Released: 26/02/2010
- Part 3: For the preceeding part double click [ID:nPRrPBF2Ab]
may, at times, contain assets significantly in excess of those required to meet
insurance liabilities or other defined funding needs. The sub-set of guidelines
adds a further degree of requirements, including fewer allowable asset classes,
higher credit quality, shorter duration and higher liquidity. The primary
objectives of this portion of assets are capital preservation and providing
liquidity to meet insurance and other near term obligations.
Assets in excess of those required to be held in the core portfolio, are
typically held in the "core plus" or "surplus" portfolios. The core plus
portfolio is invested in fixed income securities and cash and cash equivalents.
The surplus portfolio is invested in fixed income securities, cash and cash
equivalents and can also be invested in equity securities and derivative
instruments. The assets in the core plus and surplus portfolios are not matched
to specific insurance liabilities. In general, the duration of the surplus
portfolio may be slightly longer than the core or core plus portfolio, while
maintaining a focus on high quality assets. Currently, the Group does not hold
any equity securities or any alternative investments, such as hedge funds.
The Group reviews the composition, duration and asset allocation of its
investment portfolio on a regular basis in order to respond to changes in
interest rates and other market conditions. If certain asset classes are
anticipated to produce a higher return within management's risk tolerance an
adjustment in asset allocation may be made. Conversely, if the risk profile is
expected to move outside of tolerance levels, adjustments may be made to reduce
the risks in the portfolio.
The Group's fixed income portfolios are managed by three external investment
managers. The equity portfolio was managed by one investment manager and was
fully liquidated in the first half of 2009. The performance of the managers is
monitored on an on-going basis.
The investment mix of the fixed income portfolios is as follows:
as at 31 december 2009 $m % $m % $m % $m %
available for sale - core core plus surplus total
external
- short-term investments 164.3 8.7 3.5 0.2 14.5 0.8 182.3 9.7
- U.S. treasuries 49.8 2.6 8.4 0.4 196.6 10.4 254.8 13.4
- other government bonds 14.0 0.7 - - 62.3 3.3 76.3 4.0
- U.S. government agency 35.1 1.9 10.7 0.6 69.2 3.7 115.0 6.2
debt
- U.S. government agency 64.0 3.4 16.4 0.9 404.0 21.3 484.4 25.6
mortgage backed
securities
- corporate bonds 151.0 8.0 11.8 0.6 317.0 16.8 479.8 25.4
- corporate bonds - FDIC 124.3 6.5 5.0 0.3 64.1 3.4 193.4 10.2
guaranteed(1)
total available for sale 602.5 31.8 55.8 3.0 1,127.7 59.7 1,786.0 94.5
- external
available for sale -
internal
- short-term investments 106.5 5.5 - - - - 106.5 5.5
total fixed income 709.0 37.3 55.8 3.0 1,127.7 59.7 1,892.5 100.0
securities
(1) FDIC guaranteed corporate bonds are protected by the Federal Deposit
Insurance Corporation, an independent agency of the U.S. government
as at 31 december 2008 $m % $m % $m % $m %
core core plus surplus total
available for sale -
external
- short-term investments 101.5 6.4 9.9 0.6 52.2 3.3 163.6 10.3
- U.S. treasuries 148.3 9.3 15.8 1.0 27.6 1.7 191.7 12.0
- other government bonds 27.7 1.7 11.4 0.7 15.0 0.9 54.1 3.3
- U.S. government agency 39.5 2.5 15.5 1.0 59.5 3.7 114.5 7.2
debt
- U.S. government agency 180.9 11.3 82.2 5.1 351.3 22.0 614.4 38.4
mortgage backed
securities
- corporate bonds 138.3 8.6 52.0 3.2 113.2 7.1 303.5 18.9
- corporate bonds - FDIC 108.8 6.8 14.6 0.9 30.0 1.9 153.4 9.6
guaranteed(1)
- convertible debt - - - - 0.2 - 0.2 -
securities
available for sale - 745.0 46.6 201.4 12.5 649.0 40.6 1,595.4 99.7
external
at fair value through profit and loss - external
- convertible debt - - - - 4.0 0.3 4.0 0.3
securities
total fixed income 745.0 46.6 201.4 12.5 653.0 40.9 1,599.4 100.0
securities
(1) FDIC guaranteed corporate bonds are protected by the Federal Deposit
Insurance Corporation, an independent agency of the U.S. government
The sector allocation of the corporate bonds and convertible debt securities is
as follows:
2009 2008
as at 31 december $m % $m %
sector
financial 344.1 51.1 254.6 55.2
industrial 262.9 39.1 172.7 37.5
utility 52.7 7.8 15.7 3.4
other 13.5 2.0 18.1 3.9
total 673.2 100.0 461.1 100.0
The financial sector allocation includes $193.4 million (2008 - $153.4 million)
of FDIC guaranteed bonds.
