HISCOX LTD Hiscox Ltd
Ownership means making it your business..
Why ownership is so important to us
Taking ownership means making it your business. It means being passionate, curious and restless, always looking for a better way of doing things. We strive to be the kind of people who take responsibility, are ambitious, accountable, pragmatic, tenacious and proudly high-achieving.
In a growing business like ours, taking initiative is something we expect of everyone, regardless of their role.
It shows itself in a willingness to speak up, to confront problems, to avoid easy excuses, and to embrace hard work.
These are qualities we have always valued and nurtured. But in 2020, Covid-19 meant that instinct to step up and take ownership was more vital than ever before.
It is in difficult times that our values are tested, but it is also in difficult times that they prove the greatest guide. Throughout this report, you will find some examples of how we showed ownership in 2020.
Hiscox is a diversified international insurance group with a powerful brand, strong balance sheet and plenty of room to grow.
We are headquartered in Bermuda, listed on the London Stock Exchange, and currently have over 3,000 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.
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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.
107 Owning our contributions to the local community
108 Directors' report
111 Directors' responsibilities statement
111 Advisors
113 Owning our adoption of big-ticket digital trading
114 Independent auditor's report
122 Consolidated income statement
122 Consolidated statement of comprehensive income
123 Consolidated balance sheet
124 Consolidated statement of changes in equity
125 Consolidated statement of cash flows
126 Notes to the consolidated financial statements
187 Additional performance measures (APMs)
188 Five-year summary
Showing ownership in claims
Among the many life-changing impacts of Covid-19, a postponed concert, deferred sports event or cancelled flight may seem trivial. But for businesses that rely on events for revenue, or individuals unable to return home or be reunited with family members, these cancellations can be devastating. Travel disruption was one of the earliest impacts of Covid-19, and required immediate ownership from our claims teams. In the first month of the UK lockdown, we processed over 200 travel claims, including repatriation costs for customers who were abroad when the Foreign & Commonwealth Office advised all British nationals to return home immediately.
Travel bans and restrictions were soon followed by event cancellations. Our UK team worked with small- to medium-sized businesses to provide support and find solutions. One example was Motorcycle Live 2020, a Birmingham-based show representing the best of the British motorcycle industry. With a global audience, cancelling the November show was not taken lightly, but as a result of our prompt claims resolution they were able to make an announcement in June, provide significant notice for attendees, and shift their efforts to promoting the 2021 event.
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A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Our key performance indicators (KPIs)
The global pandemic impacted on profitability in 2020, but digitisation and exceptional commitment from our employees helped to deliver good underlying performance and our usual service levels.
Financial KPIs
Gross premiums written $4,033.1m 2020 2019 2018 2017 2016 4,033.1 4,030.7 3,778.3 3,286.0 3,257.9 | Net premiums earned $2,752.2m 2020 2019 2018 2017 2016 2,752.2 2,635.6 2,573.6 2,416.2 2,271.3 | (Loss)/profit before tax $(268.5)m 2020 2019 2018 2017 2016 (268.5) 53.1 135.6 37.8 480.0 |
Combined ratio 114.5% 2020 2019 2018 2017 2016 114.5 106.8 94.4 98.8 90.6 | Basic (loss)/earnings per share (91.6)¢ 2020 2019 2018 2017 2016 (91.6) 17.2 41.68.1 159.0 | Ordinary dividend 0.0¢ 2020 2019 2018 2017 2016 0.0 13.8 41.9 39.8 35.0 |
Net asset value per share 689.0¢ 2020 2019 2018 2017 2016 689.0 768.2 798.6 817.1 792.5 | Tangible net asset value per share 601.5¢ 2020 2019 2018 2017 2016 601.5 670.6 726.2 751.5 737.7 | Return on equity (11.8)% 2020 2019 2018 2017 2016 (11.8) 2.2 5.31.0 22.5 |
A balanced business Our key performance indicators (KPIs)
UK gender pay gap 21.2% As a UK company with 250 or more employees, we are required to disclose our gender pay gap for UK employees, which we have done since 2017. Improving diversity and inclusion at Hiscox is a high priority, and we continue to focus on finding ways to reduce our gender pay gap. 2020 2019 2018 2017 21.2% 26.1% 28.8% 31.1% Data only available from 2017. | London Market broker satisfaction 69% 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. 2020 2019 2018 2017 2016 69% 78% 76% 66% 76% | UK customer satisfaction 92% 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. 2020 2019 2018 2017 92% 89% 90% 90% Data only available from 2017. |
Employee engagement 68% 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 heavily influence our people strategy. 2020 2019 2018 2017 2016 68% 71% 74% 77% 78% | UK claims net promoter score 72 We measure and monitor the satisfaction of our customers at critical points during the policyholder journey, and especially in the event of making a claim. Our UK claims net promoter score is based on customers' responses as to the likelihood they would recommend Hiscox following a claims experience with us, on a scale where ten is very likely and zero is unlikely, and we are pleased with the stability of these scores over time. 2020 2019 2018 2017 72 75 76 67 Data only available from 2017. | US customer reviews using Feefo 4.8/5 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. 2020 2019 2018 2017 2016 4.8 4.8 4.7 4.7 4.8 |
Our response to Covid-19
Coronavirus affected us all in 2020 and as the situation evolves, so has our response. Our efforts are focused on four key areas; our customers, our employees, our operations, and our contribution to the communities in which we live and work.
"Hiscox extended my travel cover free of charge while
I was stranded abroad and trying to get back to the UK. Your quick response and high level of communication helped ease an extremely stressful situation."
Set up dedicated Covid-19 claims telephone lines, as well as an online claims portal to process and pay business insurance claims as quickly as possible.
Extended cover in some lines such as home and motor, provided premium refunds for event insurance customers, waived 30-day cancellation periods for commercial insurance policyholders, and offered a range of financial concessions including payment holidays.
Provided new ways to quote, negotiate, bind and endorse within our London Market business, with over 90% of risks bound online using the Lloyd's Placing Platform Limited (PPL) during the third quarter of 2020.
Took a 'pay it forward' approach to contract staff and suppliers by continuing to pay them during national and local lockdowns and office closures.
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Participated in an insurance industry test case with seven other insurers to provide clarity and certainty on the business interruption cover available to customers as quickly as possible.
"The mental health training made you reflect about your own well-being, as well as the well-being of your team, and gave me tools that I can have confidence will work."
IT home-working tips, additional training and drop-in sessions quickly upskilled employees on safe and secure remote working - from setting up new devices to using new tools for video conferencing and staying connected.
Delivered mental health training to over 1,000 employees and provided access to over 30 webinars led by mental health experts on topics such as sleep, resilience, home-schooling and living alone.
A balanced business Our response to Covid-19
"Being in the business of risk means managing claims surges. Whether those surges are the result of a flood, a hurricane, or as we saw this year, a global pandemic, we have established and repeatable structures and processes for handling claims during large loss events."
Grace Hanson Chief Claims Officer
Redeployed 27 employees to provide additional frontline support to ensure we could continue to effectively serve our customers at a time of increased demand.
Set up small and focused working groups to cover very specific operational elements, including return to office working groups and future ways of working teams.
Additional Board meetings were held during the year, covering specific topics such as the approval of May's capital raise, the Company's response to Covid-19 and the insurance industry test case.
"We began preparing our IT systems in January 2020 for the potential transition from our usual c.600 remote workers per week to over 3,000, and it paid off - with little to no systems downtime."
Established four distinct workstreams, led by Executive Committee members, to manage our response, focused on operating effectively, underwriting exposure and customer service through claims, financial flexibility and resilience, and working with regulators and governments.
Led the Bermuda reinsurance market in supporting the Bermuda Education Network by providing computers for home-schooling for over 300 children, and in raising more than $550,000 for Bermuda's King Edward VII hospital.
Enabled 630 meals to be delivered to isolated elderly New Yorkers, 91,300 meals for Londoners facing food poverty and almost 10,000 meals for hard-working NHS staff.
Founding supporter of the ABI's Covid-19 Support Fund, the largest UK non-government fundraise to date, with over £100 million in voluntary contributions from the insurance and long-term savings industry pledged so far.
Established new partnerships with organisations that aim to improve SME access to funding and critical business resources, including Business in the Community in the UK and The Women's Business Development Center in the USA.
Set up a 'donate your commute' initiative to encourage employees to use their commuting time to work to practically support a cause close to their heart.
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A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Our purpose, values, culture and vision
We have had a strong set of values for decades which, along with our purpose, culture and vision, connect us to the business, our customers and each other.
We periodically review our purpose, values, culture and vision to ensure they are still true to the business and fit for the future. Our values are incredibly important to us; we are guided by them and we work hard to make sure they are lived, not paid lip service to. By doing so, we become a business that our customers can relate to, and we provide employees with a work environment in which they can flourish. In our 2020 annual global employee engagement survey, which was completed by almost 2,500 employees, 90% said they believe in our corporate values, 83% said employees are treated fairly regardless of disability, age or professional background, and 77% said they felt proud to work for Hiscox.
Our purpose
As experts in risk, we give people and businesses the confidence to realise their ambitions.
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.
A balanced business Our purpose, values, culture and vision
"I have worked at Hiscox for almost 20 years, and in all of the roles I have held - from Hiscox UK to Group functions, in claims, underwriting or operations -
I have felt a strong and consistent culture. Our values are our common lexicon, no matter which part of the business you work in. They are lived and breathed, they are talked about often, and they inform decision-making at every level."
Joanne Musselle
Group Chief Underwriting Officer
Our culture
We work hard to nurture our culture, and it is something we regularly measure and monitor to ensure we keep it alive. In 2020, we began designing new office space with our distinctive culture in mind and embodying our values of ownership, connected and human. Examples of this from our Bermuda and London offices can be seen in the images to the right. We are also establishing exciting new ways of working that balance both flexibility and collaboration and support our desire to attract and retain the best talent.
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.
Read more about how we measure and monitor culture.
Our strategy and how we operate
Our long-held strategy has delivered throughout the insurance cycle. Central to this is a simple business model.
A strategy of balance
Hiscox's long-held strategy ensures we are not overly reliant on any one of our divisions for the Group's overall profits. We maintain a balance between big-ticket business - the larger premium, globally traded and catastrophe-exposed lines written through Hiscox London Market and Hiscox Re & ILS - and the smaller premium, locally traded, relatively less volatile business written through Hiscox Retail. In our big-ticket businesses, we shrink and expand according to the pricing environment. In retail, where our specialist knowledge differentiates us, we target growth of 5-15% per annum and invest in brand-building to continually strengthen our market position.
View a breakdown of our big-ticket and retail business for 2020.
A truly international 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 3,000 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.
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.
A balanced business Our strategy and how we operate
"I have admired Hiscox for 20 years as both a reinsurance partner and a competitor. For me, Hiscox is synonymous with underwriting acumen and product innovation, and its brand is iconic in our industry. The selection process was refreshingly clear and with a candour that you don't often find, which really appealed to me. I am joining at an exciting moment - not only in the Company's growth, but also as conditions in the reinsurance market improve and new opportunities present themselves."
Kathleen Reardon
Chief Executive Officer, Hiscox Re & ILS
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 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.
Read more about our stakeholder engagement.
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Key risks and business priorities
As an insurance business, understanding and managing risk is part of our DNA. This is how we will balance risk and opportunity in 2021.
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 for the risk exposed, 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. | 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. Credit risk The risk of a reinsurance counterparty being subject to a default or downgrade, or that for any other reason they may renege on a reinsurance contract or alter the terms of an agreement. The Group buys reinsurance as a protection, but if our reinsurers do not 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. Liquidity risk This relates to the risk of the Group being unable to meet cash requirements from available resources within the appropriate or required timescales, such as being |
unable to pay liabilities to customers or other creditors when they fall due. It could result in high costs in selling assets or raising money quickly in order to meet our obligations, with the potential to have a material adverse effect on the Group's financial condition and cash flows.
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 data. Operational risk also covers the potential for financial losses, information and cyber security risks which have implications from a legal, regulatory, reputational or customer perspective, 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
of our 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.
Read more on how we manage key risks in note 3.
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A balanced business Key risks and business priorities
"The past year has only accelerated the pace at which the insurance market is going digital, and Hiscox is uniquely placed to seize the moment. Our multi-year technology investments have given us the tools to deliver superb digital experiences for customers, brokers, partners, and employees alike. The opportunity is huge."
Ben Walter
Chief Executive Officer, Hiscox Retail
In 2021, we will build on last year's progress in optimising our underwriting portfolios and improving loss ratio performance through a continued focus on active portfolio management. This means addressing poor-performing lines, investing in top quartile business and taking decisive action when needed. We will examine where we can simplify underwriting processes, products and services; boost existing product and pricing controls; and formalise the flow of data and insight between underwriting, claims and actuarial.
Read more on performance against our 2020 business priorities.
We are becoming a more digital business, having invested $500 million in technology over the last five years. In 2021, we will look to realise these efficiencies in order to seize the significant digital opportunity ahead, and begin our claims transformation journey. We will also focus on rigour in execution; rebalancing our global versus local capabilities to ensure we have the right knowledge in the right place, embedding consistent and repeatable processes, and pooling resources to benefit from our growing scale. This will result in some simplification within the business to improve the speed of decision-making and delivery. | After a year of lockdowns and home-working, 2021 is about unleashing potential and investing in talent. This will include embedding new working styles and supporting policies that balance the ability to work remotely with the culture, collaboration and energy of our office environments. It will also mean establishing robust plans in every part of the business for developing talent, more talent sharing across the Group, and focusing on our diversity as well as our succession pipeline at all levels. |
Why invest in Hiscox?
A balanced business which provides opportunities throughout the insurance cycle.
A focus on creating sustainable and compounding shareholder returns We aim to achieve this by balancing consistent capital returns to our shareholders with reinvesting excess capital into our business to ensure sustainable growth in the medium to long term. The challenging operating environment over the past 12 months has resulted in the Board's decision to suspend dividend payments. However, the Board believes that as our business delivers the 2021 business plan and as profits flow through, it may be in a position to consider paying a dividend with the 2021 interim results.
A balanced business achieving sustainable growth
By running a well-balanced business, underpinned by a clear set of values and characterised by a disciplined approach to underwriting, our aim is to consistently grow the business in a way that is organic, sustainable and profitable. Covid-19 presented some unique challenges in 2020, but as the chart opposite shows, over the past 28 years the Group's controlled income has broadly risen in a steady manner, despite the industry's innate volatility. That growth has been fuelled by progress across all our divisions and regions.
Total Group controlled income ($m)
Big-ticket businessHiscox Re & ILSHiscox London Market
Retail business
Hiscox UKHiscox EuropeHiscox Special RisksHiscox USA
Hiscox Asia
*Hiscox Retail includes $1.5m GWP of fully reinsured run-off portfolios.
A balanced business Why invest in Hiscox?
"We are an A-rated, well capitalised business, with the financial flexibility, operational strength and talent to drive sustainable long-term growth. In our Retail businesses, our established digital platforms are benefiting from the global shift to digital. In our big-ticket lines, our expertise and underwriting discipline positions us well as the rating environment improves."
Aki Hussain
Group Chief Financial Officer
Owning our understanding of the cyber risk
The cyber risk landscape is constantly changing, as new risks appear and known risks evolve, but it is vital that we stay ahead in this area. That means taking ownership of developing technical abilities and responding to industry trends. The Hiscox Technical Cyber Training Programme, which launched this year with industry-leading cyber security qualifications CompTIA Security+ and CompTIA Pentest+, ensures a consistent and repeatable approach to underwriter cyber training. This training, along with our cyber efforts around the world, are coordinated by our CyberClear Centre, which provides cyber-related education and advisory services to our cyber teams in every business unit, enabling them to deliver real-time information and external insights to our brokers and customers.
The Hiscox Cyber Insight Dashboard is an example of this melding of information and insight, as it combines third-party cyber security ratings with our own claims data analysis to create a profile of a business's cyber exposure. As well as allowing our underwriters to get a valuable overview of what could be a complicated risk and make informed pricing decisions, it also gives brokers and customers a unique insight into their cyber risk.
Chairman's statement
2020 got off to a good start and then came the global pandemic. Over my 48 years in the business, I have experienced most of the challenges
The pandemic has also affected the way we work and how we interact with each other. In the field of business processing, our response to the pandemic has significantly accelerated our digital progress. For example, in 2020 our London Market business bound over 90% of its business digitally, which is a phenomenal change in the way business is written in the market. Our investment in IT systems and the superb dedication of all our employees meant that the transition to working from home was almost seamless. We all long for a return to more normal working but it is unlikely we will return to exactly the way it was.
Gross written premiums are stable at $4,033.1 million (2019: $4,030.7 million) and the combined ratio increased to 114.5% (2019: 106.8%). Excluding Covid-19 the combined ratio decreased to 97.0% (2019: 106.8%).
Our long-term strategy has been to build a balanced book of business. We have grown our small-ticket Retail business in the UK, Europe, USA and Asia to balance the big-ticket London Market and Re & ILS businesses written through Lloyd's and in Bermuda. We have seen strong profitable growth in Hiscox London Market as rates continue to surge ahead in the wholesale markets. Disciplined underwriting over the lastthat Mother Nature and mankind have three years as we weeded out underperforming business
thrown at the insurance industry, but Covid-19 and its repercussions have been one of the most testing. As a result, we expect to pay $475 million in Covid-related claims net of reinsurance, the majority for event cancellation and the remaining for business interruption and other claims. These are large sums and disappointingly means that we will make a pre-tax loss for the year of $268 million. Without Covid-19 we would have produced a profit of $207 million.
has meant that we are very well placed to take advantage of the improving conditions. In Retail, Hiscox Europe and the US direct and partnerships business, in particular, had good results, notwithstanding the pandemic.
In all segments we have benefited from our multi-year investment in new technology and digital tools. These include new underwriting platforms, quote and buy systems, robotics and APIs to connect us with business partners. Global lockdowns have accelerated our customers' adoption of online systems and this has driven a good underlying performance in Hiscox Retail which delivered growth of 3%. Customer numbers in our Retail business have grown by 10% to 1.3 million over the period.
For Hiscox UK, Covid-19 brought about a dispute with a number of our customers over the wording in some commercial property policies. Our commitment to putting things right for our customers has long been the cornerstone of the Hiscox brand. But for the first time, our reputation for paying claims quickly and without fuss came under intense scrutiny. We regret any dispute with a customer, but particularly where
the policy wording was not as clear as it should have been. That is why we willingly agreed to be one of the group of insurers that assisted the FCA with the test case and we welcome the finality and certainty the Supreme Court Judgment has brought. We are now paying covered claims as quickly as possible.
In the face of unprecedented economic uncertainty, prudent capital management is critical to ensure we are able to continue to serve our customers, pay valid claims and grow where opportunity permits. We have taken a range of proactive actions, both before the onset of the pandemic and since, to further strengthen Hiscox's robust balance sheet and position us for growth.
In our first quarter 2020 trading statement, we announced an equity placing for up to 19.99% of our issued share capital to support growth opportunities and rate improvements in the US wholesale and reinsurance markets. This placement was successful and we raised £375 million. I would like to thank our shareholders for their support during a challenging time.
In April, we announced the decision not to pay the 2019 final dividend and that the Group would not propose an interim dividend payment. The Board has also decided not to declare a final dividend for 2020. The decision was not taken lightly by the Board, who are acutely aware of the importance of dividends as a source of income for our shareholders, including private shareholders many of whom own shares through pension funds. The Executive Directors will not be taking any cash bonuses until the dividend is reinstated. The Board believes that as our business delivers the 2021 business plan and as profits flow through, it intends, subject to Board approval, to resume paying dividends with the 2021 interim results.
The Group remains strongly capitalised against both our regulatory and rating agency requirements, and we are able to withstand a combination of severe downside scenarios including an active hurricane season.
People
Without the resilience of our 3,000 employees across the globe, we would not have overcome this challenging year. I would like to take this opportunity to thank everyone for their dedication, flexibility and, most of all, their hard work.
Over the years, we have employed some of the best minds in the industry, but like any business we must work hard to continue to attract and retain good people. I am immensely proud that in 2020 we welcomed over 300 new talented and ambitious individuals across the Group. Starting a new job during lockdown cannot be easy, and we have found new ways to welcome them.
"Disciplined underwriting over the last three years as we weeded out underperforming business has meant that we are very well placed to take advantage of the improving conditions."
One of our recent senior joiners has been Kathleen Reardon, our new Hiscox Re & ILS CEO. Kathleen has spent the last six years as CEO of Hamilton Re, where she built a reinsurance business from the ground up. She replaces Mike Krefta, who made an immense contribution to Hiscox during his 17-year tenure, most recently developing our ESG framework. We look forward to benefiting from Kathleen's depth of knowledge and presence in global reinsurance, and her experience of building businesses through the reinsurance cycle.
