For the year ended 31 December 2019
“Retail profits up as Hiscox weathers a third consecutive year of storms.”
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2019 |
2018 |
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Gross premiums written |
$4,030.7m |
$3,778.3m |
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Net premiums earned |
$2,635.6m |
$2,573.6m |
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Profit before tax |
$53.1m |
$135.6m* |
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Earnings per share ($) |
17.2¢ |
41.6¢* |
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Earnings per share (£) |
13.5p |
31.2p* |
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Total ordinary dividend per share for the year |
43.4¢ |
41.9¢ |
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Net asset value per share ($) |
768.2¢ |
798.6¢* |
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Net asset value per share (£) |
580.1p |
627.0p* |
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Group combined ratio |
105.7% |
94.9% |
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Return on equity (annualised) |
2.2% |
5.3%* |
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Investment return (annualised) |
3.6% |
0.7% |
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Reserve releases |
$25.9m |
$326.5m |
Highlights
- Gross premiums written up by 8.1% in constant currency, despite disciplined action to reduce $200 million in underperforming lines.
- Group profits were impacted by large catastrophe events, with $165 million reserved for Hurricane Dorian and Typhoons Faxai and Hagibis, in addition to $25 million of reduced fees and profit commissions.
- Hiscox Retail now a $2.2 billion business with profits increased by 22% to $178.4 million. Combined ratio of 98.7%, in line with guidance of between 97-99% for 2019.
- Hiscox UK and Hiscox Europe generate good profits, driven by a strong performance in small business insurance.
- Hiscox USA is profitable, with action taken to improve performance in D&O and media business progressing as planned.
- 180,000 Retail customers added in 2019, taking the total to 1.2 million globally – including more than 450,000 direct and partnerships customers. Growth in Retail expected to be in the middle of the 5-15% target range for 2020.
- Retail combined ratio to improve by 1-2% per annum and return to 90-95% target range in 2022.
- Hiscox London Market impacted by catastrophes and property claims, but market conditions continue to improve. Hiscox Syndicate 33 increased its capacity by 19% to make the most of any opportunities for profitable growth in 2020 as rates rise for the third successive year, up in 14 out of 15 lines.
- Hiscox Re & ILS impacted by natural catastrophes, market-wide adverse development on prior year catastrophes, as well as deterioration in some previously exited lines.
- Strong investment return of $223.0 million (2018: $38.1 million).
- Robust reserves 9.4% above actuarial estimate, with continued positive development in Retail. Reserve releases expected to be between 3-5% of opening net reserves in 2020.
- Full year dividend up by 3.5% to 29.6 cents, in line with the Group’s progressive dividend policy.
Bronek Masojada, Chief Executive Officer, Hiscox Ltd, commented:
“Our strategy of balance, between big-ticket lines and our more steady retail earnings, provides resilience and opportunity. Our growing Retail profits and strong investment return has enabled us to weather a third consecutive year of storms. We are investing for growth as we look to capture the many opportunities we see ahead.”
*These figures have been restated to reflect previously announced tax provisions. See note 2.2 of the financial statements.
2020 events, Coronavirus and UK floods
It is too early to estimate the impact of the Coronavirus. The main areas of potential exposure for Hiscox are event cancellation, travel and personal accident cover and we have received notifications of small claims to date. Pandemic is covered in a very small part of the portfolio where we have very controlled net exposure.
Some Hiscox UK household customers have unfortunately suffered flooding from the recent storms and our claims teams are working hard to get them back to normal. To date we have had 112 claims of which over 50% are reinsured with FloodRe, the Government backed flood insurance programme. Net losses are well within our expected catastrophe loss budget for the quarter.
For further information
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Hiscox Ltd |
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Marc Wetherhill, Group Company Secretary, Bermuda |
+1 441 278 8300 |
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Kylie O’Connor, Head of Group Communications, London Ryan Thompson, Investor Relations Manager, London |
+44 (0)20 7448 6656 +44 (0)20 7448 6522 |
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Brunswick |
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Tom Burns |
+44 (0)20 7404 5959 |
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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.
The Hiscox Group employs over 3,100 people in 14 countries, and has customers worldwide. Through the retail businesses in the UK, Europe, Asia and the USA, 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 & ILS.
Our values define our business, with a focus on people, courage, ownership and integrity. We pride ourselves on being true to our word and our award-winning claims service is testament to that.
The 2019 Preliminary Results presentation will take place on Monday, 2nd March 2020 at 9:00am GMT. Replay the webcast here.