The Group's net asset value is directly impacted by movements in the value of
investments held. Values can be impacted by movements in interest rates, credit
ratings, economic environment and outlook, and exchange rates.
Following the liquidation of its equity portfolio in the first half of 2009,
the Group has no exposure to valuation risk from equity securities. The impact
on net unrealised gains and losses of a 10% fall in the value of the Group's
equity portfolio at 31 December 2008 would have been $0.6 million. Valuation
risk in the equity portfolio was mitigated by diversifying the portfolio across
sectors.
The Group's investment portfolio is comprised mainly of fixed income
securities. The fair value of the Group's fixed income portfolio is generally
inversely correlated to movements in market interest rates. If market interest
rates fall, the fair value of the Group's fixed income securities would tend to
rise and vice versa.
The sensitivity of the price of fixed income securities, and certain
derivatives, to movements in interest rates is indicated by their duration(1).
The greater a security's duration, the greater its price volatility to
movements in interest rates. The sensitivity of the Group's fixed income and
derivative investment portfolio to interest rate movements is detailed below,
assuming linear movements in interest rates:
2009 2008
as at 31 december $m % $m %
immediate shift in yield
(basis points)
100 (56.7) (3.0) (43.1) (2.7)
75 (42.5) (2.2) (32.3) (2.0)
50 (28.3) (1.5) (21.6) (1.4)
25 (14.2) (0.7) (10.8) (0.7)
(25) 10.0 0.5 6.6 0.4
(50) 20.0 1.1 13.1 0.8
(75) 29.9 1.6 19.7 1.2
(100) 39.9 2.1 26.2 1.6
(1) duration is the weighted average maturity of a security's cash flows, where
the present values of the cash flows serve as the weights. The effect of
convexity on the portfolio's response to changes in interest rates has been
factored into the data above.
The Group mitigates interest rate risk on the investment portfolio by
establishing and monitoring duration ranges in its investment guidelines. The
duration of the core portfolio is matched to the modeled duration of the
insurance reserves, within a permitted range. The permitted duration range for
the core plus portfolio is between one and four years and the surplus portfolio
is between one and five years.
The duration of the externally managed portfolios, expressed in years, is as
follows:
as at 31 december 2009 2008
core portfolio 1.6 1.7
core plus portfolio 1.9 1.4
surplus portfolio 3.2 2.6
In addition to duration management, the Group uses Value at Risk ("VaR") on a
monthly basis to measure potential losses in the estimated fair values of its
cash and invested assets and to understand and monitor risk.
The VaR calculation is performed using variance/covariance risk modeling to
capture the cash flows and embedded optionality of the portfolio. Securities
are valued individually using market standard pricing models. These security
valuations serve as the input to many risk analytics, including full valuation
risk analyses, as well as parametric methods that rely on option adjusted risk
sensitivities to approximate the risk and return profiles of the portfolio.
The principal measure that is produced is a ninety day VaR at the 95th
percentile confidence level. Management also monitors the 99th percentile
confidence level. The ninety day VaR, at the 95th percentile confidence level,
measures the minimum amount the assets should be expected to lose in a ninety
day time horizon, under normal conditions, 5% of the time. The current VaR
tolerance is 4.0% of shareholders' equity, using the ninety day VaR at the 95th
percentile confidence level.
