(Limited by guarantee) REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2014
REPORT OF THE COUNCIL MEMBERS The Council Members have pleasure in submitting their annual report together with the audited financial statements for the year ended 31st December 2014 Principal activities The Bureau administers two funds, namely the First Fund Scheme and the Insolvency Fund Scheme for the satisfaction of claims liabilities to certain motor vehicle accident victims under the circumstances as set out in note 1 on the financial statements. Financial statements The results of the Bureau for the year ended 31st December 2014 and the state of affairs of the Bureau as at that date are set out in the financial statements on pages 5 to 32. Property, plant and equipment Details of movements in property, plant and equipment are set out in note 8 to the financial statements. General reserve and retained surplus Movements in retained surplus during the year are set out in the statement of changes in equity. Council Members The Council Members during the financial year and up to the date of this report are: Ms Agnes Choi Heung Kwan Mr Andrew Wong Kwai Chuen Mr Jimmy Poon Wing Fai Mr Kenneth John Reid Mr Kin Nam Yu Mr Kok Ho Wong Mr Pak Kee Lee Mr Pui Leung Chan Messrs Kok Ho Wong, Agnes Choi Heung Kwan and Andrew Wong Kwai Cheun are to retire at the forthcoming annual general meeting in accordance with article 37(a) of the Bureau s Articles of Association and, being eligible, offer themselves for re-election. All other remaining Council Members continue in office. - 1 -
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF MOTOR INSURERS BUREAU OF HONG KONG (Incorporated in Hong Kong and limited by guarantee) We have audited the financial statements of Motor Insurers Bureau of Hong Kong ( the Bureau ) set out on pages 5 to 32, which comprise the statement of financial position as at 31 December 2014, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Council members responsibility for the financial statements The Council members are responsible for the preparation of financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants, and the Hong Kong Companies Ordinance, and for such internal control as the Council members determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with section 80 of Schedule 11 to the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Council members, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. - 3 -
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 First Fund Scheme Insolvency Fund Scheme Note 2014 2013 2014 2013 HK$ HK$ HK$ HK$ Revenue Members contributions 38,823,495 36,883,437 77,646,345 73,609,098 Non-members contributions 124,184 122,888-38,947,679 37,006,325 77,646,345 73,609,098 ----------------- ----------------- ------------------- ------------------- Other income Net realised and unrealised gains on financial instruments at fair value through profit or loss and financial liabilities 20,117,489 4,018,750 63,356,664 9,031,080 Other investment income 9,830,654 8,816,644 34,976,721 31,557,626 Interest income on deposits 367 199 724 489 Rental income - - 1,113,784 998,405 29,948,510 12,835,593 99,447,893 41,587,600 ----------------- ------------------ -------------------- -------------------- Less: Incurred claims Gross claims paid 8,516,043 20,593,857 20,614,035 72,454,723 Claims recoveries Reinsurance recoveries (88,200) (20,000,000) (99,280) - (3,155,162) - - - Net claims (recovered) / paid (11,572,157) 20,494,577 17,458,873 72,454,723 Movement in provision for outstanding claims (19,199,000) 66,837,000 (326,128,000) (152,796,000) 14 (30,771,157) 87,331,577 (308,669,127) (80,341,277) ------------------ ------------------ --------------------- -------------------- Less: Expenses Excess of loss reinsurance 16,468,835 16,165,057 - - ------------------ ------------------ -------------------- -------------------- Other expenses:- Accountancy and secretarial fees 1,011,050 968,950 1,852,750 1,794,250 Audit fees 146,081 139,125 146,082 139,125 Consultancy, legal and professional fees 372,300 518,750 401,355 830,527 Depreciation 8 218,980 222,608 1,598,321 1,601,949 Fixed assets written off 405 3,901 1,322 3,901 Investment expenses 3,479,181 3,267,717 8,585,404 8,262,222 Staff costs 7 2,453,719 2,018,300 4,320,344 4,518,292 Others 636,833 636,475 710,191 756,208 8,318,549 7,775,826 17,615,769 17,906,474 ----------------- ----------------- ------------------- -------------------- Total expenses 24,787,384 23,940,883 17,615,769 17,906,474 ----------------- ----------------- ------------------- ------------------- Surplus / (loss) for the year 74,879,962 (61,430,542) 468,147,596 177,631,501 Other comprehensive surplus - - - - Total comprehensive surplus / (loss) for the year 74,879,962 (61,430,542) 468,147,596 177,631,501 The notes on pages 9 to 32 are an integral part of these financial statements. - 5 -
