Notes to the consolidated the risk characteristics of the underlying requirement and there were no cash
financial statements assets. In order to obtain or maintain
an optimal capital structure the Group may
drawings (2011: $340 million and £nil
million respectively) to support general
continued adjust the amount of dividends paid to trading activities;
shareholders, return capital to shareholders, external Names – 27.5% of Syndicate
issue new shares, assume debt, or sell 33’s capacity is capitalised by
3 Management of risk continued assets to reduce debt. third-parties paying a profit share
3.2 Financial risk continued of approximately 20%;
The Group’s activities are funded by a Syndicate 6104 at Lloyd’s – with a
(g) Limitations of sensitivity analysis mixture of capital sources including issued capacity of £39 million for the 2012
The sensitivity information given in notes equity share capital, retained earnings, year of account (2011 year of account:
(a) to (f) above demonstrates the estimated Letters of Credit, bank debt and other £37 million). This Syndicate is wholly
impact of a change in a major input third-party insurance capital. backed by external members and takes
assumption while other assumptions remain pure years of account quota share
unchanged. In reality, there are normally The Board ensures that the use and of Syndicate 33’s international property
significant levels of correlation between allocation of capital are given a primary catastrophe reinsurance account;
the assumptions and other factors. It should focus in all significant operational actions. gearing quota shares – historically
also be noted that these sensitivities are With that in mind, the Group has developed the Group has used reinsurance capital
non-linear, and larger or smaller impacts and embedded sophisticated capital to fund its capital requirement for
should not be interpolated or extrapolated modeling tools within its business. These short-term expansions in the volume
from these results. The same limitations join together short-term and long-term of business underwritten by the
exist in respect to the retirement benefit business plans and link divisional aspirations Syndicate; and
scheme sensitivities presented at note 30 with the Group’s overall strategy. The qualifying quota shares – these are
to these financial statements. Furthermore, models provide the basis of the allocation reinsurance arrangements that allow
estimates of sensitivity may become less of capital to different businesses and the Group to increase the amount
reliable in unusual market conditions such business lines, as well as the regulatory of premium it writes in hard markets.
as instances when risk-free interest rates and rating agency capital processes.
fall towards zero. The funds raised through Letters of
During the year the Group was in Credit and loan facilities have been applied
The sensitivity analyses do not take into compliance with capital requirements to support both the 2012 year of account
consideration that the Group’s assets and imposed by regulators in each jurisdiction for Syndicates 33 and 3624 and the capital
liabilities are actively managed. Additionally, where the Group operates. requirements of Hiscox Insurance Company
the financial position of the Group may vary (Bermuda) Limited.
at the time that any actual market movement There were no changes in the Group’s
occurs. For example, the Group’s financial approach to capital risk management during Financial strength
risk management strategy aims to manage the current or prior year under review. The financial strength ratings of the
the exposure to market fluctuations. As Group’s insurance company subsidiaries
investment markets move past various Gearing are outlined below:
trigger levels, management actions could The Group currently utilises short- to Standard
A.M. Best Fitch & Poor’s
include selling investments, changing medium-term gearing as an additional source
investment portfolio allocation and taking of funds to maximise the opportunities from Hiscox Insurance
other protective action. strong markets and to reduce the risk profile Company Limited A (Excellent) A+ A (Strong)
of the business when the rating environment Hiscox Insurance
3.3 Capital risk management shows a weaker model for the more volatile Company (Bermuda)
Limited A (Excellent) A+ –
The Group’s primary objectives when business. The Group’s gearing is obtained
managing its capital position are: from a number of sources, including: Hiscox Insurance
to safeguard its ability to continue Letter of Credit and revolving credit Company (Guernsey)
Limited A (Excellent) A+ –
as a going concern, so that it can facility – the Group’s main facility was
continue to provide long-term growth replaced during 2012 for a total of $875 Hiscox Insurance
and progressive dividend returns million which may be drawn as cash Company Inc. A (Excellent) – –
for shareholders; (under a revolving credit facility), Letter
to provide an adequate return to of Credit or a combination thereof, Syndicate 33 benefits from an A.M.
the Group’s shareholders by pricing providing that the cash portion does Best rating of A (Excellent). In addition,
its insurance products and services not exceed $400 million. This facility the Syndicate also benefits from the Lloyd’s
commensurately with the level of risk; was secured during 2012 by the ratings of A (Excellent) from A.M. Best
to maintain an efficient cost of capital; Company’s subsidiary Hiscox plc. and A+ (Strong) from Standard & Poor’s.
to comply with all regulatory The Letter of Credit availability period
requirements by a significant ends on 31 December 2013. This Capital performance
margin; and enables the Group to utilise the Letter The Group’s main capital performance
to maintain financial strength ratings of Credit as Funds at Lloyd’s to support measure is the achieved return on equity
of A in each of its insurance entities. underwriting on the 2012, 2013 and (ROE). This marker best aligns the
2014 years of account. The revolving aspirations of employees and shareholders.
The Group sets the amount of capital credit facility has a maximum three- As variable remuneration, the vesting of
required in its funding structure in proportion year contractual period for repayment. options and longer-term investment plans
to risk. The Group then manages the capital At 31 December 2012 US$308 million all relate directly to ROE, this concept
structure and makes adjustments to it in the was drawn by way of Letter of Credit is embedded in the workings and culture
light of changes in economic conditions and to support the Funds at Lloyd’s of the Group. The Group maintains its cost
74 Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012