The Group's VaR calculations are as follows:
2009 2008
as at 31 december $m % $m %
95th percentile confidence level 40.4 2.9 43.1 3.4
99th percentile confidence level 57.0 4.1 60.9 4.8
derivative financial instruments
The Group may utilise derivative instruments for yield enhancement, duration
management, interest rate and foreign currency exposure management, or to
obtain an exposure to a specific financial market, currency or product. The
Group currently invests in the following derivative financial instruments:
mortgage backed "to be announced" securities ("TBAs")
The TBA market is essentially a forward or delayed delivery market for
mortgage-backed securities issued by U.S. government agencies, where securities
of a specific term and interest rate are bought or sold for future settlement
on a "to be announced" basis. TBAs are generally physically settled and
classified as available for sale fixed income securities. Occasionally TBAs may
be traded for net settlement. Such instruments are deemed to be derivative
instruments. All TBAs classified as derivatives are held on a non-leveraged
basis. The credit exposure is restricted to the differential between the
settlement value of the forward purchase and the forward sale. The
credit-worthiness of the counter-party is monitored and collateral may be
required on open positions.
The estimated fair value of TBA positions is an asset and corresponding
liability of $nil (2008 - $116.4 million).
futures
The Group's investment guidelines only permit the use of futures that are
exchange-traded. Such futures provide the Group with participation in market
movements, determined by the underlying instrument on which the futures
contract is based, without holding the instrument itself or the individual
securities. This approach allows the Group more efficient and less costly
access to the exposure than would be available by the exclusive use of
individual fixed income and money market securities. Exchange-traded futures
contracts may also be used as substitutes for ownership of the physical
securities.
All futures contracts are held on a non-leveraged basis. An initial margin is
provided, which is a deposit of cash and/or securities in an amount equal to a
prescribed percentage of the contract value. The fair value of futures
contracts is estimated daily and the margin is adjusted accordingly with
unrealised gains and/or losses settled daily in cash and/or securities. A
realised gain or loss is recognised when the contract is closed.
Futures contracts expose the Group to market risk to the extent that adverse
changes occur in the estimated fair values of the underlying securities.
Exchange-traded futures are, however, subject to a number of safeguards to
ensure that obligations are met, including: the use of clearing houses (thus
reducing counter-party credit risk); the posting of margins; and the daily
settlement of unrealised gains and losses. The amount of credit risk is
therefore considered low.
The notional value of open futures contracts as at 31 December 2009 is as
follows:
$m $m
long short
eurodollar futures 570.0 -
contracts
A Eurodollar futures contract is an exposure to 3 month LIBOR, based on a
commitment to a $1.0 million deposit. The estimated fair value is based on
expectations of 3 month LIBOR, is determined using exchange-traded prices and
is negligible as at 31 December 2009. The contracts currently held by the Group
expire in December 2010. There were no Eurodollar futures contracts in place
during 2008.
The sensitivity of the Group's Eurodollar futures position to interest rate
movements as at 31 December 2009 is detailed below:
$m
immediate shift in 3 month
LIBOR
(basis points)
100 (1.4)
75 (1.1)
50 (0.7)
25 (0.4)
(25) 0.4
(50) 0.7
(75) 1.1
(100) 1.4
options
The Group's investment guidelines only permit the use of options which are
exchange-traded. Options are held on a similar basis to futures and are subject
to similar safeguards. Options are contractual arrangements that give the
purchaser the right, but not the requirement, to either buy or sell an
instrument at a specific set price at a future date, which may or may not be
pre-determined. There were no open option contracts in place as at 31 December
2009 and there were no options contracts in place during 2008.
The net gains or losses recognised in the consolidated statement of
comprehensive income on exchange-traded derivatives in 2009 were as follows:
$m
eurodollar futures contracts 1.6
treasury futures contracts (1.7)
options on treasury futures contracts 0.2
total 0.1
b. insurance risk
The Group is exposed to insurance market risk from several sources, including
the following:
* The advent of a soft insurance market, which may result in a stabilisation
or decline in premium rates and/or terms and conditions for certain lines,
or across all lines;
* The actions and reactions of key competitors, which may directly result in
volatility in premium volumes and rates, fee levels and other input costs;
and
* Market events which may cause a limit in the availability of cover,
including unusual inflation in rates, causing political intervention or
national remedies.
The most important method to mitigate insurance market risk is to maintain
strict underwriting standards. The Group manages insurance market risk in
numerous ways, including the following:
* Reviews and amends underwriting plans and budgets as necessary;
* Reduces exposure to market sectors where conditions have reached
unattractive levels;
* Purchases appropriate, cost effective reinsurance cover to mitigate
exposure;
* Closely monitors changes in rates and terms and conditions; and
* Regularly reviews output from the Group's economic capital model, BLAST, to
assess up-to-date profitability of classes and sectors.
