TIDMHSX
RNS Number : 7122I
Hiscox Ltd
09 August 2023
Hiscox Ltd interim results
For the six months ended 30 June 2023
"Continued growth and earnings momentum"
H1 2023 H1 2022
As restated
under IFRS
17
Insurance contract written
premium[1] $2,723.3m $2,617.2m
Net insurance contract written
premium(1) $1,945.6m $1,784.5m
Insurance service result $221.4m $140.2m
Net investment result $121.8m $(214.1)m
Profit before tax $264.8m $25.4m
Earnings per share 72.2c 9.8c
Interim dividend per share 12.5c 12.0c
Net asset value per share 823.3c 715.6c
Group combined ratio (discounted)(1) 85.7% 90.8%
Group combined ratio (undiscounted)(1) 90.2% 92.7%
Return on equity (annualised)(1) 19.9% 2.6%
Positive prior year development(1) $61.7m $67.2m
Highlights
-- Growth in revenues, insurance service result and profits in
every business unit, resulting in annualised ROE of 19.9%.
-- Group net insurance contract written premiums (net ICWP)
increased by 11.4% in constant currency to $1,945.6 million (H1
2022: $1,784.5 million), as we benefit from strategy execution, a
positive rate environment across all business segments and capital
allocation decisions.
-- Insurance contract written premiums (ICWP) increased by 6.3%
in constant currency to $2,723.3 million (H1 2022: $2,617.2
million), lower than net ICWP, as expected at this point in the
cycle.
-- Insurance service result (or underwriting profits) increased
by 57.9% to $221.4 million (H1 2022: $140.2 million) from a
combination of disciplined growth and margin expansion in a
favourable underwriting environment.
-- Retail ICWP of $1,271.0 million (H1 2022: $1,237.7 million)
increased by 5.5% in constant currency, underpinned by strong
growth in Europe and improving momentum in the UK and US DPD.
o US DPD ICWP grew 7.8%, with growth accelerating from 6.8% in
the first quarter to 8.9% in the second.
o Continue to expect US DPD growth towards the middle of the 5%
to 15% range in 2023.
o Overall retail growth temporarily tempered by deliberate
actions not to prioritise growth at the expense of quality of
earnings - full year headline retail growth to be in line with the
half year trend.
-- Retail combined ratio of 93.8% (H1 2022: 94.4%) on an undiscounted basis.
o 90% - 95% IFRS 4 range equivalent to 89% - 94% under IFRS 17
on an undiscounted basis.
-- Hiscox London Market had a strong first half, with net ICWP
increasing by 14.2% to $443.4 million (H1 2022: $388.2 million),
driven by attractive rates in property, as well as new business
growth in upstream energy and marine.
o An undiscounted combined ratio of 83.7% (H1 2022: 87.9%),
demonstrates our focus on profitable growth.
-- Hiscox Re & ILS has continued to benefit from the hard
market conditions, deploying incremental capital to grow exposure
and improve the quality of the book. Net ICWP increased by 17.9% to
$345.1 million (H1 2022: $292.8 million), underpinned by strong
double-digit growth in the North American natural catastrophe,
retrocession and marine books.
o An undiscounted combined ratio of 81.2% (H1 2022: 92.8%), 11.6
percentage point improvement on prior period reflects quality of
growth being achieved.
-- Profit before tax increased by $239.4 million to $264.8 million (H1 2022: $25.4 million).
-- Total net reserves for loss events in H1 2023 are in line
with our expectations and large losses are within budget.
-- The Group remains conservatively reserved with a confidence
level of 77% (FY 2022: 78%), within our target range of 75% to
85%.
-- Strong capital position, with an estimated Bermuda Solvency
Capital Requirement (BSCR) of 199%, in line with the full year 2022
result, despite having deployed capital into the favourable market
conditions which continue to persist.
-- Positive investment result of $121.8 million (H1 2022: loss of $214.1 million).
-- High quality portfolio positions Hiscox well to deliver high quality growth and earnings.
Aki Hussain, Group Chief Executive Officer, Hiscox Ltd,
commented:
"Our business has delivered growth in revenues and profits in
every business unit, as our proactive and disciplined underwriting
and favourable market conditions come together. Our portfolio of
businesses, our people and innovation to meet the changing needs of
our customers position us well to continue delivering high-quality
growth and earnings."
S
A conference call for investors and analysts will be held at
10:30 BST on Wednesday, 9 August 2023.
Participant dial-in numbers:
United Kingdom (Local): 020 4587 0498
All other locations: +44 20 4587 0498
Participant Access Code: 780075
For further information
Investors and analysts
Yana O'Sullivan, Director of Investor Relations, London +44
(0)20 3321 5598
Marc Wetherhill, Group Company Secretary, Bermuda +1 441 278
8300
Media
Simone Selzer, Brunswick +44 (0)20 7404 5959
Tom Burns, Brunswick +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 3,000 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
products in commercial and personal lines. 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. For
more information, visit www.hiscoxgroup.com .
CEO's statement
The Group delivered continued growth and strong profits in the
first six months of the year, as we benefitted from sustained
momentum across our Retail businesses, a proactive approach to
(re)insurance cycle management in big-ticket, continued
underwriting discipline, and a positive rating environment that
persists across all business segments. Losses were within our
expectations and we deployed incremental capital judiciously where
we saw attractive opportunities. Profit before tax of $264.8
million is a combined effect of the insurance service result of
$221.4 million, up 57.9% on the prior period, and the improved
investment result of $121.8 million, as higher bond reinvestment
yields begin to earn through.
I am pleased with the progress we have made this year in
maximising the strength of our portfolio of businesses. All of our
three business segments have delivered strong growth and earnings
and are well positioned to continue to do so, as we face into
favourable market and societal trends. Our diverse business
portfolio enables Hiscox to operate in a number of different parts
of the specialist insurance sector, allocating capital with agility
to areas of expertise which offer the highest risk-adjusted
returns. This has enabled us to deliver a half-year annualised RoE
of 19.9%.
Group net ICWP increased by an impressive 11.4% in constant
currency to $1,945.6 million (H1 2022: $1,784.5 million). Our
reinsurance business is leaning into the hard market in a focused
way and enjoying some of the best market conditions in over a
decade. Our London Market business has returned to growth, as we
believe the property book is priced adequately following
significant re-rating and we are benefitting from attractive new
growth opportunities in upstream energy, marine and renewables. In
Retail, the opportunity remains significant, particularly in the
USA, as the digitalisation of small businesses continues to
accelerate and new business formation levels remain strong.
With a focus on quality growth, we have maintained our
commitment to disciplined underwriting. For example, in Retail,
where we have faced downward pressure on rates in certain segments
of our cyber portfolio, we have remained disciplined and accepted a
decline in share to maintain quality of earnings . As previously
disclosed, we have also been exiting some non-core underwriting
partnerships in the UK which are outside of our risk appetite.
These two factors, which we consider to be transitory, have
tempered headline growth in order to maintain quality of earnings.
The strength and diversity in our Retail business means that the
underlying growth[2] in Retail is 7.3% in constant currency.
One of our current priorities is to continue our investment in
technology and expand our distribution capabilities. We are making
material progress that positions Hiscox to achieve sustained
long-term growth. Our technology investment in the USA is beginning
to drive benefits, with digital direct now achieving double-digit
growth and digital partnerships gaining momentum in the second
quarter. Our core system implementation in Europe is also going
well and we anticipate operational benefits as the programme
proceeds.
We continue to expand our product and distribution capabilities
with solid progress in our e-broker extranet roll-out in the UK
and, in an exciting step in the USA, we have agreed a new
partnership with a multi-line US insurer to distribute workers'
compensation, thereby materially increasing our reach and relevance
in our target addressable market whilst also creating a new fee
income stream. In London Market the ESG sub-syndicate is now
operational and we have begun writing incremental new business.
Rates
The rating environment has been favourable in aggregate across
all Hiscox businesses, and in particular in property lines, which
continued to experience hard market conditions in both reinsurance
and primary lines.
Hiscox Re & ILS benefitted from an average rate increase of
34%, with positive trends experienced in all lines of business -
most notably in North American natural catastrophe (up 43%) and
retrocession (up 42%). This is the sixth successive year of rate
improvement in Hiscox Re & ILS with cumulative rate increases
of 95% since 2018. Cyber reinsurance continues to benefit from
notable rate increases (25% at half year), and our terror business
saw rates increase by 31%. Importantly, in these hard market
conditions we have improved the quality of our book by
significantly removing aggregate contracts and moving to higher
attachment points.
Hiscox London Market achieved a 9% rate increase in the first
half of 2023, with an overall 72% cumulative rate increase since
2018. Property lines are seeing the strongest increases, with 27%
in household and 23% in major property, and we see the potential
for further rate hardening through the rest of the year. Terrorism
rates are up 15%, as expected, driven by geopolitical uncertainty,
which allowed us to maintain top-line premiums whilst reducing
exposure, thus further increasing the overall profitability of the
portfolio. In contrast, casualty lines, in particular D&O and
cyber, continue to see rate decreases. Overall, we expect London
Market rates to continue their current trajectory for the remainder
of 2023.
Hiscox Retail benefitted from an average rate increase of 6% in
the first half of 2023 with rates remaining in aggregate positive
across all markets .
Claims
While there were tragically several natural catastrophes during
the first half, including New Zealand floods, Syria/Turkey
earthquake, winter storm Elliot and cyclone Gabrielle, as well as
other non-natural catastrophe events, the total estimated net
losses are within our modelled expectations. In addition, our net
loss reserved for the Russia/Ukraine conflict remains unchanged.
Large and attritional losses across the Group are within our
expectations.
While inflationary pressures continue to persist across our
markets, the impact on our business is relatively contained due to
the short-tail nature of our book, with the average duration of our
liabilities at 1.9 years.
The Group has a conservative reserving philosophy and
continuously evaluates reserve adequacy to ensure we maintain a
robust balance sheet position , with net reserves at the 77%
confidence level (FY 2022: 78%) and a risk adjustment above best
estimate of $211.1[3] million (FY 2022: $217.6 million). The
Group's legacy portfolio transactions (LPTs) continue to provide
protection of 25% for 2019 and prior-year gross reserves from
inflationary pressures up to a 1-in-200 downside risk. The
favourable prior-period run-off is reflected in reserve releases of
$61.7 million, broadly in line with prior year.
With regards to the new business we are writing, we mitigate
inflationary pressures through a combination of exposure indexation
and rate increases. The inflation assumptions included in our
pricing and reserving models across the Group remain robust. The
increased premiums being collected through rate and indexation are
keeping pace with our view of expected inflation.
Hiscox Retail
Hiscox Retail comprises our retail businesses around the world:
Hiscox UK, Hiscox Europe, Hiscox USA and DirectAsia. In this
segment, our specialist knowledge and ongoing investment in the
brand, distribution and technology reinforce our strong market
position in an increasingly digital world.
Retail ICWP of $1,271.0 million (H1 2022: $1,237.7 million)
increased by 5.5% in constant currency.
We continue to achieve strong top-line growth in Europe,
improving momentum in the UK and acceleration in US DPD. Overall
retail growth was tempered by the business maintaining discipline
in the face of increased competition and reducing prices in the
cyber product line, particularly prevalent in the USA. While not
significant in absolute terms for the Retail division, it has
impacted growth by 0.8 percentage points as we experience a
reduction in cyber new business and retention. As previously
reported, in the UK we have been exiting some non-core underwriting
partnerships business which are outside our risk appetite,
impacting top line by 1.0 percentage points. Excluding these two
temporary factors, Retail growth continues to deliver in line with
expectations. Looking forward, taking into account these factors,
we expect the full year headline growth to be in line with the
half-year trend.
On an undiscounted basis, Hiscox Retail's combined ratio is
93.8%. Under IFRS 4, the Group had a Retail combined ratio
operating range of 90% to 95% in normal circumstances, equivalent
to 89%-94% under IFRS 17 on an undiscounted basis. Our first half
result is within the range on both bases.
The IFRS 17 accounting standard introduces discounting of
liabilities, which results in greater volatility in the combined
ratio purely due to external macro-economic factors with potential
off-setting elements captured outside the combined ratio, therefore
reducing its usefulness as a measure of underwriting profits. We
will report the combined ratio on an undiscounted basis, which we
believe is a useful measure of underwriting profits, and improves
comparability period on period. Considering the definitional
changes, the new standard requires reclassification of some
expenses, primarily related to brand and some other overheads, as
non-attributable, which results in a permanent definitional benefit
to the Retail combined ratio. This is partially offset by the
negative impact from moving to the own share presentation, thus
resulting in an overall small net benefit leading to the restated
operating range. For clarity, there is no change to the economics
of our business.
Insurance contract written premium $1,271.0 million (H1 2022: $1,237.7 million)
Net insurance contract written premium $1,157.1 million (H1 2022: $1,103.5 million)
Insurance service result $113.2 million (H1 2022: $75.7 million)
Profit before tax $153.3 million (H1 2022: $4.3 million)
Combined ratio 89.2% (H1 2022: 92.6%)
Undiscounted combined ratio 93.8% (H1 2022: 94.4%)
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 ICWP grew by 4.0% on a constant currency basis. In US
Dollars this reduced by 1.7% to $399.3 million (H1 2022: $406.4
million). The business delivered solid growth in commercial lines,
with commercial property, general liability and emerging
professions showing sustained momentum. Pleasingly, the art and
private client (APC) book has seen growth momentum in the first
half of 2023, as we continue to sharpen the focus of the book on
our target high net worth segment.
The previously reported course correction to reduce exposure to
some non-core delegated authority partnerships had a 2.6 percentage
points impact on growth in the first half of 2023. We expect the
impact of this course correction to continue to moderate into the
fourth quarter. The core portfolio continues to grow well.
To reinforce the strength of our brand and support the
acquisition marketing engine in the UK, we are increasing our
investment in brand advertising for the second half of the year.
Our new brand campaign will run nationally from September and will
target primarily small business and APC customers.
Our e-trade extranet has been live since the start of the year
and now has over 200 brokers. During the second quarter, we have
continued to improve the core platform capability with ongoing
builds of specialty product extranets, a high net worth product
build, and we are in the early stages of developing the technology
for our schemes business.
Earlier this year Hiscox UK launched its Underwriting Academy,
the latest incarnation of the long tradition we have of investing
in talent across our underwriting ecosystem to ensure we are
training, developing and growing top-tier capabilities in this
area.
Hiscox Europe
Hiscox Europe provides both personal lines cover, including
high-value household, fine art and classic car, and commercial
insurance for small- and medium-sized businesses.
Our European business has again delivered excellent growth, with
ICWP of $365.6 million (H1 2022: $339.3 million) up 11.2% in
constant currency, or 7.8% in US Dollars. France, Benelux and
Iberia grew particularly well in the first half of the year.
France, Europe's second largest market, continues to demonstrate
strong top-line growth of 16.8% in constant currency, benefitting
from proactive management actions in the prior years which laid the
groundwork for profitable growth. In Germany, we continue to see
good growth of 8.0% in constant currency. Throughout the Group
there is a strong culture of being attentive to customer needs and
innovating to meet these needs as they evolve. In response to newly
passed legislation, Hiscox Germany has developed and launched a new
whistle blower assistance programme for small businesses that are
unable to offer this function in-house.
We continue to make significant progress in the technology
re-platforming programme in Europe, with its phased roll-out across
our European markets progressing as planned.
Hiscox USA
Hiscox USA focuses on underwriting small commercial risks with
distribution through brokers, partners and direct-to-consumer using
a wide range of trading models - traditional, service centre,
portals and application programming interfaces (APIs). Our
aspiration is to build America's leading small business
insurer.
Hiscox USA's ICWP grew 2.0% to $475.8 million (H1 2022: $466.3
million). US DPD is accelerating growth in line with expectations
following the technology re-platforming, with growth accelerating
in the second quarter to 8.9% from 6.8% in the first quarter with
overall growth for the first six months of the year at 7.8%.
The Direct business has now been live on the new technology for
12 months, delivering a positive and accelerating growth trend.
Direct ICWP growth rate has improved reaching double digits,
underpinned by particularly strong momentum in new business, where
the top line grew in excess of 30%, supported by increasing
marketing expenditure.
As anticipated, the embedding of the new technology in our
partnerships business slowed growth in the first quarter of the
year; this has now begun to recover from its low point over the
past three months, albeit at a moderate pace. To accelerate
technology adoption and new business generation among the
established partners, we have ongoing tailored partner engagement
and introduced temporary financial incentives. Since the start of
the year, we have added 17 new portal partners to our digital
platform and have a healthy pipeline of further opportunities. We
also continue to refine our internal onboarding processes to find
ways to accelerate the timeline from sign-up to production.
A key part of building America's leading small business insurer
is to increasingly become the destination brand for a wider breadth
of insurance customer needs in our DPD business - whether we
underwrite those ourselves or partner with others where we do not
take insurance risk onto our own balance sheet. A prerequisite to
being able to attract high-quality partners is to have the
gravitational pull of a substantial customer base - with customer
numbers now well in excess of 500,000 we have reached a tipping
point. In June, we launched a workers' compensation product in
partnership with a multi-line US insurer. This is a balance sheet
'lite' approach, with Hiscox taking no underwriting risk and,
instead, generating fee income.
The addition of this product from a high-quality partner enables
Hiscox to reach a greater proportion of the target market, it
increases our potential share of wallet from existing customers
through cross-selling opportunities and introduces a new
non-insurance fee income stream. At present the product has been
soft launched (available through the Hiscox call centre) with the
full launch due in the next six months; this will include
integration into the Hiscox digital shop front and straight-through
processing to our partner, providing a more efficient and seamless
customer experience.
Our confidence in the value of the new platform is increasing,
as the Direct business is showing sustained positive momentum,
although embedding of the partnerships business will take longer as
discussed in March. The combination of continued acceleration in
the digital direct business and improving momentum in digital
partnerships is expected to drive US DPD growth towards the middle
of the 5% to 15% range in 2023.
Growth in the US broker business has been tempered by the
business maintaining discipline in the face of increased
competition and reducing prices in the cyber product line, as a
result US broker revenue has reduced by 4.2%.
Hiscox Asia
DirectAsia delivered insurance contract written premiums growth
of 16.1% in constant currency to $30.3 million (H1 2022: $25.7
million). This was driven by a good performance in both Singapore
and Thailand, where both markets benefitted from an increase in
both partnership and travel insurance business, and a strong
renewal performance.
Hiscox London Market
Hiscox London Market uses the global licences, distribution
network and credit rating of Lloyd's to insure clients throughout
the world.
Insurance contract written premium $654.4 million (H1 2022: $591.8 million)
Net insurance contract written premium $443.4 million (H1 2022: $388.2 million)
Insurance service result $75.5 million (H1 2022: $53.6 million)
Profit before tax $106.9 million (H1 2022: $17.8 million)
Combined ratio 79.6% (H1 2022: 85.6%)
Undiscounted combined ratio 83.7% (H1 2022: 87.9%)
Hiscox London Market had a strong first half, increasing ICWP by
10.6% to $654.4 million (H1 2022: $591.8 million). This was driven
by a combination of strong rate in property and new business growth
in upstream energy and renewables, partially offset by softening
rates in casualty lines. We continue to see a strongly positive
underwriting environment in our property and marine, energy and
specialty divisions, delivering growth of 16.8% and 37.9%
respectively. Net ICWP grew 14.2% on prior year and we expect this
positive growth momentum to continue throughout the rest of the
year.