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014 Insolvency First Fund Scheme Fund Scheme Total retained surplus: HK$ HK$ Balance at 1 January 2013 256,042,322 1,185,982,868 Total comprehensive (loss) / surplus for the year (61,430,542) 177,631,501 Balance at 31 December 2013 and 1 January 2014 194,611,780 1,363,614,369 Total comprehensive surplus for the year 74,879,962 468,147,596 Balance at 31 December 2014 269,491,742 1,831,761,965 The notes on pages 9 to 32 are an integral part of these financial statements. - 7 -
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014 Operating activities First Fund Scheme Insolvency Fund Scheme Note 2014 2013 2014 2013 HK$ HK$ HK$ HK$ Total comprehensive surplus / (loss) for the year 74,879,962 (61,430,542) 468,147,596 177,631,501 Adjustments for: - Investment expenses 3,479,181 3,267,717 8,585,404 8,262,222 - Interest income on deposits (367) (199) (724) (489) - Depreciation 218,980 222,608 1,598,321 1,601,949 - Other investment income (9,830,654) (8,816,644) (34,976,721) (31,557,626) - Loss on write off of fixed assets 405 3,901 1,322 3,901 - Net realised and unrealised gains on financial assets at fair value through profit or loss and financial liabilities (20,117,489) (4,018,750) (63,356,664) (9,031,080) Operating surplus / (loss) before changes in working capital 48,630,018 (70,771,909) 379,998,534 146,910,378 Increase in contributions and other receivables (363,691) (794,173) (700,321) (1,795,441) (Decrease) / increase in provision for outstanding claims (19,199,000) 66,837,000 (326,128,000) (152,796,000) Increase / (decrease) in other creditors and accruals 1,272,506 1,332,139 386,995 (978,945) Net cash inflow / (outflow) from operating activities 30,339,833 (3,396,943) 53,557,208 (8,660,008) ---------------- ---------------- ------------------ ------------------ Investing activities Payment for purchase of fixed assets 8 (2,220) (22,904) (2,220) (22,903) (Purchases) / sales of financial instruments (net) (38,902,859) 6,474,438 (86,357,478) (24,551,430) Investment expenses (3,479,181) (3,267,717) (8,585,404) (8,262,222) Interest income on deposits 367 199 724 489 Other investment income 9,830,654 8,816,644 34,976,721 31,557,626 Net cash (outflow) / inflow from investing activities (32,553,239) 12,000,660 (59,967,657) (1,278,440) ---------------- ---------------- ------------------ ------------------ Net (decrease) / increase in cash and cash equivalents (2,213,406) 8,603,717 (6,410,449) (9,938,448) Cash and cash equivalents at 1 January 17,059,845 8,456,128 24,775,026 34,713,474 Cash and cash equivalents at 31 December 9 14,846,439 17,059,845 18,364,577 24,775,026 The notes on pages 9 to 32 are an integral part of these financial statements. - 8 -
1 Legal status Motor Insurers Bureau of Hong Kong (the Bureau ) is a company limited by guarantee and was incorporated under the Hong Kong Companies Ordinance on 10th December 1980. The address of its registered office is Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong. Under the provision of the Bureau s Memorandum of Association, every member shall, in the event of the Bureau being wound up, contribute such amount as may be required to meet the liabilities of the Bureau but not exceeding HK$100 per member. The assets of the Bureau shall be applied solely towards the promotion of the objects of the Bureau as set out in the Bureau s Memorandum of Association and no part thereof shall be distributed to the members of the Bureau. All insurers authorised by law to carry on motor vehicle insurance business in Hong Kong must become members of the Bureau. The First Fund Scheme was set up in accordance with an agreement entered into on 1 February 1981 between the Government of Hong Kong and the Bureau ( the First Fund Agreement ) and also a Domestic Agreement entered into on 1st February 1981 between the Bureau and insurers authorised to carry on motor vehicle insurance business in Hong Kong. In accordance with the First Fund Agreement, the Bureau is liable for the settlement of all claims for damages for bodily injury or death arising out of any motor vehicle accidents, if judgement is obtained and either at the time of the accident giving rise to liability there is not in force a policy or such policy is ineffective for any reason other than the inability of the insurer to pay its debts by reason of its insolvency and any such judgement is not satisfied in full within 28 days. The Insolvency Fund Scheme was set up in accordance with an agreement entered into on 1 November 1985 