Hiscox Ltd
Report and Accounts
2019
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 3,100 staff across 14 countries and 35 offices.
Our products and services reach every continent, and
we are one of the only insurers to offer everything from
small business and home insurance to reinsurance
and insurance-linked securities.
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 1
From purpose
to performance
2
4
6
8
Our key performance
indicators (KPIs)
From purpose
to performance
Our strategy and
how we operate
Business priorities
and key risks
10 Why invest in Hiscox?
14 Chairman’s statement
17 Chief Executive’s report
26 Capital
28 Risk management
32 Stakeholder engagement
Environmental, social and
34
governance (ESG)
44 Board of Directors
47 Board statistics
48
Chairman’s letter
to shareholders
49 Corporate governance
54
Compliance with the UK
Corporate Governance
Code 2018
Nominations
and Governance
Committee report
60 Audit Committee report
58
64
Letter from the Chairman
of the Remuneration
Committee
66 Remuneration summary
68
Annual report on
remuneration 2019
Remuneration policy
82
As a Bermuda–incorporated
company, Hiscox is not subject
to the UK Companies Act.
As a company listed on the
London Stock Exchange, we
comply with the requirements
set out in the UK Corporate
Governance Code (2018)
and the Listing Rules and
Disclosure & Transparency
Rules of the of the UK Listing
Authority. Our remuneration
report is consistent with UK
regulations. Any additional
disclosures over and above
these requirements, have
been made for the benefit
of shareholders, on a
voluntary basis.
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
96 Directors’ report
98
Directors’ responsibilities
statement
Advisors
99
102 Independent auditor’s
report
108 Consolidated income
statement
108 Consolidated statement
of comprehensive
income
109 Consolidated balance
111
110
sheet
Consolidated statement
of changes in equity
Consolidated statement
of cash flows
Notes to the consolidated
financial statements
167 Additional performance
measures (APMs)
112
168 Five-year summary
Connected
Connected
Together,
build something
better.
Connected
A restless
spirit runs
through Hiscox,
which means we
are never fully
satisfied with
what we have
achieved.
Connected
We remember that it’s not all about
making money and working hard.
Take time to have fun.
And we think about the implications
of our decisions on everyone else
in our Group, our customers, our
industry and our community,
because we’re committed to
building a sustainable business
with a legacy we can all be proud of.
That’s why in 2019 we adopted
‘connected’ as one of our new
core values. It simply states what
we’ve always known – that by being
connected to our past and to each
other we can build a stronger future.
For more information on our values
5
Why being connected is so
important to us
At Hiscox, we know that you achieve
more together than you ever can
alone. Our growth and success
have been built on teamwork.
We understand that by working
as one to achieve shared goals,
celebrating together when things
go right and supporting each
other when they go wrong, the
memorable moments become
even more special.
We get more from being part of
something bigger. That’s why we
encourage everyone to step up,
not step back. We’re not the kind
of people to walk past a ringing
phone, or a colleague who we
can see needs a hand.
We take the time to get to know
the people we work with and work
for – our customers.
We have courage in our convictions,
but are also not afraid to ask
other people for their opinions
– because someone else might
have a better solution.
Connected
We are an
ambitious
bunch and
what drives us
onwards are the
opportunities
ahead.
Connected
We come
together to
conquer our
challenges
and celebrate
our victories.
Connected
Our success
depends
on our
relationships
with a network
of experts
beyond our
business.
Connected
We work
collaboratively
towards our
shared goals.
Connected
We are in this
for the long term;
we want to build
a business that
lasts and that
everyone is proud
to be part of.
Connected
Chapter 1:
From purpose
to performance
Hiscox Ltd Report and Accounts 2019
1
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Our key performance indicators (KPIs)
2019 showed the value of our long-standing strategy of building
and broadening the balance in our business between big-ticket
lines and more steady retail earnings.
Financial KPIs
*These comparative figures have been restated to reflect previously announced tax provisions. See note 2.2 of the financial statements.
$4,030.7m
Gross premiums written ($m)
$2,635.6m
Net premiums earned ($m)
$53.1m
Profit before tax ($m)*
2019
2018
2017
2016
2015
4,030.7
3,778.3
3,286.0
3,257.9
2,972.7
2019
2018
2017
2016
2015
2,635.6
2,573.6
2,416.2
2,271.3
2,194.1
105.7%
Combined ratio (%)
17.2¢
Basic earnings per share (¢)*
2019
2018
2017
2016
2015
105.7
94.9
99.9
84.2
85.0
2019
2018
2017
2016
2015
17.2
41.6
8.1
159.0
108.5
2019
2018
2017
2016
2015
53.1
135.6
37.8
480.0
329.3
43.4¢
Ordinary dividend (¢)
2019
2018
2017
2016
2015
43.4
41.9
39.8
35.0
36.1
768.2¢
Net asset value per share (¢)*
670.6¢
Tangible net asset value per share (¢)*
2.2%
Return on equity (%)*
2019
2018
2017
2016
2015
768.2
798.6
817.1
792.5
790.0
2019
2018
2017
2016
2015
670.6
726.2
751.5
737.7
723.8
2019
2018
2017
2016
2015
2.2
5.3
1.0
22.5
15.6
2
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
Our key performance
indicators (KPIs)
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Non-financial KPIs
71%
Employee engagement (%)
Our annual global employee engagement survey
looks at how connected we feel to Hiscox, our
managers, teams and roles. The results are shared
widely and heavy influence our people strategy.
In 2019, this led to a Group-wide effort to improve
manager effectiveness.
78%
Broker satisfaction – London Market
Each year, we survey our London Market
broker partners to understand more about their
experience of working with Hiscox throughout the
year. Their feedback is a reflection of our products
and service levels, so receiving consistently good
scores matters to us.
89%
Customer satisfaction – UK
In the UK, customers who speak to one of our
Insurance Experts in our Customer Experience
Centre in York are asked to rate their experience
of Hiscox at the end of the call. Whether they
have phoned for advice, a quote, to purchase
a new policy or make changes to an existing one,
their feedback helps us to constantly improve
our service.
2019
2018
2017
2016
2015
71%
74%
77%
78%
79%
2019
2018
2017
2016
78%
76%
66%
76%
2019
2018
2017
89%
90%
90%
Data only available from 2016.
Data only available from 2017.
4th
Glassdoor’s Best Places to Work – UK
Anonymous employee reviews on recruitment
website Glassdoor are used to inform their
annual ‘Best Places to Work’ ranking, and we
are pleased to have scored so favourably out
of the 50 companies included.
48%
Broker satisfaction – UK
We annually survey our UK broker partners to
understand how satisfied they are with the service
they have received from Hiscox, and how likely
they would be to recommend Hiscox to their
clients. After a decline in satisfaction levels in
2018, in response to our usual service levels
being impacted by systems and process
changes in our UK business, it is encouraging
to see improved satisfaction scores this year.
4.8/5
Customer reviews using Feefo – USA
In the USA, we ask customers to review their
experience of Hiscox post purchase. We do this
using Feefo, which has a five-star rating system,
and are pleased to maintain such high scores
year after year even as the business grows.
2019
2018
2017
4th place
7th place
8th place
Data only available from 2017.
2019
2018
2017
2016
2015
48%
35%
62%
69%
66%
2019
2018
2017
2016
2015
4.8
4.7
4.7
4.8
4.8
Hiscox Ltd Report and Accounts 2019
3
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
From purpose to performance
Good performance does not develop in isolation. It flows from
the many decisions we make, informed by our purpose, values,
culture and vision, and our success in implementing them.
Everything we do flows from our purpose,
because we realise we can achieve
more together than we can on our own.
For our purpose to be effective it needs
to be coherent and widely understood.
It needs to underpin our values, which
must be embedded throughout the
business. Our culture needs to reflect
those values. Our vision needs to be clear
and attainable. All of that needs to feed
into our strategy and how we execute it,
taking into account our business model,
our customers, our people and other
stakeholders’ expectations.
This is how we get from purpose
to performance.
Our purpose, values, culture and vision
In 2019, one of our strategic initiatives
was to develop a purpose and refresh
our values.
Our purpose
As experts in risk, we give people and
businesses the confidence to realise
their ambitions.
We have had a strong set of values for
decades and we believe that they should
be lived, not paid lip service to. Over time,
as a business grows and changes, it is
all too easy for a set of values to become
lost in people’s day-to-day work and the
business’ evolving priorities. That is
why, every five years or so, we undertake
an exercise to refresh our values, to
ensure they resonate with our employees
and have a genuine impact on the way
we behave.
During the year, we hosted 26 workshops
attended by over 500 employees in
17 locations to find out what makes them
proud to be part of Hiscox, what values
resonate with them and what values
they see being lived. The Executive
Committee debated these results in
depth and refined our values and their
meaning. We strive to make our five
values – courage, ownership, integrity,
connected and human – the heart of
everything we do. Our challenge is to
ensure that everyone at Hiscox lives
them every day. In 2020, one of our
strategic initiatives is to ensure these
values become embedded across
the Group.
At the same time, the Executive
Committee focused on developing
a meaningful purpose for the Group.
This articulates why we exist – not
simply what we do, but why and how
we do it differently. It’s our collective
sense of identity which gives us
strength in adversity and power
in pursuing a common goal.
We want to give our customers, whether
they are a small business, a risk manager
for a large corporate, a homeowner or a
collector, the confidence to pursue their
ambitions. We exist to offer them peace
of mind, by providing advice, expertise,
a safety net or simply an arm around
them when they need it most.
Our culture
“Culture isn’t something you can pay lip
service to, or that you can impose from
the top. We work very hard at nurturing
it and one of the things that has pleased
me most as the Group has grown is how
our culture and values have acted as a
magnet for talented people.”
Robert Childs, Chairman
Read more about our culture and values
in our Chairman’s statement
14
Our vision
For Hiscox to be the leading specialist
insurer in material markets – not the
biggest, but the most respected. We want
to be known by customers for being true
to our word, as a great place to work and
grow for those who are ambitious and
talented, and to be seen as an industry
leader in attitude, sales growth, profits
and value creation.
4
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Hiscox was ranked
fourth in Glassdoor’s
‘Best Places to Work’
in the UK, according
to employee reviews.
Hiscox values
Hiscox Ltd Report and Accounts 2019
5
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Our strategy and how we operate
Our long-held strategy has delivered throughout the insurance
cycle. Central to this is a simple business model.
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,
relatively 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.
46%
54%
A strategy of diversity by product
and geography
Hiscox has a long-held strategy to ensure
we are not overly reliant on any one of our
divisions for the Group’s overall profits.
As the chart to the right shows, we
maintain a balance between big-ticket
business – larger premium, globally
traded and catastrophe-exposed –
and the smaller premium, locally traded,
relatively less volatile retail business.
As the nature of risk evolves, we want
to be diversified in both the range of
insurance we write and its geographical
spread. Our business is truly international,
with over 3,100 staff across 14 countries
and 35 offices and a portfolio of products
and services that reach every continent. We
are one of the few insurers to cover every
size of business, from one-man-bands
right up to the largest multinationals; an
approach which means we can adapt
to market conditions and which gives
us opportunities for profitable growth
throughout the insurance cycle.
Read more about our performance
by product and geography in our
Chief Executive’s report
17
A specialist product approach
We seek to excel in our chosen markets,
such as small business, flood or kidnap
and ransom insurance. In some, such
as fine art, we have deep foundations
to build on; in others we are relative
newcomers. To be successful in any
of these fast-moving sectors, we invest
in the right people, infrastructure and
technology to give us the flexibility
and nimbleness to respond quickly to
changes. The common thread is our
focus on niche products and services
that differentiate us.
6
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
Our strategy and
how we operate
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Read more about our
stakeholder engagement
32
Business model – a diversified portfolio,
focused on organic growth
We aim to be industry leaders in material
markets. We use our underwriting
expertise in Bermuda and London to
write larger premium, volatile or complex
risks while building distribution and
operational effectiveness in the UK,
Europe, USA and Asia for our specialist
retail products.
Customers – true to our word
We invest in creating a customer-focused
ethos and a powerful differentiated brand
that our target customers identify with.
Our people – a great place to work
for the hard-working, ambitious
and talented
The quality of our people is a crucial factor
in our continuing success. Their expertise,
courage and dedication drive our reputation
for quality and professionalism. In return,
we strive to provide them with a work
environment in which they can flourish.
Stakeholders’ expectations –
a respected specialist insurer
We constantly adapt to the evolving
regulatory environment in each of our
regions. We are accountable to our
communities and responsible in how
we operate.
A strategy built around our business model, customers, people and other stakeholders such as shareholders, regulators
and communities
Business model
– a diversified
portfolio, focused
on organic growth
People
– a great place
to work for the
hard-working,
ambitious
and talented
Annual and
long-term plans
– disciplined
– commercial
– deliverable
Customers
– true to our word
Stakeholders’
expectations
– a respected
specialist insurer
Hiscox Ltd Report and Accounts 2019
7
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Business priorities and key risks
As an insurance business, understanding and managing risk is
part of our DNA. This is how we will balance opportunity and risk
in 2020.
Business priorities
for 2020
Where we will focus our efforts in
the year ahead.
Continuous optimisation
of our underwriting
portfolios
Driving efficiency and
disciplined execution
Embedding our
refreshed values
and vision
8
Hiscox Ltd Report and Accounts 2019
For 2020, actively managing our portfolio
means a strong and sustained focus on
underperforming lines, which we call
Decile 10, where we will aggressively
manage the lowest performing 10% of
the business with investments in data
and analytics. At the other end, through
efficient capital allocation, we will grow
our Quartile 1 top-performing lines.
Our efforts are focused on delivering the
major projects already under way, such as
the systems changes taking place in our
Retail businesses and our Group-wide
finance transformation programme.
These changes mean we are building
a business that is fit for the future. We
will also be driving a more disciplined
approach to expenses and external
commissions, and efficiently executing
regulatory changes. We are now
focused on embedding our approach in
first-line teams and evolving our structures,
processes and culture accordingly.
The new values and vision we developed
in 2019 have been well received. They now
need to become embedded throughout
the business. For 2020, our focus will
be to ensure they are well understood
by everyone, demonstrated by our
leadership, and visible in our daily life.
Chapter 1
From purpose
to performance
Business priorities
and key risks
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Read more about how we manage risks in
our risk management section
28
Read more about our key risks
hiscoxgroup.com/about-hiscox/
risk-management
data. Operational risk also covers the
potential for financial losses, information
and cyber security risks which have
legal, regulatory and reputational
consequences, for example major IT,
systems or service failures.
Regulatory, legal and tax governance
This relates to the business failing to
act in accordance with its applicable
regulatory requirements in all its
applicable jurisdictions, or a deterioration
in the quality of our relationship with one
or more regulators. Legal risk is the risk
of acting contrary to the relevant legal
requirements in any of the jurisdictions
in which we operate, while tax governance
risk covers the consequences of any
failure to act in accordance with relevant
taxation laws or adapt to changes
in taxation.
Hiscox Ltd Report and Accounts 2019
9
Key risks
As an insurance group, specific risks
related to our business include:
Strategic risk
The possibility of adverse outcomes
resulting from ineffective business plans
and strategies, decision-making, resource
allocation or adaptation to changes in
the business environment. The Group’s
continuing success depends on how well
we understand our clients, markets and
the various internal and external factors
affecting our business, and having a
strategy in place to address risks and
opportunities arising out of this. Not
having the right strategy could have a
detrimental impact on profitability, capital
position, market share and reputation.
Underwriting risk
The risk that insurance premiums prove
insufficient to cover future insurance
claims and associated expenses. Likely
causes include failing to price policies
adequately, making poor risk selection
decisions, allowing insurance exposures
to accumulate to an unacceptable level,
or accepting underwriting risks outside
of agreed underwriting parameters.
This includes people, process and system
risks directly related to underwriting,
such as human error in paying invalid
claims or misquoting premium prices.
Credit risk
The risk of a reinsurance counterparty
being subject to a default or downgrade
that might cause them to renege on a
reinsurance contract or alter the terms
of an agreement. The Group buys
reinsurance as a protection, but if our
reinsurers found themselves unable to
meet their obligations to us, this could put
a strain on our earnings and capital and
harm our financial condition and cash
flows. Similarly, if a broker were to default,
causing them to fail to pass premiums
to us or pass the claims payment to a
policyholder, this could result in Hiscox
losing money.
Market risk
The threat of unfavourable or unexpected
movements in the value of the Group’s
assets or the income expected from
them. It includes risks related to
investments – for example, losses within
a given investment strategy, exposure to
inappropriate assets or asset classes, or
investments that fall outside of authorised
strategic asset allocation or tactical asset
allocation limits. It also includes issues of
liquidity, which could result in the Group
being unable to meet cash requirements
from available resources within the
appropriate timescales, such as being
unable to pay liabilities to customers or
other creditors when they fall due.
Reserving 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. Reserving risk
relates to the possibility of unsuitable case
reserves and/or insufficient outstanding
reserves being in place to meet incurred
losses and associated expenses, which
could affect the Group’s future earnings
and capital.
Operational risk
The risk of direct or indirect loss resulting
from internal processes, people or
systems, or from external events. This
includes cyber security risk, which is
the threat posed by the higher maturity
of attack tools and methods and the
increased motivation of cyber attackers,
in conjunction with a failure to implement
or maintain the systems and processes
necessary to protect the confidentiality,
integrity or availability of information and
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Why invest in Hiscox?
A track record of strong performance.
Total Group controlled income
($m)
Big-ticket business
Hiscox Re & ILS
Hiscox London Market
Retail business
Hiscox UK
Hiscox Europe
Hiscox Special Risks
Hiscox USA
Hiscox Asia
* Hiscox Retail includes $1.5m GWP
of fully reinsured run-off portfolios.
A focus on creating long-term
shareholder value, with a progressive
dividend policy
A strong track record of creating
profitable growth
By running a well-balanced business,
underpinned by a clear set of values and
characterised by a careful, disciplined
approach to underwriting, our aim is to
grow the business in a way that is organic,
sustainable and profitable. As the chart
opposite shows, over the past 26 years
the Group’s controlled income has been
rising in a steady, sustained manner,
despite the industry’s innate volatility.
That growth has been fuelled by progress
across all our divisions and regions.
422%
8%
total shareholder return over the last ten
years, well above the FTSE All-Share
of 118%.
compound growth over the last ten
years in Hiscox Retail. Six per cent
across the Group.
$1.8bn
returned to shareholders since 2010.
$30bn
gross premiums written over the last
ten years.
3%
compound dividend growth over the
last ten years.
10
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
Why invest in Hiscox?
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Total Group controlled income
($m)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
2,033
1,928
1,901
1,506
1,131
892
799 828
666
630
677
569
579
4,530
4,224
S
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&
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,
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a
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H
i
3,625 3,652
3,310
3,268
2,951
3,008
2,839
2,690
2,669
2,587
2,570
2,585
*
l
i
a
t
e
R
x
o
c
s
H
i
0
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
2018
2019
Hiscox Ltd Report and Accounts 2019
11
Connected
When one of our youngest
Hiscox Re & ILS team
members wanted to share with
undergraduates his passion
for insurance as being a great
industry in which to work, he
found a great way to connect
Hiscox to university students.
He took the concept of a
‘Hiscox University Challenge’
and worked with colleagues
throughout the Group to
devise a programme that
enabled students to cut their
teeth on the sort of problems
underwriters face every day,
have professional skills training
and meet Hiscox people,
including Bronek, our CEO, to
get a glimpse of what it’s like
to work here. The programme
persuaded several of the
students to pursue a career in
insurance and they are now on
our graduate trainee scheme.
12
Hiscox Ltd Report and Accounts 2019
Connected
Chapter 2:
A closer look
Hiscox Ltd Report and Accounts 2019
13
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Chairman’s statement
In 2019, the Retail businesses accounted for 54% of our overall
gross premiums written and 73% of our net premiums written.
As I have said before, the growth in the Retail arm demonstrates
the power of compounding, each year we aim for between
5% and 15% growth. In 2019, Retail growth moderated to 7%
(2018: 11.3%) in constant currency, in line with our expectations,
given the result of action taken over the last 18 months to reduce
in underperforming lines, and the impact of bedding in new
IT systems and ways of working in the UK. Our US business
accelerated growth as the year progressed, in the UK we are
seeing momentum improve and our European business had
another excellent year. The combined ratio for Hiscox Retail is
98.7%, outside of our target range of between 90%-95%, but
still profitable, and it’s needed to be as our big-ticket lines took
a battering from a series of catastrophes in Japan and an active
claims year in the London Market. Paying claims and restoring
businesses is the raison d’etre of an insurance company. We
have fulfilled our promise to pay this year, having paid out
$1.2 billion in claims across the Group. The London Market
has responded well, with increased prices across the board;
the reinsurance market is a little slower to adjust and we
will shrink accordingly.
Our balanced strategy means that we are still able to grow
the dividend, despite a large loss year. As such, the Board
is pleased to announce a final dividend of 29.6 cents,
which is an increase of 3.5% in line with prior year dividend.
The record date for the dividend will be 15 May 2020 and
the payment date will be 10 June 2020.
Hiscox is a specialist insurer. We are not a generalist and aim
to be very good at some things and leave other classes to
the competition. The breadth of the reach of the Company,
however, is increasingly impressive. In the big-ticket arena we
participate as a significant participant in the ILS market and
stretch all the way across into the retail business to offering
personal and commercial customers online coverage.
This innovative activity emanates from our restless culture
of always trying to find a better way of doing insurance and
reinsurance. I derive joy from seeing my colleagues creating
new opportunities and making Hiscox such a stimulating
environment and interesting place to work. New people are
attracted by these qualities and the challenging careers we
offer and I’m proud that we have been named in the top five
of Glassdoor’s Best Places to Work in 2020. This ability to
attract talented and driven workers gives me confidence for
the future.
I am able to report a profit before tax
of $53.1 million (2018: $135.6 million*),
with the investment income of
$223.0 million (2018: $38.1 million)
being a key contributor to the result.
Our strategy has remained the
same as we continue to build our
retail businesses to balance the
more volatile big-ticket risks and
it is working.
14
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chairman’s statement
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
In 2019, Hiscox London
Market saw rate rises in
14 out 15 classes, overall
up by 11% and continuing
to rise.
The market
The market
The retail market in the USA is hardening in casualty lines,
where we are seeing rate rises up to 13% in response to
adverse claims trends. The action taken over the last 18 months
to refocus our private company D&O and our media accounts
is working. We are seeing increased competition in the UK
direct-to-consumer commercial business and expect some
impact following the IR35 legislation†, but we also see plenty
of opportunity for profitable growth.
The reinsurance market has yet to show the same level of
discipline as we have seen in our big-ticket insurance lines.
It is felt that the very large reinsurers are happy to hold prices
at last year’s levels in order to squeeze some smaller players
who are reliant on increasingly expensive retrocession.
It was ever thus, and the dance will no doubt continue.
It is very unlikely that the investment contribution will be so
high in 2020 and hopefully reinsurance underwriting discipline
will return. In the meantime, we will reduce our exposure,
waiting for sense to prevail.
The big-ticket insurance business is getting interesting at last.
In 2019, Hiscox London Market saw rate rises in 14 out of 15
classes, overall up by 11% and continuing to rise. The direction
is good. We don’t need to be greedy and drive huge volatility
in pricing, but we need to be persistent in getting reasonable
increases year-on-year to repair the damage done by a long
decline. We have to be able to cover claims inflation, which
has been equally persistent, driven by genuine increased
costs but also by the ingenuity of lawyers to meet their
budgets at the cost of ours.
Climate change
I have spent my working life wrestling with the impact of
climate volatility on our business. The year-to-year nature of
underwriting risk gives us a front row seat to climate variability.
Investment in natural catastrophe research and modelling
has always been important to us, and our market-leading
catastrophe research team develops not just what we call the
‘Hiscox view of risk’, but now the ‘Hiscox view of climate risk’.
We will strengthen our expertise this year with two additional
climate change researchers.
As debate around dealing with climate change and, more
specifically, environment social and governance (ESG) issues,
accelerate, so too do our efforts. We developed the Hiscox
ESG framework during the year, which guides our efforts,
with central themes that can be locally tailored and executed.
We also publicly pledged our support for the Financial Stability
Board’s Task Force on Climate-related Financial Disclosures
(TCFD), and completed ESG disclosures for FTSE4Good, CDP,
Dow Jones Sustainability Index and ClimateWise. Hiscox has
been carbon neutral through offsetting since 2014. There is more
to do, of course, and we are focused on the opportunity as well
as the challenge that this brings.
The Board
We have a strong Board and Executive team. Our Non Executive
Directors have a wealth of experience in insurance, reinsurance,
marketing and banking, gained in all corners of the world. They
have diverse backgrounds and importantly come from a number
of different countries which is very important to us as we continue
to build a global business. One test I always apply to a new Non
Executive is that in some way, they have already been where we
are going.
We enjoy having an Executive team that has had a long service
with the Company, and a balance of experience and fresh
thinking. This year, Richard Watson retired as Executive Director
and Group Chief Underwriting Officer after 33 years with Hiscox.
He has made a massive contribution to the business in that time
in a variety of leadership roles and I thank him for everything he
has done. He stays on with us as Non Executive Chairman of
Hiscox Re & ILS and also as a Director of our London Market
subsidiary. Both are roles he is admirably suited to, and qualified
to do, and I am pleased we will continue to benefit from his
expertise in this way.
Joanne Musselle replaces Richard as our new Chief Underwriting
Officer for the Group and Executive Director. This was an
internal appointment after an extensive search both inside
and outside of Hiscox. Joanne has been with Hiscox since
2002 and has some very valuable experience under her belt,
gained in claims management, as Chief Underwriting Officer for
Hiscox UK & Ireland, and latterly as Chief Underwriting Officer
of all our retail operations. I am delighted we will benefit from her
expertise on the main Board.
Following nine years of service, at which point the UK Corporate
Governance Code deems him not independent, Robert
McMillan, stepped down from the Board in May. Bob’s vast
experience in building retail businesses has been invaluable and
I am pleased that we will continue to benefit from his advice as
he remains a Non Executive Director on our Hiscox USA Board.
Hiscox Ltd Report and Accounts 2019
15
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chairman’s statement
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Outlook
We aim to balance Hiscox Retail with the higher-volatility
big-ticket businesses. Looking forward, we expect our retail
business to get back on track, with better growth this year
than last and an improved combined ratio. We will trim the
reinsurance business to suit conditions. The London Market
is seeing improvements in rates and conditions. In the past
these improvements have made it straight through to much
better returns. We have the brand, talent and diversity
of product and geography to make the most of the
opportunities ahead.
Robert Childs
2 March 2020
* Restated to reflect previously announced tax provisions. See note 2.2 to the
financial statements.
† The new IR35 legislation that comes into effect from April 2020 will change the
way in which contractor status is determined when working with medium and
large organisations in the private sector.
We have the brand,
talent and diversity of
product and geography
to make the most of the
opportunities ahead.
Outlook
It is with great sadness that I report the death of Dr James King
during 2019, who served on the main Board from 2006 to 2015
and was a valued counsellor. His sound common sense and
incisive mind were very important to me. As a Bermudian, he
was an able pilot helping us to navigate our arrival on Bermuda
in 2006.
Culture and values
We periodically review our culture to make sure as a Group
we have the right set of values to guide us.
We have recently finished a year-long initiative, which involved
canvassing hundreds of employees from across the Group
asking: what makes them proud to be a part of Hiscox,
what values resonate with them and what values they see
being lived. I am glad to say that this has resulted in some
fine-tuning of our values to guarantee that they are fit for
purpose for the future.
As a result of our values re-fresh we’ve adopted ‘connected’
as the theme of this year’s Annual Report. It captures our
sense of togetherness and our long-term commitment to
building a sustainable business of which everyone can be
proud. Part of that connectedness is also about looking out
for each other, knowing the people we work with and creating
networks beyond teams. I am proud of the WeMind initiative
created in the UK by our employees; a mental health and
well-being network that introduced mental health first aiders
and oversees activities including a ‘walk and talk club’ to
bring people together to discuss what’s on their mind and
delivered mental health training for over 100 people managers.
It was gratifying for the team behind this initiative to receive
the Outstanding Employee Network of the Year award at the
European Diversity Awards 2019 and shows how our values
are being lived by the people who work here. I thank them all
for their hard work during the year.
16
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Chief Executive’s report
2019 showed the value of our
long-standing strategy of building
and broadening the balance in our
business between big-ticket lines
and more steady retail earnings.
Good performance by Hiscox UK and Hiscox Europe,
combined with strong investment returns, offset the impact
of a third year of catastrophe events and some adverse
claims development in the big-ticket business and Hiscox
USA. This allowed us to deliver a combined ratio of
105.7% (2018: 94.9%) and a pre-tax profit of $53.1 million
(2018: $135.6 million*). This is below our ambitions and your
expectations of us. We have taken necessary action which
is having a positive impact.
Gross premiums written grew in constant currency by 8.1%
to $4,030.7 million (2018: $3,778.3 million). We have seen
good rate momentum in many areas, and will continue to
grow in a disciplined way. We have cut over $200 million of
underperforming business, but we are still growing having
found new opportunities where conditions are good and rates
are healthy. In the same way that our strategy of balance has
given us resilience in the short term, it drives opportunities in
the medium term and we are optimistic about the prospects
for our $2.2 billion Retail business, and in the benefit of the
repricing we are seeing in our London Market business.
I review each of our business areas in turn below.
Hiscox Retail
Hiscox Retail comprises our smaller ticket businesses in
the UK, Europe, the USA and Asia, and our Special Risks
business. In this division, our specialist knowledge
and tailored products differentiate us and our ongoing
investment in brand helps us build strong market positions.
Retail profits increased by 22% to $178.4 million
(2018: $146.3 million*) with a combined ratio of 98.7%
(2018: 93.6%). Investment returns were a material
contributor and we were pleased that Hiscox Retail
experienced continued positive prior year reserve
development of $46 million (2018: $100 million) despite
strengthening in a few poor performing lines.
As we said in our Q3 trading update, the 2019 combined
ratio for Hiscox Retail is outside the 90-95% range we target
for this division due to the impact of claims activity in the
USA and a cautious approach to reserve development.
Our US experience is due to three factors. First, like
others in the US private company directors and officers’
(D&O) market, we experienced an increase in claims costs
on the employment practices liability element of the cover.
Hiscox Ltd Report and Accounts 2019
17
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
We now serve over
1.2 million retail
customers generating
$2.2 billion of premiums.
Hiscox Retail
Hiscox Retail
Gross premiums written
Net premiums written
Underwriting profit
Investment result
Profit before tax
Combined ratio (%)
2019
$m
2018
$m
2,196.3
1,957.5
36.5
133.9
178.4
98.7
2,087.1
1,874.5
125.4
19.9
146.3†
93.6
† These figures have been restated to reflect previously announced tax provisions. See notes 2.2 and 4 to the
financial statements.
Our lower D&O policy limits leaves us relatively insulated from
‘jumbo awards’, but the trickle-down effect increased average
claim size. Second, the time to settle small business casualty
claims in the USA has lengthened, increasing our currently
outsourced legal costs. Finally, in line with our cautious
approach, we are setting more prudent current year loss
picks, and we expect to hold reserves for longer.
As we announced last year, we have responded firmly to
these factors. We have reduced our private company D&O
book from $80 million to less than $20 million and are investing
in strengthening our internal claims capability to allow us
to in-source more of our legal work. Rates for US private
company D&O are turning and we are seeing increases
of 13%. We are confident that our Retail combined ratio
will improve by 1-2% per annum to return to our 90-95%
combined ratio target range in 2022.
We now serve over 1.2 million Retail customers generating
$2.2 billion of premiums, growth of 7.1% in constant currency
(2018: 1 million customers and $2.1 billion GWP). A key priority
has been building the brand as well as the infrastructure to
operate effectively at this scale. In the last decade we have
invested over $500 million in marketing of which $88.9 million
was in the last year (2018: $69.7 million). We see the pay-off
in brand awareness, affinity, consideration and decision
to purchase, all of which are key drivers of our economics.
Our multi-year IT modernisation programmes continue in
order to support the growth ahead.
Our direct-to-consumer and partnerships businesses are
thriving, seeing compound growth of 29% over the last three
years. We focus largely on micro businesses, sole traders and
businesses with fewer than ten employees, and 80% of our
customers have premiums of less than $/£/€1,000.
The opportunity for Hiscox Retail remains enormous, with an
addressable small business market in countries where we
already operate of over $80 billion of premium income and
growing. We estimate that we currently serve less than 2% of
this highly fragmented sector. At the moment this opportunity
is clearest in the USA where we are ahead of the competition,
but inevitably some are now beginning to respond. Ongoing
investment in marketing is essential as we continue to see greater
value in investing for profitable growth, rather than running the
business for short-term profitability. Building a small-ticket retail
business takes time, but persistence pays off in market position,
18
Hiscox Ltd Report and Accounts 2019
scale and long-term profitability. Our expectations for revenue
growth for Hiscox Retail remain between 5-15%.
During the year, we made an additional tax provision of up to
$60 million following a reappraisal of how we invested in, and
classified, marketing activity historically. This additional provision
has been presented as a prior year adjustment and, as a result,
the previously disclosed profit for 2018 has been restated.
Hiscox UK
Hiscox UK provides commercial insurance for small- and
medium-sized businesses as well as personal lines cover,
including high-value household, fine art and luxury motor.
Hiscox UK had a good year of recovery after a challenging
2018 as it adapted to a new IT system with new ways of
working which impacted growth. Service levels have now
improved and we appreciate the support of our brokers
and customers while we worked hard to put things right.
Gross premiums were up by 3.9% in constant currency
to $746.4 million (2018: $749.6 million) with our commercial
business growing by 9%.
The direct-to-consumer market remains competitive,
particularly in commercial lines. Despite this, we are operating
in healthy niche markets and have been able to grow premiums
by around 10%. Looking forward, IR35 (the changing basis of
taxation for independent contractors), may have a short-term
modest impact on growth.
In household broker business, retention was impacted due
to the tough pricing action taken over the last 18 months in
response to market-wide claims trends such as the growing
prevalence of escape of water claims. I am pleased to report
a return to profitability and stability in top line, driven by our
award-winning claims reputation.
Cyber is a growth area and we launched a new and enhanced
product called CyberClear during the period. We are proud that
it has been rated the most comprehensive cyber insurance
policy for SMEs as the first and only policy to receive a 100%
score in the Insurance Times Cyber Product Report.
The team’s hard work was recognised with three industry
awards; Insurance Times’ Personal Lines Insurer of the Year
and Cyber Product of the Year, and, at the British Insurance
Awards, Insurance Provider of the Year.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
An actively managed business mix
Total Group controlled premium 31 December 2019: $4,530 million
(Period-on-period in constant currency)
Small
commercial
Reinsurance
Property
Art and
private client
Specialty
Global
casualty
Marine
and energy
+10%
+11%
+4%
+1%
+1%
+28%
+17%
$1,568m
Professional liability
Errors and
omissions
Private directors
and officers’ liability
Cyber
Commercial
small package
Small technology
and media
Healthcare related
Media and
entertainment
$982m
Property
Marine
Aviation
Casualty
Specialty
$574m
Commercial
property
Onshore energy
USA homeowners
Flood programmes
Managing
general agents
International
property
$456m
Home and contents
Fine art
Classic car
Luxury motor
Asian motor
$446m
Kidnap and ransom
Contingency
Terrorism
Product recall
Personal accident
$275m
Public directors and
officers’ liability
Professional
indemnity
Large cyber
General liability
$229m
Cargo
Marine hull
Energy liability
Offshore energy
Marine liability
Hiscox Ltd Report and Accounts 2019
19
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
We have an addressable
market of 30 million small
businesses in the USA.
Hiscox USA
Hiscox Europe
Hiscox Europe operates in Germany, France, Benelux,
Iberia and Ireland. These businesses provide personal lines
cover, including high-value household, fine art and classic
car, as well as commercial insurance for small- and
medium-sized businesses.
Our European operations had another excellent year, delivering
$408.4 million in gross written premiums (2018: $372.2 million),
an increase of 15.6% in constant currency. Our new carrier,
Hiscox SA, started trading in January 2019, and we successfully
transferred all policies to our new entity. This completed
our Brexit restructuring for Hiscox Retail, a multi-year
effort which cost us $18 million and required $50 million
in incremental capital.
We continue to see strong demand for our professions, specialty
commercial and cyber products across our businesses in
Europe. This has enabled us to carve out a leadership position
for these lines in Germany, Spain and Benelux.
We extended our footprint in Germany, opening offices in Berlin
and Stuttgart, and expanded the team in Munich. Additional
investment in marketing and distribution is having a positive
impact, and the team were rewarded for their efforts with a
‘Best in Industry’ award for our claims management in D&O,
cyber and professional indemnity from AssCompact, a popular
broker publication.
In France we have seen a return to stronger profitability after
several challenging years. This improvement has been driven by
a period of portfolio adjustment which included the introduction
of a new underwriting and pricing strategy. A continued focus on
growing our partnerships business in Spain, through innovative
solutions and by improving the service we offer, has seen a 20%
increase in premium versus the prior year. We will continue to
build on our successful partnerships in both France and Spain
and actively explore new distribution opportunities in
the technology and insurtech space.
The roll-out of our ‘MyHiscox’ broker extranet sites across
Europe has made it easier for brokers to do business with us
by providing them with access to additional products and
self-service features. The robotic process automation (RPA)
which has been rolled out across policy administration,
claims and finance, has resulted in the automation of 115,000
transactions in 2019. This enables us to not only automate
20
Hiscox Ltd Report and Accounts 2019
back-end processing but also further improves service levels
for our brokers and partners.
Similar to the systems changes completed in the UK and
under way in the USA, we are also about to begin the multi-year
implementation of a new core platform for Europe, starting
in Germany in 2020. This is a necessity to support the scale
of the business.
Our business in Europe has grown since we opened our first
office in Paris in 1995, with no business, and lots of ambition.
It is now a consistent and important contributor to our profits.
Hiscox Germany reached €100 million in premiums in 2019 and
France will follow suit in 2020. The market in our segments in
Europe is significant and our ambition is to have Hiscox Europe
match Hiscox UK in scale and profits. This is a significant
opportunity for us.
Hiscox USA
Hiscox USA underwrites small- to mid-market commercial risks
through brokers, other insurers and distribution partners and
directly to businesses online and over the telephone.
The business continues to achieve strong growth, with gross
premiums written increasing by 6.8% over the year in constant
currency to $865.0 million (2018: $809.6 million), growing to 11%
in the second half. Despite market challenges in some casualty
lines, Hiscox USA delivered a profit in 2019.
Our direct and partnerships division (DPD) continues to be
the star performer to reach $275 million. It has benefited from
our sustained investment in marketing and brand building.
We launched our first fully integrated marketing campaign
with ABC TV and Major League Baseball this year, and have
continued to build on our ongoing ‘Encourage Courage’
campaign aimed at small businesses – all of which helps to
differentiate us from our competitors.
Our broker channel business has seen strong growth in
healthcare and general liability where rates are attractive, but
a disciplined approach in private company D&O, media and
entertainment business has resulted in a reduction in those
areas throughout the year. The action we have taken in these
lines is working, as we have seen an improvement in current year
loss ratios. Like others in the market, we are seeing increased
competition in mid-market cyber, which has led to reduced
pricing and widening cover, and we are being selective.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Over 75% of all business
we write at Lloyd’s is
bound electronically.
Hiscox London Market
Hiscox London Market
Gross premiums written
Net premiums written
Underwriting (loss)/profit
Investment result
Profit before tax
Combined ratio (%)
†See note 4 to the financial statements.
2019
$m
967.9
504.6
(26.3)
50.6
30.4
104.4
2018
$m
877.7
522.9
68.2†
10.8
75.8†
89.3
Our preparations for the US IT systems changes, which are
necessary to support our future growth plans, are progressing
well, with roll-out to DPD expected during 2020.
We have an addressable market of 30 million small businesses
in the USA and these investments in IT and marketing will help
us achieve our ambitions.
Hiscox Special Risks
Hiscox Special Risks underwrites kidnap and ransom (K&R),
security risks, personal accident, classic car, jewellery and fine
art, with teams in London, Guernsey, Cologne, Madrid, Munich,
Paris, New York, Los Angles and Miami.
Gross premiums written decreased by 3.1% in constant
currency to $129.9 million (2018: $136.2 million). Our expertise in
the K&R market has helped us maintain our leadership position
in a very competitive environment. While others in the market
are streamlining their offering, we remain focused on building
out our expertise and will continue to innovate to preserve our
market share. A highlight this year was a new product the team
developed and brought to market in just two weeks to support
our marine clients travelling to the Gulf following political tensions
in Iran. It is precisely this responsiveness which sustains and
builds our market position with customers.
Hiscox Asia
Our brand in Asia, DirectAsia, is a direct-to-consumer business
in Singapore and Thailand that sells predominantly motor
insurance. It grew gross written premiums by 36.6% in
constant currency to $46.6 million.
Singapore and Thailand have attracted and retained record
numbers of customers, driven by the success of new
partnerships with firms like Prudential, Shell and Vicom.
Similar partnerships with like-minded businesses will
enable us to continue on this growth trajectory. An ongoing
investment in brand has helped us to combat increased
competition and supports our drive to reach scale.
Hiscox London Market
Hiscox London Market uses the global licences, distribution
network and credit rating available through Lloyd’s to insure
clients throughout the world.
104.4% (2018: 89.3%). The most material adverse impact came
from attritional losses in property, and large loss activity in
D&O and alternative risk. We also suffered adverse prior-year
development from healthcare, and prior-year catastrophes.
A second year of rising rates in the London Market has
driven above-budget growth of 10.3% to $967.9 million
(2018: $877.7 million), or 11.2% in constant currency. Positive
momentum has continued in the majority of classes, spurred on
by a withdrawal of capacity and the Lloyd’s ‘Decile 10’ initiative
which has instilled some much-needed discipline in the market.
We have seen material rate increases in major property, cargo,
hull, and general liability. In US public company D&O, rates are
up by nearly 60% and we have grown substantially. These rate
improvements are necessary after the extended soft market,
however, in some areas such as Florida small property risks and
personal accident, rates are still not reflective of the risk, and
where necessary we will shrink.
In property, we are actively changing the portfolio mix and
reducing our exposure in our household and commercial binders
where we have suffered attritional losses alongside catastrophe
losses from Hurricane Dorian. This action will improve underlying
profitability in time; however, the 12-month terms on binder
business means that we will not see the full benefits until 2021 and
2022. Terrorism delivered good profits in tough market conditions,
despite being impacted by riots in Hong Kong and Chile.
