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Risk management continued The high quality and short duration of these funds allows the Group to meet its aim of paying valid claims quickly. These funds are maintained in the currency of the insurance policy to reduce foreign exchange risk. Due to the short-tail nature of the Group’s insurance liabilities, the aim is not to match the duration of the assets and liabilities precisely. Benchmarks are instead set for the fixed income fund managers which approximate the payment profile of the claims as well as providing the managers with some flexibility to enhance returns. A proportion of the Group’s assets is allocated to riskier assets, principally equities. Here, it is the Group’s philosophy to take a long-term view in search of acceptable risk adjusted returns. The proportion of the Group’s funds invested in risk assets will depend on the outlook for investment and underwriting markets. An allocation within the risk assets is made to less volatile, absolute return strategies. This balances the desire to enhance returns against the need to ensure capital is available to support underwriting throughout any downturn in financial markets. Foreign exchange The US Dollar is the Group’s largest underwriting currency. The Group’s policy is to match US Dollar insurance liabilities with investments held in the same currency in order to minimise the effect of currency fluctuations. Whilst the Group’s functional and reporting currency is Sterling, a significant proportion of the Group’s operational cost base is located in the US and Europe, and movements in foreign exchange rates may have a material adverse effect on its financial performance and position. In addition the capital base of the Bermuda, Guernsey and US insurance companies are in US Dollars. Where appropriate a percentage of the capital will be held in the currency matching that of the underlying business being written. Net currency positions are closely monitored and currency hedging transactions are entered into where this is considered advantageous in the light of anticipated movements in exchange rates. Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 20 to the financial statements. 24 Risk management Hiscox Ltd Report and Accounts 2009 Liquidity Liquidity risk is the risk of being unable to meet liabilities to customers or other creditors as they fall due, or the risk of incurring excessive costs in selling assets or having to raise finance in a very short period. The majority of the Group’s cash inflows and outflows are routine and can be forecast well in advance. The primary source of inflows is insurance premiums whilst outflows are to policyholders for claims made. Cash flow is forecast on rolling weekly, monthly and quarterly basis depending on the source, and, in the event of a major catastrophe, such forecasting may be up to three years in advance. Free cash is invested according to the Group’s investment policy and cash requirements can normally be met through regular income streams (i.e. premiums or investment income), existing cash balances or realising investments that have reached maturity. The Group’s liquidity risk arises from large, unplanned cash demands and the principal source of risk is a major catastrophe resulting in a high value of claims. This could be exacerbated if we had to fund claims pending recovery from a reinsurance partner. We plan for this risk through a number of measures. First, we run stress tests to estimate the size and timing of claims that might have to be paid in the event of a number of major catastrophes all occurring within a short period of time. We also run scenario analyses that consider the impact on liquidity of a range of adverse events happening simultaneously; for example, an economic downturn and declining investment returns combined with unusual levels of insurance losses. Second, taking into account the stress and scenario analyses, we maintain extensive borrowing facilities. These are held with a diverse range of major international banks in order to minimise the risk of one or more being unable to honour their commitments. Third, our investment policy recognises that some investments may need to be realised before maturity or at short notice and hence a high proportion of investments must be held in liquid assets. This minimises the risk of loss in the event of having to sell assets quickly. Using these measures we believe the likelihood of being unable to meet our liabilities, or of incurring excessive costs in doing so, to be extremely remote.
Boxplot and whisker diagram of Hiscox Ltd net loss (USD) 0 Upper 95%/lower 5% Hiscox Ltd loss ($m) 700 600 500 400 300 200 100 JP EQ Loma Prieta Quake $3bn market loss 7 year return period US EQ 5–10 year Mean EU WS Hurricane Ike $17.5bn market loss 7 year return period US HU JP EQ Northridge Quake $10bn market loss 16 year return period US EQ 1987J $8.3bn market loss 15 year return period EU WS 10–25 year 25–50 year 50–100 year 100–250 year Industry loss return period and peril The chart above shows the variability in net loss the Group expects from individual losses of a given industry loss size. The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur. For example, an event with a return period of 20 years would be expected to occur on average five times in 100 years. Hurricane Katrina $39bn market loss 18 year return period US HU JP EQ US EQ EU WS Hurricane Andrew $52bn market loss 29 year return period US HU JP EQ US EQ EU WS US HU JP EQ US EQ EU WS US HU Risk management Hiscox Ltd Report and Accounts 2009 25
Page 1 and 2: Hiscox Ltd Report and Accounts 2009
Page 3 and 4: Corporate highlights Group key perf
Page 5 and 6: Chairman’s statement It is an eno
Page 7 and 8: Chief Executive’s report In 2009
Page 9 and 10: Hiscox London Market Hiscox London
Page 11 and 12: We have also worked hard to develop
Page 13 and 14: We have continued to invest in trai
Page 15 and 16: Hiscox London Market Hiscox London
Page 17 and 18: Group financial performance Group f
Page 19 and 20: The expense ratio deteriorated by 7
Page 21 and 22: High quality and well diversified p
Page 23 and 24: Risk management The risk management
Page 25: Credit Reinsurance counterparties T
Page 29 and 30: in essence a non-bureaucratic organ
Page 31 and 32: Cougar Syndicate 6104 Cougar Syndic
Page 33 and 34: Hiscox Insurance Company (Bermuda)
Page 35 and 36: Independent Non Executive Directors
Page 37 and 38: ecent and relevant financial experi
Page 39 and 40: Directors’ remuneration report Th
Page 41 and 42: Executive Directors’ cash incenti
Page 43 and 44: Remuneration of Executive Directors
Page 45 and 46: Share options Number of Number of M
Page 47 and 48: Directors’ report The Directors h
Page 49 and 50: Report of the independent registere
Page 51 and 52: Consolidated balance sheet At 31 De
Page 53 and 54: Consolidated statement of cash flow
Page 55 and 56: 2 Significant accounting policies c
Page 63 and 64: 3 Management of risk continued 3.1
Page 75 and 76: 4 Operating segments continued (a)
Page 77 and 78:
5 Net asset value per share 2009 20
Page 79 and 80:
12 Auditors’ remuneration continu
Page 81 and 82:
15 Intangible assets continued Othe
Page 83 and 84:
19 Reinsurance assets 2009 2008 Not
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22 Derivative financial instruments
Page 87 and 88:
23 Fair value measurements continue
Page 89 and 90:
25 Share capital continued Share op
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27 Insurance liabilities and reinsu
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27 Insurance liabilities and reinsu
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30 Deferred tax continued (b) Group
Page 97 and 98:
31 Employee retirement benefit obli
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36 Contingencies and guarantees con
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38 Principal subsidiary companies o
Page 103 and 104:
To request a copy of the 2009 Hisco
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