Notes to the consolidated the assets trade. The fair value of financial The fair value of equity assets in the Group’s
financial statements assets is measured primarily with reference
to their closing bid market prices at the
balance sheet at 31 December 2012 was
£190 million (2011: £173 million). These may
continued balance sheet date. The ability to obtain be analysed as follows:
quoted bid market prices may be reduced
in periods of diminished liquidity. In addition, Nature of equity and unit
2012 2011
3 Management of risk continued those quoted prices that may be available trust holdings % weighting % weighting
3.1 Insurance risk continued may represent an unrealistic proportion of
Directly held equity
Reserving risk continued market holdings or individual trade sizes that
securities 4 3
could not be readily available to the Group.
Units held in funds –
Certain marine and property insurance In such instances fair values may be
traditional long only 69 73
contracts, such as those relating to subsea determined or partially supplemented using
Units held in funds –
and other energy assets and the related other observable market inputs such as
long and short and
business interruption risks, can also take prices provided by market makers such as
special strategies 27 24
longer than normal to settle. This is because dealers and brokers, and prices achieved
of the length of time required for detailed in the most recent regular transaction Geographic focus
subsea surveys to be carried out and of identical or closely related instruments Specific UK mandates 44 39
damage assessments agreed together occurring before the balance sheet date Global mandates 56 61
with difficulties in predicting when the assets but updated for relevant perceived changes
can be brought back into full production. in market conditions.
The allocation of equity risk is not heavily
For the inwards reinsurance lines, there is At 31 December 2012, the Group holds confined to any one market index so as
often a time lag between the establishment asset-backed and mortgage-backed fixed to reduce the Group’s exposure to individual
and re-estimate of case reserves and income instruments in its investment portfolio sensitivities. A 10% downward correction
reporting to the Group. The Group works however has minimal direct exposure in equity prices at 31 December 2012
closely with the reinsured to ensure timely to sub-prime asset classes. Together with the would have been expected to reduce
reporting and also centrally analyses industry Group’s investment managers, management Group equity and profit after tax for
loss data to verify the reported reserves. continues to monitor the potential for any the year by approximately £16.7 million
adverse development associated with this (2011: £15.0 million) assuming that the only
3.2 Financial risk investment exposure through the analysis area impacted was equity financial assets.
Overview of relevant factors such as credit ratings, A 10% upward movement is estimated
The Group is exposed to financial risk collateral, subordination levels and default to have an equal but opposite effect.
through its ownership of financial instruments rates in relation to the securities held. The
including financial liabilities. These items Group has no direct exposure to sovereign (c) Interest rate risk
collectively represent a significant element debt in Portugal, Ireland, Italy, Greece or Fixed income investments represent
of the Group’s net shareholder funds. Spain. Note 3.2d shows the Group’s positions a significant proportion of the Group’s
The Group invests in financial assets in order at 31 December 2012 for government issued, assets and the Board continually monitors
to fund obligations arising from its insurance government supported and bank debt investment strategy to minimise the risk
contracts and financial liabilities. exposures. The Group did not experience of a fall in the portfolio’s market value which
any material defaults on debt securities could affect the amount of business that
The key financial risk for the Group is that during the year. the Group is able to underwrite or its ability
the proceeds from its financial assets to settle claims as they fall due. The fair
and investment result generated thereon Valuation of these securities will continue value of the Group’s investment portfolio
are not sufficient to fund the obligations. to be impacted by external market factors of debt and fixed income securities is
The most important entity and economic including default rates, rating agency normally inversely correlated to movements
variables that could result in such an actions, and liquidity. The Group will make in market interest rates. If market interest
outcome relate to the reliability of fair value adjustments to the investment portfolio rates rise, the fair value of the Group’s
measures, equity price risk, interest rate as appropriate as part of its overall portfolio debt and fixed income investments would
risk, credit risk, liquidity risk and currency strategy, but its ability to mitigate its risk tend to fall and vice versa if credit spreads
risk. The Group’s policies and procedures by selling or hedging its exposures may remained constant.
for managing exposure to these specific be limited by the market environment. The
categories of risk are detailed below. Group’s future results may be impacted, both Debt and fixed income assets are
positively and negatively, by the valuation predominantly invested in high quality
(a) Reliability of fair values adjustments applied to these securities. corporate, government and asset backed
The Group has elected to carry all financial bonds. The investments typically have
investments at fair value through profit Note 22 provides an analysis of the relatively short durations and terms
or loss as they are managed and evaluated measurement attributes of the Group’s to maturity. The portfolio is managed
on a fair value basis in accordance with financial instruments. to minimise the impact of interest rate
a documented strategy. With the exception risk on anticipated Group cash flows.
of unquoted equity investments and the (b) Equity price risk
insurance linked fund, all of the financial The Group is exposed to equity price risk The Group may also, from time-to-time,
investments held by the Group are available through its holdings of equity and unit enter into interest rate future contracts
to trade in markets and the Group therefore trust investments. This is limited to a small in order to minimise the interest rate risk
seeks to determine fair value by reference and controlled proportion of the overall on specific longer duration portfolios.
to published prices or as derived by pricing investment portfolio and the equity and unit
vendors using observable quotations trust holdings involved are well diversified The fair value of debt and fixed income
in the most active financial markets in which over a number of companies and industries. assets in the Group’s balance sheet at
66 Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012