Modernisation in the London Market is a multi-year, market-wide
initiative which I believe is critical to the long-term success of
Lloyd’s. We have been strong supporters of the push towards
electronic trading via Placing Platform Limited, an initiative which
I chair, and I am pleased to say that over 75% of all business we
write at Lloyd’s is now bound electronically.
The goal for Hiscox London Market is ‘to lead the way in
emerging risk’ and so we have been focused on driving
awareness of new risks. We held a first-of-its-kind ‘cyber cube’
experiential event on the trading floor of Lloyd’s of London
which tested cyber security knowledge and promoted our new
CyberClear365 product. We created a virtual reality simulation
of a US hurricane and an app to assist our client’s understanding
of rising sea levels and the downstream impact for homes and
communities. These events drive awareness and sales.
Hiscox London Market’s profits decreased to $30.4 million
(2018: $75.8 million*) and the combined ratio deteriorated to
We are also leading the way in digital trading. Our FloodPlus
product uses external data to price risks more precisely and
Hiscox Ltd Report and Accounts 2019
21
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Both of our flagship
Kiskadee Funds ended
2019 with positive
returns, a good result
in a challenging year.
Hiscox Re & ILS
Hiscox Re & ILS
Gross premiums written
Net premiums written
Underwriting loss
Investment result
Loss before tax
Combined ratio (%)
†See note 4 to the financial statements.
2019
$m
866.5
216.7
(144.7)
38.5
(93.8)
163.9
2018
$m
812.0
241.5
(23.2)
7.4
(28.7)†
116.9
we drive down cost by using APIs to connect to US coverholders.
We also use third-party capital to leverage our expertise, giving
us larger lines to deploy through consortia for general liability,
space, flood and product recall.
We are optimistic about conditions in the London Market and
have increased our stamp capacity – the amount of business
we can write through Lloyd’s via Hiscox Syndicate 33 – by 19%
year-on-year to £1.7 billion in 2020. This gives us the headroom
to execute our plans, taking advantage of the ongoing price rises
and dislocation in the market.
Hiscox Re & ILS
Hiscox Re & ILS comprises the Group’s reinsurance teams,
based in London and Bermuda, and insurance-linked securities
(ILS) activity. The team underwrites on behalf of Hiscox and
third-party capital partners, including other insurance
companies, Lloyd’s syndicates and capital market investors.
Hiscox Re & ILS has been impacted by another year of heavy
catastrophe claims, resulting in a loss before tax of $93.8 million
(2018: loss of $28.7 million*) and a 2019 combined ratio of
163.9% (2018: 116.9%). This is the third consecutive year of
large events. Our long-standing relationships in the Japanese
market meant that Typhoons Faxai and Hagibis had a material
impact on us. We also experienced claims from Hurricane Dorian
which impacted the Bahamas and the USA, as well as from
the riots in Chile and wildfires in Australia. Unusually, Hiscox
Re & ILS suffered prior year deteriorations due to the adverse
development of 2018 Typhoon Jebi and the need to strengthen
reserves for the healthcare business which we exited in 2017.
All of these factors combined meant we had this poor result.
Gross premiums written grew by 7.4% in constant currency to
$866.5 million (2018: $812.0 million), as rate improvement in
loss-affected property lines and retrocession was offset by
deliberate reductions in risk excess and our withdrawal from
casualty reinsurance business. Throughout the year, the team
remained disciplined in the face of underwhelming, albeit
positive, rate improvement, still dampened by an overabundance
of capacity despite three years of significant market losses.
Our ILS offering continues to see interest from new and existing
clients, with assets under management at $1.5 billion. Both of
our flagship Kiskadee funds ended 2019 with positive returns, a
good result in a challenging year. We expect that ILS funds under
management will decrease in 2020 as one of our investors has
22
Hiscox Ltd Report and Accounts 2019
indicated that they will reduce their commitment to this asset
class. At the beginning of 2019 we launched a new fund, giving
ILS investors access to both reinsurance and primary insurance
risk through the Hiscox Re and Hiscox London Market teams.
The fund launched with $100 million in capital and we have
been pleased with its performance in its maiden year. We also
launched a new fund for 1 January renewals, offering investors
a higher risk/reward profile to complement our existing medium
and lower risk/return funds.
In such an uncertain environment as this, it pays to be disciplined
and nimble. The vision for Hiscox Re & ILS is ‘one team, unlocking
capital and pioneering risk’ and the goal is to bring together our
capabilities from underwriting through to analytics, research
and claims, in order to profit in changing markets. We continue
to believe engaging with multiple capital sources will allow us to
write a broader range of products, more of them, and at better
margins. At the moment we do not expect to fully use all of the
capital available to us in 2020 as rate increases continue to be
below our targets. We therefore expect top line growth to remain
subdued as we pursue a disciplined path.
Claims
It has been a busy year for claims in big-ticket lines and Hiscox
USA as outlined previously; however, our Retail businesses in
the UK and Europe had a relatively good claims experience.
For Japanese Typhoons Faxai and Hagibis, and Hurricane
Dorian which impacted the Bahamas and the USA, we reserved
$165 million and in addition we expect $25 million in reduced
fees and profit commission.
In 2019, we had a small positive reserve release of $26 million
(2018: $326 million) from prior years. Despite its challenges
in the USA, Hiscox Retail had a positive prior year reserve
development of $46 million (2018: $100 million). Hiscox London
Market and Hiscox Re & ILS suffered deteriorations of $20 million
in aggregate (2018: $126 million favourable). We seek to reserve
cautiously and our reserves are set at 9.4% above actuarial
estimates (2018: 11.0%). We expect that we will return to our
more normal pattern reserve releases of 9% to 12% of opening
reserves over the next three years. In 2020, we expect reserve
releases to be between 3-5% of opening net reserves, returning
to our normal pattern over the next three years.
Information technology and major projects
The significant investment we are making in replacing end-of-life
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
$1.2bn
paid out in claims across the Group.
technologies with new systems and processes has continued
this year. Our Retail customer numbers have grown by 172% to
1.2 million over the last five years, and we need this improved
infrastructure to meet their expectations for system availability,
digital accessibility, and operational robustness. Regulators are
also beginning to scrutinise the financial sector’s operational
resilience. Although our core system availability is currently over
99.9% these investments mean we are building a business
with the infrastructure to support our future growth ambitions.
2019 saw the bedding in of the new Hiscox UK IT system. After a
challenging period of adjustment in which broker service levels
were not what we would have hoped, I am pleased to say we
have seen a return to normalcy. Those products which are not
on the new system will be migrated across by 2022. In the direct
channel, the underwriting of 90% of direct commercial business
and in the broker channel 60% of new business, is automated.
The increased automation of simple underwriting process has
freed our underwriters up to do what they do best by focusing
their efforts on our most unusual or complex risks.
Hiscox USA worked on a new system in 2019 and 2020 will see
this go live within our DPD business with the project concluding
in 2021. Our US broker channel will follow once the new system
has had the opportunity to embed. Hiscox Europe is at the start
of a similar journey, with preparations under way to begin system
changes in Germany, and so will benefit the most from our
lessons learnt along the way.
We are now in the implementation period of our Group-wide
finance transformation programme, which will replace our
core finance systems and evolve the capabilities of our
finance teams worldwide.
We expect that 2020 will be the last year of peak system
change, with the volume of change dropping to a lower level
from 2021. As the systems become fully functional we can
expect to see benefits in the Group’s expense ratio.
2020 will also see Hiscox develop a new UK location strategy.
Hiscox London has been located at 1 Great St Helen’s for the last
22 years and our lease will soon come to an end. Before moving
into new premises, we have taken the opportunity to review our
UK footprint in order to shape our UK-based activities to support
growth at a lower cost. Over the next two to three years we
will move up to 300 roles out of London to join the 750 Hiscox
employees already working in other locations across the UK.
Investments
We manage our investment portfolio with two main objectives
in mind: providing sufficient liquidity to pay claims and providing
capital to support the underwriting business, while generating
strong risk-adjusted returns. On all fronts, the investment
portfolios delivered in 2019.
With the tailwinds of strong markets, our investment return
was the best we have seen in several years. US bonds form
the majority of our portfolios across the Group, and we
maintained a modest allocation to equities and other risk
assets. As a result of this strategy, our investments made
$223.0 million (2018: $38.1 million) after deducting investment
expenses, a return of 3.6% (2018: 0.7%).
Given the strength of markets in 2019, we do not expect a
repeat in the year ahead. Government bond yields are lower
and corporate bond spreads look tight. Having re-rated, equity
markets are clearly less well placed than after the falls of 2018.
Markets also seem relatively sanguine about political instability
but this does not mean such events cannot have an impact;
there is no shortage of events in the calendar in the year ahead,
the US election amongst them. As such, we enter the year more
cautiously, but remain prepared to add risk as opportunities
present themselves.
People
Building an insurance business requires a pile of money and a
group of talented people. As capital will follow talent, we put a
disproportionate effort on attracting, developing, retaining and
rewarding talented people. This is a never-ending effort with
different approaches being used at different levels of seniority.
In 2019 across Hiscox we received around 50,000 applicants for
advertised roles, and hired 867. As a parent of children applying
for junior roles, I became aware that for many companies the
recruitment process can be like a black hole – you apply and hear
nothing, not even an acknowledgement. Hiscox was better than
this, but not always good enough. In 2019 we re-engineered our
approach to job seekers, thinking of them with the same care
and intelligence that we apply to customers. We introduced a
net promoter score for all applicants, a brave decision when we
have 58 rejections for every successful applicant. I am pleased
to report that our net promoter score amongst those who were
unsuccessful after interview improved by 26 points over the year,
a real vindication of a recruitment approach much more in tune
with our human value.
Hiscox Ltd Report and Accounts 2019
23
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Strategic focus
Total Group controlled income for 2019
100% = $4,530 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, relatively 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%
Large property
8%
Casualty
6%
Specialty – terrorism, product recall
5%
Marine and energy
5%
24
Hiscox Ltd Report and Accounts 2019
Small commercial
27%
Tech and media casualty
7%
Art and private client
10%
Specialty – kidnap and ransom,
contingency, personal accident
5%
Small property
5%
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Chief Executive’s report
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
We are still a small and
successful player in many
of our areas with plenty of
room to grow.
Outlook
For many years at a senior level, we have practised
personalised career development and succession planning
to ensure that we have the right mix of leadership experience,
underwriting nous, business acumen and technical skills to
drive the Group forward – and it is working. Individual
development plans fit in with global succession plans,
as we have seen with the recent appointment of Joanne
Musselle as Group Chief Underwriter who replaced
Richard Watson on his retirement outlined in the Chairman’s
statement. Similarly, in April 2019 Bob Thaker was
appointed CEO of Hiscox UK, after an internal and external
search. Bob joined Hiscox ten years ago in a Group
strategy role and has worked in UK Claims, Hiscox Asia
as Chief Operating Officer and then Chief Executive.
He was replaced in Asia by Celine Chotithamaporn,
an external hire who brings valuable local cultural and
industry knowledge.
In 2019 we welcomed Grace Hanson as our new Chief
Claims Officer, again after an internal and external search.
Grace has held multiple roles in the industry in the USA
and Bermuda, and she brings a unique blend of experience
in both big-ticket and smaller-ticket retail claims. We are
already benefiting from her broad experience as she directs
the re-engineering of our US claims function.
We believe that this approach – looking ahead, taking
career risks on talent, but looking externally as well, ensures
smoother senior leadership transitions, to the benefit of the
individuals, the business and shareholders.
Purpose and values
During the year we undertook a Group-wide conversation
and workshop process to define our purpose and update
our values. This involved over 500 staff from all geographies
and seniorities. We last did this five years ago.
We see our purpose as ‘As experts in risk, we give people
and businesses the confidence to realise their ambitions’.
Whether they are a small business, a large corporate, a
homeowner or a collector, we believe our expertise and
clear products are a safety net, giving our clients confidence.
If a loss occurs their claim will be handled sympathetically,
professionally and fairly. If we do this well our customers
are free to do what they want to do most – pursue their
ambitions with confidence.
Our values evolve as our business and the societies we
serve evolve. Our refreshed values are:
A Integrity – do the right thing, no matter how hard.
A Courage – dare to take a risk.
A Human – clear, fair and inclusive.
A Connected – together, build something better.
A Ownership – passionate, commercial and accountable.
Most businesses have values. The challenge is to believe in
them and then live up to them, accepting that we are all human
and will err while we strive to do so. The inclusivity of the process
we went through in updating our purpose and values showed
the real passion our staff have for living the values, and we have
all committed to use them as a reference point in our day-to-day
and longer-term decision-making. We believe that by trying to
do so, we make better decisions, make Hiscox a better business
to work with and a better place of employment for talented
ambitious people, to the ultimate benefit of customers, staff,
shareholders and society.
Outlook
I am excited and optimistic about the scale of opportunity we
have ahead of us.
In the short term we will take advantage of the strong pricing
momentum in our London Market business, navigate our way
through the pricing challenges in reinsurance and continue to
build our profitable Retail businesses. Our success in this will
be reflected in our 2020 earnings.
Looking further ahead, we are still a small and successful player
in many of our areas with plenty of room to grow. Our strategy
of balance, between big-ticket lines and our more steady retail
earnings, continues to provide us with options. We have made
investments in people, brand and infrastructure that will help
us deliver our ambition to be the leading specialist insurer in the
markets in which we operate – leading in growth rate, profitability
and reputation.
Bronek Masojada
2 March 2020
* Restated – see notes 2.2 and 4 to the financial statements.
Hiscox Ltd Report and Accounts 2019
25
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Capital
The Board monitors the Group’s capital strength, ensuring Hiscox
remains suitably capitalised for regulatory and rating purposes,
and to fund future growth opportunities.
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.
The Group measures its capital requirements against its
available capital, which 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 rating agency capital requirements.
At 31 December 2019 available capital was $2,276 million
(2018 restated: $2,405 million), comprising net tangible asset
value of $1,912 million (2018 restated: $2,055 million) and
subordinated debt of $364 million (2018: $350 million).
The Group can source additional funding from revolving credit
and Letter of Credit (LOC) facilities. Standby funding from
these sources comprised $800 million at 31 December 2019
(2018: $800 million), of which $50 million was utilised at
31 December 2019 (2018: $50 million).
Our key rating agencies, A.M. Best, S&P and Fitch, calculate
capital adequacy by measuring available capital, after making
various balance sheet adjustments, and comparing it with
required capital, which incorporates charges for catastrophe,
premium, reserve, investment and credit risk. Our interpretation
of the results of each of these models indicates that we are
comfortably able to maintain our current ratings.
Read more about our current ratings in note 3 to the
financial statements
123
Read more about our financial condition in our financial
condition report
hiscoxgroup.com/about-hiscox/group-policies-and-disclosures
The largest driver of our capital requirement 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 ($135 million), with an
allowance for expected investment income. A market loss of this
magnitude would be expected to bring about increases in the
pricing of risk, and the Group’s capital strength and financial
flexibility following this scenario means we would be well positioned
26
Hiscox Ltd Report and Accounts 2019
to take advantage of any opportunities that might arise as a result.
Read more about underwriting risk
hiscoxgroup.com/about-hiscox/risk-management
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 and provide
a return in accordance with the Group Solvency Self Assessment
(GSSA) framework, including an assessment of the Group’s
Bermuda Solvency Capital Requirement (BSCR). The BSCR
model applies charges for catastrophe, premium, reserve, credit
and market risks 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 Group-wide
Hiscox integrated capital model (HICM) that, 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.
The Group’s estimate for the year-end 2019 BSCR solvency
coverage ratio is 205%, which includes the first stage of changes
to the BSCR standard formula being phased in by the BMA over a
three-year period beginning in 2019. The changes are expected to
reduce the Group’s BSCR solvency coverage ratio by an estimated
ten percentage points per annum over the next two years.
As the Group’s premium base continues to grow and become
more diversified, the Group has elected to recognise geographic
diversification within its premiums and reserves in the BSCR
standard formula. The resulting diversification benefit has offset
the impact of the changes in the formula.
The Group expects to further mitigate the impact of the changes
to the BSCR standard formula through ongoing capital generation
and optimisation activities over the remaining two years of the
transition period.
The Group continues to operate with a robust solvency position
and expects to maintain an appropriate margin of solvency
after these changes have taken effect. In addition, each of the
respective insurance carriers holds appropriate capital positions
on a local regulatory basis.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Capital
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
$2,276m
Available capital at 31 December 2019.
Estimated BSCR post new formula
Rating agency assessments shown are internal
Hiscox assessments of the agency capital
requirements on the basis of year end 2019 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.
Projected capital requirement
$2.28 billion available capital
$2.19 billion available capital (post-final dividend)
Economic
Regulatory
A.M. Best
S&P
Fitch
Hiscox
integrated
capital model
(economic)
Hiscox
integrated
capital model
(regulatory)
Bermuda
enhanced
solvency
capital
requirement
Hiscox Ltd Report and Accounts 2019
27
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Risk management
We seek to maximise return on equity by taking risk where it is
adequately rewarded, within a defined risk appetite.
The Group’s 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. The Group’s success
is dependent on how well we understand and manage our
exposures to principal risks.
Read more about our key risks
9
More information on our risk management can be found at
hiscoxgroup.com/about-hiscox/risk-management
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. It is based on 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 identifying, measuring, managing, monitoring and reporting
risk 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 the mitigation approaches being used.
We consider how different exposures and risk types interact,
and whether these may result in correlations, concentrations
or dependencies. The objective is to optimise risk-return
decision-making while managing total exposure, and in
doing so remain within the parameters set by the Board.
The risk management framework is underpinned by a system of
internal control, which provides a proportionate and consistent
system for designing, implementing, operating and assessing
how we manage our key risks. This framework is regularly
28
Hiscox Ltd Report and Accounts 2019
reviewed and enhanced to reflect evolving practice on risk
management and governance. Over 2019, we continued to
embed and strengthen our system of internal control.
Risk appetite
The 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 exposure management and is
monitored throughout the year.
Our risk appetite is set out in risk appetite statements, which outline
the level of risk we are willing to assume, both by type and overall,
and define our risk tolerances: the thresholds whose approach
would represent a ‘red alert’ for senior management and the Board.
Risk management framework
Our continuing success depends on how well we understand
and manage the significant exposures we face.
Risk governance
Risk definition
Risk owner
Risk reporting
R S A proces
s
O
Risk appetite
Risk monitoring
Risk measurement
Risk mitigation
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Risk management
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Risk appetites, which are set for each of our insurance carriers
and for the Group as a whole, are reviewed annually, enabling
us 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 that may have an impact on capacity
and rates. In addition, in 2019 we began work to enhance and
strengthen our risk appetite statements across the Group.
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 below. 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
Three lines of defence model
risks such as catastrophe, reserving, investments and credit, as
well as emerging risks. The Group Risk and Capital Committee
and the Group Underwriting Review Committee make wider
decisions on risk.
The Own Risk and Solvency Assessment (ORSA) process
The Group’s ORSA process involves a self-assessment of
the risk mitigation and capital resources needed to achieve
the strategic objectives of the Group and relevant insurance
carriers on a current and forward-looking basis, while remaining
solvent, given their risk profiles. The annual process includes
multi-disciplinary teams from across the business, such as
capital, finance and business planning.
Hiscox Own Risk and Solvency Assessment (ORSA) framework
The Group’s ORSA process is an evolution of its long-standing
risk management and capital assessment processes.
First line of defence
Owns risk and controls
ORSA governance
Responsible for ownership and management of risks on a
day-to-day basis. Consists of everyone at every level in the
organisation, as all have responsibility for risk management
at an operational level.
Second line of defence
Assesses, challenges and advises on risk objectively
Provides independent oversight, challenge and support to
the first line of defence. Includes the Group risk team and the
compliance team.
Third line of defence
Provides independent assurance of risk control
Provides independent assurance to the Board that risk control
is being managed in line with approved policies, appetite,
frameworks and processes, and helps verify that the system of
internal control is effective. Consists of the internal audit function.
ORSA
documentation
Business
planning
Assurance
Risk
assessment
Capital
and solvency
assessment
Hiscox Ltd Report and Accounts 2019
29
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Risk management
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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 risk exposures, to inform Board decisions.
The Risk Committee relies on frequent updates from within
the business and from independent risk experts. At each of
its meetings during the year, the Risk Committee reviews and
discusses a risk dashboard and a critical risk tracker which
monitors 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. Stress tests and reverse stress tests (scenarios
which could potentially give rise to business failure as a result
of a lack of viability or 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 emerging and 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 role of the Group risk team
The Group risk team is responsible for designing and
overseeing the implementation and continual improvement
of the risk management framework. The team is led by
the Chief Risk Officer who reports to the Chief Executive,
the Risk Committee of the main Board and to those of the
relevant subsidiary boards.
Casualty extreme loss scenarios
As our casualty businesses continue to grow, we develop
extreme loss scenarios to better understand and manage
the associated risks.
Losses in the region of $80 million-$750 million could be
suffered in the following extreme scenarios:
Event
Pandemic
Multi-year
loss ratio
deterioration
Economic
collapse
Casualty reserve
deterioration
Cyber
Estimated loss
($m)
175
200
600
750
80-750
410
Global Spanish flu-type
event (high infection,
low mortality)
45% infection rate
20% medical treatment
0.3% case fatality
5% deterioration
on three years’ casualty
premiums c. $4 billion.
An economic collapse
more extreme than
any witnessed since
World War II.*
40% deterioration
on existing casualty
reserves of c. $1.5 billion.
Estimated 1-in-200
year event.*
A range of cyber
scenarios including
mass ransomware
outbreaks and cloud
outages. Includes ‘silent
cyber’ exposures.**
1-in-200 year
catastrophe event
from $220 billion
US windstorm.
The team works with the first-line business units to understand
how they manage risks and whether they need to make
changes in their approach. It is also responsible for monitoring
how the business goes about meeting regulatory expectations
around enterprise risk management.
Property
catastrophe
2019 has seen a focus on improving the efficiency of the risk
management framework, mainly through the streamlining and
automation of repeatable cycles such as the risk and control
self-assessment process. This drive for efficiency should allow
for an increase in risk deep-dives and for more support to be
available to the portfolio of Group-wide change programmes.
30
Hiscox Ltd Report and Accounts 2019
*Losses spread over multiple years.
**‘Silent cyber’ refers to losses incurred from traditional lines, from a cyber event.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Risk management
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
The Board is at the
heart of risk governance
and is responsible for
setting the Group’s risk
strategy and appetite,
and for overseeing
risk management
(including the risk
management framework).
The role of the Board in risk management
Property extreme loss scenarios
Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modelled losses
January 2020
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5–10 year
10–25 year
25–50 year
50–100 year
100–250 year
Mean industry loss ($bn)
02
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36
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67 145
This chart shows a modelled range of net loss the Group might expect from any one catastrophe event.
The white line between the bars depicts the modelled 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, JP WS – Japanese windstorm, EU WS – European windstorm, US EQ – United States earthquake, US WS – United States windstorm.
Hiscox Ltd Report and Accounts 2019
31
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Stakeholder engagement
We have a diverse range of stakeholders whose engagement is
critical to our continued success. We engage with, consider and
respond to our stakeholders’ needs at various levels of the Group,
up to and including Board level.
Shareholders
Our shareholders value our consistent
strategy, successful track record of
delivery, strong underwriting discipline
and sound capital management, and we
maintain ongoing engagement with them.
Employees
We want to build teams that are as diverse
as our customers and create a vibrant
work environment where all employees
can thrive.
Brokers
The risks we write through brokers
account for around 85% of our business
so it is essential that we build strong and
lasting relationships with those brokers
that share our values.
Regular investor interaction
We maintain regular dialogue with our shareholders
throughout the year, outside of the regular
drumbeat of the financial reporting cycle. This
is undertaken predominantly by the Chief Financial
Officer and our investor relations lead, who meet
with existing shareholders and potential investors
as well as research analysts, and participate in
industry conferences and roadshows. During
2019 they met with over 300 investors.
Financial reporting
We report to the market on Company performance
four times per year, which provides shareholders
with a quarter-by-quarter overview of business
performance and trading conditions. Each financial
report is made available on our website, and
along with other key corporate announcements,
is available as an email alert for subscribers, which
can be found at hiscoxgroup.com/investors.
Annual Report and Accounts
Our Annual Report and Accounts provides
shareholders with a wealth of information and is
designed to give them a better understanding
of a year in the life of Hiscox. When it comes to
our corporate governance practices, we include
some additional disclosures beyond our statutory
requirements where we think that doing so
improves our narrative reporting.
Investor roadshows
Our Chairman and Executive Directors maintain
a programme of investor roadshows, generally
following the publication of our preliminary and
interim results. The roadshows provide investors
with an opportunity to learn more about Company
strategy, strategic priorities, trading conditions
and other factors affecting our operations. During
the 2019 roadshows, our Chairman and Executive
Directors met with investors representing over 60%
of our issued share capital.
Annual General Meeting (AGM)
Our AGM provides another regular investor
touchpoint. At the 2019 AGM all resolutions were
passed, with votes in favour ranging from 92%
to 100%.
Remuneration policy consultation
We engaged with major shareholders on our
remuneration policy ahead of its renewal in 2020.
See pages 64 to 65 for more information.
32
Hiscox Ltd Report and Accounts 2019
Workforce engagement
Our annual employee engagement survey gives all
our employees the opportunity to provide honest
feedback on how they feel about Hiscox. We also
have an Employee Engagement Network, led by
our Employee Liaison and Non Executive Director,
Anne MacDonald. For more, see page 54.
Training and development
All employees have access to internal and external
resources to help drive their own learning and
development, as well as two formal opportunities each
year to discuss development needs and potential.
Our approach gives people the choice to develop in
their current role, take a step up or try something new.
Employee networks
Almost one in four employees belong to at least one
of our nine networks. From WeMind (mental health
and well-being) to Women at Hiscox and LGBT+,
each network provides focused discussion, practical
activities and support. Some of our Non Executive
Directors have participated, for example as part
of a panel discussion on career journeys. For more,
visit hiscoxgroup.com/our-employee-networks.
Communication updates
Employees receive regular updates on business
plans and performance through emails, intranet
articles and team meetings. We ensure everyone is
informed of matters; for example, in our customer
experience centre in York, we close the phone lines
for one hour each week to give those teams the
same opportunity to hear from leadership.
Annual ‘launch’ events and box meetings
Business unit leaders hold regular all-staff meetings
to align on strategy and objectives, inspire and excite.
These events are also when we celebrate those marking
ten or 20 years at Hiscox with long-service awards.
Partners’ meetings
Hiscox Partner is an honorary title given to employees
who make significant contributions to the development
and profitability of the Group. Up to 5% of the
total workforce are Hiscox Partners, and have the
opportunity to influence the direction of our business
through regular formal and informal Partners’
meetings, which Board members also attend.
Living Wage
We believe a hard day’s work deserves a fair day’s
pay, which is why in 2019 we became a Living Wage
employer in the UK.
Superb service ethos
Our long-held ‘superb service’ ethos means we
take the time to develop a greater understanding
of our brokers’ needs and the needs of their
customers. Hiscox UK and Hiscox London
Market have Chartered Insurer status from
the Chartered Insurance Institute, which
recognises the professionalism and expertise
of staff, and is a marker for attracting high-quality
business partners including brokers.
Annual preferred broker summit and rising stars
broker summit
For the last nine years we have held an annual
preferred broker summit for our UK brokers, and
more recently we have also hosted a rising stars
broker summit for the leaders of tomorrow. These
events are designed to inform and entertain our key
brokers, with a mixture of Hiscox-led presentations,
as well as external guest speakers.
Broker satisfaction survey
Each year we engage with our key brokers to
measure their satisfaction with our products and
services. In 2019, this involved surveying over
1,200 UK, US and London Market brokers.
Attending key broker events
We participate in key broker events in every part
of our broker-facing business. Our teams and
Board members attend events including: BIBA,
a UK insurance and broker conference; the CIAB,
a US marketplace meeting for commercial property
and casualty brokers and insurers; and, in our
London Market and reinsurance business,
Monte Carlo, Baden Baden, and RIMS.
Educational seminars
Throughout the year we hold a range of educational
events and roadshows for brokers, focused
on improving knowledge around complex or
unusual risks. In 2019 this included cyber and
commercial schemes.
Experiential events
We look to bring to life evolving and emerging risks,
and how our products respond to them, through
interactive broker events. During the year, we held a
‘can you crack the cube’ event at Lloyd’s of London
to test brokers’ cyber risk knowledge, as well as
a virtual reality experience at WSIA in San Diego
which simulated to over 120 brokers the impact
on a homeowner of a Category 5 hurricane hitting
the East Coast of the USA.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
Stakeholder
engagement
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Read more about our work in the
communities in which we operate in the
environmental, social and governance
(ESG) section
34
Customers
We have over 1.2 million retail customers
worldwide and providing each of them
with products they can rely on is our
reason for being.
Regulators
We are a global business with a
responsibility to engage with regulators
in all jurisdictions where we operate.
The Group is regulated in Bermuda, and
has regulated subsidiaries worldwide.
Research and insight
Finding out more from our customers about
insurance products and services enables us
to continually improve our offering. We talk to
thousands of customers each year, through
surveys, focus groups and other qualitative
research. This includes measuring our customer
service by collecting feedback after they have
contacted our service centre, bought a product
or made a claim.
Sharing news
In the UK, Cover Stories is a channel through
which we share news, opinion pieces and tips for
our home insurance and collections customers.
Here, we share seasonal pieces such as protecting
your home for winter, but also insight pieces on
upcycled furniture, art world news, developments
in collecting items such as wine or watches, and
more. We have similar channels in the USA for our
small business customers via our blog, including
a ‘side hustle to small business’ campaign which
showcased how individuals turned their side hustle
into a fully-fledged small business.
Vulnerable customers
We have developed our approach to dealing with
vulnerable customers in the UK this year, with new
policies and procedures and by establishing a team
of vulnerable customer champions within our UK
direct-to-consumer business. We currently have
over 20 vulnerable customer champions across our
York, London, Birmingham and Colchester offices,
and their work is already having a positive effect.
Piloting new technologies
Our customers play an important role in helping
us to pilot new technologies that can improve our
role in risk prevention. We have done this with
leak prevention technologies in the home as well
as internet alerts for home and small business
customers that help keep connections secure,
and we continue to explore other potentially
valuable preventative measures.
Educational tools
We have developed tools to help our customers
better understand their exposure to specific
types of risk. For example, our cyber exposure
calculator helps businesses of different sizes in
different jurisdictions to estimate the value of their
company’s data.
Regular meetings
Our Chief Compliance Officer and central
compliance team lead our relationships with
regulators worldwide and maintain regular dialogue
with them through informal meetings and calls.
In 2019, the team engaged with our various
regulators, with involvement from senior
management and the Board when required.
Regulatory change
We want to play our part in industry discussion
and help shape our sector, which is why we
contribute to the regulatory change process on
a variety of issues, both directly and through
active membership of trade associations in many
of the jurisdictions where we operate, such as the
Association of Bermuda Insurers and Reinsurers
and the Association of British Insurers. In 2019,
subjects covered have included regulatory
responses to climate change, ‘green finance’,
enhancements to data rights in parts of the USA,
and potential changes to the Solvency II regime
in Europe.
Supervisory co-operation
In 2019, the Bermuda Monetary Authority (BMA)
hosted a supervisory college meeting, which
included nearly all of the Group’s regulators
worldwide. This is an important annual opportunity
for us to present a consistent message to
our regulators on issues of common interest,
so seven of our senior management team
contributed to the session.
Stress and scenario testing
As in previous years, in 2019 we participated in
regulator-led stress and scenario testing exercises,
most notably the Prudential Regulation Authority’s
General Insurance Stress Test, part of which was
carried out in conjunction with the BMA. Beyond
the completion of these specific exercises, our
engagement with the regulators helped to shape
the stress tests from the outset, and also supported
our own embedded annual cycle of stress testing.
Regulatory reporting
The Group and all of its subsidiaries have met all
of their material regulatory reporting obligations
during the course of the year.
Hiscox Ltd Report and Accounts 2019
33
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Environmental, social and governance (ESG)
We take our role in the world seriously and want to play a
responsible part in society.
Hiscox ESG framework
Core themes
i s k
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customers can re l y o n
34
Hiscox Ltd Report and Accounts 2019
U
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Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
2019: C grade
2018: C grade
2019: 46%*
2018: 74%
* Change of methodology
in 2019.
2019: 31/100
First year of participation.
2019: 4.2/5
2018: 3.9/5
ESG oversight
In 2018, we appointed an ESG Executive Sponsor whose role is
to provide ESG oversight within the Executive Committee as well
as updates at Board level. Facilitated discussions on ESG took
place at both an Executive Committee and Board level during
2019, and these sessions focused on approving the Hiscox
ESG framework and agreeing the ESG plan for 2020.
Read more on the Board’s areas of focus in 2019
53
ESG oversight in the business
Hiscox Ltd Board
sDiscusses ESG twice-yearly.
sProvides challenge and approval of key ESG matters.
Executive Committee
s Sets strategy and reviews plans and
progress quarterly.
ESG working group
sChaired by ESG Executive Sponsor.
sMeets monthly.
s Includes representatives from underwriting,
investments, risk and corporate affairs.
ESG approach
We take our role in the world seriously and want to play a
responsible part in society. As an insurer, if we do our job
well, our customers and society benefit when times are tough.
Being an insurer our customers can rely on matters to us, and
it’s this philosophy that underpins our approach to ESG issues.
Like others, we are responding to a changing climate, and are
helping our customers and business partners to adapt through
our products and services. We also evolve as regulation changes
and public interest in emerging issues grows.
ESG issues touch many different parts of our business – such as
HR, risk, finance, underwriting and investments – and the Hiscox
ESG framework we developed in 2019 helps us stay focused
and make an impact. It ensures we are pragmatic and consistent,
teaming Group-wide themes with local market relevance.
See chart opposite.
More information on our approach to ESG can be found at
hiscoxgroup.com/responsibility/what-guides-us
ESG measurement
Our ESG efforts are measured both internally and externally.
Externally, we participate in a number of key ESG indices
including CDP, Dow Jones Sustainability Index and FTSE4Good,
and we reported against TCFD-aligned principles for the first
time in our 2019 climate report and ClimateWise submission.
Internally, we set key performance indicators for ESG issues
including carbon emissions and gender parity in recruitment.
We will look to build on these in 2020, with areas of focus to
include setting new carbon emissions targets and further
developing our approach to diversity and inclusion, with a
particular focus on ethnic diversity.
Read more about our ESG activities in 2019
36
Hiscox Ltd Report and Accounts 2019
35
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Our ESG framework in action
Environmental
Understanding climate risk and helping
our customers to adapt.
We carefully manage our environmental impact and work
with our customers, suppliers and business partners to
respond to the changing climate. For Hiscox, this means
looking at our operations and how we can reduce waste –
water, electricity and other consumption – helped by our
growing network of Green Teams. It also means investing
in areas such as research, catastrophe modelling and new
technologies that improve our underwriting capabilities
and benefit our brokers and customers.
Highlights
s We reduced our Scope 1 and 2 carbon emissions per
full-time equivalent (FTE) by 1% year-on-year. Our target
remains to complete a 15% real-term reduction in our
Scope 1, 2 and 3 carbon emissions per FTE by the end
of 2020, relative to 2014, and we will be setting new
carbon emission targets in 2020.
s We have been a carbon neutral business since 2014.
In 2019, we worked with Capricorn Ridge Wind Farm in
Texas to offset our location-based total of 9,198 CO2e
tonnes of carbon emissions.
s We are a founding member of ClimateWise, a global
insurance industry network, which leverages members’
expertise to better understand, communicate and act
on climate-related risks.
s We formally pledged our support of the Taskforce for
Climate-Related Financial Disclosures (TCFD) in 2019 and
reported against TCFD-aligned principles for the first time
in our 2019 climate report. You can read the report at
hiscoxgroup.com/climate-report.
s We built on the successes of our Green Team in
Bermuda with a UK Green Team to help us make
positive environmental changes across our UK offices,
and will look to establish other country green teams
in 2020.
Case studies
US virtual reality event raises awareness of flood risk
Flood is a growing climate risk faced by many of our
customers and we have focused on raising awareness of
the risk through education at the same time as developing
products that respond to it. We hosted a virtual reality event
in the USA which was attended by over 120 guests including
some of our key US brokers, giving them the opportunity
to experience a Category 5 hurricane for themselves, and
bringing to life the nature of the risk as well as the uniqueness
of our FloodPlus product offering.
36
Hiscox Ltd Report and Accounts 2019
New UK recycling processes helps reduce waste going
to landfill
We introduced new recycling processes in our York and
London offices to ensure less of the waste we generate ends
up in landfill. Although we encourage employees to use
re-usable cups, our disposable cups are now recycled by
a specialist company which turns the plastic elements into
tubing or park benches, and the paper elements back into
high quality paper and paper products. We also now collect
our plastic milk bottle lids and drinks tops, which go to high
street store Lush for recycling.
Investment in research and modelling improves wildfire
risk understanding
The devastating California wildfires of 2018 highlighted the
wildfire risk for (re)insurers worldwide. We invested in new
research and modelling throughout 2019 to further increase
our understanding of the risk. By licensing a new risk model for
wildfire, and applying our own in-house research to it – what
we call the ‘Hiscox view of risk’ – not only have we significantly
increased our understanding of the risk, we are now able to
price risks more accurately.
Expanding our involvement in ClimateWise
During the year we increased our involvement in ClimateWise,
which connects us to others in the (re)insurance industry
who are focused on adapting to a changing climate.
Having already been involved in the ClimateWise working
group for some time, our ESG Executive Sponsor and
member of the Executive Committee now sits on the
ClimateWise Insurance Advisory Council. This group
comprises of C-suite executives who work together to
strengthen the industry’s response to climate-related risks
and inform regulators, policymakers and other stakeholders
on how to promote a more systematic response to climate
change across the financial system, and we are pleased to
play our part.
Keeping Bermuda beautiful with beach clean-ups
Our employees are involved in a number of environmentally
responsible initiatives around the world. For example, in
Bermuda we work with Keep Bermuda Beautiful, the island’s
oldest environmental charity. Through their Adopt an Area
initiative, which gives individuals or teams responsibility
for a specific piece of the island, Hiscox has its own designated
area to take care of, so our Bermuda team work together to
hold regular beach clean-ups.
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Virtual reality event in the USA.
Our virtual reality event
in the USA was attended
by over 120 guests
including some of our
key US brokers, giving
them the opportunity to
experience a Category 5
hurricane for themselves.
FloodPlus
Reporting against
ClimateWise’s
TCFD-aligned
principles in 2019
resulted in a
score of 46%.
We have been a
carbon neutral
business since 2014.
Our Bermuda team work
together to hold regular
beach clean-ups.
Keep Bermuda Beautiful
Beach clean-ups in Bermuda.
Hiscox Ltd Report and Accounts 2019
37
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Our ESG framework in action
Social
Global themes, locally executed to
make an impact.
We strive to be a good employer, a trusted insurer and a
good corporate citizen, recognising that there is not a
‘one-size-fits-all’ solution to such matters; no claim, person
or plight is the same as another. We take our role in the
world seriously and so our claims philosophy, our strategy
for charitable giving and our employment practices all
contribute to our social narrative. It’s why we have had a
charitable foundation – The Hiscox Foundation – since 1987,
and why we have Hiscox Gives, which creates meaningful
volunteering opportunities for employees.
Highlights
s We paid out $1.2 billion in claims worldwide in 2019,
helping businesses and individuals recover after a loss,
for events including Hurricane Dorian and Typhoons
Faxai and Hagibis.
s We donated just over $1 million to good causes in 2019
through the Hiscox Foundation (UK and USA), Hiscox
Gives and individual employee efforts, and published
our first impact report, outlining how the money was
distributed and the difference it made. You can read
the report at: hiscoxgroup.com/impactreport.
s Our employees spent almost 2,000 hours volunteering
for good causes – including collecting surplus food for
redistribution to those in need, going into schools to
help children with their reading, and helping to build
a house for a disadvantaged family in Sri Lanka.
s We continue to work hard to reduce our gender pay
gap, which in 2019 was 22.6% on a median basis.
We have seen steady reductions in our gender pay
gap for two consecutive years now, but there is
more still to do. You can read our latest report at
hiscoxgroup.com/gender-pay-gap.
s We are becoming a more diverse and inclusive business;
one in four employees are now members of at least one
of our nine employee networks, over 400 employees
have received unconscious bias training, and we have
over 75 trained mental health first aiders.
Case studies
Building homes for disadvantaged families in Sri Lanka
Hiscox London Market supports the Dust Project, a charity
which helps disadvantaged children in Sri Lanka by pairing
building projects with child sponsorship. As part of our
multi-year programme of support, we raised over £64,000
in 2019 and ten members of our London Market team spent
a week in Sri Lanka helping to build a home for a local family.
38
Hiscox Ltd Report and Accounts 2019
Celebrating Pride in the UK and Bermuda with processions
and exhibitions
Hiscox employees around the world celebrated Pride.
In Bermuda, we took part in the island’s first ever Pride
event, and in London we sponsored the Queer Frontiers
exhibition which focused on profiling the work of LGBTQ+
artists and raising awareness of issues important to
the community. Proceeds from the exhibition raised
over £28,000 for LGBTQ+ charities including Switchboard
(an LGBT+ helpline) and AKT (an LGBTQ+ youth
homelessness charity).
Equipping underprivileged US girls with essential life skills
In the USA, we supported Girls on the Run, a charity
which provides a positive youth development programme
for school-age girls from low-income, under-resourced
communities. The work they do helps to increase
physical activity levels and healthy behaviours using an
experience-based curriculum, boosting confidence and
life skills, and our fundraising enabled 63 girls to benefit
from the programme.
Championing mental health and well-being via our
global employee network
One of our employee networks, WeMind, has been
championing mental health and well-being internally
and helping to de-stigmatise mental health issues.
Through training, motivational and expert speaker
seminars, and story sharing, WeMind brings employees
across the Group together. Its 2019 programme of events
included newsletters and events to mark Men’s Health
Awareness Month, a sleep seminar, suicide prevention
webinar, and ‘it’s good to talk’ sessions to mark World
Mental Health Day. The network has also received
external recognition for its work, winning Outstanding
Employee Network of the Year at the European Diversity
Awards 2019.
