Capital management Both A.M. Best and Standard & Poor’s have
Capital Hiscox believes in managing its capital. The
Board monitors the capital strength of the Group
shared their capital models with management.
These models calculate a capital adequacy
and ensures its insurance carriers are suitably score by measuring available capital, after
capitalised for regulatory and ratings purposes, making various balance sheet adjustments,
taking into account future needs including as a proportion of required capital which
growth where opportunities arise. As discussed incorporates charges for premium, reserve,
in the Chairman’s statement, as a result of our investment and catastrophe risk. Management’s
strong performance in 2012, the Board has interpretation of A.M. Best’s ‘Best Capital
reviewed the Group’s capital level and proposed Adequacy Ratio’ (BCAR) model indicates the
that a special distribution of 38.0p per share Group has a healthy surplus above the minimum
£150m
Additional special distribution
(approximately £150 million), should be made.
A further amount of 12.0p per share is proposed
instead of payment of a final dividend. This return
capital required to maintain the carriers’ A
ratings. On a similar basis the Standard & Poor’s
modeled result indicates a surplus in excess
of capital will align the Group’s available capital of the mid-point of the required A range with
with its risk appetite and ensure a surplus is additional headroom above the minimum
maintained above the rating agencies’ minimum requirement. Projections indicate a reasonable
capital requirements to remain in the A range, level of flexibility would be maintained following
the most restrictive of the Group’s external the £150 million special distribution.
capital assessments.
The rating agency capital requirements shown
The impact of this distribution and how it in the chart below are based on the Group’s own
compares to the Group’s capital requirements internal projections of the requirements based
is presented in the chart below right. upon its 2013 business plan. The A.M. Best
capital requirements stated are also consistent
Capital requirements with the latest assessment received from A.M.
The Group monitors its capital requirements Best in November 2012, which also took into
based on both external risk measures, set consideration the 2013 business plan.
by regulators and the ratings agencies, and
its own internal guidelines of risk appetite. Group regulators
A full description of the requirements set by As a Bermudian registered holding company,
the regulators for the most significant insurance the Bermuda Monetary Authority (BMA) has been
carriers is included in note 3.3 to the financial assessed as the Group’s regulator under the
statements. A brief explanation of the primary Bermuda Group Supervisory Framework. During
internal and external capital constraints 2011, the BMA introduced proposals for a group
at a Group level is given below. solvency capital requirement under which the
Group provides a solvency return in accordance
Management compares the capital requirements
of the Group against its available capital.
Available capital is defined by the Group as
shareholders’ equity which was £1,378 million
at 31 December 2012 (2011: £1,256 million).
Debt or preference shares are not defined
as available capital by the Group as they
do not absorb losses, should they occur,
ahead of or alongside ordinary shareholders.
However, the Group can source additional
funding through a revolving credit and Letter
of Credit facility. Additional funding from these
sources comprised $875 million at 31 December
2012 (2011: $750 million).
Rating agencies
The ability of the Group to attract business,
particularly reinsurance, is dependent upon
the maintenance of appropriate financial
strength ratings from the leading rating agencies,
Standard & Poor’s, A.M. Best and Fitch.
These ratings are assigned individually to
the insurance carriers of the Group, but capital
adequacy is also monitored by the rating
agencies at the consolidated Group level.
16 Capital Hiscox Ltd Report and Accounts 2012