Chairman’s statement
I am able to report a profit before tax of $53.1 million (2018: $135.6 million*), with the investment income of $223.0 million (2018: $38.1 million) being a key contributor to the result. Our strategy has remained the same as we continue to build our retail businesses to balance the more volatile big-ticket risks and it is working.
In 2019, the Retail businesses accounted for 54% of our overall gross premiums written and 73% of our net premiums written. As I have said before, the growth in the Retail arm demonstrates the power of compounding, each year we aim for between 5% and 15% growth. In 2019, Retail growth moderated to 7% (2018: 11.3%) in constant currency, in line with our expectations, given the result of action taken over the last 18 months to reduce in underperforming lines, and the impact of bedding in new IT systems and ways of working in the UK. Our US business accelerated growth as the year progressed, in the UK we are seeing momentum improve and our European business had another excellent year. The combined ratio for Hiscox Retail is 98.7%, outside of our target range of between 90%-95%, but still profitable, and it’s needed to be as our big-ticket lines took a battering from a series of catastrophes in Japan and an active claims year in the London Market. Paying claims and restoring businesses is the raison d’etre of an insurance company. We have fulfilled our promise to pay this year, having paid out $1.2 billion in claims across the Group. The London Market has responded well, with increased prices across the board; the reinsurance market is a little slower to adjust and we will shrink accordingly.
Our balanced strategy means that we are still able to grow the dividend, despite a large loss year. As such, the Board is pleased to announce a final dividend of 29.6 cents, which is an increase of 3.5% in line with prior year dividend. The record date for the dividend will be 15 May 2020 and the payment date will be 10 June 2020.
Hiscox is a specialist insurer. We are not a generalist and aim to be very good at some things and leave other classes to the competition. The breadth of the reach of the Company, however, is increasingly impressive. In the big-ticket arena we participate as a significant participant in the ILS market and stretch all the way across into the retail business to offering personal and commercial customers online coverage. This innovative activity emanates from our restless culture of always trying to find a better way of doing insurance and reinsurance. I derive joy from seeing my colleagues creating new opportunities and making Hiscox such a stimulating environment and interesting place to work. New people are attracted by these qualities and the challenging careers we offer and I’m proud that we have been named in the top five of Glassdoor’s Best Places to Work in 2020. This ability to attract talented and driven workers gives me confidence for the future.
The market
The retail market in the USA is hardening in casualty lines, where we are seeing rate rises up to 13% in response to adverse claims trends. The action taken over the last 18 months to refocus our private company D&O and our media accounts is working. We are seeing increased competition in the UK direct-to-consumer commercial business and expect some impact following the IR35 legislation†, but we also see plenty of opportunity for profitable growth.
The reinsurance market has yet to show the same level of discipline as we have seen in our big-ticket insurance lines. It is felt that the very large reinsurers are happy to hold prices at last year’s levels in order to squeeze some smaller players who are reliant on increasingly expensive retrocession. It was ever thus, and the dance will no doubt continue. It is very unlikely that the investment contribution will be so high in 2020 and hopefully reinsurance underwriting discipline will return. In the meantime, we will reduce our exposure, waiting for sense to prevail.
The big-ticket insurance business is getting interesting at last. In 2019, Hiscox London Market saw rate rises in 14 out of 15 classes, overall up by 11% and continuing to rise. The direction is good. We don’t need to be greedy and drive huge volatility in pricing, but we need to be persistent in getting reasonable increases year-on-year to repair the damage done by a long decline. We have to be able to cover claims inflation, which has been equally persistent, driven by genuine increased costs but also by the ingenuity of lawyers to meet their budgets at the cost of ours.
Climate change
I have spent my working life wrestling with the impact of climate volatility on our business. The year-to-year nature of underwriting risk gives us a front row seat to climate variability. Investment in natural catastrophe research and modelling has always been important to us, and our market-leading catastrophe research team develops not just what we call ‘the Hiscox view of risk’, but now ‘the Hiscox view of climate risk’. We will strengthen our expertise this year with two additional climate change researchers.
As debate around dealing with climate change and, more specifically, Environment Social and Governance (ESG) issues, accelerate, so too do our efforts. We developed the Hiscox ESG framework during the year, which guides our efforts, with central themes that can be locally tailored and executed.
We also publicly pledged our support for the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and completed ESG disclosures for FTSE4Good, CDP, Dow Jones Sustainability Index and ClimateWise. Hiscox has been carbon neutral through offsetting since 2014. There is more to do, of course, and we are focused on the opportunity as well as the challenge that this brings.
