
2017
£000
2016
£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
19 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
643,585
623,402
2,390,457 2,406,736
384,811
3,430,243 3,414,949
396,201
151,562
182,738
–
334,300
159,199
146,143
–
305,342
2,568
–
2,752
5,320
3,903
18,199
2,490
24,592
3,769,863 3,744,883
2017
£000
2016
£000
743,727
(1,644)
742,083
699,768
(1,276)
698,492
481,888
260,195
742,083
524,958
173,534
698,492
11,306
7,713
17,008
13,579
22,451
24,277
830,704
21,232
12,590
30,223
32,656
802,906
726,415
104,289
830,704
720,509
82,397
802,906
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 £368,000 (2016: gain of £899,000) for the impairment of
receivables during the year ended 31 December 2017. This is recorded under operational expenses in the consolidated income
statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
131
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
20 Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2017.
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 2017 all mature within one year of the balance sheet date and are detailed below:
31 December 2017
Derivative financial instruments included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
Equity index futures
Gross contract
notional amount
£000
Fair value
of assets
£000
Fair value
of liabilities
£000
Net balance
sheet position
£000
30,196
122,122
–
138
166
–
(121)
–
–
17
166
–
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 2016
Derivative financial instruments included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
Equity index futures
13,823
(13,685)
138
16,703
(16,824)
(121)
30,526
(30,509)
17
Gross contract
notional amount
£000
Fair value
of assets
£000
Fair value
of liabilities
£000
Net balance
sheet position
£000
26,591
56,728
10,223
312
17
–
(121)
(106)
(247)
191
(89)
(247)
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
12,724
(12,412)
312
13,746
(13,867)
(121)
26,470
(26,279)
191
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 loss on these forward contracts of £748,000 (2016: gain of £664,000) as included in investment result in note 7. 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 denominated in a range of currencies to
informally hedge interest rate risk on specific long portfolios. All contracts are exchange traded and the Group made a loss on these
futures contracts of £423,000 (2016: loss of £111,000) as included in investment result in note 7.
Equity index options
During the year, the Group purchased a number of equity index futures in order to economically hedge equity market exposure.
All contracts were exchange traded and the Group made a loss on these future contracts of £144,000 (2016: loss of £398,000)
as included in investment result in note 7.
132
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 21 Fair value measurements
In accordance with IFRS 13: Fair Value Measurement, the financial instruments carried at fair value, based on a three-level fair value
hierarchy that reflects the significance of the inputs used in measuring the fair value, are provided below.
As at 31 December 2017
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Insurance-linked funds
Derivative financial assets
Total
Financial liabilities
Derivative financial liabilities
Total
As at 31 December 2016
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Insurance-linked fund
Derivative financial assets
Total
Financial liabilities
Derivative financial liabilities
Total
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
1,192,934 2,237,309
322,914
–
–
304
1,198,254 2,560,527
–
5,320
–
–
11,386
–
36,976
–
– 3,430,243
334,300
5,320
36,976
304
48,362 3,807,143
–
–
Level 1
£000
121
121
Level 2
£000
–
–
Level 3
£000
121
121
Total
£000
1,005,111 2,409,838
293,187
–
–
329
1,029,703 2,703,354
–
24,592
–
–
12,155
–
46,821
–
– 3,414,949
305,342
24,592
46,821
329
58,976 3,792,033
–
–
474
474
–
–
474
474
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.
Investments in mutual funds, which are included in equities and shares in unit trusts, 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, long-term debt and exchange-traded
equities which are measured based on quoted prices in active markets. The fair value of the long-term debt that is carried at
amortised cost, is estimated at £317.4 million (2016: £292.3 million) and is considered as Level 1 in fair value hierarchy.
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.
133
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 21 Fair value measurements continued
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. At 31 December 2017, the insurance-linked funds of £36,976,000 represents the Group’s investment in the Kiskadee
Funds (2016: £46,821,000).
The fair value of the Kiskadee Funds is estimated to be the net asset value as at the balance sheet date. The net asset value is
based on the fair value of the assets and liabilities in the Fund. The majority of the assets of the Funds are cash and cash equivalents.
Significant inputs and assumptions in calculating the fair value of the assets and liabilities associated with reinsurance contracts
written by the Kiskadee Funds include the amount and timing of claims payable in respect of claims incurred and periods of
unexpired risk. 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.
The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the relevant reporting
period during which the transfers are deemed to have occurred.
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:
31 December 2017
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
12,155
(341)
(217)
584
(795)
11,386
(255)
Financial asset
Insurance
linked fund
£000
46,821
(5,710)
(3,687)
4,000
(4,448)
36,976
(7,082)
Total
£000
58,976
(6,051)
(3,904)
4,584
(5,243)
48,362
(7,337)
* 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 2016
Balance at 1 January
Fair value gains or losses through profit or loss*
Foreign exchange gains
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
13,640
(279)
729
305
(2,240)
12,155
(1,397)
Financial asset
Total
£000
53,685
3,387
8,448
305
(6,849)
58,976
908
Insurance
linked fund
£000
40,045
3,666
7,719
–
(4,609)
46,821
2,305
* 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.
