Hiscox Ltd full year results
For the year ended 31 December 2016
"A record result"
|
2016 |
2015 |
Gross premiums written |
£2,402.6m |
£1,944.2m |
Net premiums earned |
£1,675.0m |
£1,435.0m |
Profit before tax |
£354.5m |
£216.1m |
Earnings per share |
119.8p |
72.8p |
Total ordinary dividend per share for year |
27.5p |
24.0p |
Special dividend |
|
16.0p |
Net asset value per share |
649.9p |
545.0p |
Group combined ratio |
84.4% |
85.0% |
Return on equity |
23.0% |
16.0% |
Investment return |
1.9% |
1.0% |
Foreign exchange gains |
£152.4m |
£15.2m |
Reserve releases |
£213.0m |
£205.9m |
Highlights
· A record profit of £354.5 million, an increase of 64%, with gross written premium growth of 23.6% (14.1% in local currency).
· Hiscox Retail now accounts for 49% of the Group's GWP, 61% of NWP and 45% of profits (60% excluding foreign exchange gains). Hiscox UK and Europe doubled profits, and Hiscox USA remains the stand-out performer with premium growth of over 30%.
· Hiscox London Market is navigating its way through a challenging trading environment, growing selectively and focusing on long-term opportunity.
· Hiscox Re and ILS delivered an excellent result. It benefited from good underwriting and an increasing contribution from fees and profit commissions. Kiskadee Investment Managers' Assets Under Management now $1.25 billion.
· Final dividend of 19.0p, a step up in the full year ordinary dividend to 27.5p, which is an increase of 15%. Going forward we will maintain our progressive dividend policy. The Group continues to use retained profits to fund future growth opportunities.
Bronek Masojada, Chief Executive of Hiscox Ltd, commented:
"This is a good result, flattered by foreign exchange and boosted by a strong investment return. Our retail business has come of age, driving growth and profitability for the Group. This gives us options and, although there are uncertainties in both the insurance and political environments, we have the right people, footprint and financial power to adapt. We will remain focused and disciplined where margins are shrinking and invest where we see opportunities for long-term profitable growth."
For further information
Hiscox Ltd |
|
Jeremy Pinchin, Group Company Secretary, Bermuda |
+1 441 278 8300 |
Kylie O'Connor, Head of Group Communications, London |
+44 (0)20 7448 6656 |
Brunswick |
|
Tom Burns |
+44 (0)20 7404 5959 |
Simone Selzer |
+44 (0)20 7404 5959 |
Notes to editors
About The Hiscox Group
Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). 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. It's a long-standing strategy which in 2016 helped generate gross premiums written of £2,402.6 million and a record profit before tax of £354.5 million.
The Hiscox Group employs over 2,300 people in 13 countries, and has customers worldwide. Through the retail businesses in the UK, Europe and the US, we offer a range of specialist insurance for professionals and business customers as well as homeowners. Internationally traded, bigger ticket business and reinsurance is underwritten through Hiscox London Market and Hiscox Re and ILS.
Our values define our business, with a focus on people, quality, courage and excellence in execution. We pride ourselves on being true to our word and our award-winning claims service is testament to that. For more information, visit www.hiscoxgroup.com.
Chairman's statement
I am pleased to report a record profit of £354.5 million (2015: £216.1 million), over 60% more than last year. This year we maintained our underwriting discipline and benefited from a very favourable foreign exchange gain and good investment return.
On-going investment in our brand, infrastructure, and the hard work of our highly talented, energetic teams have all contributed to a strong result for Hiscox Retail. Hiscox USA has performed particularly well and continues to represent an excellent growth opportunity for the Group.
Hiscox London Market delivered a good result against a backdrop of fierce competition in specialty classes of business. Profitability is under pressure in most lines, and on the whole we are exercising caution. We hunt for opportunities where we can but are not afraid to sit on our hands where margins are thin. We are cautiously growing in some lines, particularly in new product areas and in our fledgling MGA business, which gives us access to attractive returns, helping to offset reductions elsewhere.
Hiscox Re and ILS (insurance-linked securities) has been very successful. Our strategy of reducing volatility in our earnings by diversifying our operations saw us create an ILS business in 2013 which has grown quickly to reach US$1.25 billion in assets under management and is now firmly in the premier league of ILS businesses. It performs a number of very useful functions for the Group, enabling us to leverage our underwriting expertise to give clients a full range of solutions, as well as providing an attractive source of regular fee income. It sits comfortably alongside our well-developed partnership with various quota share reinsurers.
Hiscox has had the same strategy for the 30 years I have been here. We continue to grow the retail businesses between 5% and 15% on average each year, whilst managing the more volatile London Market and reinsurance businesses more aggressively up and down as the opportunity and conditions dictate. This strategy has resulted in our transformation from a niche Lloyd's underwriter to an international insurance group with a strong consumer brand. This has required discipline and persistence by an experienced management team led by Bronek. Our retail business, outside of the London Market and Bermuda, now delivers 45% of profits (60% excluding foreign exchange gains), 49% of income and again its profits cover the dividend.
Results
The result for the year ending 31 December 2016 was a record profit before tax of £354.5 million (2015: £216.1 million). Gross written premium increased by 23.6% to £2,402.6 million (2015: £1,944.2 million). The combined ratio was 84.4% (2015: 85.0%). Earnings per share increased to 119.8p (2015: 72.8p) and the net asset value per share increased by 19.2%, or over £1, to 649.9p (2015: 545.0p). Return on equity was 23.0% (2015: 16.0%).
Dividend, balance sheet and capital management
In view of the performance of the Group, the growing contribution of the retail business, and the diversification of our reinsurance offering, I am pleased to announce a final dividend of 19.0p, a step up in the full year ordinary dividend to 27.5p, which is an increase of 15%. Going forward we will maintain our progressive dividend policy. The record date for the dividend will be 12 May 2017 and the payment date will be 20 June 2017.
The Board proposes to offer a scrip alternative subject to the terms and conditions of Hiscox Ltd's 2016 Scrip Dividend Scheme. The last date for receipt of scrip elections will be 19 May 2017 and the reference price will be announced on 30 May 2017.
The Group continues to use retained profits to capitalise on the opportunities for profitable growth which we have created. Despite our shifting profile towards retail, as in previous years our key capital constraint remains the view of rating agencies on our solvency.
Investments
We made a much improved investment return of £74.8 million (2015: £33.7 million), excluding derivatives, which equates to a return of 1.9% (2015:1.0%) on total assets under management. We would happily have accepted this at the beginning of the year, particularly given the political surprises that added considerably to the already challenging investment environment. Our bond portfolios, which traditionally deliver the majority of our returns, all benefited from the dramatic decline in yields following the UK referendum outcome. However, in the US Dollar market, where the bulk of our assets are invested, yields soon rose again, which created a particularly difficult end to the year, although we were somewhat protected by our focus on investment grade credit and short-duration investments. Our risk assets portfolio also made a useful contribution in absolute terms over the year, but lagged our benchmark.
In 2017, our expectation is that yields are more likely to rise than fall. Our largely short-duration portfolio means we are well positioned to take advantage of such a move. Capital gains will be harder to come by in such an environment and income will play a more important role, so our preference for corporate credit is likely to remain given the higher coupons available. The outlook remains unclear, and we therefore expect another year of relatively modest investment returns.
Industry stress test
Last year I talked about my desire to gain consensus on an industry-wide 'dry run' to test the London Market's ability to withstand a mega-catastrophe. This year, I'm delighted to say we have accomplished that task. It is rare for such an initiative to be driven by the industry rather than the regulator, but we succeeded in bringing together insurers, brokers, Lloyd's, rating agencies, regulators and Her Majesty's Treasury.
We learnt a number of valuable lessons from the exercise. The industry has a vital part to play in the economy in the aftermath of a major event, and this exercise demonstrated that it has all the ingredients it needs not just to survive such a market-turning event, but to thrive. We confirmed that the resilience of the London Market depends on the robustness of reinsurance and recapitalisation arrangements and the ability of firms to implement these arrangements during a turbulent financial environment. We also resolved that out of five critical factors - capital, rates, liquidity, underwriting expertise and regulatory response - it is a deep underwriting expertise and surefooted regulatory response that will differentiate the London insurance market in a market-turning event.
The London Market is the world's pre-eminent insurance market and our industry-led approach to this exercise is one of many reasons this market is so special. This exercise sets us apart from others at a time when there is greater fluidity of capital and a growing expertise in other territories to challenge us. We now have a blueprint for what the London insurance market needs to do to maintain its leadership position.
People
We should never think that we know everything. For the Group to thrive, it needs to continually adapt to the changes in our industry, and to do that we must embrace new ideas and perspectives. That is why it is so important to us to attract and retain the brightest and best people from a range of backgrounds.
2016 was a great year for us in this respect. Further consolidation in the London Market enabled us to recruit several market-leading specialty teams, and our new apprenticeship scheme for non-graduates also saw us take on clever, enthusiastic young people whose positive attitude and fresh outlook are beneficial to our business.
It has also been pleasing to see our Board and Executive Committee boosted by the addition of Aki Hussain, our new Chief Financial Officer, who brings different skills to our top team as well as important regulatory experience. His positive impact is already being felt and we are learning a lot from him.
Ultimately our people and our culture set us apart. I am always hugely impressed by the passion and positivity I encounter when I visit any of our 30 offices around the world. I am grateful to all our people for their focus and commitment to excellence, and thank them for their hard work over the year.