All property classes are enjoying hard market conditions due to
the reduced availability of capital, with particularly strong ICWP
momentum in major property, up 75% and household binders up 68%.
Upstream energy is also benefitting from strong growth,
particularly in the newly formed 'power and renewables' division,
where new business is flowing in from the extensive amount of
construction taking place in the renewable energy sector. Earlier
this year we launched our ESG sub-syndicate, which has been well
received by the market, with the first risks written being a wind
farm in Europe and a solar farm based in the USA, and it is an area
where we anticipate good momentum over time. We have seen extremely
high interest from third-party capital providers (reinsurers) and
have already secured the desired level of quota share capacity.
As previously flagged, market conditions in casualty, notably in
D&O and cyber, continue to be challenging with rates declining
in both classes. In line with the wider market, our cyber growth
was impacted by the Lloyd's war exclusion mandate which has made
writing new business more challenging. In D&O, where rates
declined 11% year-on-year but still remain attractive (up 203%
since 2018), we have taken our foot off the accelerator and
maintained line size discipline.
Overall, we remain focused on profitable growth through
effective cycle management: shrinking exposure in casualty classes
where margins have started to contract, and deploying capital in
more attractively priced business classes, such as property and
marine and energy. Testament to the success of this strategy has
been the consistency of the strong underwriting result. The London
Market insurance service result is up 40.9% to $75.5 million (H1
2022: $53.6 million) with an undiscounted combined ratio of 83.7%,
a 4.2 percentage point improvement on the prior period.
Hiscox Re & ILS
Hiscox Re & ILS comprises the Group's reinsurance businesses
in London and Bermuda and insurance-linked securities (ILS)
activity written through Hiscox ILS.
Insurance contract written premium $797.9 million (H1 2022: $787.7 million)
Net insurance contract written premium $345.1 million (H1 2022: $292.8 million)
Insurance service result $32.7 million (H1 2022: $10.9 million)
Profit/(loss) before tax $55.1 million (H1 2022: $(12.2) million)
Combined ratio 76.3% (H1 2022: 91.7%)
Undiscounted combined ratio 81.2% (H1 2022: 92.8%)
Hiscox Re & ILS net ICWP grew 17.9% in the first half to
$345.1 million (H1 2022: $292.8 million)[4], underpinned by strong
double-digit growth in the North American natural catastrophe,
retrocession and marine books. Leaning into the hard market, the
Group has allocated additional organic capital to the Hiscox Re
& ILS business. The business grew natural catastrophe exposure
at a double-digit rate while also moving up in layers, further
de-risking the bottom line from attritional or low severity events;
this also explains the dynamic between net premium growth and rate
increases. While the exceptional conditions seen at January
renewals have eased, the momentum in the market remains strong. A
slight slowdown from the growth seen in the first quarter is due to
our decision to keep exposure flat in Japan, where we are already
at our target market share, and in Florida, where we grew exposure
only slightly, due to the complex underwriting and legislative
environment.
The powerful combination of exposure growth and the best-rated
reinsurance market in a decade is expected to result in material
increases in profits in a normal loss year. In addition, the
favourable market conditions allowed a continuing trend of
improvement to the quality of the book, where both participations
on aggregate excess of loss deals, and exposure to secondary
perils, have been reduced.
The January renewals saw a seismic shift in pricing following
Hurricane Ian, with the market conditions akin to those following
Hurricane Andrew in 1992. All lines of business saw significant
rate increases, which resulted in a total risk-adjusted rate change
of over 30%. The April renewals, dominated by Japanese clients and
some specific larger US cedants, met the anticipated rate increases
of 20%, following a significant re-rating over the prior two years,
and we maintained our share of the market. The June renewals also
saw significant rate increases in US catastrophe and retrocession
and we have again grown exposure, although less so than in January.
As Florida remains a highly uncertain legal and regulatory
jurisdiction, renewal rates were pushed up by over 40%, which
allowed us to increase exposure in the state minimally while
growing net premiums at a double-digit rate.
In line with the first quarter trend we delivered modest ICWP
growth at 1.3% in the first half to $797.9 million (H1 2022: $787.7
million), in contrast with the net ICWP growth noted above. This is
to be expected for the Hiscox Re & ILS model at this point in
the cycle - a key factor resulting in hard market conditions is a
reduction in available capital, which has manifested itself in ILS
net outflows of $219 million, as third-party capital investment
appetite remains subdued. ILS assets under management were $1.7
billion as at 30 June 2023. The reduction in ILS capital has been
partially offset by increased allocation of own capital, thereby
boosting net ICWP growth at an attractive point in the cycle.
Notwithstanding this, the ILS funds are performing at
inception-to-date highs as a result of rate improvements,
heightened interest earnings, and modest loss activity in the first
half of the year. While there is a likelihood that we will continue
to experience ILS outflows as that sector rebalances, our quota
share capital strategy welcomed new partners at both 1 January and
mid-year, demonstrating our ability to access different mechanisms
of third-party capital. The Hiscox ILS offering remains attractive
and well positioned to support new flows of capital into this
segment when the market trends reverse.
The business delivered a strong insurance service result of
$32.7 million (H1 2022: $10.9 million) and a combined ratio on an
undiscounted basis of 81.2%. In our Re & ILS business we have
chosen to reduce vulnerability to attritional losses through higher
attachment points and reductions in our non-property aggregate
excess of loss book which, given the market experience in the first
half, appears to have shielded our business from much of the
heightened loss activity. Under IFRS 17, reinsurance commissions
are classified as earnings rather than offsetting expenses under
IFRS 4, which increases the combined ratio by 4.5 percentage
points; however, this does not change the economic benefit of our
reinsurance programmes.
Investments
The investment result for the first half of 2023 was
$121.8million (H1 2022: loss of $214.1 million), or a return of
1.7% year to date (H1 2022: negative return of 3.0%). Assets under
management at 30 June 2023 were $7.4 billion (FY 2022: $7.1
billion).
While inflation is falling in most developed economies, it
remains elevated, as growth and employment have remained firm.
Central banks' commitment to lowering inflation remains unchanged
and they have continued to raise rates. The economic resilience
surprised markets which had anticipated slower growth, and so
expectations shifted to pricing potential rate cuts much later and
bond yields drifted higher. The rise in yields was particularly
sharp in the UK, after surprising inflation numbers and the Bank of
England reverting to a rate increase of 0.5% in June.
After a strong first quarter, our investment portfolio made
modest gains in the second quarter. Rising coupons and cash returns
combined with gains from equity exposure were sufficient to offset
mark-to-market losses on the bond portfolios caused by rising
yields. The UK bond portfolio was most impacted and saw the weakest
returns. Corporate bond returns were positive given only limited
movement in credit spreads over the first six months of 2023.
Better than expected growth has meant markets remain sanguine about
the prospects for businesses and borrowers. The bond reinvestment
yield has improved to 5.6% on 30 June 2023 from 5.1% on 31 March
2023, indicative of a further uplift in future investment income
expectations.
Equity markets have made gains so far this year, on signs that
any recessionary risk has been delayed, and a downturn, should it
happen, is expected to be brief. Equity investors seem untroubled
by rising rates and events in the bond markets. We have slightly
reduced our equity exposure and maintain a cautious stance.
Overall, the Group maintains a modest exposure to selected risk
assets. Our book has no direct exposure to commercial real estate
and had no defaults in the first half.
Dividend, capital and liquidity management
Hiscox remains strongly capitalised from both a regulatory and a
ratings agency perspective, allowing us to pursue our ambitious
business plan while being sufficiently protected against market
events.
The Hiscox Group Bermuda solvency capital requirement (BSCR)
ratio is estimated at 30 June 2023 at 199% (31 December 2022:
199%). Capital generation exceeded capital consumption, despite the
Group growing natural catastrophe exposure in the hard market. We
remain comfortably above the S&P 'A' rating threshold and
significantly above the regulatory capital ratio requirement. Even
after a severe loss scenario , our solvency position remains
consistent with the S&P 'A' rating .
The Group continues to retain a significant level of liquidity
with fungible assets in the region of $1 billion, comprised of
liquid assets and undrawn borrowing facilities. Leverage for the
Group at the half year is 18.9% ([5]) , 1.7 percentage points lower
than the prior year due to the uplift in shareholder equity - the
result of the transition to IFRS 17.
The Board believes that paying a dividend is an important
indicator of the financial health of the Group, and having
considered the capital requirements of the business, the Board has
recommended to shareholders for approval the payment of an interim
dividend of 12.5 cents per share, an increase of 4.2%. The record
date for the dividend will be 18 August 2023 and the payment date
will be 26 September 2023. The Board proposes to offer a Scrip
alternative, subject to the terms and conditions of the Group's
2023 Scrip Dividend Scheme. The last date for receipt of Scrip
elections will be 4 September 2023 and the reference price will be
announced on 12 September 2023. Further details on the dividend
election process and Scrip alternative can be found on the investor
relations section of our corporate website,
www.hiscoxgroup.com.
IFRS 17
Our finance function reached a significant milestone when we
commenced reporting under IFRS 17, which coincided with a period of
significant interest rate volatility. Interest rate increases in
the first six months of the year resulted in a net positive impact
to earnings from the discounting of liabilities of $32.4 million,
as the benefit from the initial recognition of claims more than
offset the negative impact of discount unwind.
On the asset side, rising coupons, cash returns and gains from
equity exposure in the first half of 2023 in combination with the
reduction of credit spreads more than offset mark-to-market losses
on bond portfolios due to rising yields, which are largely
non-economic in nature. Under IFRS 17, the discounting of both
liabilities and assets creates a better symmetry as movements
arising from the unwinding of claims discount and changes in the
claims discount rate partially offset fair value movements on
bonds.
People
In May we announced the appointment of our new Chairman,
Jonathan Bloomer, who brings a wealth of experience and a real
passion for building businesses. Jonathan started his financial
services career at Arthur Andersen, where he became Partner before
joining the Prudential plc. as Group Finance Director. Jonathan has
held numerous financial services positions and Board roles
including operating partner at Cerberus Capital Management. He is
currently Chair of Morgan Stanley International and DWF Group
PLC.
In addition, we have two other notable senior hires - Fabrice
Brossart, who will be taking on the Group Chief Risk Officer role,
and Chris Loake, our new Group Chief Information Officer. These are
key appointments that will help to drive the business forwards and
I look forward to working with them to deliver on our strategy.
Brand
We always strive to do the right thing for our customers, our
people, and our partners, but what that looks like changes over
time. That is why we have refreshed our brand promise, to better
reflect the needs of our people and customers for today and
tomorrow. It sets a clear vision for our people and reflects the
strong values and distinctive culture that we have always fostered
at Hiscox. It will also be reflected in our brand-building and
advertising and, thanks to an increased investment in our brand
during the second half of the year, we will soon launch new
creative and advertising campaigns across the UK, with our European
and US markets to follow suit from next year.
Outlook
Our diversified business portfolio is well positioned to deliver
high-quality growth in revenue and earnings, as we continue to
drive disciplined growth in positive market conditions across our
big-ticket segments, and to pursue the attractive long-term
structural growth opportunity in retail, combined with investment
income tailwinds.
Our Retail businesses continue to see positive growth momentum,
albeit tempered by our deliberate actions not to prioritise growth
at the expense of quality of earnings. As such, we expect the
full-year headline growth to be in line with the half-year
trend.
I anticipate that our London Market business will continue to
grow on its current trajectory, as we face into multiple attractive
growth opportunities; and in Re & ILS, we wrote over
three-quarters of this year's reinsurance premiums in the first
half, with a greater share of these premiums to be earned in the
second half in line with the risk profile of the business. We look
ahead to the US wind season well capitalised and with a
high-quality portfolio written at an attractive rate.
Our portfolio of businesses and our people position us well to
continue delivering high-quality disciplined growth and
earnings.
Aki Hussain
Group Chief Executive
9 August 2023
Condensed consolidated interim income statement
For the six month period ended 30 June 2023
Six months Six months
to to
30 June 30 June Year to
2023 2022
(restated*) 31 Dec
2022
(restated*)
Note $m $m $m
Insurance revenue 6 1,941.1 1,880.5 4,273.3
Insurance service expenses 6 (1,486.7) (1,468.9) (3,485.9)
------------------------------------------- ----- ------------ ------------- --------------
Insurance service result before
reinsurance contracts held 454.4 411.6 787.4
Allocation of reinsurance premiums 6 (417.3) (423.0) (1,264.8)
Amounts recoverable from reinsurers
for incurred claims 6 184.3 151.6 838.3
------------------------------------------- ----- ------------ ------------- --------------
Net expenses from reinsurance contracts
held (233.0) (271.4) (426.5)
------------------------------------------- ----- ------------ ------------- --------------
Insurance service result 6 221.4 140.2 360.9
------------------------------------------- ----- ------------ ------------- --------------
Investment result 9 121.8 (214.1) (187.3)
------------------------------------------- ----- ------------ ------------- --------------
Net finance (expenses)/income from
insurance contracts (64.4) 165.2 213.7
Net finance income/(expenses) from
reinsurance contracts 26.6 (77.4) (102.1)
------------------------------------------- ----- ------------
Net insurance finance (expenses)/income 9 (37.8) 87.8 111.6
------------- --------------
Net financial result 9 84.0 (126.3) (75.7)
------------------------------------------- ----- ------------ ------------- --------------
Other income 10 33.7 18.7 42.3
Other operational expenses 6 (33.8) (34.5) (67.8)
Net foreign exchange (losses)/gains (16.5) 45.7 54.7
Other finance costs 11 (24.0) (18.4) (39.7)
Share of profit of associates after
tax - - 0.9
------------------------------------------- ----- ------------ ------------- --------------
Profit before tax 264.8 25.4 275.6
Tax (expense)/credit 12 (14.7) 8.2 (21.7)
------------------------------------------- ----- ------------
Profit for the period (all attributable
to owners of the Company) 250.1 33.6 253.9
------------------------------------------- ----- ------------ ------------- --------------
Earnings per share on profit attributable
to owners of the Company
Basic 14 72.2c 9.8c 73.8c
Diluted 14 70.8c 9.7c 72.7c
*restated for the adoption of IFRS 17 and IFRS 9, see note
2.1.