134
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
22 Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
2017
£000
2016
£000
525,002
117,787
642,789
568,186
96,630
664,816
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 presentation of the comparative in the cash flow statement in relation to cash derecognised on loss of control has been
reclassified to cash inflows from the sale of subsidiaries.
23 Share capital
Group
Authorised ordinary share capital of 6.5p (2016: 6.5p)
Issued ordinary share capital of 6.5p (2016: 6.5p)
31 December 2017
31 December 2016
Share
capital
£000
Number
of shares
000
Share
capital
£000
Number
of shares
000
240,000 3,692,308
294,484
19,141
240,000 3,692,308
293,227
19,060
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 2016
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2016
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2017
Ordinary share
capital
£000
Share
premium
£000
Contributed
surplus
£000
19,030
22
8
19,060
58
23
19,141
15,231
1,534
1,270
18,035
4,681
4,412
27,128
89,864
–
–
89,864
–
–
89,864
Contributed surplus is a distributable reserve and arose on the reverse acquisition of Hiscox plc on 12 December 2006.
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.
The Company relies upon dividend streams from its subsidiary companies to provide the cash flow required for distributions to be
made to shareholders. The ability of the subsidiaries to pay dividends is subject to regulatory restrictions within the jurisdiction from
which they operate.
Share repurchase
The Trustees of the Group’s Employee Benefit Trust did not purchase any Hiscox Ltd shares during the year. In 2016, shares to the
value of £38,558,000 were purchased 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
At 31 December
All issued shares are fully paid.
Number of
ordinary
shares in issue
(thousands)
2017
Number of
ordinary
shares in issue
(thousands)
2016
293,227
897
360
294,484
292,776
332
119
293,227
Note
31
135
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 23 Share capital continued
Share options and Performance Share Plan awards
Performance Share Plan awards are granted to Directors and to senior employees. 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 £25,186,000 (2016: £26,274,000). This comprises charges of £24,390,000
(2016: £25,585,000) in respect of Performance Share Plan awards and £796,000 (2016: £689,000) 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.
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)
2017
2016
0.19-0.26 0.16-0.55
3.59
3.25
22.0
966.7
3.09
3.25
22.0
1,139.3
The weighted average fair value of each share option granted during the year was 223.6p (2016: 183.8p). The weighted average fair
value of each Performance Share Plan award granted during the year was 1,127.1p (2016: 961.8p).
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances
outstanding at 31 December 2017 for the Executive Directors are shown in the annual report on remuneration. The total number
of options and Performance Share Plan awards outstanding is 10,009,723 (2016: 10,848,727) of which 2,966,870 are exercisable
(2016: 2,528,736). The total number of SAYE options outstanding is 1,580,570 (2016: 1,971,842).
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.
136
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 24 Retained earnings and other reserves
Currency translation reserve at 31 December
Retained earnings at 31 December
2017
£000
2016
£000
148,789
202,272
1,468,639 1,488,306
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 did not purchase its own shares during 2017. In 2016, the Group purchased £38,558,000 of its own shares and placed
them in the Trust for future utilisation on vesting of Performance Share Plan awards.
At 31 December 2017 Hiscox Ltd held 7,523,190 shares in treasury (2016: 7,523,190). Additional details are shown in note 34 to these
financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
25 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
Note
2017
£000
2016
£000
1,204,509
977,664
2,018,131 1,588,160
1,227,542 1,287,152
4,450,182 3,852,976
361,657
743,748
252,561
17 1,357,966
159,141
383,974
262,534
805,649
842,852
818,523
1,274,383 1,204,186
974,981 1,024,618
3,092,216 3,047,327
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows:
Within one year
After one year
2017
£000
2016
£000
1,778,462 1,674,538
1,313,754 1,372,789
3,092,216 3,047,327
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 2017 and 2016 are
not material.
137
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 25 Insurance liabilities and reinsurance assets continued
25.1 Insurance contracts assumptions
(a) Process used to decide on assumptions
There are many risks associated with insurance contracts, and this means that there is a considerable amount of uncertainty in
estimating the future settlement cost of claims. There is uncertainty in both the amounts and the timing of future claim payment
cash flows.
Claims paid are claims transactions settled up to the reporting date including settlement expenses allocated to those transactions.
Unpaid claims reserves are made for known or anticipated liabilities which have not been settled up to the reporting date. Included
within the provision is an allowance for the future costs of settling those claims.
The Group relies on actuarial analysis to estimate the settlement cost of future claims. There is close communication between
the actuaries and other key stakeholders, such as the underwriters, claims and finance teams when setting and validating the
assumptions. The unpaid claims reserve is estimated based on past experience and current expectations of future cost levels.
Allowance is made for the current premium rating and inflationary environment.
The claim reserves are estimated on a best estimate basis, taking into account current market conditions and the nature of risks
being underwritten.
Under certain insurance contracts, the Group may be permitted to sell property acquired in settling a claim (for example, salvage).
