Hiscox Ltd Report and Accounts 2015 Contents Strategic report 2 Corporate highlights 4 Why invest in Hiscox? 6 Chairman’s statement 8 Chief Executive’s report 16 Building a balanced business 17 Executive Committee 18 Actively managed business mix 19 Actively managed key underwriting exposures 20 Capital 22 Group financial performance 24 Group investments Governance 27 Risk management 35 Corporate responsibility 39 Insurance carriers 42 Board of Directors 44 Hiscox Partners 46 Corporate governance 51 Audit Committee report Remuneration 53 Letter to shareholders 55 Remuneration policy report 64 Annual report on remuneration 2015 73 Directors’ report 75 Directors’ responsibilities statement Financial summary 78 Independent auditor’s report 79 Consolidated income statement 79 Consolidated statement of comprehensive income 80 Consolidated balance sheet 81 Consolidated statement of changes in equity 82 Consolidated statement of cash flows 83 Notes to the consolidated financial statements 132 Five-year summary Cover image: Ferrofluid from our ‘elements of risk’ series, challenging the opposing forces of nature and unseen threats in what we believe is a thought-provoking and beautiful way. Our ambition is to be a respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastrophe-exposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle. Strategic focus 100% = £2,165m Total Group controlled income for 2015 Internationally traded lines Local specialty lines 20% Reinsurance Local casualty 21% and commercial 7% Large property Tech and 6% media casualty 4% Global casualty Art and 13% private client 13% Specialty – terrorism, contractors’ equipment FTC, political risks, aerospace Specialty – kidnap and ransom, 7% contingency, personal accident 5% Marine and energy Small property 4% 1 Corporate highlights Group key performance indicators Net asset value p per share 2015 2014 Gross premiums written (£m) 1,944.2 1,756.3 545.0 Net premiums earned (£m) 1,435.0 1,316.3 462.5 Profit before tax (£m) 216.1 231.1 Profit after tax (£m) 209.9 216.2 Earnings per share (p) 72.8 67.4 Total ordinary dividend per share for year (p) 24.0 22.5 Special dividend (p) 16.0 45.0 Net asset value per share (p) 545.0 462.5 2014 2015 Group combined ratio (%) 85.0 83.9 Group combined ratio excluding foreign exchange (%) 85.7 84.7 Ordinary dividend p per share Return on equity (%) 16.0 17.1 Investment return (%) 1.0 1.8 Reserve releases (£m) 205.9 172.2 22.5 24.0 Operational highlights Strong premium growth of 10.7% from across the Group, with retail businesses now generating 50% of income. Each division delivered good profits through careful risk selection, growth in profitable niches and an absence of natural catastrophes. 2014 2015 Investment in the Hiscox brand continues to deliver, with retail customers now exceeding 600,000. Hiscox London Market continues to grow profitably, benefiting from new teams in complementary Profit before tax (£m) specialty lines. Hiscox Re performing well with Kiskadee Investment Managers’ AUM on track to reach US$1 billion in 2016 after its second year of operation. 231.1 A second interim dividend of 32.0p per share comprised a special dividend of 16.0p and a final 216.1 dividend equivalent of 16.0p, bringing the year’s total distribution to 40.0p. Going forward the Group will retain a greater proportion of earnings to fund the growth opportunities we see. 2014 2015 2 Strategic report Hiscox Ltd Report and Accounts 2015 The Hiscox Group has over 2,200 people in 14 countries UK Birmingham Colchester Glasgow Leeds London Maidenhead Manchester York Guernsey St Peter Port Europe Amsterdam USA Bordeaux Atlanta Brussels Chicago Bermuda Cologne Los Angeles Hamilton Dublin New York City Hamburg San Francisco Lisbon White Plains Lyon (New York) Madrid Munich Asia Latin American Paris Bangkok gateway Hong Kong Miami Singapore Strategic report Hiscox Ltd Report and Accounts 2015 3 – to protect and nurture our distinctive Why invest in Hiscox? culture and ethos by recruiting the best people, and by focusing on organic growth. Our three divisions covering reinsurance, London Market insurance, and retail insurance, provide the Group with a natural hedge against major catastrophes and market cycles in each of our businesses. Our operations span every continent and we are not overly reliant on any one of our divisions for the Group’s overall profits. A track record of profitable growth Over the last five years the Hiscox Group has: increased gross written premiums by 34.2% to £1.94bn delivered average combined ratio of Hiscox is a uniquely diversified insurer with a clear vision for the future. Our success is due 87.4% to a strategy of building balance (illustrated below) which we have held for decades posted average return on equity of and