The Board
We have a strong Board and Executive team. Our Non Executive Directors have a wealth of experience in insurance, reinsurance, marketing and banking, gained in all corners of the world. They have diverse backgrounds and come from a number of different countries which is very important to us as we continue to build a global business. One test I always apply to a new Non Executive is that in some way, they have already been where we are going.
We enjoy having an Executive team that has had a long service with the Company, and a balance of experience and fresh thinking. This year, Richard Watson retired as Executive Director and Group Chief Underwriting Officer after 33 years with Hiscox. He has made a massive contribution to the business in that time in a variety of leadership roles and I thank him for everything he has done. He stays on with us as Non Executive Chairman of Hiscox Re & ILS and also as a Director of our London Market subsidiary. Both are roles he is admirably suited to, and qualified to do, and I am pleased we will continue to benefit from his expertise in this way.
Joanne Musselle replaces Richard as our new Chief Underwriting Officer for the Group and Executive Director. This was an internal appointment after an extensive search both inside and outside of Hiscox. Joanne has been with Hiscox since 2002 and has some very valuable experience under her belt, gained in claims management, as Chief Underwriting Officer for Hiscox UK & Ireland, and latterly as Chief Underwriting Officer of all our retail operations. I am delighted we will benefit from her experience on the main Board.
Following nine years of service, at which point the UK Corporate Governance Code deems him not independent, Robert McMillan, stepped down from the Board in May. Bob’s vast experience in building retail businesses has been invaluable and I am pleased that we will continue to benefit from his advice as he remains a Non Executive Director on our Hiscox USA Board.
It is with great sadness that I report the death of Dr James King during 2019, who served on the main Board from 2006 to 2015 and was a valued counsellor. His sound common sense and incisive mind were very important to me. As a Bermudian, he was an able pilot helping us to navigate our arrival on Bermuda in 2006.
Culture and values
We periodically review our culture to make sure as a Group we have the right set of values to guide us.
We have recently finished a year-long initiative, which involved canvassing hundreds of employees from across the Group asking: what makes them proud to be a part of Hiscox, what values resonate with them and what values they see being lived. I am glad to say that this has resulted in some fine-tuning of our values to guarantee that they are fit for purpose for the future.
As a result of our values re-fresh we’ve adopted ‘connected’ as the theme of this year’s Annual Report. It captures our sense of togetherness and our long-term commitment to building a sustainable business of which everyone can be proud. Part of that connectedness is also about looking out for each other, knowing the people we work with and creating networks beyond teams. I am proud of the WeMind initiative created in the UK by our employees; a mental health and well being network that introduced mental health first aiders and oversees activities including a ‘walk and talk club’ to bring people together to discuss what’s on their mind and delivered mental health training for over 100 people managers. It was gratifying for the team behind this initiative to receive the Outstanding Employee Network of the Year award at the European Diversity Awards 2019 and shows how our values are being lived by the people who work here. I thank them all for their hard work during the year.
Outlook
We aim to balance Hiscox Retail with the higher-volatility big-ticket businesses. Looking forward, we expect our retail business to get back on track, with better growth this year than last and an improved combined ratio. We will trim the reinsurance business to suit conditions. The London Market is seeing improvements in rates and conditions. In the past these improvements have made it straight through to much better returns. We have the brand, talent and diversity of product and geography to make the most of the opportunities ahead.
Robert Childs
2 March 2020
*These figures have been restated to reflect previously announced tax provisions. See note 2.2 of the financial statements.
†The new IR35 legislation that come into effect from April 2020 will change the way in which contractor status is determined when working with medium and large organisations in the private sector.
Chief Executive’s report
2019 showed the value of our long-standing strategy of building and broadening the balance in our business between big-ticket lines and more steady retail earnings. Good performance by Hiscox UK and Hiscox Europe, combined with strong investment returns, offset the impact of a third year of catastrophe events and some adverse claims development in the big-ticket business and Hiscox USA. This allowed us to deliver a combined ratio of 105.7% (2018: 94.9%) and a pre-tax profit of $53.1 million (2018: $135.6 million*). This is below our ambitions and your expectations of us. We have taken necessary action which is having a positive impact.
Gross premiums written grew in constant currency by 8.1% to $4,030.7 million (2018: $3,778.3 million). We have seen good rate momentum in many areas, and will continue to grow in a disciplined way. We have cut over $200 million of underperforming business, but we are still growing having found new opportunities where conditions are good and rates are healthy. In the same way that our strategy of balance has given us resilience in the short term, it drives opportunities in the medium term and we are optimistic about the prospects for our $2.2 billion Retail business, and in the benefit of the repricing we are seeing in our London Market business.
I review each of our business areas in turn below.