Supporting community art initiatives around the world
Art is a long-held passion of ours, and we relish finding
ways to share it with the wider community. We supported
a whole range of art-related initiatives around the world
during the year, including Sculpture in the City and Art Night
in London, which make art accessible to all in the city; and
through our work with Hamburg’s renowned university of
fine art, HFBK, where we support promising young artists
with a €7,500 art prize.
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Queer Frontiers exhibition in London.
$1 million
donated to good causes around the
world in 2019.
1 in 4
employees are members of at least one
of our nine employee networks.
€7,500
Annual Hiscox art prize for promising
young artists at Hamburg’s renowned
university of fine art, HFBK.
WeMind’s European Diversity Award.
Through training,
motivational and expert
speaker seminars, and
story sharing, WeMind
brings employees across
the Group together.
WeMind
Hiscox Ltd Report and Accounts 2019
39
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Our ESG framework in action
Governance
Compliance with Bermuda
Companies Act, UK listing rules,
and local country laws.
As a global insurer, good governance practices are essential
to our day-to-day business of serving customers and paying
claims. Good governance encompasses not just having the
appropriate internal controls, policies and procedures, and
structures and oversight; it also requires our 3,100 staff to
be accountable for their actions and empowered to raise
their hand if something goes wrong. Naturally it also means
complying with the laws and regulations that are relevant to
our operations, so as a Bermuda-incorporated company with
a UK listing, we comply with the Bermuda Companies Act,
UK listing rules and local country laws.
Highlights
s We developed the Hiscox Group governance model
following a review of decision-making and control within
the Board and the subsidiary boards. More information
can be found on page 51.
s We issued six new mandatory training modules to
employees across the Group, to raise awareness of
risks including information security and data protection,
which resulted in 2,281 hours of mandatory Group-wide
information security training being completed – the
equivalent of 325 days.
s We published annual financial condition reports (FCR),
which are a requirement of the Bermuda Monetary
Authority (BMA) and the UK’s Prudential Regulation
Authority (PRA). The FCRs provide stakeholders with
additional information on the financial condition of
the Company over and above that contained in the
annual financial statements, and can be viewed at
hiscoxgroup.com/about-hiscox/group-policies-
and-disclosures.
s We continued to review and refine our policies and
procedures, with an updated whistleblowing policy,
an enhanced conflicts of interest policy, updated
Board and Committee terms of reference, and a
revised outsourcing policy which responds to
regulatory interest in outsourcing and cloud services.
Case studies
Maintaining a regular programme of internal training and testing
Working in a regulated industry means we take staff training
seriously. We deliver a year-round programme of monthly
internal training, testing, awareness and education on issues
such as information security, financial crime, Senior Managers
& Certification Regime, data privacy and data protection,
and how to report an incident. This includes a cyber security
40
Hiscox Ltd Report and Accounts 2019
awareness month, where we educate employees on what to look
out for when it comes to phishing, smishing and other cyber
security issues; Company-wide phishing tests to monitor internal
vigilance when it comes to suspicious emails; and timely news
items on issues such as mobile security during the summer
holidays or online shopping security in the run-up to Christmas.
Identifying and addressing emerging risks
We have an emerging risks forum which assesses risks and
opportunities which could potentially affect the business.
This year, topics have included climate change, data regulation
and the impact of changes in governments. Monitoring emerging
risks and regulations allows us to explore how our business can
adapt if necessary to be able to operate in the medium term and
respond to change. In addition, the Group compliance function
and our exposure management groups regularly perform horizon
scanning for regulatory change. This year, topics monitored
included general insurance value measures, the 2021 transition
from LIBOR and Solvency II enhancements.
Building resilience through stress testing and scenario analysis
Maintaining a regular cycle of stress testing and scenario analysis
is important to ensure we manage risk well and evolve at the
same pace as the risks we cover. We have embedded an internal
programme of stress testing, which is performed annually to
assess the resilience of the business plan in extreme, adverse
scenarios. In 2019, a key part of this was the biennial General
Insurance Stress Test (GIST) which was facilitated by the UK’s
PRA and which we participated in alongside many of our peers.
This year’s scenario required us to examine climate and cyber
events as new scenarios alongside the traditional scenarios
which include a deterioration in the economic environment.
Our 2019 stress testing confirmed that the Group is able to
withstand the considered short-term shocks and has strong
controls and mitigation strategies in place across risk types.
Bringing teams together for cyber crisis simulations and large
loss dry runs
We carry out a combination of events with leadership and
underwriting teams to ensure our preparedness for reputational
issues and large losses. In 2019 this included a three-day
cyber large loss training exercise, which brought together over
50 participants across 14 locations to test our response to a
market-changing cyber loss event, put us under pressure and
challenge our plans. It involved senior underwriting, claims and
finance teams and its outputs have helped inform our cyber
strategy and refine our claims surge plans, and contributed to
Chapter 1
From purpose
to performance
1
13
Chapter 2
A closer look
Environmental, social
and governance
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
the development of our cyber exposure management models.
We also conducted a series of desktop simulations with
country leadership teams to work through operational
challenges arising from a reputational event.
An internal training event in our New York office.
Our emerging risks
forum looked at topics
including climate change,
data regulation and the
impact of changes in
governments in 2019.
2,281
hours of mandatory Group-wide
information security training completed.
Our three-day cyber
large loss training
exercise brought
together over 50
participants across
14 locations to test
our response to a
market-changing
cyber loss event.
Hiscox Ltd Report and Accounts 2019
41
Connected
Hiscox Iberia staff believe the
secret of their success is the
close connection between
the Madrid and Lisbon teams.
Every new recruit spends time
in the other office, so a new
underwriter in Madrid will spend
several weeks learning the ropes
in Lisbon, while a fresh hire in
our operations team will travel
in the opposite direction to
do the same.
This exchange scheme helps
everyone gain a shop-floor
knowledge of the mechanics
of the insurance process from
start to finish, as well as give
them a better appreciation of
what their workmates do and
the challenges they deal with.
This means they work better
together to provide client
service that is second to none.
Monthly video-linked ‘box
meetings’, regular social
events and a popular social
media group all reinforce this
sense of togetherness. This
connectedness has definitely
produced results – our Iberia
unit has been a standout
success in recent years.
42
Hiscox Ltd Report and Accounts 2019
Connected
Chapter 3:
Governance
Hiscox Ltd Report and Accounts 2019
43
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Board of Directors
Non Executive Chairman
Executive Director
Robert Simon Childs
Non Executive Chairman (Aged 68)
Appointed Chairman: February 2013
Appointed to the Board: September 2006
Relevant skills and experience
s Extensive knowledge of Hiscox, having
worked for the Group for over 30 years.
s Significant expertise in insurance cycle
management, having worked through
unprecedented large loss events such
as 9/11 and Hurricanes Katrina, Rita
and Wilma.
Robert joined Hiscox in 1986 and has held a
number of senior roles across the Group, including
Active Underwriter for Syndicate 33 and Group
Chief Underwriting Officer, before becoming Non
Executive Chairman in February 2013. He joined
the Council of Lloyd’s in 2012 and has served as
Deputy Chairman of Lloyd’s since 2017.
External board appointments
Council of Lloyd’s; Deputy Chairman of Lloyd’s.
Bronislaw Edmund Masojada
Group Chief Executive (Aged 58)
Appointed to the Board: October 2006
Relevant skills and experience
s Strong track record of building long-term
value, helping guide the Group from initial
listing to a $4 billion revenue business.
s Wide-ranging capability in business
planning and executing strategy.
Bronek joined Hiscox in 1993 as Group Managing
Director and became Chief Executive in 2000. Prior
to that he worked with McKinsey & Company, where
he advised Lloyd’s on its renowned Reconstruction
and Renewal plan. Bronek also previously served
as Deputy Chairman of Lloyd’s and Chairman of
the Lloyd’s Tercentenary Research Foundation.
External board appointments
Association of British Insurers; Pool Reinsurance
Company Limited; Policy Placement Limited;
Bajka Investments (Pty) Ltd; Heptagon Assets Ltd;
Heptagon Bir Ltd.
Executive Directors
Hamayou Akbar Hussain
Group Chief Financial Officer (Aged 47)
Appointed to the Board: September 2016
Joanne Musselle
Group Chief Underwriting Officer (Aged 49)
Appointed to the Board: March 2020
Relevant skills and experience
s Considerable experience of
providing strategic, financial and
commercial management and
in-depth knowledge of the regulatory
and compliance environment.
s Significant expertise in leading
major change programmes.
Aki joined Hiscox in 2016 from Prudential,
where he was Chief Financial Officer of its UK
and Europe business. Before that, he held a
number of senior roles across a range of sectors,
including Finance Director for Lloyds Banking
Group’s consumer bank division until 2009.
Aki is a Chartered Accountant, having trained
with KPMG.
Relevant skills and experience
s Considerable underwriting expertise,
including experience of managing
underwriting portfolios in our key markets.
s Significant knowledge of Hiscox,
particularly Hiscox Retail, having
worked for the Group for 18 years.
Joanne joined Hiscox in 2002 and has held a
number of roles across the Group, including
Head of UK Claims, Chief Underwriting
Officer for Hiscox UK & Ireland, and Chief
Underwriting Officer for Hiscox Retail. Prior to
Hiscox, Joanne spent almost ten years working
in a variety of actuarial, pricing and reserving
roles at AXA and Aviva in both the UK and
Asian markets.
External board appointments
Visa Europe Limited.
External board appointments
Realty Insurances Ltd.
44
Hiscox Ltd Report and Accounts 2019
Senior Independent Director
Colin Keogh
Independent Non Executive Director (Aged 66)
Appointed to the Board: November 2015
Relevant skills and experience
s Valuable financial services experience.
s Significant knowledge of how to run an
international financial business.
Colin has spent his career in financial services,
principally at Close Brothers Group plc where
he worked for 24 years and served as CEO for
seven years until 2009.
External board appointments
Investec Asset Management; Premium
Credit Limited.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Board of Directors
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Independent Non Executive Directors
Caroline Foulger
Independent Non Executive Director (Aged 59)
Appointed to the Board: January 2013
Michael Goodwin
Independent Non Executive Director (Aged 61)
Appointed to the Board: November 2017
Thomas Hürlimann
Independent Non Executive Director (Aged 56)
Appointed to the Board: November 2017
Relevant skills and experience
s Extensive accounting and financial
reporting expertise.
Relevant skills and experience
s Significant knowledge of the Asian
insurance market.
Relevant skills and experience
s Considerable experience of leading a
s Deep understanding of Bermuda as a
s Deep understanding of risk management
s Extensive knowledge of the European
reinsurance centre.
as a trained actuary.
global business.
insurance market.
Caroline is a resident of Bermuda and led
PwC’s insurance and reinsurance practice
in Bermuda until her retirement in 2012. With
a strong background in accounting, she 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.
External board appointments
Oakley Capital Investments Limited; Catalina
Holdings (Bermuda) Ltd; Generation Life Ltd;
General Two Ltd; Bank of Butterfield.
Michael has over 25 years’ experience in the
insurance industry, having worked in Australia
and the Asia Pacific region for QBE Insurance
Group for over 20 years. Michael started his
career as an actuary, is a Fellow of the Institute
of Actuaries of Australia and served as Vice
President of the General Insurance Association
of Singapore between 2006 and 2012.
External board appointments
Partner Reinsurance Asia Pte Ltd; Steadfast
Distribution Services Pte Ltd; NCI Brokers (Asia)
Pte Ltd; Galaxy Insurance Consultants Pte Ltd.
Thomas has 30 years’ experience in banking,
reinsurance and insurance. He was CEO Global
Corporate at Zurich Insurance Group, a $9 billion
business working in over 200 countries. Prior to
that, he held senior positions at Swiss Re Group
and National Westminster Bank.
External board appointments
None.
Independent Non Executive Directors
Anne MacDonald
Independent Non Executive Director (Aged 64)
Appointed to the Board: May 2015
Constantinos Miranthis
Independent Non Executive Director (Aged 56)
Appointed to the Board: November 2017
Lynn Pike
Independent Non Executive Director (Aged 63)
Appointed to the Board: May 2015
Relevant skills and experience
s Extensive marketing expertise,
particularly in the USA.
s Sizable experience in developing
well-known global brands.
Relevant skills and experience
s Deep understanding of Bermuda’s
(re)insurance industry.
s Senior leadership experience in the
reinsurance sector.
Anne has served as Chief Marketing Officer
at four Fortune 100 companies, and been in
charge of some of the most recognised brands
in the world, including Citigroup, Traveler’s,
Macy’s and Pepsi.
External board appointments
Boot Barn Holdings, Inc.; Zeotap; Ignite National;
Tuckerman & Co.; Chops Snacks.
Costas served as President and CEO of
PartnerRe Ltd, one of the world’s leading
reinsurers, until 2015 and prior to that was a
Principal of Tillinghast-Towers Perrin in London,
where he led its European non-life practice.
A trained actuary, he is a member of the UK
Institute and Faculty of Actuaries and a resident
of Bermuda.
External board appointments
None.
Relevant skills and experience
s Strong background in the US financial
services sector.
s Significant knowledge of providing
commercial solutions for small
businesses, particularly in the USA.
Lynn worked in the US banking industry for nearly
four decades, most recently as President of
Capital One Bank. Before that, she was President
of Bank of America’s small business banking
division, a multi-billion-Dollar business with
110,000 clients and over 2,000 employees.
External board appointments
American Express Company (NYSE: AXP);
American Express National Bank.
Hiscox Ltd Report and Accounts 2019
45
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Board of Directors
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Departures and appointments
Retired Directors
Executive retirements
Richard Watson
(effective 31 December 2019)
Executive appointments
Joanne Musselle
(effective March 2020)
Non Executive retirements
Robert McMillan
(effective 16 May 2019)
Non Executive appointments
None
Robert McMillan
Independent Non Executive Director (Aged 67)
Appointed to the Board: November 2010
Richard Colin Watson
Group Chief Underwriting Officer (Aged 56)
Appointed to the Board: May 2013
Bob spent over two decades with The Progressive
Corporation, where he held senior roles in
product development, claims and marketing,
leading initiatives including multi-channel
distribution and immediate-response claims.
He stepped down from the Ltd Board in 2019.
Richard worked for Hiscox for over 30 years and
held a number of senior roles across the Group
including Managing Director of Hiscox Global
Markets, Active Underwriter of Syndicate 33,
and CEO of Hiscox USA, before succeeding
Robert Childs as Group Chief Underwriting
Officer in 2012. He retired as Group Chief
Underwriting Officer in 2019. Richard will
continue as an employee of Hiscox Ltd,
providing strategic advice as a Director for
key subsidiaries.
Group General Counsel and Company Secretary
Marc Wetherhill
Group General Counsel and Company Secretary
(Aged 47)
Marc has significant legal and governance
experience, and is the Principal Representative
to the Bermuda Monetary Authority for the
Hiscox Group. He previously served as Chief
Legal Counsel and Chief Compliance Officer
at PartnerRe Ltd, having trained as a solicitor in
London, and is a member of the Bermuda Bar.
46
Hiscox Ltd Report and Accounts 2019
Director duties
As a company incorporated under the laws of
Bermuda, Hiscox complies with the Bermuda
Company Law and as such the UK Companies
Act 2006 and associated reporting regulations
do not apply. Although there is no prescription
of statutory duties in Bermuda, Directors are
bound by fiduciary duties to the Company and
statutory duties of skill and care. This includes
exercising care, diligence, and skill that a
reasonably prudent person would be expected
to exercise in comparable circumstance. The
Directors act in a way that they consider in good
faith would be most likely to promote the success
of the company for the benefit of its members as
a whole.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Board statistics
Board diversity at 2 March 2020
Gender
Female
Male
36%
64%
Age
46-55
56-65
66-75
2
7
2
Location
USA
Bermuda
Europe
Asia
Tenure
0-3 years
3-6 years
6-8 years
8+ years
2
2
6
1
4
4
1
2
Board Committee composition and attendance 2019
Board member
Role
Robert Childs
Bronek Masojada
Aki Hussain
Richard Watson
Caroline Foulger
Michael Goodwin
Thomas Hürlimann
Colin Keogh
Anne MacDonald
Bob McMillan
Costas Miranthis
Lynn Pike
Non Executive Chairman
Chief Executive
Chief Financial Officer
Chief Underwriting Officer
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Independent Non Executive Director
Committee Chairman.
See page 50 to read more about each Committee’s roles and responsibilities.
Board
meetings
attended
Audit
Committee
attended
Nominations
and Governance
Committee
attended
Remuneration
Committee
attended
Risk
Committee
attended
Investment
Committee
attended
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
–
–
–
–
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
4/4
–
–
–
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
–
–
–
–
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
3/4
–
–
–
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
3/4
4/4
4/4
–
4/4
4/4
4/4
4/4
4/4
2/2
4/4
4/4
All Directors attended all Board meetings during 2019. Robert Childs missed November’s Risk Committee and Investment
Committee due to personal commitments. Bob McMillan was only eligible to attend the February and May meetings due to his
retirement from the Ltd Board in May.
Hiscox Ltd Report and Accounts 2019
47
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Chairman’s letter to shareholders
Dear Shareholder
Last year I talked about the need for our governance framework
to continue to evolve as our business grows, and this work
continued in 2019. It was a busy year as we refreshed our
values, established a new mechanism for Board engagement
with the workforce, and strengthened our governance
structures with a new Group governance model, alongside
the business-as-usual activities.
We also reviewed the revised UK Corporate Governance
Code (the Code), published by the Financial Reporting
Council and applicable from 1 January 2019 onwards,
and have taken steps to ensure our governance practices
not only reflect the latest requirements but also the spirit
of the Code. We set out in detail how we have complied
with the Code on pages 54 to 57, which should be read
in conjunction with the corporate governance section on
pages 49 to 53.
Purpose, values and strategy
This year we undertook a comprehensive review of our
values and developed a Group purpose. The Code
emphasises the importance of the Board’s role in
establishing a company’s purpose, values and strategy
and ensuring these are aligned with its culture but this has
always been important at Hiscox, and reviewing our values
is something we endeavour to do every five years or so.
As new people join and the business evolves, we think it is
important to take a fresh look at our values to ensure that
they continue to relate to our business and our people.
You can read more on our purpose, values, culture, vision
and strategy on pages 4 to 7 and in my Chairman’s
statement on pages 14 to 16.
Workforce and the Board
In light of the Code’s focus on ensuring the views of the
workforce have been considered in Board discussions
and decision-making, we reviewed our current approach
to workforce engagement and the formal and informal
mechanisms already in place. I am proud that employee
engagement is already wide and varied at Hiscox, so we are
building on what we already have in place by establishing
a new Employee Liaison role as well as an Employee
Engagement Network to strengthen the link between
the workforce and the decisions taken in the boardroom.
Their work is outlined on page 54.
48
Hiscox Ltd Report and Accounts 2019
Engagement
The Chairman of the Remuneration Committee engaged with
major shareholders on the remuneration policy renewal. We are
satisfied that the remuneration policy reflects the feedback that
we received and is in the best interests of the Company and all
shareholders. The proposed policy includes new provisions
required by the Code and will be put to shareholders at the AGM
in May 2020 for approval. More information on this can be found
in the remuneration section on pages 64 to 93, and you can
read more on how we engage with shareholders and other
stakeholders on pages 32 to 33.
Reporting
The Companies (Miscellaneous Reporting) Regulations 2018,
which came into force last year, applied from 1 January 2019
onwards and introduced a number of new reporting
requirements for quoted companies incorporated in the UK.
Although these new regulations do not apply to Hiscox as a
company incorporated under the laws of Bermuda, we have
included some additional disclosures where we feel that doing
so would give shareholders a better understanding of our
governance arrangements. For example, last year we voluntarily
reported our Chief Executive’s pay ratio, which is a practice
we have continued this year. For 2019, we have also included
additional disclosures regarding the way we engage with
employees, and the delivery of Director duties, which can
be found on pages 32 and 46 respectively.
Governance
During the year we strengthened our underlying governance
structures with a Group governance model which defines the
Group-wide governance standards required of all legal entities.
There is a balance to be found in how information flows from
Group Board level through to our subsidiary Boards, and vice
versa, and this model helps us to articulate that.
I trust that the updates we have made to corporate governance
together with the additional detail we have provided in this report
will give you a strong understanding of our corporate governance
arrangements and assurance that Hiscox continues to be
focused on the importance of maintaining a robust corporate
governance framework.
Robert Childs
Chairman
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Corporate governance
Our robust governance framework continues to evolve and
underpins our business model.
Board composition
The Board has responsibility for the overall leadership of the
Group and its culture.
Leadership of the Company
The Board as a whole is collectively responsible for the success
of Hiscox Ltd and the Group.
The Hiscox Ltd Board of Directors:
s set the Group’s strategic direction, purpose and values
and align these with its culture;
s oversee competent and prudent management of internal
control, corporate governance and risk management;
s determine the sufficiency of capital in light of the Group’s
risk profile and business plans;
s approve the business plans and budgets.
As at the date of this report, the Board comprised the Non
Executive Chairman, three Executive Directors, and seven
independent Non Executive Directors including a Senior
Independent Director. The operations of the Board are
underpinned by the collective experience of the Directors
and the diverse skills which they bring. Biographical details
for each member of the Board are provided on pages 44
to 45. Notable changes during 2019 include Bob McMillan
(Independent Non Executive Director) and Richard Watson
(Executive Director) retiring from the Ltd Board in May and
December respectively; and Joanne Musselle being appointed
to the Board in March 2020 as Group Chief Underwriting
Officer – succeeding Richard Watson. In accordance with
the Company’s Bye-laws and the Code, all Directors will seek
re-appointment at the 2020 Annual General Meeting and no
issues have arisen that would prevent the Chairman from
recommending the re-appointment of any individual Director.
More information on the role of the Board can be found on
pages 50 to 53.
To ensure that the Board operates efficiently, each Director has role responsibilities. The role of the Chairman,
Senior Independent Director and Chief Executive are distinct to demonstrate the segregation of responsibilities.
Chairman
Senior Independent Director (SID)
Chief Executive
s Leadership of the Board.
s Ensuring effective relationships
exist between the Non Executive
and Executive Directors.
s Ensuring that the views of all
stakeholders are understood
and considered appropriately in
Board discussions.
s Overseeing the annual performance
evaluation and identifying any
action required.
s Leading initiatives to assess the
culture of the Company and ensure
that the Board leads by example.
s Advisor to the Chairman.
s Leading the Chairman’s
performance evaluation.
s Serving as an intermediary to other
Directors when necessary.
s Being available to shareholders and
other stakeholders if they have any
concerns which are unable to be
resolved through normal channels,
or if contact through these channels
is deemed inappropriate.
s Proposing and delivering the
strategy as set by the Board.
s Facilitating an effective link between
the business and the Board in
support of effective communication.
s Leading the Executive Committee,
which delivers operational and
financial performance.
s Representing Hiscox internally
and externally to stakeholders,
including shareholders, employees,
government and regulators,
suppliers and contractors.
Hiscox Ltd Report and Accounts 2019
49
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Corporate governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
The Board has delegated a number of its responsibilities to its Audit, Nominations and Governance, Remuneration and
Risk Committees.
Audit Committee
s Advises the Board on
financial reporting.
s Oversees the relationship
with internal and
external audit.
s Oversees internal
controls including
reserving and claims.
Nominations and
Governance Committee
s Recommends Board
appointments.
s Succession planning.
s Ensures an appropriate
mix of skills and
experience on the Board.
s Promotes diversity.
s Manages any
potential conflicts.
The Audit Committee report
can be found on pages
60 to 61.
The Nominations and
Governance Committee
report can be found on
pages 58 to 59.
Remuneration Committee
Risk Committee
s Establishes remuneration
s Advises the Board on
policy.
s Sets Chairman,
Executive Director and
senior management
remuneration.
s Oversees workforce
remuneration-related
policies and practices
across the Group.
s Oversees alignment
of rewards, incentives
and culture.
The remuneration report can
be found on pages 68 to 81.
the Group’s overall
risk appetite, tolerance
and strategy.
s Provides advice,
oversight and challenge
to embed and maintain
a supportive risk culture
throughout the Group.
More information on risk
management can be found
on pages 9 and 28 to 31.
This structure is supported by the Executive Committee, Investment Committee and a number of other management committees.
Certain administrative matters have been delegated to a committee comprising of two Directors and the Company Secretary.
Corporate governance oversight
The Board operates within an established governance
structure to ensure that through the delegations,
strategy can be implemented effectively and is supported
by transparent, well informed and balanced decision-making.
The Board’s terms of reference include a schedule of matters
reserved for Board decision, a copy of which can be found at
hiscoxgroup.com/investors/corporate-governance, which
was updated in 2018 to ensure ongoing compliance with
the updated Code. Each Board committee operates within
established written terms of reference, which were also
updated in line with the Code, and each committee Chairman
reports directly to the Board. The matters reserved for Board
decision and the committee terms of reference were further
reviewed in late 2019 as part of the annual review of terms
of reference.
50
Hiscox Ltd Report and Accounts 2019
The Board is responsible for the success of the Company
and the underlying Hiscox Group of companies and as part
of this the Board sets the governance framework and the
overarching principles which should be applied across the
Group. The framework is supported by a formal governance
manual which explicitly sets out our corporate governance
standards. The Group governance manual sets out the
overall Group structures, the division of responsibilities
between Group and principal subsidiary boards, operational
requirements for the Board and the principles applied to
subsidiary management.
During the year, a review was completed on subsidiary
management including the breakdown of decisions taken by
the Board and the level of control maintained by the Board and
the principal subsidiary boards. This led to the development
of the Hiscox Group governance model.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Corporate governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Hiscox Group governance model
The Hiscox Group governance model shows the relationship
between the Board exercising strategic direction and oversight
of the Hiscox Group, and the subsidiary boards’ delivery of their
respective entities.
Further governance changes completed in the year include new
Board, Committee and Director evaluation processes which
focus more clearly on outcomes, outlined on pages 58 to 59,
greater oversight of responsibilities, continued formalisation of
the control environment and enhanced reporting.
The model is divided into key themes, aligned to the division of
responsibilities, and translated into explicit terms of reference
for the principal subsidiaries – ensuring alignment to the overall
Group approach to values, purpose, culture of risk awareness,
ethical behaviour and Group controls.
The governance manual defines the Group-wide governance
standards required of all legal entities, and supports the delivery
of strategy and business objectives within a framework of good
corporate governance practice.
Hiscox Group governance framework
How key themes flow through Group and subsidiary level Boards, and where responsibility is centralised versus devolved.
Key themes: strategic direction
Key themes: oversight
Boards
1.
Purpose
and values
2.
Remuneration
3.
Strategy
and capital
allocation
4.
Regulatory
environment
5.
Risks and
controls
6.
Insurance
regulation
7.
Conduct
9.
Operations
10.
Marketing
8.
Underwriting
(exposure,
pricing,
product)
Centralised responsibility
Balanced
Devolved responsibility
Group level:
Ltd Board
Subsidiary
level Boards
Hiscox Ltd Report and Accounts 2019
51
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Corporate governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
In line with the agreed
meeting schedule,
the Board held four
formal meetings in 2019
along with scheduled
informational calls in
between these meetings.
Board meetings and activity
Board meetings and activity
The Group has an effective Board which supports a culture
of accountability, transparency and openness. Executive
management and the Non Executive Directors continue to
work well together as a unitary Board and debate issues freely.
The Board culture is congenial; however both Non Executive
Directors and Executive Directors continually challenge each
other in order to deliver our shared aim. In the context of
unitary Boards, Non Executive Directors provide Executive
Directors with support and guidance, not just challenge, and
our Non Executive Directors are close enough to the business
to do this.
In line with the agreed meeting schedule, the Board
held four formal meetings in 2019 along with scheduled
informational calls in between these meetings. In the
months where no full Board meeting was due to be held,
an update call was held; these calls provided the opportunity
to advise of any business developments, emerging issues
and opportunities.
Each Board meeting has at least a two-day series of events
which involve the formal Board and Committee meetings
alongside a wide spectrum of other sessions which give access
to all levels of the business. These include training sessions;
Non Executive Director-only meetings; and briefings with
Executive Committee members and senior management
where the Non Executive Directors have the opportunity to
hear key issues and conduct ‘deep dives’ on specialist
subjects. In 2019, this included an update on business
opportunities, Group governance, strategy, marketing and
technology in insurance, as well as deep dives on business
unit performance. Specific sessions are held for succession
planning and strategy. Outside of these meetings, Non Executive
Directors have unfettered access to employees and regularly
liaise with management on activities aligned to their key skills
as well as the opportunity to attend appropriate management
strategy and training days.
Board evaluation 2019
Internal Board evaluations are completed in each of the interim
years between our external reviews, which in compliance with
the Code are undertaken every three years. More information
on our internal Board evaluation in 2019, and preparations for an
externally facilitated Board evaluation in 2020, can be found in
the Nominations and Governance Committee report on pages
58 to 59.
52
Hiscox Ltd Report and Accounts 2019
Board agenda planning in action
The Board agenda is set by the Chairman following discussion
with the Chief Executive and Company Secretary, taking into
consideration feedback from the individual Directors. Board
agendas focus on strategically important issues and regular
reports from key business areas.
Board papers are circulated at least five days before each
meeting to ensure Directors have appropriate time to review
them, and to seek clarification where necessary. The quality
of Board papers is kept under regular review.
The scheduled meetings follow an agreed format; agendas
are developed from the Board’s annual plan of business, with
flexibility built in to ensure the agendas can accommodate
relevant upcoming issues.
The Chairman and Non Executive Directors usually meet at
the start or end of each Board meeting without the Executive
Directors, creating an opportunity for Non Executive Directors
to raise any issues privately.
Each agenda is typically divided between special strategy
items (‘deep dives’), and management reports. Deep dive
sessions are selected for a variety of reasons, including
identified actions from previous meetings, issues escalated
from management, and items requested either formally or
informally by Non Executive Directors. Any issues highlighted
will be addressed either at the Board, during Committee
discussions, or during informal informational sessions,
depending on the nature of the matter. The management
reports follow a short standard format which aids discussion
and understanding. At each meeting the Board receives an
update from the Committee Chairs to keep them abreast of
the items discussed, the outcomes agreed, and to summarise
recommendations for Board approval from the Committees.
Board agendas are also set out in line with the Committee
agenda setting to ensure that the most appropriate method
of progressing an item is utilised.
The agenda planner was refreshed during the year to ensure it
covered the appropriate strategy, performance and governance
items. The agenda planning also includes the review of external
influences on the Board including ongoing regulatory review
throughout the Group.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Corporate governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
An alert service
is available on
hiscoxgroup.com to
notify any stakeholder
of new stock exchange
announcements.
Shareholder engagement
Key themes
The Board receives appropriate and timely information to enable Directors to review business strategy, trading performance,
business risks and opportunities. Executive Directors and senior management from the business are invited to present on key
items, allowing the Board the opportunity to debate and challenge initiatives directly with Executive Directors and senior managers.
Key themes in 2019
Key activities and actions
Business performance
s Approval of the 2020 business plan.
s Agreement on business priorities.
Engagement
s Board members met throughout the year with the Group regulator, the Bermuda Monetary
Governance
Authority, in addition to key regulators in the principle subsidiaries.
s The Board regularly considered the Group’s relationship with various stakeholder groups.
It discussed shareholder matters, employee engagement, customers, and the Group’s
impact on, and relationship with, wider society as detailed on pages 32 to 33.
s The Board formalised the Company’s approach to workforce engagement, establishing
a new Employee Liaison role which Non Executive Director Anne MacDonald will fulfil
as detailed on page 54.
s Approval of the Group governance manual.
s Approval of an updated conflicts of interest policy.
s Appointment of the external facilitator for the 2020 Board evaluation and discussion of the
outcomes of the 2019 Board evaluation review at the February 2020 meeting.
s Approval of the Hiscox ESG framework.
s Discussion of governance culture and approval of the Group governance framework.
Risk, compliance and
internal controls
s Oversight of all key risk, compliance, internal control and governance matters as detailed
in the Audit Committee report on pages 60 to 61.
s Update on key underwriting exposures (Hiscox view of risk).
Strategy and culture
s Approval of the 2030 ambition.
s Reviewing the Company’s values and developing a purpose for the Group.
For more, see pages 4 to 5.
s Oversight of work on the development of a robust and open culture.
Hiscox Ltd Report and Accounts 2019
53
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Compliance with the UK Corporate Governance Code 2018
The UK Corporate Governance Code (the Code) was published by
the Financial Reporting Council in July 2018 and is applicable to
accounting periods from 1 January 2019. As a company listed on
the London Stock Exchange, the Code is applicable to Hiscox.
The Code sets out a revised set of principles and, as with
previous versions of the Code, a set of ‘comply or explain’
provisions. This section, along with the corporate governance
section on pages 49 to 53, provides meaningful disclosure on
our application of the principles of each section of the revised
Code in turn, and explanations where we deviate from its
provisions along with reasons why the Board believes such
deviation to be appropriate.
Board leadership and Company purpose
The Board is collectively responsible for the stewardship and
long-term success of the Company and for setting the strategic
direction for the Group. In the corporate governance section on
pages 49 to 53, we have set out the governance structure which
supports the Board in setting and overseeing the delivery of the
Company’s strategy. We have also described some of the key
decisions taken by the Board during the year and how the
Board’s view of emerging risks influenced those decisions to
ensure the focus remains on delivering long-term, sustainable
good performance.
Purpose and values have always been important at Hiscox,
and the Board reviews and refines them every five or so
years to ensure they remain relevant as new people join
and the business evolves. The Board believes that the
Company’s purpose and values act as a barometer by
which the Board and the wider workforce can hold each
other to account. During the year, a comprehensive process
was undertaken to consult employees across the Group,
at all levels of the Company, on the purpose and values
and these were approved by the Board and subsequently
updated and published in September 2019. For more
information see pages 4 to 5.
The Board operates within a Group-wide governance
framework which was also explicitly set out in a Board-approved
governance manual during 2019. For further details see
pages 50 to 51. The governance framework complements
the Company’s internal controls which are designed to enable
risk to be properly assessed and managed. To support this,
the Board has a formal schedule of matters reserved for the
Board’s determination that covers areas including: setting the
Group’s purpose and strategic vision; monitoring performance
of the delivery of the strategy; approving major investments,
acquisitions and divestments; the oversight of risk and the
setting of the Group’s risk appetite; and reviewing the
Group’s governance.
54
Hiscox Ltd Report and Accounts 2019
The terms of reference explicitly state that the Board and
Committees shall have unfettered access to the resources
they determine as being necessary to fulfil their obligations.
The Board is ultimately responsible for our risk management
and internal controls, and for ensuring that the systems
in place are robust and take into account the principal
and emerging risks faced by the Company. The Board
delegates certain matters to the Risk Committee, whose work
is outlined on page 30, and the Audit Committee, whose work
is outlined on pages 60 to 61. The Audit Committee provides
updates to the Board on matters discussed at each meeting.
The Board is kept aware of major shareholder issues and
concerns through reports from a variety of sources, including
the Chairman, the Chief Executive, the Chief Financial Officer,
senior management and external consultants. Other ways in
which the Board maintains dialogue with shareholders include
general meetings, investor roadshows and interim and full-year
results presentations. Shareholder engagement is not limited
to the period following the publication of financial results or
other significant announcements.
In 2019, the Company formalised its existing approach to
workforce engagement by establishing an Employee engagement
Network, which is led by Non Executive Director Anne MacDonald,
who will also now hold the role of Employee Liaison. While the
Board has historically engaged with the workforce and will
continue to leverage the pre-existing infrastructure to ensure
that Hiscox is motivating and engaging employees in an effective
way, the new Employee Engagement Network will ensure
workforce views are considered in its decision-making process.
It sits separate to the existing HR mechanisms. The Employee
Liaison is responsible for providing a verbal summary of findings
at Board meetings. The Employee Liaison facilitated several
meetings in 2019 with individuals and representatives from
the Company’s employee networks, the Head of Diversity
and Inclusion and the Group Company Secretary.
The whistleblowing policy ensures that employees feel
empowered to raise concerns in confidence and without fear
of unfair treatment. It allows serious concerns to be raised
confidentially with senior management or, if they choose, with
the Chair of the Audit Committee. Having a supportive and
inclusive culture is important to us, and we track how employees
feel about working at Hiscox through our annual employee
engagement survey.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
43
Chapter 3
Governance
Compliance with the UK
Corporate Governance
Code 2018
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Each year, the Directors are required to provide a complete
list of all third-party relationships that they maintain. This is
analysed to determine if there is any actual or potential conflict
of interest. The Nominations and Governance Committee review
the findings and determine if there is any conflict of interest.
Hiscox’s response to section 1 of the Code
The Board has complied with all of the applicable provisions
of section 1. Provision 5 states that, in the context of how the
Board understands the view of key stakeholders, the Board
should describe in the Annual Report how the matters set out
in section 172 of the Companies Act 2006 have been considered
in Board discussions and decision-making. Section 172 applies
only to companies incorporated in the UK, therefore as a
Bermuda-incorporated company the Board is not subject to
section 172 statutory duties. Nevertheless, where appropriate
the Board as a matter of good governance has set out how
we deliver comparable Director duties against the Bermuda
Companies Act 1981. More information on Director duties
can be found on page 46.
Division of responsibilities
The Chairman is responsible for the leadership and overall
effectiveness of the Board. He recognises the importance of
creating a boardroom culture which encourages openness and
debate and ensures constructive relations between Executive
and Non Executive Directors. There is a clear division of
responsibilities between the Chairman, Chief Executive and
Senior Independent Director to ensure that no individual has
unfettered powers of decision, which is outlined on page 49.
The Non Executive Directors provide constructive
challenge and help develop proposals on strategy.
They are also responsible for scrutinising management
performance and ensuring that financial information, risks
and controls, and systems of risk management are robust.
The Board ensures, through the Nominations and Governance
Committee, that Board composition is kept under review,
that appropriate succession plans are in place, that
the independence of Non Executive Directors is not
compromised and that they have the time and resources
necessary to devote to the role.
The Remuneration Committee ensures that appropriate
remuneration structures are in place.
Colin Keogh, the Senior Independent Director, provides a
sounding board for the Chairman and serves as intermediary for
other Directors when necessary. His other role responsibilities
are outlined on page 49.
The General Counsel and Company Secretary acts as a trusted
adviser to the Board and its Committees, and ensures that there
are appropriate interactions between senior management and
the Non Executive Directors. He is responsible for advising the
Board on all governance matters and all Directors have access
to him for advice.
Hiscox’s response to section 2 of the Code
The Company complied with all of the provisions of section 2
with the exception of Provision 9, where as previously disclosed,
the Chairman, Robert Childs, was not deemed to be
independent upon his appointment as Chairman in 2013.
At that time, major shareholders were consulted ahead of
Robert’s appointment and the Board set out its reasons for
his appointment.
In the Annual Report and Accounts last year, we stated that the
Board believed the Chairman’s experience and expertise in
underwriting and risk management continued to be a valuable
asset in the performance of its functions. In light of the new
provision of the Code, the question of the Chairman’s tenure
on the Board was discussed by the Non Executive Directors
(without the Chairman being present) and the meeting
concluded, having taken soundings from all of the other
Directors on the Board, that the Board continues to highly
value the Chairman’s skills and experience, and that he
demonstrates independence, constructive challenge and
engagement in the Board as well as valuable guidance to
Executive management. The Board is therefore satisfied
that he continues to show the independence of character
and judgement necessary to chair the Board effectively.
There are a number of further measures to ensure the
robustness of these arrangements. There is a strong
Senior Independent Director in place; an annual review of
independence of mind as part of the effectiveness review,
and oversight of this at the Nominations and Governance
Committee; the Chairman is not a member of the Remuneration
Committee or the Audit Committee; and a majority of Board
Directors are independent Directors. A key focus of the 2020
Hiscox Ltd Report and Accounts 2019
55
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
43
Chapter 3
Governance
Compliance with the UK
Corporate Governance
Code 2018
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
externally facilitated succession plan will be an assessment of
the independence of the Board, the role of the Chairman and
the robustness of the Non Executive Director succession plan.
the delivery of the Company’s strategy. More information can be
found in the Nominations and Governance Committee report
on pages 58 to 59.
The Board therefore retains complete confidence in the
Chairman’s ability to act independently and unanimously
supports his re-election at the Annual General Meeting (AGM).
Composition, succession and evaluation
The current composition of the Board is set out on pages
44 and 45 and is considered to be an appropriate size for
the business, with the right balance of Executive and Non
Executive Directors. The Board is satisfied that it has the
appropriate balance of skills, experience, independence,
and knowledge of the Company to enable it to discharge its
duties and responsibilities effectively, and that no individual
or group dominates the Board’s decision-making. Any
changes to the Board during the period are outlined on
page 46.
Diversity of thought, which is vital at every level of the business
including at Board level, remains vital and we are guided by
both our diversity and inclusion policy and our Board diversity
statement, which are available to view at hiscoxgroup.com/
about-hiscox/group-policies-and-disclosures. Details of
our diversity activities are detailed on pages 38 to 39 and 59.
The Nominations and Governance Committee also assesses
the independence of each Non Executive Director, taking into
account, among other things, the circumstances set out in the
Code that are likely to impair, or could appear to impair their
independence. The Committee remains of the view that the most
important factor is the extent to which they are independent.
All Non Executive Directors, other than the Chairman, were
considered to be independent when appointed to the Board, and
the Nominations and Governance Committee has determined
that they all continued to be independent in 2019. In line with
good governance practice, a particularly rigorous independence
review was conducted for Caroline Foulger as she has served
on the Board for more than six years, and concluded that she
continues to demonstrate independence.
The Nominations and Governance Committee also
ensures a formal, rigorous and transparent procedure for
the appointment of new Directors and is responsible for
Board succession planning, regularly assessing the balance
of skills, experience, diversity and capacity required to oversee
56
Hiscox Ltd Report and Accounts 2019
Each Non Executive Director’s letter of appointment outlines
the commitments expected of them throughout the year. Each
Director has undertaken to allocate sufficient time to the Group
in order to discharge their responsibilities effectively, and this
is kept under review by the Nominations and Governance
Committee. Executive Directors are prohibited from taking
more than one Non Executive Directorship in a FTSE 100
company, or the Chairmanship of such a company. Information
on Board members’ other appointments are listed on pages
44 to 45.