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim statement of comprehensive
income
For the six month period ended 30 June 2023
Six months Six months
to to
30 June 2023 30 June Year to
2022
(restated) 31 Dec
2022
(restated)
----------------------------------------
Note $m $m $m
---------------------------------------- ----- --------------- ------------ -------------
Profit for the period 250.1 33.6 253.9
Other comprehensive income
Items that will not be reclassified
to the income statement:
Remeasurements of the net defined
benefit pension scheme 19 (2.8) 34.4 34.9
Income tax effect (1.7) (10.8) (7.7)
---------------------------------------- ----- --------------- ------------ -------------
(4.5) 23.6 27.2
---------------------------------------- ----- --------------- ------------ -------------
Items that may be reclassified
subsequently to the income statement:
Exchange gains/(losses) on translation
of foreign operations 21.0 (91.2) (118.0)
---------------------------------------- ----- --------------- ------------ -------------
Other comprehensive income net
of tax 16.5 (67.6) (90.8)
---------------------------------------- ----- --------------- ------------ -------------
Total comprehensive income for
the period (all attributable to
owners of the Company) 266.6 (34.0) 163.1
---------------------------------------- ----- --------------- ------------ -------------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim balance sheet
As at 30 June 2023
30 June 30 June 2022 31 Dec 2022
2023
(restated) (restated)
Note $m $m $m
---------------------------------- ----- ---------- -------------- -------------
Assets
Employee retirement benefit
asset 19 32.2 20.9 20.9
Goodwill and intangible assets 329.0 302.8 320.4
Property, plant and equipment 130.2 132.0 133.1
Investments in associates 6.0 5.2 5.6
Deferred tax assets 38.1 71.2 38.2
Financial assets carried at
fair value 16 6,151.7 5,684.2 5,812.1
Reinsurance contract held assets 13 2,514.3 2,535.9 2,517.2
Trade and other receivables 206.7 206.7 160.6
Current tax assets 4.2 8.2 4.0
Cash and cash equivalents 1,289.9 1,413.9 1,350.9
---------------------------------- ----- ---------- -------------- -------------
Total assets 10,702.3 10,381.0 10,363.0
---------------------------------- ----- ---------- -------------- -------------
Equity and liabilities
Shareholders' equity
Share capital 38.7 38.7 38.7
Share premium 522.2 517.2 517.6
Contributed surplus 184.0 184.0 184.0
Currency translation reserve (383.2) (377.4) (404.2)
Retained earnings 2,482.5 2,100.9 2,297.8
---------------------------------- ----- ---------- -------------- -------------
Equity attributable to owners
of the Company 2,844.2 2,463.4 2,633.9
Non-controlling interest 1.1 1.1 1.1
---------------------------------- ----- ---------- -------------- -------------
Total equity 2,845.3 2,464.5 2,635.0
---------------------------------- ----- ---------- -------------- -------------
Deferred tax liabilities 20.1 16.0 4.1
Insurance contract liabilities 13 6,804.5 6,732.9 6,694.3
Financial liabilities 16 692.3 683.2 636.2
Current tax liabilities 9.4 17.2 14.1
Trade and other payables 330.7 467.2 379.3
---------------------------------- ----- ---------- -------------- -------------
Total liabilities 7,857.0 7,916.5 7,728.0
---------------------------------- ----- ---------- -------------- -------------
Total equity and liabilities 10,702.3 10,381.0 10,363.0
---------------------------------- ----- ---------- -------------- -------------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim statement of changes in
equity
For the six month period ended 30 June 2023
Share Share Contributed Currency Retained Equity Non- Total
capital premium surplus translation earnings attributable controlling equity
reserve to owners interest
of the
Company
$m $m $m $m $m $m $m $m
--------------- --------- --------- ------------ ------------- ---------- ------------- ------------- --------
Balance at 1
January 2023
(restated,
see
note 2.1) 38.7 517.6 184.0 (404.2) 2,297.8 2,633.9 1.1 2,635.0
Profit for the
period - - - - 250.1 250.1 - 250.1
Other
comprehensive
income net of
tax - - - 21.0 (4.5) 16.5 - 16.5
Employee share
options:
Equity
settled
share-based
payments - - - - 19.7 19.7 - 19.7
Proceeds from
shares
issued - 3.5 - - - 3.5 - 3.5
Deferred and
current tax
on
employee
share
options - - - - 2.2 2.2 - 2.2
Shares issued
in relation
to
Scrip
Dividend - 1.1 - - - 1.1 - 1.1
Dividends paid
to owners of
the Company - - - - (82.8) (82.8) - (82.8)
--------------- --------- --------- ------------ ------------- ---------- ------------- ------------- --------
Balance at 30
June 2023 38.7 522.2 184.0 (383.2) 2,482.5 2,844.2 1.1 2,845.3
--------------- --------- --------- ------------ ------------- ---------- ------------- ------------- --------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim statement of changes in equity
(continued)
For the six month period ended 30 June 2022
Share Share Contributed Currency Retained Equity Non- Total
capital premium surplus translation earnings attributable controlling equity
reserve to owners interest
of the
Company
$m $m $m $m $m $m $m $m
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
Balance at 31
December
2021 (as
previously
reported) 38.7 516.8 184.0 (289.3) 2,088.0 2,538.2 1.1 2,539.3
IFRS 17 and
IFRS
9 opening
equity
adjustments
(note
2.1) - - - 3.1 20.8 23.9 - 23.9
Balance at 1
January
2022 38.7 516.8 184.0 (286.2) 2,108.8 2,562.1 1.1 2,563.2
Profit for the
period - - - - 33.6 33.6 - 33.6
Other
comprehensive
income net of
tax - - - (91.2) 23.6 (67.6) - (67.6)
Employee share
options:
Equity settled
share-based
payments - - - - 13.8 13.8 - 13.8
Proceeds from
shares
issued - 0.1 - - - 0.1 - 0.1
Deferred and
current
tax on
employee
share options - - - - 0.3 0.3 - 0.3
Shares issued
in
relation to
Scrip
Dividend - 0.3 - - - 0.3 - 0.3
Dividends paid
to owners of
the
Company - - - - (79.2) (79.2) - (79.2)
Balance at 30
June
2022 38.7 517.2 184.0 (377.4) 2,100.9 2,463.4 1.1 2,464.5
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim statement of changes in equity
(continued)
For the year ended 31 December 2022
Share Share Contributed Currency Retained Equity Non- Total
capital premium surplus translation earnings attributable controlling equity
reserve to owners interest
of the
Company
$m $m $m $m $m $m $m $m
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
Balance at 31
December 2021
(as previously
reported) 38.7 516.8 184.0 (289.3) 2,088.0 2,538.2 1.1 2,539.3
IFRS 17 and
IFRS
9 opening
equity
adjustments
(note
2.1) - - - 3.1 20.8 23.9 - 23.9
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
Balance at 1
January
2022 38.7 516.8 184.0 (286.2) 2,108.8 2,562.1 1.1 2,563.2
Profit for the
year - - - - 253.9 253.9 - 253.9
Other
comprehensive
income net of
tax - - - (118.0) 27.2 (90.8) - (90.8)
Employee share
options:
Equity settled
share-based
payments - - - - 27.2 27.2 - 27.2
Proceeds from
shares issued - 0.1 - - - 0.1 - 0.1
Deferred and
current
tax on
employee
share options - - - - 1.2 1.2 - 1.2
Shares issued
in relation to
Scrip Dividend - 0.7 - - - 0.7 - 0.7
Dividends paid
to owners of
the
Company - - - - (120.5) (120.5) - (120.5)
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
Balance at 31
December 2022 38.7 517.6 184.0 (404.2) 2,297.8 2,633.9 1.1 2,635.0
---------------- --------- --------- ------------ ------------ ---------- ------------- ------------- --------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Condensed consolidated interim cash flow statement
For the six month period ended 30 June 2023
Six months to Six months to Year to
June 2023 June 2022 31 Dec 2022
(restated) (restated)
Note $m $m $m
--------------------------------------------------------------- ----- --------------- -------------- -------------
Profit before tax 264.8 25.4 275.6
Adjustments for:
Net foreign exchange losses/(gains) 16.5 (45.7) (54.7)
Interest and equity dividend income 9 (105.3) (46.5) (119.5)
Interest expense 11 24.0 18.4 39.7
Net fair value (gains)/losses on financial assets (29.3) 228.3 254.2
Depreciation, amortisation and impairment 10 30.6 29.2 60.0
Charges in respect of share-based payments 19.7 13.8 27.2
Realised gain on sale of subsidiary undertaking, intangible
assets and property plant and
equipment - (1.0) 0.1
Changes in operational assets and liabilities:
Insurance and reinsurance contracts 50.5 16.3 2.2
Financial assets carried at fair value (248.1) 14.7 (128.3)
Financial liabilities carried at fair value (0.2) (0.1) -
Financial liabilities carried at amortised cost 0.2 0.4 0.9
Other assets and liabilities (72.1) (0.5) (49.8)
Cash paid to the pension fund 19 (12.2) (13.5) (13.5)
Interest received 97.9 44.4 109.1
Equity dividends received 0.7 2.0 3.9
Interest paid (3.9) (2.6) (31.3)
Current tax paid (4.2) (1.2) (2.4)
--------------------------------------------------------------- ----- --------------- -------------- -------------
Net cash flows from operating activities 29.6 281.8 373.4
--------------------------------------------------------------- ----- --------------- -------------- -------------
Purchase of property, plant and equipment - (9.9) (20.9)
Proceeds from the sale of property, plant and equipment 0.1 2.4 0.9
Purchase of intangible assets (20.6) (24.1) (61.9)
Net cash flows used in investing activities (20.5) (31.6) (81.9)
--------------------------------------------------------------- ----- --------------- -------------- -------------
Proceeds from the issue of ordinary shares 3.5 0.1 0.1
Proceeds from the issue of loan notes - - 279.1
Distributions made to owners of the Company (81.7) (78.9) (119.8)
Repayments of borrowings - - (336.6)
Principal elements of lease payments (8.7) (6.9) (13.7)
Net cash flows used in financing activities (86.9) (85.7) (190.9)
--------------------------------------------------------------- ----- --------------- -------------- -------------
Net (decrease)/increase in cash and cash equivalents (77.8) 164.5 100.6
--------------------------------------------------------------- ----- --------------- -------------- -------------
Cash and cash equivalents at 1 January 1,350.9 1,300.7 1,300.7
Net (decrease)/increase in cash and cash equivalents (77.8) 164.5 100.6
Effect of exchange rate fluctuations on cash and cash
equivalents 16.8 (51.3) (50.4)
--------------------------------------------------------------- ----- --------------- -------------- -------------
Cash and cash equivalents at end of period 18 1,289.9 1,413.9 1,350.9
--------------------------------------------------------------- ----- --------------- -------------- -------------
The notes to the condensed consolidated interim financial
statements are an integral part of this document.
Notes to the condensed consolidated interim financial
statements
1. General information
Hiscox Ltd (the 'Company') is a public limited company
registered and domiciled in Bermuda. The condensed consolidated
interim financial statements for the Company as at, and for the six
months ended, 30 June 2023 comprise the Company and its
subsidiaries (together referred to as the 'Group') and the Group's
interest in associates. The CEO's statement accompanying these
condensed consolidated interim financial statements forms the
Interim Statement for the half year ended 30 June 2023.
The Directors of Hiscox Ltd are listed in the Group's 2022
Report and Accounts. A list of current Directors is maintained and
available for inspection at the registered office of the Company
located at Chesney House, 96 Pitts Bay Road, Pembroke HM 08,
Bermuda. Jonathan Bloomer was appointed on 1 June 2023 and has
joined the Board as Chair, succeeding Robert Childs who retired on
1 July 2023.
2. Basis of preparation
These condensed consolidated interim financial statements for
the six months to 30 June 2023 have been prepared in accordance
with IAS 34 Interim Financial Reporting, the UK-adopted
international accounting standards, and the Disclosure Rules
Sourcebook and Transparency Rules issued by the Financial Conduct
Authority.
The accounting policies applied, the significant judgements
made, and the key sources of estimation uncertainty in the
condensed consolidated interim financial statements are the same as
those applied in Hiscox Ltd's 2022 consolidated financial
statements, except for those discussed in note 2.1. On 20 June
2023, Finance (No.2) Act 2023 was substantively enacted in the UK,
introducing a global minimum effective tax rate of 15%. The
legislation implements a domestic top-up tax and a multinational
top-up tax, effective for accounting periods starting on or after
31 December 2023. The Group has applied the exception under the IAS
12 amendment to recognising and disclosing information about
deferred tax assets and liabilities related to top-up income taxes.
The Group has not early adopted any other standard, interpretation
or amendment that has been issued but is not yet effective.
These condensed consolidated interim financial statements are
unaudited but have been reviewed by the auditor,
PricewaterhouseCoopers Ltd. The comparative results for the year
ended 31 December 2022 and 30 June 2022 have been taken from the
Group's 2022 Annual Report and Accounts, and the 2022 Interim
Statements except for certain balances which have been restated but
not audited following the implementation of IFRS 17 Insurance
Contracts and IFRS 9 Financial Instruments (see notes 2.1 and 2.2).
They should be read in conjunction with the audited consolidated
financial statements of the Group as at, and for the year ended, 31
December 2022.
In preparing these condensed consolidated interim financial
statements, management makes judgements, estimates and assumptions
that affect the reported amounts of assets and liabilities, income
and expense. Actual results may differ from these estimates. The
significant judgements made by management in applying the Group's
accounting policies and the key sources of estimation uncertainty
were the same as those that applied to the consolidated financial
statements as at, and for the year ended, 31 December 2022, except
for those discussed in notes 2.3 and 2.4.
The condensed consolidated interim financial statements have
been prepared on a going concern basis. In adopting the going
concern basis, management has reviewed the Group's current and
forecast solvency and liquidity positions for the next 12 months
and beyond. As part of this consideration, management uses scenario
analysis and stress testing to assess the robustness of the Group's
solvency and liquidity positions.
The Directors have a reasonable expectation that the Company and
the Group have adequate resources to continue in operational
existence over a period of at least 12 months from the date of
approval of the condensed consolidated interim financial
statements. For this reason, they continue to adopt the going
concern basis in preparing the condensed consolidated interim
financial statements.
Items included in the financial statements of each of the
Group's entities are measured in the currency of the primary
economic environment in which that entity operates ('the functional
currency'). The condensed consolidated interim financial statements
are stated in US Dollars which is the Group's presentation
currency. Except where otherwise indicated, all amounts presented
in the financial statements are in US Dollars millions ($m) rounded
to the nearest hundred thousand Dollars.
These condensed consolidated interim financial statements were
approved by the Board for issue on Wednesday, 9 August 2023.
2.1 New and amended accounting standards adopted by the
Group
In these condensed consolidated interim financial statements,
the Company has applied IFRS 17 and IFRS 9 for the first time.
2022/2023 2021/2022
$m $m
------------------------------------------------- ----------- -----------
Equity as at 31 December as previously reported 2,416.7 2,539.3
------------------------------------------------- ----------- -----------
Impact of IFRS 17 219.6 25.1
Impact of IFRS 9 (1.3) (1.2)
------------------------------------------------- ----------- -----------
Restated equity 1 January 2,635.0 2,563.2
------------------------------------------------- ----------- -----------
2.1 New and amended accounting standards adopted by the Group
(continued)
2.1.1 IFRS 17 Insurance Contracts
The Group has restated comparative information for 2022 applying
the full retrospective transitional provisions of IFRS 17 Insurance
Contracts.
The nature of the changes in accounting policies can be
summarised, as follows:
The Group was permitted under IFRS 4 Insurance Contracts to
continue to adopt the existing accounting policies that were
applied prior to the adoption of IFRS ('grandfathered') or the date
of the acquisition of a subsidiary. IFRS 17 replaces IFRS 4 and is
effective for annual periods beginning on or after 1 January 2023.
IFRS 17 establishes specific principles for the recognition,
measurement and presentation of insurance contracts issued and
reinsurance contracts held by the Group. Under IFRS 17, the
liability for incurred claims (LIC) is equivalent to the
liabilities for claims reported, claims adjustment expenses, and
claims incurred but not reported under IFRS 4 and the liability for
remaining coverage (LRC) is equivalent to unearned premium
liabilities for premiums received.
Measurement
IFRS 17 requires a current measurement model where estimates are
remeasured each reporting period. Under the General
Measurement Model ("GMM"), contracts are measured using the
building blocks of discounted probability-weighted fulfilment
cash flows, including an explicit risk adjustment, and a
contractual service margin (CSM) representing the unearned profit
of the contract which is recognised as revenue over the coverage
period. A simplification, the Premium Allocation Approach (PAA),
can be applied if certain eligibility criteria are met. The
majority of the Group's policies have a coverage period of 12
months or less and so are eligible for the PAA. Management applies
significant judgements in assessing whether applying the PAA to
groups of
contracts with a coverage period extending beyond 12 months
would produce a measurement of the LRC that would not differ
materially from the one that would be produced applying GMM.
Management has concluded that a majority of the Group's
insurance contracts issued and reinsurance contracts held meet
the criteria and the PAA is applied to measure them.
The measurement principles differ from the approach used by the
Group under IFRS 4. The key areas are:
-- the LRC reflects premiums received less deferred insurance
acquisition cash flows and less amounts recognised in insurance
service revenue;
-- measurement of the LRC does not require separate
identification of the risk adjustment for non-financial risk and
the CSM;
-- measurement of the LRC is adjusted if a group of contracts is
expected to be onerous (i.e. loss making) over the remaining
coverage period and a loss is recognised immediately in the
consolidated income statement under 'insurance service expenses'
with the recoveries in 'amounts recoverable from reinsurers for
incurred claims'. A loss component is measured as the excess of the
fulfilment cash flows that relate to the remaining coverage of the
group over the carrying amount of the LRC of the group of
contracts;
-- measurement of the LIC is determined on a
probability-weighted expected value basis. In contrast to IFRS 4,
the LIC is discounted. The LIC also includes an explicit risk
adjustment to compensate for non-financial risk. The liability
includes the Group's obligation to pay other incurred insurance
expenses;
-- the discount rates used to calculate the LIC are constructed
using risk-free rates, plus an illiquidity premium, where
applicable. Risk-free rates are determined by reference to the
market observable data (swap rates or highly liquid sovereign
bonds) in the currencies of the respective (re)insurance contract
liabilities. The illiquidity premium is determined based on market
observable illiquidity premiums in financial assets, adjusted to
reflect the liquidity characteristics of the liability cash
flows;
-- the risk adjustment for non-financial risk is the estimated
compensation that the Group requires for bearing the uncertainty
about the amount and timing of the cash flows of groups of
insurance contracts. Management applies significant judgements in
determining the risk adjustment amount;
-- measurement of the reinsurance contract asset for remaining
coverage (ARC) reflecting reinsurance premiums paid for reinsurance
held is adjusted to include a loss-recovery component to reflect
the expected recovery of onerous contract losses where such
contracts reinsure onerous contracts;
-- measurement of the reinsurance asset for incurred claims
(AIC) is similar to the LIC as set out above except for the
adjustment for the effect of the risk of reinsurer's
non-performance;
-- the expected premium received is recognised in the
consolidated income statement as part of insurance service revenue
over the insurance coverage period on the basis of the passage of
time unless the expected pattern of release from risk differs
significantly from the passage of time, in which case it is
recognised based on the expected timing of incurred claims and
benefits;
-- all insurance and reinsurance contract assets and liabilities
are monetary items. As a result, those balances denominated in
foreign currencies are subject to revaluation at foreign exchange
rates prevailing at the reporting date, with the impact of changes
in foreign exchange rates recognised in the consolidated income
statement;
-- under IFRS 4, acquisition costs were recognised and presented
separately as 'deferred acquisition costs'. Under IFRS 17, the
Group has taken the option to include directly attributable
acquisition cash flows in the LRC which are tested separately for
recoverability and are amortised as part of insurance service
expenses.
2.1 New and amended accounting standards adopted by the
Group
2.1.1 IFRS 17 Insurance Contracts (continued)
Changes to presentation and disclosure
The presentation of the consolidated income statement changes,
with premium and claims figures being replaced with insurance
contract revenue, insurance service expense and insurance finance
income and expenses. Gross and net written premium will no longer
be presented on the face of the consolidated income statement.
Further, reinsurance commission income that is contingent on
claims, for example, profit commission income is treated as a part
of claims recoveries cash flows and that which is not contingent on
claims e.g. overrider commission is accounted for as part of
premium paid or received cash flows.
Transition
On transition date, 1 January 2022, the Group:
-- has identified, recognised and measured each group of
insurance contracts as if IFRS 17 requirements had always
applied;
-- derecognised any existing balances that would not exist had
IFRS 17 requirements always applied;
-- performed a PAA eligibility assessment for the 2021 and prior
unexpired groups of insurance and reinsurance contracts with
coverage periods of longer than 12 months;
-- has determined that the net impact to equity at 1 January
2022 was $25.1 million (increase) driven by the following
factors:
o the application of the discounting of the insurance contract
liabilities and assets of $55.0 million (increase); and
o offset by other differences including the recognition of
onerous contract net loss components, non-performance risk, and
alignment of risk adjustment and accounting policies on a
consistent basis under IFRS17 of $29.9 million (decrease).
2.1.2 IFRS 9 Financial Instruments
The Group has adopted IFRS 9 Financial instruments with effect
from 1 January 2023. IFRS 9 replaces IAS 39 and addresses the
classification and measurement of financial assets and liabilities;
impairment of financial assets; and general hedge accounting.
Comparatives have been restated with adjustments to the carrying
amounts of financial assets and liabilities at the date of
transition recognised in retained earnings.
The adoption of IFRS 9 has resulted in changes to the Group's
accounting policies for recognition, classification and measurement
of financial assets and liabilities.
Transition
On the transition date, 1 January 2022, the net impact
recognised in equity is $1.2 million (decrease) driven by the
recognition of expected credit losses (ECL) under IFRS 9 for
financial assets carried at amortised cost, net of tax.
Classification and measurement of financial instruments
IFRS 9 contains three principal classification categories for
financial assets: amortised cost; fair value through other
comprehensive income (FVOCI); and fair value through profit or loss
(FVPL). On transition to IFRS 9, the Group assessed the business
models and contractual cash flows of its financial instruments.
The following table reconciles the carrying amounts of financial
instruments, from their previous measurement category in accordance
with IAS 39, to the measurement categories upon transition to IFRS
9 on 1 January 2022, including any re-measurement impact. Certain
balances previously disclosed within Trade and other
receivables/payables are in scope of IFRS 17 as they are
attributable to insurance contracts; these balances have been
excluded from the table below as they are not in scope of IFRS
9.
2.1 New and amended accounting standards adopted by the
Group
2.1.2 IFRS 9 Financial Instruments (continued)
Classification and measurement of financial instruments
31 December 2021 1 January 2022
IAS 39 IFRS 9
---------------------------------- ----------------------------
Measurement Carrying Measurement Carrying
category Amount category Amount
($m) ($m)
----------------------- --------- ----------------- ---------
Financial assets
Government gilts/Bonds FVPL 907.4 FVPL (mandatory) 907.4
----------------------- --------- ----------------- ---------
Corporate bonds FVPL 3,600.8 FVPL (mandatory) 3,600.8
----------------------- --------- ----------------- ---------
Asset backed securities FVPL 116.6 FVPL (mandatory) 116.6
----------------------- --------- ----------------- ---------
Mortgage-backed securities FVPL 360.1 FVPL (mandatory) 360.1
----------------------- --------- ----------------- ---------
Other fixed income holdings FVPL 434.3 FVPL (mandatory) 434.3
----------------------- --------- ----------------- ---------
Hedge/Equity funds FVPL 417.0 FVPL (mandatory) 417.0
----------------------- --------- ----------------- ---------
Strategic investments FVPL 44.2 FVPL (mandatory) 44.2
----------------------- --------- ----------------- ---------
Insurance linked funds FVPL 50.9 FVPL (mandatory) 50.9
----------------------- --------- ----------------- ---------
Loans and receivables
Deposits with credit institutions (Amortised
(Lloyds deposits) cost) 108.9 Amortised cost 108.9
----------------------- --------- ----------------- ---------
Derivatives FVPL 1.1 FVPL (mandatory) 1.1
----------------------- --------- ----------------- ---------
Loans and receivables
(Amortised
Trade and other receivables cost) 68.5 Amortised cost 67.3
----------------------- --------- ----------------- ---------
Cash and cash equivalents Amortised cost 1,300.7 Amortised cost 1,300.7
----------------------- --------- ----------------- ---------
Total 7,410.5 7,409.3
--------- ----------------- ---------
Financial liabilities
----------------------- --------- ----------------- ---------
Borrowings and accrued
interest Amortised cost 746.5 Amortised cost 746.5
----------------------- --------- ----------------- ---------
Derivatives FVPL 0.2 FVPL (mandatory) 0.2
----------------------- --------- ----------------- ---------
Trade and other payables Amortised cost 22.4 Amortised cost 22.4
----------------------- --------- ----------------- ---------
Total 769.1 769.1
--------- ----------------- ---------
The classification of financial instruments under IFRS 9 has had
no impact on the carrying values previously measured under IAS
39.