Hiscox Retail
Hiscox Retail comprises our smaller ticket businesses in the UK, Europe, the USA and Asia, and our Special Risks business. In this division, our specialist knowledge and tailored products differentiate us and our ongoing investment in brand helps us build strong market positions.
Retail profits increased by 22% to $178.4 million (2018: $146.3 million*) with a combined ratio of 98.7% (2018: 93.6%). Investment returns were a material contributor and we were pleased that Hiscox Retail experienced continued positive prior year reserve development of $46 million (2018: $100 million) despite strengthening in a few poor performing lines.
As we said in our Q3 trading update, the 2019 combined ratio for Hiscox Retail is outside the 90-95% range we target for this division due to the impact of claims activity in the USA and a cautious approach to reserve development. Our US experience is due to three factors. First, like others in the US private company directors and officers’ (D&O) market, we experienced an increase in claims costs on the employment practices liability element of the cover. Our lower D&O policy limits leaves us relatively insulated from ‘jumbo awards’, but the trickle-down effect increased average claim size. Second, the time to settle small business casualty claims in the US has lengthened, increasing our currently outsourced legal costs. Finally, in line with our cautious approach, we are setting more prudent current year loss picks, and we expect to hold reserves for longer.
As we announced last year, we have responded firmly to these factors. We have reduced our private company D&O book from $80 million to less than $20 million and are investing in strengthening our internal claims capability to allow us to in-source more of our legal work. Rates for US private company D&O are turning and we are seeing increases of 13%. We are confident that our Retail combined ratio will improve by 1-2% per annum to return to our 90-95% combined ratio target range in 2022.
We now serve over 1.2 million Retail customers generating $2.2 billion of premiums, growth of 7.1% in constant currency (2018: 1 million customers and $2.1 billion GWP). A key priority has been building the brand as well as the infrastructure to operate effectively at this scale. In the last decade we have invested over $500 million in marketing of which $88.9 million was in the last year (2018: $76.9 million). We see the pay-off in brand awareness, affinity, consideration and decision to purchase, all of which are key drivers of our economics. Our multi-year IT modernisation programmes continue in order to support the growth ahead.
Our direct-to-consumer and partnerships businesses are thriving, seeing compound growth of 29% over the last three years. We focus largely on micro businesses, sole traders and businesses with fewer than ten employees, and 80% of our customers have premiums of less than $/£/€1,000.
The opportunity for Hiscox Retail remains enormous, with an addressable small business market in countries where we already operate of over $80 billion of premium income and growing. We estimate that we currently serve less than 2% of this highly fragmented sector. At the moment this opportunity is clearest in the USA where we are ahead of the competition, but inevitably some are now beginning to respond. Ongoing investment in marketing is essential as we continue to see greater value in investing for profitable growth, rather than running the business for short-term profitability. Building a small-ticket retail business takes time, but persistence pays off in market position, scale and long-term profitability. Our expectations for revenue for Hiscox Retail remain between 5-15%.
During the year, we made an additional tax provision of up to $60 million following a reappraisal of how we invested in and classified marketing activity historically. This additional provision has been presented as a prior year adjustment and, as a result, the previously disclosed profit for 2018 has been restated.
Hiscox UK
Hiscox UK provides commercial insurance for small- and medium-sized businesses as well as personal lines cover, including high-value household, fine art and luxury motor.
Hiscox UK had a good year of recovery after a challenging 2018 as it adapted to a new IT system with new ways of working which impacted growth. Service levels have now improved and we appreciate the support of our brokers and customers while we worked hard to put things right. Gross premiums were up by 3.9% in constant currency to $746.4 million (2018: $749.6 million) with our commercial business growing by 9%.
The direct-to-consumer market remains competitive, particularly in commercial lines. Despite this, we are operating in healthy niche markets and have been able to grow premiums by around 10%. Looking forward, IR35 (the changing basis of taxation for independent contractors), may have a short-term modest impact on growth.
In household broker business, retention was impacted due to the tough pricing action taken over the last 18 months in response to market-wide claims trends such as the growing prevalence of escape of water claims. I am pleased to report a return to profitability and stability in top line, driven by our award-winning claims reputation.
Cyber is a growth area and we launched a new and enhanced product called CyberClear during the period. We are proud that it has been rated the most comprehensive cyber insurance policy for SMEs as the first and only policy to receive a 100% score in the Insurance Times Cyber Product Report.
The team’s hard work was recognised with three industry awards; Insurance Times’ Personal Lines Insurer of the Year and Cyber Product of the Year, and, at the British Insurance Awards, Insurance Provider of the Year.