The Group may also have the right to pursue third parties for payment of some or all costs (for example, subrogation). If it is certain
a recovery or reimbursement will be made at the valuation date, specific estimates of these salvage and/or subrogation amounts
are included as allowances in the measurement of the insurance liability for unpaid claims. This is then recognised in insurance
and reinsurance receivables when the liability is settled.
Estimates of where claim liabilities will ultimately settle 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.
Booked reserves are held above the best estimate to help mitigate the uncertainty within the reserve estimates. As the best estimate
matures and becomes more certain, the management margin is gradually released in line with the reserving policy. This approach is
consistent with last year.
(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. 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.
138
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 25 Insurance liabilities and reinsurance assets
25.1 Insurance contracts assumptions
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – gross at 100%
2016
£000
2011
£000
2015
£000
2014
£000
Total
£000
2017
£000
2012
£000
2013
£000
2008
£000
2009
£000
2010
£000
997,119 710,704 892,030 1,301,401 1,013,920 720,272
959,217 709,616 868,533 1,281,243 1,005,456 719,687
–
920,888 705,018 853,705 1,244,585
–
910,027 691,149 832,477 1,193,663
–
–
–
–
–
–
1,069,702 779,112 971,422 1,331,894 1,098,396 865,236
1,041,562 714,642 905,958 1,291,195 1,016,367 770,982 852,869
817,362
–
–
–
–
–
–
Accident year
Estimate of
ultimate claims
costs as adjusted
for foreign
exchange* at end
of accident year: 1,266,621 949,379 1,149,653 1,478,091 1,235,048 989,712 1,082,686 1,163,310 1,444,780 2,521,450 13,280,730
– 9,357,091
one year later
– 7,551,331
two years later
– 6,452,808
three years later
– 5,543,752
four years later
– 4,722,417
five years later
– 3,627,316
six years later
– 2,404,043
seven years later 895,707 689,127 819,209
– 1,558,061
–
eight years later
nine years later
888,380
–
–
Current estimate of
cumulative claims 888,380 672,197 819,209 1,193,663
Cumulative
payments to date (866,500) (632,943) (759,806) (1,113,670)
Liability
recognised at
100% level
Liability
recognised in
respect of prior
accident years
at 100% level
Total gross liability to external parties at 100% level
919,764 1,039,545 1,282,020
–
957,756
–
–
–
–
–
–
–
–
–
–
–
–
–
–
998,221
–
–
–
–
318,091 624,023 2,040,051 3,587,378
957,756 1,282,020 2,521,450 10,869,945
885,864 672,197
–
888,380
154,204 101,077 149,402
145,810
3,733,188
(844,017) (618,610)
998,221 719,687
(639,665)
(667,960)
(657,997)
817,362
39,254
59,403
79,993
21,880
(481,399) (7,282,567)
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2017.
Reconciliation of 100% disclosures above to Group’s share – gross
2010
£000
2016
£000
2011
£000
Total
£000
2017
£000
2008
£000
2009
£000
2012
£000
2013
£000
2014
£000
2015
£000
(346,420) (1,482,296)
(78,888)
(143,092)
(90,645) (103,769)
(174,624) (129,405)
718,082 555,860 690,391 1,019,039 868,816 640,799 726,717 853,987 1,138,928 2,175,030 9,387,649
Accident year
Current estimate of
cumulative claims 888,380 672,197 819,209 1,193,663 998,221 719,687 817,362 957,756 1,282,020 2,521,450 10,869,945
Less: attributable
to external Names (170,298) (116,337) (128,818)
Group’s share of
current ultimate
claims estimate
Cumulative
payments to date (866,500) (632,943) (759,806) (1,113,670) (844,017) (618,610) (667,960) (639,665)
Less: attributable
to external Names 167,206 109,944 115,793
Group’s share
of cumulative
payments
Liability for 2008
to 2017 accident
years recognised
on Group’s
balance sheet
Liability for accident
years before
2008 recognised
on Group’s
balance sheet
Total Group liability to external parties included in balance sheet – gross**
64,046 134,031 88,963 131,432 281,489 553,030 1,758,446 3,109,464
(954,993) (734,785) (551,836) (595,285) (572,498)
(699,294) (522,999) (644,013)
113,176
3,222,640
64,815 1,004,382
158,677 109,232
(585,898)
(657,997)
72,099
32,861
46,378
18,788
72,675
66,774
67,167
(481,399) (7,282,567)
(416,584) (6,278,185)
