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Notes to the consolidated financial statements continued 23 Fair value measurements In accordance with the Amendments to IFRS7 Financial Instruments: Disclosures, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below. Level 1 Level 2 Level 3 Total As at 31 December 2009 £000 £000 £000 £000 Financial assets Debt and fixed income securities 627,702 1,628,035 – 2,255,737 Equities and shares in unit trusts 162 129,419 4,260 133,841 Deposits with credit institutions 11,394 – – 11,394 Catastrophe bonds – 11,310 – 11,310 Derivative financial instruments – 1,018 – 1,018 Total 639,258 1,769,782 4,260 2,413,300 Financial liabilities Derivative financial instruments – 539 – 539 Level 1 Level 2 Level 3 Total As at 31 December 2008 £000 £000 £000 £000 Financial assets Debt and fixed income securities 605,222 1,323,377 – 1,928,599 Equities and shares in unit trusts 2,043 122,282 539 124,864 Deposits with credit institutions 22,392 – 5,877 28,269 Catastrophe bonds – – – – Derivative financial instruments – – 40 40 Total 629,657 1,445,659 6,456 2,081,772 Financial liabilities Derivative financial instruments – 53,072 – 53,072 The levels of the fair value hierarchy are defined by the standard as follows: Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on observable market data; Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data. The fair values of the Group’s financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources. The fair values of the Group’s investments in catastrophe bonds are based on quoted market prices or, where such prices are not available, by reference to broker or underwriter bid indications. Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager. Included within Level 1 of the fair value hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices. 84 Notes to the consolidated financial statements <strong>Hiscox</strong> Ltd Report and Accounts 2009
23 Fair value measurements continued Level 2 of the hierarchy contains US Government Agencies, Corporate Securities, Asset Backed Securities and Mortgage Backed Securities and Catastrophe bonds. The fair value of these assets are based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government Agencies and Corporate Securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics of those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives. Level 3 contains investments in a limited partnership and unquoted equity securities which have limited observable inputs on which to measure fair value. In the prior year, investments in a mutual fund were included within level 3 as redemptions from the fund were suspended. The fund was redeemed in full in 2009. Unquoted equities are carried at cost, which is deemed to be comparable to fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. Derivative instruments included within Level 3 in the prior year represented event linked future contracts which are transacted on the Chicago Climate Futures Exchange. During the current year, the classification of these instruments was reviewed and they have been transferred into Level 2 as the valuation of the derivative is based on observable inputs used by the exchange to determine fair value. In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement. During the year, there were no transfers made between Level 1 and Level 2 of the fair value hierarchy. The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Equities and shares Deposits with Derivative in unit trusts credit institutions Instruments Total 31 December 2009 £000 £000 £000 £000 Balance at 1 January 539 5,877 40 6,456 Total gains or losses through profit or loss* 245 – – 245 Purchases 3,353 – – 3,353 Issues 123 – – 123 Settlements – (5,877) – (5,877) Transfer into Level 2 – – (40) (40) Closing balance 4,260 – – 4,260 *Total gains/(losses) are included within the investment result in the income statement. Equities and shares Deposits with Derivative in unit trusts credit institutions Instruments Total 31 December 2008 £000 £000 £000 £000 Balance at 1 January – – – – Total gains or losses through profit or loss* – – – – Purchases 539 – 40 579 Transfers into Level 3 – 5,877 – 5,877 Settlements – – – – Closing balance 539 5,877 40 6,456 *Total gains/(losses) are included within the investment result in the income statement. 24 Cash and cash equivalents 2009 2008 £000 £000 Cash at bank and in hand 166,780 353,542 Short-term bank deposits 92,867 87,080 The Group holds its cash deposits with a well diversified range of banks and financial institutions. 259,647 440,622 Cash and cash equivalents include amounts of US$334,000 (2008: US$17,775,000) held in escrow to settle deferred consideration on acquisitions. Notes to the consolidated financial statements <strong>Hiscox</strong> Ltd Report and Accounts 2009 85
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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
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The expense ratio deteriorated by 7
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High quality and well diversified p
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Risk management The risk management
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Credit Reinsurance counterparties T
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Boxplot and whisker diagram of Hisc
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in essence a non-bureaucratic organ
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Cougar Syndicate 6104 Cougar Syndic
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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
Page 85: 22 Derivative financial instruments
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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