Insurance contract liabilities are not directly sensitive to the level of
market interest rates, as they are undiscounted and contractually non-interest
bearing.
c. debt risk
The Group has issued long-term debt as described in note 18. The loan notes
bear interest at a floating rate that is re-set on a quarterly basis, plus a
fixed margin of 3.70%. The Group is subject to interest rate risk on the coupon
payments of the long-term debt. The Group has mitigated the interest rate risk
by entering into interest rate swap contracts as follows:
maturity date prepayment date interest hedged
subordinated loan notes $97.0 15 december 2035 15 march 2011 50%
million
15 june 2035 15 march 2011 50%
subordinated loan notes #24.0
million
The swaps expire on 15 March 2011.
In certain circumstances the subordinated loan notes can be prepaid from 16
December 2005, with a sliding scale redemption price penalty which reduces to
zero by 15 March 2011. Refer to note 18 for further details.
The current Euribor interest rate on 50% of the Euro subordinated loan notes
has been set at 0.71% (2008 - 3.33%). The current LIBOR interest rate on 50% of
the U.S. dollar subordinated loan notes has been set at 0.25% (2008 - 2.00%).
The Group has no interest rate risk on the remaining portion of the notes.
d. currency risk
The Group currently underwrites from two locations, Bermuda and London,
although risks are assumed on a worldwide basis. Risks assumed are
predominantly denominated in U.S. dollars.
The Group is exposed to currency risk to the extent its assets are denominated
in different currencies to its liabilities. The Group is also exposed to
non-retranslation risk on non-monetary assets such as unearned premiums and
deferred acquisition costs. Exchange gains and losses can impact income.
The Group hedges non-U.S. dollar liabilities primarily with non-U.S. dollar
assets. The Group's main foreign currency exposure relates to its insurance
obligations, cash holdings, premiums receivable, dividends due and the #24.0
million subordinated loan notes long-term debt liability.
The Group's assets and liabilities, categorised by currency at their translated
carrying amount were as follows:
assets $m $m $m $m $m
U.S. $ sterling euro other total
cash and cash equivalents 124.9 271.1 37.8 6.2 440.0
accrued interest receivable 12.0 - - - 12.0
fixed income securities - 1,892.5 - - - 1,892.5
available for sale
reinsurance assets 45.7 - - - 45.7
deferred acquisition costs 43.4 1.0 4.6 3.9 52.9
other receivables 4.0 0.3 - - 4.3
inwards premiums receivable from 143.6 4.8 19.1 10.7 178.2
insureds and cedants
deferred tax asset - 3.3 - - 3.3
property, plant and equipment 6.9 1.3 - - 8.2
total assets as at 31 december 2,273.0 281.8 61.5 20.8 2,637.1
2009
liabilities $m $m $m $m $m
U.S. $ sterling euro other total
losses and loss adjustment 445.0 3.6 21.4 18.9 488.9
expenses
unearned premiums 265.8 8.4 22.7 20.7 317.6
insurance contracts - other 12.4 0.2 2.1 1.1 15.8
payables
amounts payable to reinsurers 4.2 - - - 4.2
deferred acquisition costs ceded 2.7 - - - 2.7
other payables 18.9 274.6 0.3 - 293.8
interest rate swap 3.0 - 0.6 - 3.6
accrued interest payable 0.1 - 0.1 - 0.2
long-term debt 97.0 - 34.4 - 131.4
total liabilities as at 31 849.1 286.8 81.6 40.7 1,258.2
december 2009
assets $m $m $m $m $m
U.S. $ sterling euro other total
cash and cash equivalents 368.8 7.6 33.9 3.3 413.6
accrued interest receivable 10.1 - - - 10.1
investments
- fixed income securities
- available for sale 1,595.4 - - - 1,595.4
- at fair value through profit 4.0 - - - 4.0
and loss
- equity securities - available 5.8 - - - 5.8
for sale
reinsurance assets 55.3 - - - 55.3
deferred acquisition costs 48.8 1.7 5.5 4.9 60.9
other receivables 152.2 1.7 - 0.1 154.0
inwards premiums receivable from 143.9 7.8 25.0 10.6 187.3
insureds and cedants
deferred tax asset - 1.2 - - 1.2
property, plant and equipment 0.1 1.2 - 0.1 1.4
total assets as at 31 december 2,384.4 21.2 64.4 19.0 2,489.0
2008
liabilities $m $m $m $m $m
U.S. $ sterling euro other total
losses and loss adjustment 488.2 3.1 20.0 17.5 528.8
expenses
unearned premiums 274.2 14.0 26.6 24.8 339.6
insurance contracts - other 13.3 0.2 3.2 0.9 17.6
payables
amounts payable to reinsurers 1.9 0.1 - - 2.0
deferred acquisition costs ceded 1.9 - - - 1.9
other payables 184.3 5.8 0.2 - 190.3
interest rate swap 4.4 - 0.5 - 4.9
accrued interest payable 0.2 - 0.2 - 0.4
long-term debt 97.0 - 33.8 - 130.8
total liabilities as at 31 1,065.4 23.2 84.5 43.2 1,216.3
december 2008
The impact on net income of a proportional foreign exchange movement of 10% up
and 10% down against the U.S. dollar at the year end spot rates would be an
increase or decrease of $0.7 million (2008 - $0.4 million).
C. liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations
when they are due without incurring an unreasonable cost.
The Group's main exposures to liquidity risk are with respect to its insurance
and investment activities. The Group is exposed if proceeds from financial
assets are not sufficient to fund obligations arising from its insurance
contracts. The Group can be exposed to daily calls on its available investment
assets, principally from insurance claims.
Exposures in relation to insurance activities are as follows:
* Large catastrophic events, or multiple medium-sized events in quick
succession, resulting in a requirement to pay a large amount of claims
within a relatively short time-frame;
* Failure of insureds or cedants to meet their contractual obligations with
respect to the payment of premiums in a timely manner; and
* Failure of reinsurers to meet their contractual obligations with respect to
the payment of claims in a timely manner.
Exposures in relation to investment activities are as follows:
* Adverse market movements and/or a duration mismatch to obligations,
resulting in investments being disposed of at a significant realised loss;
and
* An inability to liquidate investments due to market conditions.
The maturity dates of the Group's fixed income portfolio are as follows:
as at 31 december 2009 $m $m $m $m
fixed income securities- external core core plus surplus total
less than one year 180.4 4.8 29.1 214.3
between one and two years 120.1 3.5 131.2 254.8
between two and three years 156.2 15.3 152.0 323.5
between three and four years 39.8 14.3 70.1 124.2
between four and five years 38.6 1.5 193.0 233.1
over five years 3.4 - 148.3 151.7
mortgage backed securities 64.0 16.4 404.0 484.4
total fixed income securities - 602.5 55.8 1,127.7 1,786.0
external
fixed income securities - internal 106.5 - - 106.5
less than one year
total 709.0 55.8 1,127.7 1,892.5
as at 31 december 2008 $m $m $m $m
core core plus surplus total
fixed income securities- external
less than one year 184.4 22.2 69.8 276.4
between one and two years 128.8 30.8 39.9 199.5
between two and three years 157.7 48.7 63.7 270.1
between three and four years 61.7 8.9 20.8 91.4
between four and five years 18.4 6.8 27.0 52.2
over five years 13.1 1.8 80.5 95.4
mortgage backed securities 180.9 82.2 351.3 614.4
total fixed income securities - 745.0 201.4 653.0 1,599.4
external
The maturity profile of the financial liabilities of the Group is as follows:
as at 31 december 2009 $m $m $m $m $m $m
years until liability becomes due -
undiscounted values
balance less one to three over total
three five
sheet than to five
one
losses and loss adjustment 488.9 183.5 181.7 67.0 56.7 488.9
expenses
insurance contracts - other 15.8 12.7 2.4 0.7 - 15.8
payables
amounts payable to 4.2 4.2 - - - 4.2
reinsurers
other payables 291.4 291.4 - - - 291.4
corporation tax payable 2.4 2.4 - - - 2.4
interest rate swap 3.6 2.9 0.7 - - 3.6
accrued interest payable 0.2 0.2 - - - 0.2
long-term debt 131.4 5.2 10.7 10.7 243.1 269.7
total 937.9 502.5 195.5 78.4 299.8 1,076.2
as at 31 december 2008 $m $m $m $m $m $m
years until liability becomes due -
undiscounted values
balance less one to three over total
three five
sheet than to five
one
losses and loss adjustment 528.8 188.5 211.0 72.2 57.1 528.8
expenses
insurance contracts - other 17.6 14.0 3.2 0.4 - 17.6
payables
amounts payable to 2.0 2.0 - - - 2.0
reinsurers
other payables 190.3 190.3 - - - 190.3
interest rate swap 4.9 2.1 2.8 - - 4.9
accrued interest payable 0.4 0.4 - - - 0.4
long-term debt 130.8 7.9 15.8 15.8 303.4 342.9
total 874.8 405.2 232.8 88.4 360.5 1,086.9
Actual maturities of the above may differ from contractual maturities because
certain borrowers have the right to call or pre-pay certain obligations with or
without call or prepayment penalties. The prepayment options for the Group's
long-term debt are discussed in note 18. While the estimation of the ultimate
liability for losses and loss adjustment expenses is complex and incorporates a
significant amount of judgement, the timing of payment of losses and loss
adjustment expenses is also uncertain and cannot be predicted as simply as for
other financial liabilities. Actuarial and statistical techniques, past
experience and management's judgement have been used to determine a likely
settlement pattern.