Outlook
In 2016 we saw favourable foreign exchange movements produce increased profits despite declining margins. We are very happy to take the exchange gain but are equally aware it can go the other way. Margins are under pressure in big-ticket business and are not likely to improve next year. This is where our retail strategy comes into its own. We have plenty of room for growth in all retail segments as our penetration in professional lines and homeowners is far from complete.
The last time I saw market conditions like this was in the 1990s, but the difference between then and now is that the Group has a depth of expertise and experience and more tools to deal with market challenges than before. Hiscox remains disciplined, and our longstanding strategy serves us well. We expect the tension between underwriting discipline and market relevance to continue in 2017, particularly in the London Market, and will respond by retreating in those lines where margins are vanishing.
Despite the difficult trading environment, the Hiscox Group has never been in better shape. The strategy we began so many years ago is guiding us in the soft market, giving us precisely the kind of options and flexibility that we could only have dreamt of some years ago. We look forward with optimism and confidence.
Robert Childs
27 February 2017
Chief Executive's report
Our 2016 result represents a record year for Hiscox with profits before tax of £354.5 million (2015: £216.1 million), beating our previous record of £320.6 million achieved in 2009. The improvement since last year is thanks to increased investment returns, significant foreign exchange gains and good underwriting which has offset the impact of a softening market. At the same time we were able to grow our revenues to £2,402.6 million (2015: £1,944.2 million), an increase of 14.1% at constant exchange rates.
Hiscox Retail is becoming an ever more important part of our business, growing revenues by 13.2% in local currency and doubling profits to £158.0 million (2015: £78.6 million). Our retail business has come of age and now accounts for 49% of the Group's GWP, 61% of NWP and 45% of profits (60% excluding foreign exchange gains), and again covers the dividend. Our long-held strategy of balance and diversity gives us choice and flexibility in this soft market and the symbiotic relationship we have created between our retail operations and bigger-ticket, more volatile lines, is not quickly replicated. It is the culmination of years of investment in infrastructure, our skills and our brand.
These very good results mask on-going soft market challenges. Our London Market business continues to face pricing pressure in most lines. Despite this, it delivered a strong profit of £44.0 million (2015: £54.6 million) and growth in local currency of 14.2%. Our investment in new teams has offset the decline in some established lines. We expect the soft market conditions to continue in 2017, and that particularly tortured London Market lines will shrink.
Hiscox Re and ILS has spent the last three years evolving and adapting to market disruption, successfully navigating new capital and declining rates to become a premier league player in the reinsurance and ILS space. Through good underwriting and good fortune we have avoided significant losses in what has been the worst year for catastrophes since 2012, increasing profits to £115.5 million (2015: £97.5 million).
Our adaptability has meant we have evolved organically over the past decade. We are now a lot more than a Lloyd's business with a retail play on the side. We are a diversified international insurance Group with a powerful brand, strong balance sheet and plenty of room to grow. We are not afraid to take bets, make difficult decisions or shrink as we adapt to the markets around us.
Hiscox Retail
Hiscox Retail continues to grow in significance and this year generated almost half of the Group's gross written premiums at £1,181.4 million (2015: £989.8 million). It is the single biggest segment in the Group, a strong profit contributor, and it differentiates us from our peers. We continue to invest heavily in our brand and our significant investment in IT infrastructure in both the UK and USA will support our next phase of growth.
Our retail businesses doubled profits to £158.0 million (2015: £78.6 million) and delivered a combined ratio of 88.1% (2015: 92.9%), the result of good underwriting decisions and a modest year for claims. Rates are broadly flat in retail, with marginal increases in select areas offset by declines elsewhere. Hiscox UK and Ireland saw increases in personal lines, though new business rates in casualty remain under pressure.
Hiscox Retail comprises Hiscox UK and Ireland, Hiscox Europe, and Hiscox International. I review them in turn below.
Hiscox UK and Europe
This division provides commercial insurance for small and medium-sized businesses, typically operating in white-collar industries, and personal lines cover - predominantly high-value household, fine art and collectibles, and luxury motor. These products are distributed via brokers, through a growing network of partnerships, and direct to consumers.
Our retail businesses in the UK and Europe doubled profits to £122.0 million (2015: £59.6 million) and experienced a benign year for claims, with minimal exposure to Storm Katie in the UK and Storm Elvira in France.
Hiscox UK and Ireland
Our most mature retail operation, Hiscox UK and Ireland, increased gross written premiums by 12.5% to £498.6 million (2015: £443.3 million), with every region contributing.
The broker channel remains a key driver of growth, particularly in professions and specialty commercial lines where we have expanded our appetite for larger risks. Within our technology book, our cyber and data risks product continues to perform well, supported by a focused marketing campaign. Underwriting partnerships grew by over 60% and we have made good progress in motor following our acquisition of RH Classics in 2015. Our market-leading position in media, entertainment and events, and specialised claims handling team, continue to set us apart, achieving double-digit premium growth in the period.
In our direct-to-consumer business, the investment in infrastructure that I have spoken about previously is bearing fruit. We completed our migration to a new online platform with an improved user experience, and that has helped to drive good growth, particularly in commercial lines where we have broadened our appetite to include more businesses at the 'medium' end of the SME scale. In direct home, we are already benefiting from our new IT system's ability to tailor pricing intelligently.
In 2016 we successfully launched a number of new products. These included Hiscox Trader, an e-trading solution for commercial brokers to make it easier for them to quote and sell Hiscox products to their clients; a renovation and extension product that provides homeowners with additional protection when undertaking sizable building works; a liability product for tradespeople and contractors; and a crime product to protect small businesses from a broad range of fraudulent acts. All have performed well so far, particularly Hiscox Trader which has helped us to streamline the way we quote and process small risks.
2016 was also the year we saw the much-debated Flood Re scheme go live. We are proud to have supported our customers by successfully campaigning for higher council tax band homes to be included within the scheme. However, we were disappointed to see the government announce further increases to Insurance Premium Tax (IPT) in the Autumn Statement. This is the third price increase in 18 months, taking IPT from 10% to 12% from June 2017 and, alongside the Flood Re levy of 4%, punishes the prudent. The latest hike amounts to a 300% increase since the introduction of IPT in 1994 and is hitting consumers' pockets and their ability to protect their assets - which I am sure is not the aim of HM Revenue and Customs.
It has been little over a year since we opened our landmark office in York, the home of our UK direct business. We now have 255 people working there and were pleased to be recognised by the British Council for Offices, winning the Best Workplace in the North award.
Continued investment in our brand saw us achieve some of our strongest ever brand health scores in 2016. Targeted small business and cyber insurance campaigns boosted brand affinity amongst SMEs to a record high of 53%. Our home insurance marketing also delivered strong results amongst target customer groups and helped new business to grow by 21%.
Our strong brand, established broker and partner relationships and award-winning claims service continue to deliver good opportunities in the UK market.
Hiscox Europe
Hiscox Europe grew gross written premiums to £174.7 million (2015: £148.3 million), 9.0% in constant currency. This good growth was driven by Germany, Spain and Benelux, all of which exceeded expectations at both the top and bottom line, and by our specialty commercial business which performed well in all markets.
Our German operations are doing very well. Here, core homeowner and small business products continue to deliver, while a focus on classic cars, the expansion of our cyber business, and new products launched for online shops and IT freelancers all help to differentiate us. It is a similar story in Benelux, where our classic car product (available through brokers) is proving popular, and our cyber offering is gaining traction. Cyber is a growing area of focus for our business, and this year a refined cyber offering will be launched in both France and Iberia.
In Spain, all lines are growing, with a particularly good performance in professional indemnity and directors and officers' business. We have also expanded our appetite for partnerships with financial service providers, with promising early signs.
Hiscox France experienced a difficult year following the loss of a number of key underwriters in 2015 and the cancellation of a challenged home surveyors' scheme. Our direct operations are performing well, helped by a move away from brand-building activity towards more focused acquisition marketing.
Our Shared Service Centre in Lisbon continues to improve our expense ratio for Europe. Around one third of our 325 Hiscox Europe staff are based there, and the team are involved not only in credit control and collection processes, but also in underwriting, pricing, broker relations, claims and IT.
Hiscox International
This division comprises Hiscox USA, Hiscox Special Risks and DirectAsia. Its revenues grew by 27.6% to £508.1 million (2015: £398.2 million), 16.9% at constant currency, and it achieved a combined ratio of 93.6% (2015: 93.9%). Hiscox USA was the biggest contributor to the division's growth and profit improvement.
Hiscox USA
Hiscox USA underwrites small-to-mid market commercial risks through brokers, other insurers and directly to businesses online and over the telephone. The outstanding momentum in this business has not stopped, delivering excellent growth of 30% in constant currency to £400.0 million (2015: £280.7 million) and a second year of aggregate profitability. Our business model is working.
Our broker business and direct and partnerships division have both performed well, with key contributors being our professional liability and cyber lines. The general liability account is also now established. Our first mover advantage in the direct and partnerships division is reaping rewards, delivering almost US$100 million in premium in 2016 and increasing its customer base to 175,000 policyholders. The low loss environment which benefited our terrorism line was offset by a more normal loss experience in the property account to deliver a good result in a challenging market.
During the year we expanded our cyber and data risk solutions to include Hiscox CyberClear, a product aimed at small and medium-sized enterprises in the U.S. with less than US$1 billion in annual revenue. This complements our existing offering for larger businesses. We also launched a new workplace violence coverage for our management liability product, and re-launched our industry-leading terrorism product to include a wider range of risks, such as the threat of an 'active shooter'.