**This represents the claims element of the Group’s insurance liabilities.
139
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 25 Insurance liabilities and reinsurance assets
25.1 Insurance contracts assumptions
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – net at 100%
2009
£000
2011
£000
2012
£000
2010
£000
2008
£000
2016
£000
Total
£000
2017
£000
2013
£000
2014
£000
2015
£000
874,319 770,050 909,622 1,134,891 898,706 853,422 884,251 941,762 1,100,293 1,387,895 9,755,211
– 7,432,933
777,422 640,573 794,340 1,047,635 790,634 754,513 769,648 865,225 992,943
– 6,044,451
–
775,934 610,232 749,016 1,005,876 732,953 677,509 700,338 792,593
– 5,068,121
–
–
– 4,326,157
–
–
– 3,645,498
–
–
– 2,869,551
–
–
– 1,910,433
–
–
– 1,217,313
–
–
652,969
–
–
–
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 730,412 612,801 729,846 1,003,399
695,799 602,146 707,349 996,201
four years later
682,857 599,370 702,389
five years later
674,391 586,697 678,767 929,696
six years later
–
seven years later 660,192 582,642 667,599
–
–
eight years later 650,361 566,952
nine years later
–
–
–
Current estimate of
cumulative claims 652,969 566,952 667,599 929,696 703,822 624,512 656,820 792,593 992,943 1,387,895 7,975,801
Cumulative
payments to date (633,834) (532,229) (627,636)
Liability
recognised at
100% level
Liability
recognised in
respect of prior
accident years
at 100% level
Total net liability to external parties at 100% level
707,487 627,356 656,820
–
700,150 624,512
–
–
–
–
–
–
–
–
–
–
957,060 703,822
–
–
–
–
66,563 129,882 88,369 138,971 281,261
475,339 1,018,790 2,292,996
102,358
2,395,354
(573,940) (536,143)
(863,133)
(511,332)
(517,849)
(517,604)
652,969
39,963
34,723
19,135
(369,105)(5,682,805)
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2017.
Reconciliation of 100% disclosures above to Group’s share – net
2011
£000
2016
£000
2010
£000
Total
£000
2017
£000
2008
£000
2009
£000
2012
£000
2013
£000
2014
£000
2015
£000
(973,097)
(74,881)
(82,307)
(92,225)
(64,029)
(95,349)
(68,368)
(125,164)
(151,590)
(101,243)
(863,133) (573,940) (536,143)
535,028 474,727 572,250 804,532 628,941 560,483 588,452 710,286
Accident year
Current estimate of
cumulative claims 652,969 566,952 667,599 929,696 703,822 624,512 656,820 792,593 992,943 1,387,895 7,975,801
Less: attributable
to external Names (117,941)
Group’s share of
current ultimate
claims estimate
Cumulative
payments to date (633,834) (532,229) (627,636)
Less: attributable
to external Names 115,138
Group’s share
of cumulative
payments
Liability for 2008
to 2017 accident
years recognised
on Group’s
balance sheet
Liability for accident
years before
2008 recognised
on Group’s
balance sheet
Total Group liability to external parties included in balance sheet – net**
(515,121) (482,383) (463,533) (459,395)
78,100 124,919 250,891 425,353
891,700 1,236,305 7,002,704
(518,696) (445,632) (540,641)
78,056
2,117,235
914,106 2,039,179
54,954 113,820
(466,347)
(749,578)
(511,332)
(517,604)
(517,849)
719,280
113,555
46,906
86,995
29,095
86,597
16,332
53,760
31,609
58,819
54,316
51,937
51,257
(369,105) (5,682,805)
(322,199) (4,963,525)
**This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
140
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 25 Insurance liabilities and reinsurance assets continued
25.2 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
Total at end of year
Gross
£000
Reinsurance
£000
2017
Net
£000
Gross
£000
Reinsurance
£000
2016
Net
£000
(2,565,824)
(1,931,417)
1,107,481
167,120
543,115 (2,022,709) (2,038,096)
(1,004,601)
914,416 (1,017,001)
776,722
820,061
(287,420)
(299,849)
102,414
(64,706)
(2,565,824)
(3,222,640) 1,105,405 (2,117,235)
365,477 (1,672,619)
(739,772)
264,829
627,257
(149,465)
62,274
(237,575)
543,115 (2,022,709)
Claims reported and claim adjustment expenses
Claims incurred but not reported
Total at end of year
(842,852)
361,657
(1,204,509)
(2,018,131)
743,748 (1,274,383)
(3,222,640) 1,105,405 (2,117,235)
(977,664)
(1,588,160)
(2,565,824)
(818,523)
159,141
383,974 (1,204,186)
543,115 (2,022,709)
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
Acquisitions/(divestments) and transfers*
Total claims and claim adjustment expenses
Gross
£000
Reinsurance
£000
2017
Net
£000
Gross
£000
Reinsurance
£000
2016
Net
£000
(2,258,615)
982,093 (1,276,522)
(1,275,018)
299,564
(975,454)
327,198
–
(1,931,417)
(75,677)
8,000
251,521
8,000
914,416 (1,017,001)
270,417
–
(1,004,601)
(57,465)
22,730
264,829
212,952
22,730
(739,772)
*The net movement in 2017 and 2016 relates to a retroactive reinsurance arrangement that transferred the benefits and risks of some of the Group’s insurance portfolio.