The Group manages its liquidity risks via its investment strategy to hold high
quality, highly liquid securities, sufficient to meet its insurance liabilities
and other near term liquidity requirements. The creation of the core portfolio
with its subset of guidelines ensures funds are readily available to meet
potential insurance liabilities in an extreme event plus other near term
liquidity requirements.
In addition, the Group has established asset allocation and maturity parameters
within the investment guidelines such that the majority of the investments are
in high quality assets which could be converted into cash promptly and at
minimal expense. The Group monitors market changes and outlooks and
re-allocates assets as deemed necessary.
D. credit risk
Credit risk is the risk that a counter-party may fail to pay, or repay, a debt
or obligation. The Group is exposed to credit risk on its fixed income
investment portfolio and derivative instruments, its inwards premiums
receivable from insureds and cedants, and on any amounts recoverable from
reinsurers.
Credit risk on the fixed income portfolio is mitigated through the Group's
policy to invest in instruments of high credit quality issuers and to limit the
amounts of credit exposure with respect to particular ratings categories and
any one issuer. Securities rated below BBB- / Baa3 may comprise no more than 5%
of shareholders' equity, with the exception of U.S. government and agency
securities. In addition, no one issuer, with the exception of U.S. government
and agency securities, should exceed 5% of shareholders' equity. The Group is
therefore not exposed to any significant credit concentration risk on its
investment portfolio, except for fixed income securities issued by the U.S.
government and government agencies.
Credit risk on derivative instruments is mitigated by the use of
exchange-traded instruments which use clearing houses to reduce counter-party
credit risk, require the posting of margins and settle unrealised gains and
losses daily.
Credit risk on inwards premiums receivable from insureds and cedants is managed
by conducting business with reputable broking organisations, with whom the
Group has established relationships, and by rigorous cash collection
procedures. The Group also has a broker approval process in place. Credit risk
from reinsurance recoverables is primarily managed by review and approval of
reinsurer security by the GRSC as discussed in the insurance risk section
above.
The table below presents an analysis of the Group's major exposures to
counter-party credit risk, based on their Standard & Poor's or equivalent
rating. The table includes amounts due from policyholders and unsettled
investment trades. The quality of these receivables is not graded, but based on
management's historical experience there is limited default risk associated
with these amounts.
as at 31 december $m $m $m $m
2009
equity cash and inwards premiums reinsurance
securities and recoveries
other fixed income receivable and
investments securities other receivables
AAA - 1,830.6 - -
AA+, AA, AA- - 110.8 - -
A+, A, A- - 295.9 4.3 35.8
BBB+, BBB, BBB- - 95.0 - -
other - 0.2 182.5 -
total - 2,332.5 186.8 35.8
as at 31 december $m $m $m $m
2008
equity cash and inwards premiums reinsurance
securities and recoveries
other fixed income receivable and
investments securities other
receivables
AAA - 1,572.6 - -
AA+, AA, AA- - 207.9 - -
A+, A, A- - 190.8 3.2 42.1
BBB+, BBB, BBB- - 38.9 - -
other 5.8 2.8 341.3 -
total 5.8 2,013.0 344.5 42.1
The counter-party to the Group's interest rate swap is currently rated AA by
Standard & Poor's.
