Hamilton, Bermuda (8 June 2023) – Hiscox Ltd (LSE:HSX), the international specialist insurer, today publishes its full year and half year 2022 restated financial results under IFRS 17.
Despite the new presentation and remeasurement of numbers, there is no change in the outlook for Hiscox and any changes in guidance is purely definitional. Following an initial period of transition, over time, the Group expects greater transparency and comparability as reporting convention emerges.
| 2022 Total | H1 2022 | |||
|---|---|---|---|---|
|
IFRS 17 |
IFRS 4 |
IFRS 17 |
IFRS 4 |
|
| Insurance contract written premium[1] | $4,355.4 | $4,424.9 | $2,617.2 | $2,649.8 |
| Net insurance contract written premium[2] | $3,225.5 | $2,980.0 | $1,784.5 | $1,609.3 |
| Insurance service result | $360.9 | $269.5[3] | $140.2 | $123.2[3] |
| Investment result | $(187.3) | $(187.3) | $(214.1) | $(214.1) |
| Profit before tax | $275.6 | $44.7 | $25.4 | $(107.4) |
| Earnings per share | 73.8¢ | 12.1¢ | 9.8¢ | (25.3)¢ |
| Ordinary dividend per share | 36.0¢ | 36.0¢ | 12.0¢ | 12.0¢ |
| Net asset value per share | 764.5¢ | 701.2¢ | 715.6¢ | 679.5¢ |
| Group combined ratio | 88.7% | 90.6% | 90.8% | 91.3% |
| Return on equity (annualised) | 10.1% | 1.7% | 2.6% | (6.8)% |
Highlights:
- Discounting of claims reserves of $195.6 million has a positive impact on profit before tax to $275.6 million (IFRS 4: $44.7 million), as interest rates increased through 2022. Discounting also main contributor of a $218.3 million increase in closing shareholders’ equity on transition to IFRS 17.
- Discount unwind of $(17.8) million and discount rate change of $137.8 million in 2022 are recognised outside of the insurance service result and combined ratio, flowing through the insurance finance income and expenses line. Unwind of discount on claims in 2023 is expected to be in the region of $(110.0) million to $(140.0) million, significantly higher than in 2022 when interest rates were comparatively lower.
- IFRS 17 treatment of reinsurance commissions increases the Group expense ratio by 4.4 percentage points and decreases the Group claims ratio by 3.8 percentage points, thus having a net increase of 0.6 percentage points on the Group combined ratio. Impact is most pronounced in Hiscox Re & ILS due to its extensive use of reinsurance, with no change in underlying profitability.
- Seasonality of earnings will depress underwriting result and combined ratio in H1 notably for Hiscox Re & ILS as a greater proportion of the year’s premium is recognised in H2. There is no change in underlying profitability, with minimal impact on full year.
- Reclassification of expenses of $44.3 million from insurance service result to non-attributable expenses decreases the Group combined ratio by 1.4 percentage points.
- Adopted net/net[4] definition of combined ratio, consistent with how the Group uses reinsurance and offers better peer comparability. We have also moved to an own share presentation of the combined ratio from 100% (unrelated to IFRS 17).
- Hiscox Retail growth target of (5% to 15%) unchanged. Hiscox Retail combined ratio target under IFRS 17 will be released with the half year results. It will be on an undiscounted basis and will incorporate the directional benefit of expense reclassification under IFRS 17.
- Total risk adjustment of $246.3 million equates to confidence level at 78th percentile at 31 December 2022. Hiscox aims to travel in the 75th to 85th percentile range in normal business circumstances.
- No change to the Group’s strategy, economics of the business, investment result and strategic asset allocation, reserving philosophy, capital and dividend approach.
[1] Insurance contract written premium is our top-line key performance indicator, comprising premiums on business incepting in the financial year, together with adjustments to estimates of premiums written in prior accounting periods. This growth metric is similar to Gross Written Premium under IFRS 4, and 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.
[2] 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.
[3] Includes other income of $39.9m (H1 2022: $17.6m) in the underwriting profit APM under IFRS 4, which is excluded from the IFRS 17 insurance service result. Also includes $4.2m (H1 2022: $2.4m) of other income under IFRS 4 which remains in insurance revenue under IFRS 17.
[4] The combined ratio is the total of the claims and expenses ratios. 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. All ratios are on an own share basis, reflecting the Group’s share in Syndicate 33, and include a reclassification of LPT premium from allocation of reinsurance premium into amounts recoverable from reinsurers.