On joining the Board, all Non Executive Directors take part in a
full, formal induction programme which is tailored to their specific
requirements. Board members can also participate in training
and development opportunities throughout the year, including
visits to Hiscox overseas offices and inclusion at the annual
Hiscox Partners event, attended by those employees who make
significant contributions to the development and profitability
of the Group. These visits provide an opportunity to meet
employees and other key stakeholders, and to develop a deeper
understanding of the challenges and opportunities at operational
sites and in the business areas more generally. The Chairman
holds annual appraisal meetings with all Directors to review their
performance, and to discuss their training and development
needs. The Board also enjoys a full programme of informal
meetings that support the Board meetings; this helps to ensure
that the Non Executive Directors in particular have wide access
to all levels of the business.
The Board’s policy is that all Directors stand for re-election by
shareholders each year at the AGM. The Board considers that
all Directors continue to perform effectively and demonstrate
appropriate levels of commitment. The biographical details of
the Board on pages 44 to 45 summarise each Director’s relevant
skills and experience as well as the specific reasons why each
Director’s contribution is important to the Company’s long-term
sustainable success. As recommended by the Code, this
information will also be included in the Notice of Annual
General Meeting.
A Director, Board and Committee effectiveness evaluation
is carried out each year and results in effectiveness reviews,
which are discussed by the Board and each of the Committees.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
43
Chapter 3
Governance
Compliance with the UK
Corporate Governance
Code 2018
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
The remuneration policy was reviewed during the year ahead
of its renewal in 2020. Details of the proposed changes and
shareholder consultation process are set out in the letter from
the Chairman of the Remuneration Committee, on pages
64 to 65 and in the annual report on remuneration on pages 68
to 81. The Code stipulates the importance of clarity, simplicity,
risk, predictability, proportionality and alignment to culture in
remuneration, and how we address this for Hiscox is outlined
in the table on page 72.
The remuneration report also contains details of the procedure
that has been established for developing the Company’s
policy on Executive pay and determining Director and senior
management remuneration outcomes. No Director is involved
in deciding their own remuneration.
Hiscox’s response to section 5 of the Code
The Company complied with all of the provisions of section 5.
Every third year, the Board evaluation is externally facilitated
and this is next scheduled to take place later this year. More
information can be found in the Nominations and Governance
Committee report on pages 58 to 59.
Hiscox’s response to section 3 of the Code
The Company complied with all of the provisions of section 3
with the exception of Provision 19. The Chairman has been in
post since 2013, and therefore served less than nine years.
For the reasons outlined in section 2, the Chairman has
remained in post to facilitate effective succession planning
and the development of a diverse Board. For more information
see Hiscox’s response to section 2 of the Code.
Audit, risk and internal control
A key part of the Audit Committee’s and Risk Committee’s
responsibilities is to provide oversight, on behalf of the Board,
of the Company’s internal financial controls, and internal
control and risk management systems as well as monitoring
the integrity of the financial statements of the Company.
A report from Caroline Foulger, Chair of the Audit Committee,
on the work of the Committee during the year can be found
on pages 60 to 61.
The Board is responsible for the preparation of the Annual Report
and Accounts and for stating whether it considers the Annual
Report and Accounts, taken as a whole, to be fair, balanced
and understandable and provide the information necessary for
shareholders to assess the Company’s position, performance,
business model and strategy. The Directors’ responsibilities
statement, going concern and viability statements are set out
on pages 96 to 98.
Hiscox’s response to section 4 of the Code
The Company complied with all of the provisions of section 4.
Remuneration
The remuneration policy is developed by the Remuneration
Committee in consultation with shareholders and is designed
to support the Company’s strategic aims and promote the
long-term sustainable success of the Company while also
being aligned with the Company’s purpose, values and culture.
Hiscox Ltd Report and Accounts 2019
57
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Nominations and Governance Committee report
undertaken in the fourth quarter of 2020 and a formal report will
be prepared and shared with the Board in early 2021, with key
focus areas being an assessment of the independence of the
Board, the role of the Chair and the robustness of Non Executive
Director succession plans.
In 2019, the process for our interim Board and Committee
reviews – undertaken in the years between external evaluations
– was updated to deliver an even more robust evaluation.
The key themes of the 2019 internal review were: composition
and diversity; updated skills review; succession planning;
independence of mind of the Board; effectiveness of working
relationships; key themes for the future; progress with employee
liaison development; and regulatory and legal compliance.
The findings of the evaluation were discussed by the Nominations
and Governance Committee, and by the Board as a whole, and
resulted in confirmed actions which will be tracked to completion
during the year.
Individual Director reviews were an opportunity to discuss
individual skills, succession and any issues. No significant issues
were addressed although the Nominations and Governance
Committee will continue to review the overall skills, succession
and rotation of Directors. Overall Board and Committee
effectiveness was rated as good or extremely good with
no fundamental issues highlighted.
The Board and its Committees are focused on continuous
improvement and this was reiterated in the questionnaire, with
incremental changes highlighted for improvement. Themes
of improvement were linked to the continued development
of the Board and Committees and related to: further strategy
development with strengthened competitor analysis; revised
plans for focusing deeper in the organisation; the enhancement
of certain management information; further review of
remuneration philosophy; and Board succession planning.
The work of the Nominations and Governance Committee is
wide-ranging, with a specific focus on the appointment and
succession of Directors and Executive management; the Board
evaluation; and Company strategy relating to diversity and
inclusion and the gender balance of both the Board and senior
management. The Nominations and Governance Committee
also carries out several other Group activities, including a
review of compliance with governance requirements, a
review of conflicts and the approval of Group policies.
Board structure – appointment and succession
The Nominations and Governance Committee leads in the
delivery of formal, rigorous and transparent procedures on
appointments and succession, ensuring the development of
a diverse pipeline. The key activities to ensure delivery of this
included the annual review of succession plans for Executives
and Non Executives. This was supplemented by the explicit
documentation of appointment and succession principles in
the Group governance manual.
2019 marked the retirement of Bob McMillan, one of our
Independent Non Executive Directors, who retired from the
Ltd Board at the 2019 Annual General Meeting, and Richard
Watson, Executive Director, who retired as Group Chief
Underwriting Officer on 31 December 2019. The Committee
and the Board decided to not fill the position vacated by Bob as
it was determined that the Board already had sufficient skills and
independence; however, a robust and transparent appointment
process was carried out for the position vacated by Richard.
An executive search firm provided us with some very strong
external candidates, but it was Joanne Musselle, an internal
candidate, who impressed our Executive and Non Executive
Directors during the three-stage selection process which
included one-to-one and panel interviews with some of our
Executives and Non Executives. Joanne was appointed
Group Chief Underwriting Officer from 1 January 2020 and
Executive Director in March 2020, and we are benefitting from
her underwriting expertise and knowledge of the Group.
Board evaluation
Board and Committee effectiveness evaluations are carried
out each year and the results are discussed at the Board
and each of the Committees. Every third year, the Board
evaluation is externally facilitated and this is next scheduled
to take place in 2020. Preliminary work on the 2020 evaluation
has already commenced and we are reviewing third-party
service providers. The interviews and data collection will be
58
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Nominations and
Governance
Committee report
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
The 2019 Board evaluation process
Stage 1
Director review
Stage 2
Committee review
Stage 3
Board review
Stage 4
Outputs shared
Stage 5
Action plan agreed
s One-to-one interviews
between the Chairman
and the Directors to
assess Director
effectiveness.
s Senior Independent
Director meets with
the Non Executive
Directors to assess
the effectiveness of
the Chairman.
s Detailed
s Detailed
s Results
questionnaire
completed to
assess the
effectiveness
of the
Committees.
questionnaire
completed
to assess the
effectiveness
of the Board.
presented and
discussed at
Board and
Committee
meetings.
s Action plan
overseen to
completion.
Diversity and inclusion
Diversity and inclusion (D&I) has been a strategic priority for
a number of years and remains important to us. We have a
Head of Diversity and Inclusion who drives our progress, a
diversity and inclusion policy that applies to all employees,
and a Board diversity statement that applies to our Executive
and Non Executive Directors.
In 2019, we refined and re-published our Board diversity
statement, which is available on our corporate website. It
outlines our requirement for the candidate pool for each
Board position to include at least one female and one
ethnic minority candidate of appropriate merit.
We complied with the provisions of the Hampton-Alexander
Review, which examines female representation within FTSE
350 companies at both Board and senior manager level.
This included a target of 33% representation of women
on FTSE 350 boards and leadership teams (which they
consider as comprising the Executive Committee and the
direct reports to the Executive Committee, and which we
call ‘senior management’) by the end of 2020, which as
the table opposite shows we have met.
Diversity at 2 March 2020
Board
Executive Committee
Direct reports to the Executive Committee
Hiscox Partners*
All employees**
Male
Female
64%
67%
51%
77%
50%
36%
33%
49%
23%
49%
* Hiscox Partner is an honorary title given to employees who make significant
contributions to the development and profitability of the Group. The Partnership
encourages a proprietorial attitude, and comprises of up to 5% of the workforce.
**1% of employees did not declare their gender.
We also complied with the UK obligations to report our gender
pay gap ratios with respect to our UK subsidiaries, and published
our third annual gender pay report during the year. As the
Chairman of the Remuneration Committee indicated in his letter,
we are pleased with the year-on-year improvement but will
continue to focus on this area with further D&I programmes
and initiatives in 2020.
Robert Childs
Chairman of the Nominations and Governance Committee
Hiscox Ltd Report and Accounts 2019
59
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Audit Committee report
In relation to financial reporting, the primary role of the Audit
Committee (the Committee) is to monitor the integrity of the
financial statements of the Group and any formal announcements
relating to the Group’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
catastrophe events in 2019, the Company strengthened reserves
for prior-year claims, specifically claims arising from Typhoon
Jebi, Hurricane Michael and within the risk excess reinsurance
business, based on materially increased industry loss estimates.
Similarly, the Committee received detailed presentations
from the Chief Actuary and management relating to this new
information and the recommendations arising therefrom. The
Committee is satisfied with both the process that was conducted
and the reporting and disclosure of the resulting estimates.
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 and
estimates have been applied or where 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 and estimates 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 external auditor, PwC,
in displaying the necessary professional scepticism its role
requires. The primary areas considered by the Committee
in relation to the 2019 Annual Report and Accounts were:
i) Reserving for insurance losses
As set out in our significant accounting policies on pages 119
to 120, the reserving for insurance losses, in particular losses
incurred but not reported, is the most critical estimate in the
Company’s consolidated balance sheet.
The Chief Actuary presents a quarterly report to the Committee
covering Group loss reserves which reviews both the approach
taken by management in arriving at the estimates and also the
key judgments within those estimates.
During the year, a number of large natural catastrophes
occurred which impacted the Group, including Hurricane
Dorian and Typhoons Faxai and Hagibis. It is important that the
Company can quickly and with a reasonable degree of reliability,
estimate the gross and net losses arriving for these events. The
Committee received presentations from the Chief Actuary and
management on the process undertaken and the judgments
arrived at to establish these key estimates. In addition to the
60
Hiscox Ltd Report and Accounts 2019
ii) Accounting for taxation
During the year, the Company made an additional tax provision
of up to $60 million, following a reappraisal of how the Company
invested in and classified marketing activity historically. This
additional tax provision has been presented as a prior year
adjustment and, as a result, the previously disclosed profit for 2018
has been restated. The Committee received detailed information
from management on the reclassification, the enquiries conducted
and the enhanced controls and procedures introduced. The
Committee also heard from the external and internal auditors
relating to the matter. The Committee is satisfied with the actions
taken and the reporting and disclosures of the matter.
Additionally, as 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 assets and is satisfied with the methodology.
iii) The valuation of the investment portfolio
The Group values and reports its investment assets at fair value.
Due to the nature of the investments, as disclosed in note 17, the
fair value is generally straightforward to determine for most of the
portfolio which is highly liquid. For the element of the portfolio
held in risk assets, a small proportion relies on a higher degree of
estimation. The Committee, through the Investment Committee,
receives quarterly reports on the portfolio valuation and is
content with the process and the estimates reported.
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 and estimates in the financial
statements from the Chief Financial Officer, and the results of
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
Audit Committee
report
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
the independent pension valuation, and is satisfied that the
assumptions used to measure the net liabilities are reasonable.
v) The recoverability of reinsurance assets
As a result of the large loss 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,
including the level of collateral held, and the regular contact with
counterparties, the ratings of reinsurers and the concentration
of risk. The Committee is satisfied with the approach taken and
the recoverability of those assets.
vi) Estimated premium income
The Hiscox Syndicates write a large proportion of their business
through binding authorities. Due to a time lag between the
binding of business and reporting to the insurance carrier,
significant judgements are made in estimating the gross written
premiums. The estimated gross written premium is regularly
compared to the actuals and no significant differences have
been noted. The Committee is satisfied with the approach taken.
vii) The level of rounding
A change to the level of rounding was applied in the consolidated
financial statements from nearest thousand to nearest hundred
thousand. This reflects the growth of the business and further
aligns the Group’s external reporting with its peers, a change
which was approved by the Committee.
Systems and process change projects
The various systems and process change projects under
way across the Group continued this year and include systems
changes in our retail businesses as well as a Group-wide finance
change programme (FTP), which involves a wide-ranging
transformation of the finance IT systems and controls. The
Committee receives a quarterly update on the status of the
FTP which enables it to monitor progress, obtain updates on
delivery and provide challenge where necessary. Delivering the
major projects already under way remains a business priority
for 2020, and is outlined on page 8.
External auditor
PwC has been the Company’s external auditor since 2016.
PwC is 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 PwC the scope of its audit plan for the full-year
and the review plan for the interim statement.
The Audit Committee receives reports from PwC at each meeting
which include the progress of the audit, key matters identified and
the views of PwC on the judgements outlined above. PwC also
reports on matters such as their observations on the Company’s
financial control environment, developments in the audit
profession, key upcoming accounting and regulatory changes
and certain other mandatory communications. 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 management present.
In 2019, management, in consultation with the Committee,
updated its policy to ensure that no non-audit services will be
contracted with PwC unless it is clear that there is no practical
alternative and there are no conflicts of interest or independence
considerations. During the year, the value of non-audit services
provided by PwC amounted to nil (2018: $168,000).
Throughout the year, the Audit Committee assesses the
independence, effectiveness and quality of the external audit
process. This process forms the basis for its recommendation
to shareholders to reappoint the external auditor.
Other committee meeting attendees
In addition to the standing invitees discussed above and
financial management, the Group’s Chief 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’s Chief Risk Officer aids in facilitating discussions relating
to risk.
In addition, and depending on the specific agenda, additional
invitees are invited to attend from time to time to present to the
Committee on findings from any of the above areas or other
matters of topical interest.
Complying with the UK Corporate Governance Code
In accordance with the 2018 UK Corporate Governance
Code, the Committee has advised the Board 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 position and
performance, business model and strategy.
Caroline Foulger
Chairman of the Audit Committee
Hiscox Ltd Report and Accounts 2019
61
Connected
We attend a host of industry
events so we can connect with
our brokers and coverholders
but, when we’re there, we do
our best to stand out from the
crowd by creating memorable
experiences. At an event in
San Diego, we used virtual
reality (VR) technology to
allow our business partners
to experience what it’s
really like to be caught in a
Category 5 hurricane and to
bring to life our cutting-edge
FloodPlus research.
Guests were blown away
– virtually – by the unique
experience, which brought
the threat of flood to life and
underlined the importance
of catch-all flood insurance.
Using a VR headset, they
followed Joe, an avatar of a
New Jersey homeowner, as
he hurried to protect his home.
They then witnessed the
devastation caused by
the storm, before being
transported to the future,
where the FloodPlus intelligent
algorithms and modelling
software, aided by computer
graphics, demonstrated how
rising sea levels could affect
real US towns.
62
Hiscox Ltd Report and Accounts 2019
Connected
Chapter 4:
Remuneration
Hiscox Ltd Report and Accounts 2019
63
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Letter from the Chairman of the Remuneration Committee
Dear fellow Shareholder
As set out later in this letter, under the normal three-year renewal
cycle we are proposing to make some changes to the Executive
Directors’ remuneration policy for 2020, subject to shareholder
support. But first, I think it worthwhile to set out again the
Group’s remuneration strategy and what it seeks to achieve.
It is designed to attract and keep talented, ambitious people
and create a culture that encourages sustainable high
performance in which pay reflects results, not just effort.
The Committee believes that for all employees, basic pay
should be competitive but not excessive, with bonuses relative
to personal performance and profitability of business area. We
expect all employees to meet or exceed a series of objectives
based on our strategy and values, which are essential to Hiscox’s
business operations and reputation, including delivering great
customer service, complying with regulation and managing risk.
For Executives across the Group to earn incentives, such as
an annual bonus or long-term share awards, they must have
helped to earn profits and deliver shareholder value above
and beyond demanding performance targets.
We believe this approach works well for both our employees
and shareholders. It has helped the business to be profitable
across the insurance cycle and to deliver good returns to
shareholders. The total return on Hiscox shares over the last
five years is 112%, more than double that of the FTSE All-Share
Index. Hiscox employee retention is also generally high at 76%.
Performance and remuneration outcomes for
Executive Directors
In 2019, the Executive Directors led the business in delivering
an increase in gross premiums written of 8.1% in constant
currency, and a profit before tax of $53 million. In a third year
of natural catastrophe events, this result has been driven
by a strong investment return of $223 million. Hiscox Retail
continues to deliver strong profits and the Executive team made
progress on major IT projects in the UK and USA as well as a
transformation of the finance function. As mentioned previously
in this report, a project to refresh the values and purpose of the
Group has been completed and is being rolled out.
The Committee feels that the Executive Directors continue
to drive value for shareholders in the long term and have
achieved a number of key objectives during the year as outlined
on page 71. However, in line with our approach of rewarding
financial outcomes and not just effort, as the pre-tax ROE
64
Hiscox Ltd Report and Accounts 2019
hurdle rate of 6.5% was not achieved no bonuses were paid.
Similarly, post-tax ROE over three years of 3% was below the
7% hurdle for the Performance Share Plan awards granted in
2017, therefore none of these awards will vest.
Notwithstanding good personal performance for the Executive
Directors, the Committee stuck to the philosophy of rewarding
financial outcomes, not just effort, and did not feel the need
to exercise any discretion or override the outcome of the
performance conditions.
The net result of the above is that the remuneration package
and single figure result reported for the Chief Executive is lower
than previous years at £698,196, a decrease of 60%.
Changes to the remuneration policy in 2020
Over the life of the current policy we have made a number
of changes in direct response to shareholder feedback and
changing market practice, and we intend to formalise these
changes under the new policy. These are:
— to use growth in net asset value (NAV) plus dividends
measured on a per-share basis as the basis for our
long-term incentive (the Performance Share Plan or PSP)
awards, which from 2018 replaced return on equity (ROE)
as the benchmark for awards;
— to reduce the level of vesting of PSP awards for threshold
performance from 25% of maximum to 20% for awards
from 2018; and
— to increase the shareholding requirements for Executive
Directors from 150% to 200% of salary.
Ahead of the remuneration policy’s renewal in 2020, the
Committee conducted a thorough review of Executive Directors’
arrangements taking into account evolving market practice.
This involved ensuring the policy is aligned to our strategy and
values and the UK Corporate Governance Code, and has an
appropriate balance between short-term and long-term incentive
opportunities. I am pleased to report that we do not believe the
policy requires wholesale changes, but we do want it to be even
more weighted towards long-term returns as we believe this will
enhance our strong ownership culture and focus Executives’
minds on building for the future.
We are therefore proposing to rebalance the weighting of
incentives further towards the long term by:
— reducing the maximum opportunity under the annual
bonus scheme by 100% of salary;
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
63
Chapter 4
Remuneration
Letter from the Chairman
of the Remuneration
Committee
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
— increasing the maximum opportunity under the PSP by
50% of salary.
The increase in maximum opportunity under the PSP will
be accompanied by an increase stretch of the performance
targets required to deliver maximum vesting. This increase
in PSP opportunity requires an amendment to our plan rules
for which shareholder approval is being sought at this AGM.
in our median pay gap. While this remains higher than we
would like, at 22.6% (2018: 24.5%), we continue to make good
progress in getting more women into more senior, higher-paid
roles. The proportion of women in the upper pay quartile, which
is the key reason for the discrepancy, improved to 30% in 2019
(2018: 26%). For examples of our work around diversity and
inclusion go to page 38, and details of our gender composition
are outlined on page 59.
We are also introducing new post-employment shareholding
guidance for our Executive Directors. They would have to hold
at least as many shares as they were required to when they were
employed by the Group (or, if the shareholding guideline has
not been met, then the actual number of shares they held on
stepping down from the Board) for at least one year after they
have left, and half of this amount for the following year. Also,
we are expanding the scope of the malus and clawback
provisions that apply to variable pay awards and providing
a more robust framework in applying discretion to formulaic
incentive outcomes. Further details can be found on page 90.
After extensive consultation, the response to these proposed
changes from shareholders to date has been positive.
Meeting the requirements of the UK Corporate
Governance Code
We comply with the remuneration provisions of the new UK
Corporate Governance Code, which came into effect in 2019.
Our Executive Directors’ pension benefits have always been
consistent with the wider UK workforce, and all three Executive
Directors in 2019 received a 10% cash allowance in lieu of the
standard employer pension contribution.
We voluntarily disclosed our Chief Executive pay ratios in
our 2018 Annual Report and have done so again this year.
We expect these ratios to be volatile from year-to-year due
to the variable and performance-based nature of the Chief
Executive’s remuneration package, and so it is important they
are understood within the context of our business, which is
discussed in the Chief Executive’s report on pages 17 to 25.
We have outlined how we have addressed other parts of the
Code on pages 54 to 57.
Gender pay reporting
In 2019, Hiscox published its third annual gender pay report
for the UK, which showed further year-on-year improvement
With similar legislation now in place in other countries in which
the Group operates, we will respond in line with local labour
requirements and so may see our reporting requirements in
this area expand over time.
Executive Director changes during 2019
Upon his retirement from the board, Richard Watson stepped
down as an Executive Director on 31 December 2019. Richard
will continue to be employed as an advisor to the business as
well as holding positions on a number of subsidiary boards.
His successor, Joanne Musselle, joined the Board in March
2020. Further details on Joanne and Richard’s remuneration
are set out in the annual remuneration report on pages 78 to 79.
In summary
The Remuneration Committee is satisfied that our 2019
outcomes are aligned with the interests of shareholders and
incentivise Executive Directors appropriately over both the short
and long term. We look forward to receiving further feedback at
our 2020 AGM where we will be seeking approval of our renewed
remuneration policy, annual remuneration report and revised
PSP rules.
Colin Keogh
Chairman of the Remuneration Committee
Hiscox Ltd Report and Accounts 2019
65
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Remuneration summary
Summary of remuneration arrangements for 2020
A summary of the remuneration
arrangements for Executive Directors
is provided opposite.
Base salary
Competitive but not excessive.
Over the life of our current remuneration
policy (approved by shareholders in 2017)
we have made certain implementation
changes in direct response to shareholder
feedback received as well as evolving
market practice. It is our intention to
formalise these under the new policy,
as well as incorporating the changes set
out in the Chairman’s letter, subject to
shareholder approval at the 2020 AGM.
Read our updated remuneration policy
83
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.
Key principles underpinning
remuneration at Hiscox
The Hiscox remuneration policy is
designed to drive a culture of high
performance and create sustainable
long-term value for shareholders. The
policy follows three clear principles:
— 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, return on equity (ROE)
and net asset value growth, which
drives total shareholder return
over time.
Remuneration
outcomes for 2019
No bonus for Executive
Directors as ROE was
below the threshold
performance level.
Long-term performance
impacted by
catastrophes; PSP
awards granted in
2017 will not vest.
Single figure of
£698,196 for
CEO is 60% lower
than last year.
66
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration
summary
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Implementation of policy for 2019
Implementation for 2020
Salaries for 2019:
— Bronek Masojada: £636,500
— Aki Hussain: £490,000
— Richard Watson: £490,000
Salary increase of 2.7%, in line with average UK employee increase.
Salaries for 2020:
— Bronek Masojada: £654,000
— Aki Hussain: £503,500
— Joanne Musselle: £503,500
Salary increase of 2.7%, in line with the average
UK employee increase.
Executive Directors’ 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, or a combination of pension contribution and cash allowance, totalling 10% of salary. These benefits mirror
those available to 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 28% of the current maximum opportunity.
Performance metrics: combination of ROE and individual performance
delivered against set objectives approved by the Board. Disclosure of the
ROE target ranges and detail around the individual performance factors
including specific risk-based objectives used to determine outcomes for
2019 is provided on pages 69 to 71.
Deferral: part deferral of amounts in excess of £50,000.
2019 actual as percentage of salary:
— Bronek Masojada: 0%
— Aki Hussain: 0%
— Richard Watson: 0%
ROE performance has been below the predetermined hurdle so
irrespective of personal performance, no bonus is payable.
Award subject to three-year performance period and two-year holding period.
Maximum opportunity: 200% of salary for all Executive Directors.
Vesting subject to: net asset value per share growth plus dividends.
20% of maximum vests for achievement of threshold performance.
2019 award as percentage of salary:
— Bronek Masojada: 200%
— Aki Hussain: 200%
— Richard Watson: 200%
Share ownership guidelines of 200% of salary for all Executive Directors,
after five years in role.
2019 actual:
— Bronek Masojada: 6,800%
— Aki Hussain*: 200%
— Richard Watson: 1,400%
*Aki Hussain was appointed in September 2016.
Maximum opportunity:
Reduction of 100% of salary:
— up to 300% of salary for CEO and CFO;
— up to 400% of salary for CUO.
Performance metrics and deferral unchanged.
Increase the maximum opportunity by 50% of
salary from up to 200% to up to 250% of salary
as part of the wider rebalancing of incentives
towards the long term. This increase in opportunity
will be accompanied by an increase in stretch of
the performance targets at the top end (see page
80). Threshold vesting remains unchanged as a
percentage of salary (up to 40% salary). As currently,
awards will be subject to a further two-year holding
period following vesting.
Share ownership guideline unchanged.
Post-employment shareholding requirement
introduced under the new policy.
Hiscox Ltd Report and Accounts 2019
67
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Annual report on remuneration 2019
This report explains how the remuneration policy was implemented
for the financial year ending 31 December 2019 and how it will be
applied for the 2020 financial year.
PwC has been engaged to audit the sections in the annual report on remuneration 2019 below entitled ‘Executive Director
remuneration’ and additional notes, ‘annual bonus’, ‘long-term incentives’, ‘details of pension entitlements’, ‘Non Executive Director
fees’, ‘Directors’ shareholding and share interest’, ‘Performance Share Plan’ and ‘Sharesave Schemes’, ‘Payments to past Directors’,
‘Richard Watson’s retirement from the Board’, to the extent that would be required by the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2013.
Executive Director remuneration
2019
Bronek Masojada
Richard Watson
Aki Hussain3
2018
Bronek Masojada
Richard Watson
Aki Hussain
Salary
£
632,375
486,750
486,750
Benefits
£
10,252
10,780
8,089
Bonus
£
Long-term
1
incentives plan
£
0
0
0
0
0
0
Retirement
£
55,569
44,248
44,248
Total
£
698,196
541,778
539,087
Salary
£
614,906
473,063
473,063
Benefits
£
9,971
10,211
7,338
2
Bonus
£
Long-term
3
incentives plan
£
Retirement
benefits
£
Total
£
223,000
215,000
172,000
916,175
632,159
569,716
54,034 1,818,086
43,004 1,373,437
43,004 1,265,121
1 2019 long-term incentives relate to performance share awards granted in 2017 where the performance period ends on 31 December 2019. The award is due to vest
on 7 April 2020. Based on performance achieved, this award is due to lapse in full.
2 A proportion of the bonus amount was deferred as set out on page 86 of the policy report.
3 The 2018 long-term incentive award relates to performance share awards granted in 2016 where the performance period ended on 31 December 2018.
The amount also includes dividend equivalents accrued on this award. The value of the awards have been updated to reflect the actual share price at vesting
on 8 April 2019 of £15.46. Of the vested amount, 41% relates to share price appreciation over the performance period (35% for Aki Hussain based on his later
date of grant).
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 2.7% from April 2019, the same as the average UK-based employee salary increase. Base
salaries for Executive Directors from 1 April 2019 were as follows:
Bronek Masojada
Richard Watson
Aki Hussain
68
68
Hiscox Ltd Report and Accounts 2019
Hiscox Ltd Report and Accounts 2019
April 2019
£636,500
£490,000
£490,000
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Benefits
For 2019, benefits provided for Executive Directors included the Company healthcare scheme, Sharesave scheme, life insurance,
income protection insurance and critical illness policies as well as a Christmas gift hamper.
Variable pay
To ensure that remuneration is aligned with Company performance and the shareholder experience, a significant proportion of pay is
delivered through incentive awards, consisting of an annual bonus and share awards under the Performance Share Plan, which can
vary significantly based on the level of performance achieved. Bonuses are only paid if results exceed a specified threshold and are
not used as a reward for effort alone – an approach that has helped reinforce a strong performance culture across the business.
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.
Annual bonus
The bonus is structured in a way that ensures significant variability in outcomes, including the possibility of no bonus being paid.
The Remuneration Committee believes that the most appropriate measure for the calculation of the bonus pool is pre-tax return
on equity (ROE), as this aligns management’s interests with those of shareholders, minimises the possibility of anomalous results,
and ensures that incentives for Executive Directors and other employees are tied to the Company’s profit performance.
The Executive Directors, along with other employees across the Group, participate in profit-related bonus pools, which are calculated
at a business unit level and for the Group as a whole. In determining the bonuses to be paid to Executive Directors, the Remuneration
Committee bases its judgement on both the performance of the Group and a robust assessment of individual performance, including
adherence to specific risk management objectives. The Remuneration Committee also seeks input from the Chief Risk Officer and
Chief Actuary to aid its assessment of whether bonus outcomes are appropriate.
Bonuses are not paid unless the Group’s performance exceeds a given threshold, irrespective of individual performance. Over the
past ten years there have been three occasions when the Group delivered a pre-tax ROE below the required threshold and no
bonuses were paid to Executive Directors.
When setting targets, the Committee seeks to motivate strong performance while also encouraging sustainable behaviours, in line
with the defined risk appetite of the business. In determining the size of the Executive Director bonuses for 2019, the Committee used
the following framework.
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%
Indicative bonus range (% of max)
Nil
0-15%
15-40%
30-60%
50-70%
60-100%
* The risk-free rate (RFR) is reviewed annually using government bonds as a reference point, reflecting the rate available to investors without commercial risk.
For 2019, the RFR was set at 1.5%.
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 typically up to 10% of salary.
Hiscox Ltd Report and Accounts 2019
69
400
350
300
250
200
150
100
50
0
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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
2018
2019
Below zero
0%
5%
10%
15%
20%
25%
30%
35%
40%
Return on equity
Performance outcomes for 2019
The pre-tax ROE for 2019 was 2.2%. Despite delivery of good progress against their key individual objectives during the year, in
accordance with the bonus framework on page 69, no bonuses were paid to the Executive Directors as the threshold performance
hurdle had not been met. For completeness, the table opposite sets out the key objectives and individual achievements of each
Executive Director.
0
5
10
15
20
25
30
35
40
70
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Key objectives and individual achievements by the Executive Directors
Key objectives
Achievements
Bronek Masojada
Delivering the 2019
business plan
Deliver Executive
Committee
priorities
Bronek has led the business to achieve growth in gross premiums written of 8.1%
in constant currency to $4 billion, however, profits of $53 million were below target.
The Retail business increased profits by 22%, however, during the year the business
had to publish new guidance for the combined ratio over the medium term, due to an
uptick in claims activity and a more cautious approach to reserving in the USA.
Supporting business opportunities to drive value for the Group including Hiscox USA,
Hiscox Asia and the use of third-party capital. Progress has been made in Direct Asia,
adding new partnerships to drive growth. The direct and partnership division in the
USA has had sustained investment in marketing and IT to protect our market position
in the direct small business market. The third-party capital strategy is developing well.
Refreshing the values, defining a purpose and common vision was also a priority for
the Executive Committee. Bronek led this project with good results and engagement
across the business.
Ensure Hiscox
operates within
risk, regulatory
and societal
expectations
Bronek has instigated structural processes across the Group to facilitate horizon
scanning of emerging risk and regulatory change. The successful implementation of
the FCA’s Senior Managers & Certification Regime is an example of this. Bronek has
also brought together our environmental, social and governance (ESG) efforts across
the Group under a distinctive Hiscox ESG framework.
Richard Watson
Review how
we manage
casualty exposure
Reshape our
underwriting
portfolio to achieve
the right balance of
profitable business
Richard has established a new process of review and action to ensure proactive
management of casualty business around the Group and create an environment of
constant course correction. He has also improved our understanding of the cyber
peril; driving a refresh of existing large loss scenarios, and leading a three-day large
loss training exercise which tested the Group’s response to a market-changing
cyber loss event.
Balancing the portfolio takes constant course correction and there is still more to
do. However, Richard drove decisive action in underperforming lines, cutting over
$200 million of business in 2019. At the same time we have grown in profitable areas
to achieve overall growth in constant currency of 8.1%.
Ongoing
development of
underwriting talent
Richard has driven refinements in talent monitoring processes and has encouraged
courageous career moves for high potential underwriters. The successful move of
Hiscox Re & ILS’s CUO to Hiscox USA is a good example of this.
Diversity and
inclusion (D&I)
As Executive Sponsor for D&I, Richard has overseen another year of improved
engagement in D&I initiatives. The Group now has nine established employee networks
with over 1,000 members combined, and KPIs that are creating more gender-balanced
shortlists for roles.
Aki Hussain
Balance sheet
management
ROE enhancing
opportunities
across the
business
Deliver finance
transformation
Focus on the
efficiency agenda
In another volatile year for earnings, Aki oversaw the continued optimisation of
the Group’s capital and financial flexibility, maintaining the strength of the Hiscox
balance sheet. Hiscox is well capitalised against both regulatory and ratings
agency requirements.
Hiscox is able to self-fund ambitious infrastructure plans in Retail, including additional
investment in marketing for Hiscox USA, due to Aki’s efforts to improve the Group’s
financial flexibility. Similarly, the Group’s third-party capital capabilities in the big-ticket
businesses have evolved to take advantage of opportunities that arise.
The multi-year finance transformation programme is progressing to plan and budget,
with five of the nine systems now embedded across the Group. Preparations for the
final phase of the programme were completed successfully in 2019, with the final
systems and organisational changes to be deployed in 2020.
An Executive Committee priority has been to reduce Hiscox’s expense ratio over time,
which has been impacted by a series of capital intensive projects to support greater
scale in the business. Although improvements in efficiency are being made, for example
through increased automation, there is more to do, and plans for 2020 include moving
300 roles out of London to more cost-effective locations.
Hiscox Ltd Report and Accounts 2019
71
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
How we have addressed the following factors in the 2018 UK Corporate Governance Code
Factor
Consideration of how this is addressed for Hiscox
Clarity – remuneration
arrangements should be
transparent and promote
effective engagement
with shareholders and
the workforce.
s Shareholders’ views on the key changes to the policy have been sought.
s Although the Committee did not consult directly with the broader workforce on Executive
Directors’ remuneration policy, there is a process by which employees’ views are gathered
on a range of topics and reflected in Board discussion. The Remuneration Committee also
receives information on broader workforce remuneration policies and practices during the
year which informs its consideration of the policy for Executive Directors.
Simplicity – remuneration
structures should avoid
complexity and their rationale
and operation should be easy
to understand.
s Hiscox’s remuneration framework is simple, comprising three main elements:
i) fixed pay (base salary, benefits and pension);
ii) annual bonus; and
iii) PSP awards.
s The remuneration philosophy is a simple one: to reward performance. For over a decade,
the foundation of the Group’s remuneration strategy has been the belief that the best way
to foster a high-performance culture across the Group is to ensure that pay reflects our
results, not just effort.
s The remuneration policy’s operation, including form of awards, time horizons, and
performance measures, is designed to avoid complexity and is fully disclosed in the
Directors’ remuneration report.
Risk – remuneration
arrangements should ensure
reputational and other risks
from excessive rewards, and
behavioural risks that can
arise from target-based
incentive plans, are identified
and mitigated.
s Incentive awards are capped and are not considered excessive.
s Executive Directors’ annual bonus awards are judgement based to ensure they reflect
their overall performance rather than being measured according to a formulaic outcome.
Risk is also taken into consideration as part of this.
s In the new policy, the Committee has the ability to apply independent judgement to ensure
that the PSP outcome is a fair reflection of both the company’s performance and that of the
individual over that period.
s Part of the annual bonus is subject to deferral, and PSP awards are subject to a holding
period following vesting. Deferred bonus and variable pay awards are subject to malus
and clawback.
Predictability – the range of
possible values of rewards
to individual Directors and
any other limits or discretions
should be identified and
explained at the time of
approving the policy.
Proportionality – the link
between individual awards,
the delivery of strategy and
the long-term performance of
the Company should be clear.
Outcomes should not reward
poor performance.
Alignment to culture –
incentive schemes should
drive behaviours consistent
with Company purpose,
values and strategy.
s The range of possible values are set out in the performance scenario charts in the
remuneration policy.
s Limits and ability to exercise discretion are also set out in the policy.
s Historic variable incentive pay-outs have had a strong link to the Company’s actual
performance. There is a track record of payment for performance, with evidence of zero
bonuses where ROE performance has been below the predetermined hurdle.
s The variable incentive schemes, including quantum, time horizons, form of award and
performance measures are all designed with the Company’s purpose, values and strategy
in mind.
s The pay arrangements for the Executive Directors are aligned with those of the broader
workforce and senior team.
72
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Long-term incentives
Performance Share Plan awards (PSP) where the performance period ends with the 2019 financial year
The Executive Directors were granted nil-cost options under the PSP on 7 April 2017 for the three-year performance period
1 January 2017 to 31 December 2019.
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 3%, the awards ending with the 2019 performance year will not vest as
the minimum performance threshold has not been met.
PSP awards granted during the 2019 financial year
On 8 April 2019, the Executive Directors were granted nil-cost options under the PSP.
Bronek Masojada
Richard Watson
Aki Hussain
* Middle market quotation on 8 April 2019.
Percentage
of salary
Number of
awards granted
Market prices at
date of grant*
200% 82,000
63,250
200%
63,250
200%
£15.46
£15.46
£15.46
Market value at
date of grant
£1,267,720
£977,845
£977,845
The performance condition for these awards, measured over the period 1 January 2019 to 31 December 2021 is as follows:
Minimum threshold vesting
Maximum vesting
Straight-line vesting between these points
Growth in net asset value plus dividends
measured on a per-share basis
Proportion of PSP vesting
%
RFR + 6 = 7.5
RFR + 14 = 15.5
20
100
The net asset value targets, which are reviewed annually, are designed to outperform the risk-free rate (RFR) and motivate the
management team while driving the right behaviours. The RFR for the awards granted in 2019 was 1.5%.
Executive Directors will be required to retain any shares vesting (net of tax charges) at the end of the performance period for a further
two years (five years post the start of the performance period).
Hiscox Ltd Report and Accounts 2019
73
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Balance between pay elements
The chart below 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.
CEO remuneration – short-term versus long-term weighting
Fixed pay – salary and benefits
PSP – value at vesting
PSP – share price appreciation
Annual bonus
2019
100%
2018
37%
2017
27%
73%
51%
12%
2016
16%
46%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Details of pension entitlements
Bronek Masojada, Richard Watson and Aki Hussain hold lifetime allowance protection certificates and have therefore opted out
of the Company defined contribution 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. Executive Director retirement benefits are consistent with those offered to the majority of
UK employees. This has been the policy at Hiscox for a number of years.
The table below details the legacy entitlements from the closed defined benefit pension plan.
Pensions
Bronek Masojada
Richard Watson
There are no further accruals under this plan.
Normal retirement
age
Increase
in accrued
pension during
the year
£000
Total accrued
annual pension
at 31 December
2019
£000
Increase in
accrued pension
net of inflation
£000
Transfer value
of accrued
pension at
31 December
2018
£000
Transfer value
of accrued
pension at
31 December
2019
£000
Increase/
(decrease) in
transfer value of
accrued pension
during the year
£000
60
60
3
9
58
185
–
–
2,107
7,092
2,331
7,884
224
792
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 2019
and 31 December 2018.
Ltd
Board fee
£
Ltd Committee
fee
£
Subsidiary
Board fee
£
145,000
Robert Childs
67,398
Caroline Foulger
67,398
Michael Goodwin
67,398
Thomas Hürlimann
79,937
Colin Keogh
67,398
Anne MacDonald
Bob McMillan2
25,344
Constantinos Miranthis 67,398
67,398
Lynn Pike
–
36,834
28,997
28,997
35,266
28,997
10,904
28,997
34,483
145,000
89,469
28,409
50,000
47,000
–
62,696
37,618
61,783
2019
Total
Hiscox fees
£
301,860
193,701
119,122
146,395
162,204
96,395
98,943
134,013
163,664
1
Benefits
£
11,860
–
–
–
–
–
–
–
–
Ltd
Board fee
£
Ltd Committee
fee
£
Subsidiary
Board fee
£
145,000
64,662
64,662
64,662
76,692
64,662
64,662
64,662
64,662
–
35,338
27,820
27,820
34,211
27,820
31,579
27,820
33,083
145,000
87,846
21,805
40,254
15,567
–
60,150
19,825
–
2018
Total
Hiscox fees
£
301,301
187,846
92,482
132,736
126,470
92,482
156,391
112,307
97,745
Benefits
£
11,301
–
–
–
–
–
–
–
–
1 Benefits include life assurance and healthcare.
2 Bob McMillan stepped down from the Ltd Board following the May AGM.
There was no change to the Ltd Board and Committee US Dollar fee structure in 2019.
2018 fees that were paid in US Dollar have been converted using an exchange rate of 1.33. Those paid in Euros were converted using 1.18.
2019 US Dollar fees were converted using 1.276 and Euros were converted using 1.14.
74
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Directors’ shareholding and share interests
To align their interests with those of Hiscox shareholders, senior managers are expected to own a minimum number of Hiscox shares.
Executive Directors are required to hold Hiscox shares valued at 200% of salary within five years of becoming an Executive Director.
Bronek Masojada and Richard Watson have over 20 and 30 years’ service respectively, so their shareholdings far exceed the
guidelines. Aki Hussain was appointed to the Board in September 2016 and has met his minimum shareholding requirement.
As part of the renewal of the remuneration policy we intend to introduce a post-employment shareholding guideline for our Executive
Directors which will apply for a period of two years from stepping down from the Board. This will be set at the level of the in-employment
shareholding guideline for one year (or the actual shareholding on stepping down from the Board if lower) and at half of this amount for
the following year.
