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Notes to the consolidated financial statements continued 3 Management of risk continued 3.2 Financial risk continued (e) Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: 1) Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and 2) Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity's functional currency. The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operation in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net investments made in European operations. The Group’s risk appetite permits the acceptance of structural foreign exchange movements within defined aggregate limits and exchange rate parameters which are monitored centrally. Exchange rate derivatives are used when appropriate to shield the Group against significant movements outside of a defined range. At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between Group companies where one party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to relate to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain a fuller understanding of the Group’s financial performance (note 14). Up to 6 May 2008 the Group financed a portion of its net investment in the Bermuda and Guernsey insurance operations using US Dollar borrowings to which hedge accounting was applied (see note 20). There were no items qualifying for hedge accounting in the current year. The Group has the ability to draw on its current borrowing facility in any currency requested, enabling the Group to match its funding requirements with the relevant currency. Operational foreign exchange risk is controlled within the Group’s operations. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities producing a natural hedge. Due attention is paid to local regulatory solvency and risk based capital requirements. Details of all foreign currency derivative contracts entered into with external parties are given in note 22. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £240 million (2008: £225 million) which are denominated in foreign currencies. As a result of the accounting treatment for non monetary items, the Group may also experience volatility in its income statement during a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non monetary items are recorded at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statements. Further details of the impact of the accounting treatment is provided in note 13. The currency profile of the Group’s assets and liabilities is as follows: At 31 December 2009 Sterling £000 US Dollar £000 Euro £000 Other £000 Total £000 Intangible assets 44,105 6,308 – – 50,413 Property, plant and equipment 13,678 7,893 673 – 22,244 Investments in associates 6,728 – 590 – 7,318 Deferred tax – 14,077 – – 14,077 Deferred acquisition costs 42,376 71,678 23,125 4,326 141,505 Financial assets carried at fair value 580,797 1,623,276 166,629 42,598 2,413,300 Reinsurance assets 54,976 320,424 27,375 17,351 420,126 Loans and receivables including insurance receivables 127,361 259,539 88,480 13,402 488,782 Current tax – – – – – Cash and cash equivalents 93,096 97,754 57,998 10,799 259,647 Total assets 963,117 2,400,949 364,870 88,476 3,817,412 68 Notes to the consolidated financial statements <strong>Hiscox</strong> Ltd Report and Accounts 2009
3 Management of risk continued 3.2 Financial risk continued (e) Currency risk continued Sterling US Dollar Euro Other Total £000 £000 £000 £000 £000 Employee retirement benefit obligations – – – – – Deferred tax 69,673 – – – 69,673 Insurance liabilities 486,488 1,361,934 220,661 53,268 2,122,351 Financial liabilities 138,000 539 – – 138,539 Current tax 26,080 – – – 26,080 Trade and other payables 142,659 149,005 42,766 5,053 339,483 Total liabilities 862,900 1,511,478 263,427 58,321 2,696,126 Sterling US Dollar Euro Other Total At 31 December 2008 £000 £000 £000 £000 £000 Intangible assets 42,249 6,308 – – 48,557 Property, plant and equipment 16,378 2,404 886 – 19,668 Investments in associates 6,504 – 696 – 7,200 Deferred tax assets – 5,996 – – 5,996 Deferred acquisition costs 40,263 66,462 20,094 4,311 131,130 Financial assets carried at fair value 370,043 1,430,712 236,066 44,951 2,081,772 Reinsurance assets 66,081 400,727 26,154 10,832 503,794 Loans and receivables including insurance receivables 127,702 290,523 64,748 11,342 494,315 Current tax 26,289 – – – 26,289 Cash and cash equivalents 127,881 229,165 75,109 8,467 440,622 Total assets 823,390 2,432,297 423,753 79,903 3,759,343 Sterling US Dollar Euro Other Total £000 £000 £000 £000 £000 Employee retirement benefit obligations – – – – – Deferred tax 74,645 – – – 74,645 Insurance liabilities 455,606 1,570,090 206,228 45,492 2,277,416 Financial liabilities – 132,818 10,532 – 143,350 Current tax – – – – – Trade and other payables 145,926 120,233 42,065 4,682 312,906 Total liabilities 676,177 1,823,141 258,825 50,174 2,808,317 Sensitivity analysis As at 31 December 2009, the Group used closing rates of exchange of £1:€1.13 and £1:$1.61 (2008: £1:€1.03 and £1:$1.44). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-sterling functional currency financial statements. During the year, the Group transacted in a number of over the counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible. Effect on equity Effect on profit after tax before tax At 31 December 2009 £m £m Strengthening of US Dollar 94.6 54.2 Weakening of US Dollar (74.8) (41.7) Strengthening of Euro 10.0 13.9 Weakening of Euro (8.2) (11.4) Notes to the consolidated financial statements <strong>Hiscox</strong> Ltd Report and Accounts 2009 69
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Hiscox Ltd Report and Accounts 2009
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Corporate highlights Group key perf
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Chairman’s statement It is an eno
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Chief Executive’s report In 2009
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Hiscox London Market Hiscox London
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We have also worked hard to develop
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We have continued to invest in trai
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Hiscox London Market Hiscox London
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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 and 26: Credit Reinsurance counterparties T
Page 27 and 28: Boxplot and whisker diagram of Hisc
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 69: 3 Management of risk continued 3.2
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
Page 85 and 86: 22 Derivative financial instruments
Page 87 and 88: 23 Fair value measurements continue
Page 89 and 90: 25 Share capital continued Share op
Page 91 and 92: 27 Insurance liabilities and reinsu
Page 93 and 94: 27 Insurance liabilities and reinsu
Page 95 and 96: 30 Deferred tax continued (b) Group
Page 97 and 98: 31 Employee retirement benefit obli
Page 99 and 100: 36 Contingencies and guarantees con
Page 101 and 102: 38 Principal subsidiary companies o
Page 103 and 104: To request a copy of the 2009 Hisco
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