Hiscox Europe
Hiscox Europe operates in Germany, France, Benelux, Iberia and Ireland. These businesses provide personal lines cover, including high-value household, fine art and classic car, as well as commercial insurance for small- and medium-sized businesses.
Our European operations had another excellent year, delivering $408.4 million in gross written premiums (2018: $372.2 million), an increase of 15.6% in constant currency. Our new carrier, Hiscox SA, started trading in January 2019, and we successfully transferred all policies to our new entity. This completed our Brexit restructuring for Hiscox Retail, a multi-year effort which cost us $18 million and required $50 million in incremental capital.
We continue to see strong demand for our professions, specialty commercial and cyber products across our businesses in Europe. This has enabled us to carve out a leadership position for these lines in Germany, Spain and Benelux.
We extended our footprint in Germany, opening offices in Berlin and Stuttgart, and expanded the team in Munich. Additional investment in marketing and distribution is having a positive impact, and the team were rewarded for their efforts with a ‘Best in Industry’ award for our claims management in D&O, cyber and professional indemnity from AssCompact, a popular broker publication.
In France we have seen a return to stronger profitability after several challenging years. This improvement has been driven by a period of portfolio adjustment which included the introduction of a new underwriting and pricing strategy. A continued focus on growing our partnerships business in Spain, through innovative solutions and by improving the service we offer, has seen a 20% increase in premium versus the prior year. We will continue to build on our successful partnerships in both France and Spain and actively explore new distribution opportunities in the technology and insurtech space.
The roll-out of our ‘MyHiscox’ broker extranet sites across Europe has made it easier for brokers to do business with us by providing them with access to additional products and self-service features. The robotic process automation (RPA) which has been rolled out across policy administration, claims and finance, has resulted in the automation of 115,000 transactions in 2019. This enables us to not only automate back-end processing but also further improves service levels for our brokers and partners.
Similar to the systems changes completed in the UK and under way in the USA, we are also about to begin the multi-year implementation of a new core platform for Europe, starting in Germany in 2020. This is a necessity to support the scale of the business.
Our business in Europe has grown since we opened our first office in Paris in 1995, with no business, and lots of ambition. It is now a consistent and important contributor to our profits. Hiscox Germany reached €100 million in premiums in 2019 and France will follow suit in 2020. The market in our segments in Europe is significant and our ambition is to have Hiscox Europe match Hiscox UK in scale and profits. This is a significant opportunity for us.
Hiscox USA
Hiscox USA underwrites small-to-mid-market commercial risks through brokers, other insurers and distribution partners and directly to businesses online and over the telephone.
The business continues to achieve strong growth, with gross premiums written increasing by 6.8% over the year in constant currency to $865.0 million (2018: $809.6 million), growing to 11% in the second half. Despite market challenges in some casualty lines, Hiscox USA delivered a profit in 2019.
Our direct and partnerships division (DPD) continues to be the star performer to reach $275 million. It has benefited from our sustained investment in marketing and brand building. We launched our first fully integrated marketing campaign with ABC TV and Major League Baseball this year, and have continued to build on our ongoing ‘Encourage Courage’ campaign aimed at small businesses – all of which helps to differentiate us from our competitors.
Our broker channel business has seen strong growth in healthcare and general liability where rates are attractive, but a disciplined approach in private company D&O, media and entertainment business has resulted in a reduction in those areas throughout the year. The action we have taken in these lines is working, as we have seen an improvement in current year loss ratios. Like others in the market, we are seeing increased competition in mid-market cyber, which has led to reduced pricing and widening cover, and we are being selective.
Our preparations for the US IT systems changes, which are necessary to support our future growth plans, are progressing well, with roll-out to DPD expected during 2020.
We have an addressable market of 30 million small businesses in the USA and these investments in IT and marketing will help us achieve our ambitions.
Hiscox Special Risks
Hiscox Special Risks underwrites kidnap and ransom (K&R), security risks, personal accident, classic car, jewellery and fine art, with teams in London, Guernsey, Cologne, Madrid, Munich, Paris, New York, Los Angles and Miami.
Gross premiums written decreased by 3.1% in constant currency to $129.9 million (2018: $136.2 million). Our expertise in the K&R market has helped us maintain our leadership position in a very competitive environment. While others in the market are streamlining their offering, we remain focused on building out our expertise and will continue to innovate to preserve our market share. A highlight this year was a new product the team developed and brought to market in just two weeks to support our marine clients travelling to the Gulf following political tensions in Iran. It is precisely this responsiveness which sustains and builds our market position with customers.
Hiscox Asia
Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance. It grew gross written premiums by 36.6% in constant currency to $46.6 million.