The interests of Executive and Non Executive Directors are set out below, including shares held by connected persons. There have
been no changes in the Director share interests between 31 December 2019 and 2 March 2020.
Directors
Executive Directors
Bronek Masojada
Richard Watson
Aki Hussain
Non Executive Directors
Robert Childs
Caroline Foulger
Michael Goodwin
Thomas Hürlimann
Colin Keogh
Anne MacDonald
Bob McMillan
Constantinos Miranthis
Lynn Pike
31 December 2019
6.5p ordinary shares
number of shares beneficial
31 December 2018
6.5p ordinary shares
number of shares beneficial
2,990,109
494,946
71,794
1,200,810
13,231
4,986
8,863
24,967
35,375
–
4,525
–
3,014,894
614,973
64,794
1,274,610
8,231
4,950
3,660
20,942
28,611
–
4,525
–
Performance Share Plan (PSP)
Awards in the form of nil-cost options are granted under the PSP as a percentage of salary. All awards are subject to performance
conditions. The interests of Executive Directors are set out below:
Bronek Masojada
Richard Watson
Aki Hussain
Total
Number of
awards at
1 January 2019
168,450
117,006
120,000
105,000
83,250
–
87,484
82,800
75,000
58,000
–
75,000
75,000
58,000
–
1,104,990
Number of
awards granted
Number of
awards lapsed
Number of
awards exercised
Number of
awards at
31 December
2019
Mid market
price at date
of grant
£
Average market price
at date of exercise
£
Date
from which
released
–
–
–
–
(63,084)
2,385
–
–
–
–
–
82,000
–
–
(43,528)
1,646
–
–
–
–
–
63,250
(39,428)
1,301
–
–
–
–
63,250
–
213,832 (146,040)
(37,500) 130,950
117,006
59,301
105,000
83,250
82,000
87,484
40,918
75,000
58,000
63,250
36,873
75,000
58,000
63,250
(37,500) 1,135,282
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6.94
8.82
9.56
11.19
14.88
15.46
8.82
9.56
11.19
14.88
15.46
10.46
11.19
14.88
15.46
15.75 17-Mar-17*
13-Apr-18*
08-Apr-19*
07-Apr-20
06-Apr-21
08-Apr-22
13-Apr-18*
08-Apr-19*
07-Apr-20
06-Apr-21
08-Apr-22
08-Apr-19*
07-Apr-20
06-Apr-21
08-Apr-22
*Awards have vested but are unexercised.
Hiscox Ltd Report and Accounts 2019
75
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Sharesave Schemes
The interests of Executive Directors under the Sharesave Schemes are set out below:
The scheme offers a three-year savings contract where the exercise price of the options is calculated based on an average share
price over five days prior to the invitation date, with a 20% discount.
Number of
options at
1 January 2019
Number of
options
granted
Number of
options
lapsed
Number of
options
exercised
Bronek Masojada
Richard Watson
Aki Hussain
Total
1,040
778
1,557
2,081
5,456
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Number of
options at
31 December
2019
1,040
778
1,557
2,081
5,456
Exercise
price
£
Market price at
date of exercise
£
Date from
which
exercisable
8.648
11.556
11.556
8.648
01-Jun-20
01-Jun-21
01-Jun-21
01-Jun-20
Expiry date
30-Nov-20
30-Nov-21
30-Nov-21
30-Nov-20
External Non Executive Directorships
Executive Directors may not accept any external appointment that may give rise to a conflict of interest, and all external appointments
require the consent of the Chairman. During the year Bronek 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 and was
Chair of Policy Placement Limited. Bronek Masojada was remunerated £40,114 gross for his Directorship at Pool Reinsurance
Company Limited. Richard Watson held a Directorship at White Oak Underwriting Agency Limited and was not remunerated for
his services. Aki Hussain held a Directorship at VISA Europe Limited and received a gross fee of £46,320.
Table of historic data
The table below shows the single total remuneration figure for the Chief Executive for the past ten years.
CEO single figure
of remuneration (£)
Annual bonus
as percentage
of current max
PSP vesting
as percentage
of maximum
opportunity
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1,759,123 1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,394,428 1,818,086
698,196
29
0
46
51
44
39
64
0
9
100
85
39
53
100
100
100
85
47
0
0
Prior to 2015 the annual bonus was operated on an uncapped basis. In order to facilitate comparison the current 400% salary cap
has been applied retrospectively.
76
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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 2009 and 2019, Hiscox delivered total shareholder return of 422% – well above the FTSE All-Share and
FTSE Non-Life Insurance indices.
Total shareholder return
(%)
Hiscox
FTSE All-Share
FTSE Non-Life Insurance
600
550
500
450
400
350
300
250
200
150
100
50
0
-50
600
550
500
450
400
350
300
250
200
150
100
50
0
-50
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
M ar 18
Jun 18
Sep 18
D ec 18
M ar 19
Jun 19
Sep 19
D ec 19
Relative importance of the spend on pay
The charts below show the relative movement in profit, shareholder returns and employee remuneration for the 2018 and 2019
financial years. 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 108.
Profit before tax ($m)
-61.0 (% change)
Dividend and return of
capital to shareholders ($m)
+4.2 (% change)
Total employee remuneration ($m)
-2.5 (% change)
320
312
136
119
124
53
2018 (restated)
2019
2018
2019
2018
2019
Hiscox Ltd Report and Accounts 2019
77
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Remuneration for the wider workforce
The Remuneration Committee receives information on Group-wide remuneration policies and uses internal and external measures
to assess the appropriateness of the remuneration policy and outcomes for Executive Directors. During the year, the Committee
reviewed information on market levels of pay in our peer group, bonus pools split by business area, levels of share plan participation
and pay ratios between Executives and average employees.
Percentage change in Chief Executive remuneration
The table below shows the percentage change in base salary, benefits and annual bonus of the Chief Executive between the
2018 and 2019 financial years. As the Chief Executive is based in the UK, UK-based employees have been used as the comparator
group for base salary and benefits. This ensures that any comparison avoids the impact of exchange rates and takes into account
country-specific inflation and local benefit plans. For the bonus, we have used Group employees as this is a more accurate
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
*No bonus was paid to the CEO in respect of 2019 or 2017.
% change 2018 to 2019
% change 2017 to 2018
CEO
Employee
CEO
Employee
2.7
2.7
N/A*
2.8
2.0
(58.8)
3.4
3.3
N/A*
3.0
2.7
56.5
Chief Executive pay ratio
The CEO’s total remuneration compared with the median (50th percentile) remuneration of the Company’s UK employees as at
31 December 2019 is shown below, along with the 25th and 75th percentiles.
Full year
2019
2018*
*Based on restated CEO single figure for 2018.
Calculation
methodology
A
B
P25
(lower quartile)
1:19
1:35
P50
(median)
1:11
1:29
P75
(upper quartile)
1:7
1:15
Last year the lower quartile, median and upper quartile employees were determined based on data used to calculate our gender
pay gap. This was ‘Option B’ in terms of the permitted calculation methodologies. For 2019 and future years we have selected
‘Option A’ as it is the more robust approach and favoured by investors. This involves calculating the ‘single figure’ remuneration for
every employee for 2019 and ranking them in order. Part-time employee single figures were annualised to provide more meaningful
comparison. The single figure for P25 was £36,210, P50 £61,155 and P75 £94,661. The salary for P25 was £29,607, P50 £52,248
and P75 £81,145.
The Committee has considered the pay data for the three employees identified and believes that it fairly reflects pay at the relevant
quartiles amongst the UK employee population. The calculations were in line with the single figure methodology, with no elements
of pay and benefits omitted.
By design, the remuneration of our most senior executives including the CEO is more highly performance geared than other roles
in the business. The Committee therefore appreciates that the ratio between the pay of the CEO and wider employees can vary
significantly over time. For example, in a year when the business performs well, the ratio would typically be higher. In contrast if the
CEO’s incentives lapse in full as they have in 2019, the ratio will be lower. The Committee is comfortable that the medium pay ratio
aligns to the pay and progression policies for employees, in particular that pay is truly linked to performance and that individuals are
appropriately motivated and rewarded according to their knowledge and seniority within the business.
Richard Watson’s retirement from the Board
Richard Watson stepped down as Chief Underwriting Officer and as an Executive Director of Hiscox Ltd with effect from
31 December 2019. He continues to be an employee of Hiscox Ltd following his retirement from the Board. Accordingly he
has received no loss of office payment in respect of his service as a Director.
As he had served a full year as an Executive Director, Richard Watson was considered for an annual incentive award in respect of
2019. In line with the other Executive Directors, no bonus was payable. Similarly, in line with the other Executive Directors, his 2017
PSP award will lapse in full.
In accordance with the remuneration policy and plan rules, Richard’s outstanding deferred bonuses earned and disclosed in
previous years (of £107,500) and unvested PSP awards (121,250 shares) will subsist, subject to performance testing and continued
employment with the Group. His outstanding options under the HMRC-approved all-employee Sharesave Scheme have been dealt
with in accordance with the rules of the scheme.
78
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Payments to past Directors
There were no payments made during 2019.
New appointments to the Board
Joanne Musselle joined the Board in March 2020, following her appointment as Group Chief Underwriting Officer, effective 1 January
2020. Her salary from this date will be £490,000. In line with practice for the current Executive Directors and the majority of other
employees, she will receive a combination of pension contributions and cash allowance, totalling 10% of salary. Joanne will receive
the same benefits as other Executive Directors, including healthcare insurance, life insurance and the opportunity to participate in
all-employee Sharesave Schemes. Details of her variable pay opportunities for 2020 are set out in the following section.
As an internal promotion, there is no buyout associated with her appointment. All other elements of her package are in line with the
remuneration policy.
Implementation of remuneration policy for 2020
Salary
Annual salary reviews take effect from April each year. The Committee takes account of a number of factors, primarily the increase
applied to other UK-based employees. The Committee applies judgement when using external market data.
For 2020, salaries for Executive Directors will be increased by 2.7%. This is in line with other UK-based employees. Salaries from
April 2020 will be as follows:
Bronek Masojada
Aki Hussain
Joanne Musselle
April 2020
£
654,000
503,500
503,500
Annual bonus
Under the new remuneration policy (detailed on pages 83 to 93), we intend to reduce the maximum opportunity under the annual
bonus by 100% of salary.
The maximum opportunity and overall bonus structure for the year ending 31 December 2020 will be 300% of salary (and 400% of
salary for the CUO).
In determining the bonuses to be paid to Executive Directors, the Committee bases its judgements on both the performance of the
Group and a robust assessment of individual performance. These objectives are not prospectively disclosed as they are considered
to be commercially sensitive as a result of their close alignment with Hiscox’s strategic goals and objectives over the coming year.
Bonuses are not paid unless the Group’s performance exceeds a given ROE threshold. There is no change in this threshold for 2020
(ROE of risk-free rate (RFR) plus 5%). A maximum bonus will only be achieved for ROE performance of at least RFR plus 20%, taking
into account individual performance and risk management. The ranges used to support the Committee’s decision-making will be
disclosed in next year’s Directors’ remuneration report, together with an overview of the individual objectives set.
Hiscox Ltd Report and Accounts 2019
79
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Performance Share Plan (PSP)
As set out elsewhere in this report, under the new remuneration policy (pages 83 to 93) we are proposing to increase the maximum
PSP opportunity to 250% of salary, as part of the rebalancing of the incentive opportunity towards the long-term. This increased
opportunity will only be delivered where more stretching performance targets have been met over a three-year period.
Subject to the new remuneration policy being approved by shareholders, the maximum opportunity for the awards to be granted to
the Executive Directors in 2020 will be 250% of salary. These award levels will be kept under review for future years.
For 2020, PSP awards will continue to 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.
There will be no change in the level of payout (as percentage of salary) for threshold performance. The additional award opportunity
above 200% of salary will only be delivered for higher levels of NAV growth, as set out below. The increased targets are considered to
be very stretching, requiring average NAV growth plus dividends of above RFR + 17% p.a. over three years for maximum vesting.
Growth in NAV plus dividends measured on a per-share basis
Award vesting (% of salary)
Less than RFR + 6% p.a.
RFR + 6% p.a.
RFR + 14% p.a.
>RFR + 14% to RFR +17% p.a.
The risk-free rate (RFR) will be 1% for 2020.
Nil
40% (no change from current plan)
200% (no change from current plan)
Straight-line vesting between 200% of salary and maximum award
Membership of the Remuneration Committee
The Committee members during the year were Caroline Foulger, Bob McMillan, Lynn Pike, Anne MacDonald, Thomas Hürlimann,
Michael Goodwin, Constantinos Miranthis and Colin Keogh (Chairman).
Non Executive Director fees
Following two years in which Directors fees were not reviewed, the Company Secretary recommended changes based on third-party
data which benchmarked Director fees against peer companies. These changes were reviewed in November 2019 by the Nominations
and Governance Committee. No Director was involved in approving fees that related to themselves, and recused themselves with
respect to any discussion about fee increases.
The Chairman’s fees increased by $3,190, an increase of 1.7%. The Remuneration Committee Chairman and Remuneration
Committee membership fees increased by $1,000 and $500 respectively. The Nominations and Governance Committee
membership fees increased by $1,500 and the Senior Independent Director fee increased by $1,000. In addition, to reflect the
increase in responsibility and the additional time commitment, it was agreed that the role of Employee Liaison would receive a
fee of $10,000. All other fees remained the same.
The Non Executive Director fees which apply for 2020 are set out below.
Board Chairman
Basic fee
Additional fees for:
Audit Committee Chair
Audit Committee member
Remuneration Committee Chair
Remuneration Committee member
Risk Committee Chair
Risk Committee member
Nominations and Governance Committee member
Senior Independent Director fee
Employee Liaison fee
80
Hiscox Ltd Report and Accounts 2019
2020
fees
£147,500
$ 86,000
$ 26,000
$16,000
$18,000
$9,000
$17,000
$10,000
$4,000
$17,000
$10,000
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Annual report on
remuneration 2019
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
External advisors
The Committee received independent advice from Deloitte, who were 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. 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 £92,625 based on a time and materials basis.
The Committee regularly reviews the advice it receives and is satisfied that this has been objective and independent. During the year
Deloitte also provided the Company with other tax and consulting services.
In addition to the external advisors, the Chief Executive and Group HR Director attend the Committee meetings by invitation and
provided material assistance to the Remuneration Committee during the year. No Director or Committee member was involved in
determining their own remuneration during the year.
Statement of shareholder voting
At the AGM on 16 May 2019, the Directors’ annual report on remuneration received the votes below from shareholders.
The remuneration policy was last voted on at the 2017 AGM; votes shown below.
For
%
Against
%
Withheld
Total votes
Annual remuneration
report
228,264,867
98.58
3,292,502
1.42
618,886
232,176,255
Remuneration
policy
177,072,418
84.46
32,579,285
15.54
1,016,024
210,667,727
Hiscox Ltd Report and Accounts 2019
81
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Remuneration policy
Hiscox has a forward-looking remuneration policy for its
Board members.
In addition to the above, the Remuneration Committee has been
mindful of the views of shareholders and the provisions detailed
within the revised UK Corporate Governance Code. As a result
we are proposing the following additional changes to our policy.
p Rebalancing the weighting of incentives further towards
the long term – in order to encourage and support an
ownership culture and increase the focus on long-term
performance, it is proposed to increase the maximum
award opportunity under the PSP from 200% to 250% of
salary. The maximum opportunity under the annual bonus
opportunity will be reduced from 400% to 300% of salary
for the CEO and CFO and from 500% to 400% of salary for
the CUO.
p Post-employment shareholding guidelines – in recognition
of the changes to the UK Corporate Governance Code,
Executive Directors will now be expected to maintain
an interest in Hiscox shares after they step down from
the Board.
p Recovery and discretion – the recovery provisions have
been strengthened and discretion to override formulaic
returns introduced to the PSP to enable the Committee
to apply judgement to plan outcomes under the PSP
in exceptional circumstances, in line with the 2018 UK
Corporate Governance Code.
Other minor drafting changes are proposed to clarify areas
of implementation.
The Company consulted with major shareholders regarding
the above changes and generally received positive feedback
in respect of the changes.
The core function of the Remuneration Committee’s role is
to determine:
p the overall remuneration strategy, policy and cost for
the Group;
p the levels and make-up of remuneration for Executive
Directors and senior management;
p the award of material bonuses to individuals other than
the Executive Directors; and
p the awards and wider operation of the Company’s share
plans, including the Performance Share Plan.
The Company’s intended forward-looking remuneration policy
for Board members is set out on pages 83 to 93.
We are a Bermuda-incorporated company and therefore is not
subject to the UK Companies Act and related UK secondary
legislation. Our intention, however, has always been to provide
transparent remuneration disclosure and to engage with
shareholders on the topic, therefore our remuneration reporting
is consistent with the UK regulations and we will be submitting
the policy and remuneration report for an advisory vote at the
Annual General Meeting on 14 May 2020.
Changes to the policy
The new remuneration policy has been determined by the
Committee following a robust process, which took into
account the views of Hiscox’s major shareholders.
The policy has been drafted to incorporate the changes
previously adopted by the Company in 2017. These have
been communicated to shareholders in prior years and are
formalised under the new policy. The changes previously
adopted are:
p threshold vesting – a reduction in the minimum vesting
threshold of PSP awards from up to 25% to up to 20%
of maximum;
p performance condition – an amendment to the
performance condition used to determine PSP awards
from ROE to growth in net asset value plus dividends
per share; and
p shareholding guidelines – an increase in shareholding
guidelines from 150% to 200% of salary for all
Executive Directors.
82
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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 which apply for 2020 are set out on page 79.
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, to address market competitiveness, development in the role, or a change in role size,
scope or responsibility).
Performance metrics
Individual and business performance are taken into account when setting salary levels.
Application to broader
employee population
Process for review of salaries is consistent for all employees.
Hiscox Ltd Report and Accounts 2019
83
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Future policy table
Executive Director remuneration
Benefits (including retirement benefits)
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
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, or a combination of pension contributions
and cash allowance, totalling 10% of salary.
Certain Board members retain legacy interests in closed defined benefit schemes. However,
there is no entitlement to any further accrual under these schemes.
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 assurance, long-term disability
schemes and participation in all-employee share plans such as the Sharesave Scheme.
Executive Directors are included on the directors and officers’ indemnity insurance.
The Committee may provide reasonable additional benefits based on the circumstances
(for example, travel allowance and relocation expenses) for new hires and changes in role.
Maximum potential value
Set at an appropriate level by reference to the local market practice and reflecting individual and
family circumstances.
Pension benefits will be in line with the standard employer contribution taking into account any
local requirements.
Performance metrics
None.
Application to broader
employee population
Executive Directors’ benefits are determined on a basis consistent with all employees.
84
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Future policy table
Executive Director remuneration
Annual bonus
Purpose and link to strategy
To reward for performance against the achievement of financial results over the financial year and
key objectives linked to the strategic priorities.
To provide 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 2020, 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);
p individual performance, including non-financial and strategic factors;
p consideration of risk.
Amounts are paid in accordance with the bonus deferral mechanism described on page 86.
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 90.
Maximum potential value
The maximum bonus opportunity for the Executive Directors will be as follows:
p CEO and CFO – 300% of salary;
p CUO – up to 400% of salary.
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 against a hurdle (reviewed
annually). Performance at or above this hurdle is rewarded and where performance falls below
this hurdle, payouts will be nil. Financial performance is therefore the main determinant of overall
bonus payouts.
In determining the level of bonuses awarded, the Committee also considers a range of other factors
including the achievement of stretching personal and strategic objectives during the relevant year
together with a consideration of risk, ensuring a robust assessment of performance.
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.
Hiscox Ltd Report and Accounts 2019
85
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Future policy table
Executive Director remuneration
Bonus deferral
Purpose and link to strategy
To encourage retention of employees.
To 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, $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, $100,000, paid shortly
after the end of the financial year in which the
bonus was achieved.
Bonus above $100,000 and below $200,000
Bonus above £100,000, €150,000, $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).
50% of bonus paid shortly after the end of the
financial year following the announcement
of results.
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 90.
Maximum potential value
In accordance with the operation of the annual bonus.
Performance metrics
In accordance with the operation of the annual bonus.
Application to broader
employee population
Approach is consistent for all employees across the Group who are awarded a sizeable bonus.
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Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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, and governed by, the rules of the PSP as approved by shareholders
from time to time.
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. Further
details are set out on page 73.
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 90.
Maximum annual grant of up to 250% of salary in respect of any one financial year.
Maximum potential value
The performance conditions for awards are set to align with the long-term objectives of
the Company.
Performance metrics
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 growth in net asset value
plus dividends, measured on a per-share basis, over the performance period.
For delivery of the threshold hurdle, up to 20% of the relevant award will vest. For full vesting,
the stretch hurdle needs to be met in full.
The discretions available to the Committee in assessing the achievement of the performance
target are as set out in the notes to the policy table on page 90.
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.
Hiscox Ltd Report and Accounts 2019
87
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Future policy table
Executive Director remuneration
Shareholding guidelines
Purpose and link to strategy
To ensure Executive Directors are aligned with shareholder interests.
Operation
Maximum potential value
Performance metrics
Application to broader
employee population
Within five years of becoming an Executive Director, individuals will normally be expected to have
acquired an interest in Hiscox shares valued at 200% of salary. Shares owned by the Executive
Director (and any connected person) count towards the guidelines as do shares subject to any
vested but unexercised PSP award (net of assumed taxes).
Executive Directors are normally expected to remain aligned with the interests of shareholders
for an extended period after leaving the Company. Executive Directors will typically be expected
to retain a shareholding at the level of the in-employment shareholding guideline for one year
(or the actual shareholding on stepping down, if lower) and at half of this amount for the following
year, unless the Committee determines otherwise in exceptional circumstances.
N/A.
N/A.
Executive Directors are required to hold more shares than other senior managers.
Post-employment shareholding guidelines only apply to Executive Directors.
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Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Future policy table
Non Executive Director remuneration
General approach
Chairman
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 (including any tax thereon
where these are deemed to be taxable benefits). 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 80.
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 (including any tax thereon where these are deemed to be taxable benefits).
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 Governance and Nominations Committee.
Hiscox Ltd Report and Accounts 2019
89
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Notes to the policy table
Performance measures, target setting and assessment
The performance targets for the annual bonus and share
plan awards to Executive Directors are 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 page 85)
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.
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 award to ensure that these remain
suitable and relevant.
It is the intention of the Committee that the vesting of PSP
awards should normally reflect the outcome of the performance
measures set, although the Committee has the ability to apply
independent judgement to ensure that the outcome is a fair
reflection of the performance of the Company and individual
over the performance period. When making this judgement,
the Committee has scope to consider any such factors as it
deems relevant.
Detailed provisions
The Committee may make minor changes to this remuneration
policy to aid in its operation or implementation (for example,
for regulatory or administrative purposes), provided that any
such change is not to the material advantage of Directors.
The Committee may continue to operate the share awards
under the 2006 and 2016 PSP 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
Deferred bonus awards and PSP awards granted for
2020 are subject to malus and clawback provisions as set
out below. The Committee may, in its absolute discretion,
90
Hiscox Ltd Report and Accounts 2019
determine at any time prior to the vesting of an award to
reduce, defer, 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 an error in assessing a performance condition applicable
to the award or in the information or assumptions on
which the award was granted, or vests;
p actions of gross misconduct or material error, including
fraud, by the participant or their team;
p significant reputational or financial damage to the
Company (as a result of the participant’s conduct).
Annual bonus and PSP awards granted to Executive
Directors shall also be subject to clawback provisions
for up to two years from the date of vesting in the
above circumstances.
The malus and clawback provisions that apply to awards
made prior to 2020 are as set out in the relevant remuneration
policy as at the date of award.
Recruitment policy
A new hire will ordinarily be remunerated in accordance with
the policy described in the table on the previous pages. In order
to define the remuneration for an incoming Executive Director,
the Committee will take account of:
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;
p 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 85 to 87. 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.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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 re-election 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.
associated benefits, during the contractual notice period of
six months.
The Committee may also make a payment in respect of
outplacement costs, legal fees and costs of settling any
potential claims where appropriate.
The terms set out in the service contracts for the current
Executive Directors do not allow for any payments that are
not in line with this policy.
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:
5. Change of control
In the event of a change of control, outstanding PSP awards will
normally vest early to the extent that the performance condition,
as determined by the Committee in its discretion, has been
satisfied and unless the Committee determines otherwise,
would be pro-rated to reflect the period which has elapsed
from the commencement of the award to the date of the
relevant corporate event.
1. Notice period of up to 12 months
In the normal course of events, an Executive will 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).
In the event of a termination where Hiscox requests that
the Executive Director ceases work immediately, a payment
in lieu of notice may be made that is equal to fixed pay,
pension entitlements and other benefits (benefits may
continue to be provided). Payments may be made in
instalments and would ordinarily be subject to mitigation
should the individual find alternative employment during
the unexpired notice period.
2. Bonus payment for the financial year of exit
The Committee may pay a bonus calculated in line with the
normal bonus scheme timings and performance metrics.
The bonus amount would normally be pro-rated depending
on the proportion of the financial year which has been
completed by the time of the termination date.
3. Release of any deferred bonuses
All outstanding bonuses deferred from the annual incentive
scheme will normally be paid in full at the normal vesting date.
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 plan 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 Bermuda 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
Deferred bonus awards will vest in full. Outstanding awards
under all-employee share plans will be treated in accordance
with the relevant plan rules.
Consideration of employment conditions elsewhere
At Hiscox we encourage employees to share in the
Group’s success through competitive pay, profit and
performance-related bonuses, all employee share plans
and a generous benefits package.
Salary reviews are applied consistently throughout the
Group, ensuring employees are paid fairly in line with their
responsibilities, experience and the market rate for the role.
All employees (including Executive Directors) are encouraged
to become Hiscox shareholders through our SAYE schemes
and have benefited from the strong share price growth
over recent years. Employees participate in a discretionary
profit-related bonus scheme, with the overall level of payout
based primarily on financial performance. More junior
employees may also receive a personal performance bonus.
Remuneration for the most senior executives, including
the CEO is more highly performance geared towards the
longer term in order to encourage delivery of strong returns
across the insurance cycle and create sustainable long-term
value for our shareholders. Senior employees participate
in a performance share plan with awards normally vesting
after a three-year period subject to the achievement of
performance conditions. An additional holding period
applies for Executive Directors.
Whilst the Committee did not consult directly with the broader
workforce on the remuneration policy for Executive Directors,
we have introduced a process by which employee views are
gathered on a range of topics and presented to the Board.
The Remuneration Committee also receives an update on the
broader workforce remuneration policies and practices during
the year which informs the Committee’s consideration of the
policy for Executive Directors
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.
The Committee consulted with major shareholders during
2019 and took shareholders feedback into account when
finalising the revised 2020 policy.
Hiscox Ltd Report and Accounts 2019
91
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Illustration of application of the remuneration policy
(£000s)
Long-term variable remuneration
Annual variable remuneration
Fixed remuneration
4,999
48%
4,203
38%
45%
38%
Chief Executive
2,453
32%
39%
Chief Financial Officer
Chief Underwriting Officer
3,850
48%
3,237
38%
45%
38%
1,890
32%
39%
4,343
42%
3,730
33%
52%
45%
2,138
29%
46%
702
100%
29%
17%
14%
542
545
100%
29%
17%
14%
100%
25%
15%
13%
Below target
On target
Maximum
Max with
share price
appreciation
Below target
On target
Maximum
Max with
share price
appreciation
Below target
On target
Maximum
Max with
share price
appreciation
The charts above have been compiled using the following assumptions.
92
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
Remuneration policy
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Fixed remuneration
Variable remuneration
Fixed reward (base salary, benefits and retirement benefit).
p Salary with effect from 1 April 2019.
p Benefits as received during 2019, as disclosed in the Executive Director remuneration
table on page 68.
p Retirement benefit as received during 2019, 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 87. 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 50% of the maximum opportunity.
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 300% of salary for the CEO and CFO
and 400% of salary for the CUO.
p PSP: vesting of 100% of the maximum award.
Maximum performance with
share price appreciation
Fixed reward plus variable pay for the purpose of illustration as follows.
p Annual incentive: maximum bonus equivalent to 300% of salary for the CEO and CFO and
400% of salary for the CUO.
p PSP: vesting of 100% of the maximum award plus assumed share price growth of 50%.
Hiscox Ltd Report and Accounts 2019
93
Connected
The insurance industry is
a huge part of the City of
London, yet many children
who grow up in its shadows
never consider working in it.
That’s why Hiscox supports
social mobility charity The
Brokerage: to connect with
young Londoners so we can
spread the word about the
great career opportunities that
insurance can offer them.
Members of our team mentor
ambitious students at inner
city schools and we also hold
‘master classes’ to teach
them about the business
of insurance and help them
develop extra skills that
would be desirable in the
Square Mile.
94
Hiscox Ltd Report and Accounts 2019
Connected
Chapter 5:
Shareholder information
Hiscox Ltd Report and Accounts 2019
95
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Directors’ report
The Directors have pleasure in submitting their Annual Report
and consolidated financial statements for the year ended
31 December 2019.
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 found on pages
17 to 25, 28 to 31, 108 to 166 and 168 fulfils the requirements of the
management report as referred to in Chapter 4 of the Disclosure
Guidance and Transparency Rules (DTR). This includes additional
explanation of the figures detailed in the financial statements and
the office locations of the Group in different countries.
The key performance indicators are shown on pages 2 to 3.
Details of the use of financial instruments are set out in note 19 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 17 to 25. 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. A description of the Company’s
strategy and business model is set out on pages 6 to 7. A
description of the principal risks and uncertainties and how they
are managed or mitigated can be found in the key risks section
on page 9 and the risk management section on pages 28 to 31. 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.
Compliance with the UK Corporate Governance Code 2018
(the Code)
Details of how the Company has applied the principles set out
in the Code and the extent to which it has complied with the
provisions of the Code are set out on pages 54 to 57.
Emerging and principal risks
The confirmation required by provision 28 of the Code in relation
to the Board’s assessment of the Company’s emerging and
principal risks can be found on page 9.
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 49 to 53 in this report.
Diversity
The diversity of the business is outlined in the Nominations and
Governance Committee report on pages 58 to 59.
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Hiscox Ltd Report and Accounts 2019
Financial results
The Group achieved a pre-tax profit for the year of $53.1 million
(2018: $135.6 million). Detailed results for the year are shown in
the consolidated income statement on page 108.
Going concern
A review of the financial performance of the Group is set out in
the Chief Executive’s report on pages 17 to 25. The financial
position of the Group, its cash flows and borrowing facilities are
included in the capital section on pages 26 and 27. The Group
has considerable financial resources and a well-balanced book
of business.
After making enquiries, the Directors have an expectation
that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future,
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 statement
It is fundamental to the Group’s longer-term strategy that the
Directors manage and monitor risk, taking into account all key
risks the Group faces, including insurance risks, so that it can
continue to meet its obligations to policyholders. The Group is
also subject to extensive regulation and supervision including
Bermuda Solvency Capital Requirement.
Against this background, the Directors have assessed the
prospects of the Group in accordance with provision 31 of
the UK Corporate Governance Code 2018, with reference to
the Group’s current position and prospects, its strategy, risk
appetite and key risks, as detailed in the key risks section on
page 9 and the risk management section on pages 28 to 31,
as well as note 3 to the consolidated financial statements. The
assessment of the Group’s prospects by the Directors covers
the three years to 2022 and is underpinned by management’s
2020-2022 business plan which includes projections of
the Group’s capital, liquidity and solvency and reflects the
Group’s risk profile of a portfolio of diversified short-tailed and
medium-tailed insurance liabilities. The Group’s stress and
scenario testing considers the Group’s capacity to respond to
a series of relevant financial, insurance-related or operational
shocks should future circumstances or events differ from
these current assumptions. These allow the Board to review
and challenge the risk management strategy and consider
potential mitigating actions.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
Directors’ report
95
Chapter 6
Financial summary
101
Based on this assessment, the Directors have a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the three-year
assessment period.
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,
hiscoxgroup.com.
Dividends
An interim dividend of 13.75¢ was paid on 11 September 2019
in respect of the year ended 31 December 2019. As in previous
years a scrip dividend alternative was offered. The Directors
are proposing payment of a final dividend in respect of the
year ended 31 December 2019 of 29.6¢ which will be paid on
10 June 2020 to shareholders on the register at 15 May 2020.
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 22 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 2019
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.
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 44 and 46. Details of the Chairman’s professional
commitments are included in his biography on page 44 and
there were no changes during the year. The Bye-laws of
the Company govern the appointment and replacement of
Directors. In accordance with the Code, the Directors will
submit themselves for re-election at the Annual General
Meeting, with the exception of Richard Watson who stepped
down from the Ltd Board with effect from 31 December 2019
following his retirement as Chief Underwriting Officer. Joanne
Musselle was appointed as his successor with effect from
1 January 2020, and joined the Board in March, subject to her
re-election by shareholders at the Annual General Meeting.
Biographical details of the Directors are set out on pages
44 to 45, as are the reasons why the Board believes their
contribution is (and continues to be) important to the Company’s
long-term sustainable success. This information will also be
set out in the circular which will accompany the notice of
Annual General Meeting.
Major interests in shares
The Company has been notified of the interests of 5% or more of
voting rights in its ordinary shares, which are outlined in the table
above, right.
Major interests in shares
The Company has been notified of the following interests
of 5% or more of voting rights in its ordinary shares:
Massachusetts Financial
Services Company
Fidelity Management & Research
% of issued
share capital
as at
31 January
*
2020
Number
of shares
37,242,009
19,791,140
12.91
6.86
* Per RNS announcement there were 288,584,493 shares in issue (excluding
Treasury shares) as at 2 January 2020.
As at 28 February 2020, no changes have been notified to the Company.
Political donations and charitable contributions
The Group made no political donations during the year (2018: $nil).
Information concerning the Group’s charitable activities is
contained in the environmental, social and governance (ESG)
section on pages 34 to 41 and at hiscoxgroup.com/responsibility.
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 2019, 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 2020.
Disclosure under LR 9.8.4 of the Listing Rules
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
Annual report on remuneration
(page 73)
Allotment of shares for
cash pursuant to employee
share schemes
Note 22 to the consolidated
financial statements on
employee share schemes
(page 151)
Annual General Meeting
The notice of the Annual General Meeting, to be held on
14 May 2020, 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
Company Secretary
Chesney House
96 Pitts Bay Road
Pembroke HM 08
Bermuda
2 March 2020
Hiscox Ltd Report and Accounts 2019
97
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
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 2 March 2020.
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, performance, business
model and strategy.
The Board is responsible for ensuring the maintenance of proper
accounting records which disclose with reasonable accuracy
the financial position of the Group. 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:
• the financial statements, prepared in accordance with
the International Financial Reporting Standards (IFRS)
as adopted by the European Union, give a true and fair
view, in all material respects, the assets, liabilities,
financial position and profit or loss of the Company
and the undertakings included in the consolidation
taken as a whole; and
• the 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.
98
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Advisors
Hiscox Ltd
Secretary
Marc Wetherhill
Registered office
Chesney House
96 Pitts Bay Road
Pembroke HM 08
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
37 Front Street
Hamilton HM 11
Bermuda
Stockbrokers
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
United Kingdom
Registrars
Equiniti (Jersey) Limited
c/o Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
United Kingdom
Hiscox Ltd Report and Accounts 2019
99
Connected
At Hiscox, we want our
customers to be at the centre
of everything we do. That’s
why we regularly connect
with micro and small
businesses in the UK and
USA – the backbone of
both economies and Hiscox
Retail’s core clientele.
We trust their judgement – if
they don’t like something we’ll
change it. They’re our very
own focus groups, ensuring
we never rest on our laurels.
By connecting with them and
garnering their feedback, we
are able to continually improve
our service and make our
products even better.
customers. We canvas their
opinions and find out what’s
on their minds. We might test
a new ad with them before
launch. Or we ask them what
else we could do that would
help make their lives easier,
such as apps.
Every month, we contact
our ‘SME panel’ of 500 small
British businesses, as well as
frequently touching base with
our American small business
100
Hiscox Ltd Report and Accounts 2019
Connected
Chapter 6:
Financial summary
Hiscox Ltd Report and Accounts 2019
101
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Independent auditor’s report
to the Board of Directors and the Shareholders of Hiscox Ltd
Report on the audit of the consolidated financial statements
Our audit approach
Overview
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 2019, 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 European Union (EU).
What we have audited
Hiscox Ltd’s consolidated financial statements comprise:
A the consolidated income statement for the year ended
31 December 2019;
A the consolidated statement of comprehensive income for
the year ended 31 December 2019;
A the consolidated balance sheet as at 31 December 2019;
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 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.
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.
102
Hiscox Ltd Report and Accounts 2019
Materiality
Group
scoping
Key audit
matters
A Overall group materiality: $29.4 million, which represents
0.75% of the gross earned premium for the year ended
31 December 2019.
A We performed full scope audit procedures over six
significant components.
A For certain other components, we performed audit
procedures over specified financial statement line
item balances.
A For the remaining components that were not
inconsequential, analytical procedures were
performed by the Group engagement team.
A Valuation of gross incurred but not reported (IBNR)
loss reserves and the associated reinsurers’ share of
IBNR loss reserves.
A Uncertain tax positions.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Independent auditor’s
report
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 to the right. 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 consolidated financial statements as a whole.
We agreed with the Audit Committee that we would report
to them misstatements identified during our audit above
$1.4 million, as well as misstatements below that amount that,
in our view, warranted reporting for qualitative reasons.
Overall Group materiality
$29.4 million
How we determined it
Rationale for the materiality
benchmark applied
0.75% of gross earned
premium for the year ended
31 December 2019
In determining our
materiality, we have
considered financial
metrics which we believe
to be relevant to the primary
users of the 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.
Hiscox Ltd Report and Accounts 2019
103
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Independent auditor’s
report
Key audit matters
Key audit matters are those matters that, in our professional
judgement, 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.
Key audit matter
How our audit addressed the key audit matter
Valuation of gross incurred but not reported (IBNR) loss
reserves and the associated reinsurers’ share of IBNR
loss reserves
Refer to note 2.14, 2.22 and 23 to the consolidated financial
statements for disclosures of related accounting policies
and balances.
Total gross IBNR loss reserves and the associated reinsurers’
share of IBNR loss reserves are material estimates in the
consolidated financial statements and as at 31 December 2019
amount to $4.017 billion and $2.106 billion respectively. 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. As a result, we
focused on this area as the valuation can be materially impacted
by numerous factors including:
A the underlying volatility attached to estimates for certain
classes of business, where small changes in assumptions
can lead to large changes in the levels of the estimate held;
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
management’s estimation;
A the judgements made in significant areas of uncertainty,
for example liability and casualty classes of business; and
A the risk that key assumptions in respect of natural
catastrophes and other large claims losses are
inappropriate. There is significant judgement involved
in these loss estimates, particularly as they are often
based on limited data.
104
Hiscox Ltd Report and Accounts 2019
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.
This work, supplemented with tests of detail, included:
(i) reviewing and testing the reconciliation of data from the
underlying policy administration systems to the data used
in the actuarial projections; (ii) testing the completeness and
accuracy of premiums and claims data used in the actuarial
projections; and (iii) testing to ensure gross IBNR loss
reserves, as a component of insurance liabilities, and the
associated reinsurers’ share of IBNR loss reserves were
reviewed, approved and reconciled to the consolidated
financial statements.
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 PwC actuarial specialists,
where appropriate. Our procedures included:
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 2019 and performing roll-forward
testing to 31 December 2019;
A testing, for certain 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;
A performing analytical review procedures over the remaining
classes of business to evaluate gross IBNR loss reserves;
A evaluating the appropriateness of the booked gross IBNR
management margin, taking into account estimation
uncertainty inherent in the underlying insurance business;
A re-calculating gross to net ratios on a sample basis against
the estimated gross IBNR loss reserves to calculate the
estimated reinsurers’ share of IBNR loss reserves; and
A comparing our estimates, based on the procedures
performed above, to those booked by management.
The results of our procedures indicated that the valuation
of gross IBNR loss reserves and the associated reinsurers’
share of IBNR loss reserves were supported by the evidence
we obtained.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Independent auditor’s
report
Key audit matter
Uncertain tax positions
Refer to note 2.15, 2.22, 3.4 and 25 to the consolidated financial
statements for disclosures of related accounting policies
and balances.
The Group recognises provisions, or determines it appropriate
not to recognise provisions for uncertain tax positions
based on facts and circumstances at the balance sheet date.
We focused on this area because the Group is subject to
taxation in multiple jurisdictions and, in some cases, the ultimate
tax treatment is uncertain until resolved with the relevant tax
authority. Consequently, management make judgements
and estimates with respect to the incidence and quantum
of tax liabilities. The provision for uncertain tax positions
may be materially impacted by numerous factors including:
A decisions and pronouncements made by the relevant
tax authorities;
A assumptions used in interpreting the relevant tax
regulations; and
A assumptions used in determining transactions subject
to the relevant tax regulations.
How our audit addressed the key audit matter
In performing our detailed audit work over uncertain tax
positions we were assisted by our PwC tax specialists.
Our procedures included:
A evaluating management’s rationale for the accounting
treatment of potential and recognised liabilities,
and assessing this treatment against the relevant
accounting standards;
A examining documentation and correspondence with
the relevant tax authorities;
A evaluating and challenging management’s assumptions
and agreeing input data to underlying supporting
evidence; and
A testing the accuracy of the calculations management
used to determine the uncertain tax positions as at the
balance sheet date.
The results of our procedures indicated that management’s
determination of uncertain tax positions were supported by
the evidence we obtained.
Hiscox Ltd Report and Accounts 2019
105
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Independent auditor’s
report
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.
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, and it’s
operations primarily consist of the legal entity operations in
the United Kingdom, Europe, the United States and Bermuda.
A full scope audit was performed for six components located
in the aforementioned locations. Financial statement line
item audit procedures were also performed over certain
other components in the United Kingdom and Bermuda.
Taken together, this work gave us over 90% coverage of
the Group’s gross earned premium and over 90% of the
Group’s total assets.
The six full scope audit components are:
(i) Hiscox Dedicated Corporate Member Syndicate No. 33;
(ii) Hiscox Dedicated Corporate Member Syndicate No. 3624;
(iii) Hiscox Insurance Company Limited;
(iv) Hiscox Insurance Company Inc.;
(v) Hiscox Société Anonyme; and
(vi) the parent company, Hiscox Ltd (including consolidation).