The difference in the carrying amount for Trade and other
receivables is due to the expected credit loss (ECL) impairment
methodology introduced by IFRS 9.
Impairment allowances
IFRS 9 introduces an ECL approach for measuring impairment
allowances. The ECL methodology is an unbiased,
probability-weighted estimation that incorporates all available
information relevant to the assessment of credit risk, including
information about past events, current conditions and reasonable
and supportable forecasts of economic conditions at the reporting
date. The forward-looking aspect of IFRS 9 requires judgement as to
how changes in economic factors affect ECLs.
Hedge accounting
IFRS 9 introduces changes to the qualifying criteria for hedge
accounting and expands the financial and non-financial instruments
which may be designated as hedged items and hedging instruments in
order to align hedge accounting with business strategy. As the
Group does not currently employ any hedge accounting, these changes
do not impact the consolidated financial statements of the
Group.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Insurance and reinsurance contracts
The accounting policy set out below is applicable to insurance
and reinsurance contracts that are issued by the Group and
reinsurance contracts held by the Group unless indicated
otherwise.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Insurance and reinsurance contracts (continued)
(a) Classification
Insurance contracts are defined as those containing significant
insurance risk. Significant insurance risk criteria are met if, and
only if, an insured event could cause an insurer to make
significant additional payments in any scenario, excluding
scenarios that lack commercial substance, at the inception of the
contract. Such contracts remain insurance contracts until all
rights and obligations are extinguished or expire.
The Group issues short-term casualty and property (re)insurance
contracts in the normal course of business, under which it accepts
significant insurance risk from its policyholders. The Group also
enters into ceded reinsurance contracts with reinsurers under which
the Group transfers significant insurance risk to reinsurers and is
compensated for claims on contracts issued by the Group.
(b) Separating components
The Group assesses its insurance and reinsurance products to
determine whether they contain distinct components which must be
accounted for under another IFRS instead of under IFRS 17. After
separating any distinct components, the Group applies IFRS 17 to
all remaining components of the (host) insurance contract.
Currently, the Group's products do not include any distinct
components that require separation.
Some reinsurance contracts issued contain profit commission
arrangements. Under these arrangements, there is a guaranteed
minimum amount that the policyholder will always receive - either
in the form of profit commission, or as claims, or another
contractual payment irrespective of the insured event happening.
The guaranteed minimum amounts have been assessed to be highly
interrelated with the insurance component of the reinsurance
contracts and are, therefore, non-distinct investment components
which are not accounted for separately. However, receipts and
payments of these investment components are excluded from insurance
service revenue and expenses.
(c) Level of aggregation
Insurance contracts are aggregated into groups for measurement
purposes. The level of aggregation for the Group is determined
firstly by grouping contracts into portfolios which, with some
limited exceptions, are set as the reserving classes of each legal
entity. Portfolios comprise groups of contracts with similar risks
which are managed together. Portfolios are further divided based on
expected profitability at inception into three categories: onerous
contracts, contracts with no significant risk of becoming onerous,
and the remainder. No group for level of aggregation purposes may
contain contracts issued more than one year apart. The grouping of
contracts is not subsequently reconsidered.
A group of insurance contracts is considered to be onerous at
initial recognition if the fulfilment cashflows allocated to that
group of contracts in total are a net outflow. That is if the
present value of expected claims, attributable expenses and risk
adjustment exceeds the premium.
Portfolios of reinsurance contracts held are assessed for
aggregation separately from portfolios of insurance contracts
issued. Reinsurance contracts held cannot be onerous.
(d) Recognition and derecognition
Groups of insurance contracts issued are initially recognised
from the earliest of the following:
-- the beginning of the coverage period;
-- the date when the first payment from the policyholder is due,
or actually received if there is no due date; and
-- when the Group determines that a group of contracts becomes onerous.
Insurance contracts acquired in a business combination within
the scope of IFRS 3 Business Combinations or a portfolio transfer
are accounted for as if they were entered into at the date of
acquisition or transfer.
Reinsurance contracts held are recognised as follows:
-- a group of reinsurance contracts held that provide
proportionate coverage is recognised at the later of the following
dates (unless underlying contracts are onerous, in which case
earlier recognition is required):
o the beginning of the coverage period of the group; and
o the initial recognition of any underlying insurance
contract;
-- all other groups of reinsurance contracts held are recognised
from the beginning of the coverage period of the group of
reinsurance contracts held; unless the Group entered into the
reinsurance contract held at or before the date when an onerous
group of underlying contracts is recognised prior to the beginning
of the coverage period of the group of reinsurance contracts held,
in which case the reinsurance contract held is recognised at the
same time as the group of underlying insurance contracts is
recognised.
Only contracts that individually meet the recognition criteria
by the end of the reporting period are included in the groups.
When
contracts meet the recognition criteria in the groups after the
reporting date, they are added to the groups in the reporting
period
in which they meet the recognition criteria. Composition of the
groups is not reassessed in subsequent periods.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Insurance and reinsurance contracts (continued)
An insurance contract is derecognised when it is:
-- extinguished (that is, when the obligation specified in the
insurance contract expires or is discharged or cancelled); or
-- the contract is modified such that the modification results
in a change in the measurement model e.g. GMM or the applicable
standard for measuring a component of the contract, substantially
changes the contract boundary, or requires the modified contracts
to be included in a different group.
When a modification is not treated as a derecognition, the Group
recognises amounts paid or received for the modification of the
contract as an adjustment to the relevant liability or asset for
remaining coverage.
When a group of insurance contracts is derecognised, adjustments
to remove related rights and obligations result in the following
amounts being charged immediately to consolidated income
statement:
-- if the contract is extinguished, any net difference between
the derecognised part of the liability for remaining coverage (LRC)
of the original contract and any other cash flows arising from
extinguishment;
-- if the contract is transferred to the third party, any net
difference between the derecognised part of the LRC of the original
contract and the premium charged by the third party; or
-- if the original contract is modified resulting in its
derecognition, any net difference between the derecognised part of
the LRC and the hypothetical premium that the entity would have
charged if it had entered into a contract with equivalent terms as
the new contract at the date of the contract modification, less any
additional premium charged for the modification.
(e) Contract boundary
The Group uses the concept of contract boundary to determine
what cash flows should be considered in the measurement of groups
of insurance contracts. Cash flows are within the boundary of an
insurance contract if they arise from substantive rights and
obligations that exist during the reporting period in which the
Group can compel the policyholder to pay the premiums, or in which
the Group has a substantive obligation to provide the policyholder
with services. A substantive obligation to provide services ends
when:
-- The Group has the practical ability to reassess the risks of
the particular policyholder and, as a result, can set a price or
level of benefits that fully reflects those risks; or
-- Both of the following criteria are satisfied:
o The Group has the practical ability to reassess the risks of
the portfolio of insurance contracts that contain the contract and,
as a result, can set a price or level of benefits that fully
reflects the risk of that portfolio;
o The pricing of the premiums for coverage up to the date when
the risks are reassessed does not take into account the risks that
relate to periods after the reassessment date.
A liability or asset relating to expected premiums or claims
outside the boundary of the insurance contract is not
recognised.
Such amounts relate to future insurance contracts.
(f) Measurement - Premium Allocation Approach
Initial measurement
The Group applies the premium allocation approach (PAA) to the
majority of the insurance contracts that it issues and
reinsurance contracts that it holds, because:
-- The coverage period of each contract in the group is one year or less; or
-- For contracts longer than one year, the Group has modelled
possible future scenarios and reasonably expects that the
measurement of the LRC for the group containing those contracts
under the PAA does not differ materially from the measurement that
would be produced applying the general model.
For insurance contracts issued, on initial recognition, the
Group measures the LRC as the amount of premiums received, less any
acquisition cash flows paid and any amounts arising from the
derecognition of the insurance acquisition cash flows asset and the
derecognition of any other relevant pre-recognition cash flows.
For reinsurance contracts held, on initial recognition, the
Group measures assets for the remaining coverage at the amount of
ceding premiums paid, plus broker fees paid to a party other than
the reinsurer and any amounts arising from the derecognition of any
other relevant pre-recognition cash flows.
For insurance contracts issued, insurance acquisition cash flows
allocated to a group are recognised over the coverage period of
contracts in the group. For reinsurance contracts held, broker fees
are recognised over the coverage period of contracts in a
group.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Insurance and reinsurance contracts (continued)
Subsequent measurement
For insurance contracts issued, at each of the subsequent
reporting dates, the LRC is
-- increased for premiums received in the period;
-- decreased for insurance acquisition cash flows paid in the period;
-- decreased for the amounts of expected premium receipts
recognised as insurance revenue for the services provided in
the
period;
-- increased for the amortisation of insurance acquisition cash
flows in the period recognised as insurance service expenses; and
decreased for any investment component paid or transferred to the
liability for incurred claims.
For reinsurance contracts held, at each of the subsequent
reporting dates, the remaining coverage is:
-- increased for ceding premiums paid in the period;
-- increased for broker fees paid in the period;
-- decreased for the expected amounts of ceding premiums and
broker fees recognised as reinsurance expenses for the services
received in the period; and
-- decreased for any investment component paid or transferred to
the reinsurance assets for incurred claims.
The Group does not adjust the LRC for insurance contracts issued
or the remaining coverage for reinsurance contracts held for the
effect of the time value of money, because associated premiums are
due within one year of the coverage period. The Group only adjusts
the remaining coverage for reinsurance contracts held for the time
value of money in relation to the legacy portfolio transactions
(LPT) that were held as the associated premiums are not due within
one year of the coverage period.
The Group estimates the Liability for Incurred Claims (LIC) as
the fulfilment cash flows related to incurred claims. The
fulfilment cash flows incorporate, in an unbiased way, all
reasonable and supportable information available without undue cost
or effort about the amount, timing and uncertainty of those future
cash flows, they reflect current estimates from the perspective of
the entity, and include an explicit adjustment for non-financial
risk (the risk adjustment). In addition, the Group adjusts the AIC
for the effect of the risk of reinsurers' non-performance.
If facts and circumstances indicate that a group of insurance
contracts measured under the PAA is onerous on initial recognition
or has become onerous subsequently, the Group increases the
carrying amount of the LRC, recognising a loss component, to the
amounts of the excess of the fulfilment cash flows that relate to
the remaining coverage of the group of contracts, over the carrying
amount of the LRC of the group. The amount of such an increase is
recognised in insurance service expenses. Subsequently, the loss
component is amortised over the coverage period of the group of
contracts.
When a loss is recognised on initial recognition of an onerous
group of underlying insurance contracts or on addition of onerous
underlying insurance contracts to that group, the carrying amount
of the reinsurance asset for remaining coverage for reinsurance
contracts held measured under the PAA is increased by the amount of
expected recoveries that will be in the consolidated income
statement and a loss recovery component is established or adjusted
for that amount. The loss recovery component is calculated by
multiplying the loss component recognised on underlying insurance
contracts by the percentage of claims on underlying insurance
contracts that the Group expects to recover from the reinsurance
contracts held that are entered into before or at the same time as
the loss is recognised on the underlying insurance contracts. When
underlying insurance contracts that are reinsured are included in
the same group as insurance contracts issued that are not
reinsured, the Group applies a systematic and rational method of
allocation to determine the portion of losses that relates to
underlying insurance contracts.
(g) Insurance revenue
The insurance revenue for the period is the amount of expected
premium receipts (excluding any investment component) allocated to
the period. The Group allocates the expected premium receipts to
each period of insurance contract services on the basis of the
passage of time. But if the expected pattern of release of risk
during the coverage period differs significantly from the passage
of time, for example a group of contracts that is exposed to large
natural catastrophe risk concentrated in the first or second half
of the year, then the allocation is made on the basis of the
expected timing of incurred insurance service expenses.
Changes to the basis of allocation are accounted for
prospectively as a change in accounting estimate.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Insurance and reinsurance contracts (continued)
(h) Insurance service expenses
Insurance service expenses include the following:
-- incurred claims, excluding investment components reduced by loss component allocations;
-- other incurred directly attributable expenses;
-- insurance acquisition cash flows amortisation using the
pattern that is consistent with the insurance revenue;
-- changes that relate to past service;
-- changes that relate to future service;
-- insurance acquisition cash flows assets impairment; and
-- mandatory reinstatement premiums.
Other expenses not meeting the above categories are included in
other operating expenses in the consolidated Income
statement.
(i) Allocation of reinsurance premiums
The allocation of reinsurance premiums includes reinsurance
premiums and other incurred directly attributable expenses.
Reinsurance premium and expenses are recognised similarly to
insurance revenue. The amount of reinsurance expenses recognised in
the reporting period depicts the transfer of received insurance
contract services at an amount that reflects the portion of ceding
premiums that the Group expects to pay in exchange for those
services. Additionally, broker fees and ceding commissions that are
not contingent on claims of the underlying contracts issued reduce
ceding premiums and are accounted for as part of reinsurance
premiums.
In addition, the allocation of reinsurance premiums also
includes changes in the reinsurance assets arising from retroactive
reinsurance contracts held and voluntary reinstatement ceded
premiums.
(j) Amounts recoverable from reinsurers for incurred claims
The amounts recoverable from reinsurers for incurred claims
include:
-- incurred claims recoveries, excluding investment components;
-- loss-recovery component allocations;
-- changes that relate to past service;
-- effect of changes in the risk of reinsurers' non-performance;
-- amounts relating to accounting for onerous groups of underlying insurance contracts issued;
-- ceding commissions that are contingent on claims of the
underlying contracts issued reduce incurred claims recovery;
and
-- mandatory reinstatement ceded premiums.
(k) Insurance finance income or expenses
Insurance finance income or expenses comprise the change in the
carrying amount of the group of insurance contracts arising
from:
-- the effect of the time value of money and changes in the time
value of money. This mainly comprises of interest accreted on the
LIC and interest unwind on the AIC; and
-- the effect of financial risk and changes in financial risk.
This mainly includes the effect of changes in interest rates i.e.,
discount rates.
The Group does not disaggregate changes in the risk adjustment
for non-financial risk between insurance service result and
insurance finance income or expenses. The change in the risk
adjustment is entirely presented as part of the insurance
service
result.
Foreign exchange gains and losses continue to be presented as
Net other foreign exchange gain/(loss) line item.
Financial assets and liabilities
The Group classifies its financial assets in the following
measurement categories, which depends on the business model for
managing the financial assets and the contractual terms of the cash
flows:
-- Amortised cost: Assets that are held for collection of
contractual cash flows where those cash flows represent solely
payments of principal and interest (SPPI), and that are not
designated at fair value through profit or loss (FVPL), are
measured at amortised cost. Interest income from these financial
assets is included in interest income using the effective interest
rate method. Such assets held by the Group include cash and cash
equivalents, receivables from brokers, prepayments and accrued
income, receivables and accrued interest and other debtors.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Financial assets and liabilities (continued)
-- Fair value through other comprehensive income (FVOCI): Assets
that are held for collection of contractual cash flows and for
selling the financial assets, and where the cash flows represent
SPPI, and that are not designated as FVPL, are measured at FVOCI.
Movements in the carrying amount are taken through OCI, except for
the recognition of impairment gains or losses, interest revenue and
foreign exchange gains and losses which are recognised in profit or
loss. When the financial asset is derecognised, the cumulative gain
or loss on the instrument's amortised cost previously recognised in
OCI is reclassified from equity to profit or loss. Interest from
these financial assets is included in interest income using the
effective interest rate method. The Group does not hold any assets
at FVOCI as the business model criteria are not met.
-- Fair value through profit or loss (FVPL): Assets that do not
meet the criteria for amortised cost or FVOCI are measured at FVPL.
Assets can also be designated to FVPL if in doing so it eliminates,
or significantly reduces, an accounting mismatch. The gains or
losses arising from fair value changes on assets measured at FVPL
are recognised in profit or loss and presented within investment
result in the period in which it arises. The Group's investment
assets in this category include government bonds, corporate bonds,
asset and mortgage-backed securities, other fixed income holdings,
equities, investment funds, insurance linked funds and derivatives.
All these assets are at FVPL because of the business model
test.
(a) Recognition
The Group recognises a financial asset or a financial liability
in its balance sheet when, and only when, it becomes a party to the
contractual provisions of the instrument. At initial recognition,
the Group measures a financial asset at its fair value plus, in the
case of a financial asset not at fair value through profit or loss,
transaction costs that are incremental and directly attributable to
the acquisition or issue of the financial asset. Transaction costs
of financial assets carried at FVPL are expensed in profit or
loss.
(b) Impairment allowances
IFRS 9 outlines an expected credit loss (ECL) model for all
assets measured at amortised cost and FVOCI.
The assessment of credit risk and the estimation of an ECL are
unbiased, probability-weighted and incorporate all available
information relevant to the assessment, including information about
past events, current conditions and reasonable and supportable
forecasts of economic conditions at the reporting date. The
forward-looking aspect of IFRS 9 requires judgement as to how
changes in economic factors affect ECLs. Impairment charges are
recognised in the Income Statement within operational expenses.
The ECL is a three-stage model based on forward looking
information regarding changes in credit quality since inception.
Credit risk is measured using a probability of default (PD);
exposure at default (EAD); and loss given default (LGD) as
follows:
-- PD is an estimate of the likelihood of default of the asset.
-- EAD is an estimate of the exposure at that future default
date, taking into account expected changes in the exposure after
the reporting date.
-- LGD is an estimate of the loss arising in the case where a
default occurs at a given time. It is based on the difference
between the contractual cash flows due and those that the Group
would expect to receive. It is usually expressed as a percentage of
the exposure at default.
The three stages of ECL are defined and assessed as follows:
Stage 1 - no significant increase in credit risk since
inception, ECL is calculated using a 12-month PD.
Stage 2 - a significant increase in credit risk since inception,
ECL is calculated using a lifetime PD.
Stage 3 - credit impaired, ECL is calculated using a lifetime
PD.
A significant increase in credit risk is considered to have
incurred when payments are 30 days past due, or earlier if other
factors indicate the risk has increased significantly since
inception.
Financial assets are written off when there is no reasonable
expectation of recovery on a case-by-case basis.