between the Government of Hong Kong and the Bureau ( the Insolvency Fund Agreement ) and also a Domestic Agreement on the same date between the Bureau and insurers authorised to carry on motor vehicle insurance business in Hong Kong. In accordance with the Insolvency Fund Agreement, the Bureau is liable for the settlement of judgements that remain unsettled as a result of the insolvency of a motor insurer. The assets of the Insolvency Fund are to be kept separate from the Bureau s other assets and from any other funds subsequently set up. The Government of Hong Kong and the Bureau came to an agreement to revise the Insolvency Fund Agreement and Domestic Agreement (effective 13 August 2009), to the effect that where any claim, in respect of a liability for damage to property of any third party caused by or arising out of the use of a motor vehicle in Hong Kong as insured by the Insurers, or in respect of a liability to indemnify, make contribution to, or pay damages to a person in respect of a relevant liability where another party has satisfied or is obligated to satisfy that liability pursuant to a policy of insurance, is not paid in full by the relevant Insurer solely by reason of the insolvency of the relevant Insurer, the Bureau may, at its absolute discretion and subject to the provisions of the Insolvency Fund Agreement, pay the claim to any persons entitled to such payment. At the request of the Government of Hong Kong, the Bureau has made available, with effect from 1 January 2002, a limited facility out of the First Fund to satisfy the claims of third parties who have suffered death or bodily injury caused by a terrorism act through the use of a motor vehicle in Hong Kong. The Bureau s liability for such terrorist acts is limited to a maximum aggregate amount of HK$200 million (or such other amount as may be agreed in writing from time to time between the Government of Hong Kong and the Bureau) or such lesser amount as shall stand to the credit of the First Fund in the books of account of the Bureau as at midnight on the 28th day after a judgement (whether in respect of a terrorist act or any other claims) is obtained. - 9 -
1 Legal status (continued) This is after making all appropriate provisions and reductions for actual liabilities of the Bureau under the First Fund Agreement which have been notified to the Bureau prior to the date of judgement of the relevant claim until such time as further funds shall at any time thereafter have been credited to the First Fund, in which event, and as from that time, the Bureau shall become liable for the unsatisfied portion of the relevant judgment. The limited facility provides cover on a first come first served (by notification of court judgements) basis. The Bureau waives any rights to which it would be entitled under the First Fund Scheme s Domestic Agreement dated 1 February 1981 to recover from any insurer concerned any sums paid where the judgement is given in respect of bodily injury liability which arises out of a terrorist act. 2 Principal accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented. (a) Basis of preparation These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standard (HKFRS). They have been prepared under the historical cost convention as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. In accordance with the transitional and saving arrangements for Part 9 of the Hong Kong Companies Ordinance (Cap. 622), Accounts and Audit as set out in sections 76 to 87 of Schedule 11 to the Hong Kong Companies Ordinance (Cap. 622), the financial statements are prepared in accordance with the applicable requirements of the predecessor Companies Ordinance (Cap. 32) for this financial year and the comparative period. The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bureau's accounting policies. Changes in accounting policy and disclosures (i) New and amended standards adopted by the Bureau Amendment to HKAS 32, Financial instruments: Presentation on offsetting financial assets and financial liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment did not have a significant effect on the Bureau s financial statements. Amendment to HKAS 39, Financial instruments: Recognition and measurement on the novation of derivatives and continuation of hedge accounting. This amendment considers legislative changes to over-the-counter derivatives and the establishment of central counterparties. Under HKAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets specified criteria. The Bureau has applied the amendment and there has been no significant impact on the Bureau s financial statements as a result. - 10 -