Our operating model continues to adapt and evolve to accommodate a fast-growing business. We now have over 20 professionals working in a dedicated underwriting centre in Atlanta to service small accounts efficiently, which in turn enables our field underwriters to win more complex middle-market business, and we are benefiting from this approach. We are also embarking on a major project to replace our underlying US infrastructure with a more digital-friendly environment to ensure we have the capacity to support the size of business we would like to build.
On-going investment in the brand, including a US$28 million marketing spend, is paying off, with brand affinity amongst our target customers growing to 23% (2015: 7%). Our UK experience is that brand investment combined with good service drives customer growth, and that certainly appears to be the case here.
We remain very optimistic about our ability to grow profitably in the US market. We expect that Hiscox's combination of flexible underwriting delivered locally and our willingness to challenge convention by developing our direct offering will continue to differentiate us.
Hiscox Special Risks
This business underwrites special risks including kidnap and ransom, fine art and executive security from offices in Cologne, London, Los Angeles, Miami, Munich, New York, Paris and St Peter Port.
The business delivered gross written premiums of £95.2 million (2015: £99.3 million), a decrease of 4.2% or 11.6% in constant currency, due to intense competition and rate pressure across all lines. We continue to find opportunities in new and established markets though, helped by disciplined underwriting and careful expense management to protect profitability. In the Middle East, our fine art offering has been well received, and Latin America remains a source of great opportunity. New partnerships and distribution channels have also proven successful.
In partnership with global risk consultants Control Risks, we have developed a broader security-based offering for corporate and private clients, beyond our traditional kidnap and ransom product. The Security Incident Response product includes cover for criminal threats, workplace violence, corporate espionage and cyber extortion, and so responds to the changing needs of our clients. We expect these initiatives will return the business to growth in 2017.
DirectAsia
DirectAsia is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance. Hiscox acquired the business in April 2014. Its premiums shrank to £13.0 million (2015: £18.2 million), following the sale of our business in Hong Kong.
The team is navigating a highly competitive motor insurance market in Singapore, where restrictions on car ownership limit the size of the opportunity. In 2017 the Singapore team will focus on the core motor market and begin exploring the potential to use our digital platform to enter other lines of business.
In Thailand we see strong growth potential and our brand-building work continues to deliver results. Thailand has some 60 million people and over 12 million cars, so the opportunity for us here is significant. The challenge is to build the operational infrastructure to a level which can efficiently convert enquiries into sales. This will remain our focus for 2017.
Hiscox London Market
Conditions in the London Market remain challenging, with pressure on rates, terms and conditions, and acquisition costs. Against this backdrop, our London Market business delivered a profit of £44.0 million (2015: £54.6 million) whilst increasing premiums by 27.1% to £726.0 million (2015: £571.0 million). On a constant currency basis, premium growth was 14.2%.
Hiscox London Market's combined ratio of 91.0% (2015: 86.6%), reflects the impact of the challenging market combined with a return to a more normal loss experience. This included claims in property (where we saw losses from Hurricane Matthew, the Alberta wildfires, Houston floods and Texas hailstorm), marine and energy (including the Jubilee Oil Field loss), personal accident and terrorism (where we had a small exposure to the Brussels terrorist attack), and a number of large directors and officers' claims.
The current trading environment is reminiscent of the London Market in the 1990s. The on-going abundance of capital and a lack of major loss events have resulted in pricing pressure and lead to a conflict between underwriting discipline and marketplace relevance. This is the reality of the market, and our response is to remain disciplined and accept that we may need to shrink and even exit lines of business where we cannot see the opportunity for long-term profitability. We are growing very selectively in areas where we have introduced new lines - like US flood, where we believe we have an edge over our competitors - or where we have employed new teams, such as general liability, product recall and cargo.
Looking at each division in turn:
Property
Our property division includes US and international commercial property, power and mining risks, and US catastrophe-exposed personal and small commercial lines traded in the London Market.
Our property teams shrank in areas where rates are under most pressure such as large commercial property, power and mining. It has seen some growth in catastrophe-exposed personal and small commercial lines, where rates have held up. We see real opportunity for growth in US flood insurance, where the market is deregulating. Our new FloodPlus product has been well received by the market and was awarded Best Product Innovation at the Lloyd's Market Innovation Awards.
Marine and Energy
Our marine and energy business is one of the most challenged divisions, yet continues to deliver excellent profits.
The marine and energy liability and hull accounts are broadly flat, with some reductions in the upstream energy book. Due to rate reductions, a lack of new business, and the continuing depression in oil prices, we are actively managing our business in these lines. The cargo team we hired in 2016 is already bringing us new opportunities and we will cautiously grow in 2017. We have avoided some of the large cargo losses in the market.
Casualty
Our casualty division includes our directors and officers', cyber, professional indemnity and general liability lines.
Market challenges are less pronounced in our casualty business, where we have invested in new teams and products. We have received good support from brokers for our new general liability product as the team brings business to London which would otherwise have been written elsewhere. We will continue to grow in these lines in 2017, particularly in cyber which remains an opportunity for the Group.
Aerospace and Specialty
This division includes our aviation, space, contingency, terrorism, political risks, personal accident and product recall business. It has had a mixed year, with some lines under more pressure than others.
In aviation we have significantly reduced our airline account as prices remain under pressure, but have looked to grow our products and airports business. Personal accident had a challenging year as the market was hit by a number of losses but we saw good top line growth. Our focus for 2017 is to ensure this account is well balanced and profitable. Terrorism has benefited from a lack of losses, and our leadership position in the market stands us in good stead, however this is an area of the market where broker pressure on acquisition costs is at its most severe. We continue to grow the product recall account, where we have a market-leading team, and will expand in both product and distribution in 2017. We have taken the decision to exit political risks as the growing length of cover - now regularly over five years - and greater role of credit has moved it outside of our risk appetite.
Alternative Distribution
Our support for the underwriting agency White Oak has been a major part of our business, but after five years of working together we are materially reducing our involvement in 2017. We will not be renewing the extended warranty business and will write a much reduced line on the physical damage portfolio.
The role of the alternative distribution division is to facilitate innovation in the use of technology and specialist data to serve different markets, but to succeed at this requires a degree of selection and discipline. We are expanding in our portfolio business, where we are supporting other expert underwriters with not only capacity but also claims, wordings and pricing expertise. We have a very strong pipeline of opportunities and this area is growing profitably.
Hiscox MGA
Hiscox MGA underwrites and distributes products where customers' requirements for capacity exceeds Hiscox's own risk appetite. It operates out of London, Paris and Miami.
Our mega yacht business faced a challenging year and was not without losses, but our focus on the Mediterranean yacht market - and local presence - is already bearing fruit. For 2017, our Paris-based space team will become part of Hiscox MGA. Space is a longstanding class of business for us, and in offering material line sizes by underwriting on behalf of not only Hiscox but other insurers, we can remain relevant in this challenging market. In Miami, which serves as our gateway to Latin America, we have made good progress in our fine art, property and terrorism lines, and will be launching a casualty offering to the market in 2017. We have also extended the reach of our terrorism and political violence coverage, writing risks in the Middle East and Africa from London.
Hiscox Re and ILS
Hiscox Re and ILS comprises the Group's reinsurance businesses across the world and ILS activity through our flagship Kiskadee funds.
Gross written premiums for Hiscox Re and ILS increased by 29.1% to £495.2 million (2015: £383.4 million), 16.1% in constant currency, driven by growth in casualty and specialty lines as well as business written on behalf of Kiskadee. Net of cessions to supporting capital partners, premiums remained constant at £226.8 million (2015: £225.0 million), although declined 10.7% in constant currency. In a challenging trading environment, the business delivered a profit of £115.5 million (2015: £97.5 million) and a 53.7% combined ratio (2015: 46.6%), an excellent result boosted by a material contribution from fees and profit commissions. This was down to good risk selection, which saw the business avoid significant losses in a year of high frequency, and lower severity catastrophe activity.
The market continues to be awash with capital from new and traditional sources, which has seen rating pressure across the portfolio. While single-digit rate reductions at the important January renewals were within expectations, we remain willing to walk away from unattractively priced business. We are finding opportunity in non-catastrophe-exposed lines, such as smaller-ticket casualty and specialty reinsurance.
Product innovation continues to be a key focus for the team. New products developed in 2016 include cyber reinsurance covers and a collateralised reinsurance ILS offering which was launched for the 2017 renewal season.
Kiskadee assets under management reached US$1.25 billion in 2016. Demand for participation in the funds continues to increase, with the only constraint to growth being access to adequately priced opportunities. Pleasingly, the Hiscox Re and ILS team were awarded Underwriting Team of the Year at the Insurance Day London Market Awards.
Claims
We sell a promise to pay should the worst happen, and claims is where that promise is tested. We were therefore delighted to be rated number one in the Gracechurch London Claims Report for overall service quality for the second year in a row. One of our staff also received the Young Claims Professional of the Year Award at the Insurance Insider Honours Awards, and our net promoter scores remained at very positive levels. These are all signs that our on-going investment in claims does not go unnoticed and is in fact recognised by clients, brokers and competitors alike.
In 2016 the global insurance market returned to a more normal claims environment with earthquakes in Japan and Ecuador, Hurricanes Hermine and Matthew, wildfires in Alberta and floods in Louisiana. With the exception of Hurricane Matthew these events had limited impact on Hiscox.
Hurricane Matthew was the first material storm to make landfall on the East Coast of the United States since Hurricane Sandy in 2012. The Group set aside net US$35 million for the event, based on an insured market loss of US$8 billion, to cover claims and reduced profit commissions. This event was within our expected catastrophe loss budget for the year.