Paul Cooper, Group Chief Financial Officer, commented:
“While IFRS 17 marks a significant change in the accounting, presentation, and disclosures of our financial results, the economics of our business remain unchanged. We continue to look forward with confidence given our strong foundations, favourable market conditions and investment income outlook.”
Key financial impacts of IFRS 17 adoption
Implementation of the IFRS 17 accounting standard results in significant geographical changes to the financial statements, as laid out in the supplementary notes to the summary financial statements.
Discounting has had the most significant impact on the restated financial result. It has been introduced to represent a more economic view of claims liabilities on the same discounted basis as assets, which ultimately reduces volatility in the income statement. In 2022 the benefit of discounting on profit before tax (PBT) was $195.6 million. This comprises of $75.6 million from initial discounting on recognition of claims, an $17.8 million unfavourable movement from the unwinding of the discount and a $137.8 million favourable impact from rate movements.
Importantly, discounting is ultimately a timing difference as claims are settled and the discount unwinds throughout the claims settlement period. This will have an initial favourable impact on profit as the discount is established followed by an unfavourable impact in a positive interest rate environment as the initial credit from discounting unwinds. For 2023, we estimate that the unwind is likely to be in the region of $110 to $140 million at full year, and $60 to $65 million at half year. This is significantly higher than the year before, where interest rates were comparatively lower.
Another material driver is the change in treatment of reinsurance commissions, which were previously deducted from acquisition costs and now are deducted from allocation of reinsurance premiums. This adversely impacts combined ratios of the big-ticket businesses which use reinsurance extensively with the underlying economic impact unchanged. This is a definitional step change; the more premiums that are ceded, the higher the combined ratio, which is not a reflection of the actual profitability of the business. It is important to consider the combined ratio in this context.
A third factor is the reclassification of some expenses as non-attributable recognised outside of the insurance service result, as required by the standard, resulting in a definitional benefit to the expense ratio.
Key impacts on income statement
The IFRS 17 income statement presents premiums on an earned basis. Traditionally, Hiscox has used written premiums as a measure of volume growth, with a defined growth target range in place for the Retail business on this basis. To continue to provide detail on volume dynamics, two new alternative performance measures (APMs) have been introduced; insurance contract written premium (ICWP) representing gross volumes and net insurance contract written premium (NICWP) representing volumes net of reinsurance.
Growth trends are broadly consistent between IFRS 17 and IFRS 4 bases. ICWP is slightly lower than gross written premium (GWP) under IFRS 4 mainly due to reclassification of inwards reinstatement premiums to claims. NICWP is 8% higher than net written premium (NWP) in 2022 as the reinsurance contract written premium is presented net of the reinsurance commission income on outwards reinsurance under IFRS 17.
The insurance service result is the IFRS 17 equivalent to the underwriting result APM under IFRS 4, seeing an uplift of $135.5 million, excluding other income of $44.1 million from the business segments. The key driver for this increase is the introduction of discounting for claims in the period, leading to a favourable impact from discounting of claims reserves of $75.6 million, combined with the reallocation of $44.3 million of expenses from attributable to non-attributable, in line with the requirements of the new standard.
2022 profit before tax also saw an uplift of $230.9 million, driven by a net benefit from discounting and from the FX revaluation of unearned premium reserves and deferred acquisition costs. The increase in profit has a correspondingly positive impact on earnings per share (EPS) and return on equity (ROE) in 2022, although the benefit of discounting will unwind over the claims settlement period in future years, however this is a non-cash impact.
Key impacts on balance sheet
There is a $218.3 million increase in closing shareholders’ equity under IFRS 17 to $2,635.0 million (IFRS 4: $2,416.7 million), mainly due to discounting driven by steep interest rate increases in the period. The resulting impact on net asset value (NAV) per share as at 31 December 2022 is an increase of 63.3¢, with the impact of initial discounting to unwind over the claims settlement period in future years.
Net reserves are greater by $177.9 million at $3,701.1 million (IFRS 4: $3,523.2 million), with an increase from the reclassification of $534.1 million of legacy portfolio transactions (LPTs) more than offsetting the decrease from discounting of $250.3 million. IFRS 17 mandates that LPTs are split into earned and unearned components, whereas previously they were recorded fully as earned.
Key performance indicators
Key performance indicator (KPI) definitions have been revised to align with the new standard.