2 Principal accounting policies (continued) (a) Basis of preparation (continued) Changes in accounting policy and disclosures (continued) (i) New and amended standards adopted by the Bureau (continued) There are several other new standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 January 2014. However, they do not have significant impacts on the Bureau s financial statements and have therefore not been analyzed in detail. (ii) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Bureau, except the following set out below: HKFRS 9, Financial instruments addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of HKFRS 9 was issued in July 2014. It replaces the guidance in HKAS 39 that relates to the classification and measurement of financial instruments. HKFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in HKAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. HKFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under HKAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The Bureau is yet to assess HKFRS 9 s full impact. HKFRS 15 Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flow arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the goods or service. The standard replaces HKAS 18 Revenue and HKAS 11 Construction contracts and related interpretations. - 11 -
2 Principal accounting policies (continued) (a) Basis of preparation (continued) Changes in accounting policy and disclosures (continued) (ii) New standards and interpretations not yet adopted (continued) The standard is effective for annual period beginning on or after 1 January 2017 and earlier application is permitted. The Bureau is assessing the impact of HKFRS 15. There are no other HKFRSs or HK(IFRIC) interpretations that are not yet effective that would be expected to have a material impact on the Bureau. (iii) New Hong Kong Companies Ordinance (Cap. 622) In addition, the requirements of Part 9 Accounts and Audit of the new Hong Kong Companies Ordinance (Cap. 622) come into operation as from the Bureau s first financial year commencing on or after 3 March 2014 in accordance with section 358 of that Ordinance. The Bureau is in the process of making an assessment of expected impact of the changes in the Companies Ordinance on the financial statements in the period of initial application of Part 9 of the new Hong Kong Companies Ordinance (Cap. 622). So far it has concluded that the impact is unlikely to be significant and only the presentation and disclosure of information in the financial statements will be affected. (b) Revenue recognition (i) Members and non-members contributions Members contributions received and receivable are recognised based on gross motor insurance premiums received and receivable by members from their policyholders. (ii) Other investment income and interest income on deposits Other investment income is recognised when the right to receive rebate of investment management expense from the investment manager. Interest income from bank deposits and debt securities is accrued on a time-apportioned basis on the principal outstanding and at the rates applicable. (iii) Rental income Operating lease rental income is recognised on a straight-line basis. (iv) Realised and unrealised gains/ (losses) on financial assets at fair value through profit or loss and financial liabilities Gains or losses arising from disposals and changes in the fair values of financial assets at fair value through profit or loss and financial liabilities are recognized in the period in which they arise. - 12 -
2 Principal accounting policies (continued) (c) Property, plant and equipment Leasehold property classified as finance lease and all other property, plant and equipment are stated in the statement of financial position at cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bureau and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the statement of comprehensive income during the financial period in which they are incurred. Amortisation on leasehold property classified as finance lease and depreciation on other fixed assets is calculated using the straight-line method to allocate costs to their residual values over their estimated useful lives, as follows: Leasehold property Other fixed assets 20 years 6⅔ years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each financial reporting date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income. (d) Insurance contracts Insurance contracts are those contracts that transfer significant insurance risk. As a general guideline, the Bureau defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur. The Bureau believes that the facilities described in note 1 above meet the definition of insurance contracts. Claims are charged to income as incurred based on the estimated liability for compensation