Hiscox's prudent approach to reserving is again reflected in reserve releases for 2016 of £213.0 million (2015: £205.9 million).
Marketing
In 2016 the Group spent £42.1 million on marketing and brand-building activity (2015: £44.5 million). This was focused on our key retail businesses with incremental marketing investment accelerating the growth of our direct-to-consumer lines around the world. In the UK our consistent marketing approach helped maintain excellent brand awareness and relevance in the small business sector and a new home insurance marketing campaign contributed to a 25% year-on-year increase in new business premium. In the US we doubled brand awareness to a record 38% (2015: 21%) through the successful activation of the "Encourage Courage" campaign, which also helped to deliver 45% growth in our direct small business division.
This year saw the successful activation of some new sponsorships, including the London to Brighton Veteran Car Run in the UK and the International Edelweiß Bergpreis in Germany, both of which helped to promote our classic car and high net worth business. In order to drive awareness of DirectAsia, we became the Official Club Partner of Leicester City Football Club (LCFC) for the 2016/17 season.
We continue to support the arts through corporate sponsorship such as Sculpture in the City, and through key local partnerships, particularly in York where we are establishing ourselves as a major local employer.
IT
Robust infrastructure is required as we grow into a business whose customer numbers will be measured in the millions, not the tens of thousands, so an investment in IT is a multi-year priority for the Group.
We are undertaking some significant IT infrastructure projects, particularly within our Retail businesses. In the UK, a new underwriting and policy administration platform will allow the business to grow scale efficiently, adapt to the increasingly digital world and meet customers changing expectations. The UK direct business has already migrated to our new platform and is already benefiting from better conversion rates, more targeted pricing and improved customer service. The UK broker channel commercial business will follow suit during 2017. Hiscox USA is beginning the task of replacing its policy and claims administration system to ensure we are fit for future growth. This will be another multi-year investment.
We expect that as these new systems come on stream their impact on efficiency will more than offset the increased depreciation cost.
Investments
We have learnt to live with lower investment returns for the last few years and have resisted the temptation to stretch for yield given the high valuations that prevail in many parts of the bond and equity markets. Our strategy however has been one of low risk rather than no risk given that so-called risk free returns remain at minimal, and in many parts of the world, negative levels. The result for 2016 therefore is a good one and certainly exceeds the expectations we had at the beginning of the year. Our investments, before derivatives, made £74.8 million (2015: £33.7 million) equating to a return of 1.9% (2015: 1.0%). The significant improvement on last year is pleasing and masks the volatility in bond and equity markets which arose following the main political events on either side of the Atlantic. Whilst the Brexit vote in June provided a boost for our bond portfolios, the election of President Trump in November reversed much of the benefit, particularly in the US bond market where many of our assets are invested. Our bond managers performed well in the fast changing conditions and the overall return of 1.9% from the bond portfolios is the highest for several years and comfortably ahead of the benchmarks against which they are measured. After initial weakness both outcomes were viewed as being positive for equities but with a wide range of performance between sectors. The risk assets portfolio delivered 6.2% in a challenging year for active managers.
There is currently much debate as to whether the increase in US yields that has occurred recently will persist in 2017. We have seen numerous false dawns on this front but with the Federal Reserve indicating that they intend to continue along a path of gradually increasing interest rates, our hope and expectation is that they will indeed rise. Such a move would be welcome and, given the short duration of our bond portfolios, we are well positioned to benefit. On balance we continue to err on the side of caution. Whilst there are signs of improvement economically, emergency monetary measures remain in place in many parts of the world prolonging the period of artificially elevated asset prices and doing little to reduce the overall levels of debt in the world. Political uncertainty can be added to the likely source of volatility in 2017 and, as 2016 has shown us, predicting outcomes and market reaction to them is something of a lottery. At risk of repetition, the outlook for 2017 therefore seems no clearer or more predictable than of late and our focus on resilience over return is likely to remain in place.
Capital management
The key measure of value creation in insurance is return on equity. All of our internal financial incentives are focused on having a good return on equity, with reasonable leverage and within a tightly defined appetite for risk. In 2016 we delivered a 23.0% return on equity (2015: 16.0%).
Retaining our capital efficiency is an important priority. We are proposing a 15% increase in our annual dividend and remain committed to progressive increases in the future whilst retaining the balance of our profits to fund our growth. Areas for capital deployment include our retail businesses in the UK, US and Europe. In our London Market business we do not expect an immediate capital release as this business shrinks and we have to manage the associated reserving risk as the business on our books matures.
A further demand for capital will be to fund the creation of an EU-27 carrier to allow us to trade in Europe post-Brexit. This will require some initial capital commitment, though we expect that as the European business with our UK carrier develops there will be a release of capital here. Inevitably though there will be a timing difference.
For some time we have been communicating to rating agencies and regulators that Hiscox has a broad diversified business, both by product and geography, and we are no longer a London Market business with a retail operation on the side. Slowly they are seeing this in our results, and this year with retail contributing to 45% of pre-tax profits, I think that they will see that reality matches our message.
Political environment
2016 has seen some major changes in the political environment. Brexit is becoming a reality and it is possible that the US may enact major changes to its trading and taxation relationships with other countries.
Hiscox has been planning for a Brexit in which the UK will have regulatory equivalence with the EU-27, but no passporting or freedom of services. This means that to continue to conduct business in Europe we will have to incorporate a new carrier within the EU-27. Our European business employs 300 people, underwrites £174.7 million in premiums and has a combined ratio of 86.3%, so we have an incentive to retain and expand this business. We are in discussions with two regulators about domiciling our new legal entity in their country. We expect to begin the process of incorporation in the first half of this year, so that we are in a position to write new business into the new carrier before the end of 2018.
The only difficulty we see at the moment is the handling of claims on in-force or historic policies. The cost of a Part VII court approved process to transfer these liabilities to a new EU-27 carrier is significant. In the Brexit negotiations to come we hope that pragmatism will prevail and practical transition arrangements will be developed.
Another source of business uncertainty is the emerging conversation in the US on its relationship with the rest of the world. There is much talk of 'border adjustment taxes', changes to the taxation of related party transactions and a reduction in the headline rate of corporation tax. It is very uncertain what will be enacted by Congress and the Senate and approved by the President. We currently feel that Hiscox has the flexibility and capital to adjust to these developments as they unfold, but we will be keeping a close eye on trends in the US.
People
During 2016 we successfully managed a number of senior changes. In September we welcomed Aki Hussain as our new Group Chief Financial Officer. Aki is already proving to be an excellent addition to our senior team, bringing extensive financial services experience, strong regulatory exposure, and a fresh perspective. I would like to take this opportunity to thank John Worth, our interim CFO, for his great contribution over his tenure.
During the year Pierre-Olivier Desaulle stepped down as Managing Director of Hiscox Europe. When Pierre-Olivier assumed leadership of this business it had a premium income of €19.5 million and was loss making. It is now a €218.5 million business and a valuable profit contributor to the Group. I would like to thank Pierre-Olivier for his endeavours over his tenure. He is succeeded by Stéphane Flaquet, Group IT Director and formerly Chief Operating Officer of Hiscox Europe. His knowledge of our business and the European territories in which we operate is already having a positive effect and we look forward to continued growth and steadily increasing profits under his leadership.
After five years in Bermuda Jeremy Pinchin, Chief Executive Officer of Hiscox Re and ILS and Chief Executive Officer of Hiscox Bermuda, is to return to London next year where he will continue to serve as our Global Head of Claims and also join the Board of Hiscox Special Risks. Mike Krefta, currently the Chief Underwriting Officer of Hiscox Re, will succeed Jeremy in these roles with effect from 1 August 2017, subject to regulatory and immigration approvals. Jeremy has made a major contribution to this business in his time in Bermuda. He brought together the Bermuda, London and Paris reinsurance teams into a powerful single unit, made innovation a core part of our client interaction and was instrumental in the creation of Kiskadee Investment Managers. Hiscox remain a material participant in the reinsurance market thanks to Jeremy's leadership.
There is, understandably, interest in the inclusiveness of businesses and their gender pay gap. There are two elements to this - first, whether individuals performing the same roles with the same level of competence are paid equally, and second, the gender mix at different levels of seniority. Hiscox conducted an audit of the first and have corrected any anomalies. In the second, despite a 50/50 gender split at entry level, Hiscox sees a decline in females filling senior roles. Although this has been a focus in the last two years, we have decided to take further steps to address this and Richard Watson, our Chief Underwriting Officer, has become the champion of our internal efforts in this regard.
As Hiscox grows and evolves, we are pleased that our people are able to fulfil their personal ambitions and build their careers here. The success and adaptability of Hiscox is thanks to the collective endeavours of each person. I would like to thank all 2,300 of my colleagues for their commitment and achievements throughout the year.
Outlook
2017 will represent yet another step change in the evolution of our business, with our retail businesses further growing in importance. We have diversity by earnings, investments, geography, product and distribution. We are increasingly leveraging our underwriting expertise and brand to generate fees and commissions.
We talk a lot about the symbiotic relationship between our retail and big-ticket businesses. This has never been more relevant than this business plan cycle as we proactively reduce the big-ticket insurance lines, but continue to grow the retail lines to drive growth and profits.
There are uncertainties, both from the insurance and the political environments, but Hiscox has the right talent, footprint and financial power to adapt to what lies ahead, taking advantage of trends for the benefit of shareholders, customers and staff.
Bronek Masojada
27 February 2017
Inside Information
This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation.