(c) Derecognition
Financial assets are derecognised when the contractual rights to
receive the cash flows from the financial assets have expired; or
they have been transferred and the Group transfers substantially
all the risks and rewards of ownership; or they have been
transferred and the Group neither transfers nor retains
substantially all the risks and rewards of ownership and the Group
has not retained control. Any gain or loss arising from
derecognition is recognised directly in profit or loss. A financial
liability is derecognised when the obligation under that liability
is discharged, cancelled or expires.
(d) Investment income
The total gain/loss from financial assets carried at fair value
through profit or loss (FVPL) is recognised in profit or loss and
disclosed in the notes as investment income comprising interest
received, realised gains/losses and unrealised gains/losses.
2.2 Summary of material accounting policies in relation to
insurance contracts and financial instruments
Financial assets and liabilities (continued)
(e) Financial liabilities
At initial recognition, the Group classifies a financial
liability at fair value and subsequently at amortised cost using
the effective interest rate method. Financial liabilities mainly
include payables to brokerage customers, short term borrowings,
long term borrowings and bonds payable.
When all or part of the current obligations of a financial
liability have been discharged, the Group derecognises the portion
of the financial liability or obligation that has been discharged.
The difference between the carrying amount of the derecognised
liability and the consideration is recognised in profit or
loss.
Derivative financial liabilities are measured at fair value
through profit or loss. All the related realised and unrealised
gains or losses and transaction costs are recognised in profit or
loss.
(f) Derivative financial instruments
Derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into and are subsequently
valued at fair value at each balance sheet date. Fair values are
obtained from quoted market values and, if these are not available,
valuation techniques including option pricing models are used as
appropriate. The method of recognising the resulting gain or loss
depends on whether the derivative is designated as a hedging
instrument and, if so, the nature of the item being hedged. For
derivatives not formally designated as a hedging instrument, fair
value changes are recognised immediately in the consolidated income
statement. Changes in the value of derivatives and other financial
instruments formally designated as hedges of net investments in
foreign operations are recognised in the currency translation
reserve to the extent they are effective; gains or losses relating
to the ineffective portion of the hedging instruments are
recognised immediately in the consolidated income statement.
The Group had no derivative instruments designated for hedge
accounting during the current period and prior financial year.
2.3 Significant accounting judgements
Insurance and reinsurance contracts
The Group applies the PAA to simplify the measurement of
insurance contracts. When measuring liabilities for remaining
coverage, the PAA is broadly similar to the Group's previous
accounting treatment under IFRS 4. However, when measuring
liabilities for incurred claims, the Group applies discounting and
includes an explicit risk adjustment for non-financial risk.
(a) Liability for incurred claims
The ultimate cost of outstanding claims is estimated by using a
range of standard actuarial claims projection techniques. The Group
relies on actuarial analysis to estimate the settlement cost of
future claims. Via a formal governed process, there is close
communication between the actuaries and other key stakeholders,
such as the underwriters, claims and finance teams when setting and
validating the assumptions. The main assumption underlying these
techniques is that a Group's past claims development experience can
be used to project future claims development and hence ultimate
claims costs. These methods extrapolate the development of paid and
incurred losses, average costs per claim (including claims handling
costs), and claim numbers based on the observed development of
earlier years and expected loss ratios. Historical claims
development is mainly analysed by accident years, but can also be
further analysed by geographical area, as well as by significant
business lines and claim types. In most cases, no explicit
assumptions are made regarding future rates of claims inflation or
loss ratios. Instead, the assumptions used are those implicit in
the historical claims development data on which the projections are
based. Additional qualitative judgement is used to assess the
extent to which past trends may not apply in future, (e.g., to
reflect one-off occurrences, changes in external or market factors
such as public attitudes to claiming, economic conditions, levels
of claims inflation, judicial decisions and legislation, as well as
internal factors such as portfolio mix, policy features and claims
handling procedures) in order to arrive at the estimated ultimate
cost of claims that present the probability-weighted expected value
outcome from the range of possible outcomes, taking account of all
the uncertainties involved.
(b) Risk adjustment for non-financial risk
The risk adjustment for non-financial risk is the compensation
that the Group requires for bearing the uncertainty about the
amount and timing of the cash flows of groups of insurance
contracts. The risk adjustment reflects an amount that an insurer
would rationally pay to remove the uncertainty that future cash
flows will exceed the expected value amount.
To determine the risk adjustment for non-financial risk for
reinsurance contracts, the Group applies a combination of a Value
at Risk (VaR) (or a percentile) approach and a scenario-based
approach both gross and net of reinsurance and derives the amount
of risk being transferred to the reinsurer as the difference
between the two results. Most business is measured under the PAA
model and therefore the Group does not calculate a risk adjustment
in relation to LRC excluding loss component.
2.3 Significant accounting judgements (continued)
Insurance and reinsurance contracts
For the incurred claim liabilities measurement purposes, the
Group calculates the risk adjustment at each insurance undertaking
entity in accordance with its risk profile using a combination of
Value at Risk method and scenario analysis targeting an overall
confidence level for the aggregate risk distribution. Scenario
analysis is used to determine the level of compensation that the
Group requires for bearing uncertainty about the large event-driven
claims e.g. natural catastrophe. This element of the compensation
for risk takes into consideration the range of potential outcomes
from an event and the sensitivities of the loss positions in any
modelled scenarios. Given the nature of the underlying business and
losses it is normal for new risks to become apparent or for the
magnitude of existing risks to change over time.
Group diversification benefit is not considered at the
individual insurance undertaking entity level but is considered in
determining the confidence level at a consolidated level for
disclosure purposes. At 30 June 2023, the risk adjustment in
respect of the LIC net of reinsurance is at the 77th percentile (31
December 2022: 78th percentile).
(c) Premium Allocation Approach (PAA) eligibility assessment
A simplified measurement model, the PAA, can be applied if
certain eligibility criteria are met. The majority of the Group's
policies have a coverage period of 12 months or less and so are
eligible for the PAA. Management applies significant judgements in
assessing whether to apply the PAA to groups of contracts with a
coverage period extending beyond 12 months.
2.4 Significant estimates and assumptions
The preparation of consolidated financial statements requires
the use of accounting estimates which could differ to the actual
results. This note provides an overview of items that are more
likely to be materially adjusted due to changes in estimates and
assumptions in subsequent periods. Detailed information about each
of these estimates is included in the notes below, together with
information about the basis of calculation for each affected line
item in the condensed consolidated interim financial
statements.
Insurance and reinsurance contracts
In applying IFRS 17 measurement requirements, the following
inputs and methods were used that include significant estimates.
The present value of future cash flows is estimated using
deterministic scenarios. The assumptions used in the deterministic
scenarios are derived to approximate the probability-weighted mean
of a full range of scenarios. For the sensitivities with regard to
the assumptions made that have the most significant impact on
measurement under IFRS 17 please refer to note 3 Management of
risk.
(a) Discount rates
Insurance contract liabilities are calculated by discounting
expected future cash flows at a risk-free rate, plus an illiquidity
premium where applicable. Risk-free rates were derived using swap
rates available in the market denominated in the same currency as
the insurance contracts being measured. When swap rates are not
available, highly liquid sovereign bonds with the highest e.g.,
AAA/AA credit rating were used.
Management uses judgement to assess liquidity characteristics of
the liability cash flows. The illiquidity premium was estimated
based on market observable liquidity premiums in financial assets,
adjusted to reflect the illiquidity characteristics of the
liability cash flows. The illiquidity premium is determined by
reference to market observable AA-rated bonds yield curve in the
currency of the insurance contract being measured adjusted to
remove both expected and unexpected credit risk.
The following discount rates were applied for the currencies and
periods presented below:
Period end 30 June
2023
-------- --------------------------
1 year 3 year 5 year
-------- ---------- ------ ------
USD 5.22% 4.33% 3.98%
-------- ---------- ------ ------
GBP 6.04% 5.70% 5.32%
-------- ---------- ------ ------
EUR 3.91% 3.66% 3.49%
-------- ---------- ------ ------
CAD 5.11% 4.42% 3.97%
-------- ---------- ------ ------
Year end 31 December
2022
-------- --------------------------
1 year 3 year 5 year
-------- ---------- ------ ------
USD 4.90% 4.24% 4.00%
-------- ---------- ------ ------
GBP 4.59% 4.64% 4.55%
-------- ---------- ------ ------
EUR 3.12% 3.28% 3.31%
-------- ---------- ------ ------
CAD 4.66% 4.03% 3.74%
-------- ---------- ------ ------
2.4 Significant estimates and assumptions (continued)
(b) Estimates of future cash flows to fulfil insurance
contracts
Included in the measurement of each group of contracts within
the scope of IFRS 17 are all of the future cash flows within the
boundary of each group of contracts. The estimates of these future
cash flows are based on probability-weighted expected future cash
flows. The Group estimates which cash flows are expected and the
probability that they will occur as at the measurement date. In
setting these expectations, the Group uses information about past
events, current conditions and forecasts of future conditions. The
Group's estimate of future cash flows is the mean of a range of
scenarios that reflect the full range of possible outcomes. Each
scenario specifies the amount, timing and probability of cash
flows. The probability-weighted average of the future cash flows is
calculated using a deterministic scenario representing the
probability-weighted mean of a range of scenarios.
Where estimates of expenses-related cash flows are determined at
the portfolio level or higher, they are allocated to groups of
contracts on a systematic basis, such as activity-based costing
method. The Group has determined that this method results in a
systematic and rational allocation. Similar methods are
consistently applied to allocate expenses of a similar nature.
Acquisition cash flows are typically allocated to groups of
contracts based on gross premiums written. This includes an
allocation of acquisition cash flows among existing groups of
insurance contracts issued. Claims settlement-related expenses are
largely allocated based on claims costs.
Uncertainty in the estimation of future claims and benefit
payments arises primarily from the severity and frequency of claims
and uncertainties regarding future inflation rates leading to
claims and claims-handling expenses growth. Assumptions used to
develop estimates about future cash flows are reassessed at each
reporting date and adjusted where required.
3. Management of risk
Operational risk
The Group demonstrates continued operational resilience,
underscoring the benefits of its business model, disciplined risk
management and ongoing investment in technology and
infrastructure.
Insurance risk
The insurance risks are consistent with those disclosed within
the Report and Accounts 2022 on pages 181 to 184. The Group
continues to assess, review and monitor its underwriting and
reserve risk.
Financial risk
The Group continues to monitor all aspects of its financial risk
appetite and the resultant exposure is taken with caution.
Reliability of fair value
As detailed in note 16, the Group's investment allocation is
broadly comparable to that at 31 December 2022. In order to assist
users, the Group has disclosed the measurement attributes of its
investment portfolio in a fair value hierarchy in note 17 in
accordance with IFRS 13 Fair Value Measurement. At 30 June 2023,
only 2.1% (31 December 2022: 2.4%) of the Group's investments are
categorised as Level 3.
Price risk
The price risks are consistent with those disclosed within the
Report and Accounts 2022 on pages 184 to 185. The Group's equity
and investment fund holdings are limited to a relatively small and
controlled proportion of the overall investment portfolio. The
equity and investment funds holdings are diversified over a number
of companies and industries. The fair value of equity and
investment fund assets in the Group's balance sheet at 30 June 2023
was $ 308 million (31 December 2022: $339 million).
Interest rate risk
The interest rate risks are broadly consistent with those
disclosed within the Report and Accounts 2022 on page 185. The fair
value of the Group's investment portfolio of debt and fixed income
holdings is normally inversely correlated to movements in market
interest rates. When market interest rates decrease, the fair value
of the Group's debt and fixed income investments would tend to
increase and vice versa if credit spreads remained constant. The
fair value of debt and fixed income assets on the Group's balance
sheet at 30 June 2023 was $5,802 million (31 December 2022: $5,427
million).
The liability for incurred claims, reinsurance assets for
incurred claims and certain reinsurance assets for remaining
coverage are subject to discounting. Please refer to note 2.4(a)
for further details regarding the discount rate used.
One method of assessing interest rate sensitivity is through the
examination of duration-convexity factors in the underlying
portfolio. Duration is the weighted average length of time required
for an instrument's cash flow stream to be recovered, where the
weightings involved are based on the discounted present values of
each cash flow. A closely related concept, modified duration,
measures the sensitivity of the instrument's price to a change in
its yield to maturity. Convexity measures the sensitivity of
modified duration to changes in the yield to maturity.
3. Management of risk
Interest rate risk (continued)
The Group has used a duration-convexity-based sensitivity
analysis for the debt and fixed income holdings, and recalculated
the discounting impact for the reinsurance contract assets and
insurance contract liabilities, to estimate that a movement in
interest rates may affect the Group equity and profit after tax for
the period/year as follows:
30 June 2023 1% increase/decrease in interest rates
------------------------------- --------------------------------------
Equity/Profit after tax
$m
------------------------------- --------------------------------------
Reinsurance contract assets (39)/39
Insurance contract liabilities 90/(90)
Debt and fixed income holdings (86)/86
------------------------------- --------------------------------------
31 December 2022 1% increase/decrease in interest rates
------------------------------- --------------------------------------
Equity/Profit after tax
$m
------------------------------- --------------------------------------
Reinsurance contract assets (43)/43
Insurance contract liabilities 92/(92)
Debt and fixed income holdings (77)/77
------------------------------- --------------------------------------
Credit risk
The credit risks are consistent with those disclosed within the
Report and Accounts 2022 on pages 185 to 187.
The Group Credit Committee assesses the creditworthiness of all
reinsurers by reviewing credit grades provided by rating agencies
and other publicly available financial information detailing their
financial strength and performance as well as details of recent
payment history and the status of any ongoing negotiations between
Group companies and these third parties. As at 30 June 2023, 99%
(31 December 2022: 99%) of Group's reinsurance assets are rated BBB
or higher, or are fully collateralised.
Individual operating units maintain records of the payment
history for significant brokers and contract holders with whom they
conduct regular business. The exposure to individual counterparties
is also managed by other mechanisms, such as the right of offset,
where counterparties are both debtors and creditors of the Group,
and obtaining collateral from unrated counterparties.
The Group mitigates credit risk by investing predominantly in
high-quality debt and fixed income instruments. As at 30 June 2023,
92.8% (31 December 2022: 92.6%) of the Group's investments are
rated BBB or higher.
Liquidity risk
The liquidity risks are consistent with those disclosed within
the Report and Accounts 2022 on pages 187 to 188.
The available headroom of working capital is monitored through
the use of a Group cash flow forecast which is reviewed by
management quarterly, or more frequently as required.
Strong treasury management has ensured that the Group's balance
sheet remains well funded and its operations are financed to
accommodate liquidity demands, together with a high level of
undrawn funds that are sufficient to meet future catastrophe
obligations even if difficult investment market conditions were to
prevail for a period of time.
The Group is exposed to daily calls on its available cash
resources, mainly from claims arising from insurance and
reinsurance contracts. Liquidity risk is the risk that cash may not
be available to pay obligations when due at a reasonable cost. The
Board sets limits on the minimum level of cash and maturing funds
available to meet such calls and on the minimum level of borrowing
facilities that should be in place to cover unexpected levels of
claims and other cash demands.
A significant proportion of the Group's investments is in highly
liquid assets which could be converted to cash in a prompt fashion
and at minimal expense. The 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 is presented below.
3. Management of risk
Liquidity risk (continued)
Fair values at balance sheet date analysed by contractual
maturity:
As at 30 June Within Between Between Between three Between Over five 2023
2023 one one and two and and four and years total
year two years three years four years five years
$m $m $m $m $m $m
$m
--------------- -------------- ------------ --------------- --------------- ----------- -------------- --------
Debt and fixed
income
holdings 1,367.5 1,564.2 1,510.8 625.2 260.4 474.3 5,802.4
Cash and cash
equivalents 1,289.9 - - - - - 1,289.9
--------------- -------------- ------------ --------------- --------------- ----------- -------------- --------
Total 2,657.4 1,564.2 1,510.8 625.2 260.4 474.3 7,092.3
--------------- -------------- ------------ --------------- --------------- ----------- -------------- --------
As at 31 Within Between one Between Between three Between Over five 2022
December 2022 one and two and and four years four and years total
year two years three $m five years
$m years $m $m $m
$m
$m
--------------- -------------- -------------- -------------- -------------- ----------- -------------- --------
Debt and fixed
income
holdings 1,355.5 1,519.6 1,296.1 495.0 272.7 487.7 5,426.6
Cash and cash
equivalents 1,350.9 - - - - - 1,350.9
--------------- -------------- -------------- -------------- -------------- ----------- -------------- --------
Total 2,706.4 1,519.6 1,296.1 495.0 272.7 487.7 6,777.5
--------------- -------------- -------------- -------------- -------------- ----------- -------------- --------
The Group's equities, equity funds, hedge funds and credit funds
and other non-dated instruments have no contractual maturity terms
but predominantly could be liquidated in an orderly manner for cash
in a prompt and reasonable time frame within one year of the
balance sheet date.
The following is an analysis by liability type of the estimated
timing of net cash flows based on the liability for incurred
claims. The estimated phasing of settlement is based on current
estimates and historical trends and the actual timing of future
settlement cash flows may differ materially from the disclosure
below.
Liquidity requirements to settle estimated profile of net
undiscounted liability for incurred claims on balance sheet:
As at 30 June 2023 Within one Between Between Between Between Over 2023
year one and two and three four and five years Total
two years three years and four five years
$m years $m $m $m
$m $m $m
------------------- ---------- ----------- ------------ --------- ----------- ----------- -------
Total 1,730.2 1,017.6 543.9 350.9 197.4 359.7 4,199.7
------------------- ---------- ----------- ------------ --------- ----------- ----------- -------
As at 31 December Within one Between Between Between Between Over five 2022
2022 year one and two and three four and years Total
two years three years and four five years
years $m $m $m
$m $m $m $m
------------------- ---------- ----------- ------------ --------- ----------- ----------- -------
Total 1,642.8 975.9 521.6 336.5 189.3 344.8 4,010.9
------------------- ---------- ----------- ------------ --------- ----------- ----------- -------
Currency risk
The currency risk is consistent with the disclosures in the 2022
Report and Accounts on pages 188 to 190, except for liabilities and
reinsurance assets for remaining coverage which are now remeasured
at the balance sheet date under IFRS 17. The Group remains
susceptible to fluctuations in rates of foreign exchange, in
particular between US Dollars and Sterling.
Capital risk management
The Group's capital risk management approach is consistent with
the disclosures described within the Report and Accounts 2022 on
pages 190 to 192. Prudent capital management is critical to ensure
the Group is able to continue to serve its customers, pay valid
claims and grow where opportunity permits. As a result, at 30 June
2023, the Group remains strongly capitalised against both our
regulatory and rating agency requirements. The Group's available
capital on an IFRS 17 basis was $2,865.9 million (31 December 2022:
$2,645.4 million), comprising net tangible asset value of $2,516.3
million (31 December 2022: $2,314.6 million) and subordinated debt
of $349.6 million (31 December 2022: $330.8 million).
4. Seasonality and weather
The Group's material exposure to catastrophe losses on certain
lines of business such as reinsurance inwards and marine and major
property risk mainly in Re & ILS segment is greater during the
second half of the calendar year, broadly in line with the most
active period of the North Atlantic windstorm season.