Combined ratio remains the key profitability metric and, in-line with the IFRS 4 tradition, is on a net/net basis but now includes the impact of discounting. The definition is consistent with how the Group uses reinsurance and offers better comparability with peers. The main definitional changes are the move to an own share basis (unrelated to IFRS 17), change in classification of reinsurance commission and expense reclassification. The impact of LPTs has been reclassified in the definition as they net to nil in the insurance service result, but would have created volatility in the net COR as they distort earned premiums.
The new combined ratio calculation includes components which do not appear on the face of the IFRS 17 income statement. Additional disclosures of the breakdown of insurance service expenses and LPT premium reclassification are provided in the notes to the summary financial statements and will become a regular disclosure.
Under the new definition, 2022 Group combined ratio decreases by 1.9 percentage points from the reported IFRS 4 number to 88.7%. The transition to own share presentation increases Group combined ratio by 1.7 percentage points. This is due to the mix of Syndicate 33 business across net premiums and net claims. The IFRS 17 impact is a 3.6 percentage point decrease driven by favourable movements from discounting and reclassification of non-attributable expenses more than off-setting the negative impact from the change in treatment of reinsurance commission.
Segmental commentary
Hiscox Retail
| 2022 Total | H1 2022 | |||
|---|---|---|---|---|
|
IFRS 17 |
IFRS 4 |
IFRS 17 |
IFRS 4 |
|
| Insurance contract written premium | $2,273.1 | $2,272.1 | $1,237.7 | $1,235.2 |
| Net insurance contract written premium | $2,071.3 | $1,976.8 | $1,103.5 | $1,044.3 |
| Insurance service result | $182.5 | $101.9[5] | $75.7 | $44.5[5] |
| Profit/(loss) before tax | $130.2 | $(3.4) | $4.3 | $(72.2) |
| Combined ratio | 91.0% | 94.8% | 92.6% | 95.5% |
[5] Includes other income of $11.7m (H1 2022: $5.0m) in the underwriting profit APM under IFRS 4, which is excluded from the IFRS 17 insurance service result. Also includes $4.2m (H1 2022: $2.4m) of other income under IFRS 4 which remains in insurance revenue under IFRS 17.
Hiscox Retail ICWP is comparable to GWP and as a result, there is no change to the Hiscox Retail growth target range of 5% to 15%. The main difference arising between GWP and ICWP is reclassifications of reinstatement premiums which are not common to Hiscox Retail.
Hiscox Retail combined ratio for 2022 under the new definition is 91.0% (IFRS 4: 94.8%). Rebasing to an own share basis increases the opening ratio by 0.8 percentage points. The key drivers of the 4.6 percentage point reduction due to IFRS 17, are the impact of discounting (2.7 percentage point benefit), the reclassification of expenses, primarily related to brand and other certain overheads, as non-attributable (1.6 percentage point decrease).
The Hiscox Retail combined ratio target range under IFRS 17 (to replace 90% to 95% under IFRS 4 on a 100% share basis), will be quantified with our half year 2023 results, when we report under IFRS 17 for the first time. This range will be on an undiscounted basis as we have no control over interest rate movements, and it will also incorporate the directional benefit of expense reclassification. The Group’s expectations of ultimate Hiscox Retail profitability and cashflows remain unchanged.
Hiscox London Market
| 2022 Total | H1 2022 | |||
|---|---|---|---|---|
|
IFRS 17 |
IFRS 4 |
IFRS 17 |
IFRS 4 |
|
| Insurance contract written premium | $1,114.7 | $1,114.9 | $591.8 | $591.9 |
| Net insurance contract written premium | $789.2 | $735.1 | $388.2 | $364.4 |
| Insurance service result | $123.3 | $110.0[6] | $53.6 | $46.9[6] |
| Profit/(loss) before tax | $101.0 | $53.0 | $17.8 | $(15.6) |
| Combined ratio | 84.5% | 84.8% | 85.6% | 86.1% |
[6] Includes other income of $7.4m (H1 2022: $3.9m) in the underwriting profit APM under IFRS 4, which is excluded from the IFRS 17 insurance service result.