Hiscox Ltd
Consolidated income statement
For the year ended 31 December 2016
|
|
|
2016
Total |
2015 Total |
|
|
Note |
£000 |
£000 |
Income |
|
|
|
|
Gross premiums written |
|
4 |
2,402,579 |
1,944,220 |
Outward reinsurance premiums |
|
|
(614,636) |
(372,376) |
Net premiums written |
|
4 |
1,787,943 |
1,571,844 |
Gross premiums earned |
|
|
2,220,853 |
1,828,334 |
Premiums ceded to reinsurers |
|
|
(545,840) |
(393,318) |
Net premiums earned |
|
4 |
1,675,013 |
1,435,016 |
Investment result |
|
7 |
74,991 |
35,381 |
Other income |
|
9 |
37,594 |
17,156 |
Total income |
|
|
1,787,598 |
1,487,553 |
Expenses |
|
|
|
|
Claims and claim adjustment expenses |
|
|
(1,004,601) |
(685,897) |
Reinsurance recoveries |
|
|
264,829 |
113,444 |
Claims and claim adjustment expenses, net of reinsurance |
|
17 |
(739,772) |
(572,453) |
Expenses for the acquisition of insurance contracts |
|
|
(538,467) |
(441,376) |
Reinsurance commission income |
|
|
128,627 |
97,093 |
Operational expenses |
|
9 |
(415,719) |
(361,215) |
Net foreign exchange gains |
|
|
152,408 |
15,153 |
Total expenses |
|
|
(1,412,923) |
(1,262,798) |
Results of operating activities |
|
|
374,675 |
224,755 |
Finance costs |
|
|
(20,266) |
(9,662) |
Share of profit from associates after tax |
|
|
134 |
1,007 |
Profit before tax |
|
|
354,543 |
216,100 |
Tax expense |
|
19 |
(17,557) |
(6,205) |
Profit for the year (all attributable to owners of the Company) |
|
|
336,986 |
209,895 |
Earnings per share on profit attributable to owners of the Company |
|
|
|
|
Basic |
|
20 |
119.8p |
72.8p |
Diluted |
|
20 |
116.0p |
70.5p |
The related notes 1 to 22 are an integral part of this document.
Consolidated statement of comprehensive income
For the year ended 31 December 2016
|
|
2016 Total |
2015 Total |
|
|
£000 |
£000 |
Profit for the year |
336,986 |
209,895 |
Other comprehensive income |
|
|
Items that will not be reclassified to profit and loss |
|
|
Remeasurements of the net defined benefit obligation |
(46,531) |
28,236 |
Income tax on the remeasurement of other comprehensive income |
9,502 |
(6,762) |
|
(37,029) |
21,474 |
Items that may be reclassified subsequently to profit and loss: |
|
|
Exchange differences on translating foreign operations |
111,094 |
34,478 |
Income tax on the remeasurement of other comprehensive income |
- |
- |
|
111,094 |
34,478 |
Other comprehensive income net of tax |
74,065 |
55,952 |
Total comprehensive income for the year (all attributable to owners of the Company) |
411,051 |
265,847 |
|
|
|
The related notes 1 to 22 are an integral part of this document.
Consolidated balance sheet
At 31 December 2016
|
|
|
2016 |
2015 |
|
|
Note |
£000 |
£000 |
Assets |
|
|
|
|
Goodwill and intangible assets |
|
|
123,724 |
126,222 |
Property, plant and equipment |
|
|
48,425 |
46,509 |
Investment in associates |
|
|
13,835 |
13,525 |
Deferred tax |
|
|
41,392 |
35,147 |
Deferred acquisition costs |
|
|
346,592 |
271,517 |
Financial assets carried at fair value |
|
12 |
3,792,033 |
2,921,585 |
Reinsurance assets |
|
11,17 |
805,649 |
538,810 |
Loans and receivables including insurance receivables |
|
13 |
802,906 |
619,563 |
Current tax asset |
|
|
2,406 |
3,243 |
Cash and cash equivalents |
|
16 |
664,816 |
727,880 |
Total assets |
|
|
6,641,778 |
5,304,001 |
|
|
|
|
|
Equity and liabilities |
|
|
|
|
Shareholders' equity |
|
|
|
|
Share capital |
|
|
19,060 |
19,030 |
Share premium |
|
|
18,035 |
15,231 |
Contributed surplus |
|
|
89,864 |
89,864 |
Currency translation reserve |
|
|
202,272 |
91,178 |
Retained earnings |
|
|
1,488,306 |
1,312,660 |
Equity attributable to owners of the Company |
|
|
1,817,537 |
1,527,963 |
Non-controlling interest |
|
|
866 |
866 |
Total equity |
|
|
1,818,403 |
1,528,829 |
|
|
|
|
|
Employee retirement benefit obligations |
|
|
56,139 |
75 |
Deferred tax |
|
|
17,030 |
29,814 |
Insurance liabilities |
|
17 |
3,852,976 |
3,048,362 |
Financial liabilities |
|
12 |
276,293 |
275,679 |
Current tax |
|
|
21,735 |
4,884 |
Trade and other payables |
|
18 |
599,202 |
416,358 |
Total liabilities |
|
|
4,823,375 |
3,775,172 |
Total equity and liabilities |
|
|
6,641,778 |
5,304,001 |
The related notes 1 to 22 are an integral part of this document. |
|
|
|
|
|
|
|
Consolidated statement of changes in equity
For the year ended 31 December 2016
|
|
Share capital |
Share premium |
Contributed surplus |
Currency translation reserve |
Retained earnings |
Equity attributable to owners of the Company |
Non controlling interest |
Total equity |
|
Note |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
Balance at 1 January 2015 |
|
19,913 |
10,417 |
89,864 |
56,700 |
1,276,446 |
1,453,340 |
866 |
1,454,206 |
Profit for the year (all attributable to owners of the company) |
|
- |
- |
- |
- |
209,895 |
209,895 |
- |
209,895 |
Other comprehensive income/(expense) net of tax (all attributable to owners of the company) |
|
- |
- |
- |
34,478 |
21,474 |
55,952 |
- |
55,952 |
Employee share options: |
|
|
|
|
|
|
|
|
|
Equity settled share based payments |
|
- |
- |
- |
- |
17,726 |
17,726 |
- |
17,726 |
Proceeds from shares issued |
|
29 |
1,400 |
- |
- |
- |
1,429 |
- |
1,429 |
Deferred and current tax on employee share options |
|
- |
- |
- |
- |
5,761 |
5,761 |
- |
5,761 |
E/F Share Scheme: |
|
|
|
|
|
|
|
|
|
Return of capital, special distribution |
21 |
- |
(32) |
- |
- |
(141,422) |
(141,454) |
- |
(141,454) |
Final dividend equivalent |
21 |
- |
- |
- |
- |
(48,105) |
(48,105) |
- |
(48,105) |
Share consolidation and sub division |
|
(930) |
930 |
- |
- |
- |
- |
- |
- |
Shares purchased by Trust |
|
- |
- |
- |
- |
(6,712) |
(6,712) |
- |
(6,712) |
Shares issued in relation to Scrip dividends |
21 |
18 |
2,516 |
- |
- |
- |
2,534 |
- |
2,534 |
Dividends paid to owners of the Company |
21 |
- |
- |
- |
- |
(22,403) |
(22,403) |
- |
(22,403) |
Balance at 31 December 2015 |
|
19,030 |
15,231 |
89,864 |
91,178 |
1,312,660 |
1,527,963 |
866 |
1,528,829 |
Profit for the year (all attributable to owners of the company) |
|
- |
- |
- |
- |
336,986 |
336,986 |
- |
336,986 |
Other comprehensive income net of tax (all attributable to owners of the company) |
|
- |
- |
- |
111,094 |
(37,029) |
74,065 |
- |
74,065 |
Employee share options: |
|
|
|
|
|
|
|
|
|
Equity settled share based payments |
|
- |
- |
- |
- |
26,274 |
26,274 |
- |
26,274 |
Proceeds from shares issued |
|
22 |
1,534 |
- |
- |
- |
1,556 |
- |
1,556 |
Deferred and current tax on employee share options |
|
- |
- |
- |
- |
1,907 |
1,907 |
- |
1,907 |
Shares purchased by Trust |
|
- |
- |
- |
- |
(38,558) |
(38,558) |
- |
(38,558) |
Shares issued in relation to Scrip dividends |
21 |
8 |
1,270 |
- |
- |
- |
1,278 |
- |
1,278 |
Dividends paid to owners of the Company |
21 |
- |
- |
- |
- |
(113,934) |
(113,934) |
- |
(113,934) |
Balance at 31 December 2016 |
|
19,060 |
18,035 |
89,864 |
202,272 |
1,488,306 |
1,817,537 |
866 |
1,818,403 |
The related notes 1 to 22 are an integral part of this document
Consolidated statement of cash flows
For the year ended 31 December 2016
|
|
|
2016 |
2015 |
|
|
|
Note |
£000 |
£000 |
|
Profit before tax |
|
|
354,543 |
216,100 |
|
Adjustments for: |
|
|
|
|
|
Net foreign exchange gains |
|
|
(152,408) |
(15,153) |
|
Interest and equity dividend income |
|
|
(54,789) |
(40,951) |
|
Interest expense |
|
|
20,266 |
9,662 |
|
Net fair value losses/(gains) on financial assets |
|
|
(13,786) |
8,538 |
|
Depreciation, amortisation and impairment |
|
|
28,162 |
22,734 |
|
Charges in respect of share based payments |
|
|
26,274 |
17,726 |
|
Other non-cash movements |
|
|
- |
(782) |
|
Changes in operational assets and liabilities: |
|
|
|
|
|
Insurance and reinsurance contracts |
|
|
251,836 |
38,975 |
|
Financial assets carried at fair value |
|
|
(431,324) |
(5,606) |
|
Financial liabilities carried at fair value |
|
|
458 |
(7,093) |
|
Financial liabilities carried at amortised cost |
|
|
156 |
- |
|
Other assets and liabilities |
|
|
3,687 |
41,441 |
|
Interest received |
|
|
55,273 |
40,768 |
|
Equity dividends received |
|
|
505 |
1,027 |
|
Interest paid |
|
|
(21,852) |
(8,453) |
|
Current tax paid |
|
|
(6,108) |
(27,757) |
|
Cash derecognised on loss of control |
|
|
(17,477) |
(342,655) |
|
Cash flows from subscriptions (paid)/received in advance |
|
|
(4,000) |
123,000 |
|
Net cash flows from operating activities |
|
|
39,416 |
71,521 |
|
Cash flows from the purchase of subsidiaries |
|
|
- |
(7,375) |
|
Cash flows from the sale of subsidiaries |
|
|
13,596 |
- |
|
Cash flows from the purchase of associates |
|
|
(450) |
(2,089) |
|
Cash flows from the sale of associates |
|
|
2 |
- |
|
Cash flows from the purchase of property, plant and equipment |
|
|
(5,770) |
(19,272) |
|
Cash flows from the purchase of intangible assets |
|
|
(20,909) |
(30,952) |
|
Net cash flows from investing activities |
|
|
(13,531) |
(59,688) |
|
Proceeds from the issue of ordinary shares |
|
|
1,556 |
1,429 |
|
Shares repurchased |
|
|
(38,558) |
(6,712) |
|
Proceeds from long-term debt issue, net of fees |
|
|
- |
273,909 |
|
Distributions made to owners of the Company |
|
21 |
(112,656) |
(209,428) |
|
Net cash flows from financing activities |
|
|
(149,658) |
59,198 |
|
Net increase in cash and cash equivalents |
|
|
(123,773) |
71,031 |
|
Cash and cash equivalents at 1 January |
|
|
727,880 |
650,651 |
|
Net increase in cash and cash equivalents |
|
|
(123,773) |
71,031 |