owed to policyholders. They include claims settlement costs arising from events that have occurred up to the financial reporting date even if they have not yet been reported to the Bureau. The Bureau does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Bureau. For the claims incurred but not reported, statistical analyses are used, subject to maintaining a minimum provision of HK$10 million. (e) Financial instruments at fair value through profit or loss Financial instruments at fair value through profit or loss comprise financial assets or liabilities designated at fair value through profit or loss upon initial recognition. Investments at fair value through profit or loss are classified in this category if they are acquired principally for trading. Assets or liabilities in this category are classified as current assets or liabilities. - 13 -
2 Principal accounting policies (continued) (e) Financial instruments at fair value through profit or loss (continued) Regular way purchases and sales of investments are recognized on trade-date the date on which the Bureau commits to purchase or sell the asset. Financial instruments carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the statement of comprehensive income. Financial instruments are derecognized when the right to receive cash flows from the investments have expired or have been transferred and the Bureau has transferred substantially all risks and rewards of ownership. Gains and losses arising from changes in the fair value of the financial instruments at fair value through profit or loss category are presented in the statement of comprehensive income in the period in which they arise. Dividend income from financial instruments at fair value through profit or loss is recognised in the statement of comprehensive income when the Bureau s right to receive payments is established. The fair values of quoted investments are based on current bid prices. (f) Employee benefits Employee entitlements to annual leave and long-service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the financial reporting date. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave. Contributions to the defined contribution retirement scheme are expensed as incurred. (g) Operating leases (Bureau as the lessor) Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments received under operating leases (net of any incentives given to the lessee) are recognized in the statement of comprehensive income on a straight line basis over the period of the lease. (h) Translation of foreign currencies The financial statements are presented in Hong Kong dollars, which is the Bureau's functional currency and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. (i) Cash and cash equivalents In the statement of cash flows, cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. - 14 -
3 Management of insurance and financial risk 3.1 Financial risk factors The Bureau is exposed to financial risk through its financial assets. In particular, the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from claims and from unanticipated volatility of return and other financial market driven events that can change the risk profile of the funds. The most important components of this financial risk are interest rate risk, credit risk, currency risk and price risk. (a) Interest rate risk The investment portfolio of the Bureau as at 31 December 2014 comprises bonds of approximately HK$421 million (2013: HK$394 million) for the First Fund Scheme and HK$1,367 million (2013: HK$1,281 million) for the Insolvency Fund Scheme. Interest rate movements can have a material impact on the carrying values of these bond funds. The effective interest rates for the bond funds are approximately 2.66% (2013: 2.37%) for the First Fund Scheme and 2.87% (2013: 2.62%) for the Insolvency Fund Scheme. The Bureau manages its interest rate risk for hedging and non-speculative purposes by entering into certain derivative transactions. (b) Credit risk The Bureau has exposures to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Bureau is exposed to credit risk are: - reinsurers share of insurance liabilities for the First Fund Scheme; and - counterparty risk with respect to investments in bond securities. Reinsurance is used to manage insurance risk. This does not, however, discharge the Bureau s primary liability to settle claims. If a reinsurer fails to pay a claim for any reason, the Bureau remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength prior to finalization of any reinsurance contracts. In relation to the Bureau s investment portfolio, the Bureau manages the level of credit risk it accepts by implementing a set of investment guidelines. No more than 5% of