22 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 is 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 to 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 and an insurance linked fund which have limited
observable inputs on which to measure fair value. Unquoted equities are carried at cost, which is deemed to be comparable to fair value.
The Group invested into the insurance linked fund in December 2012, which is subject to a two-year initial lock-up period. The fund
specialises in catastrophe reinsurance opportunities. 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.
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 significant 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 Insurance Derivative financial
in unit trusts credit institutions linked fund instruments Total
31 December 2012 £000 £000 £000 £000 £000
Balance at 1 January 10,626 – – – 10,626
Total gains or losses through profit or loss* 2,587 – – – 2,587
Purchases 322 – 8,098 – 8,420
Settlements – – – – –
Closing balance 13,535 – 8,098 – 21,633
Unrealised gains and losses in the year
on securities held at the end of the year 2,587 – – – 2,587
*Total gains/(losses) are included within the investment result in the income statement.
Equities and shares Deposits with Insurance Derivative financial
in unit trusts credit institutions linked fund instruments Total
31 December 2011 £000 £000 £000 £000 £000
Balance at 1 January 6,926 – – – 6,926
Total gains or losses through profit or loss* 1,242 – – – 1,242
Purchases 3,002 – – – 3,002
Settlements (544) – – – (544)
Closing balance 10,626 – – – 10,626
Unrealised gains and losses in the year
on securities held at the end of the year 1,242 – – – 1,242
*Total gains/(losses) are included within the investment result in the income statement.
23 Cash and cash equivalents
2012 2011
£000 £000
Cash at bank and in hand 428,454 258,927
Short-term deposits 229,208 257,620
657,662 516,547
The Group holds its cash deposits with a well-diversified range of banks and financial institutions. Cash includes overnight deposits.
Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 89