The Hiscox London Market combined ratio has been restated to 84.5% (IFRS 4: 84.8%), broadly consistent to that on the IFRS 4 basis. Hiscox London Market combined ratio is increased by 1.1 percentage points by the move to an own share presentation, driven by a weighting of profits from Syndicate 33. IFRS 17 changes decrease the Hiscox London Market combined ratio by 1.4 percentage points, as the 1.2 percentage points negative impact from changes to the treatment of reinsurance is offset by the benefit due to the impact of discounting (2.2 percentage points) and reallocation of certain expenses to non-attributable (0.5 percentage points).
Hiscox Re & ILS
| 2022 Total | H1 2022 | |||
|---|---|---|---|---|
|
IFRS 17 |
IFRS 4 |
IFRS 17 |
IFRS 4 |
|
| Insurance contract written premium | $967.6 | $1,037.9 | $787.7 | $822.7 |
| Net insurance contract written premium | $365.0 | $268.1 | $292.8 | $200.6 |
| Insurance service result | $55.1 | $57.6[7] | $10.9 | $31.8[7] |
| Profit/(loss) before tax | $46.9 | $21.5 | $(12.2) | $(8.0) |
| Combined ratio | 84.5% | 81.6% | 91.7% | 80.2% |
[7] Includes other income of $20.8m (H1 2022: $8.7m) in the underwriting profit APM under IFRS 4, which is excluded from the IFRS 17 insurance service result.
Hiscox Re & ILS restated combined ratio increases to 84.5% (IFRS 4: 81.6%). Hiscox Re & ILS’s combined ratio is increased by 4.0 percentage points by the move to an own share presentation, driven by a weighting of profits from Syndicate 33. IFRS 17 changes decrease the combined ratio by 1.1 percentage points. The key drivers are a 4.1 percentage point negative impact from the change in treatment of reinsurance (due to extensive use of third party capital) offset by the benefit from reclassification of non-attributable expenses of 2.4 percentage points (related to ILS fee income) and discounting of 1.1 percentage points, which is less pronounced compared with other business units due to the shorter duration of the Hiscox Re & ILS book.
The overall increase in the combined ratio is not a reflection of any change in the underlying profitability of the business but rather an outcome of the transition to own share presentation and change in treatment of reinsurance commission income, where commissions were previously deducted from acquisition costs, however they are now deducted from allocation of reinsurance premiums. To make this point clear, we will be disclosing the drag on Hiscox Re & ILS’s combined ratio from the impact of reinsurance treatment.
Seasonality has a markedly greater impact on the Hiscox Re & ILS business, where insurance revenue is earned in line with the risk profile of the business, with the majority of premium to earn in the second half of the year. This leads to a disproportionate impact on profit in the first half of the year with a negative impact of $16.7 million in 2022. Importantly, this impact reverses in the second half of 2022. This trend will be similar in future years. As we deployed capital and benefitted from significant rate increases in our natural catastrophe lines in 2023, the majority of these premiums will be earned in the second half of the year meaning that at half year the insurance service result will be lower and combined ratio higher.
Reserves and confidence level
The Group remains conservatively reserved with limited financial impact on transition and our prudent reserving philosophy remains unchanged.
Under IFRS 17, the risk adjustment of $246.3 million replaces the IFRS 4 reserve margin, with events not in data being reclassified from margin to best estimate. This risk adjustment equates to confidence level at the 78th percentile at the end of 2022.
Going forward we expect to travel in the 75% - 85% range, under normal business circumstances, demonstrating our continued prudent reserving approach.
Concluding remarks
While IFRS 17 marks a significant change in the accounting, presentation, and disclosures of our financial results, the economics of our business remain unchanged. We continue to look forward with confidence given our strong foundations, favourable market conditions and investment income outlook.
More details on the IFRS 17 impact on the Group’s financial results can be found in the analysts’ presentation that accompanies this statement on www.hiscoxgroup.com.
ENDS
A conference call for investors and analysts will be held at 9:00 BST on Thursday, 8 June 2023.
Participant dial-in numbers:
United Kingdom (Local): 020 3936 2999 All other locations: +44 20 3936 2999 Participant Access Code: 539001
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
Kylie O’Connor, Director of Communications, London +44 (0)20 7448 6656
Tom Burns, Brunswick +44 (0)20 7404 5959
Simone Selzer, 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 for professionals and business customers as well as homeowners. Internationally traded, bigger ticket business and reinsurance is underwritten through Hiscox London Market and Hiscox Re & ILS.
Our values define our business, with a focus on people, courage, ownership and integrity. We pride ourselves on being true to our word and our award-winning claims service is testament to that. For more information, visit www.hiscoxgroup.com.
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