has been proven to deliver in the short, medium and long term. 14.2% achieved compound dividend growth of Our strategy is: –to use our underwriting expertise in 9.0% Bermuda and London to write high-margin volatile or complex risks; returned capital to shareholders of – to build distribution for our specialist retail products; £815m A balanced business with a symbiotic relationship between catastrophe-exposed internationally traded lines, and less volatile local specialty business Internationally traded lines Local specialty lines wLarge premium, w Premium growth catastrophe exposed between 5–15% wShrinks and expands per annum according to rates w Pays dividends wExcess profits allow wBrand builds strong investment in retail market position development wProfits act as additional capital Profit generator Value creator 4 Strategic report Hiscox Ltd Report and Accounts 2015 A resilient business We are acknowledged market leaders in many Strong underwriting discipline, a diversified of the sectors in which we operate, while our strategy and sound capital management commitment to provide clients with quick lead to a lower risk profile for the Group. responses, clear coverage and superb service is at the heart of everything we do. We have Our divisions always underwrite for profit, not invested significantly in creating a powerful, for market share, and we actively manage our differentiated brand that reflects our values and business mix according to the conditions in customer service ethos, with which our target each sector. clients identify. For example in DirectAsia, Thailand, brand awareness reached 37% in The Hiscox businesses maintain strong and our first year of advertising, which is higher stable credit ratings: A by A.M. Best and than expected. Standard & Poor’s and A+ by Fitch. The Group has an increasingly diversified capital base Specialist expertise that is valued by and is in a strong position to take advantage our customers of future growth opportunities. –In France, 96% of small business customers are satisfied with our services. Unique culture and strong brand –In the USA, 97% of small business The excellence of our people has been a crucial customers surveyed would recommend us. factor in our continuing success. Their expertise, –In the UK, 97% of Hiscox Home Insurance courage and dedication continue to drive our customers who have made a claim would reputation for quality and professionalism. In recommend us. return we strive to provide them with a working –Our broker partners value our claims environment in which they can flourish. In our expertise, rating Hiscox number one in annual global employee engagement survey the Gracechurch London Claims Report we looked at how connected employees feel for overall service quality. to Hiscox, their managers, their teams and –In 2015 we received industry accolades their role. Hiscox enjoys very high employee which included Insurance Company of engagement, which averages in the top quartile the Year at the City A.M. Awards and of over 200 companies worldwide. Of our the Hiscox London Market Directors and employees, 90% said they are proud to work Officers’ team being awarded Underwriting for us, while 95% said they believed in our Team of the Year at the Insurance Day corporate values. London Market Awards. Focus on creating long-term shareholder value with a progressive dividend policy (%) Hiscox FTSE Non Life Insurance FTSE All Share 200 180 160 140 120 100 80 60 40 20 0 -20 1 1 2 2 4 10 1 11 11 1 12 1 12 13 13 13 13 14 14 1 14 15 15 15 15 n 1 Dec Mar Jun Sep Dec Mar Ju Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Strategic report Hiscox Ltd Report and Accounts 2015 5 dividend equivalent of 16.0p per share (2014: Chairman’s statement 15.0p), taking the total ordinary dividend per share for the year to 24.0p, an increase of 1.5p (2014: 22.5p) and; an additional return of capital of 16.0p per share (2014: 45.0p). On this occasion the Directors have decided not to offer a scrip alternative. This is the fourth successive year we have been able to return additional capital to shareholders. As previously communicated to the market however, returning capital to shareholders is not a long-term strategy and going forward the focus will be on pursuing opportunities for profitable growth. The Group continues to maintain a progressive core dividend policy. In 2015 we raised £275 million via a subordinated debt issue. As Tier 2 capital it will support our ratings and also give us capital flexibility The Hiscox Group delivered a very healthy underpinning our 2016 business plans and profit of £216.1 million (2014: £231.1 million) beyond. As an inaugural issue it was competitively in 2015 with some help from a benevolent priced and the support was flattering. Mother Nature.