A reconciliation of the unearned premium reserves is as follows:
Gross
£000
Reinsurance
£000
2017
Net
£000
Gross
£000
Reinsurance
£000
2016
Net
£000
Balance deferred at 1 January
Premiums written
Premiums earned through the income statement
Foreign exchange and other adjustments
Balance deferred at 31 December
1,287,152
2,549,279
(2,556,993)
(51,896)
1,227,542
(262,534) 1,024,618
1,010,266
(685,046) 1,864,233 2,402,579
(2,220,853)
682,512 (1,874,481)
95,160
(39,389)
1,287,152
974,981
12,507
(252,561)
(173,333)
836,933
(614,636) 1,787,943
545,840 (1,675,013)
74,755
(20,405)
(262,534) 1,024,618
The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this
note 25.
26 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
Other creditors
Reinsurers’ share of deferred acquisition costs
Accruals and deferred income
Total
Note
16
2017
£000
60,931
373,647
434,578
6,368
20,090
10,555
37,013
68,004
118,862
658,457
2016
£000
27,997
319,494
347,491
9,844
16,429
5,650
31,923
66,681
153,107
599,202
Included within accruals and deferred income is £8.1 million (2016: £9.6 million) of deferred gain on retroactive reinsurance contracts.
141
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 26 Trade and other payables continued
The amounts expected to be settled before and after one year are estimated as follows:
Within one year
After one year
2017
£000
2016
£000
550,457
108,000
658,457
474,023
125,179
599,202
The amounts expected to be settled after one year of the balance sheet date primarily relate to reinsurance creditors.
The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
27 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 34. 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
2017
£000
2016
£000
18,993
(82)
18,911
32,240
(5,010)
27,230
(21,221)
5,690
1,108
(14,423)
4,488
(5,055)
(3,786)
(832)
(9,673)
17,557
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 14.6% (2016: 5.0%). The
higher effective rate in 2017 is due principally to the one-off impact of the revaluation of deferred tax assets, following the change
in the US Federal tax rate introduced by the Tax Cuts and Jobs Act in December 2017.
A reconciliation of the difference is provided below:
Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2016: 0%)
Effects of Group entities subject to overseas tax at different rates
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
Adjustment for share-based payments
Non-taxable income
Prior year tax adjustments
Tax charge for the period
2017
£000
2016
£000
30,798
–
(3,407)
354,543
–
17,104
1,108
1,675
5,176
334
(588)
(5,418)
5,608
4,488
(832)
7,487
2,155
(373)
812
–
(8,796)
17,557
The UK Finance Act 2015 introduced a new tax with effect from 1 April 2015, the Diverted Profits Tax (DPT), which in certain situations
applies a tax of 25% on income which would not otherwise be chargeable to UK tax. The Group is currently in discussions with HMRC
as to the scope of the new tax in the context of the Group’s operations. No provision for DPT has been made in 2017 or 2016.
142
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
28 Deferred tax
Net deferred tax assets
Trading losses in overseas entities
Deferred tax assets
Deferred tax liabilities
Total deferred tax asset
Net deferred tax liabilities
Deferred tax assets
Deferred tax liabilities
Total net deferred tax liability
2017
£000
34,520
15,142
(10,060)
39,602
2017
£000
–
–
–
2016
£000
41,392
–
–
41,392
2016
£000
34,388
(51,418)
(17,030)
Deferred tax assets and deferred tax liabilities relating to the same tax authority are presented net in the Group’s balance sheet.
Net Group deferred tax assets/(liabilities) analysed by balance sheet headings
At 31 December
Tangible assets
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*
Open years of account
Total deferred tax liabilities
Net total deferred tax liabilities
Trading losses in overseas entities
Net total deferred tax assets/(liabilities)
Net deferred tax position asset/(liability)
Income
statement
(charge)/credit
£000
2016
£000
Recognised in
equity
£000
523
4,036
1,538
8,093
12,799
7,399
34,388
(753)
(24,457)
(26,208)
(51,418)
(17,030)
41,392
(17,030)
24,362
(281)
(1,517)
(147)
1,973
(21,040)
949
(20,063)
(75)
5,132
36,301
41,358
21,295
(6,872)
21,295
14,423
–
–
–
(1,768)
–
2,585
817
–
–
–
–
817
–
817
817
2017
£000
242
2,519
1,391
8,298
(8,241)
10,933
15,142
(828)
(19,325)
10,093
(10,060)
5,082
34,520
5,082
39,602
* Prior to January 2016, the solvency regulations in the UK required certain entities within the Group to establish an equalisation provision, to be utilised against abnormal
levels of future losses in certain lines of business. Under these regulations, the provision was adjusted each year based on a percentage of net premiums written for
those lines for business during the financial year, subject to a maximum percentage. Any annual increase in the provision was a deductible expense for tax purposes,
and any release was taxable income. From 2008, Lloyd’s Corporate Members were entitled to a tax deduction for claims equalisation provisions although this was not a
solvency requirement for Lloyd’s. Equalisation provisions are not permitted under IFRS, which therefore resulted in a temporary difference for tax purposes. Finance Act
2012 repealed the legislation which treated the equalisation provision as a tax deductible expense, and treats the existing equalisation provision as a receipt taxable over
six years with effect from January 2016, when the former solvency regulations were replaced by Solvency II, which does not require an equalisation provision. The Group
has provided for the deferred tax liability on its claims equalisation provisions during the year.