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
|
60,709 |
6,198 |
|
Cash and cash equivalents at 31 December |
|
|
664,816 |
727,880 |
|
The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totalling £136 million (2015: £126 million) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held. Additionally £38 million (2015: £172 million) is pledged cash against Funds at Lloyd's and £13 million is held within trust funds against reinsurance arrangements. The presentation of the cash flow statement has been reformatted to extract the foreign exchange movements on to one line to better represent the movements in the other lines. The prior year has been adjusted for comparison. The related notes 1 to 22 are an integral part of this document. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the consolidated financial statements
1. General information |
|
The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2016. The financial statements are subject to completion of audit activity. We anticipate receiving an unqualified audit opinion. The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and USA with over 2,300 staff. The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 22 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union. The consolidated financial statements for the year ended 31 December 2016 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Board of Directors on 27 February 2017. |
|
2. Significant accounting policies |
|
Except as described below, the accounting policies applied in these consolidated financial statements are consistent with the prior year. The consolidated financial statements as at, and for the year ended 31 December 2016 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981. |
|
Changes in accounting policies |
|
A number of new standards, amendments to standards and interpretations, as adopted by the European Union, are effective for annual periods beginning on or after 1 January 2016. They have been applied in preparing these consolidated financial statements. There were no new standards, amendments or interpretations that had a material impact on the Group. The amendments included minor changes to the following standards: IAS1: Presentation of Financial Statements IAS16: Property, Plant and Equipment IAS38: Intangible Assets Annual Improvements to IFRSs 2010-2012 cycle IAS19: Employee Benefits The following new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2017 and have not been applied in preparing these financial statements. - IFRS 17 will replace IFRS 4 and is expected to include a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard will likely have a significant impact on the results of the Group. In addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2021 is likely to be the earliest date for the adoption of a new standard. The date of the release of the standard is not yet known. - IFRS 9: Financial Instruments; Classification and Measurement. The new standard is effective for annual periods beginning on or after 1 January 2018.The IASB has stated they will allow insurers to defer implementation of IFRS9 until the earlier of the effective date of IFRS 17 and 2021. The Group will adopt the deferral approach to better align the implementation of the new standards. The Group qualifies for the deferral option by having a ratio of Insurance Liabilities to Total Liabilities greater than 80% and by not having any significant non-insurance related activities. A full impact analysis is expected to be completed at least 12 months prior to the effective date of the standard. - IFRS 15: Revenue from Contracts with Customers replaces IAS 18 and is effective from 1 January 2018. Revenue from contracts accounted for under IFRS 4 is outside the scope of IFRS 15. The new standard's requirement for accounting for variable consideration could change the timing of revenue recognition for non-insurance contracts issued by the Company. The impact of this standard is expected to be limited to the timing of the recognition of Profit Commission, and is not deemed to have a material impact at December 2016. - IFRS 16: Leases, will take effect from 1 January 2019 and specifies how the Company will recognise, measure, present and disclose leases. The standard requires lessees to implement a 'right-of-use' model, replacing the 'risks and rewards' model of IAS 17. The new standard will therefore require the Company to recognise an asset and liability at the inception of nearly all leases. The impact of the new standard on the 2016 consolidated statement of financial position would have been an increase in assets and liabilities by £51.3 million. There is little change in how the Company is required to account for leases in the instances where the Company is the lessor. |
2.1. Statement of compliance |
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981. Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as IFRS. The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK. |
2.2. Basis of preparation |
The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities and to all periods presented, solely for the purpose of producing the consolidated Group financial statements. The Group has financial assets and cash of over £4.4 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place. The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully. The Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases. |
2.3. Reporting of additional performance measures |
The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group's businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures, along with reserve releases, profit excluding foreign exchange gains and losses and gross written premium growth in local currency. Previous measures identified and explained can be seen in the Group's Interim Statement. |
3. Financial risk |
Credit risk The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government bonds issued mainly by North American countries and the European Union. The Group has no exposure to sovereign debt in Spain, Italy, Ireland, Greece or Portugal. An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables and equities and units in unit trusts, based on Standard & Poor's or equivalent rating, is presented below: |
As at 31 December 2016 |
AAA |
AA |
A |
Other / non-rated |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Debt and fixed income securities |
631,414 |
1,577,814 |
651,362 |
554,359 |
3,414,949 |
Deposits with credit institutions |
- |
5,194 |
5,252 |
14,146 |
24,592 |
Reinsurance assets |
196,484 |
165,708 |
419,598 |
23,859 |
805,649 |
Cash and cash equivalents |
21,188 |
87,641 |
531,178 |
24,809 |
664,816 |
Total |
849,086 |
1,836,357 |
1,607,390 |
617,173 |
4,910,006 |
Amounts attributable to largest single counterparty |
155,887 |
793,654 |
179,857 |
23,756 |
|
|
|
|
|
|
|
As at 31 December 2015 |
AAA |
AA |
A |
Other / non-rated |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Debt and fixed income securities |
603,086 |
1,160,692 |
460,922 |
390,314 |
2,615,014 |
Deposits with credit institutions |
- |
555 |
5,963 |
166 |
6,684 |
Reinsurance assets |
116,637 |
141,751 |
256,655 |
23,767 |
538,810 |
Cash and cash equivalents |
96,917 |
32,994 |
593,286 |
4,683 |
727,880 |
Total |
816,640 |
1,335,992 |
1,316,826 |
418,930 |
3,888,388 |
Amounts attributable to largest single counterparty |
117,973 |
578,741 |
109,060 |
15,712 |
|
The largest counterparty exposure within AAA rating at 31 December 2016 and 2015 is with the German Government. For the AA rating it is with the US Treasury at both 31 December 2016 and 2015. A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2016 and 2015. At 31 December 2016 and 2015, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities. The Group's AAA rated reinsurance assets include fully collateralised positions at 31 December 2016 and 2015. |
An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below: |
|
|
|
2016 |
2015 |
|
|
|
% |
% |
Government issued bonds and instruments |
|
|
30 |
33 |
Agency and government supported debt |
|
|
13 |
12 |
Asset backed securities |
|
|
5 |
8 |
Mortgage backed instruments - agency |
|
|
5 |
3 |
Mortgage backed instruments - non-agency |
|
|
2 |
2 |
Mortgage backed instruments - commercial |
|
|
1 |
3 |
Corporate bonds |
|
|
41 |
37 |
Lloyd's deposits and bond funds |
|
|
3 |
2 |
Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt. |
Liquidity risk A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges. The main focus of the investment portfolio is on high-quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows: |
|
Debt and fixed income securities |
Deposits with credit institutions |
Cash and cash equivalents |
2016 total |
2015 total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Less than one year |
706,700 |
21,039 |
664,816 |
1,392,555 |
1,245,186 |
Between one and two years |
1,004,085 |
3,054 |
- |
1,007,139 |
836,800 |
Between two and five years |
1,182,680 |
499 |
- |
1,183,179 |
922,242 |
Over five years |
521,484 |
- |
- |
521,484 |
345,350 |
Total |
3,414,949 |
24,592 |
664,816 |
4,104,357 |
3,349,578 |
The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date. |
4. Operating segments |