In contrast, a majority of gross premium income written in these
lines of business occurs during the first half of the calendar
year. The Group actively participates in many regions and, if any
catastrophic events do occur, it is likely that the Group will
share some of the market's losses. Consequently, the potential for
significant volatility in expected returns remains during the
second half of the year.
5. Related-party transactions
Transactions with related parties during the period are
consistent in nature and scope with those disclosed in note 33 of
the Group's Report and Accounts 2022.
6. 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 resources to, each business
segment.
The Group's four primary business segments are identified as
follows:
Hiscox Retail brings together the results of the Group's retail
business divisions in the UK, Europe, USA and Asia. Hiscox UK and
Hiscox Europe underwrite personal and commercial lines of business
through Hiscox Insurance Company Limited and Hiscox Société Anonyme
(Hiscox SA), together with the fine art and non-US household
insurance business written through Syndicate 33. Hiscox USA
comprises commercial, property and specialty business written by
Hiscox Insurance Company Inc. and Syndicate 3624.
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.
Hiscox Re & ILS is the reinsurance division of the Hiscox
Group, combining the underwriting platforms in Bermuda and London.
The segment comprises the performance of Hiscox Insurance Company
(Bermuda) Limited, excluding the internal quota share arrangements,
with the reinsurance contracts written by Syndicate 33. In
addition, the healthcare and casualty reinsurance contracts written
in Bermuda on Syndicate capacity are included. The segment also
includes the performance and fee income from the Insurance Linked
Securities (ILS) funds, along with the gains and losses made as a
result of the Group's investment in the funds.
Corporate Centre comprises finance costs and administrative
costs associated with Group management activities and intragroup
borrowings, as well as all foreign exchange gains and losses.
All amounts reported on the following pages 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 or loss before tax and combined
ratio.
6. Operating segments (continued)
Profit before tax by segment
Six months ended 30 June 2023
-------------------------------------------------------------------------------------
Hiscox Hiscox Hiscox Corporate Total
Retail London Re & Centre
Market ILS
$m $m $m $m $m
------------------------------- -------- -------- -------- ---------- ----------
Insurance revenue 1,139.7 499.3 302.1 - 1,941.1
Insurance service expenses (996.9) (372.7) (117.1) - (1,486.7)
------------------------------- -------- -------- -------- ---------- ----------
Incurred claims and
changes to liabilities
for incurred claims (480.9) (212.2) (44.1) - (737.2)
Acquisition costs * (322.0) (104.0) (37.7) - (463.7)
Other attributable expenses
* (187.8) (56.5) (35.3) - (279.6)
Losses on onerous contracts
and reversals (6.2) - - - (6.2)
------------------------------- -------- -------- -------- ---------- ----------
Insurance service result
before reinsurance contracts
held 142.8 126.6 185.0 - 454.4
------------------------------- -------- -------- -------- ---------- ----------
Allocation of reinsurance
premiums (119.8) (139.4) (158.1) - (417.3)
Amount recoverable from
reinsurers for incurred
claims 90.2 88.3 5.8 - 184.3
------------------------------- -------- -------- -------- ---------- ----------
Net expense from reinsurance
contracts held (29.6) (51.1) (152.3) - (233.0)
------------------------------- -------- -------- -------- ---------- ----------
Insurance service result 113.2 75.5 32.7 - 221.4
------------------------------- -------- -------- -------- ---------- ----------
Investment result 64.7 34.8 22.3 - 121.8
Net finance expense
from insurance contracts (27.3) (18.7) (18.4) - (64.4)
Net finance income from
reinsurance contracts 4.8 7.9 13.9 - 26.6
Net insurance finance
expense (22.5) (10.8) (4.5) - (37.8)
------------------------------- -------- -------- -------- ---------- ----------
Net financial result 42.2 24.0 17.8 - 84.0
------------------------------- -------- -------- -------- ---------- ----------
Other income 11.4 11.0 10.5 0.8 33.7
Other operational expenses
* (12.9) (3.5) (5.5) (11.9) (33.8)
Net foreign exchange
losses - - - (16.5) (16.5)
Other finance costs (0.6) (0.1) (0.4) (22.9) (24.0)
Profit/(loss) before
tax 153.3 106.9 55.1 (50.5) 264.8
------------------------------- -------- -------- -------- ---------- ----------
Ratio analysis
Claims ratio (%) 40.2 36.0 23.6 - 37.7
Expense ratio (%) 49.0 43.6 52.7 - 48.0
------------------------------- -------- -------- -------- ---------- ----------
Combined ratio (%) 89.2 79.6 76.3 - 85.7
------------------------------- -------- -------- -------- ---------- ----------
* Total marketing expenditure for the period was $37.2 million
(30 June 2022: $31.4 million; 31 Dec 2022: $65.8 million).
The claims ratio is calculated as incurred claims and losses on
onerous contracts net of reinsurance recoveries, as a proportion of
insurance revenue net of allocation of reinsurance premiums. The
expense ratio is calculated as acquisition costs and other
attributable expenses, as a proportion of insurance revenue net of
allocation of reinsurance premiums. The combined ratio is the total
of the claims and expense ratios. All ratios are on an own share
basis, which reflects the Group's share in Syndicate 33, and
includes a reclassification of LPT premium from allocation of
reinsurance premium into amounts recoverable from reinsurers as
detailed below.
Costs allocated to Corporate Centre along with other
non-attributable expenses are non-underwriting-related costs and
are not included within the combined ratio.
6. Operating segments (continued)
As noted above, the claims ratio, expense ratio and combined
ratio include a reclassification of LPT premium from allocation of
reinsurance premiums into amounts recoverable from reinsurers for
incurred claims. The subsequent impacts of LPTs within reinsurance
expenses and reinsurance income are analysed on a net basis within
the net claims to provide a view of the underlying development on
these contracts, against the corresponding development of the gross
reserves, consistent with the focus on net performance when
assessing underwriting performance. The impact on profit is
neutral, however this reclassification for the ratios removes any
volatility on a year-on-year comparison.
Six months ended 30 June 2023
Hiscox Hiscox Hiscox
Retail London Re & ILS Total
Market
$m $m $m $m
--------------------------------------------------------------------- ------- -------- --------- ---------
Insurance revenue 1,139.7 499.3 302.1 1,941.1
--------------------------------------------------------------------- ------- -------- --------- -------
Allocation of reinsurance premiums (119.8) (139.4) (158.1) (417.3)
LPT premium 21.3 8.6 (5.6) 24.3
--------------------------------------------------------------------- ------- -------- --------- -------
Allocation of reinsurance premiums after reclassifying LPT premium (98.5) (130.8) (163.7) (393.0)
--------------------------------------------------------------------- ------- -------- --------- -------
Adjusted net insurance revenue 1,041.2 368.5 138.4 1,548.1
--------------------------------------------------------------------- ------- -------- --------- -------
Incurred claims and changes to liabilities for incurred claims (480.9) (212.2) (44.1) (737.2)
--------------------------------------------------------------------- ------- -------- --------- -------
Amounts recoverable from reinsurers for incurred claims 90.2 88.3 5.8 184.3
LPT premium (21.3) (8.6) 5.6 (24.3)
--------------------------------------------------------------------- ------- -------- --------- -------
Amounts recoverable from
reinsurers for incurred claims after reclassifying LPT premium 68.9 79.7 11.4 160.0
--------------------------------------------------------------------- ------- -------- --------- -------
Adjusted net incurred claims (412.0) (132.5) (32.7) (577.2)
--------------------------------------------------------------------- ------- -------- --------- -------
Remove benefit from discounting of claims (48.3) (15.1) (6.8) (70.2)
--------------------------------------------------------------------- ------- -------- --------- -------
Undiscounted adjusted net incurred claims (460.3) (147.6) (39.5) (647.4)
--------------------------------------------------------------------- ------- -------- --------- -------
The following ratios reflect the reclassification of LPT premium
and removes the impact of discounting.
Ratio analysis (undiscounted)
Claims ratio (%) 44.8 40.1 28.5 42.2
Expense ratio (%) 49.0 43.6 52.7 48.0
-------------------------------- ----- ----- ----- -----
Combined ratio (%) 93.8 83.7 81.2 90.2
-------------------------------- ----- ----- ----- -----
The impact on profit before tax of a 1% change in each component
of the segmental combined ratios is shown in the following table.
Any further ratio change is linear in nature.
Six months ended 30 June 2023
Hiscox Hiscox London Hiscox Re
Retail Market &
ILS
$m $m $m
--------------------- -------- -------------- ----------
1% change in claims
or expense ratio 10.4 3.7 1.4
---------------------- -------- -------------- ----------
6. Operating segments (continued)
Six months ended 30 June 2022 (restated)
-----------------------------------------------------------------------------------------------
Hiscox Hiscox London Hiscox Re Corporate Total
Retail Market & Centre
ILS
$m $m $m $m $m
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance revenue 1,106.1 504.0 270.4 - 1,880.5
Insurance service expenses (1,021.9) (426.9) (20.1) - (1,468.9)
------------------------------- ---------- -------------- ---------- ---------- ----------
Incurred claims and
changes to liabilities
for incurred claims (516.7) (252.3) 42.6 - (726.4)
Acquisition costs (304.0) (129.5) (33.2) - (466.7)
Other attributable expenses (199.6) (45.1) (29.1) - (273.8)
Losses on onerous contracts
and reversals (1.6) - (0.4) - (2.0)
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance service result
before reinsurance contracts
held 84.2 77.1 250.3 - 411.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Allocation of reinsurance
premiums (128.8) (125.5) (168.7) - (423.0)
Amount recoverable from
reinsurers for incurred
claims 120.3 102.0 (70.7) - 151.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Net expense from reinsurance
contracts held (8.5) (23.5) (239.4) - (271.4)
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance service result 75.7 53.6 10.9 - 140.2
------------------------------- ---------- -------------- ---------- ---------- ----------
Investment result (113.3) (62.0) (38.8) - (214.1)
Net finance income from
insurance contracts 83.4 44.4 37.4 - 165.2
Net finance expense
from reinsurance contracts (31.1) (19.3) (27.0) - (77.4)
Net insurance finance
income 52.3 25.1 10.4 - 87.8
------------------------------- ---------- -------------- ---------- ---------- ----------
Net financial result (61.0) (36.9) (28.4) - (126.3)
------------------------------- ---------- -------------- ---------- ---------- ----------
Other income 5.1 3.9 8.7 1.0 18.7
Other operational expenses (14.5) (2.7) (2.9) (14.4) (34.5)
Net foreign exchange
gains - - - 45.7 45.7
Other finance costs (1.0) (0.1) (0.5) (16.8) (18.4)
Profit/(loss) before
tax 4.3 17.8 (12.2) 15.5 25.4
------------------------------- ---------- -------------- ---------- ---------- ----------
Ratio analysis
Claims ratio (%) 43.3 38.9 44.0 - 42.2
Expense ratio (%) 49.3 46.7 47.7 - 48.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Combined ratio (%) 92.6 85.6 91.7 - 90.8
------------------------------- ---------- -------------- ---------- ---------- ----------
6. Operating segments (continued)
The impact of the reclassification of LPT premium is shown in
the following table.
Six months ended 30 June 2022
Hiscox Re &
Hiscox Retail Hiscox London Market ILS Total
$m $m $m $m
---------------------------------------------- ------------- -------------------- ----------- ----------
Insurance revenue 1,106.1 504.0 270.4 1,880.5
---------------------------------------------- ------------- -------------------- ----------- ----------
Allocation of reinsurance premiums (128.8) (125.5) (168.7) (423.0)
LPT premium 43.8 (5.2) 28.9 67.5
---------------------------------------------- ------------- -------------------- ----------- ----------
Allocation of reinsurance premiums after
reclassifying LPT premium (85.0) (130.7) (139.8) (355.5)
---------------------------------------------- ------------- -------------------- ----------- ----------
Adjusted net insurance revenue 1,021.1 373.3 130.6 1,525.0
---------------------------------------------- ------------- -------------------- ----------- ----------
Incurred claims and changes to liabilities
for incurred claims (516.7) (252.3) 42.6 (726.4)
---------------------------------------------- ------------- -------------------- ----------- ----------
Amounts recoverable from reinsurers for
incurred claims 120.3 102.0 (70.7) 151.6
LPT premium (43.8) 5.2 (28.9) (67.5)
---------------------------------------------- ------------- -------------------- ----------- ----------
Amounts recoverable from
reinsurers for incurred claims after
reclassifying LPT premium 76.5 107.2 (99.6) 84.1
---------------------------------------------- ------------- -------------------- ----------- ----------
Adjusted net incurred claims (440.2) (145.1) (57.0) (642.3)
---------------------------------------------- ------------- -------------------- ----------- --------
Remove benefit from discounting of claims (18.3) (8.6) (1.5) (28.4)
---------------------------------------------- ------------- -------------------- ----------- --------
Undiscounted adjusted net incurred claims (458.5) (153.7) (58.5) (670.7)
---------------------------------------------- ------------- -------------------- ----------- --------
Ratio analysis (undiscounted)
Claims ratio (%) 45.1 41.2 45.1 44.1
Expense ratio (%) 49.3 46.7 47.7 48.6
---------------------------------------------- ------------- -------------------- ----------- --------
Combined ratio (%) 94.4 87.9 92.8 92.7
---------------------------------------------- ------------- -------------------- ----------- --------
The impact on profit before tax of a 1% change in each component
of the segmental combined ratios is shown in the following table.
Any further ratio change is linear in nature.
Six months ended 30 June 2022
Hiscox Hiscox London Hiscox Re
Retail Market &
ILS
$m $m $m
--------------------- -------- -------------- ----------
1% change in claims
or expense ratio 10.2 3.7 1.3
--------------------- -------- -------------- ----------
6. Operating segments (continued)
Year ended 31 December 2022 (restated)
-------------------------------------------------------------------------------------------------
Hiscox Hiscox London Hiscox Re Corporate Total
Retail Market & Centre
ILS
$m $m $m $m $m
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance revenue 2,218.0 1,130.6 924.7 - 4,273.3
Insurance service expenses (2,002.2) (881.9) (601.8) - (3,485.9)
------------------------------- ---------- -------------- ---------- ---------- ----------
Incurred claims and
changes to liabilities
for incurred claims (958.0) (506.4) (436.7) - (1,901.1)
Acquisition costs (618.4) (276.6) (110.5) - (1,005.5)
Other attributable expenses (422.5) (98.7) (54.3) - (575.5)
Losses on onerous contracts
and reversals (3.3) (0.2) (0.3) - (3.8)
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance service result
before reinsurance contracts
held 215.8 248.7 322.9 - 787.4
------------------------------- ---------- -------------- ---------- ---------- ----------
Allocation of reinsurance
premiums (293.3) (356.3) (615.2) - (1,264.8)
Amount recoverable from
reinsurers for incurred
claims 260.0 230.9 347.4 - 838.3
------------------------------- ---------- -------------- ---------- ---------- ----------
Net expense from reinsurance
contracts held (33.3) (125.4) (267.8) - (426.5)
------------------------------- ---------- -------------- ---------- ---------- ----------
Insurance service result 182.5 123.3 55.1 - 360.9
------------------------------- ---------- -------------- ---------- ---------- ----------
Investment result (98.9) (54.4) (34.0) - (187.3)
Net finance income from
insurance contracts 107.0 56.0 50.7 - 213.7
Net finance expense
from reinsurance contracts (38.5) (27.5) (36.1) - (102.1)
Net insurance finance
income 68.5 28.5 14.6 - 111.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Net financial result (30.4) (25.9) (19.4) - (75.7)
------------------------------- ---------- -------------- ---------- ---------- ----------
Other income 11.7 7.4 20.8 2.4 42.3
Other operational expenses (32.1) (3.8) (8.4) (23.5) (67.8)
Net foreign exchange
gains - - - 54.7 54.7
Other finance costs (1.5) - (1.2) (37.0) (39.7)
Share of profit of associates - - - 0.9 0.9
------------------------------- ---------- -------------- ---------- ---------- ----------
Profit/(loss) before
tax 130.2 101.0 46.9 (2.5) 275.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Ratio analysis
Claims ratio (%) 40.0 37.3 38.1 - 39.1
Expense ratio (%) 51.0 47.2 46.4 - 49.6
------------------------------- ---------- -------------- ---------- ---------- ----------
Combined ratio (%) 91.0 84.5 84.5 - 88.7
------------------------------- ---------- -------------- ---------- ---------- ----------
6. Operating segments (continued)
The impact of the reclassification of LPT premium is shown in
the following table.
Year ended 31 December 2022
Hiscox Re &
Hiscox Retail Hiscox London Market ILS Total
$m $m $m $m
------------------------------------------------------ ------------- -------------------- ----------- ------------
Insurance revenue 2,218.0 1,130.6 924.7 4,273.3
------------------------------------------------------ ------------- -------------------- ----------- ------------
Allocation of reinsurance premiums (293.3) (356.3) (615.2) (1,264.8)
LPT premium 114.0 20.8 46.0 180.8
------------------------------------------------------ ------------- -------------------- ----------- ------------
Allocation of reinsurance premiums after
reclassifying LPT premium (179.3) (335.5) (569.2) (1,084.0)
------------------------------------------------------ ------------- -------------------- ----------- ------------
Adjusted net insurance revenue 2,038.7 795.1 355.5 3,189.3
------------------------------------------------------ ------------- -------------------- ----------- ------------
Incurred claims and changes to liabilities for
incurred claims (958.0) (506.4) (436.7) (1,901.1)
------------------------------------------------------ ------------- -------------------- ----------- ------------
Amounts recoverable from reinsurers for incurred
claims 260.0 230.9 347.4 838.3
LPT premium (114.0) (20.8) (46.0) (180.8)
------------------------------------------------------ ------------- -------------------- ----------- ------------
Amounts recoverable from
reinsurers for incurred claims after reclassifying
LPT premium 146.0 210.1 301.4 657.5
------------------------------------------------------ ------------- -------------------- ----------- ------------
Adjusted net incurred claims (812.0) (296.3) (135.3) (1,243.6)
------------------------------------------------------ ------------- -------------------- ----------- ----------
Remove benefit from discounting of claims (53.9) (17.7) (4.0) (75.6)
------------------------------------------------------ ------------- -------------------- ----------- ----------
Undiscounted adjusted net incurred claims (865.9) (314.0) (139.3) (1,319.2)
------------------------------------------------------ ------------- -------------------- ----------- ----------
Ratio analysis (undiscounted)
Claims ratio (%) 42.7 39.5 39.2 41.5
Expense ratio (%) 51.0 47.2 46.4 49.6
-------------------------------- ----- ----- ----- -----
Combined ratio (%) 93.7 86.7 85.6 91.1
-------------------------------- ----- ----- ----- -----
The impact on profit before tax of a 1% change in each component
of the segmental combined ratios is shown in the following table.
Any further ratio change is linear in nature.