Diversity and inclusion
We are committed to creating a diverse and inclusive workplace and an environment where all employees are supported and can thrive. Under the leadership of
Kate Markham, Hiscox London Market CEO and Group Executive Sponsor for D&I, we are improving the gender balance at all levels through a combination of key performance indicators, training, networking, mentorship and partnerships such as the Insurance Supper Club and the Independent Women in Insurance Network. This progress is reflected in our improved gender pay gap for the UK, and more diverse succession pipelines with at least one female successor for every leadership team role.
This work will continue in 2021, along with a sharpened focus on ethnicity and race as we look to make further progress against the action plans put in place this year in support of the #WeStandTogether movement.
Culture and values
We have been on the defensive in 2020 as our values have been tested and the trust we have painstakingly built over many years between us and our customers has been challenged to our dismay. It has been a particularly tough year, but during times like these we have to dig deep, go back to our core values, recognise where we need to improve and learn from the past.
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A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
"In all segments we have benefited from our multi-year investment in new technology and digital tools, including new underwriting platforms, quote and buy systems, robotics and APIs."
Last year we shared the outputs of our most recent culture review; our refreshed values of courage, ownership, integrity, connectedness and being human. This year I was pleased to see them become embedded in our business and being lived. As it turned out, the timing of this exercise was fortuitous, and during a year of remote working at our kitchen tables and home offices, it is our values that have served as a golden thread throughout the Company.
Outlook
The challenges of a global pandemic have not withered the green shoots of a hardening market. Rates are rising across all three of our business areas, and the market is turning. Together with our multi-year investments in technology and digital tools, we have the infrastructure, talent and financial firepower to realise the significant opportunities ahead.
We can look forward with confidence as some normality returns globally in 2021 and we continue to focus on providing excellent service during these difficult times in all our markets.
Robert Childs 3 March 2021
Chief Executive's report
2020 is a year few of us will forget as we all adapted to the impact of Covid-19 on our societies, our businesses and our lives. Adaptability and resilience were core to weathering the storm and few of us are untouched by the human tragedies it has caused.
Like many others, Hiscox adjusted well to the challenges of working from home, operating effectively to serve our customers and brokers, and contributing to our local communities. We established new partnerships to increase small business access to essential services and funding in both the UK and the USA, and supported a number of charitable endeavours - donating over $9 million to good causes around the world. These included foodbanks, mental health and well-being charities, hospitals, and the Association of British Insurers' Covid-19 Support Fund. Our ability to do all of this was due to the hard work and dedication of our staff, who were all the while dealing with their own personal Covid-19 challenges. I would like to thank them all for their tremendous efforts this year.
In 2020, Hiscox reported a pre-tax loss of $268.5 million (2019: profit of $53.1 million). The Group combined ratio was 114.5% (2019: 106.8%). Excluding the impact of Covid-19 claims, Hiscox's combined ratio was 97.0%, reflecting the underlying improvement in performance in many parts of the Group and the benefit of circa $80 million in expense savings.
Against a backdrop of sharp economic contraction across the markets in which we operate, the Group has maintained its revenues at $4.0 billion. Hiscox London Market has had a stellar year, growing its revenues by 5.7% to $1.0 billion, delivering a 93.7% combined ratio and profits of $97.2 million. Hiscox Retail grew by 3.2% to $2.3 billion and, excluding Covid-19 claims, delivered a combined ratio, within our guidance, of 97.7% and profits of $162 million. Including Covid-19, Hiscox Retail's combined ratio is 120.0% and it made a pre-tax loss of $237.6 million. Our direct and partnerships business across the world grew by 15% with total revenues approaching $600 million as we benefited from the ongoing structural shift to digital. Hiscox UK maintained its revenues at $756.1 million. The good performance in these segments offset the reduction in revenue in Hiscox Re & ILS as it showed discipline at last January's renewals, before benefiting from price rises in the rest of the year.
Hiscox's 2020 performance, while understandable, is not satisfactory. We have worked hard to address underperforming segments in our business through our Decile 10 action plans, and equally to grow our top-performing lines through our quartile 1 focus. The performance of Hiscox London Market shows the positive impact of these plans.
"To adapt to changing demands we created a talent exchange which saw a number of colleagues moving to new roles, temporarily or permanently, particularly to support our frontline."
As we look into 2021, we see two trends which will benefit Hiscox. The first is the dramatic digital acceleration which will benefit our direct and partnerships business, as well as our London Market business where we bound over 90% of our risks through Lloyd's PPL platform in 2020 and already trade $75 million through digital means with brokers and coverholders not located in London. The second is the rating environment that will drive strong return to profit by our London Market and Re & ILS businesses. This, in turn, will allow us to drive growth in our Retail division, making use of the inherent strength of our balanced business. It is this strategy that will position Hiscox to benefit from the generational shift to digital trading. This will allow us to serve more customers more effectively and the whole of Hiscox to prosper.
Global pandemic
As the pandemic spread across the countries in which we operate, we rapidly shifted to different ways of working. Our Chief Information Officer described it as instantly going from 35 offices to over 3,000. It was a smooth transition made simpler by past IT investments and the willingness of all staff to adapt, juggling roles as parents, carers and volunteers alongside their work. We committed to our staff that no one would leave the business in 2020 due to the economic impact of the pandemic. To adapt to changing demands we created a talent exchange which saw a number of colleagues moving to new roles, temporarily or permanently, particularly to support our frontline.
Paying claims in a fair and fast manner is part of our DNA. We have reserved $475 million for Covid-19 claims across all lines. Claims teams across the Group mobilised and delivered for our clients. The Group's largest share of Covid-19 losses is for event cancellation and abandonment, where Hiscox proactively sold communicable disease cover, and many of these claims have already been paid.
The Group's second largest share of Covid-19 claims is from UK business interruption cover in commercial property policies. Unsatisfactorily for both our policyholders and ourselves, there was disagreement over whether the Hiscox policy wordings responded to the steps taken by the UK government to manage Covid-19. Our claims paying philosophy is deep-rooted: to pay claims quickly, fairly and in line with the intention of the policy. The underwriting intention of these property policies is to respond to local events affecting a firm's premises and not to nationwide steps taken to managethe pandemic. When a claims decision is challenged it is the wording which determines the coverage in law, and there was room to question whether the Hiscox wording reflected this underwriting intent. We, of course, regret the impact of this disagreement on affected policyholders, and the adverse publicity we received as a result of it has been difficult for all of our stakeholders.
Similar disagreements occurred across the industry, and the Financial Conduct Authority recognised this by bringing an expedited industry test case before the UK courts on behalf of policyholders. Their ambition was to bring clarity to approximately 370,000 policies with over 50 insurers which were subject to dispute. In May, we agreed to participate in the industry test case process, along with seven other insurers and two customer action groups.
After the High Court decision in September, all parties involved had the option to appeal some or all of the Judgment to a higher court. Although Hiscox was ready to implement the High Court Judgment, once others appealed, we felt we had no option but to appeal and participate in the Supreme Court Hearing.
In January 2021, the Supreme Court Judgment largely confirmed the outcome of the High Court's ruling in respect of Hiscox that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed. Approximately one third of Hiscox's 34,000 UK business interruption policies may respond as a result. The Supreme Court Judgment represents the final outcome of the industry test case, and there can be no further appeals. A process that would normally take a number of years was completed within nine months; almost lightning speed for any legal process of this complexity. We have begun paying claims in line with the Supreme Court Judgment. We have increased our claims handling capacity and the process of collecting information from customers who have cover and settling their claims is well under way.
Hiscox's exposure to potential business interruption claims arising from further UK government restrictions to contain the spread of Covid-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be largely run off by the end of June 2021. Following the Supreme Court Judgment, the Group estimates exposure to restrictions already announced in 2021 to be less than $40 million if restrictions extend to the end of June.
An actively managed business mix
Total Group controlled premium 31 December 2020: $4,532 million (Period-on-period in constant currency) 2020 GWP
Small commercialReinsuranceProperty
Art and private clientSpecialty
Global casualtyMarine and energy
+3%" $1,627m
Professional liability Errors and omissions
Private directors and officers' liability
Cyber
Commercial small package
Small technology and media
Healthcare related
Media and entertainment
-14%
$845m
Property Marine Aviation Casualty Specialty
-6%
$540m
Commercial property
Onshore energy USA homeowners Flood programmes
Managing general agents
International property
-1%
$456m
Home and contents Fine art
Classic car Luxury motor Asian motor
-2%
$441m
Kidnap and ransom Contingency Terrorism Product recall Personal accident
$290m
+21%"
$333m
Public directors and officers' liability
Large cyber General liability
+27%"
Cargo Marine hull Energy liability Offshore energy Marine liability
Hiscox Retail
2020 $m
2019 $m
Gross premiums written Net premiums written Underwriting profit Investment result Profit before tax Combined ratio (%)
† See note 4 to the financial statements.
2,266.3 | 2,196.3 |
1,986.8 | 1,957.5 |
(343.6) | 36.5† |
107.3 | 133.9 |
(237.6) | 169.2† |
120.0 | 99.3† |
We clearly regret the uncertainty and anguish that the dispute has caused to our customers, so it is important that we learn from this experience. The most important lesson is the need for clarity in wordings, to ensure intent is properly reflected in the policy detail. In addition, the customisation of policies has to be restricted to ensure that there is not a long tail of wordings serving very small numbers of customers. In 2021, we have commenced a series of initiatives aimed at addressing these issues.
Hiscox has undoubtedly suffered some brand damage this year. While I was reassured that net customer numbers in the UK remained stable in 2020, the route to restoring our brand is the same one which created it; providing flexible insurance cover to meet each customer's needs, paying each claim fairly and quickly, and doing this all with good customer service. Our reputation was built one risk, one claim, and one customer at a time, and with that same focus, in time, the brand will strengthen.
Hiscox Retail
Hiscox Retail comprises our retail businesses around the world: Hiscox UK, Hiscox Europe, Hiscox USA, Hiscox Special Risks and Hiscox Asia. In this segment, our specialist knowledge and retail products differentiate us and our ongoing investment in brand, distribution and technology helps us build a strong market position in an increasingly digital world.
Hiscox Retail wrote $2.3 billion of premiums globally in 2020, representing more than half of our Group's gross premiums and almost three-quarters net of reinsurance. In the face of extremely challenging operating conditions, our Retail business grew its top line by 3.2% and delivered growth in four of its five business units even as the pandemic spread across the globe and caused economic havoc.
Hiscox Retail's 2020 result is a loss of $237.6 million
(2019: profit of $169.2 million) and a combined ratio of 120.0% (2019: 99.3%). This result has been materially impacted by Covid-19. Excluding the impact of Covid-19 claims, Hiscox Retail delivered profits of $162 million, the combined ratio is at 97.7%, which is in line with our guidance.
At the end of 2020 and in 2021, we are making two changes to improve the focus of Hiscox Retail. In late 2020, we restructured our Special Risks division, integrating its activities with Hiscox Europe, Hiscox USA and HiscoxLondon Market. As a result, in 2021, $100 million of Special Risks premium income from Retail will be reported within Hiscox London Market.
Over the past five years the digitally traded direct and partnerships segment has grown to be an increasing and more attractive part of Hiscox USA's business and it is where we see long-term growth opportunity. To accelerate this strategic shift, we have taken a decision to reshape our broker channel book, by exiting liability business for customers with revenues over $100 million as well as all broker channel stand-alone general liability business. We will also reshape our cyber book to respond to adverse ransomware trends. These actions will result in a reduction of up to $100 million in the USA broker channel which will be partially offset by continued strong growth in digital direct and partnerships business.
The combined effect of these changes will result in a one-time circa $200 million reduction in Retail premiums. In addition, these changes together with more cautious loss picks adopted for 2021 to reflect the uncertain economic environment, and the inevitable time taken to address fixed costs as a result of this premium reduction, will mean our goal of reaching 90% to 95% Retail combined operating ratio range is expected to take to 2023. For 2021, we expect the Hiscox Retail combined ratio to be broadly in line with the 2020 result, excluding Covid-19 claims. We then expect an improving trajectory to 2023 as higher rates are recognised and the portfolio and expense management actions start to earn through.
The outlook for our Retail business is good and we are beginning to enjoy some positive rate momentum. We anticipate that 2021 Retail gross premiums will grow at the low end of our medium-term target range of 5%-15% on a like-for-like basis after allowing for $200 million reduction in premiums. Thereafter the business is expected to return to a high single digits growth expectation as our direct and partnerships business becomes a bigger contributor to the top line. One of the accelerating trends during the pandemic has been the shift to digital. Approaching $600 million of our 2020 Retail revenues came from our digitally traded direct and partnerships businesses, which now serves over 800,000 customers globally. Continuing historical growth trends, this business grew by 15% in 2020 with considerable room to grow further into an estimated 50 million target market of small, micro and nano businesses. We see this as a long-term opportunity for future growth and value creation.
"Approaching $600 million of our 2020 Retail revenues came from our digitally traded direct and partnerships businesses, which now serves over 800,000 customers globally."
Hiscox UK
Hiscox UK provides commercial insurance for small- and medium-sized businesses, media, events and entertainment as well as high net worth personal lines, fine art and luxury motor.
Hiscox UK delivered a resilient performance in 2020. Gross premiums written grew by 1.3% to $756.1 million (2019: $746.4 million), which is a good performance given the challenges of 2020.
Hiscox UK's commercial business, both direct and through the broker channel, has been the key driver of this performance. The business had strong growth in the first two months of the year, despite the headwinds caused by the IR35 tax changes which affect our direct commercial client base. We shrank between March and June due to the reduced level of business activity during the first lockdown. As the economy started to re-open over the summer period, we saw signs of recovery in July and August which has continued, and our direct commercial business had some of the strongest months in its history in November and December.
Our high net worth personal lines and fine art business has proven resilient. Revenues have been challenged as the team showed discipline on broker commissions. We also faced losses from Storms Dennis and Ciara in February as well as a large, individual fine art loss. We simplified our business by selling RH Specialist vehicle insurance as the cross-sell opportunities were fewer than expected. Our media, entertainment and events lines have faced real challenges; not only due to pandemic-related losses, but also as a result of dwindling media production and events activity.
We have modest growth ambitions for the year ahead given the broader economic uncertainties. We expect to see continued headwinds from the implementation of IR35 in April and ongoing subdued activity in media and events. Offsetting this will be growth in new start-ups, either voluntary or forced, which is a pattern we have seen in previous tough economic conditions. We remain convinced that this entrepreneurial activity and the shift to digital will power Hiscox UK's medium-term growth ambitions.
In 2021, we will focus on service quality, operational efficiency through automation and simplification, reviewing our policy wordings, and investing in our broker relationships.
Hiscox Europe
Hiscox Europe insures high-value household, fine art and classic cars and commercial insurance for small- and medium-sized businesses.
The business delivered a strong performance, growing gross premiums by 9.5% to $447.1 million (2019: $408.4 million), against the reduction in economic activity across European markets as the pandemic hampered growth. It was profitable after providing for the Covid-19 losses it faced.
Germany remains the key engine of Hiscox Europe. Our German business was the largest contributor to premiums in the region and delivered very healthy growth of 15%, thanks to a strong performance in commercial lines, technology and cyber. Benelux also delivered strong double-digit growth, supported by a strong performance in Belgium, which grew 16%.
Our operations in France have undergone a major transformation over the last two years. To improve underwriting performance, particularly in high-value household and commercial property, we have exited some unprofitable lines in the portfolio. This resulted in subdued top line growth but improved bottom line profitability.
Spain and Ireland both experienced mid-single digital premium growth. In Spain, we continue to focus on successful partnerships with banks and other carriers, as well as technology and insurtech companies.
In Ireland, where our commercial lines book was a strong growth driver early in the year, we have seen a material decline in new business in line with the economic impact of Covid-19. Alongside other local insurers, the team has been supporting customers affected by Covid-19 with extended credit terms, premium adjustments and other financial measures.
Hiscox Europe expects to implement the first phase of a new technology platform during 2021, starting in Germany. This will then roll out to other territories in subsequent years. This new infrastructure will help us capture the growth opportunities we see in both the traditional broker and digital channels.
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. Gross written premiums grew by 2.6% to $887.1 million
Hiscox London Market
2020 $m
2019 $m
Gross premiums written | 1,023.4 | 967.9 |
Net premiums written | 570.9 | 504.6 |
Underwriting profit | 40.7 | (26.3)† |
Investment result | 56.6 | 50.6 |
Profit before tax | 97.2 | 23.3† |
Combined ratio (%) | 93.7 | 105.6† |
† See note 4 to the financial statements. |
(2019: $865.0 million). Planned reductions were made in the broker channel in private company D&O and media to improve our book, and these were offset by continued strong growth in our direct and partnerships small commercial business. This channel grew revenues by 22.7% in the year to $337.7 million and now insures approximately 430,000 customers. Our operations have proven to be robust in the face of the pandemic. Despite the lockdown we continued to deliver excellent uninterrupted service, taking nearly one million calls with 80% answered within 20 seconds.
We have built this digital business since 2010 through ongoing investment in our brand, technology and operational know-how. Hiscox USA is now over half-way through a platform upgrade which will support future growth. We have pursued an omni-channel approach since we began, and so are less constrained by the channel conflict which affects some of our competitors. Our customers have a choice of buying our policies online end-to-end, by speaking to a Hiscox agent over the telephone, or alternatively through a third-party broker or insurance carrier partner. We follow an 'all roads lead to Hiscox' philosophy, ensuring we are available to do business with our target customers whichever way they choose, and it has served us well.
Our core target market are small, micro and nano businesses. We estimate there are in excess of 30 million businesses in the USA with revenues of less than $25 million. This market is fragmented and these businesses are increasingly shifting to digital ways of buying their insurance. Hiscox already has approximately 430,000 customers in this segment, so we enjoy customer and data insights as well as economies of scale that are not available to others.
Over the past five years this segment has made up an increasing and more attractive part of Hiscox USA's business and it is where we see our long-term future. To accelerate this strategic shift, we have taken the decision to proactively reshape our book by exiting liability business for customers with revenues over $100 million turnover as well as all broker channel stand-alone general liability business. Given the rising ransomware claims facing the market, we will also pull back in cyber until there is significant market re-rating combined with changes in terms and conditions. These actions will result in a reduction of up to $100 million in the USA broker channel which will be partially offset by continued growth in our digital direct and partnership business.
Hiscox is already one of America's leading digital small business insurers. Our goal is to further cement our market position and to continue capturing a leading share of over 30 million small businesses that represent the market opportunity ahead of us.
Hiscox Special Risks
Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art, with teams in multiple locations.
Hiscox Special Risks wrote $127.8 million in premiums, broadly in line with the prior year period (2019: $129.9 million). Existing business retention has been strong and while we have experienced heightened ransomware claims, this has been mitigated by reinsurance.
Our Special Risks products are increasingly purchased by our clients as part of a broader suite of crisis management products and to reflect this shift, we are moving to a geographic distribution-led approach. Under the new structure, locally-written kidnap and ransom business in the USA and Europe will be written through the respective Retail businesses, while a newly-created crisis management division within Hiscox London Market will handle business written in Guernsey, Miami and London. All business units will continue to work closely with long-time partner and market-leading response firm Control Risks.
The successful reorganisation of the Special Risks business was completed in the fourth quarter of 2020 and as a result Special Risks ceased to exist as a stand-alone unit from 1 January 2021. The Group's financial reporting in 2021 will reflect this change, resulting in $100 million of premium from the Retail segment now being reported within Hiscox London Market.
Hiscox Asia
Our brand in Asia, DirectAsia, is a direct-to-consumer business operating in Singapore and Thailand that sells predominantly motor insurance.
In this challenging year, DirectAsia grew its written premiums by 26% to $48.2 million. Thailand posted an exceptional 58% growth, with Singapore delivering a respectable 10% increase, despite the extended Covid-19 lockdowns which seriously impacted its travel and partnerships business. Thanks to this growth, underwriting discipline and diligent management, DirectAsia has seen a significant improvement in its combined ratio.
Hiscox Re & ILS
2020 $m
2019 $m
Gross premiums written | 743.4 | 866.5 |
Net premiums written | 192.7 | 216.7 |
Underwriting profit | (67.7) | (144.7)† |
Investment result | 33.6 | 38.5 |
Profit before tax | (35.1) | (107.6)† |
Combined ratio (%) | 131.8 | 169.9† |
† See note 4 to the financial statements. |
Hiscox London Market
Our London Market business is the star performer of 2020. It continues to use the global licences, distribution network and credit rating of Lloyd's to insure clients throughout the world. The team's focus over the past several years has been on improving portfolio quality in a rising market so growth is modest at 5.7%, taking gross written premiums to $1,023.4 million (2019: $967.9 million). A focus on quality has been rewarded with profits of $97.2 million (2019: $23.3 million) and a net combined ratio of 93.7%, a 11.9% improvement on 2019. More importantly, we have delivered an underwriting profit of $40.7 million (2019: loss of $26.3 million), even after including $13 million of Covid-19-related losses.