For certain other components, we identified account balances
which were considered to be significant in size or audit risk
at the financial statement line item level in relation to the
consolidated financial statements, and scoped the audit
of these by performing financial statement line item audits
over the specified balances. 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
by the component audit teams within the PwC United Kingdom,
PwC Luxembourg, 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 team had regular interaction with the component
teams, and senior engagement team members visited the
United Kingdom, Europe (Portugal), and Bermuda during the
audit process. Senior members of the Group engagement
team reviewed in detail all reports with regards to the audit
approach and findings submitted by the component auditors.
This together with additional procedures performed at the
Group level, as described above, gave us the evidence
we needed for our opinion on the 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).
106
Hiscox Ltd Report and Accounts 2019
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
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, 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.
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 judgement 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;
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Independent auditor’s
report
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.
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 consolidated financial
statements, as explained on page 96. 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 an annual report on
remuneration in accordance with the provisions of the UK
Companies Act 2006. The Directors have requested that we
audit the part of the annual report on 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 annual report on remuneration
to be audited has been properly prepared in accordance with
the UK Companies Act 2006.
Corporate governance statement
Under the United Kingdom’s Listing Rules we are required
to review the part of the corporate governance statement on
pages 49 to 57 relating to 11 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
2 March 2020
Hiscox Ltd Report and Accounts 2019
107
Consolidated income statement
For the year ended 31 December 2019
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 gain/(loss)
Total expenses
Results of operating activities
Finance costs
Share of profit of 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
*See note 2.2 for further details.
Note
4
4, 23.2
4, 23.2
7
9
23.2
23.2
23.2
15
15
9
10
14
25
28
28
Consolidated statement of comprehensive income
For the year ended 31 December 2019
Profit for the year
Other comprehensive income
Items that will not be reclassified to the income statement:
Remeasurements of the net defined benefit obligation
Income tax effect
Items that may be reclassified subsequently to the income statement:
Exchange losses on translating foreign operations
Note
27
Other comprehensive income net of tax
Total comprehensive income for the year (all attributable to owners of the Company)
*See note 2.2 for further details.
The notes on pages 112 to 166 are an integral part of these consolidated financial statements.
108
2019
Total
$m
4,030.7
(1,351.9)
2,678.8
3,931.9
(1,296.3)
2,635.6
223.0
53.1
2,911.7
(3,206.7)
1,630.6
(1,576.1)
(944.9)
283.9
(593.5)
8.5
(2,822.1)
89.6
(36.6)
0.1
53.1
(4.2)
48.9
17.2¢
16.9¢
2019
Total
$m
48.9
(16.5)
3.4
(13.1)
(1.0)
(1.0)
(14.1)
34.8
2018
Total
*
(restated)
$m
3,778.3
(1,196.8)
2,581.5
3,699.8
(1,126.2)
2,573.6
38.1
46.8
2,658.5
(2,326.6)
1,100.8
(1,225.8)
(882.0)
240.3
(607.5)
(13.7)
(2,488.7)
169.8
(34.6)
0.4
135.6
(17.7)
117.9
41.6¢
40.8¢
2018
Total
*
(restated)
$m
117.9
20.2
(4.1)
16.1
(14.7)
(14.7)
1.4
119.3
Hiscox Ltd Report and Accounts 2019Chapter 2 13A closer lookChapter 3 43GovernanceChapter 4 63RemunerationChapter 5 95Shareholder informationChapter 6 101Financial summaryChapter 1 1From purpose to performance
2019
$m
2018
*
(restated)
$m
2017
*
(restated)
$m
Consolidated balance sheet
At 31 December 2019
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
*See note 2.2 for further details.
Note
12
13
14
26
15
17
16, 23
18
21
22
22
22
27
26
23
17
24
278.0
128.4
8.6
76.9
456.1
5,539.0
3,386.9
1,556.3
4.7
1,115.9
12,550.8
34.1
70.5
184.0
(326.3)
2,226.3
2,188.6
1.1
2,189.7
55.1
0.4
8,094.5
728.8
62.0
1,420.3
10,361.1
12,550.8
204.6
61.4
9.9
60.7
455.9
5,029.7
2,456.6
1,265.1
3.6
1,288.8
10,836.3
34.0
57.6
184.0
(325.3)
2,307.6
2,257.9
1.1
2,259.0
35.8
9.1
6,701.5
700.5
43.9
1,086.5
8,577.3
10,836.3
The notes on pages 112 to 166 are an integral part of these consolidated financial statements.
The consolidated financial statements were approved by the Board of Directors on 2 March 2020 and signed on its behalf by:
Aki Hussain
Chief Financial Officer
Bronek Masojada
Chief Executive
186.0
65.6
10.7
53.5
446.1
5,139.6
1,833.3
1,121.5
5.7
867.8
9,729.8
33.9
45.8
184.0
(310.6)
2,363.0
2,316.1
1.1
2,317.2
64.1
9.6
6,007.7
391.1
47.3
892.8
7,412.6
9,729.8
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Hiscox Ltd Report and Accounts 2019Chapter 2 13A closer lookChapter 3 43GovernanceChapter 4 63RemunerationChapter 5 95Shareholder informationChapter 6 101Financial summaryChapter 1 1From purpose to performance
Consolidated statement of changes in equity
Note
Share
capital
$m
Share
premium
$m
Contributed
surplus
$m
Currency
translation
reserve
$m
Retained
earnings
$m
Equity
attributable to
owners of the
Company
$m
Non-
controlling
interest
$m
(restated)*
Total
equity
$m
Balance at 1 January 2018
as reported previously
Cumulative impact of prior
period adjustments
Balance at 1 January 2018 (restated)
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
22
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 2018
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:
22, 29
29
Equity settled share-based
payments
Proceeds from shares issued
22
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 2019
*See note 2.2 for further details.
33.9
45.8
184.0
(310.6)
2,414.2
2,367.3
1.1
2,368.4
–
33.9
–
45.8
–
184.0
–
(310.6)
(51.2)
2,363.0
(51.2)
2,316.1
–
1.1
(51.2)
2,317.2
–
–
–
0.1
–
–
–
–
34.0
–
–
–
–
–
–
–
–
–
4.0
–
–
7.8
–
57.6
–
–
–
3.6
–
–
9.3
–
70.5
–
–
–
–
–
–
–
–
117.9
117.9
(14.7)
16.1
1.4
–
–
–
–
–
(3.6)
–
4.2
(3.6)
4.1
4.2
(76.5)
(76.5)
–
7.8
–
–
–
–
–
–
–
117.9
1.4
(3.6)
4.1
4.2
(76.5)
7.8
–
184.0
–
(325.3)
(113.5)
2,307.6
(113.5)
2,257.9
–
1.1
(113.5)
2,259.0
–
–
–
–
–
–
–
–
48.9
48.9
(1.0)
(13.1)
(14.1)
–
–
–
–
–
3.6
–
0.2
–
–
3.6
3.6
0.2
–
9.4
–
–
–
–
–
–
–
48.9
(14.1)
3.6
3.6
0.2
–
9.4
–
184.0
–
(326.3)
(120.9)
2,226.3
(120.9)
2,188.6
–
1.1
(120.9)
2,189.7
22, 29
29
0.1
–
34.1
The notes on pages 112 to 166 are an integral part of these consolidated financial statements.
110
Hiscox Ltd Report and Accounts 2019Chapter 2 13A closer lookChapter 3 43GovernanceChapter 4 63RemunerationChapter 5 95ShareholderinformationChapter 6 101Financial summaryChapter 1 1From purpose to performance
Consolidated statement of cash flows
For the year ended 31 December 2019
Profit before tax
Adjustments for:
Net foreign exchange (gain)/loss
Interest and equity dividend income
Interest expense
Net fair value (gains)/losses 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
Cash paid to the pension fund
Interest received
Equity dividends received
Interest paid
Current tax paid
Net cash flows from operating activities
Purchase of property, plant and equipment
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
Proceeds from long-term debt issue, net of fees
Principal elements of lease payments
Net cash flows from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Net (decrease)/increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at 31 December
*See note 2.2 for further details.
Note
9, 12, 13
9, 22
22
22
22, 29
21
2019
$m
53.1
(8.5)
(123.7)
36.6
(70.8)
44.6
3.6
414.3
(405.0)
(0.5)
0.8
14.3
(3.6)
130.8
1.1
(36.4)
(11.2)
39.5
(6.4)
(90.9)
(97.3)
3.6
–
(111.6)
–
(15.5)
(123.5)
(181.3)
2018
*
(restated)
$m
135.6
13.7
(103.0)
34.6
33.8
33.2
(3.6)
136.3
3.0
(18.3)
(53.2)
58.5
(3.7)
90.8
0.8
(33.9)
(24.2)
300.4
(7.8)
(51.8)
(59.6)
4.1
(76.5)
(105.7)
380.3
–
202.2
443.0
1,288.8
(181.3)
8.4
1,115.9
867.8
443.0
(22.0)
1,288.8
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 $167 million (2018: $211 million) not
available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held. Additionally, $41 million
(2018: $24 million) is pledged cash held against Funds at Lloyd’s, and $0.3 million (2018: $10 million) held within trust funds
against reinsurance arrangements.
The notes on pages 112 to 166 are an integral part of these consolidated financial statements.
Hiscox Ltd Report and Accounts 2019
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information
95
Chapter 6
Financial summary
101
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 USA and currently has over 3,100 staff.
The Company is registered and domiciled in Bermuda and
its ordinary shares are listed on the London Stock Exchange.
The address of its registered office is: Chesney House,
96 Pitts Bay Road, Pembroke HM 08, 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 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 US Dollars millions ($m) rounded to the
nearest hundred thousand Dollars, unless otherwise stated.
112
Hiscox Ltd Report and Accounts 2019
The balance sheet of the Group is presented in order of
increasing liquidity. All amounts presented in the income
statement and statement of comprehensive income relate
to continuing operations.
The financial statements were approved for issue by the
Board of Directors on 2 March 2020.
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.
New accounting standards, interpretations and amendments
to published standards
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 2019. They have been applied in preparing
these consolidated financial statements.
The new standards include:
– IFRS 16 Leases
IFRS 16 supersedes IAS 17 Leases and sets out the
principles for the recognition, measurement, presentation
and disclosure of leases. IFRS 16 requires lessees to
account for leases under a single on-balance sheet
model. Lessor accounting under IFRS 16 is substantially
unchanged from IAS 17. Lessors will continue to classify
leases as either operating or finance leases using similar
principles as in IAS 17. Therefore, IFRS 16 did not have
an impact for leases where the Group is the lessor.
The Group has adopted IFRS 16 retrospectively from
1 January 2019, but has not restated comparatives
for the 2018 reporting period, as permitted under
the specific transitional provisions in the standard.
The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised
in the opening balance sheet on 1 January 2019.
Chapter 1
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to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
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63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation continued
2.1 Significant accounting policies
New accounting standards, interpretations and amendments
to published standards continued
the short-term leases, for which an exemption was
applied, amounted to $1.9 million. The resulting total
lease liability recognised as at 1 January 2019 under
IFRS 16 is $78.8 million.
On adoption of IFRS 16, the Group recognised lease
liabilities in relation to leases which had previously
been classified as ‘operating leases’ under the principles
of IAS 17 Leases. These liabilities were measured at
the present value of the remaining lease payments,
discounted using applicable incremental borrowing
rates as of 1 January 2019. Lease liabilities amounts
are presented in balance sheet under trade and
other payables.
The associated right-of-use assets were measured
at the amount equal to the lease liability, adjusted by
the amount of any prepaid or accrued lease payments
relating to that lease recognised in the balance sheet
as at 31 December 2018. There were no onerous
lease contracts that would have required an adjustment
to the right-of-use assets at the date of initial application.
Right-of-use assets are presented in the balance sheet
under property, plant and equipment.
The Group has elected not to reassess whether a
contract is, or contains, a lease at the date of initial
application. Instead, for contracts entered into before
the transition date, the Group relied on its previous
application of IAS 17. As permitted by IFRS 16, the
Group also elected to use hindsight in determining
the lease term if the contract contains options to
extend or terminate the lease.
In addition, the Group has opted to use the
recognition exemptions for lease contracts that,
at the commencement date:
–have a lease term of 12 months or less and do not
contain a purchase option (short-term leases); and
–lease contracts for which the underlying asset is of
low value (low-value assets).
Payments associated with short-term leases amounting
to $2.7 million and leases of low-value assets amounting
to $0.1 million are recognised on a straight-line basis as
an expense in profit or loss.
The impact on the consolidated balance sheet as at
1 January 2019 is shown below:
Assets
Increase in property, plant and equipment
Analysed as right-of-use assets related to:
Properties
Other
Liabilities
Increase in trade and other payables
Analysed as lease liabilities
$m
78.8
77.9
0.9
78.8
78.8
The weighted average incremental borrowing rate applied
to the lease liabilities on 1 January 2019 was 2.4%.
The undiscounted future minimum payments disclosed
under the prior standard at 31 December 2018 were
$87.0 million. The impact of discounting was $6.3 million,
Impact on the consolidated income statement for the
year ended 31 December 2019
The depreciation expenses from right-of-use assets
(operating expenses) and interest expense on the lease
liabilities (finance costs) under IFRS 16 in 2019 were
$1.1 million higher than the amount of operating
lease expenses under IAS 17.
Impact on the consolidated cash flow statement for
the year ended 31 December 2019
Compared with the previous accounting for operating
leases under IAS 17, the application of the new
standard affects the classification of cash flows.
In prior years, operating lease payments were
presented as operating cash flows. Lease payments
are now split into payments of principal that are
presented as financing cash flows, and payments
of interest that are presented as operating cash flows
under interest expense. Payments related to leases for
2019 amounting to $15.5 million, which under IAS 17
would be classified as operating leases, are presented
under cash flows from financing activities. Additionally,
the interest expense on the lease liabilities calculated
under IFRS 16 amounting to $1.8 million is presented
under cash flows from operating activities.
– Amendments to IAS 19 Plan Amendment, Curtailment
or Settlement
The amendments to IAS 19 address the accounting
for the current service cost and net interest when a
plan amendment, curtailment or settlement occurs
during a reporting period. The amendments are in line
with the Group’s existing accounting policy. The adoption
of these amendments has no impact on the Group’s
consolidated financial statements.
– IFRIC Interpretation 23 Uncertainty over Income
Tax Treatment
This Interpretation clarifies the accounting for income
taxes when tax treatments involve uncertainty that
affects the application of IAS 12 Income Taxes. It does
not apply to taxes or levies outside the scope of IAS 12,
nor does it specifically include requirements relating to
interest and penalties associated with uncertain tax
treatments. The Interpretation specifically addresses
the following:
–whether an entity considers uncertain tax
treatments separately;
–the assumptions an entity makes about the
examination of tax treatments by taxation authorities;
–how an entity determines taxable profit (tax loss),
tax bases, unused tax losses, unused tax credits
and tax rates;
–how an entity considers changes in facts
and circumstances.
The Group determines whether to consider each uncertain
tax treatment separately or together with one or more other
uncertain tax treatments and uses the approach that better
predicts the resolution of the uncertainty.
Hiscox Ltd Report and Accounts 2019
113
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation continued
2.1 Significant accounting policies
New accounting standards, interpretations and amendments
to published standards continued
higher loss allowance under this approach compared to
current approach resulting in a negative impact on equity
and will perform a detailed assessment in the future to
determine the extent. IFRS 9 has been endorsed by the EU.
– IFRS 17 Insurance Contracts
IFRS 17 will replace IFRS 4 and includes a number of
significant changes 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 the income statement when the
entity determines that losses are expected. The Group is
evaluating the impact of adopting IFRS 17 on the financial
statements which includes:
–performing a PAA eligibility assessment on a group
of (re)insurance contracts with a coverage period of
more than one year;
–making initial accounting policy decisions under
IFRS 17 to continue amortising acquisition expenses
under PAA approach, and to present insurance finance
income and expenses in the income statement.
The Group’s implementation programme is progressing in
line with expectations. IFRS 17 is currently expected to be
effective on 1 January 2022 and has not been endorsed
by the EU.
The Group applies significant judgement in identifying
uncertainties over income tax treatments. Since
the Group operates in a complex multinational
environment, it assessed whether the interpretation
had an impact on its consolidated financial statements.
The adoption of the interpretation did not have an
impact on the consolidated financial statements as
the clarified guidance is consistent with the Group’s
accounting policy.
There were no other new standards or amendments that
had a material impact on the Group.
The following new standards, and amendments to
standards, are effective for annual periods beginning after
1 January 2018 and have not been applied in preparing
these financial statements:
– IFRS 9 Financial Instruments
This standard incorporates new classification and
measurement 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.
The Group satisfies the criteria set out in IFRS 4
Insurance Contracts for the temporary exemption
from IFRS 9. At 31 December 2015 (the date specified
by IFRS 4), the carrying value of the Group’s liabilities
connected with insurance comprised over 90% of
the total liabilities. These include significant insurance
liabilities; the subordinated debt ($0.4 billion) as this
debt counts towards the Group’s regulatory and rating
agency capital requirements; and creditors arising
from insurance operations ($0.3 billion). The activities
of the Group remain predominantly connected
with insurance.
Under the current requirements (IAS 39), a majority
of the Group’s investments were designated as at fair
value through profit or loss on initial recognition and
subsequently remeasured to fair value at each reporting
date, reflecting the Group’s business model for managing
and evaluating the investment portfolio. Adoption of
IFRS 9 is not expected to result in any changes to the
measurement of the Group’s investments, which
continues to be at fair value through profit or loss.
Financial assets within the scope of IFRS 17 Insurance
Contracts such as premiums receivable and reinsurance
and other recoveries on paid claims, which together form
the majority of the carrying value of the Group’s loans and
receivables, and reinsurance recoveries on outstanding
claims are outside the scope of IFRS 9 and are unaffected
by the new requirements.
In addition to those balances, loans and receivables also
includes due from brokers, agents and intermediaries and
other financial assets which are within the scope of IFRS 9.
Under IFRS 9, these assets continue to be recognised at
amortised cost less impairment, with the measurement of
impairment reflecting expected as well as incurred credit
losses. The Group expects a recognition of an earlier and
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.2 Prior-period adjustments
In 2019, the Group has made an additional tax provision relating to reappraisal of uncertain tax positions, the most significant
one relates to a classification of marketing activity affecting a historical tax position. This has been presented as a prior-period
adjustment and has led to a decrease in profit after tax of $10.1 million in 2018 and a decrease in opening retained earnings for
2018 of $51.2 million, with a decrease in closing equity at 31 December 2018 of $58.1 million. The impact on the consolidated
income statement, balance sheet, equity and cash flow statements are shown in the tables below.
Consolidated income statement 2018
Total expenses
Effect analysed as:
Operational expenses
Profit before tax
Tax expense
Profit after tax
Consolidated statement of comprehensive income 2018
Profit for the year
Exchange losses on translating foreign operations
Total comprehensive income
Consolidated statement of changes in equity 2018
Balance at 1 January
Effect analysed as:
Retained earnings
As reported
previously
$m
10,846.3
13.6
8,529.2
–
10.3
1,081.1
2,317.1
2,368.9
(328.5)
Balance sheet
Total assets
Effect analysed as adjustments to:
Current tax asset
Total liabilities
Effect analysed as adjustments to:
Deferred tax
Current tax
Trade and other payables
Total equity
Effect analysed as adjustments to:
Retained earnings
Currency translation reserve
Other 2018
Earnings per share (¢)
Diluted earnings per share (¢)
NAV per share (¢)
Tangible net asset value per share (¢)
Return on equity (ROE) (%)
As reported
previously
$m
2,486.9
Effect of
prior-period
adjustments
$m
Restated
$m
1.8
2,488.7
605.7
137.4
(9.4)
128.0
As reported
previously
$m
128.0
(17.9)
126.2
As reported
previously
$m
2,368.4
1.8
(1.8)
(8.3)
(10.1)
Effect of
prior-period
adjustments
$m
(10.1)
3.2
(6.9)
Effect of
prior-period
adjustments
$m
(51.2)
607.5
135.6
(17.7)
117.9
Restated
$m
117.9
(14.7)
119.3
Restated
$m
2,317.2
2,414.2
(51.2)
2,363.0
2018
2017
–
–
51.2
9.6
37.8
3.8
(51.2)
(51.2)
–
Effect of
prior-period
adjustments –
opening
balance
$m
Effect of
prior-period
adjustments at
31 December
2018
$m
Restated
$m
As reported
previously
$m
(10.0) 10,836.3
9,729.8
(10.0)
3.6
5.7
Effect of
prior-period
adjustments at
31 December
2017
$m
–
–
Restated
$m
9,729.8
5.7
(3.1)
8,577.3
7,361.4
51.2
7,412.6
(0.5)
(4.2)
1.6
(6.9)
9.1
43.9
1,086.5
–
9.5
889.0
9.6
37.8
3.8
9.6
47.3
892.8
2,259.0
2,368.4
(51.2)
2,317.2
(10.1)
3.2
2,307.6
(325.3)
2,414.2
(310.6)
(51.2)
–
2,363.0
(310.6)
As reported
previously
Effect of
prior-period
adjustments
45.1
44.3
819.1
746.8
5.6
(3.5)
(3.5)
(20.5)
(20.6)
(0.3)
Restated
41.6
40.8
798.6
726.2
5.3
The impact on the consolidated cash flow statement is limited to a decrease in profit before tax and a corresponding increase
in changes in other assets and liabilities within net cash flows from operating activities of $1.8 million for the year ended
31 December 2018.
Hiscox Ltd Report and Accounts 2019
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation continued
2.3 Basis of consolidation
(a) Subsidiaries
Subsidiaries are those entities controlled by the Group.
Control exists when the Group has power over an entity,
exposure or rights to variable returns from its involvement
with the investee and ability to use its power to affect those
returns. The consolidated financial statements include the
assets, liabilities and results of the Group up to 31 December
each year. The financial statements of subsidiaries are
included in the consolidated financial statements only
from the date that control commences until the date that
control ceases.
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. Foreign currency gains and
losses on intragroup monetary assets and liabilities may not fully
eliminate on consolidation when the intragroup monetary item
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concerned is transacted between two Group entities that have
different functional currencies. Unrealised gains arising from
transactions with associates are eliminated to the extent of the
Group’s interest in the entity. Unrealised losses are eliminated
in the same way as unrealised gains, but only to the extent that
there is no evidence of impairment.
2.4 Foreign currency translation
(a) Functional currency
Items included in the financial statements of each of the
Group’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the ‘functional currency’). Entities operating in France,
Germany, The Netherlands, Spain, Portugal, Ireland and
Belgium have functional currency of Euros; those subsidiary
entities operating from the USA, Bermuda, Guernsey and
Syndicates have functional currency of US Dollars with the
exception of Hiscox Ltd, a public company incorporated and
domiciled in Bermuda with functional currency of Sterling.
Functional currencies of entities operating in Asia include
US Dollars, Singapore Dollars and Thai Baht. All other entities
have functional currency of Sterling.
(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.
Following the approval of the Part VII transfers, insurance
contracts covering EU risks and written by Hiscox Insurance
Company Limited (HIC) were transferred to Hiscox SA (HSA).
These contracts were measured in Euro, the functional currency
of HSA.
(c) Group companies
The results and financial position of all the Group entities that
have a functional currency different from the presentation
currency are translated into the presentation currency as follows:
– assets and liabilities for each balance sheet presented
are translated at the closing rate at the date of that
balance sheet;
– income and expenses for each income statement are
translated at average exchange rates (unless this average
is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the date of
the transactions); and
– all resulting exchange differences are recognised as a
separate component of equity.
When a foreign operation is sold, such exchange differences
are recognised in the income statement as part of the gain,
or loss, on sale.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation continued
2.5 Property, plant and equipment
Property, plant and equipment are stated at historical cost less
depreciation and any impairment loss. Historical cost includes
expenditure that is directly attributable to the acquisition of the
items. Subsequent costs are included in the asset’s carrying
amount or recognised as a separate asset, as appropriate, only
when it is probable that future economic benefits associated with
the item will flow to the Group and the cost of the item can be
measured reliably. All other repairs and maintenance items are
charged to the income statement during the financial period
in which they are incurred.
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 including fixtures
and fittings
– furniture, fittings and equipment
20–50 years
3 years
10–15 years
3–15 years
The assets’ residual values and useful lives are reviewed at
each balance sheet date and adjusted if appropriate.
An asset’s carrying amount is written down immediately to its
recoverable amount if the asset’s carrying amount is greater
than its estimated recoverable amount. Gains and losses
on disposals are determined by comparing proceeds with
carrying amount. These are included in the income statement.
2.6 Intangible assets
(a) Goodwill
Goodwill represents amounts arising on acquisition of
subsidiaries and associates. In respect of acquisitions that
have occurred since 1 January 2004, goodwill represents
the excess of the fair value of consideration of an acquisition
over the fair value of the Group’s share of the net identifiable
assets and contingent liabilities assumed of the acquired
subsidiary or associate at the acquisition date.
In respect of acquisitions prior to 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. Intangible assets
with indefinite 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.
Those intangible assets with finite lives are 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.
2.7 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.
Hiscox Ltd Report and Accounts 2019
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Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.7 Fair value continued
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 20.
2.8 Financial assets and liabilities including loans
and receivables
The Group classifies its financial assets as a) financial assets
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 are held at
initial recognition. The decision by the Group to designate debt
and fixed income securities, equities and investment funds
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.
2.9 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.
2.10 Impairment of assets
Assets that have an indefinite useful life are not subject to
amortisation and are tested annually or whenever there is
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an indication of impairment. Assets that are subject to
amortisation are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying
amount may not be recoverable.
(a) Non-financial assets
Objective factors that are considered when determining
whether a non-financial asset (such as goodwill, an intangible
asset or item of property, plant and equipment) or group of
non-financial assets may be impaired include, but are not
limited to, the following:
– adverse economic, regulatory or environmental
conditions that may restrict future cash flows and
asset usage and/or recoverability;
– the likelihood of accelerated obsolescence arising from
the development of new technologies and products; and
– the disintegration of the active market(s) to which the
asset is related.
(b) Financial assets
Objective factors that are considered when determining whether
a financial asset or group of financial assets may be impaired
include, but are not limited to, the following:
– negative rating agency announcements in respect of
investment issuers, reinsurers and debtors;
– significant reported financial difficulties of investment
issuers, reinsurers and debtors;
– actual breaches of credit terms such as persistent late
payments or actual default;
– the disintegration of the active market(s) in which a
particular asset is traded or deployed;
– adverse economic or regulatory conditions that may
restrict future cash flows and asset recoverability; and
– the withdrawal of any guarantee from statutory funds
or sovereign agencies implicitly supporting the asset.
(c) Impairment loss
An impairment loss is recognised for the amount by which the
asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value
less costs to sell and value in use. For the purpose of assessing
impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (cash-generating
units). For financial assets, the amount of the impairment loss
is measured as the difference between the asset’s carrying
amount and the value of the estimated future cash flows
discounted at the financial asset’s original effective interest rate.
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 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.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.11 Derivative financial instruments continued
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 set out in note 2.14.
Other revenue is recognised when, or as, the control of the
goods or services are transferred to a customer, i.e. performance
obligations are fulfilled at an amount that reflects the consideration
to which the Group expects to be entitled in exchange for those
goods or services. See note 9 for further details.
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.
(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 relate 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 quantitative uncertainties not
otherwise approved.
(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 is
not subsequently 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. 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.
Hiscox Ltd Report and Accounts 2019
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Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.14 Insurance contracts continued
(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.
(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 Taxation
Current tax, including corporation tax and foreign tax, is provided
at amounts expected to be paid (or recovered) using the tax rates
and laws that have been enacted or substantively enacted by the
balance sheet date.
A provision is recognised for those matters for which the tax
determination is uncertain but it is considered probable that there
will be a future outflow of funds to a tax authority. The provisions
are measured at the best estimate of the amount expected to
become payable. The assessment is based on the judgement
of tax professionals within the Group supported by previous
experience in respect of such activities and in certain cases
based on advice sought from specialist tax advisors.
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
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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.
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. 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 as an asset when it is probable
that future economic benefits will be recovered by the Group in
the form of refunds.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.16 Employee benefits continued
(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, in periods in which the estimates are revised.
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.
2.18 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 and
interest in respect of lease liabilities. 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
The Group recognises right-of-use assets at the commencement
date of the lease (i.e. the date the underlying asset is available
for use). Right-of-use assets are measured at cost, less any
accumulated depreciation and impairment losses, and adjusted
for any remeasurement of lease liabilities. The cost of right-of-use
assets includes the amount of lease liabilities recognised, initial
direct costs incurred, and lease payments made at or before the
commencement date less any lease incentives received. Unless
the Group is reasonably certain to obtain ownership of the leased
asset at the end of the lease term, the recognised right-of-use
assets are depreciated on a straight-line basis over the shorter of
its estimated useful life and the lease term. Right-of-use assets
are subject to impairment. Right-of-use assets are presented in
the balance sheet as ‘property, plant and equipment’.
At the commencement date of the lease, the Group recognises
lease liabilities measured at the present value of lease payments
to be made over the lease term. The lease payments include fixed
payments (including in-substance fixed payments) less any lease
incentives receivable, variable lease payments that depend on
an index or a rate, and amounts expected to be paid under
residual value guarantees. The lease payments also include the
exercise price of a purchase option reasonably certain to be
exercised by the Group and payments of penalties for terminating
a lease, if the lease term reflects the Group exercising the option
to terminate. The variable lease payments that do not depend on
an index or a rate are recognised as an expense in the period in
which the event or condition that triggers the payment occurs.
Lease liabilities are included in ‘trade and other payables’ in the
balance sheet.
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121
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.20 Leases
(a) Hiscox as lessee continued
In calculating the present value of lease payments, the Group uses
the incremental borrowing rate at the lease commencement date
if the interest rate implicit in the lease is not readily determinable.
After the commencement date, the amount of lease liabilities
is increased to reflect the accretion of interest and reduced for
the lease payments made. In addition, the carrying amount of
lease liabilities is remeasured if there is a modification that is not
accounted for as a separate lease: future lease payments that
are linked to a rate or index, a change in the lease term, a change
in the in-substance fixed lease payments, a change in the
assessment to purchase the underlying asset or a change in the
amounts expected to be payable under a residual value guarantee.
The Group applies the short-term lease recognition exemption
to its short-term leases (i.e. those leases that have a lease term
of 12 months or less from the commencement date and do not
contain a purchase option). It also applies the lease of low-value
assets recognition exemption to leases of office equipment that
are considered of low value. Lease payments on short-term
leases and leases of low-value assets are recognised as
expense on a straight-line basis over the lease term.
(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 judgements, estimates
and assumptions
The preparation of financial statements requires the Group
to select accounting policies and make judgements,
estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expenses in
the consolidated financial statements.
The Audit Committee reviews the reasonableness of critical
judgements, estimates and assumptions applied and the
appropriateness of significant accounting policies. The
significant issues considered by the Committee in the year are
included within the Audit Committee report on pages 60 to 61.
Critical accounting judgements
The following accounting policies are those considered to have a
significant impact on the amounts recognised in the consolidated
financial statements, with those judgements involving estimation
summarised thereafter.
– Consolidation: assessment of whether the Group controls
an underlying entity, for example, the treatment of
insurance-linked securities funds including consideration
of its decision-making authority and its rights to the variable
returns from the entity;
– Insurance contract: assessment of the significance of
insurance risk transferred to the Group in determining
whether a contract should be accounted for as an
insurance contract or as a financial instrument;
– Financial investments: classification and measurement of
investments including the application of the fair value option.
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Hiscox Ltd Report and Accounts 2019
Significant accounting estimates
All estimates are based on management’s knowledge of
current facts and circumstances, assumptions based on
that knowledge and their predictions of future events. Actual
results may differ from those estimates, possibly significantly.
Estimates are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which
the estimate is revised and in any future periods affected.
The following describes items considered particularly
susceptible to changes in estimates and assumptions.
The most critical estimate included within the Group’s balance
sheet is the estimate for losses incurred but not reported,
which is included within insurance liability and reinsurance
assets in the balance sheet. The total gross estimate as at
31 December 2019 is $4,017.0 million (2018: $3,035.0 million)
and is included within total insurance liabilities on the
balance sheet. The total estimate for reinsurers’ share of
losses incurred but not reported as at 31 December 2019
is $2,106.4 million (2018: $1,356.5 million).
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 23.
Another key estimate contained within the Group’s close
process is an estimate of gross premium written during the
year that have not yet been notified by the financial year-end.
Premiums in respect of insurance contracts underwritten
under binding authorities include those that have not been
notified and are estimated based on information provided by
the brokers and coverholders, past underwriting experience,
the contractual terms of the policy and prevailing market
conditions. The estimates are updated on a regular basis.
The Group carries its financial investments at fair value
through profit or loss, with fair values determined using
published price quotations in the most active financial
markets in which the assets trade, where available. Where
quoted market prices are not available, valuation techniques
are used to value financial instruments. These include
third-party valuation reports and models utilising both
observable and unobservable market inputs. The valuation
techniques involve judgement with regard to the valuation
models used and the inputs to these models can lead to
a range of plausible valuation for financial investments.
Note 3.2(a) discusses the reliability of the Group’s
fair values.
The employee retirement benefit scheme obligations
are calculated and valued with reference to a number of
actuarial assumptions including mortality, inflation rates
and discount rate, many of which have been subject to
specific recent volatility. This complex set of economic
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
2 Basis of preparation
2.22 Use of significant judgements, estimates
and assumptions
Significant accounting estimates continued
variables can have a significant impact on the financial
statements, as shown in note 27.
The Group operates in a complex multinational environment
and legislation concerning the determination of taxation
assets and liabilities is complex and continually evolving.
In preparing the financial statements, the Group applies
significant judgements in identifying uncertainties over tax
treatments and in the measurement of the provision being
the best estimate of the amount expected to become payable.
The assessment is based on the judgement of tax professionals
within the Group supported by previous experience in respect
of such activities and based on advice sought from specialist
tax advisors.
A deferred tax asset can be recognised only to the extent that
it is recoverable. The recoverability of deferred tax assets in
respect of carry forward losses requires consideration of the
future levels of taxable profit in the Group. In preparing the
Group’s financial statements, management estimates taxation
assets and liabilities after taking appropriate professional advice,
as shown in note 25. Significant estimates and assumptions
used in the valuation of deferred tax relate to the forecast
taxable profits, taking into account the Group’s financial
and strategic plans.
The determination and finalisation of agreed taxation
assets and liabilities may not occur until several years after
the reporting date and consequently the final amounts
payable or receivable may differ from those presented
in these financial statements.
2.23 Reporting of additional performance measures
The Directors consider that the combined ratio measures
reported in respect of operating segments and the Group
overall in note 4 and net asset value per share and return on
equity measures disclosed in notes 5 and 6, 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 the internal
performance measures reviewed by senior management
including the chief operating decision-maker. However, these
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 with similarly titled additional performance
measures reported by other companies.
3 Management of risk
The Group’s overall appetite for accepting and managing
varying classes of risk is defined by the Group’s Board of
Directors. The Board has developed a governance framework
and has set Group-wide risk management policies and
procedures which include risk identification, risk management
and mitigation and risk reporting. The objective of these
policies and procedures is to protect the Group’s shareholders,
policyholders and other stakeholders from negative events
that could hinder the Group’s delivery of its contractual
obligations and its achievement of sustainable profitable
economic and social performance.
The Board exercises oversight of the development and
operational implementation of its risk management policies
and procedures 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, although the
timing, frequency and severity of claims can fluctuate.
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
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, defined as
NAV plus subordinated debt less expected dividend less
buffer capital, plus 100% of buffer capital ($135 million) with
an allowance for expected investment income, as a result of
a one-in-200 aggregate bad underwriting year.
Specific underwriting objectives such as aggregation limits,
reinsurance protection thresholds and geographical disaster
event risk exposures 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.
Hiscox Ltd Report and Accounts 2019
123
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.1 Insurance risk
i) Underwriting risk continued
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 modelling 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 extreme
loss events using statistical models alongside input from its
underwriters. These require significant management judgement.
The extreme loss scenarios, shown on page 30, represent
hypothetical major events occurring in areas with large insured
values. They also represent areas of potentially significant
exposure for Hiscox.
The selection of extreme loss 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 unmodelled risks. This means
that should an extreme loss event actually occur, the Group’s
final ultimate losses could materially differ from those estimates
modelled 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 is purchased at an entity
level and is also considered at an overall Group level to mitigate
the effect of catastrophes and unexpected concentrations of
risk. However, the scope and type of reinsurance protection
purchased may change depending on the extent and
competitiveness of cover available in the market.
Below is a summary of the gross and net insurance liabilities
for each category of business.
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, casualty
professional indemnity 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.
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2019
Total
Reinsurance
inwards
$m
2,809.1
556.1
Property –
marine and
major assets
$m
228.8
183.6
Property –
other
assets
$m
1,098.3
710.8
Casualty –
professional
indemnity
$m
2,420.5
2,013.4
Casualty –
other risks
$m
1,020.1
813.7
*
Other
$m
517.7
430.0
Total
$m
8,094.5
4,707.6
Gross
Net
Types of insurance risk in the Group
Estimated concentration of gross and net insurance liabilities on balance sheet 31 December 2018
Total
Reinsurance
inwards
$m
1,999.6
483.9
Property –
marine and
major assets
$m
263.7
209.3
Property –
other
assets
$m
1,034.0
684.3
Casualty –
professional
indemnity
$m
2,100.0
1,785.3
Casualty –
other risks
$m
806.1
660.8
*
Other
$m
498.1
421.3
Total
$m
6,701.5
4,244.9
Gross
Net
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.
124
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.1 Insurance risk
i) Underwriting risk continued
Reinsurance inwards
The Group’s reinsurance inwards acceptances are primarily
focused on large commercial property, homeowner and
marine and crop exposures held by other insurance companies
predominantly in North America and other developed economies.
This business is characterised more by large claims arising
from individual events or catastrophes than the high-frequency,
low-severity attritional losses associated with certain other
business written by the Group. Multiple insured losses can
periodically arise out of a single natural or man-made occurrence.
The main circumstances that result in claims against the
reinsurance inwards book are conventional catastrophes,
such as earthquakes or storms, and other events including
fires and explosions. The occurrence and impact of these
events are very difficult to predict over the short term which
complicates attempts to anticipate claims frequencies on an
annual basis. In those years where there is a low incidence of
severe catastrophes, claims frequencies on the reinsurance
inwards book can be relatively low.
A significant proportion of the reinsurance inwards business
provides cover on an excess of loss basis for individual events.
The Group agrees to reimburse the cedant once their losses
exceed a minimum level. Consequently the frequency and
severity of reinsurance inwards claims are related not only to
the number of significant insured events that occur but also to
their individual magnitude. If numerous catastrophes occurred
in any one year, but the cedant’s individual loss on each was
below the minimum stated, then the Group would have no liability
under such contracts. Maximum gross line sizes and aggregate
exposures are set for each type of programme.
The Group writes reinsurance risks for periods of mainly one
year so that contracts can be assessed for pricing and terms
and adjusted to reflect any changes in market conditions.
Property risks – marine and major assets
The Group directly underwrites a diverse range of property risks.
The risk profile of the property covered under marine and major
asset policies is different to that typically contained in the other
classes of property (such as private households and contents
insurance) covered by the Group.
Typical property covered by marine and other major property
contracts includes fixed and moveable assets such as
ships and other vessels, cargo in transit, energy platforms
and installations, pipelines, other subsea assets, satellites,
commercial buildings and industrial plants and machinery. These
assets are typically exposed to a blend of catastrophic and other
large loss events and attritional claims arising from conventional
hazards such as collision, flooding, fire and theft. Climatic
changes may give rise to more frequent and severe extreme
weather events (for example 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.
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 professional, general,
technological and marine 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.
In addition there is increased potential for accumulation in
casualty risk due to the growing complexity of business,
technological advances, and greater interconnectivity and
interdependency across the world due to globalisation.
Hiscox Ltd Report and Accounts 2019
125
125
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.1 Insurance risk
i) Underwriting risk
Casualty insurance risks continued
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.
The market for cyber insurance is still a relatively immature
one, complicated by the fast-moving nature of the threat, as
the world becomes more connected. The risks associated with
cyber insurance are multiplying in both diversity and scale, with
associated financial and reputational consequences of failing
to prepare for them. The Group has focused its cyber expertise
on prevention, in addition to the more traditional recovery
product. Cyber products are sold through our businesses in
the UK, USA and Europe, and the product is sold both direct
to consumers and through a more traditional broker channel.
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 23.
The Group’s provision estimates are subject to rigorous review by
senior management from all areas of the business. The managed
Syndicates and US business 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.
Similar to the underwriting risk detailed above, the Group’s
reserve risks are well diversified. The short-tailed 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 final quantum for casualty claims may not be established for
many 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. This has been considered in the reserving process.
Certain marine and property insurance contracts, such as those
relating to subsea and other energy assets and the related
business interruption risks, can also take longer than normal to
settle. This is because of the length of time required for detailed
subsea surveys to be carried out and damage assessments
agreed together with difficulties in predicting when the assets
can be brought back into full production.
For the inwards reinsurance lines, there is often a time lag
between the establishment and re-estimate of case reserves
and reporting to the Group. The Group works closely with the
reinsured to ensure timely reporting and also centrally analyses
industry loss data to verify the reported reserves.
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Hiscox Ltd Report and Accounts 2019
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 20, 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 market prices at the balance sheet date. The ability
to obtain quoted 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 2019, 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.
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(a) Reliability of fair values continued
Note 20 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 investment funds. This is limited to a relatively small
and controlled proportion of the overall investment portfolio and
the equity and investment funds 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 2019
was $486 million (2018: $398 million).
These may be analysed as follows:
Nature of equity and investment funds
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
2019
% weighting
2018
% weighting
4
52
44
29
71
4
58
38
36
64
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 2019 would have been expected
to reduce Group equity and profit after tax for the year by
approximately $44.4 million (2018: $36.4 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.
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 2019 was $4,990 million
(2018: $4,575 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
2019
% weighting
2018
%
weighting
28
6
1
5
1
–
57
2
33
10
2
3
1
–
49
2
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 increased or decreased by 100 basis
points at the balance sheet date, the Group equity and profit after
tax for the year might have been expected to increase or decrease
by approximately $76 million (2018: $69 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 modelling 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 17.
At 31 December 2019, no cash was drawn on the Group’s
borrowing facility (2018: $nil). At 31 December 2019, the
Group had long-term debt of £550 million (2018: £550 million).
The £550 million consists of two listed instruments of
£275 million each, as explained in note 17: the first being
fixed-to-floating rate notes where the floating rate becomes
effective from November 2025; the second being fixed rate
notes maturing in December 2022. 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 30.