the Fund is to be held in any one security, other than a fund or a security representing a collective investment of other securities, unless the security represents an OECD sovereign borrowers where a limit of 20% shall apply. There shall be no restrictions on the obligations of the United States, the Government of Japan, the Republic of Germany, the United Kingdom, the Government of Canada, the Republic of France, the Republic of Italy, the Kingdom of Spain and the Netherlands. - 15 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (b) Credit risk (continued) Investments in bonds (debt securities) should have a minimum rating of BBB as measured by Standard & Poor s or Baa3 as measured by Moody s (i.e. investment grade). Short term investments should be rated A1 (Standard & Poor s) or P1 (Moody s). The overall credit rating for the bond portfolios must be maintained at AA or above as measured by Standard & Poor s or equivalent at all times. The allocation to BBB rated bonds as measured by Standard & Poor s or equivalent cannot exceed 5% above the weighting in the benchmark. The maximum holding for any single issuer with a credit rating of A+ or below as measured by Standard & Poor s or equivalent is restricted to 2% of the total portfolio. As of 31 December 2014, credit risks of the Bureau s Global Bond portfolio were diversified across various countries and sectors with approximately equal exposure to bot higher graded countries such as the United States and Japan and peripheral European countries such as Italy and Spain. The percentage contributions of duration by issuer to the United States and Japan accounted for 37% and 32% of the First Fund and Insolvency Fund respectively. Similar duration contribution percentages to peripheral European countries that meet the credit rating requirement were observed for both Funds. The Bureau has no significant concentration of credit risk. (c) Currency risk The Bureau s exposures to foreign exchange risk arise primarily from holding financial assets and financial liabilities that are denominated in currencies other than Hong Kong dollars. The above foreign currency exchange rate exposures are hedged through the use of derivatives (note 12). The tables below summarize the Bureau s exposure to foreign currency exchange rate risk at 31 December 2014. - 16 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (c) Currency risk (continued) Financial Assets (i) First Fund Scheme 2014 US$ Other Total Debt securities 86,115,362 29,614,546 144,293,748 29,877,197 289,900,853 Cash at bank 171,224 408,359 1,685,124 826,412 3,091,119 Derivative financial instruments 3,940,670 461,768 1,078,471 1,652,310 7,133,219 Others 1,185,277 323,007 938,315 342,412 2,789,011 91,412,533 30,807,680 147,995,658 32,698,331 302,914,202 2013 US$ Other Total Debt securities 93,436,907 20,525,819 96,954,170 57,623,346 268,540,242 Cash at bank 73,898 443,534 1,818,082 228,234 2,563,748 Derivative financial instruments 616,424 793,824 566,802 792,297 2,769,347 Others 1,196,235 148,576 619,685 513,967 2,478,463 95,323,464 21,911,753 99,958,739 59,157,844 276,351,800 (ii) Insolvency Fund Scheme 2014 US$ Other Total Debt securities 227,000,590 86,036,5375 518,069,340 110,577,145 941,683,612 Cash at bank 184,964 875,7938 3,612,118 2,869,026 7,541,901 Derivative financial instruments 11,342,143 838,0981 3,755,381 5,917,016 21,852,638 Others 2,892,947 1,187,7402 3,095,967 1,149,283 8,325,937 241,420,644 88,938,168 528,532,806 120,512,470 979,404,088 2013 US$ Other Total Debt securities 288,690,854 58,562,4025 304,631,086 211,272,535 863,156,877 Cash at bank 1,030,364 1,234,4168 1,393,283 1,215,663 4,873,726 Derivative financial instruments 1,891,758 1,027,7161 2,219,654 2,890,675 8,029,803 Others 3,805,641 240,2642 1,670,631 2,006,044 7,722,580 295,418,617 61,064,798 309,914,654 217,384,917 883,782,986-17 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (c) Currency risk (continued) Financial Liabilities (i) First Fund Scheme 2014 US$ Other Total Cash collaterals for swaps and foreign exchange trade 19,423 2,563 2,290,834 472,572 2,785,392 Derivative financial instruments 2,536,117 1,563,298 822,975 619,541 5,541,931 Others - - 539,890-539,890 2,555,540 1,565,861 3,653,699 1,092,113 8,867,213 2013 US$ Other Total Cash collaterals for swaps and foreign exchange trade 18,255 5,200 2,287,487-2,310,942 Derivative financial instruments 2,454,425 903,349 1,311,537 607,201 5,276,512 Others 195,943 399,569-121,415 716,927 2,668,623 1,308,118 3,599,024 728,616 8,304,381 (ii) Insolvency Fund Scheme 2014 US$ Other Total Cash collaterals for swaps and foreign exchange trade 40,779 5,127 10,729,477 1,565,471 12,340,854 Derivative financial instruments 6,861,989 