This improvement reflects the hard work under a '3-1-1' plan. Here, we have sought to reduce the loss ratio by 3%, reduce commissions by 1% and reduce the expense ratio by 1%. This was initiated several years ago and its implementation has steadily become more rigorous, requiring a combination of organisational and orchestration skills and effective risk by risk negotiations. This has seen us drive rate improvements of 20% in 2020, with 16 of our 17 lines enjoying price rises and ten lines benefiting from double-digit rate increases. This is now the fourth year of rate increases with cumulative increases of 43% since 2017.
The most significant rate improvement continues to be seen in casualty lines such as US public company D&O and US general liability, alongside terms and conditions improvements, and reduced line sizes. In the marine and energy book trends are positive, with rates increasing by 24% in cargo, and 20% in hull.
In our property lines we saw rate growth of 20% in major property where we grew our average line size over the year. We have reduced exposure in household and commercial binders through non-renewal of contracts, increased rates and by restricting aggregate in certain counties. These will flow into our results in 2021 and 2022 as new terms and increased rates feed into the portfolios. As part of this optimisation, we undertook a large data project which allowed us to match historic policies and claims at a risk level. Going forward, we will aim to do this on a quarterly basis, so we can target rate changes and aggregate management to use our capital in the most effective way.
Hiscox London Market is also making steady progress in its own digital initiatives. These plans have two strands. The first is through supporting the Lloyd's market initiatives, where we bound over 90% of our risks through PPL, the Lloyd's market digital platform. The second involves digital trading with brokers and coverholders not located in London. FloodPlus allows us to price risks in real-time with US coverholders, managing aggregate and pricing on a day-to-day basis, especially important when a river is in flood. Across all lines we traded almost $75 million of business through non-traditional digital means. Our medium-term ambition is to grow this steadily to $250 million. We see this as a critical step to allow Hiscox London Market to concentrate most of its underwriting talent in London, while using digital tools to unlock growth opportunities around the world.
In 2021, Hiscox London Market will benefit from the continuing hardening market. Thanks to Syndicate 33's stamp capacity of £1.7 billion we have sufficient headroom to do this. We will judiciously increase our aggregate exposures, with most growth coming from rates. As a result, we expect London Market growth in 2021 in mid to high single digits delivered at improving margins. The compounding impacts of rate and portfolio improvements in recent years will, we believe, drive attractive multi-year profitability.
Hiscox Re & ILS
The Hiscox Re & ILS segment comprises the Group's reinsurance activities in London and Bermuda and insurance-linked security (ILS) activity through our family of funds in Bermuda.
2020 saw gross written premiums reduce by 14.2%, to $743.4 million (2019: $866.5 million), driven by a disciplined approach to price inadequacy at the start of the year.
This includes $15.1 million of reinstatement premiums (2019: $87.2 million). Hiscox Re & ILS made a loss of $35.1 million (2019: loss of $107.6 million). Excluding Covid-19 claims it made a profit of $28.4 million; this is a good result considering the high frequency of North American catastrophe and weather-related events in 2020 and adverse developments in exited healthcare and casualty business.
After a cautious start at the January renewals, we returned to growth as the market began to harden from April onwards. Overall, we have achieved a 12% average rate increase, with positive rate momentum carrying through to January 2021 renewals.
"We have made strides towards a data-based operating model for claims by quadrupling the data analytics team, driving deployment of machine learning tools and launching a fraud mitigation tool in the UK."
During the year we have been reshaping the book to focus where we see the most opportunity. In US property catastrophe and excess of loss, we adjusted the portfolio away from the more capital-intensive nationwide covers and Florida programmes. In the international catastrophe book, we secured rate increases of 16% in Japan, in line with an updated view of typhoon risk which reflects two active years for Japanese windstorm losses. Net exposure in our retrocession book was up 65% as we sought to take advantage of rate improvements of over 20%.
In 2020, Hiscox ILS assets under management declined slightly to $1.4 billion (2019: $1.5 billion). The slight reduction on the previous year is mostly due to redemptions we reported last year.
In 2021, Hiscox Re & ILS will benefit from the deployment of some of the proceeds from the Group's equity raise earlier in the year. We expect that our net written premium growth will exceed growth in gross written premiums as Hiscox Re & ILS retains more risk in the strongest reinsurance market in several years.
Claims
Claims experience in the year has been mixed. We have benefited from some frequency reduction due to the lower levels of activity during the lockdowns. At the same time, we saw a number of large marine liability losses, exposure to the Beirut explosion, floods in the UK, some US tax-related professional liability claims as well as claims from multiple Atlantic hurricanes. All of these claims, and our normal attritional and large losses, together with Covid-19-related claims in all territories, have been handled by our claims teams in their usual award-winning manner. I would like to thank them all for their professionalism in very challenging circumstances.
Our claims teams took the lead in managing our participation in the UK industry test case, and now that it is over, are managing our claims settlement processes. We have created significant surge capacity, drawing on resources in the UK, USA and Australia to make sure we have the capacity to deal with all claims fairly and quickly.
During the year we made material progress in claims transformation. In the USA we completed the insourcing of some of our legal work, and where we do rely on external lawyers, we have renegotiated hourly rates and consolidatedvendors to make this more cost-effective. This is part of our global initiative to create a single vendor management platform integrating all external providers across our markets, which has already led to significant panel cost savings in the USA and Europe.
We have also made strides towards a data-based operating model for claims by quadrupling the data analytics team, driving deployment of machine learning tools to analyse our loss portfolios and launching a fraud mitigation tool in the UK. In 2020, we built a quality assurance portal to automate the claims control environment which is already live in the
USA and will be deployed to the rest of the business in 2021.
The high quality of the Hiscox claims experience has been recognised by brokers in the London Market and across the UK. The Lockton Claims Survey ranked Hiscox as the number one performer out of 37 peer insurers. AON's 2020 'Voice of the Client Claims Insights Global' rated Hiscox's net promoter score as 15th best out of 475 participating insurers. Hiscox was also one of just two insurers to be awarded five stars in Insurance Times' 2020 Personal Lines Ratings.
Information technology and major projects
Over the past five years we have progressively been replacing our core systems which has allowed us to benefit from the digital shift accelerated by the pandemic. In the USA we implemented the first two phases of our new technology platform in the direct and partnerships business. We expect to complete the programme by the end of the third quarter in 2021 allowing us to continue marching towards the significant digital SME opportunity. In the UK, we have steadily improved our portfolio underwriting capability and 90% of our new and renewal business is now handled through automated underwriting rules. In Europe we are working on our technology replacement programme, with implementation beginning in Germany during 2021. We have also been working on interfaces to connect our partner's systems to ours. Across the world we are now connected to 158 partners in this way.
In addition to systems supporting our frontline teams, we are close to the end of our finance transformation programme. This programme has replaced many legacy systems and processes allowing our finance team to keep pace with the scale of business we are now, and the growth to come. The next finance focus is preparing for IFRS 17.
"We are close to the end of our finance transformation programme, which will allow our finance team to keep pace with the scale of business we are now, and the growth to come."
Strategic focus
Total Group controlled income for 2020 100% = $4,532 million
Big-ticket business
Retail business
A Larger premium, globally traded, catastrophe-exposed business written mainly through Hiscox London Market and Hiscox Re & ILS.
A Smaller premium, locally traded, relatively less volatile business written mainly through Hiscox Retail.
A Growth between 5-15% per annum.
A Shrinks and expands according to pricing environment.
A Pays dividends.
A Excess profits allow further investment in retail development.
A Specialist knowledge differentiates us and investment in brand builds strong market position.
A Profits act as additional capital.
Small property 2%
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
"We manage our investment portfolio to provide sufficient liquidity to pay claims, and capital to support the underwriting business, while generating strong risk-adjusted returns."
"Our current capital position is sufficient to support our 2021 business plan, allowing us to take advantage of the hardening market in our big-ticket businesses."
As Hiscox has grown organically, we have often introduced complexity to win every piece of business and handle every customer need. This means we have too many legal entities, too many wording variations, too many sub-scale business relationships and too many suppliers. Under the rubric of the Hiscox simplification programme we are addressing these and other unnecessary complexities in 2021.
We expect the savings generated will help deliver on our plan to reduce our expense ratio by 1% a year over the next two-to-three years. It will also ensure our business is easier to manage and control.
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. Despite the turbulence of 2020, the portfolio strategy helped us navigate the volatile markets well. The investment returns for 2020 were very robust at $198 million (2019: $223 million) after investment expenses, a return of 2.8% (2019: 3.6%).
After a difficult start to 2020 we saw a significant improvement in market sentiment in the second half of the year. Incremental additions to risk assets during the depths of the crisis have performed well and helped boost returns for the year. Encouraged that the end of the pandemic is in sight, the assets of the most affected sectors of the economy surged on the expectation that economic activity may improve markedly in 2021. We have subsequently taken profits in some of our risk asset positions.
Corporate bond spreads have now retraced much of the Q1 2020 widening given the backdrop of ongoing fiscal and monetary policy support. Given the high quality of corporate bonds held, we remain comfortable maintaining our current credit exposures. While equity markets have rebounded generally, we have seen significant divergence in valuations between regions and sectors and so maintain modest exposure to selected risk assets.
While the full year 2020 investment return is well ahead of the original forecast, more meagre investment returns should be expected for 2021. Government bond yields are close to zero, while credit spreads for high-quality bonds are now atpre-Covid levels, reducing yields materially. The current yield to maturity on the bond portfolio is at its lowest ever at just 0.4% (December 2019: 1.6%).
We continue to look through ongoing volatility to steadily invest into positions where valuations present attractive long-term risk and capital adjusted outcomes.
Capital and balance sheet strength
Hiscox's approach to capital management is to ensure our balance sheet is sufficiently robust to absorb large shocks, whether due to insurance losses or economic stress, while maintaining the financial flexibility to seize opportunities as they arise.
Our capital position during the year was bolstered by a £375 million non-pre-emptive equity placement.
I would like to thank our shareholders for the support they provided to our business during a very challenging time. The capital raised externally was supplemented by action taken internally during the year to generate around $65 million of capital saving by combining our two Bermuda-based reinsurance carriers.
At the end of the year, the Hiscox Group estimated a regulatory solvency ratio of 190%, after absorbing our 2020 loss and the second stage of the Bermuda Monetary Authority's strengthening of its solvency regime.
Over the period 2019 to 2021 the Bermuda Solvency Capital basis is being strengthened, resulting in higher capital requirements; to the end of 2020 this has had a zero percentage point impact on the Hiscox coverage ratio. The final stage of basis strengthening will occur in 2021 and is expected to reduce the coverage ratio by 10-15 percentage points. This basis strengthening is expected to be funded by organic capital generation.
We remain A-rated by S&P and A.M. Best and A+ by Fitch.
We have a toolset of proactive capital management measures at our disposal which can help provide capital relief, reduce volatility and bolster our balance sheet strength further. In 2020, ahead of the North America hurricane season, we purchased approximately $100 million of additional catastrophe reinsurance in the form of industry loss warranties. We are also looking at legacy reinsurance solutions and may execute one or more of these in 2021 if the cost and capital efficiency they provide is attractive.
"Hiscox London Market's stellar performance supported by profits in Hiscox Europe and Hiscox Special Risks and better-than-expected investment returns, mitigated the impact of the pandemic."
Our current capital position is sufficient to support our 2021 business plan, allowing us to take advantage of the hardening market in our big-ticket businesses. These businesses already have scale, and as can be seen from Hiscox London Market's 2020 result, a judicious balance of exposure increases, portfolio optimisation and compounding rate rises leads to attractive returns. We anticipate that the strong return to profit of our big-ticket businesses will allow us to drive growth in our retail business. This makes use of the inherent strength of our balanced business and allows us to position Hiscox to benefit from the generational shift to digital trading in the small business sector around the world.
In the face of the uncertainty arising from Covid-19 and the losses it generated, the Board took the decision not to pay a 2019 final or 2020 interim dividend. In view of the full year loss and a desire to have capital to deploy into a strong market, the Board has also taken the decision not to pay a 2020 final dividend. The Board believes that as our business delivers the 2021 business plan and as profits flow through, it will, subject to approval at the time, resume paying dividends with the 2021 interim results.
Environmental, social and governance
Across the world there has been heightened scrutiny and expectations on companies to consider environmental, social and governance factors in their day-to-day business. As insurers we are keenly aware of the impact of climate trends and volatility on the risks that we face and take them into active consideration in the pricing and management of our exposures. In the 2020 update of the Hiscox view of risk, we adjusted it to account for recent trends in severe typhoon activity and will keep reviewing climate-related activity on a peril-by-peril basis. We also have taken proactive steps to support those at risk from climate impacts through insurance products like FloodPlus, and in reinsurance, FloodXtra.
Hiscox has long sought to reduce its own carbon footprint, targeting a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per FTE by the end of 2020, relative to 2014. We have achieved this target, completing a 45% real-term reduction in Scope 1, 2 and 3 carbon emissions per FTE over that period. Covid-19 has had a one-off positive impact by driving down business travel, currently one of the biggest contributors to our emissions, and we will assess what level of business travel is right for us going forward, though as a global business it cannot be eradicated completely. We will also set new near- to medium-term carbon emission reductiontargets in 2021, aligned to the Science Based Targets initiative, and define our action plan for limiting emissions. This will support our established carbon offsetting programme which ensures we operate in a carbon-neutral manner, having been carbon neutral through offsetting since 2014.
With the publication of these results Hiscox has announced its commitment to steadily reduce and eliminate by 2030 the insurance and reinsurance of coal-fired power plants and coal mines; Arctic energy exploration, beginning with the Arctic National Wildlife Refuge; oil sands; and controversial weapons such as land mines. These commitments are aligned with the Lloyd's ambitions announced in December and will take effect from 1 January 2022, though their implementation has already begun.
Hiscox is a member of ClimateWise, a constituent of CDP, the Dow Jones Sustainability Index and FTSE4Good, and our assets are managed by firms that are aligned with the UN-supported Principles for Responsible Investment. We are committed to being a sustainable business and will ensure that our business practices continue to evolve to support the transition to a net-zero world.
Our staff are involved in a myriad of environmentally-focused activities. These include beach clean-ups in Bermuda, creating virtual reality experiences that allow our brokers to experience a Category 5 hurricane, promoting recycling initiatives in our offices, and establishing new partnerships that detect water leaks early; thereby reducing water wastage in customer's homes. I am proud of these efforts, and more information on them is available in our 2020 climate report on our corporate website. This complies with our Task Force on Climate-related Financial Disclosure obligations.
In a year of significant trauma for the communities in which we operate, Hiscox increased its social support significantly. We supplied meals to NHS staff at The Royal Marsden Hospital, together with one of our UK catering partners; supported small businesses in the USA by giving staff $100 each to spend locally; funded ventilators at hospitals in Guernsey and Bermuda; provided 4,000 nights of emergency accommodation for vulnerable young people; and contributed to the Association of British Insurers' Covid-19 Support Fund. We supported good causes in every country where we operate during the year and donated over $9 million in total.
We also took additional steps to support our employees this year. WeMind, Hiscox's mental health and well-being employee network, has been very active, providing new mental health training and expert webinars and promoting the services of our in-house mental health first aiders. Our other employee networks, such as our Parents and Caregivers network, have also found new ways to connect and collaborate.
Finally, in 2020, we launched an updated Hiscox Group Governance Framework which clarified interactions, expectations and decision making across Hiscox Ltd, the Group and business units. This structure will prove useful to ensure that the Group acts in concert and clear prioritisation can be taken, with individual Boards having ownership and accountability for critical decisions in a challenging time and ensuring compliance with local regulatory expectations.
People 2020 has been a truly tough year and it is our people who have persevered against all odds, showing resilience, adaptability and determination. Thanks to the individual and collective efforts of over 3,000 staff, Hiscox has weathered the storm and I can only thank each and every one of them.
One of the signs of a hardening market is increasing competition for talent. Hiscox has invested in both new and experienced underwriters and we have been nurturing expertise across all ranks of the organisation. This has helped create our culture and reputation in the market. We are, and want to continue to be, a great place to work for the ambitious and talented, so it is no surprise that we are on occasion targeted by others. Hiscox has business maturity and market presence, so the market conditions that make start-ups attractive investments, apply equally to us on a larger scale. Rewards will follow as our business delivers on its plans.
In October, the Group announced that Kathleen Reardon had been appointed as CEO of Hiscox Re & ILS. Kathleen has spent the last six years as CEO of Hamilton Re and she brings a deep understanding of the market, a huge amount of underwriting expertise, a proven ability to build a business across the cycle and develop talent. She succeeded Mike Krefta who decided to take a career break after 17 years at Hiscox and leaves with our thanks and good wishes. Mike rose through the Hiscox ranks from an entry-level position in a career which spanned both Retail and big-ticket, operations, analytics and underwriting and London and Bermuda. In addition, Mike was our ESG Executive Sponsor and we owe him a debt of gratitude, for leading and at times cajoling our response to inform the proactive, forward-looking approach we have today.
We continue to attract talent at all levels, including through our graduate scheme in the UK, USA and Germany and our UK summer intern programme which changed to a virtual programme in 2020. We are pressing ahead with similar programmes for 2021, with a focus on reaching new and diverse talent pools. Hiscox has a diverse set of leaders at the Executive Committee, business unit CEO and functional leader level, but this wanes in the middle ranks. We are committed to addressing this both through adapting our internal processes and through partnerships in the UKwith The Bright Network, The Brokerage, Afro Caribbean Insurance Network, and targeted recruitment in the USA, Bermuda and Europe with our existing recruitment partners. We also have internal schemes to continue to train and develop mid-ranking staff to reach our target of filling 50% of all promotions with internal candidates.
All these efforts will ensure that Hiscox remains a desirable and fulfilling place to work.
Outlook
In 2021, we expect to see the benefits of our balanced business strategy asserting itself in a proactive manner after the past four years where the benefits have been mostly defensive.
In 2017-2019, profits in our Retail business offset the pressures of the bottom of the cycle faced by Hiscox London Market and Hiscox Re & ILS. In 2020, Hiscox London Market's stellar performance supported by profits in Hiscox Europe and Hiscox Special Risks and better-than-expected investment returns, mitigated the impact of the pandemic.
In 2021, I expect our big-ticket businesses to perform well, thanks to the increased capital allocated to them, their judiciously positioned portfolios, and the benefit of compound rate increases. Hiscox London Market and Hiscox Re & ILS are in their best markets for almost half a decade and their focus is on driving profits over maximising scale. This will provide good returns for shareholders and allows our Retail businesses to navigate the economic uncertainties within their respective countries of operation.
I also expect that we will see good growth of our Retail digital endeavours, focused as they are on the one-to-ten person firms which grow in number as people leave larger firms and set up in business themselves. Hiscox Retail will face headwinds from the 10-250 person firms who are likely to be most affected by the uncertainty of a post-pandemic economy and our own portfolio improvement activity.
Where we see opportunities we will use some of the big-ticket profits to drive our Retail businesses forward with investments greater than they can afford alone, making sure we can capture more than our fair share of the structural shift to digital in the small business segment.
Our priorities next year are to ensure we maintain the strict discipline of underwriting for profit, streamlining our model to simplify the business and, most importantly, energising our teams. 2021 has started well and our sense of ownership and connectedness will allow us to thrive as we capitalise on the opportunity that lies ahead of us.
Bronek Masojada Chief Executive Officer 3 March 2021
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 2020 available capital was $2,431 million (2019: $2,276 million), comprising net tangible asset value of $2,055 million (2019: $1,912 million) and subordinated debt of $376 million (2019: $364 million).
The Group can source additional funding from its borrowing facilities which comprise a revolving credit and Letter of Credit facility as well as a Tier 1 Funds At Lloyd's facility. Standby funding from these sources comprised $946 million (2019: $800 million), of which $524 million was utilised as at 31 December 2020 (2019: $50 million).
In order to take advantage of opportunities for profitable growth in wholesale and reinsurance markets, as a result of capital contraction and rate improvement across the market following the uncertainty caused by Covid-19, the Group raised £375 million in capital in May 2020 in the form of an equity placement. This has provided additional flexibility throughout the year to respond to growth opportunities and rate improvement, particularly in big-ticket lines.
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 A ratings. Being an A-rated business is important to us, and our intention is to maintain our current strong ratings.
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 theGroup's capital strength and financial flexibility following this scenario means we would be well positioned to take advantage of any opportunities that might arise as a result.
3.0
The Group is regulated by the Bermuda Monetary Authority (BMA) under the Bermuda Group Supervisory Framework.2.5 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.
2.0
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.
1.5
The Group's estimate for the year-end 2020 BSCR solvency coverage ratio is 190%, which includes the second stage of changes to the BSCR standard formula being phased in by the BMA over a three-year period, which began in 2019. The changes are expected to reduce the Group's BSCR solvency coverage ratio by an estimated ten percentagepoints over the next year.