(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.
Hiscox Ltd Report and Accounts 2019
127
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(d) Credit risk continued
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 its 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
the Group’s internal credit analysis team. The financial analysis of reinsurers produces an assessment categorised by factors
including 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.
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. The
Group has no direct exposure to sovereign debt in Spain, Italy, Ireland, Greece or Portugal.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, and equities and units in unit
trusts, based on S&P or equivalent rating, is presented below:
As at 31 December 2019
Debt and fixed income securities
Deposits with credit institutions
Reinsurance assets
Cash and cash equivalents
Total
As at 31 December 2018
Debt and fixed income securities
Deposits with credit institutions
Reinsurance assets
Cash and cash equivalents
Total
128
Hiscox Ltd Report and Accounts 2019
Note
17
17
16
21
Note
17
17
16
21
AAA
$m
629.7
–
1,236.8
101.7
1,968.2
AAA
$m
762.1
–
846.4
174.7
1,783.2
AA
$m
A
$m
2,083.7
–
606.5
230.2
2,920.4
1,259.1
–
1,525.5
754.1
3,538.7
AA
$m
A
$m
1,951.8
–
351.4
115.2
2,418.4
1,044.1
–
1,236.7
820.7
3,101.5
BBB
$m
972.8
–
2.3
24.3
999.4
BBB
$m
767.6
0.4
0.4
178.2
946.6
Other/
non-rated
$m
44.6
–
15.8
5.6
66.0
Other/
non-rated
$m
49.0
–
21.7
–
70.7
Total
$m
4,989.9
–
3,386.9
1,115.9
9,492.7
Total
$m
4,574.6
0.4
2,456.6
1,288.8
8,320.4
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(d) Credit risk continued
Within the debt and 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 aggregated counterparty exposure related to debt and fixed income securities holdings at 31 December 2019 of
$1,279 million is to the US Treasury (2018: $1,214 million).
The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the
restricted range of reinsurers that have acceptable credit ratings. The largest counterparty exposure included in reinsurance assets
at 31 December 2019 is to Kiskadee. The fully collateralised recoverable from Kiskadee represents 17% (2018: 17%) of this category
of assets.
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 2019 and 2018.
(e) Liquidity risk
The Group is exposed to daily calls on its available cash resources, mainly from claims arising from insurance and reinsurance
contracts. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets
limits on the minimum level of cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities
that should be in place to cover unexpected levels of claims and other cash demands.
A significant proportion of the Group’s investments is in highly liquid assets which could be converted to cash in a prompt fashion and
at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists
and which the Group can easily access. The Group’s exposure to equities is concentrated on shares and funds that are traded on
internationally recognised stock exchanges.
The main focus of the investment portfolio is on high-quality, short-duration debt and fixed income securities and cash. There are no
significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s
ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable
manner, the contractual maturity profile of the fair value of these securities at 31 December is as follows.
Fair values at balance sheet date analysed
by contractual maturity
Debt and fixed income securities
Deposits with credit institutions
Cash and cash equivalents
Total
Less than
one year
$m
Between one
and two years
$m
Between two
and five years
$m
1,447.3
–
1,115.9
2,563.2
1,389.6
–
–
1,389.6
1,735.0
–
–
1,735.0
Over
five years
$m
418.0
–
–
418.0
2019
total
$m
4,989.9
–
1,115.9
6,105.8
2018
total
$m
4,574.6
0.4
1,288.8
5,863.8
The Group’s equities and investment funds 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
US Dollar
Sterling
Euro
Canadian Dollar
2019
years
3.30
3.26
2.26
1.82
2018
years
2.72
2.95
2.03
1.71
Hiscox Ltd Report and Accounts 2019
129
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(e) Liquidity risk continued
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 the 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
$m
Between one
and two years
$m
Between two
and five years
$m
969.2
76.9
344.0
505.8
339.8
166.9
2,402.6
805.2
47.0
202.1
468.3
201.7
58.3
1,782.6
594.8
42.8
127.8
434.7
213.3
56.8
1,470.2
Within
one year
$m
Between one
and two years
$m
Between two
and five years
$m
821.1
109.6
340.4
463.0
191.5
209.7
2,135.3
512.6
56.1
173.9
455.3
126.4
49.9
1,374.2
356.0
42.6
70.1
417.1
225.1
24.8
1,135.7
Over
five years
$m
179.3
13.1
44.7
301.6
62.4
19.5
620.6
Over
five years
$m
74.0
9.5
10.3
148.9
102.9
1.4
347.0
2019
Total
$m
2,548.5
179.8
718.6
1,710.4
817.2
301.5
6,276.0
2018
Total
$m
1,763.7
217.8
594.7
1,484.3
645.9
285.8
4,992.2
*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 17, 19 and 24.
(f) Currency risk
Currency risk is the risk of loss resulting from fluctuations in exchange rates. The Group operates internationally and therefore is
exposed to the financial impact of fluctuations in the exchange rates of various currencies.
The Group’s exposures to foreign exchange risk arise mainly with respect to the US Dollar, Sterling and the Euro. These exposures
may be classified in two main categories:
– operational foreign exchange exposure arises from the conversion of foreign currency transactions resulting from the activities
of entering into insurance, investment and operational contracts in a currency that is different to each respective entity’s
functional currency; and
– structural foreign exchange exposure arises from the translation of the Group’s net investment in foreign operations to the
US Dollar, the Group’s reporting currency.
Operational currency risk
Operational foreign exchange risk is principally managed within the Group’s individual entities by broadly matching assets and
liabilities by currency and liquidity. Due attention is paid to local regulatory solvency and risk-based capital requirements. All foreign
currency derivative transactions with external parties are managed centrally.
The Group does not hedge operational foreign exchange risk arising from the accounting mismatch due to the translation of monetary
and non-monetary items. Non-monetary items including unearned premiums, deferred acquisition costs and reinsurers’ share of
unearned premiums, are recorded at historical transaction rates and are not remeasured at the reporting date. Monetary items including
claims reserves, reinsurers’ share of claims reserves, and investments are remeasured at each reporting date at the closing rates.
Structural currency risk
The Group’s exposure to structural currency risks mainly relates to Sterling and the Euro net investments in businesses operating in
the UK and Europe. 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. However, the Group does not ordinarily seek to use
derivatives to mitigate the structural risk because:
– the currency translation gains and losses are accounted for in the currency translation reserve (a component of equity)
and does not affect income statement unless the related foreign operation is disposed of;
– the currency translation gains and losses have no cash flow.
130
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(f) Currency risk
Structural currency risk continued
In periods of significant volatility that are expected to persist for an extended period of time, the Group may elect to utilise derivatives
to mitigate or reduce the risk in order to preserve capital.
The currency profile of the Group’s assets and liabilities is as follows:
As at 31 December 2019
Goodwill and 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
Current tax
Trade and other payables
Total liabilities
Total equity
As at 31 December 2018 (restated)*
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
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity
US Dollar
$m
Sterling
$m
87.1
38.8
–
51.9
262.2
3,791.3
2,384.6
856.8
0.6
524.0
7,997.3
188.1
66.4
8.6
20.4
126.6
1,157.7
349.7
503.8
–
310.9
2,732.2
US Dollar
$m
Sterling
$m
–
–
5,333.2
131.1
1.9
943.5
6,409.7
1,587.6
US Dollar
$m
37.1
5.6
–
47.6
258.5
3,450.4
1,982.4
689.6
1.0
614.8
7,087.0
US Dollar
$m
–
–
4,780.5
2.1
8.4
687.6
5,478.6
1,608.4
55.1
–
1,316.7
597.7
43.5
287.3
2,300.3
431.9
Sterling
$m
164.9
50.1
9.4
13.1
119.0
991.7
247.3
464.4
0.1
377.7
2,437.7
Sterling
$m
35.8
9.1
1,153.2
697.7
33.7
270.2
2,199.7
238.0
Euro
$m
–
21.4
–
4.6
52.4
400.7
143.7
97.8
4.1
178.0
902.7
Euro
$m
–
0.4
689.1
–
16.6
146.2
852.3
50.4
Euro
$m
–
4.7
0.5
–
68.4
436.3
142.9
71.3
2.5
225.0
951.6
Euro
$m
–
–
647.8
–
1.8
83.5
733.1
218.5
Other
$m
Total
$m
278.0
2.8
128.4
1.8
8.6
–
76.9
–
456.1
14.9
5,539.0
189.3
3,386.9
508.9
1,556.3
97.9
4.7
–
103.0
1,115.9
918.6 12,550.8
Other
$m
–
–
755.5
–
–
43.3
798.8
119.8
Total
$m
55.1
0.4
8,094.5
728.8
62.0
1,420.3
10,361.1
2,189.7
Other
$m
Total
$m
2.6
1.0
–
–
10.0
151.3
84.0
39.8
–
71.3
204.6
61.4
9.9
60.7
455.9
5,029.7
2,456.6
1,265.1
3.6
1,288.8
360.0 10,836.3
Other
$m
–
–
120.0
0.7
–
45.2
165.9
194.1
Total
$m
35.8
9.1
6,701.5
700.5
43.9
1,086.5
8,577.3
2,259.0
*See note 2.2 for further details.
** Following a review of the underlying currency of the debt and fixed income securities, an amount of $67.9 million has been reclassified from US Dollars and Sterling to
Euro and other currencies.
Hiscox Ltd Report and Accounts 2019
131
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.2 Financial risk
(f) Currency risk continued
Sensitivity analysis
As at 31 December 2019, the Group used closing rates of exchange of $1:£0.76 and $1:€0.89 (2018: $1:£0.79 and $1:€0.87).
The Group performs sensitivity analysis based on a 10% strengthening or weakening of the US Dollar against Sterling and the Euro.
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-US Dollar 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
Strengthening of Sterling
Weakening of Sterling
Strengthening of Euro
Weakening of Euro
December 2019
effect on equity
after tax
$m
December 2019
effect on profit
before tax
$m
December 2018
effect on equity
after tax
$m
December 2018
effect on profit
before tax
$m
64.1
(52.4)
21.2
(15.3)
28.6
(23.4)
6.3
(5.2)
52.2
(42.7)
16.5
(13.5)
9.0
(7.4)
9.9
(8.1)
(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
27 to these financial statements. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as
instances when risk-free interest rates fall towards zero.
The sensitivity analysis does not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the
financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk
management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels,
management actions could include selling investments, changing investment portfolio allocation and taking other protective action.
3.3 Capital risk management
The Group’s primary objectives when managing its capital position are:
– to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive
dividend returns for shareholders;
– to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately
with the level of risk;
– to maintain an efficient cost of capital;
– to comply with all regulatory requirements by an appropriate 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 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 rating agency
capital requirements.
At 31 December 2019 available capital was $2,276 million (2018 restated: $2,405 million), comprising net tangible asset value of
$1,912 million (2018 restated: $2,055 million) and subordinated debt of $364 million (2018: $350 million).
The Group can source additional funding from revolving credit and Letter of Credit (LOC) facilities. Standby funding from these
sources comprised $800 million at 31 December 2019 (2018: $800 million), of which $50 million was utilised at 31 December 2019
(2018: $50 million).
132
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.3 Capital risk management continued
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 modelling 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.
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 in weaker markets, particularly with respect to 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 $800 million may be drawn as cash (under a revolving
credit facility), utilised as Letter of Credit or a combination thereof. This facility was increased to $800 million from $500 million in
June 2018 by the Company’s subsidiary Hiscox plc with the maximum cash portion increased to $800 million from $300 million.
This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2018, 2019 and 2020
years of account. The facility can also be used to provide regulatory ancillary own funds within a number of the Group’s
insurance companies. The revolving credit facility has a maximum three-year contractual period for repayment.
At 31 December 2019, $50 million was utilised by way of Letter of Credit to support the Funds at Lloyd’s requirement and
there were no cash drawings outstanding to support general trading activities (2018: $50 million and £nil respectively);
– £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;
– £275 million of fixed rate senior notes raised in March 2018 and maturing in 2022. 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 £45 million for the 2020 year of account (2019 year of account: £55 million).
This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s property
catastrophe, terrorism and cyber reinsurance accounts;
– 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
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
–
Fitch
A+
A+
A+
–
–
S&P
A (Strong)
A (Strong)
–
–
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 modelling 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., Hiscox Société Anonyme and Direct Asia Insurance (Singapore) Pte
Limited is driven by the level of resources necessary to maintain regulatory requirements.
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). The Group had sufficient capital at all
times throughout the year to meet the BMA’s requirements. The BMA is planning to phase in capital requirements changes
between the 2019 and 2021 year-ends. The Group expect to maintain an appropriate margin of solvency after these changes
have taken effect.
Hiscox Ltd Report and Accounts 2019
133
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
3 Management of risk
3.3 Capital risk management
Capital modelling and regulation continued
The Solvency II regime came into force in Europe 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 and Hiscox Société Anonyme
use the standard formula to calculate their regulatory capital requirements. Their risk profiles are 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. In the Group’s other geographical
territories, including the USA and Asia, its subsidiaries underwriting insurance business are required to operate within broadly similar
risk-based externally imposed capital requirements when accepting business.
During the year the Group was in compliance with capital requirements imposed by regulators in each jurisdiction where the
Group operates.
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.
– taking additional advice and obtaining legal opinions from local third-party professionals with the necessary experience in
the particular area.
The Group seeks to maintain an open dialogue with the relevant tax authorities and to resolve any issues arising promptly.
The Group recognises uncertain tax provisions where there is uncertainty that a tax treatment will be accepted under local law,
including matters which are under discussion with the tax authorities. Based on facts and circumstances at the balance sheet date,
the range of the total exposure is estimated between $25 million and $88 million. The estimate is subject to review on an ongoing basis
and is susceptible to the progress of the settlement discussions with the tax authorities. Matters under discussion which could affect
the estimate include the Hiscox Group’s policy on the allocation of expenses between companies within the Group, the allocation of
income and expenses between branches of the same company, and the period subject to re-assessment.
4 Operating segments
In the first half of 2019, the Group reviewed the segmental presentation of financial information it requires to assess performance
and allocate resources. To further align to how the Group manages its investments through a centralised investment function, and
the basis for internal performance incentivisation, the Group has changed the method of allocation of the investment result to the
reportable operating segments. Previously this was presented based on investment returns recognised by legal entities that made up
the segments, and this is now allocated to each segment based on: attributed capital at the beginning of the year under the Group’s
capital allocation methodology; and weighted average insurance liabilities net of reinsurance. There is no impact on the consolidated
investment result and following this change, the comparative figures in the segmental reporting have been re-presented.
The Group’s four primary business segments are identified as follows:
– Hiscox Retail brings together the results of the Group’s retail business divisions in the UK, Europe, USA and Asia, as well as
Hiscox Special Risks. Hiscox UK and Hiscox Europe underwrite personal and commercial lines of business through Hiscox
Insurance Company Limited and Hiscox Société Anonyme (Hiscox SA), together with the fine art and non-US household
insurance business written through Syndicate 33. In addition, Hiscox UK includes elements of specialty and international
employees and officers’ insurance written by Syndicate 3624. Hiscox Europe excludes the kidnap and ransom business written
by Hiscox SA. Hiscox Special Risks comprises the specialty and fine art lines written through Hiscox Insurance Company
(Guernsey) Limited and the European kidnap and ransom business written by Hiscox SA and Syndicate 33. Hiscox USA
comprises commercial, property and specialty business written by Hiscox Insurance Company Inc. and Syndicate 3624.
134
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
4 Operating segments continued
– 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 and London.
The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share
arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance
contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also includes the performance
and fee income from the ILS funds, along with the gains and losses made as a result of the Group’s investment in the funds.
– Corporate Centre comprises finance costs and administrative costs associated with Group management activities and
intragroup borrowings. The segment includes results from run-off portfolios where the Group has ceded all insurance risks
to third-party reinsurers.
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
$m
Hiscox
London
Market
$m
Hiscox
Re & ILS
$m
Corporate
Centre
$m
†
Total
$m
Hiscox
Retail
$m
Hiscox
London
Market
$m
Hiscox
Re & ILS
$m
Corporate
Centre
$m
Total
$m
Year to 31 December 2019
Year to 31 December 2018
(restated)*†
Gross premiums
written
2,196.3
967.9
866.5
Net premiums written 1,957.5
504.6
216.7
–
–
–
–
2.4
2.4
–
–
4,030.7
2,087.1
877.7
812.0
1.5
3,778.3
2,678.8
1,874.5
522.9
241.5
(57.4)
2,581.5
2,635.6
223.0
53.1
2,911.7
1,821.8
19.9
23.8
1,865.5
551.8
10.8
9.8
572.4
257.4
7.4
13.1
277.9
(57.4)
–
0.1
(57.3)
2,573.6
38.1
46.8
2,658.5
(1,576.1)
(812.1)
(253.3)
(217.9)
57.5
(1,225.8)
(661.0)
(459.3)
(164.6)
(17.4)
(0.4)
(641.7)
527.9
50.6
9.0
587.5
212.6
38.5
12.7
263.8
(356.1)
(290.3)
(147.9)
(16.1)
(59.2)
(63.6)
(9.8)
(593.5)
(448.5)
(75.5)
(58.4)
(25.1)
(607.5)
7.1
(556.1)
13.8
(356.2)
(21.6)
(31.4)
8.5
(2,822.1)
1.1
(1,718.8)
(2.6)
(496.0)
(11.6)
(305.3)
(0.6)
31.4
(13.7)
(2,488.7)
31.4
(1.0)
–
30.4
(92.4)
(1.4)
–
(93.8)
(29.0)
(33.0)
0.1
(61.9)
89.6
(36.6)
0.1
53.1
146.7
(0.2)
(0.2)
146.3
76.4
(0.6)
–
75.8
(27.4)
(1.3)
–
(28.7)
(25.9)
(32.5)
0.6
(57.8)
169.8
(34.6)
0.4
135.6
(929.7)
Net premiums earned 1,895.1
Investment result‡
133.9
29.0
Other income
Total income
2,058.0
Claims and claim
adjustment
expenses, net of
reinsurance
Expenses for the
acquisition of
insurance contracts
Operational
expenses
Net foreign exchange
gains/(losses)
Total expenses
Results of operating
activities
Finance costs
Share of profit/(loss) of
associates after tax
Profit/(loss) before tax
–
178.4
9.2
(1,878.4)
179.6
(1.2)
(460.9)
(497.0)
*See note 2.2 for further details.
† Includes a run-off casualty portfolio following the completion of a loss portfolio transfer reinsurance treaty effective from 2018 ceding any future payments on losses
arising from claims developments related to policies written from 2010 to 2016, with premiums earned of $(57.4) million and claims adjustment expenses net of
reinsurance of $57.5 million.
‡ Re-presented to reflect change in the method of allocation of the investment result to reportable operating segments. The impact as at 31 December 2018 amounted
to an increase of $10.4 million in Hiscox Retail, and decreases of $2.5 million in Hiscox London Market, $5.5 million in Hiscox Re & ILS and $2.4 million in Corporate
Centre. See page 134 for further details.
Hiscox Ltd Report and Accounts 2019
135
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
4 Operating segments continued
The following charges are included within the consolidated income statement:
Year to 31 December 2019
Year to 31 December 2018
Hiscox
Retail
$m
16.6
16.3
0.5
33.4
Hiscox
London
Market
$m
2.5
4.8
0.6
7.9
Hiscox
Re & ILS
$m
Corporate
Centre
$m
1.0
1.2
0.3
2.5
0.6
0.1
0.1
0.8
Total
$m
20.7
22.4
1.5
44.6
Hiscox
Retail
$m
6.8
17.9
–
24.7
Hiscox
London
Market
$m
1.0
5.1
–
6.1
Hiscox
Re & ILS
$m
Corporate
Centre
$m
0.5
1.4
–
1.9
0.4
0.1
–
0.5
Total
$m
8.7
24.5
–
33.2
Depreciation
Amortisation of
intangible assets
Impairment of
tangible assets
Total
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.
100% ratio analysis
Claims ratio (%)
Expense ratio (%)
Combined ratio (%)
Hiscox
Retail
48.9
49.8
98.7
Hiscox
London
Market
66.3
38.1
104.4
Hiscox
Re & ILS
Corporate
Centre
132.8
31.1
163.9
–
–
–
Total
60.4
45.3
105.7
Hiscox
Retail
43.8
49.8
93.6
Hiscox
London
Market
46.0
43.3
89.3
Hiscox
Re & ILS
83.8
33.1
116.9
Corporate
Centre
–
–
–
Total
48.5
46.4
94.9
Year to 31 December 2019
Year to 31 December 2018
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, operational expenses,
including profit-related pay and foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the
total of the claims and expenses ratios. All ratios are calculated using the 100% results and excludes a run-off portfolio, where the
Group has ceded all insurance risks to a third-party reinsurer, included within Corporate Centre.
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.
At 100% level (note 4b)
1% change in claims or expense ratio
At Group level
1% change in claims or expense ratio
Year to 31 December 2019
Year to 31 December 2018
Hiscox
Retail
$m
19.3
19.0
Hiscox
London
Market
$m
7.2
5.3
Hiscox
Re & ILS
$m
2.5
2.1
Hiscox
Retail
$m
18.6
18.2
Hiscox
London
Market
$m
7.2
5.5
Hiscox
Re & ILS
$m
3.0
2.6
136
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
4 Operating segments continued
(b) 100% operating result by segment
Year to 31 December 2019
Year to 31 December 2018
(restated)*
Gross premiums
2,237.1
written
Net premiums written 1,994.7
Net premiums earned 1,934.4
128.7
Investment result
25.6
Other income
Claims and claim
adjustment expenses,
net of reinsurance
Expenses for the
acquisition of
insurance contracts
Operational expenses
Net foreign exchange
gains/(losses)
Results of operating
activities
178.5
(509.2)
(464.9)
(945.5)
9.4
Hiscox
Retail
$m
Hiscox
London
Market
$m
Hiscox
Re & ILS
$m
Corporate
Centre
$m
Total
$m
Hiscox
Retail
$m
1,334.3
705.6
721.6
58.0
5.1
958.8
254.6
249.4
45.4
11.7
–
–
–
–
2.4
4,530.2
2,954.9
2,905.4
232.1
44.8
2,134.1
1,913.8
1,863.0
21.7
20.5
Hiscox
London
Market
$m
1,194.3
710.8
719.4
13.7
9.9
Hiscox
Re & ILS
$m
Corporate Centre
$m
Total
$m
894.0
282.0
298.1
9.2
9.1
1.5
(57.4)
(57.4)
–
0.1
4,223.9
2,849.2
2,823.1
44.6
39.6
(478.6)
(331.3)
–
(1,755.4)
(816.1)
(330.9)
(249.8)
57.5
(1,339.3)
(205.1)
(78.2)
(20.7)
(71.6)
–
(9.8)
(735.0)
(624.5)
(475.6)
(451.9)
(213.9)
(95.3)
(19.5)
(66.0)
(0.4)
(17.7)
(709.4)
(630.9)
8.4
14.9
(21.6)
11.1
0.3
(2.7)
(13.2)
(0.6)
(16.2)
31.2
(102.2)
(29.0)
78.5
161.9
100.2
(32.1)
(18.5)
211.5
*See note 2.2 for further details.
Segment results at the 100% level presented above differ from those presented at the Group’s share at note 4(a) solely as a result
of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd’s.
(c) Geographical information
The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK, the USA, Guernsey,
France, Germany, Belgium, The Netherlands, Spain, Portugal, Ireland, Singapore and Thailand.
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from
external parties:
Year to 31 December 2019
Year to 31 December 2018
(restated)*
Gross premium
revenues earned
from external parties
UK
Europe
United States
Rest of world
Hiscox
Retail
$m
721.3
438.4
858.6
100.7
2,119.0
Hiscox
London
Market
$m
23.1
42.2
746.4
156.4
968.1
Hiscox
Re & ILS
$m
14.0
17.6
517.6
295.6
844.8
Corporate
Centre
$m
–
–
–
–
–
Total
$m
758.4
498.2
2,122.6
552.7
3,931.9
Hiscox
Retail
$m
701.4
416.3
814.9
78.8
2,011.4
Hiscox
London
Market
$m
21.3
39.0
683.3
150.5
894.1
Hiscox
Re & ILS
$m
12.4
17.1
533.5
229.8
792.8
Corporate
Centre
$m
1.5
–
–
–
1.5
Total
$m
736.6
472.4
2,031.7
459.1
3,699.8
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
Europe
United States
Rest of world
*See note 2.2 for further details.
2019
total
$m
263.3
21.4
120.8
9.5
415.0
2018
total
*
(restated)
$m
215.5
4.8
52.0
3.6
275.9
Hiscox Ltd Report and Accounts 2019
137
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
5 Net asset value per share and net tangible asset value per share
Net asset value
Net tangible asset value
*See note 2.2 for further details.
2019
2018
(restated)*
Net asset value
)
(total equity
$m
Net asset value
per share
cents
Net asset value
)
(total equity
$m
Net asset value
per share
cents
2,189.7
1,911.7
768.2
670.6
2,259.0
2,054.4
798.6
726.2
The net asset value per share is based on 285,051,997 shares (2018: 282,886,319 shares), being the shares in issue at
31 December 2019, less those held in treasury and those held by the Group Employee Benefit Trust.
Net tangible assets comprise total equity excluding intangible assets. The net asset value per share expressed in pence is 580.1p
(2018: 627.0p).
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 (%)
*See note 2.2 for further details.
2019
$m
48.9
2,259.0
(52.3)
2,206.7
2.2
2018
(restated)
*
$m
117.9
2,317.2
(83.7)
2,233.5
5.3
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.
7 Investment result
The total investment result for the Group comprises:
Investment income including interest receivable
Net realised gains/(losses) on financial investments at fair value through profit or loss
Net fair value gains/(losses) 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
Note
8
19
2019
$m
123.7
34.4
73.0
231.1
(2.2)
(5.9)
223.0
2018
$m
103.0
(25.4)
(35.1)
42.5
1.3
(5.7)
38.1
138
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
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:
US Dollar
Sterling
Euro
Other
(b) Investment return
Debt and fixed income securities
Equities and investment funds
Deposits with credit institutions/cash and cash equivalents
Investment result – financial assets
Return
$m
161.8
61.4
7.9
231.1
2019
Yield
%
3.4
13.3
0.7
3.6
9 Other income and operational expenses
Agency-related income
Profit commission
Other underwriting income/(loss)
Other income
Other income
Wages and salaries
Social security costs
Pension cost – defined contribution
Pension cost – defined benefit
Share-based payments
Temporary staff costs
Travel and entertainment
Legal and professional
Office costs
Computer costs
Marketing expenses
Depreciation, amortisation and impairment
Other expenses
Operational expenses
*See note 2.2 for further details.
2019
%
4.2
3.5
0.2
2.6
Return
$m
57.5
(27.5)
12.5
42.5
2019
$m
28.6
3.9
0.9
19.7
53.1
192.3
33.9
16.7
1.0
3.6
49.6
20.6
40.7
12.7
70.4
88.9
44.6
18.5
593.5
2018
%
1.1
(0.5)
–
1.5
2018
Yield
%
1.3
(6.2)
0.8
0.7
2018
*
(restated)
$m
27.1
7.0
(3.4)
16.1
46.8
212.3
32.7
14.6
2.2
(3.6)
55.6
19.7
39.9
25.0
71.1
69.7
33.2
35.1
607.5
Agency-related income relates to commission received from a non-Group insurer by an insurance intermediary (‘agency’) for
placement services and in limited cases claims handling services. Commission income associated with the placement services
are recognised at the point in time when the agency has satisfied its performance obligation. That is when the terms of the insurance
policy have been agreed contractually by the insurer and policyholder and the insurer has a present right to payment from the
policyholder. Where the agency also provides the insurer with claims handling services, the commission income associated with
these services are recognised over time in line with the terms of the contractual arrangements.
Profit-commission income attributed to non-insurance entities, for example, Lloyd’s managing agent and ILS investment managers
are determined based on a best estimate of the variable consideration. The income is recognised to the extent that it is highly
probable that it will not be subject to significant reversal.
Other underwriting income represents results from the insurance-linked securities managed by the Group and other income includes
management fees which are recognised when the investment management services are rendered to the ILS funds.
Wages and salaries have been shown net of transfers to acquisition and claims expenses.
Hiscox Ltd Report and Accounts 2019
139
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
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
Other interest expenses†
Finance costs
†Including interest expenses on lease liabilities of $1.8 million (2018: $nil).
Note
17
30
2019
$m
28.7
3.2
2.0
2.7
36.6
11 Auditor’s remuneration
Fees payable to the Group’s external auditor, 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 its associates in respect of:
The auditing of the accounts of the Group and its subsidiaries
All audit-related assurance services
All other non-audit services
*See note 2.1 for further details.
2019
$m
3.2
0.3
–
3.5
2018
$m
28.3
2.5
3.2
0.6
34.6
2018
$m
2.7
0.3
0.2
3.2
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 Goodwill and intangible assets
At 1 January 2018
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2018
Opening net book amount
Additions
Amortisation charges
Foreign exchange movements
Closing net book amount
At 31 December 2018
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2019
Opening net book amount
Additions
Amortisation charges
Foreign exchange movements
Closing net book amount
At 31 December 2019
Cost
Accumulated amortisation and impairment
Net book amount
140
Hiscox Ltd Report and Accounts 2019
Goodwill
$m
Syndicate
capacity
$m
State
authorisation
licences
$m
Software and
development
costs
$m
Other
$m
Total
$m
13.7
(5.2)
8.5
8.5
–
–
(0.1)
8.4
13.6
(5.2)
8.4
8.4
–
–
(0.1)
8.3
13.4
(5.1)
8.3
33.1
–
33.1
33.1
–
–
–
33.1
33.1
–
33.1
33.1
–
–
–
33.1
33.1
–
33.1
8.5
–
8.5
8.5
–
–
–
8.5
8.5
–
8.5
8.5
–
–
–
8.5
8.5
–
8.5
182.3
(82.2)
100.1
100.1
51.5
(19.7)
(7.6)
124.3
220.7
(96.4)
124.3
124.3
90.7
(17.7)
4.8
202.1
269.3
(67.2)
202.1
67.5
(31.7)
35.8
35.8
–
(4.7)
(0.8)
30.3
65.5
(35.2)
30.3
30.3
–
(4.7)
0.4
26.0
66.5
(40.5)
26.0
305.1
(119.1)
186.0
186.0
51.5
(24.4)
(8.5)
204.6
341.4
(136.8)
204.6
204.6
90.7
(22.4)
5.1
278.0
390.8
(112.8)
278.0
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
12 Goodwill and intangible assets continued
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. $7.2 million (2018: $7.4 million) is allocated to the Lloyd’s corporate member entity CGU and $1.1 million
(2018: $1.0 million) 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 7.0% (2018: 7.0%), 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.
There was no impairment in 2019 (2018: no impairment).
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.
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 2019 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the
market price.
(b) US state authorisation licences
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 asset is not amortised, as the Group 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. This assumption is reviewed annually to determine whether the asset
continues to have an indefinite life.
The licences are tested annually for impairment, and accumulated impairment losses are deducted from the historical cost.
The carrying value of this asset is tested for impairment based on its value in use. The value in use is calculated using a 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 the test show there is no impairment.
(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 (2018: $nil).
At 31 December 2019 there were $79.8 million of assets under development on which amortisation has yet to be charged
(2018: $37.5 million).
Hiscox Ltd Report and Accounts 2019
141
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
12 Goodwill and intangible assets
Intangible assets
(c) Software and development costs continued
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.
At the end of each reporting period an assessment is made on whether there is any indication that customer contractual relationships
may be impaired. Where indications of impairment are identified, the carrying value 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 using the same method as described above for goodwill
and the same discount rate used. The results of this test led to no impairment being recognised (2018: no impairment).
13 Property, plant and equipment
Year ended 31 December 2018
Opening net book amount
Additions
Disposals
Depreciation charge
Transfers
Impairment
Foreign exchange movements
Closing net book amount
At 31 December 2018
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2019
Opening net book amount*
Additions
Disposals
Depreciation charge
Transfers
Impairment
Foreign exchange movements
Closing net book amount
At 31 December 2019
Cost*
Accumulated depreciation
Net book amount
*See note 2.1 for further details.
Land and
buildings
$m
Leasehold
improvements
$m
Furniture
fittings and
equipment
and art
$m
Right-of-use
assets:
property
$m
Right-of-use
assets:
other
$m
27.7
–
–
(1.2)
0.1
–
(1.5)
25.1
29.2
(4.1)
25.1
25.1
–
–
(1.2)
–
–
1.0
24.9
30.4
(5.5)
24.9
4.0
0.5
–
(1.2)
–
–
–
3.3
12.0
(8.7)
3.3
3.3
5.7
(0.3)
(0.8)
–
(0.7)
0.1
7.3
17.4
(10.1)
7.3
33.9
7.3
(0.1)
(6.3)
(0.1)
–
(1.7)
33.0
72.9
(39.9)
33.0
33.0
4.7
(3.9)
(4.7)
–
(0.8)
0.7
29.0
75.0
(46.0)
29.0
–
–
–
–
–
–
–
–
–
–
–
77.9
1.4
–
(13.4)
–
–
0.3
66.2
79.7
(13.5)
66.2
–
–
–
–
–
–
–
–
–
–
–
0.9
0.7
–
(0.6)
–
–
–
1.0
1.6
(0.6)
1.0
Total
$m
65.6
7.8
(0.1)
(8.7)
–
–
(3.2)
61.4
114.1
(52.7)
61.4
140.2
12.5
(4.2)
(20.7)
–
(1.5)
2.1
128.4
204.1
(75.7)
128.4
The Group’s land and buildings assets relate to freehold property in the UK. There was an impairment charge during the year of
$1.5 million (2018: $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.
The income from subleasing right-of-use assets amounted to $0.7 million (2018: $nil).
142
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
14 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 and investments in associates.
(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 2019, HDCM owned 72.6% of Syndicate 33 (2018: 72.6%), and 100% of Syndicate 3624 (2018: 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. 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 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.
The Kiskadee Latitude Fund was launched in 2019 to give investors access to a more diverse portfolio of insurance and reinsurance
risks, with less focus on pure property catastrophe risk. The fund is managed by Hiscox Re Insurance Linked Strategies Ltd which is
a wholly owned subsidiary of the Group.
The Group determined that it does not control these entities. Hence they are not consolidated.
As at 31 December 2019, the Group recognised a financial asset at fair value of $61.2 million (2018: $55.2 million) in relation to its
investment in the Funds (note 17). 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 $888 million
at 31 December 2019 (2018: $951 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.
Hiscox Ltd Report and Accounts 2019
143
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
14 Subsidiaries, associates and interests in other entities continued
(c) Investments in associates
Year ended 31 December
At beginning of year
Disposals during the year
Impairments
Transfer to equity investments
Distributions received
Net profit from investments in associates
Foreign exchange movements
At end of year
The Group’s interests in its principal associates, all of which are unlisted, were as follows:
2019
$m
9.9
–
(1.3)
(0.5)
(0.3)
0.1
0.7
8.6
2018
$m
10.7
–
–
–
(0.4)
0.4
(0.8)
9.9
100% results
2019
Associates incorporated in the UK and USA
Associates incorporated in Europe
Total at the end of 2019
2018
Associates incorporated in the UK
Associates incorporated in Europe
Total at the end of 2018
% interest held at 31 December
Assets
$m
Liabilities
$m
Revenues
$m
Profit after tax
$m
from 29% to 35%
from 26%
18.7
4.4
23.1
13.7
2.8
16.5
12.2
2.6
14.8
(0.3)
0.8
0.5
100% results
% interest held at 31 December
Assets
$m
Liabilities
$m
Revenues
$m
Profit after tax
$m
from 17% to 35%
from 10% to 26%
16.9
2.8
19.7
11.8
1.3
13.1
16.3
2.6
18.9
1.3
0.8
2.1
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.
15 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
$m
Reinsurance
$m
455.9
943.4
(944.9)
1.7
456.1
(106.8)
(301.4)
283.9
(0.4)
(124.7)
2019
Net
$m
349.1
642.0
(661.0)
1.3
331.4
Gross
$m
Reinsurance
$m
446.1
898.2
(882.0)
(6.4)
455.9
(91.8)
(255.9)
240.3
0.6
(106.8)
2018
Net
$m
354.3
642.3
(641.7)
(5.8)
349.1
The deferred amount of insurance contract acquisition costs attributable to reinsurers of $124.7 million (2018: $106.8 million) is not
eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 24).
The net amounts expected to be recovered before and after one year are estimated as follows:
Within one year
After one year
144
Hiscox Ltd Report and Accounts 2019
2019
$m
301.7
29.7
331.4
2018
$m
314.7
34.4
349.1
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
16 Reinsurance assets
Reinsurers’ share of insurance liabilities
Provision for non-recovery and impairment
Reinsurance assets
Note
23
2019
$m
2018
$m
3,387.7
(0.8)
3,386.9
2,457.4
(0.8)
2,456.6
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
1,510.9
1,876.0
3,386.9
1,277.9
1,178.7
2,456.6
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and
receivables (note 18). The Group recognised a gain during the year of $14,000 (2018: gain of $10,000) in respect of previously
impaired balances.
17 Financial assets and liabilities
Financial assets designated at fair value through profit or loss are measured at fair values, with all changes from one accounting
period to the next being recorded through the income statement.
Debt and fixed income securities
Equities and investment funds
Deposits with credit institutions
Total investments
Insurance-linked fund
Derivative financial instruments
Total financial assets carried at fair value
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
Note
2019
$m
2018
$m
4,989.9
486.4
–
5,476.3
61.2
1.5
5,539.0
4,574.6
398.0
0.4
4,973.0
55.2
1.5
5,029.7
19
2019
$m
1,447.3
3,542.6
4,989.9
2018
*
(restated)
$m
1,258.0
3,316.6
4,574.6
*Following a review of the contractual maturity of the securities, an amount of $40 million has been reclassified from within one year to after one year category.
Equities, investment funds and insurance-linked securities 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).
Derivative financial instruments
Total financial liabilities carried at fair value
Long-term debt
Accrued interest on long-term debt
Total financial liabilities carried at amortised cost
Note
19
2019
$m
0.6
0.6
2019
$m
725.6
2.6
728.2
2018
$m
1.1
1.1
2018
$m
697.1
2.3
699.4
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Chapter 2
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
17 Financial assets and liabilities continued
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 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.
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.
On 14 March 2018, the Group issued £275.0 million 2% notes due December 2022. The notes will be redeemed on the maturity
date at their principal amount together with accrued interest.
The notes bear interest from, and including, 14 March 2018 at a fixed rate of 2% per annum annually in arrears starting
14 December 2018 until maturity on 14 December 2022.
On 14 March 2018, the notes were admitted for trading on the Luxembourg Stock Exchange’s Euro MTF. The notes were rated
BBB+ by S&P as well as by Fitch.
The fair value of the long-term debt is estimated at $787.3 million (2018: $706.3 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 stock exchanges.
The increase in the carrying value of the long-term debt and accrued interest during the year comprises new debt issued at
$nil million (2018: $380.3 million), the amortisation of the difference between the net proceeds received and the redemption
amounts of $0.8 million (2018: $0.6 million) the movement in accrued interest of $0.2 million (2018: $nil million) plus exchange
movements of $27.8 million (2018: less exchange movements of $53.9 million).
Note 10 includes details of the interest expense for the year included in financing costs.
Investments at 31 December are denominated in the following currencies at their fair value:
Debt and fixed income securities
US Dollars
Sterling
Euro and other currencies
Equities and investment funds
US Dollars
Sterling
Euro and other currencies
Deposits with credit institutions
US Dollars
Sterling
Euro and other currencies
Total investments
2019
$m
2018
*
(restated)
$m
3,464.6
961.6
563.7
4,989.9
3,157.8
831.0
585.8
4,574.6
265.5
195.5
25.4
486.4
–
–
–
–
5,476.3
237.3
160.7
–
398.0
–
–
0.4
0.4
4,973.0
* Following a review of the underlying currency of the debt and fixed income securities, an amount of $67.9 million has been reclassified from US Dollars and Sterling to
Euro and other currencies.
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Chapter 2
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Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
18 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
2019
$m
2018
$m
1,419.0
(7.4)
1,411.6
1,143.9
(2.1)
1,141.8
862.2
549.4
1,411.6
751.0
390.8
1,141.8
16.9
26.1
13.1
22.3
32.2
60.2
1,556.3
16.3
20.9
27.8
32.2
1,265.1
1,305.0
251.3
1,556.3
1,138.9
126.2
1,265.1
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 $5.3 million (2018: gain of $0.1 million) for the impairment
of receivables during the year ended 31 December 2019. 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.
19 Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2019.
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 2019 all mature within one year of the balance sheet date and are detailed below:
31 December 2019
Derivative financial instruments included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
Gross contract
notional amount
$m
Fair value
of assets
$m
Fair value
of liabilities
$m
Net balance
sheet position
$m
155.0
82.4
1.4
0.1
(0.6)
–
0.8
0.1
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 2018
Derivative financial instruments included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
124.5
(123.1)
1.4
28.0
(28.6)
(0.6)
152.5
(151.7)
0.8
Gross contract
notional amount
$m
Fair value
of assets
$m
Fair value
of liabilities
$m
Net balance
sheet position
$m
104.6
118.5
1.5
–
(0.6)
(0.5)
0.9
(0.5)
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
72.6
(71.1)
1.5
32.9
(33.5)
(0.6)
105.5
(104.6)
0.9
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Chapter 2
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Governance
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
19 Derivative financial instruments continued
Foreign exchange forward contracts
During the current and prior year the Group entered into a series of conventional over-the-counter forward contracts in order to
secure translation gains made on Euro, US Dollar and other non-Sterling denominated monetary assets. The contracts require the
Group to forward sell a fixed amount of the relevant currency for Sterling at pre-agreed future exchange rates. The Group made a loss
on these forward contracts of $1.5 million (2018: gain of $1.5 million) as included in the 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 substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate
bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of $0.7 million (2018: loss of $0.2 million)
as included in the investment result in note 7.
Equity index options
During the year, no equity index futures were purchased.
20 Fair value measurements
In accordance with IFRS 13 Fair Value Measurement, the fair value of financial instruments based on a three-level fair value hierarchy
that reflects the significance of the inputs used in measuring the fair value, is set out below.