Year ended 31 December 2022
Hiscox Hiscox London Hiscox Re
Retail Market &
ILS
$m $m $m
--------------------- -------- -------------- ----------
1% change in claims
or expense ratio 20.4 8.0 3.6
--------------------- -------- -------------- ----------
7. Net asset value (NAV) per share and net tangible asset value
per share
30 June 2023 30 June 2022 (restated) 31 December 2022
(restated)
----------------------- -------------------------- -----------------------
Net asset NAV Net asset NAV Net asset NAV
value per share value per share value per share
(total cents (total cents (total cents
equity) equity) equity)
$m $m $m
-------------------- ---------- ----------- ------------ ------------ ---------- -----------
Net asset value 2,845.3 823.3 2,464.5 715.6 2,635.0 764.5
Net tangible asset
value 2,516.3 728.1 2,161.7 627.6 2,314.6 671.5
-------------------- ---------- ----------- ------------ ------------ ---------- -----------
The NAV per share is based on 345,588,027 shares (30 June 2022:
344,417,619; 31 December 2022: 344,672,172), being the shares in
issue at 30 June 2023, less those held in treasury and those held
by the Group Employee Benefit Trust. Net tangible assets comprise
total equity excluding intangible assets. The NAV per share
expressed in pence is 647.6 pence (30 June 2022: 589.3 pence; 31
December 2022: 635.5 pence). Previously reported NAV were 30 June
2022: $2,340.4 million (679.5 cents) and 31 December 2022: $2,416.7
million (701.2 cents) and previously reported net tangible asset
value was 30 June 2022: $2,037.6 million (591.6 cents) and 31
December 2022: $2,096.3 million (608.2 cents).
8. Return on equity (ROE)
Six months Six months Year to
to to 31 Dec 2022
30 June 30 June (restated)
2023 2022 (restated)
$m $m $m
---------------------------------------- ----------- ----------------- -------------
Profit for the period 250.1 33.6 253.9
Opening total equity 2,635.0 2,563.2 2,563.2
Adjusted for the time-weighted impact
of capital distributions and issuance
of shares (3.4) (3.7) (54.9)
---------------------------------------- ----------- ----------------- -------------
Adjusted opening total equity 2,631.6 2,559.5 2,508.3
---------------------------------------- ----------- ----------------- -------------
Annualised return on equity (%) 19.9 2.6 10.1
---------------------------------------- ----------- ----------------- -------------
The ROE is calculated by using profit or loss for the period
divided by the adjusted opening total equity. The adjusted opening
total equity represents the equity on 1 January of the relevant
year as adjusted for time-weighted aspects of capital distributions
and issuing of shares or treasury share purchases during the
period. The time-weighted positions are calculated on a daily basis
with reference to the proportion of time from the transaction to
the end of the period. Previously reported ROE was (6.8)% (30 June
2022) and 1.7% (31 December 2022).
9. Net investment and insurance finance result
Six months Six months Year to
to to
30 June 30 June 31 Dec
2023 2022 2022
(restated) (restated)
$m $m $m
------------------------------------------------- ------------ ------------ ------------
Investment result
Investment income including interest receivable 105.3 46.5 119.5
Net realised losses on financial investments
at fair value through profit or loss (10.3) (32.6) (54.1)
Net fair value gains/(losses) on financial
investments at fair value through profit
or loss 29.3 (228.3) (254.2)
------------------------------------------------- ------------ ------------ ------------
Investment return - financial assets 124.3 (214.4) (188.8)
Net fair value gains on derivative financial
instruments 1.2 3.8 8.5
Investment expenses (3.7) (3.5) (7.0)
------------------------------------------------- ------------ ------------ ------------
Total investment return 121.8 (214.1) (187.3)
------------------------------------------------- ------------ ------------ ------------
Net finance (expense)/income from insurance
contracts:
Interest accreted (107.7) (7.4) (35.7)
Effects of changes in interest rates and
other financial assumptions 43.3 172.6 249.4
------------------------------------------------- ------------ ------------ ------------
Total net finance (expense)/income from
insurance contracts (64.4) 165.2 213.7
------------------------------------------------- ------------ ------------ ------------
Net finance income/(expenses) from reinsurance
contracts:
Interest accreted 44.0 0.6 9.5
Effects of changes in interest rates and
other financial assumptions (17.4) (78.0) (111.6)
------------------------------------------------- ------------ ------------ ------------
Total net finance income/(expenses) from
reinsurance contracts 26.6 (77.4) (102.1)
------------------------------------------------- ------------ ------------ ------------
Net insurance finance (expense)/income (37.8) 87.8 111.6
------------------------------------------------- ------------ ------------ ------------
Net financial result 84.0 (126.3) (75.7)
------------------------------------------------- ------------ ------------ ------------
Annualised investment return
Six months Six months Year to
to to 31 Dec 2022
30 June 2023 30 June 2022
---------------------------------------- ---------------- ----------------- ------------------
Return Return Return Return Return Return%
$m % $m % $m
---------------------------------------- ------- ------- -------- ------- -------- --------
Debt and fixed income holdings 90.5 3.2 (170.8) (6.5) (169.1) (3.2)
Equities and investment funds 13.3 7.6 (44.8) (22.0) (29.6) (7.3)
Deposits with credit institutions/cash
and cash equivalents 20.5 3.2 1.2 0.2 9.9 0.7
---------------------------------------- ------- ------- -------- ------- -------- --------
Investment return - financial assets 124.3 3.4 (214.4) (6.1) (188.8) (2.6)
---------------------------------------- ------- ------- -------- ------- -------- --------
10. Other income and operational expenses
Six months Six months Year to
to to
30 June 30 June 31 Dec
2023 2022 2022
(restated) (restated)
$m $m $m
------------------------------------------- ------------ ------------ ------------
Other income 33.7 18.7 42.3
------------------------------------------- ------------ ------------ ------------
Staff costs 146.7 148.7 313.4
Depreciation, amortisation and impairment 30.6 29.2 60.0
Other expenses 136.1 130.4 269.9
Operational expenses 313.4 308.3 643.3
------------------------------------------- ------------ ------------ ------------
The total operational expenses have been restated by $1.0
million for the year ended 31 December 2022 in relation to a
reclassification from acquisition costs plus an impact from the
IFRS 9 credit loss impairment ($0.7 million for the six months to
30 June 2022).
11. Finance costs
Six months Six months Year to
to to
30 June 30 June 31 Dec
2023 2022 2022
(restated) (restated)
$m $m $m
-------------------------------------------- ------------ ------------ ------------
Interest charge associated with borrowings 19.3 14.5 32.2
Interest and expenses associated with
bank borrowing facilities 1.5 0.8 2.5
Interest and charges associated with
Letters of Credit 1.8 2.0 4.0
Other interest expenses* 1.4 1.1 1.0
-------------------------------------------- ------------ ------------ ------------
Finance costs 24.0 18.4 39.7
-------------------------------------------- ------------ ------------ ------------
* Other interest expenses included interest on funds withheld
which is included in insurance finance expenses under IFRS 17.
Previously reported finance costs were 30 June 2022: $21.7 million
and 31 December 2022: $48.1 million.
12. Tax (credit)/expense
The Company and its subsidiaries are subject to enacted tax laws
in the jurisdictions in which they are incorporated and domiciled.
The amount charged in the condensed consolidated income statement
comprises the following:
Six months Six months Year to
to to
30 June 30 June 2022 31 Dec 2022
2023
(restated) (restated)
$m $m $m
------------------------------------- ------------ -------------- -------------
Current tax expense/(credit) 0.2 (3.4) 2.8
Deferred tax expense/(credit) 14.5 (4.8) 18.9
------------------------------------- ------------ -------------- -------------
Total tax charged/(credited) to the
income statement 14.7 (8.2) 21.7
------------------------------------- ------------ -------------- -------------
The current tax expense of $0.2 million arises on taxable profit
based on a forecast effective tax rate for the full year, and
includes the adjustments in respect of prior year.
Previously reported current tax was 30 June 2022: $(3.4) million
credit and 31 December 2022: $2.8 million charge and previously
reported deferred tax was 30 June 2022: $(16.9) million credit and
31 December 2022: $0.2 million charge.
13. Insurance liabilities and reinsurance contract
Net insurance contract liabilities
Net insurance contracts - Analysis by remaining coverage and
incurred claims
Six months to 30 June 2023
Net liabilities Net liabilities for
for remaining coverage incurred claims
Excluding Loss component Estimates Risk adjustment Total
loss component of present for non-financial
value of risk
future cash
flows
$m $m $m $m $m
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Opening assets 186.8* (0.6) (2,282.4) (421.0) (2,517.2)
Opening liabilities 287.4 2.5 5,737.1 667.3 6,694.3
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Net opening balance 474.2 1.9 3,454.7 246.3 4,177.1
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Changes in the income statement
Insurance revenue, net of
allocation of
reinsurance
premiums**
contract held assets (1,523.8) - - - (1,523.8)
Insurance service expenses, net of amounts recoverable from reinsurers
Incurred claims and other
attributable expenses - (1.4) 917.1 22.8 938.5
Acquisition costs 463.7 - - - 463.7
Adjustments to
liabilities
for incurred claims
relating
to past service - - (83.8) (21.0) (104.8)
Losses and reversals of
losses on onerous
contracts - 6.2 - - 6.2
Effect of changes in
non-performance
risk of reinsurers - - (1.2) - (1.2)
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Total net insurance
service
expenses 463.7 4.8 832.1 1.8 1,302.4
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Insurance service result (1,060.1) 4.8 832.1 1.8 (221.4)
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Net finance
(income)/expenses
from insurance contracts (3.5) - 41.3 - 37.8
Net foreign exchange
losses 12.9 - 42.4 7.3 62.6
Total change recognised
in comprehensive income (1,050.7) 4.8 915.8 9.1 (121.0)
Investment components 8.6 - (8.6) - -
Transfer to other items
in balance sheet (124.8) - (307.6) - (432.4)
Net cash flows
Net premium received 1,572.5 - - - 1,572.5
Net claims and other
insurance
service expenses paid - - (456.4) - (456.4)
Insurance acquisition
cash
flows (449.6) - - - (449.6)
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Total cash flows 1,122.9 - (456.4) - 666.5
Closing assets (46.3)* (0.2) (2,028.7) (439.1) (2,514.3)
Closing liabilities 476.5 6.9 5,626.6 694.5 6,804.5
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
Net closing balance 430.2 6.7 3,597.9 255.4 4,290.2
-------------------------- ---------------- --------------- -------------------- ------------------- ----------
* Includes LPT ARC gross of premium payables of $534.1 million
at 31 December 2022 and $520.4 million at 30 June 2023.
** includes allocation of LPT premium of $24.3 million.
13. Insurance liabilities and reinsurance contract
(continued)
Net insurance contract liabilities
Net insurance contracts - Analysis by remaining coverage and
incurred claims
Six months to 30 June 2022
Net liabilities Net liabilities for
for remaining coverage incurred claims
Excluding Loss component Estimates Risk adjustment Total
loss component of present for non-financial
value of risk
future cash
flows
$m $m $m $m $m
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Opening assets 266.7* (4.2) (2,616.0) (503.4) (2,856.9)
Opening liabilities 130.1 16.5 6,188.0 852.3 7,186.9
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net opening balance 396.8 12.3 3,572.0 348.9 4,330.0
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Changes in the income statement
Insurance revenue, net of
allocation of reinsurance
premiums**
contract held assets (1,457.5) - - - (1,457.5)
Insurance service expenses, net of amounts recoverable from reinsurers
Incurred claims and other
attributable expenses - (8.4) 962.4 27.1 981.1
Acquisition costs 466.7 - - - 466.7
Adjustments to liabilities
for incurred claims
relating
to past service - - (82.2) (48.8) (131.0)
Losses and reversals of
losses on onerous contracts - 1.1 - - 1.1
Effect of changes in
non-performance
risk of reinsurers - - (0.6) - (0.6)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Total net insurance service
expenses 466.7 (7.3) 879.6 (21.7) 1,317.3
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Insurance service result (990.8) (7.3) 879.6 (21.7) (140.2)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net finance
(income)/expenses
from insurance contracts 20.4 - (108.2) - (87.8)
Net foreign exchange losses (59.9) (0.2) (81.3) (7.9) (149.3)
Total change recognised
in comprehensive income (1,030.3) (7.5) 690.1 (29.6) (377.3)
Investment components 11.6 - (11.6) - -
Transfer to other items
in balance sheet (117.7) - (273.8) - (391.5)
Net cash flows
Net premium received 1,657.2 - - - 1,657.2
Net claims and other
insurance
service expenses paid - - (586.7) - (586.7)
Insurance acquisition cash
flows (434.7) - - - (434.7)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Total cash flows 1,222.5 - (586.7) - 635.8
Closing assets 79.6* (1.8) (2,251.3) (362.4) (2,535.9)
Closing liabilities 403.3 6.6 5,641.3 681.7 6,732.9
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net closing balance 482.9 4.8 3,390.0 319.3 4,197.0
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
* Includes LPT ARC gross of premium payables of $493.0 million
at 31 December 2021 and $521.6 million at 30 June 2022.
** includes allocation of LPT premium of $67.5 million.
13. Insurance liabilities and reinsurance contract
(continued)
Net insurance contract liabilities
Net insurance contracts - Analysis by remaining coverage and
incurred claims
Year to 31 December 2022
Net liabilities Net liabilities for
for remaining coverage incurred claims
Excluding Loss component Estimates Risk adjustment Total
loss component of present for non-financial
value of risk
future cash
flows
$m $m $m $m $m
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Opening assets 266.7* (4.2) (2,616.0) (503.4) (2,856.9)
Opening liabilities 130.1 16.5 6,188.0 852.3 7,186.9
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net opening balance 396.8 12.3 3,572.0 348.9 4,330.0
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Changes in the income statement
Insurance revenue, net of
allocation of reinsurance
premiums**
contract held assets (3,008.5) - - - (3,008.5)
Insurance service expenses, net of amounts recoverable from reinsurers
Incurred claims and other
attributable expenses - (12.8) 2,001.5 32.6 2,021.3
Acquisition costs 1,005.5 - - - 1,005.5
Adjustments to liabilities
for incurred claims
relating
to past service - - (258.3) (120.2) (378.5)
Losses and reversals of
losses on onerous contracts - 2.5 - - 2.5
Effect of changes in
non-performance
risk of reinsurers - - (3.2) - (3.2)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Total net insurance service
expenses 1,005.5 (10.3) 1,740.0 (87.6) 2,647.6
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Insurance service result (2,003.0) (10.3) 1,740.0 (87.6) (360.9)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net finance
(income)/expenses
from insurance contracts 38.2 - (149.8) - (111.6)
Net foreign exchange losses (65.9) (0.1) (74.1) (15.0) (155.1)
Total change recognised
in comprehensive income (2,030.7) (10.4) 1,516.1 (102.6) (627.6)
Investment components 20.4 - (20.4) - -
Transfer to other items
in balance sheet (235.9) - (575.4) - (811.3)
Net cash flows
Net premium received 3,091.3 - - - 3,091.3
Net claims and other
insurance
service expenses paid - - (1,037.6) - (1,037.6)
Insurance acquisition cash
flows (767.7) - - - (767.7)
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Total cash flows 2,323.6 - (1,037.6) - 1,286.0
Closing assets 186.8* (0.6) (2,282.4) (421.0) (2,517.2)
Closing liabilities 287.4 2.5 5,737.1 667.3 6,694.3
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
Net closing balance 474.2 1.9 3,454.7 246.3 4,177.1
----------------------------- ---------------- --------------- ----------------- ------------------- ----------
* includes LPT ARC gross of premium receivable $493.0 million at
31 December 2021 and $534.0 million at 31 December 2022.
** includes allocation of LPT premium of $180.8 million.
13. Insurance liabilities and reinsurance contract
(continued)
Net insurance contract liabilities
Prior year development recognised for the period amounts to
$61.7 million (30 June 2022: $67.2 million, 31 December 2022:
$209.4 million) comprises:
-- the total adjustments to liabilities for incurred claims
relating to past service, net of reinsurance recoveries (on a
present value basis) of $104.8 million (30 June 2022: $131.0
million, 31 December 2022: $378.5 million);
-- adjusted for discounting impact of $(18.8) million (30 June
2022: $3.7 million, 31 December 2022: $11.7 million);
-- adjusted for LPT premium and experience adjustment of $(24.3)
million (30 June 2022: $(67.5) million, 31 December 2022: $(180.8)
million).
14. Earnings per share
Basic
Basic earnings per share (EPS) is calculated by dividing the
profit or loss attributable to equity holders of the Company by the
weighted average number of ordinary shares in issue during the
period, excluding ordinary shares purchased by the Group and held
in treasury as own shares. Previously reported EPS was 30 June
2022: (25.3) cents and 31 December 2022: 12.1 cents.
Six months Six months Year to
to to 31 Dec 2022
30 June 30 June 2022 (restated)
2023 (restated)
Profit for the period attributable to
owners of the Company ($m) 250.1 33.6 253.9
--------------------------------------- ----------- -------------- -------------
Weighted average number of ordinary
shares in issue (thousands) 346,546 343,712 344,130
--------------------------------------- ----------- -------------- -------------
Basic earnings per share (cents per
share) 72.2 c 9.8 c 73.8 c
Basic earnings per share (pence per
share) 58.7p 7.5 p 59.5 p
--------------------------------------- ----------- -------------- -------------
Diluted
Diluted earnings per share is calculated by adjusting the
assumed conversion of all dilutive potential ordinary shares. The
Company has one category of dilutive potential ordinary shares,
share options and awards. For the share options, a calculation is
made to determine the number of shares that could have been
acquired at fair value (determined as the average annual market
share price of the Company's shares) based on the monetary value of
the subscription rights attached to outstanding share options. The
number of shares calculated as above is compared with the number of
shares that would have been issued assuming the exercise of the
share options.
Six months Six months Year to
to to 31 Dec 2022
30 June 30 June 2022 (restated)
2023 (restated)
Profit for the period attributable to
owners of the Company ($m) 250.1 33.6 253.9
------------------------------------------ ----------- -------------- -------------
Weighted average number of ordinary
shares in issue (thousands) 346,546 343,712 344,130
Adjustment for share options (thousands) 6,929 4,023 4,908
------------------------------------------ ----------- -------------- -------------
Weighted average number of ordinary
shares for diluted earnings per share
(thousands) 353,475 347,735 349,038
------------------------------------------ ----------- -------------- -------------
Diluted earnings per share (cents per
share) 70.8 c 9.7c 72.7c
Diluted earnings per share (pence per
share) 57.5p 7.4p 58.6p
------------------------------------------ ----------- -------------- -------------
Diluted earnings per share has been calculated after taking
account of Performance share plan awards (adjusted for the impacts
of adoption of IFRS 17 and IFRS 9), options under Save As You Earn
schemes and employee share awards. Previously reported diluted EPS
was 30 June 2022: (25.3) cents and 31 December 2022: 12.0
cents.
15. Dividends paid to owners of the Company
Six months Year to
to
Six months 30 June 31 Dec 2022
to 30 June 2022
2023
$m $m $m
-------------------------------------- ------------ ----------- -------------
Final dividend for the year ended:
31 December 2022 of 24.0c (net) per 82.8 - -
share
31 December 2021 of 23.0c (net) per
share - 79.2 79.2
Interim dividend for the year ended:
31 December 2022 of 12.0c (net) per
share - - 41.3
-------------------------------------- ------------ ----------- -------------
82.8 79.2 120.5
-------------------------------------- ------------ ----------- -------------
15. Dividends paid to owners of the Company (continued)
The final dividend for the year ended 31 December 2022 of 24.0c was
paid in cash of $81.7 million and 77,904 shares for the Scrip Dividend.