1.0
The Group expects to further mitigate the impact of the changes to the BSCR standard formula through ongoing capital generation over the remaining year of the transition period.
The Group continues to operate with a robust solvency position and expects to maintain an appropriate margin of
0.5
solvency after these changes have taken effect. In addition, each of the respective insurance carriers holds appropriate capital positions on a local regulatory basis.
0.0
A closer look Capital
Projected capital requirement
$2.43 billion available capital
Read more about our financial condition in our financial condition report hiscoxgroup.com/about-hiscox/ group-policies-and-disclosures
A.M. Best
S&P
Fitch
Hiscox | Bermuda | |
integrated | integrated | enhanced |
capital model | capital model | solvency |
(economic) | (regulatory) | capital |
requirement |
Hiscox
The Hiscox businesses are rated 'A' by A.M. Best and S&P and A+ by Fitch. Read more in note 3 to the financial statements.
Estimated BSCR post new formula
Rating agency assessments shown are internal Hiscox assessments of the agency capital requirements on the basis of projected year-end 2020 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.
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.
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 reviewed and enhanced to reflect evolving practice on risk management and governance. Over 2020, 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 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 2020 we continued work to enhance and strengthen our risk appetite statements across the Group.
Risk management framework
Our continuing success depends on how well we understand and manage the significant exposures we face.
Risk governance
"Given the rapid pace of change during 2020, I am pleased that the robust risk management and governance framework we have established over the years - along with the discipline we have embedded in the business - served us well. This meant we were able to respond and adapt quickly, maintaining resilient operations and making timely risk-based decisions even in such unusual circumstances."
Hanna Kam
Group Chief Risk Officer
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 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.
First line of defence Owns risk and controls
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.
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.
ORSA governance
More information on our approach to risk management can be found at hiscoxgroup.com/about-hiscox/ risk-management
Read more about our key risks.
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 such as those shown in the chart opposite, 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. During 2020, the Risk Committee actively tracked the changing risk landscape and potential impacts to the Group's risk profile.
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 and no material changes to the principle risks are required.
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.
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.
2020 has seen a continued focus on improving the efficiency of the risk management framework, mainly through the streamlining and automation of repeatable cycles and further development and embedding of the risk and control self-assessment process. This drive for efficiency allows for an increase in risk deep-dives and for more support to be available to the portfolio of Group-wide change programmes, as well as ensuring appropriate support and challenge is provided to the first-line in assessing, understanding and responding to risks emerging out of Covid-19.
Property extreme loss scenarios
Boxplot and whisker diagram of Hiscox Ltd net loss ($m) for certain modelled losses January 2021
Upper 95%/lower 5%Modelled mean loss
Hiscox Ltd loss ($m)
700
600
500
Superstorm Sandy - $20bn market loss 7-yearreturnperiod
1987J - $10bnmarketloss
15-yearreturnperiod
LomaPrietaQuake - $6bnmarketloss
15-yearreturnperiod
HurricaneKatrina - $50bnmarketloss
21-yearreturnperiod
2011TohokuQuake - $25bnmarketloss 45-yearreturnperiod
NorthridgeQuake - $24bnmarketloss 40-yearreturnperiod
HurricaneAndrew - $56bnmarketloss 25-yearreturnperiod
400
300
200
100
0
JP JP EU US US EQ WS WS EQ WSJP JP EU US US EQ WS WS EQ WSJP JP EU US US EQ WS WS EQ WSJP JP EU US US EQ WS WS EQ WSJP JP EU US US
Industry loss return period and peril
5-10 year
10-25 year
25-50 year
50-100 yearEQ WS WS EQ 100-250 year
WSMean industry loss US$bn
02
05
06
02
24
07
10
12
06
49
21
19
19
18
89
32
30
26
36 135
44
45
33
64 195
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.
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 dialogue We maintain regular dialogue with our shareholders beyond the financial reporting cycle, predominantly via our Chief Financial Officer and investor relations, who meet with existing shareholders, potential investors and research analysts, and participate in industry conferences and roadshows. During 2020 they conducted over 300 meetings and met with over 130 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. These are published on our corporate website, and available as an email alert for subscribers. Annual Report and Accounts Our Annual Report and Accounts gives shareholders a more detailed view of the business. It also includes some additional corporate governance 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 to give investors an opportunity to learn more about Company strategy, strategic priorities, trading conditions and other factors affecting our operations. In 2020, our Chairman and Executive Directors met with investors representing over 70% of our issued share capital. Annual General Meeting (AGM) Our AGM provides another regular investor touchpoint. At the 2020 AGM all resolutions were passed, with votes in favour ranging from 88% to 100%. | 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 48. 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. Employee networks Over 1,700 employees are actively engaged in at least one of our 12 employee networks. From WeMind (mental health and well-being) and Pan-African to Women at Hiscox and LGBT+, each network provides focused discussion, practical activities and support. Communication updates Employees receive regular updates on business plans and performance through emails and newsletters, intranet articles, team meetings and Company-wide 'connected' events. Annual 'launch' events and 'box' meetings Business unit leaders hold regular all-staff meetings to align on strategy and objectives, share news and 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. UK Living Wage We believe a hard day's work deserves a fair day's pay, which is why we are an accredited UK Living Wage employer. | Chartered Insurer status 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 broker academy For the last ten years we have held an annual preferred broker summit for our UK brokers, to share insight and expertise. Our London Market business also hosted its fourth annual broker academy to educate and inform in 2020. Broker satisfaction survey Each year we measure broker satisfaction with our products and services. In 2020, this involved surveying over 1,000 UK, US and London Market brokers. Attending key broker events We participate in key broker events in every part of our broker-facing business. This includes: BIBA, a UK insurance and broker conference; the CIAB, a US marketplace meeting for commercial property and casualty brokers and insurers; and, in our big-ticket business, Monte Carlo, Baden Baden, and RIMS. Educational seminars Throughout the year we hold educational events and roadshows for brokers to improve knowledge of complex or unusual risks. In 2020, this included events on cyber, claims trends, professional indemnity and navigating market conditions. Broker newsletters and thought leadership In the UK, our broker newsletter of claims stories, product updates and events is enjoyed by over 5,000 brokers, while our London Market business produces regular thought-leadership content. In 2020, this included a 'MarketTalk' video series on topics such as the state of the market, market modernisation and the future of the London insurance marketplace. |
A closer look Stakeholder engagement
Chapter 6 113 Financial summary
"We have built strong relationships with our distribution partners, and this year we found new ways to work and engage with them. Virtual meetings, social and educational events proved popular, with more than 25,000 participants attending our webinars across Europe during 2020. Our technology investments in recent years, including in broker extranet sites, also made it easier for our brokers to do business with us, and resulted in more than 60% of small commercial business being traded online."
Stéphane Flaquet
Chief Executive Officer, Hiscox Europe
Customers
We have over 1.3 million retail customers worldwide and providing each of them with products they can rely on is what we are here for.
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 We talk to thousands of customers each year, through surveys, focus groups and other qualitative research, which helps us to continually improve our offering. We also measure our customer service by collecting feedback after they have contacted our service centre, bought a product or made a claim.For more, see page 5. Sharing useful content We share news, opinion pieces and tips with some of our core customer groups through newsletters and blog content. This includes our US 'side hustle to small business' campaign which showcased how individuals turned their side hustle into a fully-fledged small business. Vulnerable customers We have an established team of 20 vulnerable customer champions in the UK, whose work is supported by tailored policies and procedures for those customers that are identified as vulnerable. Piloting new technologies We work with our customers to pilot new technologies that aid risk prevention. This includes leak prevention technology, Leakbot, which we have so far provided to almost 2,000 of our UK home buildings insurance customers. Educational tools We have developed tools to help customers better understand their risk exposure - for example, our cyber exposure calculator helps businesses of different sizes in different jurisdictions to estimate the value of their company's data. Cover during Covid-19 In response to Covid-19, we extended cover in some lines such as home and motor, provided premium refunds for event insurance customers, waived 30-day cancellation periods for commercial insurance policyholders, and offered a range of financial concessions including payment holidays. These changes resulted in more frequent communications with our customers in 2020. | Regular dialogue Our Chief Compliance Officer and central compliance team lead our relationships with regulators worldwide and maintain regular dialogue with them. In 2020, the team engaged with our various regulators, with involvement from senior management and the Board when required, including on the impact of Covid-19. Discussions included the initial and ongoing operational impact of remote working, customer support initiatives, and the potential solvency impact of different types of claims arising from the pandemic. We also participated in an insurance industry test case organised by the UK Financial Conduct Authority.For more, see page 22. Regulatory change We contribute to the regulatory change process, both directly and through active membership of trade associations, such as the Association of Bermuda Insurers and Reinsurers and the Association of British Insurers. In 2020, subjects covered included the proposed UK operational resilience regime, potential changes to the EU Solvency II Directive, and changes to privacy requirements in Bermuda and the USA. Supervisory co-operation In 2020, our Group supervisor the Bermuda Monetary Authority (BMA) hosted a supervisory college, 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 members of our senior management team participated in the session. Scenario analysis and stress testing We maintain a regular cycle of stress testing and scenario analysis to ensure we manage risk well and evolve at the same pace as the risks we cover. We also continue to participate in regulator-led exercises such as the biennial General Insurance Stress Test (GIST) - facilitated by the UK's Prudential Regulation Authority - which was last completed in 2019. Regulatory reporting The Group and its subsidiaries met all material regulatory reporting obligations for 2020. |
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
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
ESG issues touch many different parts of our business and the Hiscox ESG framework helps us stay focused and make an impact. It ensures we are pragmatic and consistent, teaming Group-wide themes with local market relevance. We also evolve as regulation changes and public interest in emerging issues grows.
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"ESG really matters to me, and it matters to Hiscox. We made great progress this year through pragmatism and focus, and in 2021 we will build on this - embedding our divestment policies and setting new carbon reduction targets which are aligned to the Science Based Targets initiative."
James Millard
Chief Investment Officer and ESG Executive Sponsor
Our ESG Executive Sponsor is responsible for overseeing our ESG efforts, working with the Executive Committee and the Board to ensure our practices and policies continue to evolve. Facilitated discussions on ESG took place at both an Executive Committee and Board level during 2020, and these sessions focused on approving the Group's new responsible investment policy and our approach to ESG-related exclusions, developing our internal KPIs and agreeing the ESG plan for 2021.
ESG measurement
Our ESG efforts are measured both internally and externally. Externally, we participate in a number of key ESG indices and we report against Task Force on Climate-related Financial Disclosures (TCFD)-aligned principles in our annual climate report.
Internally, we set key performance indicators for ESG issues which are periodically reviewed and refined.
ESG oversight
Oversight in action:
Non Executive Director focus groups on ESG
During 2020, we held a number of focus groups with our Non Executive Directors to explore a range of ESG issues with them outside of the main Board meetings. These sessions covered issues including our exposure to fossil fuels and other contentious industries in underwriting and investments, ESG measurement and assessment, ESG risks and opportunities, and future ESG training requirements. The outputs from these sessions have proven valuable, informing our 2021 ESG plans, and similar focus groups will now become a regular feature of our annual ESG planning process.
Hiscox Ltd Board sOversight of ESG strategy and priorities. sDiscusses ESG twice-yearly. sProvides challenge and approval of key
ESG matters.
ESG working group sDrives day-to-day efforts on the ground. sChaired by ESG Executive Sponsor. sMeets at least monthly.
sIncludes representatives from underwriting, investments, risk and corporate affairs.
Our ESG framework in action
Environmental Understanding climate risk and helping our customers to adapt.
GHG emissions 2020
Activity
Energy (kWh)
Emissions
(tCO2e)
Scope 1 total 467
Total
8,345,946 2,263
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.
Key developments from the year
Exposure reduction commitments to support move to low-carbon economy
(Re)insurers have a role in ensuring an orderly transition to a low-carbon economy and we want to play our part. Our aim is to reduce steadily and eliminate by 2030 our insurance, reinsurance and investment exposure to coal-fired power plants and coal mines; Arctic energy exploration, beginning with the Arctic National Wildlife Refuge; oil sands; and controversial weapons such as land mines. These ambitions form our new Group-wide ESG exclusions policy, which aligns with the Lloyd's ESG ambitions published in December 2020.
Embedding rhythm and accountability in our approach to climate change
We take a strategic, holistic and long-term approach to managing the risks arising from climate change, considering the potential impact to all aspects of the Group's risk profile and balance sheet. During 2020, we further formalised our approach; ensuring that physical, transition, liability and reputational risks arising from climate change, and their potential impacts, are monitored, managed and owned across the business via repeatable cycles of activity and considered over a range of business planning time frames, while also taking into account wider market and regulatory trends. We have established a cycle of reporting to the Executive Committee and Board on climate-related issues, and appointed two senior managers with regulatory responsibility for managing the financial risks from climate change onto our relevant UK boards. We have also held a number of Board informational sessions on climate change during 2020, where current exposure to - and management of - climate change risks were discussed. We will continue to develop and embed our approach and legal-entity specific plans further in 2021.
Evolving the Hiscox view of risk for Japanese windstorm Following several active years for Japanese windstorms, which inflicted sizable market losses, in 2020 we undertook a fundamental reappraisal of windstorm risk in the region. This meant looking at our evolving knowledge of the peril and its potential impact on catastrophe models - with a particular focus on hazard, vulnerability, data quality, and climate change. This is particularly important as the granularity of the available exposure data in the region does not compare favourably to the data available in other parts of the world - for example in the USA, where it is customary to use location-level information. This reappraisal enabled us to gain insights on model behaviour at various scales, including the potential effects of 'urban canyons' - the wind tunnels created in urban areas as a result of tall buildings - and the role that climate change can play in our understanding of current Japanese windstorm risk. Each new event provides us with a new data point with which to update the Hiscox view of risk and the 2018 and 2019 Japanese windstorm events have - along with this reappraisal - enabled us to evolve our modelling approach and as a result improve underwriting performance in this line of business.
Strengthening our internal expertise and focus on climate change
We continue to invest in our in-house capabilities around climate change. We are creating a new climate change research role to further our understanding of climate-related threats and opportunities, which will contribute to the ongoing development of the Hiscox view of risk from a climate change perspective, and also to business and portfolio insights from a risk management perspective. We are also establishing a new climate implementation group to increase our focus on climate-related developments and drive climate-related innovation - particularly in our underwriting, research and modelling.
Current carbon reduction targets met and new targets in development
Hiscox targeted a 15% real-term reduction in our Scope 1, 2 and 3 carbon emissions per FTE by the end of 2020, relative to 2014. While we have achieved this target, having completed a 45% real-term reduction in Scope 1, 2 and 3 carbon emissions per FTE over that period, some of this achievement is as a result of the positive impact that Covid-19 has had on reducing business travel, which is currently the biggest contributor to our emissions. We are in the process of setting new targets which are aligned to the Science Based Targets initiative (SBTi) and plan to publish these during 2021.
"We have a market-leading catastrophe research and modelling team, including climate scientists, whose expertise - combined with the latest academic insights and our own underwriting and claims experience - enables us to provide accurate coverage and pricing of climate-related risks, even as these risks evolve. We already consider climate change for perils such as wildfire and Japanese typhoon, and in 2021 our work will focus on quantifying its impact on flood and convective storms."
Robert Caton
Director of Underwriting Risk and Reinsurance
Our reappraisal of Japanese windstorm risk is improving underwriting performance in our catastrophe-exposed business.
We partnered with Cycle2Work on a UK cycle to work scheme to make travelling to and from the office in a more environmentally-friendly way more affordable.
We achieved a 20 percentage point increase in our ClimateWise score for 2020, where we disclosed against TCFD-aligned principles.
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.
Key developments from the year
Supporting ethnic diversity and social justice
We strive to be an inclusive employer and to create workplaces where employees feel they can be themselves regardless of their background. Following the death of George Floyd and the ensuing protest movement, we responded with a number of initiatives aimed at demonstrating our commitment to racial and social justice. In the USA, we donated to noteworthy charities like the Equal Justice Initiative and National Cares Mentoring Movement, piloted a diverse talent development programme specifically aimed at African-Americans, and enhanced our unconscious bias training programme for managers. We also empowered our US employees by giving them $100 each to spend at a black-owned business of their choice. In the UK, we launched a new chapter of our Pan-African employee network, which led our inaugural celebration of UK Black History Month with a keynote speaker and kickstarted a programme of networking and educational opportunities for our UK employees.
Redeploying our people to best serve changing customer needs
We have always been responsible stewards of our resources and as Covid-19 took hold in the UK we swiftly reassessed the needs of our customers and our people. Recognising that the pandemic would generate increased customer queries and claims, at the same time as some of our employees would need to work fewer or less regular hours due to the demands of juggling work and home life during lockdown, we launched a talent exchange programme to draw more resource to the frontline. This enabled 27 employees - from areas including recruitment, internal audit and facilities management - to be rapidly upskilled and temporarily redeployed to customer-facing roles. The talent exchange programme not only ensured that our customers enjoyed uninterrupted service when they needed us the most, it also invigoratedthose involved and gave them a host of new skills to take back to their day jobs.
Enhancing small business' access to essential services at a time of need
Small businesses have been among those hit hard by the global pandemic, but through new partnerships we have endeavoured to increase their access to essential services, such as access to finance. In the USA, we have teamed up with Accion, which provides capital, coaching and connections to entrepreneurs; the Women's Business Development Center, which offers technical assistance and financial advisory services including micro-lending to women and underserved communities; and the Women's Business Enterprise Council, which serves established businesses by providing networking, programming, and financial consulting services. In the UK, we are working with Swoop to improve small business access to funding, and with Business in the Community as part of their National Business Response Network which connects business support with community need, and we have also established the Hiscox Business Support Hub to give our small business customers access to a range of free or significantly discounted services during this time.
Taking the temperature with our global employee engagement survey
Each year, we survey our global employee base to find out more about how employees feel about Hiscox, its leadership, their managers and their roles. In 2020, over 2,500 employees responded; 77% told us they felt proud to work for Hiscox, 83% said employees are treated fairly regardless of disability, age or professional background, 90% said they believe in our corporate values, and 91% said they are given the flexibility in their job to manage their work/life balance. In addition, manager effectiveness scores improved six percentage points year-on-year to 81% following a Group-wide effort to improve in this area. Given the events of the year we also asked how well we have managed the change in working environment and supported employees through the pandemic, and 86% said we have managed this well. All these scores will inform our work in 2021 around nurturing talent in new ways, which is one of our business priorities for the year ahead(see page 13).
"2020 marked my first year as Executive Sponsor for diversity and inclusion and what a year it's been. We now have 12 employee networks with over 1,700 members, whose passion for progress is fantastic to see. We're also improving diversity within our succession planning, with at least one female successor targeted for each leadership role; kick-starting our race and ethnicity agenda with new actions plans; and broadening out where we search for talent via new partnerships."
Kate Markham
Chief Executive Officer, Hiscox London Market and D&I Executive Sponsor
We are active members of Insuring Women's Futures, a Chartered Insurance Institute initiative aimed at evolving our industry's approach to women and risk.
This year we signed the Race at Work Charter in the UK, furthering our commitment to increase ethnic and racial diversity across our organisation.
Our ESG framework in action
Governance Compliance with the 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 3,000+ 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.
Key developments from the year
Piloting culture dashboards in our subsidiary boards During 2020, we began piloting culture dashboards across a number of our subsidiaries to allow those boards and leadership teams to create a rigorous and repeatable process for measuring and monitoring culture. Through this approach, we set out a number of culture standards we wish to live by, around themes such as openness, diversity and inclusion, customer-centricity, respectful personal behaviour, operational focus, diligence in risk management, and good leadership. We are then able to assess whether the agreed standards are being met via a list of pre-agreed culture metrics, which measure everything from customer net promoter scores and number of complaints received, to employee engagement scores and gender diversity at every level of the business. Our culture dashboards are reviewed monthly by business unit leadership teams and shared with the relevant subsidiary boards, and the findings are used to inform areas of focus when it comes to maintaining the right culture. In the UK, we also have a culture steering committee that helps drive progress through their monthly meetings to discuss culture indicators, culture strategies and new culture projects.
Establishing a rhythm with our employee engagement network
In 2019, we formalised our existing approach to workforce engagement by establishing an employee engagement network, led by Non Executive Director Anne MacDonald in her capacity as Employee Liaison. While the Board has historically engaged with the workforce and continues to leverage the pre-existing infrastructure to ensure that Hiscox is motivating and engaging employees in an effective way, the employeeengagement network ensures workforce views are considered in its decision-making process. The Employee Liaison facilitated eight meetings in 2020 with a representative group of 30 employees from across the business, supported by our Head of Diversity and Inclusion and Group Company Secretary. These sessions explored some of the key themes from our most recent employee engagement survey - such as the communication of business plans, how the updated values have been embedded in the organisation, manager effectiveness, and personal development tools and support for career paths - as well as the impact of Covid-19 on home-working and our ability to achieve business objectives. Anne has provided regular Board updates on these sessions, enabling the Board to get even closer to employee engagement and culture trends, and the workforce feedback received has informed Board discussions in areas such as remuneration. Where appropriate, outputs from the network are also raised and addressed at Executive Committee level - allowing course corrective action to be taken swiftly if needed.