4,229,740 9,779,745 2,353,559 23,225,033 Others - - 1,064,838-1,064,838 6,902,768 4,234,867 21,574,060 3,919,030 36,630,725 2013 US$ Other Total Cash collaterals for swaps and foreign exchange trade 35,003 5,445 9,946,157-9,986,605 Derivative financial instruments 7,339,543 916,820 4,209,626 2,185,027 14,651,016 Others 703,544 1,094,363-409,204 2,207,111 8,078,090 2,016,628 14,155,783 2,594,231 26,844,732-18 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (d) Liquidity risk The Bureau s exposures to liquidity risk arise primarily from the timing of cash outflows from the outstanding claims liabilities. Surplus cash held by the Bureau over and above balance required for working capital management are deposited to bank as short term deposit. The financial assets held by the Bureau are assets that are traded in active markets and can be readily disposed of. At the reporting date, the Bureau had a cash balance of HK$11,755,303 (2013: HK$14,477,666) and financial assets of HK$592,142,723 (2013: HK$541,105,814) under First Fund Scheme, and a cash balance of HK$10,822,001 (2013: HK$19,232,542) and financial assets of HK$1,922,139,693 (2013: HK$1,772,168,800) under Insolvency Fund Scheme which in total contributed to a majority part of the total asset. The tables below summarises the timing of cash flows arising from the Bureau s liabilities: (i) First Fund Scheme 2014 Carrying value and cash flows arising from: Carrying Contractual cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ Financial liabilities 8,867,213 2,788,796 3,919,242 647,444 1,511,731 Other payable and accruals 9,524,837-9,524,837 - - - - 18,392,050 2,788,796 13,444,079 647,444 1,511,731 Carrying value and cash flows arising from: Provision for Carrying Expected cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ outstanding claims 326,071,000-326,071,000 - - - 19 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (d) Liquidity risk (continued) (i) First Fund Scheme (continued) 2013 Carrying value and cash flows arising from: Carrying Contractual cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ Financial liabilities 8,304,381 3,009,836 4,304,938 815,310 174,297 Other payable and accruals 32,740,797-32,740,797 - - - 41,045,178 3,009,836 37,045,735 815,310 174,297 Carrying value and cash flows arising from: Provision for Expected cash flows (undiscounted) HK$ HK$ HK$ HK$ HK$ outstanding claims 345,270,000-345,270,000 - - (ii) Insolvency Fund Scheme 2014 Carrying value and cash flows arising from: Carrying Contractual cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ Financial liabilities 36,630,726 4,788,631 8,020,040 9,336,852 14,485,203 Other payable and accruals 2,829,863 2,829,863 - - - 39,460,589 7,618,494 8,020,040 9,336,852 14,485,203 Carrying value and cash flows arising from: Provision for outstanding Carrying Expected cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ claims 87,651,000-87,651,000 - - - 20 -
3 Management of insurance and financial risk (continued) 3.1 Financial risk factors (continued) (d) Liquidity risk (continued) (ii) Insolvency Fund Scheme (continued) 2013 Carrying value and cash flows arising from: Carrying Amount Contractual cash flows (undiscounted) On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ Financial liabilities 26,844,732 11,316,429 2,338,871 2,687,331 10,502,101 Other payables and accruals 70,397,185-70,397,185 - - 97,241,917 11,316,429 72,736,056 2,687,331 10,502,101 Carrying value and cash flows arising from: Provision for Carrying Expected cash flows (undiscounted) Amount On demand 0-5 yrs 5-10 yrs Over 10 yrs HK$ HK$ HK$ HK$ HK$ outstanding claims 413,779,000-413,779,000 - - (e) Price risk The Bureau is exposed to equity securities price risk. The Bureau manages its price risk by monitoring the percentage of allocation to equity securities in the investment portfolio. A 10% increase in the market values of the equity securities would result in a gain of HK$13 million (2013: HK$11 million) for First Fund Scheme and HK$42 million (2013: HK$37 million) for Insolvency Fund Scheme in 2014. 3.2 Fair value estimation HKFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the market assumptions. These two types of inputs have created the following fair value hierarchy: - Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and unit trusts. - Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). This level includes the majority of the debt instruments and structured debt. - Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes debt instruments with significant unobservable components. - 21 -