Following changes to the future UK main rate of corporation tax introduced in the Finance Act 2016, the deferred tax on the
Syndicates’ open years of account is calculated with reference to the tax rate expected to be in force when those years close.
Equally, the deferred tax liability on equalisation provision is calculated at the tax rate expected to be applicable as it unwinds.
All other UK deferred income tax assets and liabilities are calculated at 17% for the year ended 31 December 2017 (2016: 17%).
The Tax Cuts and Jobs Act, which entered into US law in December 2017, reduces the US Federal corporate tax rate from 35%
to 21% with effect from 1 January 2018. Deferred tax assets and liabilities arising from the Group’s US operations have therefore
been calculated at 21% for the year ended 31 December 2017 (2016: 35%).
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 £3,532,000, comprising £817,000 deferred tax and £2,714,000 current tax (2016: £9,356,000
deferred tax and £2,053,000 current tax).
143
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 28 Deferred tax
Net Group deferred tax assets/(liabilities) analysed by balance sheet headings continued
Deferred tax assets of £34,520,000 (2016: £41,392,000), 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 timing 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 five years. £1,246,000 (2016: £nil) of the tax losses to which these assets relate will expire
within ten years; a further £32,673,000 (2016: £40,572,000) will expire after ten years; the balance of tax losses carried forward has
no time limit. The Group has not provided for deferred tax assets totalling £7,238,000 (2016: £29,988,000) including £7,238,000
(2016: £26,843,000) in relation to losses in overseas companies of £39,712,000 (2016: £88,185,000). 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 £33,919,000 (2016: £41,392,000).
29 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.
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 for funded plans
Net amount recognised as a defined benefit obligation
2017
£000
2016
£000
273,803
(226,311)
47,492
47,492
271,072
(214,933)
56,139
56,139
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 2014, and updated at each intervening
balance sheet date by the actuaries. The valuation work for 31 December 2017 is ongoing as at the date of this report. 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
2017
£000
2016
£000
76,939
12,249
38,652
60,468
22,409
15,594
226,311
76,233
9,949
35,495
48,901
24,530
19,825
214,933
144
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
29 Employee retirement benefit obligations continued
The amounts recognised in total comprehensive income are as follows:
Interest cost on defined benefit obligation
Interest income on plan assets
Net interest cost
Administrative expenses and taxes
Total expense recognised in operational expenses in the income statement
Remeasurements
Effect of change in financial assumptions
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
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
Credit from third-party Names
Total remeasurement included in other comprehensive income
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
Increase due to plan combinations
Remeasurements
Return on plan assets (excluding interest income)
Closing fair value of scheme assets
Note
9
2017
£000
7,208
(5,689)
1,519
237
1,756
3,736
(14,139)
–
1,742
(8,661)
(6,905)
2017
£000
56,139
(9,402)
46,737
1,756
(294)
(8,661)
39,538
7,954
47,492
2016
£000
7,916
(7,910)
6
166
172
68,094
(12,202)
–
(9,361)
46,531
46,703
2016
£000
75
(13)
62
172
(28)
46,531
46,737
9,402
56,139
2017
£000
2016
£000
214,933
5,689
199,045
7,910
–
(8,213)
(237)
–
–
(5,671)
(166)
1,613
14,139
226,311
12,202
214,933
145
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
29 Employee retirement benefit obligations continued
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
Increase due to plan combinations
Remeasurements
Changes in financial assumptions
Closing present value of scheme obligations
2017
£000
2016
£000
271,072
7,208
199,120
7,916
(8,213)
–
(5,671)
1,613
3,736
273,803
68,094
271,072
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
2017
£000
2016
£000
2015
£000
2014
£000
2013
£000
2012
£000
2011
£000
273,803
(226,311)
271,072
(214,933)
199,120
(199,045)
227,375
(195,209)
179,479
(185,666)
173,420
(156,513)
155,685
(140,517)
47,492
–
47,492
56,139
–
56,139
75
–
75
32,166
–
32,166
(6,187
)
10,553
4,366
16,907
–
16,907
15,168
–
–
Assumptions regarding future mortality experience are set based on professional advice, published statistics and actual experience.
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
2017
years
28.6
29.8
2017
years
29.9
31.2
2016
years
28.5
29.7
2016
years
29.8
31.1
The weighted average duration of the defined benefit obligation at 31 December 2017 was 23.2 years (2016: 23.0 years).
146
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
29 Employee retirement benefit obligations continued
Other principal actuarial assumptions are as follows:
Discount rate
Inflation assumption (RPI)
Inflation assumption (CPI)
Pension increases
2017
%
2.6
3.1
2.1
3.1
2016
%
2.7
3.2
2.2
3.2
The scheme operates under UK trust law and the Trust is a separate legal entity from the Group. The scheme is governed by a board
of trustees, comprised of member and employee trustees. The trustees are required by law to act in the best interests of scheme
members and are responsible for setting certain policies together with the principal employer. The scheme is funded by the Group
when required. Funding of the scheme is based on a separate actuarial valuation for funding purposes for which the assumptions
may differ from the assumptions above. Funding requirements are formally set out in the statement of funding principles, schedule
of contributions and recovery plan agreed between the trustees and the Company.