The Group's operating segment reporting follows the organisational structure and management's internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. The Group's four primary business segments are identified as follows: · Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the US, Special Risks and Asia retail business divisions. Hiscox UK and Europe underwrite European personal and commercial lines of business through Hiscox Insurance Company Limited, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, the UK includes elements of specialty and international employees and officers' insurance written by Syndicate 3624 and Hiscox Europe excludes the kidnap and ransom business written by Hiscox Insurance Company Limited. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division. It also includes the European kidnap and ransom business written by Hiscox Insurance Company Limited and Syndicate 33. · Hiscox London Market comprises the internationally traded insurance business written by the Group's London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage, auto extended warranty and aviation business. · Hiscox Re is the Reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. · Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of these can be found in note 22. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns. The Group has aligned its kidnap and ransom business under Special Risks during 2016, and as a result, has restated the prior year period segmental information. All amounts reported below represent transactions with external parties only. In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group. Performance is measured based on each reportable segment's profit before tax. |
a. |
Profit before tax by segment |
Year ended 31 December 2016 |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Gross premiums written |
1,181,384 |
726,045 |
495,150 |
- |
2,402,579 |
Net premiums written |
1,091,969 |
469,143 |
226,831 |
- |
1,787,943 |
Net premiums earned |
1,020,531 |
443,129 |
211,353 |
- |
1,675,013 |
|
|
|
|
|
|
Investment result |
31,328 |
13,351 |
11,749 |
18,563 |
74,991 |
Other income |
14,075 |
9,121 |
13,704 |
694 |
37,594 |
Total income |
1,065,934 |
465,601 |
236,806 |
19,257 |
1,787,598 |
|
|
|
|
|
|
Claims and claim adjustment expenses, net of reinsurance |
(396,137) |
(260,468) |
(83,167) |
- |
(739,772) |
Expenses for the acquisition of insurance contracts |
(262,545) |
(137,177) |
(10,118) |
- |
(409,840) |
Operational expenses |
(287,642) |
(57,933) |
(49,335) |
(20,809) |
(415,719) |
Foreign exchange gains |
37,248 |
34,991 |
22,959 |
57,210 |
152,408 |
Total expenses |
(909,076) |
(420,587) |
(119,661) |
36,401 |
(1,412,923) |
|
|
|
|
|
|
Results of operating activities |
156,858 |
45,014 |
117,145 |
55,658 |
374,675 |
Finance costs |
- |
- |
(1,654) |
(18,612) |
(20,266) |
Share of profit of associates after tax |
1,137 |
(1,003) |
- |
- |
134 |
Profit before tax |
157,995 |
44,011 |
115,491 |
37,046 |
354,543 |
|
Year ended 31 December 2015, restated |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Gross premiums written |
989,787 |
571,021 |
383,412 |
- |
1,944,220 |
Net premiums written |
936,576 |
410,280 |
224,988 |
- |
1,571,844 |
Net premiums earned |
887,982 |
366,360 |
180,674 |
- |
1,435,016 |
|
|
|
|
|
|
Investment result |
17,361 |
6,841 |
4,664 |
6,515 |
35,381 |
Other income |
9,004 |
7,520 |
(149) |
781 |
17,156 |
Total income |
914,347 |
380,721 |
185,189 |
7,296 |
1,487,553 |
|
|
|
|
|
|
Claims and claim adjustment expenses, net of reinsurance |
(343,391) |
(180,765) |
(48,297) |
- |
(572,453) |
Expenses for the acquisition of insurance contracts |
(234,110) |
(104,581) |
(5,592) |
- |
(344,283) |
Operational expenses |
(250,513) |
(47,955) |
(40,694) |
(22,053) |
(361,215) |
Foreign exchange (losses)/gains |
(8,364) |
6,862 |
8,327 |
8,328 |
15,153 |
Total expenses |
(836,378) |
(326,439) |
(86,256) |
(13,725) |
(1,262,798) |
|
|
|
|
|
|
Results of operating activities |
77,969 |
54,282 |
98,933 |
(6,429) |
224,755 |
Finance costs |
- |
(52) |
(1,472) |
(8,138) |
(9,662) |
Share of profit of associates after tax |
661 |
346 |
- |
- |
1,007 |
Profit before tax |
78,630 |
54,576 |
97,461 |
(14,567) |
216,100 |
|
The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising therefrom. |
b. |
100% operating results by segment |
Year ended 31 December 2016 |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Gross premiums written |
1,212,774 |
894,825 |
565,006 |
- |
2,672,605 |
Net premiums written |
1,119,546 |
581,322 |
263,452 |
- |
1,964,320 |
Net premiums earned |
1,046,838 |
550,229 |
242,462 |
- |
1,839,529 |
Investment result |
32,417 |
17,668 |
13,054 |
18,563 |
81,702 |
Other income |
8,693 |
2,331 |
8,754 |
694 |
20,472 |
Claims and claim adjustment expenses, net of reinsurance |
(402,508) |
(315,951) |
(94,819) |
- |
(813,278) |
Expenses for the acquisition of insurance contracts |
(270,986) |
(165,131) |
(10,337) |
- |
(446,454) |
Operational expenses |
(289,028) |
(67,376) |
(54,015) |
(20,809) |
(431,228) |
Foreign exchange gains |
40,115 |
48,101 |
28,927 |
57,210 |
174,353 |
Results of operating activities |
165,541 |
69,871 |
134,026 |
55,658 |
425,096 |
|
Year ended 31 December 2015, restated |
|
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
Gross premiums written |
1,017,608 |
709,655 |
437,777 |
- |
2,165,040 |
Net premiums written |
961,551 |
512,690 |
249,680 |
- |
1,723,921 |
Net premiums earned |
913,296 |
461,064 |
206,669 |
- |
1,581,029 |
Investment result |
17,601 |
9,157 |
5,465 |
6,515 |
38,738 |
Other income |
3,873 |
1,421 |
(3,993) |
781 |
2,082 |
Claims and claim adjustment expenses, net of reinsurance |
(346,251) |
(225,740) |
(53,787) |
- |
(625,778) |
Expenses for the acquisition of insurance contracts |
(242,703) |
(126,262) |
(6,322) |
- |
(375,287) |
Operational expenses |
(250,829) |
(57,497) |
(46,115) |
(22,053) |
(376,494) |
Foreign exchange (losses)/gains |
(8,404) |
10,342 |
9,893 |
8,328 |
20,159 |
Results of operating activities |
86,583 |
72,485 |
111,810 |
(6,429) |
264,449 |
|
100% ratio analysis |
Year ended 31 December 2016 |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
Claims ratio (%) |
38.4 |
57.4 |
39.1 |
- |
44.2 |
Expense ratio (%) |
53.5 |
42.3 |
26.5 |
- |
46.6 |
Combined ratio excluding foreign exchange impact (%) |
91.9 |
99.7 |
65.6 |
- |
90.8 |
Foreign exchange impact (%) |
(3.8) |
(8.7) |
(11.9) |
- |
(6.4) |
Combined ratio (%) |
88.1 |
91.0 |
53.7 |
- |
84.4 |
|
Year ended 31 December 2015, restated |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Total |
Claims ratio (%) |
37.9 |
49.0 |
26.0 |
- |
39.6 |
Expense ratio (%) |
54.1 |
39.8 |
25.4 |
- |
46.1 |
Combined ratio excluding foreign exchange impact (%) |
92.0 |
88.8 |
51.4 |
- |
85.7 |
Foreign exchange impact (%) |
0.9 |
(2.2) |
(4.8) |
- |
(0.7) |
Combined ratio (%) |
92.9 |
86.6 |
46.6 |
- |
85.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are: |
|
Year to 31 December 2016 |
Year ended 31 December 2015, restated |
|
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
Hiscox Retail |
Hiscox London Market |
Hiscox Re |
Corporate centre |
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
At 100% level |
|
|
|
|
|
|
|
|
1% change in claims or expense ratio |
10,468 |
5,502 |
2,425 |
- |
9,133 |
4,611 |
2,067 |
- |
At Group level |
|
|
|
|
|
|
|
|
1% change in claims or expense ratio |
10,205 |
4,431 |
2,114 |
- |
8,880 |
3,664 |
1,807 |
- |
|
5. Net asset value per share |
|
|
|
2016 |
2015 |
|
|
|
Net asset value (total equity) |
Net asset value per share |
Net asset value (total equity) |
Net asset value per share |
|
|
|
£000 |
pence |
£000 |
p |
Net asset value |
|
|
1,818,403 |
649.9 |
1,528,829 |
545.0 |
Net tangible asset value |
|
|
1,694,679 |
605.7 |
1,402,607 |
500.0 |
The net asset value per share is based on 279,805,393 shares (2015: 280,516,658), being the shares in issue at 31 December, less those held in treasury and those held by the Group's Employee Benefit Trust. Net tangible assets comprise total equity excluding intangible assets. |
|
6. Return on equity |
|
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Profit for the year (all attributable to owners of the Company) |
|
336,986 |
209,895 |
Opening shareholders' equity |
|
1,528,829 |
1,454,206 |
Adjusted for the time weighted impact of capital distributions and issuance of shares |
|
(60,742) |
(146,028) |
Adjusted opening shareholders' equity |
|
1,468,087 |
1,308,178 |
Return on equity (%) |
|
23.0 |
16.0 |
|
7. Investment result |
|
|
The total investment result for the Group before taxation comprises: |
|
2016 |
2015 |
|
|
£000 |
£000 |
Investment income including interest receivable |
|
54,789 |
40,951 |
Net realised gains/(losses) on financial investments at fair value through profit or loss |
|
6,416 |
2,968 |
Net fair value gains/(losses) on financial investments at fair value through profit or loss |
|
13,631 |
(10,239) |
Investment result - financial assets |
|
74,836 |
33,680 |
Net fair value gains/(losses) on derivative financial instruments and borrowings (note 14) |
|
155 |
1,701 |
Total result |
|
74,991 |
35,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment expenses are presented within other expenses (note 9). |
8. Analysis of return on financial investments |
i. The weighted average return on financial investments for the year by currency, based on monthly asset values, was: |
|
|
2016 |
2015 |
|
|
% |
% |
Sterling |
|
3.2 |
2.1 |
US Dollar |
|
1.5 |
0.8 |
Other |
|
0.7 |
0.6 |