The interim dividend for the year ended 31 December 2022 of 12.0c
was paid in cash of $40.9m and 34,760 shares for a Scrip Dividend.
The final dividend for the year ended 31 December 2021 of 23.0c was
paid in cash of $78.9 million and 27,940 shares for the Scrip Dividend.
The Board has declared an interim dividend of 12.5c per share payable
on 26 September 2023 to shareholders registered on 18 August 2023
in respect of the six months to 30 June 2023. The dividends will be
paid in Sterling unless shareholders elect to be paid in US Dollars.
The foreign exchange rate to convert the dividends declared in US
Dollars into Sterling will be based on the average exchange rate in
the five business days prior to the Scrip dividend price being determined.
On this occasion, the period will be between 5 September 2023 and
11 September 2023 inclusive.
When determining the level of dividend each year, the Board considers
the ability of the Group to generate cash and the availability of
that cash in the Group, while considering constraints such as regulatory
capital requirements and the level required to invest in the business.
This is a progressive policy and is expected to be maintained for
the foreseeable future.
16. Financial assets and liabilities
i. Analysis of financial assets carried at fair value
30 June 30 June 2022 31 Dec 2022
2023
$m $m $m
----------------------------------- -------- ------------- ------------
Debt and fixed income holdings 5,802.4 5,246.4 5,426.6
Equities and investment funds 307.8 391.1 339.1
Investments 6,110.2 5,637.5 5,765.7
----------------------------------- -------- ------------- ------------
Insurance-linked funds 41.3 46.2 45.3
Derivative financial instruments 0.2 0.5 1.1
----------------------------------- -------- ------------- ------------
Total financial assets carried at
fair value 6,151.7 5,684.2 5,812.1
----------------------------------- -------- ------------- ------------
ii. Analysis of financial liabilities carried at fair value
30 June 30 June 2022 31 Dec 2022
2023
$m $m $m
------------------------------------- -------- ------------- ------------
Derivative financial instruments 0.1 0.2 0.3
------------------------------------- -------- ------------- ------------
Total financial liabilities carried
at fair value 0.1 0.2 0.3
------------------------------------- -------- ------------- ------------
iii. Analysis of financial liabilities carried at amortised
cost
30 June 30 June 31 Dec 2022
2023 2022
$m $m $m
------------------------------------- -------- -------- ------------
Borrowings 664.8 667.1 628.8
Accrued interest on borrowings 27.4 15.9 7.1
------------------------------------- -------- -------- ------------
Total financial liabilities carried
at amortised cost 692.2 683.0 635.9
------------------------------------- -------- -------- ------------
Total financial liabilities 692.3 683.2 636.2
------------------------------------- -------- -------- ------------
On 24 November 2015, the Group issued GBP275.0 million 6.125%
fixed-to-floating rate callable subordinated notes due 2045, with a
first call date of 2025.
The notes bear interest from and including 24 November 2015 at a
fixed rate of 6.125% per annum annually in arrears starting 24
November 2016 up until the first call date in November 2025, and
thereafter at a floating rate of interest equal to the sum of
compounded daily Sterling Overnight Index Average (SONIA), the
reference rate adjustment of 0.1193% and a margin of 5.076% payable
quarterly in arrears on each floating interest payment date.
On 25 November 2015, the notes were admitted for trading on the
London Stock Exchange's regulated market. The notes were rated BBB-
by S&P and Fitch.
16. Financial assets and liabilities (continued)
On 22 September 2022, the Group issued GBP250.0 million 6% notes
due September 2027. The notes will be redeemed on the maturity date
at their principal amount together with accrued interest.
The notes bear interest from, and including, 22 September 2022
at a fixed rate of 6% per annum annually in arrears starting 22
September 2022 until maturity on 22 September 2027. On 22 September
2022, the notes were admitted for trading on the Luxembourg Stock
Exchange's Euro MTF. The notes were rated BBB+ by S&P as well
as by Fitch.
iv. Investment and cash allocation
30 June 2023 30 June 2022 31 Dec 2022
--------------------------- ---------------- ---------------- ----------------
$m % $m % $m %
Debt and fixed income
holdings 5,802.4 78.4 5,246.4 74.4 5,426.6 76.2
Equities and investment
funds 307.8 4.2 391.1 5.5 339.1 4.8
Cash and cash equivalents 1,289.9 17.4 1,413.9 20.1 1,350.9 19.0
--------------------------- -------- ------ -------- ------ -------- ------
Total 7,400.1 100.0 7,051.4 100.0 7,116.6 100.0
--------------------------- -------- ------ -------- ------ -------- ------
v. Total investments and cash allocation by currency
30 June 30 June 31 Dec
2023 2022 2022
% % %
------------------ --------- -------- ---------
US Dollars 68.3 69.3 68.9
Sterling 17.5 18.5 16.6
Euro 9.7 9.0 10.4
Other currencies 4.5 3.2 4.1
------------------ --------- -------- ---------
17. Fair value measurements
An analysis of assets and liabilities carried at fair value,
categorised by fair value hierarchy that reflects the significance
of the inputs used in measuring the fair value, is set out
below.
As at 30 June 2023 Level 1 Level 2 Level 3 Total
$m $m $m $m
---------------------------------- -------- -------- -------- --------
Financial assets
Debt and fixed income holdings 1,217.9 4,523.0 61.5 5,802.4
Equities and investment funds - 279.4 28.4 307.8
Insurance-linked funds - - 41.3 41.3
Derivative financial instruments - 0.2 - 0.2
---------------------------------- -------- -------- -------- --------
Total 1,217.9 4,802.6 131.2 6,151.7
---------------------------------- -------- -------- -------- --------
Financial liabilities
Derivative financial instruments - 0.1 - 0.1
---------------------------------- -------- -------- -------- --------
Total - 0.1 - 0.1
---------------------------------- -------- -------- -------- --------
As at 30 June 2022 Level 1 Level 2 Level 3 Total
$m $m $m $m
---------------------------------- -------- -------- -------- --------
Financial assets
Debt and fixed income holdings 996.2 4,219.7 30.5 5,246.4
Equities and investment funds - 353.4 37.7 391.1
Insurance-linked funds - - 46.2 46.2
Derivative financial instruments - 0.5 - 0.5
---------------------------------- -------- -------- -------- --------
Total 996.2 4,573.6 114.4 5,684.2
---------------------------------- -------- -------- -------- --------
Financial liabilities
Derivative financial instruments - 0.2 - 0.2
---------------------------------- -------- -------- -------- --------
Total - 0.2 - 0.2
---------------------------------- -------- -------- -------- --------
As at 31 December 2022 Level 1 Level 2 Level 3 Total
$m $m $m $m
---------------------------------- -------- -------- -------- --------
Financial assets
Debt and fixed income holdings 1,122.4 4,237.1 67.1 5,426.6
Equities and investment funds - 311.8 27.3 339.1
Insurance-linked funds - - 45.3 45.3
Derivative financial instruments - 1.1 - 1.1
---------------------------------- -------- -------- -------- --------
Total 1,122.4 4,550.0 139.7 5,812.1
---------------------------------- -------- -------- -------- --------
Financial liabilities
Derivative financial instruments - 0.3 - 0.3
---------------------------------- -------- -------- -------- --------
Total - 0.3 - 0.3
---------------------------------- -------- -------- -------- --------
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy described as follows:
- Level 1 - fair values measured using quoted prices
(unadjusted) in active markets for identical instruments;
- Level 2 - fair values measured using directly or indirectly
observable inputs or other similar valuation techniques for which
all significant inputs are based on market observable data;
- Level 3 - fair values measured using valuation techniques for
which significant inputs are not based on market observable
data.
17. Fair value measurements (continued)
The fair values of the Group's financial assets are typically
based on prices from numerous independent pricing services. The
pricing services used by the investment manager obtain actual
transaction prices for securities that have quoted prices in active
markets. For those securities which are not actively traded, the
pricing services use common market valuation pricing models.
Observable inputs used in common market valuation pricing models
include, but are not limited to, broker quotes, credit ratings,
interest rates and yield curves, prepayment speeds, default rates
and other such inputs which are available from market sources.
Investments in mutual funds comprise a portfolio of stock
investments in trading entities which are invested in various
quoted investments. The fair value of these investment funds is
based on the net asset value of the fund reported by independent
pricing sources or the fund manager.
Included within Level 1 of the fair value hierarchy are certain
government bonds, treasury bills, borrowings and exchange-traded
equities which are measured based on quoted prices in active
markets.
Level 2 of the hierarchy contains certain government bonds, US
government agencies, corporate securities, asset-backed securities
and mortgage-backed securities. The fair value of these assets is
based on the prices obtained from independent pricing sources,
investment managers and investment custodians as discussed above.
The Group records the unadjusted price provided and validates the
price through a number of methods including a comparison of the
prices provided by the investment managers with the investment
custodians and the valuation used by external parties to derive
fair value. Quoted prices for US government agencies and corporate
securities are based on a limited number of transactions for those
securities and as such the Group considers these instruments to
have similar characteristics to those instruments classified as
Level 2. Also included within Level 2 are units held in collective
investment vehicles investing in traditional and alternative
investment strategies and over-the-counter derivatives.
Level 3 contains investments in a limited partnership and
unquoted equity securities and insurance-linked funds which have
limited observable inputs on which to measure fair value. Unquoted
equities, including equity instruments in limited partnerships, are
carried at fair value. Fair value is determined to be net asset
value for the limited partnerships, and for the equity holdings it
is determined to be the latest available traded price. The effect
of changing one or more of the inputs used in the measurement of
fair value of these instruments to another reasonably possible
assumption would not be significant. At 30 June 2023, the
insurance-linked funds of $41.3 million (30 June 2022: $46.2m; 31
December 2022: $45.3m) represents the Group's investment in the
unconsolidated Kiskadee funds.
The fair value of the Kiskadee funds is estimated to be the net
asset value as at the balance sheet date. The net asset value is
based on the fair value of the assets and liabilities in the funds.
The majority of the assets of the funds are cash and cash
equivalents. Significant inputs and assumptions in calculating the
fair value of the assets and liabilities associated with
reinsurance contracts written by the Kiskadee funds include the
amount and timing of claims payable in respect of claims incurred
and periods of unexpired risk. The Group has considered changes in
the net asset valuation of the Kiskadee funds if reasonably
different inputs and assumptions were used and has found that a 12%
change to the fair value of the liabilities would increase or
decrease the fair value of funds by $2.0 million.
In certain cases, the inputs used to measure the fair value of a
financial instrument may fall into more than one level within the
fair value hierarchy. In this instance, the fair value of the
instrument in its entirety is classified based on the lowest level
of input that is significant to the fair value measurement.
There were no transfers of assets into or out of level 3 during
the current period.
17. Fair value measurements (continued)
The following tables present a reconciliation of opening and
closing balances for financial instruments classified under Level 3
of the fair value hierarchy:
30 June 2023 Debt and fixed income Equities and investment Insurance-linked funds Total
holdings funds
--------------------------- -------------------------- --------------------------- ----------------------- -------
Financial assets $m $m $m $m
--------------------------- -------------------------- --------------------------- ----------------------- -------
Balance at 1 January 67.1 27.3 45.3 139.7
Fair value gains through
profit or loss 0.9 - 3.2 4.1
Foreign exchange gains 0.6 1.1 - 1.7
Settlements (7.1) - (7.2) (14.3)
--------------------------- -------------------------- --------------------------- ----------------------- -------
Closing balance 61.5 28.4 41.3 131.2
--------------------------- -------------------------- --------------------------- ----------------------- -------
Unrealised gains in the
period on securities held
at the end of the period 0.2 - 1.6 1.8
--------------------------- -------------------------- --------------------------- ----------------------- -------
30 June 2022 Debt and fixed Equities and Insurance-linked Total
income holdings investment funds funds
------------------- ------------------ ------------------ ------------------- ------
Financial assets $m $m $m $m
------------------- ------------------
Balance at 1
January 30.1 44.7 50.9 125.7
Fair value gains or
losses through
profit or loss 0.4 (2.8) (1.0) (3.4)
Foreign exchange
(losses)/gains - (4.1) 0.1 (4.0)
Settlements - (0.1) (3.8) (3.9)
-------------------
Closing balance 30.5 37.7 46.2 114.4
-------------------
Unrealised
gains/(losses) in
the period on
securities held at
the end of the
period 0.4 (2.1) 0.2 (1.5)
31 December 2022 Debt and Equities Insurance-linked Total
fixed income and investment funds
holdings funds
Financial assets $m $m $m $m
----------------
Balance at 1 January 30.1 44.7 50.9 125.7
Fair value gains or losses
through profit or loss 1.3 (3.0) 1.3 (0.4)
Foreign exchange (losses)/gains (1.2) (3.3) 0.1 (4.4)
Settlements - (0.1) (7.0) (7.1)
Transfers 36.9 (11.0) - 25.9
----------------
Closing balance 67.1 27.3 45.3 139.7
----------------
Unrealised gains/(losses)
in the period on securities
held at the end of the period 1.3 (2.4) 1.7 0.6
18. Condensed consolidated interim cash flow statement
The purchase, maturity and disposal of financial assets and
liabilities, including derivatives, is part of the Group's
insurance activities and is therefore classified as an operating
cash flow.
Included within cash and cash equivalents held by the Group are
balances totalling $231 million (30 June 2022: $323 million; 31
December 2022: $178 million) not available for immediate use by the
Group outside of the Lloyd's Syndicates within which they are held.
Additionally, $66 million (30 June 2022: $0.5 million; 31 December
2022: $89 million) is pledged cash held against Funds at Lloyd's,
and $0.5 million (30 June 2022: $0.5 million; 31 December 2022:
$0.5 million) is held within trust funds against reinsurance
arrangements.
19. Employee retirement benefit asset
The table below provides a reconciliation of the movement in the
Group's net defined benefit (surplus)/liability position under IAS
19 Employee Benefits.
Six months Year to 31
to 30 June December 2022
2023
$m $m
Group defined benefit (surplus)/liability at
beginning of period/year (20.9) 35.1
Third-party Names' share at beginning of period/year (4.3) (12.3)
Net defined benefit (surplus)/liability at
beginning of period/year (25.2) 22.8
Defined benefit (income)/expense included in
the income statement (0.5) 0.4
Contribution by employer (12.2) (13.5)
Total remeasurements included in other comprehensive
income 2.8 (34.9)
Other movements (2.0) -
Net defined benefit surplus at end of period/year (37.1) (25.2)
Third-party Names' share at end of period/year 4.9 4.3
Group defined benefit surplus at end of period/year (32.2) (20.9)
There was a contribution paid from the Company of $12.2 million
in the six months to 30 June 2023 (year to 31 December 2022: $13.5
million).
20. Post balance sheet events
There are no material events that have occurred after the
reporting date.
Directors' responsibilities statement
The Directors confirm, to the best of our knowledge, that these condensed
consolidated interim financial statements have been prepared in accordance
with UK-adopted international accounting standard 34, 'Interim Financial
Reporting' and the Disclosure Guidance and Transparency Rules sourcebook
of the United Kingdom's Financial Conduct Authority and that the Interim
Statement includes a fair review of the information required by DTR
4.2.7 and 4.2.8, namely:
* an indication of important events that have occurred
during the first six months and their impact on the
condensed set of consolidated interim financial
statements, and a description of the principal risks
and uncertainties for the remaining six months of the
financial year; and
* material related-party transactions in the first six
months and any material changes in the related-party
transactions described in the last report and
accounts.
The Interim Statement 2023 was approved by the Board for issue on Wednesday,
9 August 2023.
Alternative performance measures
The Group uses, throughout its financial publications,
alternative performance measures (APMs) in addition to the figures
that are prepared in accordance with UK-adopted international
accounting standards. The Group believes that these measures
provide useful information to enhance the understanding of its
financial performance. The APMs are: combined, claims and expense
ratios, return on equity, net asset value per share and net
tangible asset value per share, insurance contract written premium
and prior-year developments. These are common measures used across
the industry, and allow the reader of the report to compare across
peer companies. The APMs should be viewed as complementary to,
rather than a substitute for, the figures prepared in accordance
with accounting standards.
- Combined, claims and expense ratios
The combined, claims and expense ratios are common measures
enabling comparability across the insurance industry, that measure
the relevant underwriting profitability of the business by
reference to its costs as a proportion of the insurance revenue net
of allocation of reinsurance premiums. Claims are discounted under
IFRS 17 which can introduce volatility to the ratios if interest
rates move significantly during a period, therefore ratios are also
presented on an undiscounted basis. The calculation is discussed
further in note 6, operating segments. The combined ratio is
calculated as the sum of the claims ratio and the expense
ratio.
- Return on Equity (ROE)
Use of return on equity is common within the financial services
industry, and the Group uses ROE as one of its key performance
metrics. While the measure enables the Group to compare itself
against other peer companies in the immediate industry, it is also
a key measure internally where it is used to compare the
profitability of business segments, and underpins the
performance-related pay and pre-2018 share-based payment
structures. The ROE is shown in note 8, along with an explanation
of the calculation.
- Net asset value (NAV) per share and net tangible asset value per share
The Group uses NAV per share as one of its key performance
metrics, including using the movement of NAV per share in the
calculation of the options vesting of awards granted under
performance share plans (PSP) from 2018 onwards. This is a widely
used key measure for management and also for users of the financial
statements to provide comparability across peers in the market. Net
tangible asset value comprises total equity excluding intangible
assets. NAV per share and net tangible asset value per share are
shown in note 7, along with an explanation of the calculation.
- Insurance contract written premium and net insurance contract written premium
Insurance contract written premium (ICWP) is the Group's
top-line key performance indicator, comprising premiums on business
incepting in the financial year, adjusted for estimates of premiums
written in prior accounting periods, reinstatement premium and
non-claim dependent commissions to ensure consistency with
insurance revenue under IFRS 17.
The definition of net insurance contract written premium (NICWP)
has been adjusted for certain items to ensure consistency with
insurance revenue under IFRS 17. The adjustments primarily relate
to reinstatement premium and non-claim dependent commissions, along
with reinsurance commissions offset.
- Prior-year developments
Prior-year developments are a measure of favourable or adverse
development on claims reserves, net of reinsurance, that existed at
the prior balance sheet date. It enables the users of the financial
statements to compare and contrast the Group's performance relative
to peer companies.
The prior-year development is calculated as the positive or
negative movement in ultimate losses on prior accident years
between the current and prior-year balance sheet date on an
undiscounted basis adjusted for LPT premium. The LPT premium
reclass captures the LPT reinsurance recoveries due to changes in
ultimate losses related to the covered business which is recognised
in the reinsurance asset held for remaining coverage.
[1] Alternative performance measure definitions used by the
Group are included within the Condensed consolidated interim
financial statements.
[2] Excludes Retail cyber and UK underwriting partnerships.
[3] Allows for the reclassification of LPT recoveries into
claims.
[4] The net ICWP compared to NWP is negatively impacted due to
the way that ceding commissions are booked. There is no change to
the economics, however, relative to IFRS 4, with the net growth
being a lower percentage.
([5]) Leverage defined as borrowings over borrowings and
shareholder equity.
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