Singapore and Thailand have attracted and retained record numbers of customers, driven by the success of new partnerships with firms like Prudential, Shell and Vicom. Similar partnerships with like-minded businesses will enable us to continue on this growth trajectory. An ongoing investment in brand has helped us to combat increased competition and supports our drive to reach scale.
Hiscox London Market
Hiscox London Market uses the global licences, distribution network and credit rating available through Lloyd’s to insure clients throughout the world.
Hiscox London Market’s profits decreased to $30.4 million (2018: $75.8 million*) and the combined ratio deteriorated to 104.4% (2018: 89.3%). The most material adverse impact came from attritional losses in property, and large loss activity in D&O and alternative risk. We also suffered adverse prior-year development from healthcare, and prior year catastrophes.
A second year of rising rates in the London Market has driven above-budget growth of 10.3% to $967.9 million (2018: $877.7 million), or 11.2% in constant currency. Positive momentum has continued in the majority of classes, spurred on by a withdrawal of capacity and the Lloyd’s ‘Decile 10’ initiative which has instilled some much-needed discipline in the market. We have seen material rate increases in major property, cargo, hull and general liability. In US public company D&O, rates are up 60% and we have grown substantially. These rate improvements are necessary after the extended soft market, however in some areas such as Florida small property risks and personal accident, rates are still not reflective of the risk, and where necessary we will shrink.
In property, we are actively changing the portfolio mix and reducing our exposure in our household and commercial binders where we have suffered attritional losses alongside catastrophe losses from Hurricane Dorian. This action will improve underlying profitability in time, however the 12-month terms on binder business means that we will not see the full benefits until 2021 and 2022. Terrorism delivered good profits in tough market conditions, despite being impacted by riots in Hong Kong and Chile.
Modernisation in the London Market is a multi-year, market-wide initiative which I believe is critical to the long-term success of Lloyd’s. We have been strong supporters of the push towards electronic trading via Placing Platform Limited, an initiative which I chair, and I am pleased to say that over 75% of all business we write at Lloyd’s is now bound electronically.
The goal for Hiscox London Market is ‘to lead the way in emerging risk’ and so we have been focused on driving awareness of new risks. We held a first-of-its-kind ‘cyber cube’ experiential event on the trading floor of Lloyd’s of London which tested cyber security knowledge and promoted our new CyberClear365 product. We created a virtual reality simulation of a US hurricane and an app to assist our client’s understanding of rising sea levels and the downstream impact for homes and communities. These events drive awareness and sales.
We are also leading the way in digital trading. Our FloodPlus product uses external data to price risks more precisely and we drive down cost by using APIs to connect to US coverholders. We also use third-party capital to leverage our expertise, giving us larger lines to deploy through consortia for general liability, space, flood and product recall.
We are optimistic about conditions in the London Market and have increased our stamp capacity – the amount of business we can write through Lloyd’s via Hiscox Syndicate 33 – by 19% year-on-year to £1.7 billion in 2020. This gives us the headroom to execute our plans, taking advantage of the ongoing price rises and dislocation in the market.
Hiscox Re & ILS
Hiscox Re & ILS comprises the Group’s reinsurance teams, based in London and Bermuda, and insurance-linked securities (ILS) activity. The team underwrites on behalf of Hiscox and third-party capital partners, including other insurance companies, Lloyd’s syndicates and capital market investors.
Hiscox Re & ILS has been impacted by another year of heavy catastrophe claims, resulting in a loss before tax of $93.8 million (2018: loss of $28.7 million*) and a 2019 combined ratio of 163.9% (2018: 116.9%). This is the third consecutive year of large events. Our long-standing relationships in the Japanese market meant that Typhoons Faxai and Hagibis had a material impact on us. We also experienced claims from Hurricane Dorian which impacted the Bahamas and the US, as well as from the riots in Chile and wildfires in Australia. Unusually, Hiscox Re & ILS suffered prior year deteriorations due to the adverse development of 2018 Typhoon Jebi and the need to strengthen reserves for the healthcare business which we exited in 2017. All of these factors combined meant we had this poor result.
Gross premiums written grew by 7.4% in constant currency to $866.5 million (2018: $812.0 million), as rate improvement in loss-affected property lines and retrocession was offset by deliberate reductions in risk excess and our withdrawal from casualty reinsurance business. Throughout the year, the team remained disciplined in the face of underwhelming, albeit positive, rate improvement, still dampened by an overabundance of capacity despite three years of significant market losses.