The following table shows inwards premiums receivable that are past due but not
impaired:
2009 2008
as at 31 december $m $m
less than 90 days past due 8.6 8.1
between 91 and 180 days past due 0.4 1.4
over 180 days past due 0.3 0.5
total 9.3 10.0
Provisions of $1.4 million (2008 - $1.5 million) have been made for impaired or
irrecoverable balances and $0.2 million (2008 - $1.4 million) was charged to
the consolidated statement of comprehensive income in respect of bad debts. No
provisions have been made against balances recoverable from reinsurers.
E. operational risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes or systems including the risk of fraud, inadequate health
and safety for employees, damage to physical assets, business disruption,
system failure and transaction processing failure. The Group's main operational
risks are as follows:
* Underwriters may operate outside of approved authority levels;
* Employees may fail to comply with the Group's operating guidelines;
* IT systems may fail to meet business needs;
* Key processes may fail, leading to delays and/or inaccurate or untimely
management information;
* Effective and comprehensive enterprise risk management practices and
philosophies may not be embedded throughout the Group;
* Unintended insurance coverage may be provided or received due to the
misinterpretation of insurance contract policy wording;
* Management may fail to address or identify an unforeseen or unexpected
risk;
* Compliance and regulatory failures; and
* Loss of key personnel.
The Group has a robust self governance framework. Policies and procedures are
documented, reviewed and updated when necessary and affirmed by management on a
quarterly basis. The Group's internal audit function considers the accuracy and
completeness of key risks and controls, and independently verifies the
effective operation of these through substantive testing. All higher risk areas
are subject to annual audit, with all other areas audited, on a rotational
basis, at least once every three years.
Information technology risk tolerances have been defined and system performance
is monitored continuously. The Group's disaster recovery plan is re-assessed
and updated on a regular basis.
F. strategic risk
The Group has identified several strategic risks. These include the risks that
either the poor execution of the business plan or poor business planning in
itself results in a strategy that fails to adequately reflect the trading
environment, resulting in an inability to optimise performance. The Group has
also identified risks from the failure to maintain adequate capital, accessing
capital at an inflated cost or the inability to access capital. This includes
unanticipated changes in regulatory and/or rating agency models that could
result in an increase in capital requirements or a change in the type of
capital required. Lastly, the Group has identified succession planning, staff
retention and key man risk as strategic risks.
The Group addresses the risks associated with planning and execution of the
business plan through a combination of the following:
* An iterative annual budget process with cross departmental involvement;
* Approval of the annual budget by the Board of Directors;
* Regular monitoring of actual versus budgeted results; and
* Periodic review and re-forecasting as market conditions change.
Risks associated with the effectiveness of the Group's capital management are
mitigated as follows:
* Regular monitoring of current regulatory and rating agency capital
requirements;
* Oversight of capital requirements by the Board of Directors; and
* Maintaining contact with regulators and rating agencies in order to stay
abreast of upcoming developments.
Risks associated with succession planning, staff retention and key man risks
are mitigated through a combination of resource planning processes and
controls, including:
* The identification of key personnel with appropriate succession plans;
* Documented recruitment procedures, position descriptions and employment
contracts; and
* Resource monitoring and the provision of appropriate compensation and
training schemes.
a. capital risk management
The total capital of the Group as at 31 December 2009 is determined as $1,510.3
million (2008 - $1,403.5 million) comprising $1,378.9 million of shareholders'
equity (2008 - $1,272.7 million) and $131.4 million of long-term debt (2008 -
$130.8 million). The Group's capital requirements vary with the insurance
cycle.
The Group reviews the level and composition of capital on an ongoing basis with
a view to:
* Maintaining sufficient capital for underwriting opportunities and to meet
obligations to policyholders;
* Maximising the return to shareholders within pre-determined risk
tolerances;
* Maintaining adequate financial strength ratings; and
* Meeting internal and regulatory capital requirements.
Capital is increased or returned as appropriate. The retention of earnings generated
leads to an increase in capital. Capital raising can include debt or
equity and returns of capital may be made through dividends, share repurchases,
a redemption of debt or any combination thereof. Other capital management tools
and products available to the Group may also be utilised. All capital actions
require approval by the Board of Directors.
Internal methods have been developed
- More to follow, for following part double click [ID:nPRrPBF2Ad]