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The expense ratio deteriorated by
7.7% to 45.6% as a result of continued
expansion costs to take advantage
of opportunities in the US.
Profit before tax increased significantly
to £124.2 million (2008: £4.3 million).
Hiscox Corporate Centre
Hiscox Corporate Centre comprises
the investment return, finance costs
and administration costs associated
Group management activities. Corporate
centre also includes the majority of foreign
currency items on economic hedges
and intragroup borrowings.
The investment result improved
significantly to £9.2 million profit (2008:
£1.8 million loss), an improvement
experienced across all segments.
Total expenses including certain foreign
exchange items have decreased by
54.7% to £8.7 million (2008: £19.2 million).
Included within foreign exchange gains
of £10.3 million (2008: £9.0 million loss)
is the foreign currency impact on certain
intragroup loan balances.
The resulting loss before tax in Corporate
Centre improved significantly to £4.0
million (2008: £67.9 million). In the prior
year, the Group recorded a derivative loss
of £42.5 million in protecting currency
translation gains recognised directly
in equity.
Cash and liquidity
The Group’s primary source of liquidity is
generated from premium income and income
received on investments. Funds received are
used predominantly to pay claims, expenses,
reinsurance, increase investments and to pay
dividends and taxes.
Total net cash outflows for the year were
£150.1 million (2008: inflow £75.8 million).
The outflow for the year is driven mainly by
the settlement of 2008 losses, payment of
expenses, the payment of dividends and the
settlement of the derivative contracts which
were outstanding at the end of 2008. In addition,
the decrease also represents the strategic
decision by the Group to increase its returns
by investing surplus cash balances into its
fixed interest portfolio.
Net cash outflows from investing activities for
the year were £11.7 million (2008: £16.7 million).
The cash outflow is primarily as a result of the
purchase of tangible and intangible assets.
The Group did not acquire any new subsidiaries
or associates during the year.
Net cash inflows from financing activities
for the year were £1.6 million (2008: outflow
£108.5 million). The inflow is due to an increase
in the borrowing facility offset by the payment
of dividends. The Group did not enter into any
share buy-back programmes in the current year.
In 2008 the Group spent £62.9 million for the
purchase of shares held in treasury and £2.2
million for the purchase of shares held in trust.
The Group maintains relationships with a limited
selection of banks who are monitored for their
credit status and ability to meet the day-to-day
banking requirements of the Group.
There were no impairments recorded against
cash or cash equivalents and no recoverability
issues have been identified on such assets.
The Group has a secured revolving credit
facility for a total of £350 million which may
be drawn by way of cash or Letter of Credit
or a combination thereof providing that the
cash portion does not exceed £200 million.
The facility may be drawn in any foreign
currency at the request of the Group. As at
31 December 2009, $225 million was drawn
by way of Letter of Credit and £138 million
by way of cash (2008: £137.5 million and
$130.0 million respectively).
Solvency II
Solvency II is the new solvency regime for
all EU insurers and reinsurer which is due
to come into effect from 2012. The new regime
aims to implement solvency requirements
that are consistent across all member states
and which better reflect the risks that insurers
and reinsurers face.
The new regime is based on a three-pillar
approach as follows:
Pillar 1 – Quantitative requirements
Pillar 2 – Government and risk management
requirements
Pillar 3 – Disclosure and transparency
requirements.
A working group has been established to lead
the implementation of the new regime and
a comprehensive implementation plan is in
place with performance and execution ongoing.
Many of the qualitative requirements already
form an integral part of the Group’s risk
management framework and a gap analysis has
been performed in order to identify those areas
which may require small incremental changes.
The Group is seeking approval for its own
internal models and is in a firm position
to ensure that the Solvency II requirements
will be implemented successfully, however
uncertainty still exists as the full details
of the regime are yet to be confirmed.
7. 2%
Investment return
Group financial performance Hiscox Ltd Report and Accounts 2009
17