Monthly cycle of employee training
In 2020, employees received a range of mandatory new and refresher training across regulatory issues, information security and learning and development. The 2020 training programme built on the regime introduced in 2019, with modules including cyber security, financial crime, underwriting controls, working in a regulated environment, privacy and reporting regulatory incidents. Given the move to remote working in response to Covid-19, new modules included taking security home, safe web browsing, and staying secure in a connected world.
Governance in a Covid-19 world
During a turbulent year, it was important for us to engage more with our shareholders to update them on the evolving situation and reassure them of our response. We held over 30 meetings with shareholders, representing over 70% of our share register. The Board also met more frequently in 2020, with 17 informational sessions to assess our exposures and responses. Their sessions covered all aspects of the pandemic, and updates to the Board included potential loss exposures, our reinsurance programmes, reputation and engagement with regulators. The Board also carefully considered our remuneration approach for such an extraordinary year. Given our remuneration policy is designed to focus on long-term performance and drive long-term shareholder value, no bonuses were paid to Executive Directors in 2020, however personal performance bonuses were paid to frontline staff.
Read more about our approach to ESG online at hiscoxgroup.com/responsibility
"As Employee Liaison I have been very pleased with the broad representation and views received through the employee engagement network. I have found the conversations open and honest - a testament to Hiscox's culture - and the direct communication has served as a valuable tool to give the Directors insight into what people are thinking, and to validate or contribute to matters that, as a Board, we are considering."
Anne McDonald
Independent Non Executive Director and Employee Liaison
Five new phishing campaigns tested our internal responses to IT threats in 2020, alongside new information security training modules.
The Board held 17 informational sessions in 2020, meeting more frequently to assess Covid-19 exposures and responses.
Owning the Hiscox view of risk
When it comes to natural catastrophes, understanding how these risks evolve over time is vital when it comes to coverage levels and contract pricing. For three consecutive years (2017-2019), the industry experienced significant loss activity as a result of Japanese typhoons, US hurricanes and California wildfires, and Hiscox Re & ILS was not immune to this. These types of large loss events indicated a trend towards more intense natural catastrophes over time, leading to higher claims frequency and severity - and addressing them required an ownership approach.
Our Re & ILS team worked to review and refine what we call 'the Hiscox view of risk' for both Japanese windstorm and California wildfire. Their work meant examining existing catastrophe models and research, proprietary claims insight and key factors such as hazard level, vulnerability, data quality and climate change. There is complexity in this kind of data analysis, and each natural catastrophe event provides a new data point to challenge, refine and advance our understanding. The team's work has enabled us to evolve our modelling approach and improve underwriting performance in our catastrophe-exposed business.
Board of Directors
Non Executive Chairman Robert Simon Childs (Aged 69)
Appointed Chairman: February 2013
Appointed to the Board: September 2006
Relevant skills, experience and contribution 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. Robert is also Chair of the Nominations and Governance Committee, the Investment Committee, and the Hiscox Syndicates Limited Board. He joined the Council of Lloyd's in 2012 and served as Deputy Chairman of Lloyd's from 2017 to 2020.
External board appointments
The Bermuda Society.
Executive Director
Bronislaw Edmund Masojada (Aged 59) Group Chief Executive
Appointed to the Board: October 2006
Relevant skills, experience and contribution 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. Bronek also sits on the Board of a number of Hiscox subsidiary companies. 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, and currently serves as a City of London Alderman.
External board appointments
Association of British Insurers; Pool Reinsurance Company Limited; Policy Placement Limited.
Executive Director
Hamayou Akbar Hussain (Aged 48) Group Chief Financial Officer
Appointed to the Board: September 2016
Relevant skills, experience and contribution 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 as Group Chief Financial Officer and also sits on the Board of a number of Hiscox subsidiary companies. Aki came to Hiscox 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.
External board appointments Visa Europe Limited.
Executive Director Joanne Musselle (Aged 50) Group Chief Underwriting Officer
Appointed to the Board: March 2020
Relevant skills, experience and contribution 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. Joanne also sits on the Board of a number of Hiscox subsidiary companies. 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 Realty Insurances Ltd.
Senior Independent Director Colin Keogh (Aged 67)
Appointed to the Board: November 2015
Relevant skills, experience and contribution 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. Colin is also Chair of the Remuneration Committee and of the Hiscox Insurance Company Limited Board.
External board appointments
Ninety One Plc and Premium Credit Limited.
Independent Non Executive Director Caroline Foulger (Aged 60)
Appointed to the Board: January 2013
Relevant skills, experience and contribution s Extensive accounting and financial reporting expertise.
s Deep understanding of Bermuda as a reinsurance centre.
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. Caroline also serves on the Hiscox Insurance Company (Bermuda) Limited and Hiscox Syndicates Limited Boards as a Non Executive Director and is Chair of the Audit Committee.
External board appointments
Oakley Capital Investments Limited; Catalina Holdings (Bermuda) Ltd; Generation Life Ltd; General Two Ltd; Atlas Arteria; Ocean Wilsons.
Governance Board of Directors
Member of the Audit Committee
Member of the Nominations and
Governance Committee
Member of the Remuneration Committee
Member of the Risk Committee
Member of the Investment CommitteeChair of Committee is highlighted in solid.
Independent Non Executive Director Michael Goodwin (Aged 62)
Appointed to the Board: November 2017
Relevant skills, experience and contribution s Significant knowledge of the Asian insurance market.
s Deep understanding of risk management as a trained actuary.
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. Michael also serves on the DirectAsia Board as a Non Executive Director.
External board appointments
Partner Reinsurance Asia Pte Ltd; Steadfast Distribution Services Pte Ltd; NCI Brokers (Asia) Pte Ltd; Galaxy Insurance Consultants Pte Ltd; Enya-Lea Pte Ltd; Werombi Pte Ltd.
Independent Non Executive Director Thomas Hürlimann (Aged 57)
Appointed to the Board: November 2017
Relevant skills, experience and contribution s Considerable experience of leading a global business.
s Extensive knowledge of the European insurance market.
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. Thomas also serves on the Hiscox SA Board as a Non Executive Director.
External board appointments None.
Independent Non Executive Director Constantinos Miranthis (Aged 57)
Appointed to the Board: November 2017
Relevant skills, experience and contribution s Deep understanding of Bermuda's
(re)insurance industry.
s Senior leadership experience in the reinsurance sector.
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. Costas also serves on the Hiscox Insurance Company (Bermuda) Limited Board as a Non Executive Director.
External board appointments None.
Independent Non Executive Director Lynn Pike (Aged 64)
Appointed to the Board: May 2015
Relevant skills, experience and contribution 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. Lynn also serves on the Hiscox Insurance Company Inc. Board as a Non Executive Director and is Chair of the Risk Committee.
External board appointments
American Express Company (NYSE: AXP); American Express National Bank.
Independent Non Executive Director Anne MacDonald (Aged 65)
Appointed to the Board: May 2015
Relevant skills, experience and contribution s Extensive marketing expertise, particularly in the USA. s Sizable experience in developing well-known global brands.
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. Anne also serves as the Employee Liaison for Hiscox.
External board appointments
Boot Barn Holdings, Inc.; Zeotap; Tuckerman & Co.; Chops Snacks; IGNITE National; Visiting Nurse & Hospice of Litchfield County.
Group General Counsel and Company Secretary Marc Wetherhill (Aged 48) Group General Counsel and Company SecretaryMarc 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.
Senior management
Attracting and retaining top talent is important to us, and at a senior management level we have a diverse team whose combination of experience and fresh-thinking provides challenge and drives progress.
Amanda Brown
Chief Human Resources Officer
Joined Hiscox: October 2006
Relevant skills, experience and contribution s Deep expertise in developing and implementing HR strategy across multiple geographies.
s Global compensation management including executive compensation policy and shareholder consultation.
Amanda leads our team of 90 HR professionals around the world, overseeing our HR policies and procedures, employee rewards and benefits, recruitment, learning and development, and our approach to remuneration to ensure our continued ability to attract and retain talent at all levels.
Hanna Kam
Group Chief Risk Officer
Joined Hiscox: February 2015
Relevant skills, experience and contribution s Qualified actuary with in-depth enterprise risk management and insurance expertise. s International property and casualty insurance industry experience gained within corporate and consultancies across the UK and Australia.
Hanna leads our global team of risk and compliance experts, located in our key geographies and jurisdictions. She has Group-wide responsibility for Hiscox's enterprise risk management and regulatory compliance, and manages our relationships with regulators.
Stéphane Flaquet
Chief Executive Officer, Hiscox Europe
Joined Hiscox: March 2010
Relevant skills, experience and contribution s Strong financial services background. s Sizable insurance industry experience gained within a range of European territories.
Stéphane originally joined Hiscox as Chief Operating Officer for Europe, and has also served as the Group's Chief Information Officer and latterly as Chief Executive Officer of Hiscox Europe. In 2021, he will take on the newly created role of Chief Transformation Officer, driving critical change programmes including the adoption of new technologies across the Group.
Steve Langan
Chief Executive Officer, Hiscox USA
Joined Hiscox: October 2005
Relevant skills, experience and contribution s Significant global expertise in growing retail businesses throughout the insurance cycle.
s Extensive experience of brand-building and marketing, particularly across
Europe and the USA.
Steve has held a number of senior roles throughout Hiscox; Chief Marketing Officer for the Group, CEO of Hiscox UK & Europe, and CEO of the DirectAsia Group. In his current role he is now focused on building our retail business and recognised brand in the USA.
Grace Hanson Chief Claims Officer
Joined Hiscox: January 2019
Relevant skills, experience and contribution s Considerable legal expertise as a qualified US lawyer.
s Proven track record of building robust global claims functions for retail and big-ticket lines.
Grace leads our award-winning team of 340 claims specialists across 19 locations - the standard-bearers for Hiscox's customer promise. In 2021, she will kick-start our claims transformation programme, building on strong foundations through investments in technology, analytics, and operational capability.
Paul Lawrence
Chief Underwriting Officer, Hiscox London Market and Active Underwriter for Syndicate 33
Joined Hiscox: March 1992
Relevant skills, experience and contribution s Deep expertise in big-ticket and specialty insurance underwriting.
s Extensive experience of underwriting throughout the insurance cycle.
Paul has underwritten a range of insurance lines at Hiscox including fine art, personal accident, specialty, and property insurance. He has also worked through large loss events such as 9/11 in 2001 and Hurricanes Katrina, Rita and Wilma in 2005 and has valuable experience of underwriting in both hard and soft markets.
Kate Markham
Chief Executive Officer, Hiscox London Market
Joined Hiscox: June 2012
Relevant skills, experience and contribution s Strong experience of building customer-focused businesses. s Track record of establishing operational and digital infrastructures that support growth.
Kate originally joined Hiscox to run our UK Direct business, and was promoted to Chief Executive Officer of Hiscox London Market in 2017. She leads our team of 300 London Market underwriters, analysts and support functions in the UK, Guernsey and the USA.
Kathleen Reardon
Chief Executive Officer, Hiscox Re & ILS
Joined Hiscox: January 2021
Relevant skills, experience and contribution s Extensive experience of building reinsurance businesses throughout the cycle.
s In-depth knowledge of the Bermuda reinsurance market.
Kathleen joined Hiscox in 2021 from Hamilton Re, where she was Chief Executive Officer. She leads our reinsurance and ILS business, based in London and Bermuda, and is responsible for ensuring the team takes advantage of the hardening market and opportunities as they present themselves.
Senior management
James Millard
Chief Investment Officer
Joined Hiscox: January 2020
Relevant skills, experience and contribution s Significant investment management expertise. s Twenty years' experience of managing investment teams, processes and portfolios.
James is responsible for the Group's investment portfolios, implementing overall investment policy and directing all portfolio management, research, trading and strategy. He leads our small in-house team, overseeing asset allocation along with the selection and monitoring of our externally appointed asset managers.
Bob Thaker
Chief Executive Officer, Hiscox UK
Joined Hiscox: February 2010
Relevant skills, experience and contribution s Considerable experience of growing retail insurance businesses, particularly in Europe and Asia.
s Expertise in digital insurance distribution. Bob originally joined Hiscox as Head of Group Strategy and has held a range of roles since. These include Group Chief Risk Officer, Head of Claims for Hiscox UK and later, Hiscox Europe, Group Chief Operating Officer for DirectAsia - based in Singapore - and CEO of DirectAsia Group before relocating back to the UK in 2019 as Hiscox UK's Chief Executive Officer.
Ian Penny
Chief Information Officer
Joined Hiscox: May 2017
Relevant skills, experience and contribution s Deep expertise in IT strategy, development, engineering, operations,
IT change and programme execution.
s Experience of designing platforms for high-volume customer channels.
Ian leads the Group's technology function, overseeing a team of 700+ colleagues and partners globally. His experience of designing and safeguarding applications and infrastructure in a regulated industry informs our work around customer channels, software development, automation, and information security.
Ben Walter
Chief Executive Officer, Hiscox Retail
Joined Hiscox: March 2011
Relevant skills, experience and contribution s Deep understanding of global retail and digital insurance markets.
s Significant experience leading business transformation programmes.
Ben originally joined Hiscox as Chief Operating Officer for Hiscox USA before serving as its Chief Executive Officer for six years. He became Chief Executive Officer for Hiscox Retail - with responsibility for our Retail operations in the UK, Europe, and the USA - in 2018, with a focus on product innovation and growth, leveraging scale and driving digitisation.
Chairman's letter to shareholders
Dear Shareholder
Each year, I talk to you about the continued evolution of our governance structure as our business changes and grows, and I am pleased that, despite Covid-19, 2020 saw us deliver the same steady evolution. While Covid-19 was a dominant discussion point for the Board during the year, and you will find Covid-19-related Board activity outlined in the table onpage 61,we have also continued to progress with important activity including employee engagement and climate change.
Evolving governance structures
We have continued to evolve our governance framework and underlying governance structures to meet the needs of our growing business. This year we focused on refining our approach to Board composition reviews as well as the succession planning process for our Non Executive Directors. This supports the established and robust succession processes we have in place for Executive talent reviews.
Additional work was undertaken to ensure the Group governance model is also reflected in our largest subsidiary boards. As a result, we have developed subsidiary-level governance manuals and embedded a repeatable process for updates to subsidiary board composition and Non Executive Director succession planning which is in line with the Group approach.
We continue to ensure our governance practices are in line with the UK Corporate Governance Code (the Code) and set out in detail how we have complied with the Code onpages 63 to 67.This should be read in conjunction with the corporate governance section on pages 57 to 62.
As with last year's report, we have included some additional disclosures beyond our reporting requirements, such as our Chief Executive's pay ratio, where we feel that doing so would give shareholders a better understanding of our governance structures.
Employee engagement and the Board
Last year I reported that, in light of the Code's focus on ensuring the views of the workforce have been considered in Board discussions and decision-making, we had reviewed the wide and varied, formal and informal engagement mechanisms already in place and established a new Employee Liaison role and employee engagement network. In its first year, this approach has yielded new insights and ideas, and the Board is benefiting from the information thatAnne MacDonald, as our Employee Liaison, is able to share. More information on this is outlined onpage 48.
Remuneration
Last year we made some changes to our remuneration policy to rebalance the weighting of incentives towards the long term - encouraging an ownership culture and increasing the focus on long-term performance. We continue to evolve our approach, and are proposing to introduce a second measure for the 2021 PSP awards to provide a broader view of our performance. You can read more about this in the letter from the Chair of the Remuneration Committee onpages 76 to 77.
Climate change
Addressing climate variability has always been a feature of our business and in 2020 we are building on the foundations laid through the Hiscox ESG framework with a Board-approved responsible investment policy and ESG exclusions policy. These policies support our pragmatic approach to ESG issues and complement the Lloyd's approach, published in December, which as Lloyd's participants we support. 2020 also saw the baton of responsibility for ESG pass from Mike Krefta - who made an immense contribution to our progress - to James Millard, our Chief Investment Officer and new ESG Executive Sponsor for the Group.
Disclosure is almost as important as action when it comes to ESG, and we completed additional disclosures this year which are outlined onpage 43.Our climate report, which generated a 20-percentage-point increase in our ClimateWise score year-on-year, ensures our alignment to the Task Force on Climate-related Financial Disclosures (TCFD) and demonstrates our readiness to meet the UK Government requirements for mandatory TCFD-aligned climate reporting by the end of 2021.
I trust that the information set out 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
Corporate governance
Our robust governance framework underpins our business model and continues to serve us well, including during the Covid-19 pandemic.
Board composition
The Board has responsibility for the overall leadership of the Group and its culture.
The Board comprises 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 onpages 52 to 53.Notable changes during 2020 include Joanne Musselle, Group Chief Underwriting Officer, being appointed to the Board in March 2020. In accordance with the Company's Bye-laws and the Code, all Directors will seek re-appointment at the 2021 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 onpages 52 to 53.
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; and
s approve the business plans and budgets.
Director role responsibilities
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
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.
Senior Independent Director (SID)
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.
Chief Executive
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.
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
The Board has delegated a number of its responsibilities to its Audit, Nominations and Governance, Remuneration and Risk Committees
Audit Committee | Nominations and | Remuneration Committee | Risk Committee |
Governance Committee | |||
s Advises the Board on | s Recommends Board | s Establishes | s Advises the Board on |
financial reporting. | appointments. | remuneration policy. | the Group's overall |
s Oversees the relationship | s Succession planning. | s Sets Chairman, | risk appetite, tolerance |
with internal and | s Ensures an appropriate | Executive Director and | and strategy. |
external audit. | mix of skills and | senior management | s Provides advice, |
s Oversees internal | experience on the Board. | remuneration. | oversight and challenge |
controls including | s Promotes diversity. | s Oversees workforce | to embed and maintain |
reserving and claims. | s Manages any | remuneration-related | a supportive risk |
potential conflicts. | policies and practices | culture throughout | |
across the Group. | the Group. | ||
s Oversees alignment | |||
of rewards, incentives | |||
and culture. | |||
The Audit Committee report | The Nominations and | The remuneration report can | More information on risk |
Governance Committee | be found onpages 80 to 93. | management can be found | |
report can be found on | |||
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.
More information on our approach to corporate governance, including the Board and Committee terms of reference can be found at hiscoxgroup.com/investors/ corporate-governance
Read about our going concern and viability statements in our Directors' report.
Corporate governance oversight
The Board operates within an established governance structure to ensure that through the delegations, strategy can be implemented effectively and this 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. Each Board committee operates within established written terms of reference 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 2020 as part of the annual review of terms of reference.
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 theoverarching 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. The Group governance manual and supporting subsidiary governance manual ensures that the underlying processes throughout the Group follow consistent and effective governance procedures.
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.
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.
Board meetings and attendance in 2020
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 comprehensive meetings in 2020 (these meetings comprise meetings of the Board and of each of the Committees of the Board). There were additional Board meetings which covered specific topics such as the approval of May's capital raise, the Company's response to Covid-19 and the insurance industry test case. During an unprecedented and rapidly evolving period, we also held an additional 17 informational calls between Board meetings. These informational calls provided an opportunity to ensure the Board was kept informed of any business developments and allowed the Directors to monitor exposures, emerging issues and opportunities.
The Company's Bye-laws prohibit any Director who is in the UK or the USA from counting towards the quorum necessary for the transaction of business at a Board meeting. This restricts the ability of the Company's Directors based in the UK or USA to participate in Board meetings by telephone or other electronic means. Although the Company's February 2020 Board and Committee meetings were held in-person in Bermuda as scheduled, from March 2020, in-person Board activity was significantly disrupted due to government imposed Covid-19-related travel restrictions and guidance. As a result, it was not possible in many instances for our UK- and USA-based
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Directors to travel to Bermuda or join the meetings as a result of restrictions on international travel and the airport in Bermuda being closed for periods of time. In light of this, the Board held an additional 17 informational calls which allowed for the continued sharing of information and ensured that all Directors had an opportunity to be apprised of all Board issues, even when, through no fault of their own, they were not able to attend the comprehensive Board meetings in person or, as a result of the prohibition in the Bye-laws, by telephone.
All Directors were able to fulfil their fiduciary responsibilities during 2020 and attended all Board and Committee meetings that they were eligible to attend (that is, those Board and Committee meetings that they were not precluded from attending as a result of Covid-19-related travel restrictions and guidance, and the Company's Bye-laws). With respect to the four comprehensive Board meetings in 2020, the Directors attendance (and the number of meetings that they were eligible to attend) is as follows: Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Costas Miranthis (4/4); Robert Childs; Aki Hussain; Bronek Masojada; Joanne Musselle (3/3); Colin Keogh (2/2); Anne MacDonald, Lynn Pike (1/1). Joanne Musselle was appointed to the Board in March 2020 and, although not required, attended the February 2020 Board meeting.