ii. Investment return: |
|
|
|
|
|
2016 |
2015 |
|
|
|
|
|
|
|
£000 |
% |
£000 |
% |
Debt and fixed income securities |
|
|
|
|
|
|
55,709 |
1.9 |
21,585 |
0.9 |
Equities and shares in unit trusts |
|
|
|
|
|
|
17,246 |
6.2 |
10,410 |
4.0 |
Deposits with credit institutions/cash and cash equivalents |
|
|
|
|
|
|
1,881 |
0.3 |
1,685 |
0.4 |
|
|
|
|
|
|
|
74,836 |
1.9 |
33,680 |
1.0 |
|
|
9. Other income and operational expenses |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Agency related income |
|
11,743 |
9,117 |
Profit commission |
|
11,720 |
10,000 |
Other underwriting income |
|
3,666 |
(4,196) |
Other income |
|
10,465 |
2,235 |
Other income |
|
37,594 |
17,156 |
|
|
|
|
Wages and salaries |
|
145,997 |
124,466 |
Social security costs |
|
23,288 |
21,884 |
Pension cost - defined contribution |
|
8,243 |
8,432 |
Pension cost - defined benefit |
|
172 |
1,825 |
Share based payments |
|
26,274 |
17,726 |
Marketing expenses |
|
42,051 |
44,499 |
Investment expenses |
|
4,361 |
4,267 |
Depreciation, amortisation and impairment |
|
28,162 |
22,734 |
Other expenses |
|
137,171 |
115,382 |
Operational expenses |
|
415,719 |
361,215 |
Wages and salaries have been shown net of transfers to acquisition and claims expenses. Other expenses include, but not limited to, legal and professional costs, computer costs, contractor-based costs and property costs. None of the items are individually material. |
10. Net foreign exchange gains |
The net foreign exchange gains for the year include the following amounts: |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Exchange gains recognised in the consolidated income statement |
152,408 |
15,153 |
Exchange gains classified as a separate component of equity |
111,094 |
34,478 |
Overall impact of foreign exchange related items on net assets |
263,502 |
49,631 |
The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14. |
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below. |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Opening balance sheet impact of non-retranslation of non-monetary items |
3,450 |
1,608 |
Gain included within profit representing the non-retranslation of non-monetary items |
8,094 |
1,842 |
Closing balance sheet impact of non-retranslation of non-monetary items |
11,544 |
3,450 |
|
11. Reinsurance assets |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Reinsurers' share of insurance liabilities |
806,245 |
539,540 |
Provision for non-recovery and impairment |
(596) |
(730) |
Reinsurance assets (note 17) |
805,649 |
538,810 |
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a gain during the year of £134,000 (2015: gain £10,000) in respect of impaired balances. |
|
12. Financial assets and liabilities |
Financial assets designated at fair value through profit or loss are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement. |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Debt and fixed income securities |
3,414,949 |
2,615,014 |
Equities and shares in unit trusts |
305,342 |
259,705 |
Deposits with credit institutions |
24,592 |
6,684 |
Total investments |
3,744,883 |
2,881,403 |
Insurance linked fund |
46,821 |
40,045 |
Derivative financial assets (note 14) |
329 |
137 |
Total financial assets carried at fair value |
3,792,033 |
2,921,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Derivative financial liabilities (note 14) |
474 |
16 |
Total financial liabilities carried at fair value |
474 |
16 |
|
|
|
Long-term debt |
274,019 |
273,909 |
Accrued interest on long-term debt |
1,800 |
1,754 |
Total financial liabilities carried at amortised cost |
275,819 |
275,663 |
|
|
|
On 24 November 2015, the Group issued £275 million 6.125% fixed-to-floating rate callable subordinated notes due 2045, with a first call date of 2025. The notes bear interest from and including 24 November 2015 at a fixed rate of 6.125% per annum payable annually in arrears starting 24 November 2016 up until the first call date in November 2025, and thereafter at a floating rate of interest equal to three-month LIBOR plus 5.076% payable quarterly in arrears on each floating interest payment date. The fair value of the long-term debt is estimated as £292.3 million and is classified in Level 1 of the fair value hierarchy. |
Investments at 31 December are denominated in the following currencies at their fair value: |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Sterling |
|
786,504 |
579,879 |
US Dollars |
|
2,571,078 |
1,973,501 |
Euro and other currencies |
|
387,301 |
328,023 |
Total investments |
|
3,744,883 |
2,881,403 |
|
13. Loans and receivables including insurance receivables |
|
|
2016 |
2015 |
|
|
£000 |
£000 |
Gross receivables arising from insurance and reinsurance contracts |
699,768 |
538,652 |
Provision for impairment |
(1,276) |
(2,175) |
Net receivables arising from insurance and reinsurance contracts |
698,492 |
536,477 |
|
|
|
Due from contract holders, brokers, agents and intermediaries |
524,958 |
405,284 |
Due from reinsurance operations |
173,534 |
131,193 |
|
698,492 |
536,477 |
Prepayments and accrued income |
7,713 |
8,130 |
Other loans and receivables: |
|
|
Net profit commission receivable |
21,232 |
26,139 |
Accrued interest |
12,590 |
8,637 |
Share of Syndicate's other debtors balances |
30,223 |
13,173 |
Other debtors including related party amounts |
32,656 |
27,007 |
Total loans and receivables including insurance receivables |
802,906 |
619,563 |
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a gain of £899,000 (2015: loss of £44,000) for the impairment of receivables during the year ended 31 December 2016. This is recorded under operational expenses in the consolidated income statement. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date. |
14. Derivative financial instruments |
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2016. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2016 all mature within one year of the balance sheet date and are detailed below. 31 December 2016 |
|
|
Gross contract notional amount |
Fair value of assets |
Fair value of liabilities |
Net balance sheet position |
Derivative financial instrument included on balance sheet |
|
£000 |
£000 |
£000 |
£000 |
Foreign exchange forward contracts |
|
26,591 |
312 |
(121) |
191 |
Interest rate futures contracts |
|
56,728 |
17 |
(106) |
(89) |
Equity index futures |
|
10,223 |
- |
(247) |
(247) |
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below |
Gross fair value of assets |
|
|
12,724 |
13,746 |
26,470 |
Gross fair value of liabilities |
|
|
(12,412) |
(13,867) |
(26,279) |
Total |
|
|
312 |
(121) |
191 |
|
31 December 2015 |
|
|
Gross contract notional amount |
Fair value of assets |
Fair value of liabilities |
Net balance sheet position |
Derivative financial instrument included on balance sheet |
|
£000 |
£000 |
£000 |
£000 |
Foreign exchange forward contracts |
|
11,610 |
81 |
(16) |
65 |
Interest rate futures contracts |
|
31,031 |
56 |
- |
56 |
Equity index futures |
|
- |
- |
- |
- |
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below |
Gross fair value of assets |
|
|
12,765 |
367 |
13,132 |
Gross fair value of liabilities |
|
|
(12,684) |
(383) |
(13,067) |
Total |
|
|
81 |
(16) |
65 |
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £664,000 (2015: gain of £1,940,000) as included in note 7. There was no initial purchase cost associated with these instruments. Interest rate future contracts During the year the Group continued short selling a number of government bond futures denominated in a range of currencies to informally hedge interest rate risk on specific long portfolios. All contracts are exchange traded and the Group made a loss on these futures contracts of £111,000 (2015: loss of £239,000) as included in note 7. Equity index options During the year, the Group purchased a number of equity index futures in order to hedge equity market exposure. All contracts were exchange traded and the Group made a loss on these future contracts of £398,000 (2015: £nil) as included in note 7. |
15. Fair value measurements In accordance with IFRS 13 : Fair value measurements, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below. |
|
As at 31 December 2016 |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial assets |
£000 |
£000 |
£000 |
£000 |
Debt and fixed income securities |
1,005,111 |
2,409,838 |
- |
3,414,949 |
Equities and shares in unit trusts |
- |
293,187 |
12,155 |
305,342 |
Deposits with credit institutions |
24,592 |
- |
- |
24,592 |
Insurance linked funds |
- |
- |
46,821 |
46,821 |
Derivative financial assets |
- |
329 |
- |
329 |
Total |
1,029,703 |
2,703,354 |
58,976 |
3,792,033 |
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
Derivative financial liabilities |
- |
474 |
- |
474 |
Total |
- |
474 |
- |
474 |
|
|
|
|
|
As at 31 December 2015 |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial assets |
£000 |
£000 |
£000 |
£000 |
Debt and fixed income securities |
836,950 |
1,778,064 |
- |
2,615,014 |
Equities and shares in unit trusts |
- |
246,065 |
13,640 |
259,705 |
Deposits with credit institutions |
6,684 |
- |
- |
6,684 |
Insurance linked funds |
- |
- |
40,045 |
40,045 |
Derivative financial assets |
- |
137 |
- |
137 |
Total |
843,634 |
2,024,266 |
53,685 |
2,921,585 |
Financial liabilities |
|
|
|
|
Derivative financial liabilities |
- |
16 |
- |
16 |
Total |
- |
16 |
- |
16 |