The triennial valuation carried out as at 31 December 2014 resulted in a surplus position of £8.6 million on a funding basis. The Group
is therefore not required to currently make any contributions to the pension scheme.
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 £9,420,000 at 31 December 2017 (2016: £9,281,000), and would increase the recorded net deficit on the balance sheet
by £9,420,000 (2016: £9,281,000).
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 2017 as follows:
Effect of a change in discount rate
Use of discount rate of 2.85%
Use of discount rate of 2.35%
Effect of an increase in inflation
Use of RPI inflation assumption of 3.35%
Use of RPI inflation assumption of 2.85%
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
47,492
47,492
32,480
63,719
15,012
(16,227)
47,492
47,492
54,075
41,288
(6,583)
6,204
147
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 30 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)
2017
2016
26,310
281,964
9.3p
336,986
281,175
119.8p
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)
2017
2016
26,310
281,964
9,065
291,029
9.0p
336,986
281,175
9,402
290,577
116.0p
Diluted earnings per share has been calculated after taking account of 8,292,818 (2016: 8,653,254) Performance Share Plan awards
and 772,427 (2016: 748,600) options under SAYE schemes.
31 Dividends paid to owners of the Company
Final dividend for the year ended:
31 December 2016 of 19.0p (net) per share
Second interim dividend for the year ended:
31 December 2015 of 32.0p (net) per share
Interim dividend for the year ended:
31 December 2017 of 9.5p (net) per share
31 December 2016 of 8.5p (net) per share
2017
£000
53,578
2016
£000
–
–
89,674
26,878
–
80,456
–
24,260
113,934
The final dividend for the year ended 31 December 2016 was either paid in cash or issued as a scrip dividend equivalent of 19p per share.
The final dividend for the year ended 31 December 2016 was paid in cash of £51,246,000 and 251,000 shares for the scrip dividend.
The second interim dividend for the year ended 31 December 2015 was comprised of a final dividend equivalent of 16p per share,
and an additional return of capital of 16p per share. No scrip dividend alternative was offered.
The interim dividends for 2017 and 2016 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 2017 was paid in cash of £25,799,000 (2016: £22,983,000) and 108,769 shares for
the scrip dividend (2016: 119,302).
The Board has declared a final dividend of 19.5p per share to be paid on 12 June 2018 to shareholders on the register at 11 May 2018,
taking the total ordinary dividend per share for the year to 29.0p (2016: 27.5p).
When determining the level of dividend each year, the Board considers the ability of the Group to generate cash; the availability of
that cash in the Group, while considering constraints such as regulatory capital requirements; and the level required to invest in the
business. This is a progressive policy and is expected to be maintained for the foreseeable future.
148
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
32 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 Dedicated Corporate Member Limited (HDCM) and Hiscox Capital Ltd (HCL) provide assets under a Security and
Trust Deed charged to Lloyd’s of London, to meet any liabilities they occur from their interest in Syndicates 33 and 3624.
At 31 December 2017, HDCM held £323 million of investments, £5 million of cash and a $5 million letter of credit in favour of
Lloyd’s of London under this arrangement. At 31 December 2017, HCL held £485 million of investments, £6 million of cash
and a $5 million Letter of Credit in favour of Lloyd’s of London under this arrangement.
Security and Trust Deeds were established for HCL on 25 April 2017 to replace the existing HCL and Hiscox Ltd Deeds
of covenant which previously were used to meet HDCM obligations at Lloyd’s. The obligations in respect of these Deed
of covenants were secured by a fixed and floating charge over investments and other assets of the company in favour of
Lloyd’s. The total guarantee given under these Deeds of covenant (subject to limitations) at 31 December 2016 amounted
to £29 million in respect of Hiscox Ltd supported by £34 million of investments and US$486 million in respect of HCL supported
by US$369 million of investments. Additionally at 31 December 2016, HDCM held £221 million of investment securities and
£38 million of cash in favour of Lloyd’s.
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of
banks, at US$500 million (2016: US$500 million) which may be drawn in cash (under a revolving credit facility), Letter of Credit
or a combination thereof. The terms also provide that upon request the facility may be drawn in a currency other than US Dollar.
At 31 December 2017 US$10.0 million (2016: US$10.0 million) was utilised by way of Letter of Credit to support the Funds at
Lloyd’s requirement and no cash drawings were outstanding (2016: £nil).
(c)
Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2016: £50,000) with NatWest Bank plc to
support its consortium activities with Lloyd’s the arrangement is collateralised with cash of £50,000 (2016: £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. Hiscox Bermuda has in place a Letter of Credit Reimbursement and Pledge Agreement with Citibank
for the provision of a Letter of Credit facility in favour of US ceding companies and other jurisdictions, and also Letter of Credit
facility agreements with National Australia Bank and Commerzbank AG. The agreements combined are a three-year secured
facility that allowed Hiscox Bermuda to request the issuance of up to US$400 million in Letters of Credit (2016: US$400 million).
