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Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(f) Limitations of sensitivity analysis
The sensitivity information given in notes
(a) to (e) above demonstrates the estimated
impact of a change in a major input
assumption while other assumptions
remain unchanged. In reality, there are
normally significant levels of correlation
between the assumptions and other
factors. It should also be noted that these
sensitivities are non-linear, and larger or
smaller impacts should not be interpolated
or extrapolated from these results. The
same limitations exist in respect to the
retirement benefit scheme sensitivities
presented at note 31 to these financial
statements. Furthermore, estimates
of sensitivity may become less reliable
in unusual market conditions such as
instances when risk free interest rates
fall towards zero.
The sensitivity analyses do not take into
consideration that the Group’s assets and
liabilities are actively managed. Additionally,
the financial position of the Group may
vary at the time that any actual market
movement occurs. For example, the Group’s
financial risk management strategy aims to
manage the exposure to market fluctuations.
As investment markets move past various
trigger levels, management actions could
include selling investments, changing
investment portfolio allocation and taking
other protective action.
3.3 Capital risk management
The Group’s primary objectives when
managing its capital position are:
to safeguard its ability to continue
as a going concern, so that it can
continue to provide long-term growth
and progressive dividend returns
for shareholders;
to provide an adequate return to the
Group’s shareholders by pricing its
insurance products and services
commensurately with the level of risk;
to maintain of an efficient cost
of capital;
to comply with all regulatory requirements
by a significant margin; and
to maintain financial strength ratings
of A in each of its insurance entities.
The Group sets the amount of capital
required in its funding structure in proportion
to risk. The Group then manages the
capital structure and makes adjustments
to it in the light of changes in economic
conditions and the risk characteristics
of the underlying assets. In order to obtain
or maintain an optimal capital structure the
Group may adjust the amount of dividends
paid to shareholders, return capital to
shareholders, issue new shares, assume
debt, or sell assets to reduce debt.
The Group’s activities are funded by a
mixture of capital sources including issued
equity share capital, retained earnings,
Letters of Credit, bank debt and other
third-party insurance capital.
The Board ensures that the use and
allocation of capital are given a primary
focus in all significant operational actions.
With that in mind, the Group has developed
and embedded sophisticated capital
modelling tools within its business. These
join together short-term and long-term
business plans and link divisional aspirations
with the Group’s overall strategy. The
models provide the basis of the allocation
of capital to different businesses and
business lines, as well as the regulatory
and rating agency capital processes.
During the year the Group was in
compliance with capital requirements
imposed by regulators in each jurisdiction
where the Group operates.
There were no changes in the Group’s
approach to capital risk management during
the current or prior year under review.
Gearing
The Group currently utilises short- to mediumterm
gearing as an additional source of funds
to maximise the opportunities from strong
markets and to reduce the risk profile of
the business when the rating environment
shows a weaker model for the more volatile
business. The Group’s gearing is obtained
from a number of sources, including:
Letter of Credit and revolving credit
facility – the Group’s main facility
currently in place is for a total of
£350 million which may be drawn as
cash (under a revolving credit facility),
Letter of Credit or a combination
thereof, providing that the cash portion
does not exceed £200 million. This
facility was secured during 2008 by
the Company’s subsidiary Hiscox plc.
The Letter of Credit availability period
ends on 31 December 2009. This
enables the Group to utilise the Letter
of Credit as Funds at Lloyd’s to support
underwriting on both the 2009 and
2010 years of account. The revolving
credit facility has a maximum five year
contractual period for repayment.
70 Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2009
At 31 December 2009 US$225 million
was drawn by way of Letter of Credit
to support the Funds at Lloyd’s
requirement and a further £138 million
by way of cash (2008: £137.5 million
and US$130 million respectively) to
support general trading activities;
external Names – 27.5% of Syndicate
33’s capacity is capitalised by thirdparties
paying a profit share of
approximately 17.5%;
Syndicate 6104 at Lloyd’s – with an
approximate capacity of £43 million
for the 2009 year of account (2008
year of account: £34 million). This
Syndicate is wholly backed by external
members and takes a pure 2009 year
of account quota share of Syndicate
33’s international property catastrophe
reinsurance account;
gearing quota shares – historically the
Group has used reinsurance capital to
fund its capital requirement for short-term
expansions in the volume of business
underwritten by the Syndicate; and
qualifying quota shares – these are
reinsurance arrangements that allow
the Group to increase the amount
of premium it writes in hard markets.
The funds raised through Letters of Credit
and loan facilities have been applied to support
both the 2009 year of account for Syndicate
33 and the capital requirements of Hiscox
Insurance Company (Bermuda) Limited.
Financial strength
The financial strength ratings of the Group’s
insurance company subsidiaries are
outlined below:
Standard
A.M. Best Fitch & Poor’s
Hiscox Insurance
Company Limited
Hiscox Insurance Company
A (Excellent) A A (Strong)
(Bermuda) Limited
Hiscox Insurance Company
A (Excellent) A –
(Guernsey) Limited
Hiscox Insurance
A (Excellent) A –
Company Inc. A (Excellent) – –
Syndicate 33 benefits from an A.M. Best
rating of A (Excellent). In addition, the
Syndicate also benefits from the Lloyd’s
ratings of A (Excellent) from A.M. Best
and A+ (Strong) from Standard & Poor’s.
Capital performance
The Group’s main capital performance
measure is the achieved return on equity
(ROE). This marker best aligns the
aspirations of employees and shareholders.
As variable remuneration, the vesting of
options and longer-term investment plans
all relate directly to ROE, this concept is
embedded in the workings and culture of