There were also four meetings of each of the Committees of the Board during 2020. All of the Company's Non Executive Directors are members of each of the Audit Committee, Nominations and Governance Committee, Remuneration Committee, Risk Committee and Investment Committee and their attendance (and the number of meetings that they were eligible to attend) is as follows: Caroline Foulger, Michael Goodwin, Thomas Hürlimann, Costas Miranthis (4/4); Colin Keogh (2/2); Anne MacDonald, Lynn Pike (1/1).
Robert Childs is a member of the Nominations and Governance Committee, Risk Committee and Investment Committee and he attended all three of the meetings that he was eligible to attend. Aki Hussain, Bronek Masojada and Joanne Musselle are members of the Investment Committee and attended all three meetings that they were eligible to attend.
All Directors intend to attend future Board and Committee meetings in person when circumstances allow.
Outside of the formal Board and Committee meetings and informational calls, Non Executive Directors have unfettered access to employees at all levels of the business, regularly
"I have been very pleased with how our governance processes have stood up to the exceptional challenges that presented themselves in 2020. They have proven to be robust and effective. We made use of technology and additional informational sessions to ensure that we were not only able to understand how the challenges were impacting Hiscox, but were also able to contribute to the process by sharing thoughts and ideas."
Colin Keogh
Senior Independent Director
Board activity and 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. Naturally, the impact of Covid-19 was a dominant feature in much of the Board's discussion in 2020.
Key themes in 2020
Key activities and actions
Strategy, culture and business performance
s Approval of the 2021 business plan.
s Agreement on business priorities and review of these within the context of Covid-19.
s Oversight of work on the development of a robust and open culture. Ongoing monitoring and assessment of culture has been an area of focus for 2020, thanks to the piloting of a number of 'culture dashboards' within some of the subsidiary Boards, as detailed on page 48.
s Continued review of the strategy development.
Engagement
s Board members met throughout the year with the Group regulator, the Bermuda Monetary Authority, in addition to key regulators in the principle subsidiaries, as part of an ongoing focus on cultivating open and transparent relationships with all key regulators.
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 40 to 41and46 to 47.
s The Board received regular updates on workforce engagement, via the Employee Liaison role (Anne MacDonald, Non Executive Director). Further details can be found onpage 48.
Governance
s Approval of financial measures taken as a result of Covid-19 including: withdrawal of the 2019 final dividend, the 2020 interim dividend payment and 2020 share buybacks; the purchase of more than $100 million of additional catastrophe reinsurance in the form of industry loss warranties; and a £375 million equity raise.
s Appointment of the external facilitator for the 2020 Board evaluation and discussion of the outcomes of the Board evaluation review. Further details can be found onpages 68 to 70.
s Approval of the Hiscox Responsible Investment Policy, the ESG exclusions policy and ongoing engagement with the ESG 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 onpages 71 to 73 and in the risk management section onpages 36 to 39.
s Review of the changed control environment in the move to remote working due to Covid-19, which was found to be satisfactory.
s Updates on key underwriting exposures (Hiscox view of risk), taking into account Covid-19.
liaise with management on activities aligned to their key skills, and attend appropriate management strategy and training events. They also have the opportunity to attend briefings with Executive Committee members and senior management, to understand key issues and conduct 'deep dives' on specialist subjects. In 2020, among other things, this included: marketing and branding; strategic assessment; workforce engagement; and digitisation. Specific sessions are held for succession planning and strategy.
Board evaluation 2020
The externally facilitated Board evaluation in 2020 was facilitated by Lintstock, further details of which can be found in the Nominations and Governance Committee report onpages 68 to 70.
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 in advance of 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 managementreports 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.
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.
Compliance with the UK Corporate Governance Code 2018
As a company listed on the London Stock Exchange, the UK Corporate Governance Code (the Code) is applicable to Hiscox.
The Code sets out a set of 'comply or explain' provisions. This section, along with the corporate governance section onpages 57 to 62,provides meaningful disclosure on our application of the principles of each section of the Code in turn, and explains the rationale for any deviation from its provisions. A copy of the Code is available at frc.org.uk.
Section 1 of the Code:
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 onpages 57 to 62,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 the business evolves, with the last comprehensive review undertaken in 2019. 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.
For more information on our purpose and valuessee page 8.
The Board operates within a Group-wide governance framework which was also explicitly set out in a Board-approved governance manual during 2019. 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; risk oversight and setting the Group's risk appetite; and reviewing the Group's governance.
The Company's terms of reference explicitly state that the Board and its 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 inplace 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 onpages 37 to 38,and the Audit Committee, whose work is outlined onpages 71 to 73.The Committees provide 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, Chief Executive, 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, ensuring shareholder engagement is not limited to the period following the publication of financial results or other significant announcements. Dialogue with shareholders has adapted throughout the period to respond to communicating remotely where needed.
In 2019, the Company formalised its approach to workforce engagement by establishing an Employee Engagement Network, which is led by Non Executive Director Anne MacDonald, who also now holds the role of Employee Liaison. The Board continues to engage with the workforce through both the pre-existing infrastructure and via the employee engagement network, to ensure that Hiscox is motivating and engaging employees in an effective way. The Employee Liaison is responsible for providing a summary of findings at Board meetings, and more information on the work of the employee engagement network during 2020 can be found onpage 48.
Having a supportive and inclusive culture is important to us, and we track how employees feel about working at Hiscox through our annual global employee engagement survey. More information on our 2020 results can be found onpage 46.
The Board, at least quarterly, assesses and monitors culture via a culture dashboard; wide metrics are used to ensure that the Board can have oversight of any issues and seek corrective action where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the Company's purpose, values and strategy. More information on the culture dashboards can be foundon page 48.
Diversity and inclusion remains as important as ever to our business, and we have policies and processes to ensure there is a balanced workforce and an appropriately diverse pipeline.
Data from Lloyd's of London shows that our efforts in gender diversity planning have delivered above market gender ratios and we continue to evolve our efforts, with a specific focus on improving our ethnic diversity.
The Company's whistleblowing policy ensure that employees feel empowered to raise concerns in confidence and without fear of unfair treatment. The structures and processes in place allows for the proportionate and independent investigation of any such matters, and for appropriate follow up action to be taken where necessary. The Board and the Audit Committee - whose Chair also who serves as the Group's whistleblowing champion - has oversight of whistleblowing and routinely receives reports arising from its operation.
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. With respect to 2020, the Committee determined that there are no conflicts which could cause an actual or potential conflict, and additionally there are no concerns regarding overboarding by Directors with adequate time available by all to carry out their duties.
Where Directors took on additional Board positions during the year, these were reviewed as part of our corporate governance processes and were not deemed to be significant to the extent that they would overburden Directors' time. There is no issue with the time commitments or availability of these Directors; this has been demonstrated throughout 2020 where all Directors have given additional time to the Company due to increased meetings regarding the pandemic response.
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 theUK, 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 pages 108 to 110, while stakeholder engagement is covered onpages 40 to 41and ESG onpages 42 to 49.
Section 2 of the Code: 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 57.
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 on behalf of the Board, more information of which is outlined on pages 76 to 105.
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 57.
The General Counsel and Company Secretary acts as a trusted adviser to the Board and its Committees, and ensures 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. 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.
The Board continues to believe that the Chairman's experience and expertise in underwriting and risk management remain a valuable asset in the performance of its functions. In 2019, following the introduction of the new provision of the Code, a more robust annual process was introduced which allows the question of the Chairman's tenure on the Board to be discussed by the Non Executive Directors (without the Chairman being present). This meeting happened in November 2020 and the meeting concluded, having taken soundings from all 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 the Chairman continues to show the independence of character and judgement necessary to chair the Board effectively.
Separately, 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 externally facilitated Board evaluation was an assessment of the independence of the Board, the role of the Chairman and the robustness of the Non Executive Director succession plan; the results of which were positive and are detailed on pages 68 to 70.
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).
Section 3 of the Code:
Composition, succession and evaluation
Chapter 6 113 Financial summary
The current composition of the Board is set out on pages52 to 53 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 outlinedon page 57.
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 onpages 46 to 47and70.
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 of mind. 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 2020. 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 Board approved that Caroline Foulger could continue in office until May 2022, to allow for the completion of the 2021 financial statement process, as at this point Caroline continues to be independent.
The Nominations and Governance Committee plays a vital part in ensuring 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 the delivery of the Company's strategy.
More information can be found in the Nominations and Governance Committee report on pages 68 to 70.
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 onpages 52 to 53.
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. These typically include visits to Hiscox offices, specific sessions on key business areas and upcoming developments, and inclusion at the annual Hiscox Partners event, attended by those employees who make significant contributions to the development and profitability of the Group, and which this year took place as an online event. 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. A number of Non Executive Directors also serve on the subsidiary boards of the major insurance carriers in the Group, which serves as an additional control with respect to subsidiary oversight of the Group.
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 onpages 52 to 53summarise 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. The Nominations and Governance Committee was central to these reviews. Every third year, the Board evaluation is externally facilitated and this was the case in 2020. The external evaluation confirmed a strong, positive dynamic which fosters constructive discussion and decision-making. More information on the findings can be found in the Nominations and Governance Committee report onpages 68 to 70.
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 has served less than nine years as Chair, however, the Chairman has served as a Director prior to that and continues in that post for reasons outlined in Hiscox's response to section 2 of the Code.
Section 4 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, control and risk management systems, and to monitor 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 onpages 71 to 73.The risk management framework is set outon page 36.
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 to 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 108 to 111.
Section 5 of the Code: 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.
The remuneration policy was reviewed in 2019 ahead of its renewal in May 2020. 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 the opposite page.
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.
How we have addressed the following factors in the UK Corporate Governance Code 2018
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 are 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) performance share 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 reporton page 80.
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 The Committee has the ability to apply independent judgement to ensure that the vesting outcome of performance share awards 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 share awards are subject to a holding period following vesting. Deferred bonus and share grants 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.
s The range of possible values are set out in the performance scenario charts in the remuneration policy on page 104.
s Limits and ability to exercise discretion are also set out in 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.
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.
Alignment to culture - incentive schemes should drive behaviours consistent with Company purpose, values and strategy.
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.
Nominations and Governance Committee report
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 governance compliance, a review of conflicts and the approval of Group policies. The Committee is comprised of eight members (seven independent
Non Executive Directors). The Chair of the Board is also Chair of the Nominations and Governance Committee.
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 of Board members and senior managers. This includes an annual review of succession plans for Executives and Non Executives, a process which is guided by the appointment and succession principles set out in the Group governance manual, and which was again carried out in 2020 across the Group.
As part of the Board succession planning process, the Nominations and Governance Committee reviewed the composition of the Board in 2020. This included a skills and experience review - encompassing independence, length of service, the balance of skills and experience, diversity, and the capacity required to oversee the delivery of the Company's strategy - and Board succession planning on an immediate and longer-term basis for the Chair and all members of the Board. As part of this Board review, an appointment process was initiated for the replacement of Caroline Foulger as Director and Chair of the Audit Committee. Caroline's nine-year term completes in January 2022. However, the Nominations and Governance Committee approved that Caroline could continue in office until May 2022 so that the financial cycle may be completed prior to the formal handover, as changing the Audit Chair mid-cycle could be detrimental to the process. The recruitment process for an Audit Committee Chair has been initiated, and the selection of an external search company is in progress.
The Nominations and Governance Committee also leads on Executive succession planning. There is an established and robust process which reviews the key talent plans throughout the Group across three time horizons; zero-to-two years,two-to-five years and the watch list. The Group talent review is assessed by the Nominations and Governance Committee annually and fed into senior management performance development plans. This process is replicated at a business unit level to ensure they too have a sufficient pipeline of talent. Talent plans are also reviewed when vacancies arise; for example, in 2019, Joanne Musselle was identified as part of the talent plan for her predecessor and, following an open market exercise, was appointed as Group Chief Underwriting Officer.
Board evaluation
The Board and its Committees have a culture of continuous improvement and as part of this undertake a formal and rigorous annual evaluation of Board and Committee performance; the results of which help to inform appropriate action and development. Board and Committee effectiveness evaluations are carried out each year and the results are reviewed and discussed at the Board and each of the Committees. Every third year, the Board evaluation is undertaken by an external evaluator, as was the case in 2020.
2020 external Board effectiveness review
A market review of third-party Board evaluation providers was carried out in early 2020, with Lintstock selected as the external Board evaluation facilitator for 2020. Lintstock is confirmed as independent; it provides no other services to the Company, and has no other connection with the Company or individual Directors, aside from having carried out the external Board effectiveness review in 2017 and the internal review in 2018. Lintstock engaged with key project sponsors to set the context for the evaluation and carried out the review in the fourth quarter of 2020 with a formal report to the Board in early 2021. All Board members were invited to complete a survey addressing the performance of the Board, the Chair and each of the committees, after which each of the Directors were interviewed by Lintstock representatives. The anonymity of the respondents was ensured throughout the process in order to promote an open and frank exchange of views. The key areas highlighted in the scope of the review included Lintstock's assessment of the independence of the Board, the role of the Chair, and the robustness of Non Executive Director succession plans.
2020 outcomes
Lintstock presented the findings of their review, confirming that the findings were positive on the whole. 2020 has been a challenging year for all organisations but the fact that the Board has maintained a strong, positive dynamic that fosters
Governance Nominations and Governance Committee report
constructive discussion and decision-making was highlighted as being particularly noteworthy. The review was weighted towards a few particular themes, including:
s the independence of the Board, as currently composed, which was deemed satisfactory;
s the role of the Chair, who was seen to have demonstrated strong leadership over the past year; and
s the robustness of Non Executive Director succession plans, which continue to be given active consideration and are the subject of ongoing discussion as a part of the usual process of Director rotation.
The review included a number of key priorities for the Board to consider during the coming year, alongside a schedule of detailed recommendations to assist with the formulation of a robust action plan. As a result of the exercise, the Board agreed to focus on the following actions: s maintaining its focus on the succession of Executive
Directors and other key leadership positions below the Board;
s transitioning back to in-person meetings when Covid-19-related restrictions reduce, while retaining the use of video-conferencing for interim Board calls and updates;
s driving accountability and excellence in execution, including in the continued monitoring of progress against the Company's business priorities and key projects;
s continuing discussions on strategy, including business mix and capital allocation;
s devoting more time to considering changes in the external environment and their impact on Hiscox, including competitor activity in key markets; and
s maintaining its focus on talent management, employee engagement and the retention of high performers.
All Directors were fully engaged with the Board evaluation process. The Board welcomed the review's findings with the actions above feeding directly into ongoing succession planning discussions. The Chair is leading the implementation of these actions and will report on their delivery in the 2021 Annual Report and Accounts.
Governance Nominations and Governance Committee report
Individual Director reviews
Individual Director reviews are an opportunity to discuss individual skills, training requirements, succession and any other issues. No significant issues were raised in 2020. However, the Nominations and Governance Committee will continue to review the overall skills, succession and rotation of Directors.
Review of the prior year outcomes
In 2019, our internal annual evaluation of Board and Committee performance was updated to deliver an even more robust evaluation of Board, Committee Chair and individual Director performance. As part of this, the Committee reviewed the action plan to completion. Overall the prior year's Board and Committee effectiveness was rated as good or extremely good with no fundamental issues highlighted. The following themes of improvement were progressed throughout the year: additional development of strategy with a focus on competitor analysis; revised plans for focusing deeper in the organisation; continued engagement with management information to deliver better Board oversight; further review of the remuneration policy(see page 94);and enhancing the Executive succession planning process with an explicit Board and Non Executive Director succession planning process.
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 and a D&I Executive Sponsor for the Group who together drive 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. Our Board diversity statement, which is available on our corporate website, reflects the ethos of the Company in that opportunity should be limited only by an individual's ability and drive. Our Board diversity statement focuses on key requirements for appointments; it is also central to the preparation of Board appointments via the Board succession planning process which monitors skills, knowledge and experience in additional to diversity (both gender and ethnicity).
In 2020, we complied with the provisions of the Hampton-Alexander Review, which set a minimum target for FTSE 350 companies to achieve 33% representation of women on FTSE 350 boards and in the two layers of leadership below the Board (the Executive Committee and the direct reports to the Executive Committee) by the end of 2020.
Male | Female | |
Board | 64% | 36% |
Executive Committee | 60% | 40% |
Direct reports to the Executive Committee | 57% | 43% |
All employees | 50% | 50% |
We have also complied with the target of having at least one ethnic minority Director on the Board by 2021, as set out in the Parker Review.
In addition, we have fulfilled our UK obligations to report our gender pay gap ratios with respect to our UK subsidiaries, and published our fourth annual gender pay report during the year. This report sets out in detail the D&I programmes and initiatives we pursued during 2020, and can also be found on our corporate website.
Robert Childs
Chair of the Nominations and Governance Committee
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 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; and
s any correspondence from third parties in relation to our financial reporting.
To aid the review, the Committee considered the key judgements and estimates in the financial statements as identified 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 2020 Annual Report and Accounts were:
i) Going concern assessment and longer-term viability statements
The Committee reviewed and advised the Board on the Group's going concern and longer-term viability statements included in this Annual Report and the assessment reports prepared by management in support of such statements. As part of this review, the Committee assessed the methods, assumptions and judgements underpinning the going concern assessment in particular around the consideration of the impact of and the uncertainties due to Covid-19 on the Group's current and projected capital and liquidity position. The Committee was satisfied by the level of analysis presented during the year, the related approach taken and statements made in the Group's key external reporting. More information on the going concern and viability statements can be found on pages 108 to 109.
ii) Reserving for insurance losses
As set out in our significant accounting policies on pages 134 to 135, 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 discusses both the approach taken by management in arriving at the estimates and also the key judgments within those estimates.
The Committee reviewed and challenged the key judgements and estimates in valuing the insurance liabilities. During the year, Covid-19 was the most significant loss event to impact the Group. It is important that the Company can quickly, and with a reasonable degree of reliability, estimate potential losses and, in the case of Covid-19, the robust and established large loss process was used to determine potential exposures and associated loss estimates. The estimate of insurance claims related to Covid-19 in 2020, after taking into account the Supreme Court Judgment for the UK insurance industry test case on the contractual interpretation of business interruption policy wordings, is $475 million net of reinsurance. This loss estimate, along with other insurance claims, 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. The Committee received presentations from the Chief Actuary and management on the process undertaken and the judgements arrived at to establish key estimates. While there remains uncertainty around the final cost of these events to the Group, the Committee notes that the Group continues to adopt a prudent approach where uncertainty exists as to the final cost of settlement.
The Committee also reviewed the level of margin held within the insurance liabilities in the Group's balance sheet. Management confirmed that they remain satisfied that the claims reported and claims adjustment expenses, together with claims incurred but not reported liabilities included in the financial statements, provide an appropriate margin over projected claims costs to allow for the risks and uncertainties within the portfolio. As with the prior years, the Committee also considers the report of the external auditor following its re-projection of reserves using its own methodologies and the independent actuary who reviews the estimates of insurance liabilities for the Hiscox Syndicates. On the basis of this work,
it reported no material misstatements in respect of the level of reserves held by the Group at the balance sheet date. On the basis of these assessments and the consistent application of the Group's reserving principles, the Committee was satisfied that the valuation of insurance liabilities at 31 December 2020 were appropriate.
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. Sensitivity analysis on valuation of assets is captured within market risk section (note 3.3) of this report.
iv) Recoverability of goodwill and other intangible assets Judgements in relation to impairment testing relate primarily to the assumptions underlying the calculation of the value in use of the Group's businesses, being the achievability of the long-term business plans and the macroeconomic and related modelling assumptions underlying the valuation process.
The Committee reviewed and discussed detailed reporting with management and challenged the appropriateness of the assumptions made, the consistent application of management's methodology and the achievability of the business plans.
The Committee focused its attention on the updates made to assumptions as a result of managements' assessment of the impact of Covid-19 on the forecast cash flows, the cash generating units most impacted and the extent of sensitivity analysis performed.