Our ILS offering continues to see interest from new and existing clients, with assets under management at $1.5 billion. Both of our flagship Kiskadee funds ended 2019 with positive returns, a good result in a challenging year. We expect that ILS funds under management will decrease in 2020 as one of our investors has indicated that they will reduce their commitment to this asset class. At the beginning of 2019 we launched a new fund, giving ILS investors access to both reinsurance and primary insurance risk through the Hiscox Re and Hiscox London Market teams. The fund launched with $100 million in capital and we have been pleased with its performance in its maiden year. We also launched a new fund for 1 January renewals, offering investors a higher risk/reward profile to complement our existing medium and lower risk/return funds.
In such an uncertain environment as this, it pays to be disciplined and nimble. The vision for Hiscox Re & ILS is ‘one team, unlocking capital and pioneering risk’ and the goal is to bring together our capabilities from underwriting through to analytics, research and claims, in order to profit in changing markets. We continue to believe engaging with multiple capital sources will allow us to write a broader range of products, more of them, and at better margins. At the moment we do not expect to fully use all of the capital available to us in 2020 as rate increases continue to be below our targets. We therefore expect top line growth to remain subdued as we pursue a disciplined path.
Claims
It has been a busy year for claims in big-ticket lines and Hiscox USA as outlined previously, however our Retail businesses in the UK and Europe had a relatively good claims experience.
For Japanese Typhoons Faxai and Hagibis, and Hurricane Dorian which impacted the Bahamas and the US, we reserved $165 million and in addition we expect $25 million in reduced fees and profit commission.
In 2019, we had a small positive reserve release of $26 million (2018: $326 million) from prior years. Despite its challenges in the US, Hiscox Retail had a positive prior year reserve development of $46 million (2018: $100 million). Hiscox London Market and Hiscox Re & ILS suffered deteriorations of $20 million in aggregate (2018: $126 million favourable). We seek to reserve cautiously and our reserves are set at 9.4% above actuarial estimates (2018: 11.0%). We expect that we will return to our more normal pattern reserve releases of 9% to 12% of opening reserves over the next three years. In 2020, we expect reserve releases to be between 3-5% of opening net reserves, returning to our normal pattern over the next three years.
Information technology and major projects
The significant investment we are making in replacing end-of-life technologies with new systems and processes has continued this year. Our Retail customer numbers have grown by 172% to 1.2 million over the last five years, and we need this improved infrastructure to meet their expectations for system availability, digital accessibility, and operational robustness. Regulators are also beginning to scrutinise the financial sector’s operational resilience. Although our core system availability is currently over 99.9% these investments mean we are building a business with the infrastructure to support our future growth ambitions.
2019 saw the bedding in of the new Hiscox UK IT system. After a challenging period of adjustment in which broker service levels were not what we would have hoped, I am pleased to say we have seen a return to normalcy. Those products which are not on the new system will be migrated across by 2022. In the direct channel, the underwriting of 90% of direct commercial business and in the broker channel 60% of new business, is automated. The increased automation of simple underwriting process has freed our underwriters up to do what they do best by focusing their efforts on our most unusual or complex risks.
Hiscox USA worked on a new system in 2019 and 2020 will see this go live within our DPD business with the project concluding in 2021. Our US broker channel will follow once the new system has had the opportunity to embed. Hiscox Europe is at the start of a similar journey, with preparations under way to begin system changes in Germany, and so will benefit the most from our lessons learnt along the way.
We are now in the implementation period of our Group-wide finance transformation programme, which will replace our core finance systems and evolve the capabilities of our finance teams worldwide.
We expect that 2020 will be the last year of peak system change, with the volume of change dropping to a lower level from 2021. As the systems become fully functional we can expect to see benefits in the Group’s expense ratio.
2020 will also see Hiscox develop a new UK location strategy. Hiscox London has been located at 1 Great St Helen’s for the last 22 years and our lease will soon come to an end. Before moving into new premises, we have taken the opportunity to review our UK footprint in order to shape our UK-based activities to support growth at a lower cost. Over the next two or three years we will move up to 300 roles out of London to join the 750 Hiscox employees already working in other locations across the UK.
Investments
We manage our investment portfolio with two main objectives in mind: providing sufficient liquidity to pay claims and providing capital to support the underwriting business, while generating strong risk-adjusted returns. On all fronts, the investment portfolios delivered in 2019.
With the tailwinds of strong markets, our investment return was the best we have seen in several years. US bonds form the majority of our portfolios across the Group, and we maintained a modest allocation to equities and other risk assets. As a result of this strategy, our investments made $223.0 million (2018: $38.1 million) after deducting investment expenses, a return of 3.6% (2018: 0.7%).