Letters of Credit issued under these facilities are collateralised by cash, US government and corporate securities of Hiscox
Bermuda. Letters of Credit under these facilities totalling US$100.7 million were issued with an effective date of 31 December
2017 (2016: US$95.9 million on a US$400 million facility) and these were collateralised by US government and corporate
securities with a fair value of US$115.8 million (2016: US$109.1 million). In addition, Hiscox Bermuda holds US$659.5 million
(2016: US$468.0 million) of restricted cash and marketable securities collateralising reinsurance obligations.
(f)
Hiscox Europe Underwriting Limited has arranged bank guarantees with respect to their various office deposits for a total
of €207,000 (2016: €207,000). These guarantees are held with ING Bank (Belgium) for €14,000 (2016: €14,000), ABN Amro
(Netherlands) for €33,000 (2016: €33,000) and HypoVereinsbank-UniCredit (Germany) for €160,000 (2016: €160,000).
(g) Hiscox S.A. has arranged a bank guarantee with respect to the office in Luxembourg with a value of €42,000 (2016: €nil).
This guarantee is held with ING Bank (Luxembourg).
149
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements
33 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 £1,200,000 (2016: £1,881,000).
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 totalled
£11,251,000 (2016: £9,236,000). Operating lease rental income for the year totalled £569,000 (2016: £448,000).
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 and other
Land and buildings
Office equipment and other
Land and buildings
2017
£000
10,127
603
34,635
479
9,167
55,011
2016
£000
10,045
573
34,141
547
16,402
61,708
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
34 Principal subsidiary companies of Hiscox Ltd at 31 December 2017
Company
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
Hiscox Société Anonyme
Direct Asia Insurance (Holdings) Pte Ltd
Direct Asia Insurance (Singapore) Pte Limited
Nature of business
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
General insurance
Holding company
General insurance
2017
£000
360
–
–
360
2016
£000
528
352
–
880
Country
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
Luxembourg
Singapore
Singapore
*Held directly.
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2017 (2016: 38,030).
All principal subsidiaries are wholly owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity
shares held.
150
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 35 Related-party transactions
Details of the remuneration of the Group’s key personnel are shown in the annual report on remuneration 2017 on pages 68 to 75.
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
2017
£000
31 December
2016
£000
31 December
2017
£000
31 December
2016
£000
33,630
26,848
7,914
–
68,392
48,775
54,302
6,890
–
109,967
44,018
98,984
(25,293)
3,028
120,737
57,833
31,802
(16,336)
(6,626)
66,673
(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 through associates at 31 December
Details of the Group’s associates are given in note 15.
2017
£000
2016
£000
64,991
17,693
–
32,914
234,201
21,318
–
58,536
(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.
36 Subsequent events
The functional currency of Hiscox Syndicate 33, Hiscox Dedicated Corporate Member Limited, Hiscox Syndicates Limited and
Hiscox Capital Ltd and the reporting currency of the Group has changed to US Dollars effective 1 January 2018. This change will
significantly reduce the volatility of the Group’s earnings due to foreign exchange movements, in particular due to translation of
foreign currency balances. Given that a significant majority of Group earnings are denominated in US Dollars, we believe that this
change will give investors and other stakeholders a clearer understanding of Hiscox’s performance over time.
The Group is currently in the process of restating the comparative data for this change.
151
Hiscox Ltd Report and Accounts 20172 Strategic report37 Governance63 Remuneration89 Financial summary Notes to the consolidated financial statements 2
Strategic report
37 Governance
63 Remuneration
89
Financial summary
2017
£000
2016
£000
2015
£000
2014
£000
2013
£000
2,549,279 2,402,579 1,944,220
1,571,844
1,787,943
1,864,233
1,435,016
1,675,013
1,874,481
216,100
354,543
30,798
209,895
336,986
26,310
1,756,260
1,343,410
1,316,259
231,075
216,152
1,699,478
1,371,114
1,283,311
244,538
237,758
137,814
126,222
123,724
3,807,143 3,792,033
664,816
(3,047,327)
285,157
72,720
105,946
2,921,585 2,828,847 2,585,054
564,375
650,651
(2,150,299)
(2,309,854)
337,611
178,616
1,818,403 1,528,829 1,454,206 1,409,461
402.2
727,880
(2,509,552)
262,694
642,789
(3,092,216)
258,897
1,754,427
618.6
545.0
649.9
462.5
9.3
9.0
99.9
1.5
29.0
119.8
116.0
84.2
23.0
27.5
72.8
70.5
85.0
16.0
24.0
67.4
64.5
83.9
17.1
22.5
66.3
63.5
83.0
19.3
21.0
1,470.0
997.5
1,097.0
900.5
1,059.0
707.5
735.0
624.5
695.0
453.6
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)
†Closing mid-market prices.
The five-year summary is unaudited.
152
Hiscox Ltd Report and Accounts 2017
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Hiscox Ltd
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45 Reid Street
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Bermuda
T +1 441 278 8300
E enquiries@hiscox.com
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