The impairment assumptions were reviewed and updated where required for the potential impact of, and uncertainties related to, Covid-19. The Committee is satisfied with the approach taken and the recoverability of those assets.
v) Accounting for the defined benefit scheme
As explained in note 2.15, the Group recognises the present value of the defined benefit obligation, less the fair value of plan assets at the balance sheet date. The Audit Committee reviewedthe report of the key judgements and estimates in the financial statements from the Chief Financial Officer, and the results of the independent pension valuation, and is satisfied that the assumptions used to measure the net liabilities are reasonable.
vi) The recoverability of reinsurance assets
As a result of the large loss activity in the year predominantly due to Covid-19, the level of credit risk exposure to reinsurers has significantly 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 reinsurer panel and associated exposures appear to be robust, and management are not aware of any material issues regarding concentration risk, credit risk or default risk. This view is supported by assessments provided by S&P and the Group's reinsurance brokers. The Committee is satisfied with the approach taken and the recoverability of those assets.
vii) The recoverability of deferred tax assets
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 which will be available to utilise the tax losses. The deterioration in the economic environment together with significant Covid-19-related claims in 2020 has affected the results of the Group and its subsidiaries for the period and changed assumptions around the timing of when carried forward losses could be utilised. The Audit Committee challenged the underlying assumptions for the recognition of deferred tax assets, principally the availability of future taxable profits and utilisation period.
viii) Estimated premium income
Another key estimate contained within the Group's close process is an estimate of gross premiums written during the year. For certain contracts, premium is initially recognised based on estimates of ultimate premium. This occurs where pricing is based on variables which are not known with certainty at the point of binding the policy. In determining the estimated premium, the Group uses information provided by brokers and coverholders, as well as past underwriting experience, the contractual terms of the policy and prevailing market conditions. Subsequently, adjustments to those estimates arise as updated information relating to pricing variables becomes available - for example, due to declarations obtained on binding authority contracts, reinstatement premium on reinsurance
contracts or other policy amendments. The estimated gross written premium is regularly reviewed and the movements are sufficiently explained. The Committee is satisfied with the approach taken.
Systems and process change projects
The various systems and process change projects under way across the Group continued this year, particularly within the Retail business units and in finance, where a multi-year Group-wide finance transformation programme (FTP) has replaced outdated finance IT systems and controls. The Committee received quarterly updates on the status of the FTP which enabled it to monitor progress and provide challenge where necessary. This project successfully reached its conclusion this year, with the deployment of the remaining four of the nine systems. As is commonly the case, certain areas of finance continue to require short-term manual workarounds. However, the Committee is satisfied that the results of these are appropriate.
Internal audit
The Head of Group Internal Audit updates the Audit Committee at least quarterly on the progress of the internal audit plan, the outcomes of recent audits, the progress of related audit actions, and any other relevant activities including its key performance measures and the development of its resources.
The internal audit plan is derived using a risk-based approach. In 2020, key themes included core operating controls, the embedding of transformational change, the financial control framework, data governance and controls, the risk management framework, privacy and conduct risk.
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. The Committee also meets annually with the auditor and finance team without management present.
Subsequent to the 2020 year-end audit, the UK lead audit partner at PwC is required to rotate from the engagement, and this succession planning is well under way.
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.
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.
Fair, balanced and understandable
The Committee assessed whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's financial position and performance, business model and strategy. The Committee reviewed the processes and controls that underpin its preparation, ensuring that all contributors, and senior management are fully aware of the requirements and their responsibilities.
Caroline Foulger
Chair of the Audit Committee
Taking ownership of employee well-being
At Hiscox we genuinely care for our customers, for the business and for each other. When Covid-19 emerged, our first priority was the physical safety of our employees and their families. Then, as it became clear that lockdown measures would be prolonged, we recognised the need to further support employees who were struggling with the uncertainty and isolation of extended homeworking.
Enter WeMind, the mental health and well-being employee network at Hiscox. The members of this passion-led, employee-driven network became champions of well-being during lockdown. In the UK and Europe, their effective programme of activities included training for managers and employees on mental health for homeworkers, a weekly newsletter on an array of mental health topics, and a new employee award focused on kindness. In the US and Bermuda, WeMind's work ranged from a webinar series dealing with racial trauma following the death of George Floyd to the delivery of special 'wellness kits' to employees' homes. When we think about 'owning the moment', we could not be more proud of WeMind's efforts to help employees look after themselves during uncertain times.
Letter from the Chair of the Remuneration Committee
Dear fellow Shareholder
At Hiscox, our aim is to deliver strong returns across the insurance cycle and create sustainable long-term value for our shareholders. Our remuneration strategy continues to be designed to attract and keep talented, ambitious people, and foster a culture that encourages sustainable high performance in which pay reflects results, as well as effort.
The Committee believes that for all employees, basic pay should be competitive but not excessive, with bonuses reflecting personal performance, the profitability of their business area and the performance of the whole Group. 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, and I would like to thank shareholders for the high levels of support for our remuneration policy in 2020, when we made some important changes. These changes rebalanced the weighting of incentives towards the long term in order to encourage and support an ownership culture, increased the focus on long-term performance, and addressed our requirements under the UK Corporate Governance Code.
Response to Covid-19
The impact of a global pandemic has been wide and varied, and an overview of Hiscox's response can be found on pages6 to 7.We have supported our employees globally in the transition to home-working and offered flexible working options to help with the new demands of juggling work life and home life. We have also provided socially distanced office working, in line with local government guidelines, and increased the provision of mental health and well-being services across the workforce to ensure all employees have access to appropriate support, advice and training. We have not furloughed any staff or accessed any of the UK, US or European government's support schemes.
Following the AGM, and acknowledging the unprecedented uncertainty caused by Covid-19, the Committee exercised its discretion to reduce the actual 2020 Performance Share Plan (PSP) award levels to approximately 160% of salary for Executive Directors (from 250% of salary as communicated in the 2019 Directors' remuneration report). In addition, in recognition of the withdrawal of the 2019 final dividend, we committed that Executive Directors would not be paid a bonus until the dividend has resumed.
Performance and remuneration outcomes
In 2020, the Executive Directors drove a resilient performance in a turbulent year. The top line was stable with gross written premiums of $4,033.1 million (2019: $4,030.7 million), despite the economic challenges brought on by Covid-19. The Group expects to pay $475 million in Covid-19-related claims and as a result has delivered a pre-tax loss of $268.5 million and a combined ratio of 114.5%. Excluding this impact, Hiscox's combined ratio was 97.0%, which reflects the underlying improvement in performance in many parts of the Group and the benefit of delivering around $80 million in one-off expense savings - the result of a recruitment freeze and curtailment of travel and entertainment expenditure, alongside existing efficiency programmes already underway.
The Committee believes 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 onpage 83.While the business has made good progress against the priority areas set out in last year's report, it has not been immune to the external impacts of Covid-19 and the resulting economic contraction, which created some share price volatility during the period. Therefore, as the pre-tax ROE hurdle rate of 6% was not achieved, and taking into account the withdrawal of the 2019 final dividend, as well as the overall performance of the business, no bonuses were paid in respect of 2020 to Executive Directors.
The 2018-2020 Performance Share Plan was set against stretching net asset value plus dividends per share targets. The net asset value per share threshold of 7% over the three-year performance period was not met. The Committee assessed performance in the round and concluded that there would be no exercise of discretion to override the outcome of the performance conditions for 2020, therefore the awards granted in 2018 will lapse in full.
2021 remuneration
Executive Directors have been awarded a 2.0% salary increase effective from 1 April 2021, in line with the average UK employee increase.
There are no proposed changes to the award levels or structure of annual bonus awards, which will continue to be based on pre-tax ROE performance, alongside individual and strategic performance, including non-financial factors, the shareholder and wider stakeholder experience and consideration of risk. Bonuses will not be paid unless the Group's performance exceeds a hurdle rate of return set taking into account prevailing market conditions.
For the PSP, taking into account feedback received from a number of our shareholders and their representatives, we are proposing to introduce a second measure for the 2021 PSP awards to complement the growth in net asset value plus dividends metric, and provide a broader view of our performance. It is proposed that, for 2021 awards: p 60% of the awards will continue to be based on stretching growth in net asset value (NAV) plus dividends targets. The Committee has reviewed the targets and decided that these will remain the same as for the 2020 awards, as disclosed in the 2019 Directors' remuneration report. These are considered to be very stretching targets in the current environment.
p 40% of the awards will be based on relative total shareholder return ('TSR') against a group of global insurance peers. The vesting schedule for the TSR element will be in line with UK market norms, with threshold vesting for median-ranked performance, and full vesting of this element for upper-quartile performance.
The Committee believes that relative TSR aligns to our strategy of generating long-term value for shareholders, benchmarking those returns versus our closest listed peers. Further detail on the 2021 PSP measures and targets are set out onpage 88.
The Committee has reviewed the 2021 PSP award levels in the context of Company, individual, and share price performance. As previously set out, the Committee was proactive ahead of the 2020 PSP grant and, taking into account shareholder guidance, exercised its discretion to reduce the award levels up-front rather than wait to assess whether there are any 'windfall' gains at the point of vesting. Taking into account the increase in the share price since last year, the Committee has decided that the 2021 PSP award levels will revert back to the levels set out in the remuneration policy as approved by shareholders at the 2020 AGM (i.e. 250% salary). The Committee will review the PSP outcomes at the end of the performance period and retains 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.
Wider workforce
During the year the Committee was updated on wider workforce remuneration trends and policies to aid our understanding of how Executive Director's remuneration aligns to employees.
In the UK, Hiscox has been paying the living wage for a number of years and in November 2019 received accreditation
Remuneration Letter from the Chair of the Remuneration Committee
from the Living Wage Foundation. This approach ensures that everyone at Hiscox receives a wage that recognises the actual cost of living in the UK.
Hiscox also operates an all-employee Sharesave Scheme to foster a culture of ownership among the wider workforce. The scheme provides all employees with the opportunity to save over a three-year period and to purchase Hiscox shares at a discounted price, and it is popular - with over 60% of employees across the Group currently participating.
During 2020, remuneration arrangements across the organisation were reviewed and, below Board level, a new element has been introduced to the 2021 annual bonus criteria to incentivise and reward individual contribution, including individual contributions towards the delivery of business area priorities for the year. The 2021 Group-wide business priorities are outlined onpage 13.The Committee discussed whether this would also be appropriate for the Executive Directors but determined that this was not the right time to make such a change, although this will be kept under review.
Executive Directors' pension benefits have always been consistent with the wider UK workforce, and Executive Directors receive either a 10% of salary cash allowance in lieu of the standard employer pension contribution or a combination of cash and pension contribution, totalling 10% of salary.
UK gender pay reporting
In 2020, Hiscox published its fourth annual gender pay report for the UK. The gender make-up of our business continues to evolve, and these changes are reflected in this year's numbers. The mean pay gap of 21.2% (26.1% prior year) shows our steady progress at getting more women into senior (and higher-paid) roles and we are pleased to see the year-on-year improvement since we started reporting.
The median figure of 25.0% (22.6% prior year) has been impacted this year by the introduction of part-time teams in our entry-level customer-facing roles. The majority of these lower-paid positions were filled by females, which has increased the proportion of women in our lower quartile and naturally altered the midpoint pay gap metric. Although its impact on our gender pay reporting is disappointing, the part-time teams have been a success in delivering our strategic objective of increasing tenure within our customer experience centre in York, and embracing flexible working opportunities has enabled new sources of talent to join us.
Improving diversity and inclusion remains a priority, and while our progress so far has been helped by the policies, processes and partnerships we have established, we recognise there is more to do. For more on our approach to D&I, and areas of focus in 2020, seepages 46 to 47and70.
In summary
The Remuneration Committee is satisfied that the 2020 outcomes are aligned with the experience of shareholders and reflective of performance in what has been a challenging year.
Colin Keogh
Chair of the Remuneration Committee
Remuneration summary
A incentivise Executive Directors appropriately, over the short and long term; and
A 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.
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:
A simple and results-driven, with variable rewards if Hiscox delivers profits and shareholder returns in excess of specified return thresholds;
No bonus for Executive Directors following suspension of the dividend and not achieving the bonus performance hurdle.
Remuneration summary
Salaries for 2020:
- Bronek Masojada: £654,000
- Aki Hussain: £503,500
- Joanne Musselle: £503,500
Salary increase of 2.75%, in line with average UK employee increase.
Salaries for 2021: - Bronek Masojada: £667,000 -Aki Hussain: £513,500 -Joanne Musselle: £513,500 Salary increase of 2.0%, 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 300% of salary for CEO and CFO; - up to 400% of salary for CUO.
Over the past ten years, the average bonus to the CEO has been equivalent to 25% 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 2020 is provided onpages 82 to 83.
Deferral: part deferral of amounts in excess of £50,000.
2020 actual as percentage of salary:
- Bronek Masojada: 0%
- Aki Hussain: 0%
- Joanne Musselle: 0%
In recognition of the withdrawal of the 2019 final dividend, the Committee agreed that Executive Directors would not be paid a bonus until the dividend has resumed.
Award subject to three-year performance period and two-year holding period.
Maximum opportunity: 250% 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.
2020 award as percentage of salary:
- Bronek Masojada: c.160%
- Aki Hussain: c.160%
- Joanne Musselle: c.160%
Holding period: awards subject to a further two-year holding period following vesting.
Share ownership guidelines of 200% of salary for all Executive Directors, after five years in role.
2020 actual:
- Bronek Masojada: 4,580%
- Aki Hussain: 159%
- Joanne Musselle: 81%
Aki Hussain was appointed in September 2016.
Joanne Musselle was appointed in March 2020.
Post-employment shareholding requirement: retain a shareholding at the level of the in-employment guideline for one year and half this amount for the following year.
Maximum opportunity, performance metrics and deferral unchanged.
Maximum opportunity and time horizons unchanged. 2021 award as a percentage of salary reinstated to 250% of salary, taking into account the increase in share price since the 2020 PSP grants. Measures based on NAVPS growth plus dividends (60% weighting) and relative TSR (40% weighting).
Share ownership and post-employment shareholding guidelines unchanged.
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Annual report on remuneration 2020
This report explains how the remuneration policy was implemented for the financial year ending 31 December 2020 and how it will be applied for the 2021 financial year.
PwC has been engaged to audit the sections in the annual report on remuneration 2020 below entitled 'Executive Director remuneration' and 'additional notes to the Executive remuneration table, 'annual bonus', 'long-term incentives', 'Non Executive Director remuneration', 'Directors' shareholding and share interest', 'Performance Share Plan' and 'Sharesave Schemes', 'Payments to past Directors', 'Payments for loss of office', to the extent that would be required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013.
Executive Director remuneration
2020
Total splitName
Salary £
Benefits £
Bonus £
Long term incentive plan1 £
Retirement £
Total £
Fixed remuneration £
Variable remuneration £
Bronek Masojada Aki Hussain Joanne Musselle2
649,625 500,125 418,458
10,533 7,532 7,637
0 0 0
0 0 0
57,085 45,464 38,404
717,243 553,121 464,499
717,243 0
553,121 0
464,499 0
2019
Total splitName
Salary £
Benefits £
Bonus £
Long term incentive plan1 £
Retirement £
Total £
Fixed remuneration £
Variable remuneration £
Bronek Masojada Aki Hussain Richard Watson3
632,375 486,750 486,750
10,252 8,089 10,780
0 0 0
0 0 0
55,569 44,248 44,248
698,196 539,087 541,778
698,196 0
539,087 0
541,778 0
12020 long-term incentives relate to performance share awards granted in 2018 where the performance period ends on 31 December 2020. The award is due to vest on 6 April 2021. Based on performance achieved, this award is due to lapse in full. As the award will lapse in full there is no part of the award attributable to share price appreciation.
2Joanne Musselle joined the Board 2 March 2020, following her appointment as Group Chief Underwriting Officer effective 1 January 2020. Details of Joanne's remuneration package on appointment were included in the 2019 Directors' remuneration report. All aspects of the package are in line with the remuneration policy. The figures in the 2020 table above relate to 2 March-31 December 2020.
3Richard Watson stepped down from the Board with effect from 31 December 2019.
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 2.75% from April 2020, the same as the average UK-based employee salary increase.
Base salaries for Executive Directors from 1 April 2020 were as follows:
April 2020 | |
£ | |
Bronek Masojada | 654,000 |
Aki Hussain | 503,500 |
Joanne Musselle | 503,500 |
Benefits
For 2020, benefits provided for Executive Directors included the healthcare scheme, Sharesave Scheme, life insurance, income protection insurance and critical illness policies, as well as a Christmas gift hamper.
Retirement benefits
Bronek Masojada and Aki Hussain both receive a 10% of salary cash allowance (less an offset for the employer's UK National Insurance liability) in lieu of the standard employer pension contribution. Joanne Musselle receives a combination of cash allowance and employer pension contribution totalling 10% of salary (less an offset for employer's UK National Insurance on the cash allowance). The value of these retirement benefits are shown in the Executive Director remuneration table on page 80.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
Increase/ | |||||||
Increase | Transfer value | Transfer value | (decrease) | ||||
in accrued | Total accrued | of accrued | of accrued | in transfer value | |||
pension | annual pension | Increase in | pension | pension | of accrued | ||
Normal | during | at 31 December | accrued pension | at 31 December | at 31 December | pension | |
retirement | the year | 2020 | net of inflation | 2019 | 2020 | during the year | |
age | £000 | £000 | £000 | £000 | £000 | £000 | |
Bronek Masojada | 60 | 3 | 61 | - | 2,331 | 2,712 | 381 |
There are no further accruals under this plan. In the event of retirement prior to the normal retirement age, a reduced pension would be payable (in accordance with the scheme rules) to reflect the earlier payment date.
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 set taking into account prevailing market conditions.
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
As part of the policy renewal, the bonus opportunity was reduced to 300% of salary from 400% of salary for the Chief Executive Officer and Chief Financial Officer and to 400% of salary from 500% of salary for the Chief Underwriting Officer.
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 four occasions when the Group delivered a pre-tax ROE below the required threshold and no bonuses were paid to Executive Directors. A commitment was made in 2020 that Executive Directors would not be paid a bonus until the dividend had resumed, irrespective of the Group's performance.
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 2020, the Committee used the following framework. Actual bonus outcomes also take into account individual performance and risk management.
Pre-tax return on equity | Indicative bonus range (% of max) |
0% | |
RFR +5% to RFR +10% | 0-30% |
RFR +9% to RFR +14% | 25-55% |
RFR +13% to RFR +18% | 45-75% |
RFR +16% to RFR +21% | 65-90% |
Greater than RFR +19% | 80-100% |
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 2020, the RFR was set at 1%. For 2020 a maximum bonus would have required ROE performance of at least RFR plus 20%.
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.
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
40% | |
0 | 40 |
82 | Hiscox Ltd Report and Accounts 2020 |
Below zero
0%
5%
10%
15% Return on equity
20%
25%
30%
35%
Performance outcomes for 2020
In recognition of the withdrawal of the 2019 final dividend, the Committee agreed that Executive Directors would not be paid a bonus until the dividend has resumed. For completeness, the table opposite sets out the key objectives and individual achievements of each Executive Director. The pre-tax ROE for 2020 was -10.8%.
5
10
15
20
25
30
35
2020 key objectives and individual achievements by the Executive Directors
Bronek MasojadaAki HussainJoanne Musselle
Key objectivesDeliver the 2020 business planDeliver Executive Committee priorities
Ensure Hiscox operates within risk, regulatory and societal expectationsBalance sheet management
Enhancing profitability and ROE
Deliver finance transformationActive portfolio managementExposure management and view of riskDeveloping underwriting talentAchievements
Bronek has led the business to deliver a stable top-line, despite the economic challenges brought on by Covid-19. The Group expects to pay $475 million in Covid-19-related claims; however, excluding this impact, Hiscox's combined ratio was 97.0%, reflecting the underlying improvement in performance in many parts of the Group and the benefit of around $80 million in one-off expense savings - the result of a recruitment freeze and curtailment of travel and entertainment expenditure, alongside existing efficiency programmes already underway.
The multi-year priority of digital distribution, particularly across Hiscox Retail and in the big-ticket adoption of the Lloyd's PPL initiative, has been successfully accelerated during the year. Operational resilience became an increased focus for the Executive Committee in light of Covid-19, and the Group did well here, pivoting to remote working and maintaining good levels of service including paying $1.9 billion in claims, despite the disruption.
Bronek led the business's response to Covid-19 including Hiscox UK's efforts to provide clarity and certainty to business interruption policyholders via the FCA's UK business interruption test case. Commencing and concluding the legal process in just seven months is exceptionally fast and allows the business of paying valid claims to continue.
Aki oversaw the optimisation of the Group's capital and liquidity position to ensure ongoing financial flexibility, particularly in light of Covid-19. This included withdrawal of the 2019 final and 2020 interim dividend payments; the purchase of more than $100 million of additional reinsurance, renegotiation of our bank lending facilities; and a £375 million equity raise. Consequently, the balance sheet remains strong and the Group can seize opportunities as they emerge.
Aki has ensured that ROE enhancing opportunities are identified through a repeatable process of cross-business unit and functions analysis and insight. This has driven consistency in how the Group identifies business that generates a sufficient return.
Aki appointed a new CIO in 2020, which led to a repositioning of the portfolio to take advantage of market volatility in early 2020, increasing investment returns.
Our multi-year finance transformation programme concluded this year with the deployment of the remaining four of the nine systems. A process of periodic reviews and assessments, including spotting new ways finance can contribute to business strategy, drive profits and increase shareholder value has also begun.
Joanne leads the Group's efforts on continuous improvement in underwriting, which includes a focus on fixing or materially shrinking the bottom decile business while investing in top performing lines. Although Covid-19 had a significant impact on the 2020 underwriting year, the underlying loss ratio is promising; the result of discipline, remediation of underperforming lines - where poorest decile business exposure has reduced by 26% - and improving market conditions.