As at 31 December 2019
Financial assets
Debt and fixed income securities
Equities and investment funds
Insurance-linked funds
Derivative financial instruments
Total
Financial liabilities
Derivative financial instruments
Total
As at 31 December 2018
Financial assets
Debt and fixed income securities
Equities and investment funds
Deposits with credit institutions
Insurance-linked funds
Derivative financial instruments
Total
Financial liabilities
Derivative financial instruments
Total
Level 1
$m
Level 2
$m
1,495.9
–
–
–
1,495.9
3,494.0
467.9
–
1.5
3,963.4
–
–
Level 1
$m
0.6
0.6
Level 2
$m
1,509.0
–
0.4
–
–
1,509.4
3,065.6
379.1
–
–
1.5
3,446.2
Level 3
$m
–
18.5
61.2
–
79.7
–
–
Level 3
$m
–
18.9
–
55.2
–
74.1
Total
$m
4,989.9
486.4
61.2
1.5
5,539.0
0.6
0.6
Total
$m
4,574.6
398.0
0.4
55.2
1.5
5,029.7
–
–
1.1
1.1
–
–
1.1
1.1
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.
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Chapter 2
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Chapter 4
Remuneration
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Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
20 Fair value measurements continued
Investments in mutual funds, which are included in equities and investment funds comprise a portfolio of stock investments in trading
entities which are invested in various quoted investments. The fair value of these investment funds are 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 $787.3 million (2018: $706.3 million) and is considered as Level 1 in the 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.
Level 3 contains investments in a limited partnership, unquoted equity securities and insurance-linked funds which have limited
observable inputs on which to measure fair value. Unquoted equities, including equity instruments in limited partnerships are carried
at fair value. Fair value is determined to be net asset value for the limited partnerships, and for the equity holdings it is determined to be
the latest available traded price. 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 2019, the insurance-linked fund of $61.2 million
represents the Group’s investment in the Kiskadee Funds (2018: $55.2 million).
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 7-9% change to the fair value of the liabilities would increase or decrease the fair value
of the funds by $4.5 million to $5.2 million.
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, Level 2 or Level 3 of the fair value hierarchy.
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Chapter 2
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13
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
20 Fair value measurements continued
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 2019
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
Financial assets
Equities and
investment
funds
$m
Insurance-
linked funds
$m
18.9
0.2
0.5
0.7
(1.8)
18.5
(0.1)
55.2
0.7
–
5.5
(0.2)
61.2
0.7
Total
$m
74.1
0.9
0.5
6.2
(2.0)
79.7
0.6
* Fair value gains/(losses) are included within the investment result in the income statement for equities and investment funds and through other income for the
insurance-linked fund.
31 December 2018
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
investment
funds
$m
Insurance-
linked funds
$m
15.4
(0.4)
(0.7)
5.0
(0.4)
18.9
(0.4)
49.9
(3.1)
–
9.3
(0.9)
55.2
(3.1)
Financial assets
Total
$m
65.3
(3.5)
(0.7)
14.3
(1.3)
74.1
(3.5)
* Fair value gains/(losses) are included within the investment result in the income statement for equities and investment funds and through other income for the
insurance-linked fund.
21 Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
Total
2019
$m
903.2
212.7
1,115.9
2018
$m
1,124.3
164.5
1,288.8
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.
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Chapter 2
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
22 Share capital
Group
Authorised ordinary share capital of 6.5p (2018: 6.5p)
Issued ordinary share capital of 6.5p (2018: 6.5p)
31 December 2019
31 December 2018
Share
capital
$m
Number
of shares
000
425.8 3,692,308
296,108
34.1
Share
capital
$m
Number
of shares
000
425.8 3,692,308
295,315
34.0
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 2018
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2018
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2019
Ordinary share
capital
$000
Share
premium
$000
Contributed
surplus
$000
33,913
41
32
33,986
28
37
34,051
45,849
4,013
7,818
57,680
3,595
9,228
70,503
183,969
–
–
183,969
–
–
183,969
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 shares to facilitate the settlement of vesting awards under the
Group’s Performance Share Plan (2018: purchase of $76.5 million shares). 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)
2019
Number of
ordinary
shares in issue
(thousands)
2018
295,315
339
454
296,108
294,484
460
371
295,315
Note
29
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 for pre-2018 awards and net asset value targets for awards from 2018. Share options are
also conditional on the employees completing two or 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 or net asset value; 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 amount recognised in the
consolidated income statement during the year was expense of $3.6 million (2018: income of $3.6 million). This comprises an
expense of $2.7 million (2018: income of $4.6 million) in respect of Performance Share Plan awards and an expense of $0.9 million
(2018: expense of $1.0 million) 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.
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Chapter 2
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Chapter 3
Governance
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
22 Share capital continued
Share options and Performance Share Plan awards continued
The range of principal Group assumptions applied in determining the fair value of share-based payment instruments granted during
the year under review are:
Assumptions affecting inputs to fair value models
Annual risk-free rates of return and discount rates (%)
Long-term dividend yield (%)
Expected life of options (years)
Implied volatility of share price (%)
Weighted average share price (p)
2019
2018
0.42-0.68
2.39
3.25
21.0
1,555.3
0.83-0.89
3.05
3.25
22.0
1,497.8
The weighted average fair value of each share option granted during the year was 306.1p (2018: 302.5p). The weighted average
fair value of each Performance Share Plan award granted during the year was 1,554.2p (2018: 1,492.9p).
Movements in the number of share options and Performance Share Plan awards during the year and details of the balances
outstanding at 31 December 2019 for the Executive Directors are shown in the annual report on remuneration 2019. The total
number of options and Performance Share Plan awards outstanding is 9,293,491 (2018: 9,804,430) of which 2,682,751 are
exercisable (2018: 3,032,437). The total number of SAYE options outstanding is 1,530,653 (2018: 1,528,496).
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.
23 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
2019
$m
2018
$m
2,259.0
4,017.0
1,818.5
8,094.5
814.6
2,106.4
465.9
3,386.9
1,444.4
1,910.6
1,352.6
4,707.6
1,957.2
3,035.0
1,709.3
6,701.5
690.6
1,356.5
409.5
2,456.6
1,266.6
1,678.5
1,299.8
4,244.9
16
The net 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
2019
$m
2,588.2
2,119.4
4,707.6
2018
$m
2,422.7
1,822.2
4,244.9
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 2019 and 2018 are
not material.
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Chapter 2
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Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
23 Insurance liabilities and reinsurance assets continued
23.1 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.
Hiscox Ltd Report and Accounts 2019
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Chapter 2
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13
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Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
23 Insurance liabilities and reinsurance assets continued
23.1 Insurance contracts assumptions
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – gross at 100%
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
1,535.8 1,969.8
1,295.6 1,772.0 1,454.7
1,717.6 1,344.7 1,030.4
1,207.2
1,731.8 1,339.7
1,188.1
1,156.6 1,705.2 1,328.5
1,138.5 1,655.8 1,318.4
1,587.4 1,324.6
1,110.0
1,547.4 1,301.8
1,092.6
–
1,094.5 1,522.9
–
–
1,085.8
1,637.8 1,323.6 1,448.9
1,157.4 1,230.3
1,140.9
962.3 1,094.1 1,276.8
1,292.9
961.6 1,068.8
–
938.2 1,050.8
–
–
932.9
–
–
–
–
–
–
–
–
–
1,556.3 1,935.0 3,391.5
1,390.6
1,281.6 1,626.8 3,038.3
–
1,657.7
–
–
–
–
–
–
–
–
–
–
–
–
1,718.1 3,075.5 3,605.0
–
–
–
–
–
–
–
–
3,157.8 3,358.1 21,314.6
– 16,699.2
– 12,387.5
– 9,250.5
– 7,513.6
6,101.7
–
– 4,954.9
– 3,941.8
2,617.4
–
– 1,085.8
Accident year
Estimate of ultimate
claims costs as adjusted
for foreign exchange*
at end of accident year:
one year later
two years later
three years later
four years later
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative payments
to date
Liability recognised at
100% level
Liability recognised in
respect of prior accident
years at 100% level
Total gross liability to external parties at 100% level
(1,502.7)
(1,040.1)
20.2
45.7
1,085.8 1,522.9 1,301.8
(1,172.2)
129.6
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2019.
Reconciliation of 100% disclosures above to Group’s share – gross
932.9 1,050.8 1,292.9
1,657.7 3,038.3 3,605.0 3,358.1 18,846.2
(877.4)
(934.7)
(1,040.8)
(1,280.7)
(1,895.9)
(1,565.7)
(446.2) (11,756.4)
55.5
116.1
252.1
377.0
1,142.4 2,039.3 2,911.9 7,089.8
142.0
7,231.8
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
932.9 1,050.8 1,292.9
1,657.7 3,038.3 3,605.0 3,358.1 18,846.2
(132.7)
(182.6)
(412.8)
(471.7)
(431.3) (2,404.9)
1,160.2
(1,040.8)
1,475.1 2,625.5 3,133.3 2,926.8 16,441.3
(1,280.7)
(1,895.9)
(1,565.7)
(446.2) (11,756.4)
107.3
139.9
252.6
201.8
57.0 1,476.1
(933.5)
(1,140.8)
(1,643.3)
(1,363.9)
(389.2) (10,280.3)
226.7
334.3
982.2 1,769.4 2,537.6 6,161.0
115.0
6,276.0
2011
$m
2014
$m
2010
$m
2012
$m
2013
$m
832.5
938.2
(171.6)
(112.6)
(100.4)
(168.6)
(220.6)
1,133.2
(1,040.1)
(1,502.7)
914.2 1,302.3
1,085.8 1,522.9 1,301.8
Accident year
Current estimate of
cumulative claims
Less: attributable
to external Names
Group’s share of current
ultimate claims estimate
Cumulative payments
to date
Less: attributable
to external Names
Group’s share of
cumulative payments
Liability for 2010
to 2019 accident years
recognised on Group’s
balance sheet
Liability for accident
years before 2010
recognised on
Group’s balance sheet
Total Group liability to external parties included in balance sheet – gross**
(1,019.3)
(1,289.1)
(1,172.2)
(835.6)
(785.8)
(934.7)
(879.8)
(877.4)
160.3
102.6
213.6
152.9
113.9
34.4
46.7
13.2
99.1
91.6
**This represents the claims element of the Group’s insurance liabilities.
154
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
23 Insurance liabilities and reinsurance assets continued
23.1 Insurance contracts assumptions
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – net of reinsurance at 100%
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
1,218.3 1,496.1
1,178.5
1,068.1 1,379.8 1,038.2
962.8
1,325.1
1,004.8
927.0
978.1 1,321.8
917.7
947.9
1,312.7
937.8
942.2 1,260.4
927.5
909.9 1,224.2
910.2
1,191.8
894.9
–
1,172.8
888.6
–
–
885.2
Accident year
Estimate of ultimate
claims costs as adjusted
for foreign exchange*
at end of accident year:
one year later
two years later
three years later
four years later
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative payments
to date
Liability recognised at
100% level
Liability recognised in
respect of prior accident
years at 100% level
Total net liability to external parties at 100% level
(1,162.0)
1,172.8
(849.0)
885.2
910.2
36.2
10.8
97.6
(812.6)
1,128.3
1,001.1 1,034.4
1,177.0 1,252.8
1,158.4 1,341.5 1,626.9
1,267.9 1,613.8
–
–
–
–
–
–
–
1,479.1 1,851.8 1,794.2 1,785.7 14,361.8
– 11,485.7
1,837.3
–
–
9,077.1
– 7,287.9
–
– 5,917.9
–
– 4,778.4
–
– 3,863.7
–
– 2,996.9
–
– 2,061.4
–
885.2
–
–
939.8 1,063.1
884.6 1,056.0 1,285.6
–
852.2 1,056.6
–
–
833.5
–
–
–
–
–
–
–
–
–
–
–
–
899.8
834.8
830.8
804.5
802.1
–
–
–
802.1
833.5 1,056.6 1,285.6 1,613.8
1,837.3 1,785.7 12,182.8
(751.6)
(709.9)
(815.2)
(976.8)
(1,127.9)
(930.1)
(389.2) (8,524.3)
50.5
123.6
241.4
308.8
485.9
907.2 1,396.5 3,658.5
97.9
3,756.4
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2019.
Reconciliation of 100% disclosures above to Group’s share – net of reinsurance
2011
$m
2014
$m
2010
$m
2012
$m
2013
$m
(84.1)
757.7
(82.1)
813.7
749.4
802.1
910.2
(96.5)
720.0
885.2
(127.5)
(158.7)
(849.0)
1,172.8
1,014.1
(1,162.0)
Accident year
Current estimate of
cumulative claims
Less: attributable
to external Names
Group’s share of current
ultimate claims estimate
Cumulative payments
to date
Less: attributable to
external Names
Group’s share of
cumulative payments
Liability for 2010 to
2019 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2010
recognised on
Group’s balance sheet
Total Group liability to external parties included in balance sheet – net**
(1,008.5)
(729.8)
(728.0)
(812.6)
(677.5)
(751.6)
153.5
119.2
113.5
84.6
85.7
42.5
74.0
27.9
74.1
5.6
(709.9)
(635.9)
**This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
2015
$m
2016
$m
2017
$m
2018
$m
2019
$m
Total
$m
833.5 1,056.6 1,285.6 1,613.8
1,837.3 1,785.7 12,182.8
(107.1)
(129.4)
(166.9)
(184.4)
(195.9) (1,332.6)
949.5
1,156.2 1,446.9 1,652.9 1,589.8 10,850.2
(815.2)
(976.8)
(1,127.9)
(930.1)
(389.2) (8,524.3)
83.0
96.0
117.7
103.5
46.5
952.1
(732.2)
(880.8)
(1,010.2)
(826.6)
(342.7) (7,572.2)
217.3
275.4
436.7
826.3
1,247.1 3,278.0
77.0
3,355.0
Hiscox Ltd Report and Accounts 2019
155
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
23 Insurance liabilities and reinsurance assets continued
23.2 Movements in insurance claims liabilities and reinsurance claims assets
A reconciliation of the insurance claims liabilities is as follows:
Year ended 31 December
Total at beginning of year
Claims and claim adjustment expenses for the year
Cash paid for claims settled in the year
Foreign exchange and other adjustments
Total at end of year
Gross
$m
4,992.2
3,206.7
(1,940.6)
17.7
6,276.0
Reinsurance
$m
(2,047.1)
(1,630.6)
761.9
(5.2)
(2,921.0)
2019
Net
$m
2,945.1
1,576.1
(1,178.7)
12.5
3,355.0
Gross
$m
4,350.6
2,326.6
(1,567.2)
(117.8)
4,992.2
Reinsurance
$m
(1,492.3)
(1,100.8)
531.8
14.2
(2,047.1)
2018
Net
$m
2,858.3
1,225.8
(1,035.4)
(103.6)
2,945.1
Claims reported and claim adjustment expenses
Claims incurred but not reported
Total at end of year
2,259.0
4,017.0
6,276.0
(814.6)
(2,106.4)
(2,921.0)
1,444.4
1,910.6
3,355.0
1,957.2
3,035.0
4,992.2
(690.6)
(1,356.5)
(2,047.1)
1,266.6
1,678.5
2,945.1
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
Total claims and claim adjustment expenses
A reconciliation of the unearned premium reserves is as follows:
Balance deferred at 1 January
Premiums written
Premiums earned through the income statement
Foreign exchange and other adjustments
Balance deferred at 31 December
Gross
$m
Reinsurance
$m
2019
Net
$m
Gross
$m
Reinsurance
$m
2018
Net
$m
3,584.6
(1,982.6)
1,602.0
2,780.1
(1,227.8)
1,552.3
)
(377.9
3,206.7
352.0
(1,630.6)
)
(25.9
1,576.1
(453.5
)
2,326.6
127.0
(1,100.8)
(326.5
)
1,225.8
Gross
$m
Reinsurance
$m
2019
Net
$m
Gross
$m
Reinsurance
$m
2018
Net
$m
1,709.3
4,030.7
(3,931.9)
10.4
1,818.5
(409.5)
(1,351.9)
1,296.3
(0.8)
(465.9)
1,299.8
2,678.8
(2,635.6)
9.6
1,352.6
1,657.2
3,778.4
(3,699.8)
(26.5)
1,709.3
(341.0)
(1,196.9)
1,126.2
2.2
(409.5)
1,316.2
2,581.5
(2,573.6)
(24.3)
1,299.8
The amounts expected to be recovered before and after one year, based on historical experience, are included in the first table to this
note 23.
A reconciliation of the gross premium written to net premium earned is as follows:
Gross premium written
Outward reinsurance premium
Net premium written
Change in gross unearned premium reserves
Change in reinsurers’ share of unearned premium reserves
Change in net unearned premium reserves
Net premiums earned
2019
$m
4,030.7
(1,351.9)
2,678.8
(98.8)
55.6
(43.2)
2,635.6
2018
$m
3,778.3
(1,196.8)
2,581.5
(78.6)
70.7
(7.9)
2,573.6
156
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
24 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
Lease liabilities
Other creditors
Reinsurers’ share of deferred acquisition costs
Accruals and deferred income
Total
Note
15
2019
$m
139.4
823.1
962.5
2.9
39.7
71.4
74.1
188.1
124.7
145.0
1,420.3
2018
$m
74.1
664.8
738.9
5.8
36.4
–
22.0
64.2
106.8
176.6
1,086.5
Included within accruals and deferred income is $6.4 million (2018: $7.0 million) of deferred gain on retroactive reinsurance contracts.
The amounts expected to be settled before and after one year are estimated as follows:
Within one year
After one year
2019
$m
1,317.1
103.2
1,420.3
2018
$m
947.6
138.9
1,086.5
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.
The Group acts as both lessee and lessor in relation to various offices in the UK and overseas, which are held under non-cancellable
lease agreements. The leases have varying terms, escalation clauses and renewal terms.
Extension and termination options were taken into account on recognition of the lease liability if the Group was reasonably certain
that these options would be exercised in the future. As a general rule, the Group recognises non-lease components, such as
services, separately to lease payments.
Maturity analysis – contractual undiscounted cash flows:
Not later than one year
Later than one year and not later than five years
Later than five years
Total undiscounted lease liabilities at 31 December
2019
$m
15.9
46.5
18.0
80.4
The cost relating to variable lease payments that do not depend on an index or a rate amounted to $nil in the year ended
31 December 2019 (2018: $nil).
There were no leases with residual values guarantees. The leases not yet commenced to which the Group is committed amounted
to $55.3 million (2018: $nil).
Hiscox Ltd Report and Accounts 2019
157
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
25 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 32. 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
*See note 2.2 for further details.
2019
$m
36.0
(7.0)
29.0
(28.7)
3.8
0.1
(24.8)
4.2
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 8% (2018: 13%).
A reconciliation of the difference is provided below:
Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2018: 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 year
*See note 2.2 for further details.
2019
$m
53.1
–
7.9
0.6
1.2
1.6
0.9
0.4
(5.2)
(3.2)
4.2
2018
*
(restated)
$m
28.0
1.5
29.5
(11.3)
(1.0)
0.5
(11.8)
17.7
2018
*
(restated)
$m
135.6
–
4.4
0.5
9.7
5.3
1.3
(0.2)
(3.8)
0.5
17.7
The UK Finance Act 2015 introduced a new tax with effect from April 2015, the Diverted Profits Tax (DPT), which in certain situations
applies a tax of 25% to income which would not otherwise be chargeable to UK tax. The Group has been proactively engaged in
ongoing discussions with the UK’s tax authority regarding taxing rights with respect to one long-standing intra-group arrangement.
These discussions have now reached a conclusion with no assessment to DPT being raised. The Group therefore does not consider
it probable that this transaction may be found to be subject to DPT and consequently no provision is made at 31 December 2019.
Uncertain tax positions
Included within the current tax, a provision is recognised for those matters for which the tax determination is uncertain but it is
considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate
of the amount expected to become payable.
The Group companies’ tax filings include transactions which are subject to transfer pricing legislation and the taxation authorities
may challenge the tax treatment of those transactions. The Directors are proactively engaged in discussions with the tax authorities
regarding these tax positions. The Group determines, based on tax and transfer pricing advice provided by external specialist tax
advisors, that: it is probable that the tax authorities will assess additional taxes in respect of these filings, for which provisions have
been made; the amount recognised at the balance sheet date represents the best estimate of the amount expected to be settled,
taking into account the range of potential outcomes and the current progression of discussions with tax authorities.
158
Hiscox Ltd Report and Accounts 2019
Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
26 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
*See note 2.2 for further details.
2019
$m
51.5
76.1
(50.7)
76.9
2019
$m
–
0.4
0.4
2018
$m
47.6
48.0
(34.9)
60.7
2018
*
(restated)
$m
–
9.1
9.1
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
UK capital losses
Trade and other payables
Intangible assets – Syndicate capacity
Retirement benefit obligations
Open years of account
Unearned premium
Loss reserve discounting
Other items
Total deferred tax assets
Financial assets
Insurance contracts – equalisation provision
Reinsurance premiums
Deferred acquisition costs
Other items
Total deferred tax liabilities
Net total deferred tax assets/(liabilities)
Trading losses in overseas entities
Net total deferred tax assets/(liabilities)
Net deferred tax position asset/(liability)
Other
Net total deferred tax position liabilities
Net Group deferred tax asset/(liability)
*See note 2.2 for further details.
2018
*
(restated)
$m
Income
statement
(charge)/credit
$m
Recognised
in other
comprehensive
income/equity
$m
Foreign
exchange
$m
0.2
0.8
2.9
1.6
6.6
24.7
–
–
11.2
48.0
(1.5)
(18.2)
(15.2)
–
–
(34.9)
13.1
47.6
13.1
60.7
(9.1)
(9.1)
51.6
0.7
(0.8)
1.0
(0.2)
(1.5)
14.2
8.3
5.7
(1.0)
26.4
0.4
8.4
(8.2)
(14.1)
(0.8)
(14.3)
12.1
4.0
12.1
16.1
8.7
8.7
24.8
–
–
–
–
3.4
–
–
–
(4.0)
(0.6)
–
–
–
–
–
–
(0.6)
–
(0.6)
(0.6)
–
–
(0.6)
–
–
0.1
0.1
0.3
1.5
–
–
0.3
2.3
(0.1)
(0.5)
(0.9)
–
–
(1.5)
0.8
(0.1)
0.8
0.7
–
–
0.7
2019
$m
0.9
–
4.0
1.5
8.8
40.4
8.3
5.7
6.5
76.1
(1.2)
(10.3)
(24.3)
(14.1)
(0.8)
(50.7)
25.4
51.5
25.4
76.9
(0.4)
(0.4)
76.5
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 2019 (2018: 17%).
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 comprehensive income to the
extent that the movement corresponds to actuarial gains and losses recognised in the statement of comprehensive income. The total
recognised outside the income statement is $3.6 million income (2018: income of $0.1 million), comprising $0.5 million deferred tax
expense and $4.1 million current tax income (2018: $3.9 million deferred tax expense and $4.0 million current tax income).
Hiscox Ltd Report and Accounts 2019
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
26 Deferred tax continued
Deferred tax assets of $51.5 million (2018: $47.6 million), relating to losses arising in overseas entities, which depend on the availability
of future taxable profits, have been recognised. 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. $12.3 million (2018: $4.9 million) of
the tax losses to which these assets relate will expire within ten years; a further $39.2 million (2018: $42.7 million) will expire after
ten years or will be available indefinitely. The Group has not provided for deferred tax assets totalling $18.5 million (2018: $13.9 million)
in relation to losses in overseas companies of $102.9 million (2018: $76.9 million). 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 $102.9 million (2018: $47.5 million).
27 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
Net amount recognised as a defined benefit obligation
2019
$m
366.7
(311.6)
55.1
2018
$m
302.0
(266.2)
35.8
As the present value of scheme obligations exceeds the fair 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 2017, and updated at each intervening
balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated
future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the
related pension liability.
The scheme assets are invested are as follows:
At 31 December
Investment assets
Pooled investment vehicles
Equities
Bonds
Derivatives
Cash
2019
$m
*
2018
$m
219.1
70.9
7.4
0.1
14.1
311.6
190.0
50.5
5.7
(0.1)
20.1
266.2
* On review of the 2018 net scheme assets available for benefits, two investment funds previously presented under bonds and equities have been reclassified
consistent with their 2019 classification and in line with their underlying investment category. This reclassification had no impact on net assets and no impact
upon the fund account.
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Chapter 2
A closer look
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Chapter 3
Governance
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
27 Employee retirement benefit obligations continued
The amounts recognised in total comprehensive income are as follows:
Past service cost
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 changes in actuarial assumptions
Return on plan assets (excluding interest income)
Remeasurement of third-party Names share of defined benefit obligation
Total remeasurement included in other comprehensive income
Total defined benefit credit recognised in comprehensive income
Note
9
2019
$m
–
8.6
(7.6)
1.0
–
1.0
52.6
(32.8)
(3.3)
16.5
17.5
2018
$m
0.1
9.2
(7.6)
1.6
0.5
2.2
(46.3)
22.0
4.1
(20.2)
(18.0)
In October 2018, the High Court in the UK issued a ruling to address inequalities in the calculation of guaranteed minimum pensions
(GMPs) for members of pension schemes. This ruling requires pension funds to increase the benefits of some members of the
pension scheme.
The Group has completed an estimate of the impact of the ruling on the scheme using one of the methods identified by the High Court
(C2) for equalising GMPs. The Group has concluded that nothing further has occurred during 2019 that would cause the allowance to
be amended. Therefore, no charge has been recognised in 2019 (2018: $85,000).
The movement in liability recognised in the Group’s balance sheet is as follows:
Group defined benefit liabilities at beginning of year
Third-party Names’ share of liability
Net defined benefit liability at beginning of year
Defined benefit cost included in net income
Contribution by employer
Credit from third-party Names
Foreign exchange movements
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
Remeasurements
Return on plan assets (excluding interest income)
Foreign exchange movements
Closing fair value of scheme assets
2019
$m
35.8
(6.6)
29.2
1.0
(3.6)
(0.2)
1.7
16.5
44.6
10.5
55.1
2019
$m
266.2
7.6
3.6
(10.4)
–
32.8
11.8
311.6
2018
$m
64.1
(10.7)
53.4
2.2
(3.7)
(0.4)
(2.1)
(20.2)
29.2
6.6
35.8
2018
$m
305.5
7.6
3.7
(8.7)
(0.5)
(22.0)
(19.4)
266.2
Hiscox Ltd Report and Accounts 2019
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Chapter 1
From purpose
to performance
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Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
27 Employee retirement benefit obligations continued
A reconciliation of the present value of obligations of the scheme is as follows:
Opening present value of scheme obligations
Past service cost
Interest expense
Cash flows
Benefit payments
Remeasurements
Changes in actuarial assumptions
Foreign exchange movements
Closing present value of scheme obligations
2019
$m
302.0
–
8.6
2018
$m
369.6
0.1
9.3
(10.4)
(8.7)
52.6
13.9
366.7
(46.3)
(22.0)
302.0
Assumptions regarding future mortality experience are set based on the S2PA light tables. Reductions in future mortality rates are
allowed for by using the CMI 2017 projections (core model) with 1.25% p.a. long-term trend for improvements.
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
2019
years
27.9
29.0
2019
years
29.0
30.2
The weighted average duration of the defined benefit obligation at 31 December 2019 was 20.5 years (2018: 19.3 years).
Other principal actuarial assumptions are as follows:
Discount rate
Inflation assumption (RPI)
Inflation assumption (CPI)
Pension increases
2019
%
2.10
2.90
1.90
2.90
2018
years
27.9
28.9
2018
years
28.9
30.1
2018
%
2.90
3.10
2.10
3.10
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 nominated and employer appointed 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 Group.
The triennial valuation carried out as at 31 December 2017 resulted in a deficit position of £26.5 million ($35.8 million) on a funding
basis. The Group and the scheme’s trustees have agreed a recovery plan to reduce the deficit and to eliminate the deficit by 2024.
A funding contribution of £2.8 million ($3.6 million) was paid during 2019 and under the plan a further payment of £2.8 million
($3.6 million) will be made during 2020 and annually thereafter. The funding plan will be reviewed again following the next triennial
funding valuation which will have an effective date of 31 December 2020.
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 £11.8 million ($15.6 million) at 31 December 2019 (2018: £8.8 million ($11.2 million), and would increase the
recorded net deficit on the balance sheet by the same amounts.
The most sensitive and judgemental financial 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.
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
27 Employee retirement benefit obligations continued
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 2019 as follows:
Effect of a change in discount rate
Use of discount rate of 2.35%
Use of discount rate of 1.85%
Effect of a change in inflation
Use of RPI inflation assumption of 3.15%
Use of RPI inflation assumption of 2.65%
Present value
of unfunded
obligations
before change
in assumption
$m
Present value
of unfunded
obligations
after change
$m
(Increase)
/decrease
in obligation
recognised on
balance sheet
$m
55.1
55.1
55.1
55.1
37.2
74.4
61.5
49.2
17.9
(19.3)
(6.4)
5.9
28 Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average
number of ordinary shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
Basic
Profit for the year attributable to the owners of the Company ($m)
Weighted average number of ordinary shares (thousands)
Basic earnings per share (cents per share)
Basic earnings per share (pence per share)
*See note 2.2 for further details.
2019
48.9
284,015
17.2¢
13.5p
2018
(restated)*
117.9
283,564
41.6¢
31.2p
Diluted
Diluted earnings per share is calculated by 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 ($m)
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 (cents per share)
Diluted earnings per share (pence per share)
*See note 2.2 for further details.
2019
48.9
284,015
4,361
288,376
16.9¢
13.3p
2018
(restated)*
117.9
283,564
5,650
289,214
40.8¢
30.6p
Diluted earnings per share has been calculated after taking account of 4,067,881 (2018: 5,103,924) Performance Share Plan awards
and 293,028 (2018: 546,186) options under Save As You Earn schemes.
Hiscox Ltd Report and Accounts 2019
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Chapter 1
From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
29 Dividends paid to owners of the Company
Final dividend for the year ended:
31 December 2018 of 28.6¢ (net) per share
31 December 2017 of 19.5p or 27.2¢ (net) per share
Interim dividend for the year ended:
31 December 2019 of 13.75¢ (net) per share
31 December 2018 of 13.25¢ (net) per share
2019
$m
81.4
–
39.5
–
120.9
2018
$m
–
76.0
–
37.5
113.5
The final dividend for the year ended 31 December 2018 was either paid in cash or issued as a scrip dividend equivalent of
28.6¢ per share. The final dividend for the year ended 31 December 2018 was paid in cash of $75.2 million (2018: $71.5 million)
and 296,044 shares for the scrip dividend (2018: 263,368).
The interim dividends for 2019 and 2018 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 2019 was paid in cash of $36.4 million (2018: $35.7 million) and 157,487
shares for the scrip dividend (2018: 107,896).
From the 2018 interim dividend, dividends have been and will continue to be declared in US Dollars, aligning shareholder returns
with the primary currency in which the Group generates cash flow.
The Board has declared a final dividend of 29.6¢ per share to be paid on 10 June 2020 to shareholders registered on 15 May 2020,
taking the total ordinary dividend per share for the year to 43.35¢ (2018: 41.85¢). The dividends will be paid in Sterling unless
shareholders elect to be paid in US Dollars. The foreign exchange rates at which future dividends declared in US Dollars will be
calculated is based on the average exchange rate in the five business days prior to the scrip dividend price being determined.
On this occasion, the period will be between 26 May 2020 to 1 June 2020 inclusive.
A scrip dividend alternative will be offered to the owners of the Company.
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.
30 Contingencies and guarantees
The Group’s parent company and subsidiaries may become involved in legal proceedings, claims and litigation in the normal course of
business. The Group reviews and, in opinion of the Directors, maintains sufficient provision, capital and reserves in respect of such claims.
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 2019, HDCM held $433.4 million of investments, $40.7 million of cash and a $25.0 million Letter of Credit
in favour of Lloyd’s of London under this arrangement. At 31 December 2019, HCL held $622.4 million of investments
(2018: $571.9 million), $38.6 million of cash and a $25.0 million Letter of Credit in favour of Lloyd’s of London under
this arrangement.
(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 $800.0 million (2018: $800.0 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 2019 $50.0 million (2018: $50.0 million) was utilised by way of Letter of Credit to support the Funds at Lloyd’s
requirement and no cash drawings were outstanding (2018: $nil).
(c)
Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2018: £50,000) with NatWest Bank plc to
support its consortium activities with Lloyd’s; the arrangement is collateralised with cash of £50,000 (2018: £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 USA, 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 USA 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 $470.0 million in Letters of Credit (2018: $600.0 million).
164
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
30 Contingencies and guarantees continued
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 $150.8 million were issued with an effective date of 31 December 2019
(2018: $130.0 million on a $600 million facility) and these were collateralised by US government and corporate securities with
a fair value of $172.9 million (2018: $152.8 million). In addition, Hiscox Bermuda maintained assets in trust accounts to collateralise
obligations under various reinsurance agreements. At 31 December 2019 total cash and marketable securities with a carrying
value of approximately $9.3 million (2018: $10.7 million) was held in external trusts. Cash and marketable securities with an
approximate market value of $476.3 million (2018: $611.6 million) were held in trust in respect of internal quota share arrangements.
Additionally, in 2019, $35.9 million (2018: $24.8 million) was maintained in a trust account for credit enhancement purposes.
(f)
Hiscox SA has arranged bank guarantees with respect to their various office deposits for a total of €412,000 (2018: €249,000).
These guarantees are held with ING Bank (Belgium) €23,000 (2018:€14,000), ABN Amro (Holland) €45,000 (2018: €33,000),
HypoVereinsbank – UniCredit (Germany) €135,000 (2018: €160,000) ING Bank (Luxembourg) $42,000 (2018: €42,000) and
HSBC (Spain) €167,000 (2018: nil). As a consequence of the cross-border merger with Hiscox Europe Underwriting Limited
effective 1 January 2019, Hiscox SA have the obligations under guarantees that were previously held by Hiscox Europe
Underwriting Limited during 2018.
(g) See note 25 for a tax-related contingent liability.
31 Capital commitments and income from subleasing
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 $0.7 million (2018: $1.4 million). In addition, please refer to note 27 related to the Groups’ funding
contributions commitment to the defined benefit scheme.
Income from subleasing
Hiscox acts as a lessor and sublets excess capacity of its office space to third parties.
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
32 Principal subsidiary companies of Hiscox Ltd at 31 December 2019
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 Société Anonyme*
Hiscox Assure SAS
Direct Asia Insurance (Holdings) Pte Ltd
Direct Asia Insurance (Singapore) Pte Limited
Nature of business
Holding company
General insurance
General insurance
Holding company
Insurance holding company
General insurance
Insurance intermediary
General insurance and reinsurance
Lloyd’s corporate Name
Insurance holding company
Lloyd’s managing agent
Insurance intermediary
Service company
Reinsurance
Underwriting agent
General insurance
Insurance intermediary
Holding company
General insurance
2019
$m
0.7
0.4
1.1
2018
$m
0.7
1.1
1.8
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
Luxembourg
France
Singapore
Singapore
*Held directly.
**Hiscox Holdings Limited held 38,030 shares in Hiscox Ltd at 31 December 2019 (2018: 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.
Hiscox Ltd Report and Accounts 2019
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From purpose
to performance
1
Chapter 2
A closer look
13
Chapter 3
Governance
43
Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
101
Chapter 6
Financial summary
Notes to the consolidated
financial statements
33 Related-party transactions
Details of the remuneration of the Group’s key personnel, presented in Sterling, are shown in the annual report on remuneration 2019
on pages 68 to 81. 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 reflect the 27.4% interest (2018: 27.4%) that the Group does not
own, and 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
2019
$m
31 December
2018
*
(restated)
$m
31 December
2019
$m
31 December
2018
$m
3.3
(34.6)
5.8
31.1
5.6
9.6
(14.3)
3.5
31.6
30.4
0.5
(130.5)
(6.7)
0.4
(136.3)
6.4
(67.4)
(6.9)
10.5
(57.4)
* Following a review, the 2018 comparatives for transactions in the income statement have been restated to include Hiscox Underwriting Group Services Limited, under
other Hiscox Group companies. There is no impact on the reported Group’s balance sheet, income statement and cash flow statement.
(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 14.
2019
$m
13.7
3.6
–
51.5
2018
$m
1.5
5.1
–
41.1
(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.
34 Post balance sheet event
There are no material events that have occurred after the reporting period.
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Chapter 2
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Chapter 3
Governance
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Chapter 4
Remuneration
63
Chapter 5
Shareholder
information
95
Chapter 6
Financial summary
101
Additional performance measures (APMs)
The Group uses, throughout its financial publications,
additional performance measures (APMs) in addition to
the figures that are prepared in accordance with International
Financial Reporting Standards (IFRS). The Group believes
that these measures provide useful information to enhance
the understanding of its financial performance. These APMs
are: premium growth in local currency, combined claims and
expense ratios, return on equity, net asset value per share and
net tangible asset value per share and prior-year developments.
These are common measures used across the industry, and
allow the reader of our Annual Report and Accounts to compare
across peer companies. The APMs should be viewed as
complementary to, rather than a substitute for, the figures
prepared in accordance with IFRS.
Following the change in the functional currency at the
beginning of 2018, which has significantly reduced the
impact of foreign exchange movements to the Group’s
profit or loss, the Directors decided to stop disclosing
the profit excluding foreign exchange gains/(losses) key
performance measure. This APM is deemed as no longer
providing meaningful information.
– Premium growth in local currency
Gross premiums written, 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 that exchange fluctuations
have on the result and therefore allows a direct comparison
between years. This is performed on a business unit basis
and gives an accurate indication of premium growth
compared to prior years.
– 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 the Group owned all of the business,
including the proportion of Syndicate 33 that the Group
does not own (Group controlled income). 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 the Group to measure
all of its 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.
– Return on equity (ROE)
Use of return on equity is common within the financial
services industry, and 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 pre-2018 shared-based
payment structures. The ROE is shown in note 6, along
with an explanation of the calculation.
– Net asset value (NAV) per share and net tangible asset
value per share
The Group uses NAV per share as one of its key
performance metrics, including using the movement of
NAV per share in the calculation of the options vesting of
awards granted under Performance Share Plans (PSP)
from 2018 onwards. 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. Net
tangible asset value comprises total equity excluding
intangible assets. NAV per share and net tangible asset
value per share are shown in note 5, along with an
explanation of the calculation.
– Prior-year developments
Prior-year developments are a measure of favourable or
adverse development that existed at the prior balance
sheet date. It enables the users of the financial statements
to compare and contrast the Group’s performance relative
to peer companies. The Group maintains a prudent
approach to reserving, to help mitigate the uncertainty
within the reserve estimates. The prior-year development is
calculated as the positive or negative movement in ultimate
losses on prior accident years between the current and
prior-year balance sheet date, as shown in note 23.
Hiscox Ltd Report and Accounts 2019
167
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 (¢)
Key statistics
Basic earnings per share (¢)
Basic earnings per share (p)
Diluted earnings per share (¢)
Diluted earnings per share (p)
Combined ratio (%)
Return on equity (%)
Dividends per share (¢)
Dividends per share (p)
Share price – high† (p)
Share price – low† (p)
*See note 2.2 for further details.
†Closing mid-market prices.
The five-year summary is unaudited.
2019
$m
4,030.7
2,678.8
2,635.6
53.1
48.9
278.0
5,539.0
1,115.9
(4,707.6)
(35.6)
2,189.7
768.2
17.2
13.5
16.9
13.3
105.7
2.2
43.4
33.5
2018
(restated)
$m
*
2017
*
(restated)
$m
2016
*
(restated)
$m
2015
*
(restated)
$m
3,778.3
2,581.5
2,573.6
135.6
117.9
204.6
5,029.7
1,288.8
(4,244.9)
(19.2)
2,259.0
798.6
41.6
31.2
40.8
30.6
94.9
5.3
41.9
32.8
3,286.0
2,403.0
2,416.2
37.8
22.7
186.0
5,139.6
867.8
(4,174.4)
298.2
2,317.2
817.1
8.1
9.3
11.6
9.0
99.9
1.0
39.8
29.0
3,257.9
2,424.5
2,271.3
480.0
447.2
153.4
4,702.1
824.4
(3,778.7)
316.2
2,217.4
792.5
159.0
119.8
157.3
116.0
84.2
22.5
35.0
27.5
2,972.7
2,403.3
2,194.1
329.3
312.5
185.5
4,294.7
1,070.0
(3,689.0)
354.8
2,216.0
790.0
108.5
72.8
107.8
70.5
85.0
15.6
36.1
24.0
1,777.0
1,213.0
1,711.0
1,332.0
1,470.0
997.5
1,097.0
900.5
1,059.0
707.5
168
Hiscox Ltd Report and Accounts 2019Chapter 2 13A closer lookChapter 3 43GovernanceChapter 4 63RemunerationChapter 5 95Shareholder informationChapter 6 101Financial summaryChapter 1 1From purpose to performance Designed by Em-Project Limited
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the insurance sector; the impact
of changes in capital, solvency
standards or accounting standards
or relevant regulatory frameworks,
and tax and other legislation and
regulations in the jurisdictions
in which Hiscox operates; and
the impact of legal actions and
disputes. These and other important
factors could result in changes to
assumptions used for determining
Hiscox results and other key
performance indicators.
Hiscox therefore expressly
disclaims any obligation to update
any forward-looking statements
contained in this document,
except as required pursuant to
the Bermuda Companies Act,
the UK Listing Rules, the UK
Disclosure Guidance and
Transparency Rules or other
applicable laws and regulations.
Disclaimer
This document contains
forward-looking statements
regarding plans, goals and
expectations relating to the
Group’s future financial condition,
performance, results, strategy
or objectives, which by their very
nature involve risk and uncertainty.
Statements that are not historical
facts are based on Hiscox’s beliefs
and expectations. These include
but are not limited to statements
containing the words ‘may’,
‘will’, ‘should’, ‘continue’, ‘aims’,
‘estimates’, ‘projects’, ‘believes’,
‘intends’, ‘expects’, ‘plans’, ‘seeks’
and words of similar meaning.
These statements are based
on current plans, estimates and
projections as at the time they are
made and therefore undue reliance
should not be placed on them.
A number of factors could cause
Hiscox’s actual future financial
condition, performance or other
key performance indicators
to differ materially from those
discussed in any forward-looking
statement. These factors include
but are not limited to future market
conditions; the policies and actions
of regulatory authorities; the impact
of competition, economic growth,
inflation, and deflation; the impact
and other uncertainties of future
acquisitions or combinations within
Hiscox Ltd
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96 Pitts Bay Road
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Bermuda
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www.hiscoxgroup.com
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