Given the strength of markets in 2019, we do not expect a repeat in the year ahead. Government bond yields are lower and corporate bond spreads look tight. Having re-rated, equity markets are clearly less well placed than after the falls of 2018. Markets also seem relatively sanguine about political instability but this does not mean such events cannot have an impact; there is no shortage of events in the calendar in the year ahead, the US election amongst them. As such, we enter the year more cautiously, but remain prepared to add risk as opportunities present themselves.
People
Building an insurance business requires a pile of money and a group of talented people. As capital will follow talent, we put a disproportionate effort on attracting, developing, retaining and rewarding talented people. This is a never-ending effort with different approaches being used at different levels of seniority.
In 2019 across Hiscox we received around 50,000 applicants for advertised roles, and hired 867. As a parent of children applying for junior roles, I became aware that for many companies the recruitment process can be like a black hole - you apply and hear nothing, not even an acknowledgement. Hiscox was better than this, but not always good enough. In 2019 we re-engineered our approach to job seekers, thinking of them with the same care and intelligence that we apply to customers. We introduced a net promoter score for all applicants, a brave decision when we have 58 rejections for every successful applicant. I am pleased to report that our net promoter score amongst those who were unsuccessful after interview improved by 26 points over the year, a real vindication of a recruitment approach much more in tune with our ‘human’ value.
For many years at a senior level, we have practised personalised career development and succession planning to ensure that we have the right mix of leadership experience, underwriting nous, business acumen and technical skills to drive the Group forward – and it is working. Individual development plans fit in with global succession plans, as we have seen with the recent appointment of Joanne Musselle as Group Chief Underwriter who replaced Richard Watson on his retirement outlined in the Chairman’s statement. Similarly, in April 2019 Bob Thaker was appointed CEO of Hiscox UK, after an internal and external search. Bob joined Hiscox ten years ago in a Group strategy role and has worked in UK Claims, Hiscox Asia as Chief Operating Officer and then Chief Executive. He was replaced in Asia by Celine Chotithamaporn, an external hire who brings valuable local cultural and industry knowledge.
In 2019 we welcomed Grace Hanson as our new Chief Claims Officer, again after an internal and external search. Grace has held multiple roles in the industry in the US and Bermuda, and she brings a unique blend of experience in both big-ticket and smaller-ticket retail claims. We are already benefiting from her broad experience as she directs the re-engineering of our US claims function.
We believe that this approach - looking ahead, taking career risks on talent, but looking externally as well, ensures smoother senior leadership transitions, to the benefit of the individuals, the business and shareholders.
Purpose and values
During the year we undertook a Group-wide conversation and workshop process to define our purpose and update our values. This involved over 500 staff from all geographies and seniorities. We last did this five years ago.
We see our purpose as ‘As experts in risk, we give people and businesses the confidence to realise their ambitions’. Whether they are a small business, a large corporate, a homeowner or a collector, we believe our expertise and clear products are a safety net, giving our clients confidence. If a loss occurs their claim will be handled sympathetically, professionally and fairly. If we do this well our customers are free to do what they want to do most – pursue their ambitions with confidence.
Our values evolve as our business and the societies we serve evolve. Our refreshed values are:
Integrity – do the right thing, no matter how hard.
Courage – dare to take a risk.
Human – clear, fair and inclusive.
Connected – together, build something better.
Ownership – passionate, commercial and accountable.
Most businesses have values. The challenge is to believe in them and then live up to them, accepting that we are all human and will err while we strive to do so. The inclusivity of the process we went through in updating our purpose and values showed the real passion our staff have for living the values, and we have all committed to use them as a reference point in our day-to-day and longer-term decision-making. We believe that by trying to do so, we make better decisions, make Hiscox a better business to work with and a better place of employment for talented ambitious people, to the ultimate benefit of customers, staff, shareholders and society.
Outlook
I am excited and optimistic about the scale of opportunity we have ahead of us.
In the short-term we will take advantage of the strong pricing momentum in our London Market business, navigate our way through the pricing challenges in reinsurance and continue to build our profitable Retail businesses. Our success in this will be reflected in our 2020 earnings.
Looking further ahead, we are still a small and successful player in many of our areas with plenty of room to grow. Our strategy of balance, between big-ticket lines and our more steady retail earnings, continues to provide us with options. We have made investments in people, brand and infrastructure that will help us deliver our ambition to be the leading specialist insurer in the markets in which we operate – leading in growth rate, profitability and reputation.
Bronek Masojada
2 March 2020
*These figures have been restated to reflect previously announced tax provisions. See note 2.2 of the financial statements
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