Joanne has driven continued investment in the Hiscox view of risk. In 2020, this included model changes for Japanese typhoon, US wind, US flood and Californian wildfire, an investment in enhanced modelling capabilities for both cyber and casualty risks, and detailed assessment of Covid-19-related third-party claims and/or recessionary trends to inform underwriting approach and adjustment where necessary.
Joanne has continued to identify and develop underwriting talent, focusing on the key competencies and characteristics necessary not just for today but for the future. Partnering with a games development company, a new custom-built 3D simulation offers a different way of helping underwriters learn the key demands of the job.
Long-term incentives
Performance Share Plan awards (PSP) where the performance period ends with the 2020 financial year
The Executive Directors were granted nil-cost options under the PSP on 6 April 2018 for the three-year performance period 1 January 2018 to 31 December 2020.
The performance conditions for this award were set at the start of the performance period and are as follows:
Proportion of PSP
Growth in | vesting measured | |
net asset value | on a per-share basis | |
plus dividends | % | |
Minimum threshold vesting | RFR + 6 = 7 | 20 |
Maximum vesting | RFR + 14 = 15 | 100 |
Straight-line vesting between these points | ||
The risk-free rate (RFR) was set at 1%. | ||
Performance outcome |
Based on the three-year average growth in net asset value plus dividends of -2.04%, the awards ending with the 2020 performance year will not vest as the minimum performance threshold has not been met.
PSP awards granted during the 2020 financial year
The 2019 annual report on remuneration and remuneration policy, which were approved by shareholders at the 2020 AGM, provided for a maximum allowance for awards for the Executive Directors totalling 250% of salary. Acknowledging the unprecedented uncertainty caused by Covid-19, the Committee exercised discretion to reduce the awards payable to approximately 160% of salary. As a result of this, the additional stretch targets for awards above 200% of salary, as set out in the 2019 Directors' remuneration report, do not apply to this award.
On 15 May 2020, the Executive Directors were granted nil-cost options under the PSP as shown below.
Market prices | Market value | ||
Number of | at date of grant* | at date of grant | |
awards granted | £ | £ | |
Bronek Masojada | 156,000 | 6.998 | 1,091,688 |
Aki Hussain | 120,500 | 6.998 | 843,259 |
Joanne Musselle | 120,500 | 6.998 | 843,259 |
*The middle market quotation on the date of grant (15 May 2020) was £6.998. The middle market quotation immediately prior to grant (14 May 2020) was £6.744 which corresponds to an award level of c.160% of salary.
The performance condition for these awards, measured over the period 1 January 2020 to 31 December 2022 is as follows:
Proportion of PSP
Growth in | vesting measured | |
net asset value | on a per-share basis | |
plus dividends | % | |
Minimum threshold vesting | RFR + 6 = 7 | 20 |
Maximum vesting | RFR + 14 = 15 | 100 |
Straight-line vesting between these points |
The net asset value plus dividends 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 2020 was 1%.
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).
Non Executive Director remuneration
The table below sets out the remuneration received by the Non Executive Directors for the financial years ending 31 December 2020 and 31 December 2019.
2020
Total split | |||||||
Ltd Board | Ltd Committee | Subsidiary Board | Total Hiscox | ||||
fee | fee | fee | Benefits1 | fees | Fixed | Variable | |
£ | £ | £ | £ | £ | £ | £ | |
Robert Childs (Chairman)2 | 295,000 | - | - | 11,655 | 306,655 | 306,655 | - |
Caroline Foulger | 62,774 | 35,766 | 88,956 | - | 187,496 | 187,496 | - |
Michael Goodwin | 62,774 | 28,467 | 32,847 | - | 124,088 | 124,088 | - |
Thomas Hürlimann | 62,774 | 28,467 | 52,212 | - | 143,453 | 143,453 | - |
Colin Keogh | 75,182 | 35,037 | 48,000 | - | 158,219 | 158,219 | - |
Anne MacDonald | 70,073 | 28,467 | - | - | 98,540 | 98,540 | - |
Constantinos Miranthis | 62,774 | 28,467 | 35,766 | - | 127,007 | 127,007 | - |
Lynn Pike | 62,774 | 33,577 | 56,934 | - | 153,285 | 153,285 | - |
2019 | |||||||
Total split | |||||||
Ltd Board | Ltd Committee | Subsidiary Board | Total Hiscox | ||||
fee | fee | fee | Benefits1 | fees | Fixed | Variable | |
£ | £ | £ | £ | £ | £ | £ | |
Robert Childs (Chairman)2 | 290,000 | - | - | 11,860 | 301,860 | 301,860 | - |
Caroline Foulger | 67,398 | 36,834 | 89,469 | - | 193,701 | 193,701 | - |
Michael Goodwin | 67,398 | 28,997 | 22,727 | - | 119,122 | 119,122 | - |
Thomas Hürlimann | 67,398 | 28,997 | 50,000 | - | 146,395 | 146,395 | - |
Colin Keogh | 79,937 | 35,266 | 47,000 | - | 162,204 | 162,204 | - |
Anne MacDonald | 67,398 | 28,997 | - | - | 96,395 | 96,395 | - |
Robert McMillan3 | 25,344 | 10,904 | 62,696 | - | 98,943 | 98,943 | - |
Constantinos Miranthis | 67,398 | 28,997 | 37,618 | - | 134,013 | 134,013 | - |
Lynn Pike | 67,398 | 34,483 | 61,783 | - | 163,664 | 163,664 | - |
1Benefits include life assurance and healthcare. |
2Robert Childs also chairs subsidiary Boards for no additional fee. The total 2019 fee has not changed but the presentation has been amended in order to be consistent with 2020.
3Robert McMillian stepped down from the Ltd Board following the May 2019 AGM.
Fees are paid in multiple currencies - 2019 fees were converted using £1: €1.14 and £1: $1.276. 2020 fees were converted using £1: €1.13 and £1: $1.37.
Membership of the Remuneration Committee
The Remuneration Committee members during the year were Caroline Foulger, Lynn Pike, Anne MacDonald, Thomas Hürlimann, Michael Goodwin, Constantinos Miranthis and Colin Keogh (Chairman).
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 has over 20 years' service so his shareholding of 4,580% far exceeds the guidelines. Aki Hussain and Joanne Musselle have not yet been Executive Directors for five years. Aki Hussain's shareholding is 159% and Joanne Musselle's is 81%, using the closing share price on 31 December 2020.
There is a post-employment shareholding guideline for 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. On 8 January 2021, Colin Keogh received 1,404 shares in lieu of fees, otherwise there have been no changes in the Director share interests between 31 December 2020 and 3 March 2021.
31 December | 31 December | |
2020 | 2019 | |
6.5p ordinary | 6.5p ordinary | |
shares | shares | |
Directors | number of shares | number of shares |
beneficial | beneficial | |
Executive Directors: | ||
Bronek Masojada | 3,014,225 | 2,990,109 |
Aki Hussain | 80,786 | 71,794 |
Joanne Musselle | 40,798 | 33,106 |
Non Executive Directors: | ||
Robert Childs | 1,208,502 | 1,200,810 |
Caroline Foulger | 29,000 | 13,231 |
Michael Goodwin | 12,678 | 4,986 |
Thomas Hürlimann | 15,786 | 8,863 |
Colin Keogh | 39,695 | 24,967 |
Anne MacDonald | 39,893 | 35,375 |
Constantinos Miranthis | 6,832 | 4,525 |
Lynn Pike | 1,538 | - |
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:
Number of
Average market
Number of | awards at | Mid market price | price at date of | |||||
awards at | Number of | Number of | Number of | 31 December | at date of grant | exercise | Date from | |
Name | 1 January 2020 | awards granted | awards lapsed | awards exercised | 2020 | £ | £ | which released |
Bronek Masojada | 130,950 | - | - | - | 130,950 | 6.94 | 17-Mar-17* | |
117,006 | - | - | - | 117,006 | 8.82 | 13-Apr-18* | ||
59,301 | - | - | - | 59,301 | 9.56 | 08-Apr-19* | ||
105,000 | - | (105,000) | - | - | 11.19 | 07-Apr-20 | ||
83,250 | - | - | - | 83,250 | 14.88 | 06-Apr-21 | ||
82,000 | - | - | - | 82,000 | 15.46 | 08-Apr-22 | ||
- | 156,000 | - | - | 156,000 | 7.00 | 15-May-23 | ||
Aki Hussain | 36,873 | - | - | - | 36,873 | 10.46 | 08-Apr-19* | |
75,000 | - | (75,000) | - | - | 11.19 | 07-Apr-20 | ||
58,000 | - | - | - | 58,000 | 14.88 | 06-Apr-21 | ||
63,250 | - | - | - | 63,250 | 15.46 | 08-Apr-22 | ||
- | 120,500 | - | - | 120,500 | 7.00 | 15-May-23 | ||
Joanne Musselle | 32,361 | - | - | - | 32,361 | 5.68 | 02-Apr-16* | |
29,694 | - | - | - | 29,694 | 6.94 | 17-Mar-17* | ||
24,750 | - | - | - | 24,750 | 8.82 | 13-Apr-18* | ||
9,883 | - | - | - | 9,883 | 9.56 | 08-Apr-19* | ||
25,000 | - | (25,000) | - | - | 11.19 | 07-Apr-20 | ||
30,000 | - | - | - | 30,000 | 14.88 | 06-Apr-21 | ||
30,000 | - | - | - | 30,000 | 15.46 | 08-Apr-22 | ||
- | 120,500 | - | - | 120,500 | 7.00 | 15-May-23 | ||
Total | 992,318 | 397,000 | (205,000) | - | 1,184,318 |
*Awards have vested but are unexercised.
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 on an average share price over five days prior to the invitation date, with a 20% discount. Sharesave options are not subject to performance.
Number of
Number of options at
options at
1 January 2020
Number of options grantedNumber of options lapsedNumber of options exercised
31 December 2020
Exercise price £
Market price at date of exercise £
Date from which exercisableExpiry date
Bronek Masojada
1,040 778
- -
- -
(1,040)
-
- 778
8.648 11.556
Aki Hussain Joanne Musselle Total
2,081 1,557 5,456
- - -
(2,081)
- (2,081)
- - (1,040)
- 1,557 2,335
8.648 11.556
11,085 01-Jun-20 30-Nov-20 01-May-21 31-Oct-21 01-Jun-20 30-Nov-20 01-May-21 31-Oct-21
Payments for loss of office
No payments were made during the year for loss of office.
Payments to past Directors
No payments were made to former Directors during the year.
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Implementation of remuneration policy for 2021
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 2021, salaries for Executive Directors will be increased by 2.0%. This is in line with other UK-based employees. Salaries from April 2021 will be as follows:
April 2021 | |
£ | |
Bronek Masojada | 667,000 |
Aki Hussain | 513,500 |
Joanne Musselle | 513,500 |
Annual bonus |
The maximum opportunity for the year ending 31 December 2021 will remain unchanged from 2020, being 300% of salary for both the Chief Executive Officer and Chief Financial Officer and 400% of salary for the Chief Underwriting Officer. 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. Bonuses will not be not paid unless the Group's performance exceeds a given ROE threshold. This threshold and the ranges used to support the Committee's decision-making are considered to be commercially sensitive at this time and will be disclosed in the 2021 Directors' remuneration report, together with an overview of the individual objectives set and performance against these.
Performance Share Plan (PSP)
In line with our shareholder-approved remuneration policy, the maximum opportunity for the awards to be granted to the Executive Directors in 2021 will be 250% of salary. Awards will continue to be based on a three-year performance period followed by a two-year holding period.
For 2021, 60% of awards will be based on stretching growth in net asset value (NAV) plus dividends targets, measured on a per share basis with 40% based on relative total shareholder return (TSR) against a group of global insurance peers.
The Committee considers that growth in NAV continues to be a key 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. The targets for the 2021 awards are unchanged from those set out in the 2019 Directors' remuneration report and the Committee considers that they are very stretching targets in the current environment.
Growth in NAV plus dividends measured on a per-share basis | Award vesting (% of maximum)* |
Less than RFR + 6% p.a. | 0 |
RFR + 6% p.a. | 16 |
RFR + 14% p.a. | 80 |
Equal to or greater than RFR +17% p.a. | 100 |
The risk-free rate (RFR) will be 0% for 2021. |
*Applies to 60% of awards. Maximum is 250% salary. Straight-line vesting in between each point.
Remuneration Implementation of remuneration policy for 2021
Relative total shareholder return has been selected as a measure for the 2021 awards to complement the absolute NAV metric and is aligned to our strategy of generating long-term value for shareholders, benchmarking those returns versus our closest listed peers. The vesting schedule for the element of the award based on TSR is set out below.
Relative TSR | Award vesting (% of maximum)* |
Below median | 0 |
Median | 20 |
Upper quartile | 100 |
*Applies to 40% of awards. Straight-line vesting in between each point. |
The peer group will consist of the following 24 companies: Admiral Group, Alleghany, American Financial Group, Arch Capital, Argo, Axis Capital, Beazley, Conduit, Cincinnati Financial, CNA Financial, Direct Line Insurance Group, Everest Re, Fairfax Financial Holdings, Hanover Insurance, James River Group, Kinsale Capital Group, Lancashire Holdings, Markel, QBE, Renaissance Re, RLI, SCOR, White Mountains Insurance Group, and WR Berkley.
Non Executive Director fees
The Non Executive Director fees which apply for 2021 are set out below. These remain unchanged from 2020.
2021 | |
fees | |
Board Chairman and subsidiary services | £295,000 |
Basic fee | $86,000 |
Additional fees for: | |
Audit Committee Chair | $26,000 |
Audit Committee member | $16,000 |
Remuneration Committee Chair | $18,000 |
Remuneration Committee member | $9,000 |
Risk Committee Chair | $17,000 |
Risk Committee member | $10,000 |
Nominations and Governance Committee member | $4,000 |
Senior Independent Director fee | $17,000 |
Employee Liaison fee | $10,000 |
89 |
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Other remuneration matters
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 and Pool Reinsurance Company Limited and was Chair of Policy Placement Limited. Bronek Masojada was remunerated £42,090 for his Directorship at Pool Reinsurance Company Limited. Aki Hussain held a Directorship at VISA Europe Limited and received a fee of £115,000. Joanne Musselle was remunerated £18,500 for her Directorship at Realty.
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 £78,700 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 Chief Human Resources Officer 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 14 May 2020, the Directors' annual report on remuneration and remuneration policy received the votes below from shareholders.
Annual remuneration | Remuneration | |
report | policy | |
For | 238,930,420 | 230,333,655 |
% | 99.44 | 95.86 |
Against | 1,352,487 | 9,949,668 |
% | 0.56 | 4.14 |
Withheld | 33,014 | 32,597 |
Total votes | 240,315,921 | 240,315,920 |
Chapter 6 113 Financial summary
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 2010 and 2020, Hiscox delivered total shareholder return of 190%.
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
Dec16
Dec12
Dec13
Dec14
Dec15
Chief Executive historic remuneration
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
1,509,248 1,938,759 2,341,737 3,130,535 3,358,894 3,970,466 2,394,428 1,818,086 |
2014
2011
2012
2013
2015
2016
0
46
51
44
39
64
85
39
53
100
100
100
2017 2020
2018 | 2019 |
698,196 | 717,243 |
0 | 0 |
0 | 0 |
0
9
85
47
Prior to 2015 the annual bonus was operated on an uncapped basis. In order to facilitate comparison the cap has been applied retrospectively.
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 five years.
Comparator data
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. No employees were furloughed and all were offered flexible working options to help juggle the demands of work life and home life during 2020.
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 2020 is shown below, along with the 25th and 75th percentiles.
We selected calculation method 'Option A' as it is the more robust approach and favoured by investors. This method captures all pay (excluding overtime due to its volatility) and benefits for the financial year to 31 December 2020 and aligns with how the 'single figure' table is calculated (from which there has been no deviation). Part-time employee single figures were annualised to provide more meaningful comparison.
P25 | |
£ | |
Salary | 30,342 |
Total remuneration | 35,481 |
2019 | |
Salary | 29,607 |
Total remuneration | 36,210 |
P50 | P75 | |
(median) | (upper quartile) | |
12:1 | 8:1 | |
11:1 | 7:1 | |
The table below shows the salary and total remuneration of each employee at the quartile positions. | ||
2020 | P50 | P75 |
£ | £ | |
50,116 | 68,915 | |
59,980 | 92,461 | |
52,248 | 81,145 | |
61,155 | 94,661 |
Calculation methodology
P25
Full year
(lower quartile)
2020 2019
A A
20:1 19:1
The Committee has considered the pay data for the three employees identified and believes that it fairly reflects pay at the relevant quartiles among the UK employee population. There has been minimal change in the ratios over the last year, primarily as a result of the CEO not receiving a bonus in either year and the long-term incentives lapsing. In future years the expectation is that the ratios will be higher and more variable as the remuneration of our most senior executives, including the CEO, is more highly performance geared than other roles in the business. The Committee is comfortable that the pay ratio for 2020 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.
Percentage change in remuneration of the Board Directors
The table below shows the percentage change in remuneration for each Executive and Non Executive Director, between the year ended 31 December 2019 and 31 December 2020. Salary and bonus are compared against all employees globally, benefits are compared against all UK-based employees, reflecting the location of the Executive Directors.
% change | |||
Salary/fees | Benefits | Bonus2 | |
All employees1 | 4.3 | 5.9 | (36.1) |
Executive Directors: | |||
Bronek Masojada | 2.8 | 2.7 | - |
Aki Hussain | 2.8 | (6.9) | - |
Joanne Musselle3 | - | - | - |
Non Executive Directors:4 | |||
Robert Childs | 1.7 | (1.7) | - |
Caroline Foulger | (3.2) | - | - |
Michael Goodwin | 4.2 | - | - |
Thomas Hürlimann | (2.0) | - | - |
Colin Keogh | (2.5) | - | - |
Anne MacDonald | 2.2 | - | - |
Constantinos Miranthis | (5.2) | - | - |
Lynn Pike | (6.3) | - | - |
1Median employee salary, benefits and bonus have been calculated on a full-time equivalent basis. Salary and benefits are calculated as at 31 December, bonus is that earned during the year ending 31 December.
2No bonuses were paid to Executive Directors in respect of 2019 and 2020. 3Joanne Musselle was appointed to the Board on 2 March 2020.
4Non Executive Director fees are subject to exchange rate fluctuations.
Relative importance of the spend on pay
The charts below show the relative movement in profit, shareholder returns and employee remuneration for the 2019 and 2020 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 122.
Profit/(loss) before tax ($m) -605.7 (% change)
530
2019
2020
(268)
Dividend and return of capital to shareholders ($m) -100% (% change)
40
2019 (restated)*
2020
*Restated to reflect cancellation of full-year 2019 final dividend. See note 29 for further details.
Chapter 1 | 3 | Chapter 2 | 17 | Chapter 3 | 51 | Chapter 4 | 75 | Chapter 5 107 | Chapter 6 |
A balanced business | A closer look | Governance | Remuneration | Shareholder information | Financial summary |
Remuneration policy
Hiscox has a forward-looking remuneration policy for its Board members.
The policy was approved at the 2020 AGM and is replicated below, including how it will be implemented in 2021 shown in italics. The original policy can be viewed in the 2019 Annual Report and Accounts at hiscoxgroup.com.
Future policy table
Executive Director remuneration
Base salaryPurpose 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 2021 are set out onpage 88.
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.
Chapter 6 113 Financial summary
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.
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 2021, 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 onpage 82.
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; and
p consideration of risk.
Amounts are paid in accordance with the bonus deferral mechanism described onpage 97.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 101.
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 onpage 82.
Future policy table
Executive Director remuneration
Bonus deferralPurpose 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
Balance of bonus split 50% to be paid after year two (24 months after the start of the bonus year), and 50% after year three
(36 months after the start of the bonus year).
Bonus above £100,000, €150,000, $200,000
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 101.
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.
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 onpage 86.
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 101.
Maximum potential value
Maximum annual grant of up to 250% of salary in respect of any one financial year.
Performance metrics
The performance conditions for awards are set to align with the long-term objectives of the Company.
The Committee reviews the targets prior to each grant to ensure that they remain appropriate.
Currently, the performance measures are linked to the achievement of growth in net asset value plus dividends, measured on a per-share basis, over the performance period. For 2021 awards, an additional measure of relative TSR will apply to awards alongside growth in net asset value plus dividends per share.
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 101.
Where the Committee considers it appropriate to do so, under the plan rules the Committee is able to modify performance criteria for outstanding awards on the occurrence of certain events (for example, major disposal).
Application to broader employee population
Participation in this plan is restricted to Executive Directors and other senior individuals.
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Hiscox Ltd. published this content on 10 March 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 March 2021 13:16:06 UTC.