3 Management of insurance and financial risk (continued) 3.2 Fair value estimation (continued) The following table presents the Bureau s financial assets and liabilities that are measured at fair value at 31 December 2014. (i) First Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial assets (note 10) - Bond funds and accrued interest 236,361,239 55,715,838-292,077,077 - Cash 3,091,136 - - 3,091,136 - Derivatives - 8,464,726-8,464,726 - Unit trusts 288,509,784 - - 288,509,784 Total financial assets 527,962,159 64,180,564-592,142,723 (ii) Insolvency Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial assets (note 10) - Bond funds and accrued interest 694,965,084 253,613,867-948,578,951 - Cash 7,542,576 - - 7,542,576 - Derivatives - 28,812,395-28,812,395 - Unit trusts 937,205,771 - - 937,205,771 Total financial assets 1,639,713,431 282,426,262-1,922,139,693 (i) First Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial liabilities (note 11) - Cash collaterals for swaps and foreign exchange trades 2,785,392 - - 2,785,392 - Derivatives - 6,081,821-6,081,821 Total financial liabilities 2,785,392 6,081,821-8,867,213 (ii) Insolvency Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial liabilities (note 11) - Cash collaterals for swaps and foreign exchange trades 12,340,854 - - 12,340,854 - Derivatives - 24,289,872-24,289,872 Total financial liabilities 12,340,854 24,289,872-36,630,726-22 -
3 Management of insurance and financial risk (continued) 3.2 Fair value estimation (continued) The following table presents the Bureau s financial assets and liabilities that are measured at fair value at 31 December 2013. (i) First Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial assets (note 10) - Bond funds and accrued interest 200,414,846 70,510,096-270,924,942 - Cash 2,582,179 - - 2,582,179 - Derivatives - 3,801,337-3,801,337 - Unit trusts 263,797,356 - - 263,797,356 Total financial assets 466,794,381 74,311,433-541,105,814 (ii) Insolvency Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial assets (note 10) - Bond funds and accrued interest 613,756,084 256,743,828-870,499,912 - Cash 5,542,484 - - 5,542,484 - Derivatives - 15,536,399-15,536,399 - Unit trusts 880,590,005 - - 880,590,005 Total financial assets 1,499,888,573 272,280,227-1,772,168,800 (i) First Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial liabilities (note 11) - Cash collaterals for swaps and foreign exchange trades 2,310,942 - - 2,310,942 - Derivatives - 5,993,439-5,993,439 Total financial liabilities 2,310,942 5,993,439-8,304,381 (ii) Insolvency Fund Scheme Level 1 Level 2 Level 3 Total balance HK$ HK$ HK$ HK$ Financial liabilities (note 11) - Cash collaterals for swaps and foreign exchange trades 9,986,605 - - 9,986,605 - Derivatives - 16,858,127-16,858,127 Total financial liabilities 9,986,605 16,858,127-26,844,732-23 -
3 Management of insurance and financial risk (continued) 3.3 Insurance risk The principal insurance risk that the Bureau faces is that the assets of the Funds are not adequate to discharge its obligations under the terms of the fund agreements. This may arise if the actual claims exceed the carrying amount of the insurance liabilities. For the First Fund Scheme, the Bureau regularly engages qualified actuaries to review the solvency position of the Fund to make sure that the assets of the Fund are adequate to discharge its obligations under the terms of the First Fund Agreement (note 14). The Bureau also purchases excess-of-loss insurance to cover motor third party bodily injury losses originating from uninsured vehicle accidents, hit and run cases, any awards exceeding the original policy limit of HK$100 million and terrorism coverage. The effect of such reinsurance arrangements is that the Bureau should not suffer an ultimate net loss of HK$10 million for each and every loss and/or series of losses arising out of one event subject to the reinsurers stipulated annual aggregate limit and index clause. If the event losses were to exceed HK$350 million, the excess (not reinsured) would fall back on the Bureau. The loss for the Bureau for terrorist acts is HK$100 million ultimate net loss each and every loss occurrence against the Bureau s maximum aggregate limit of HK$200 million as agreed with the Government. For the Insolvency Fund scheme, the Bureau manages the above insurance risk by reviewing the percentage rate of the contributions not less than annually, as assisted by independent actuaries as needed. 4 Critical accounting estimates and judgements The Bureau makes estimates and assumptions that affect the reported amounts of its claims liabilities. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. For the First Fund Scheme, independent actuarial investigations were carried out periodically and this forms the basis of the estimate, and included stress testing of assumptions. For the Insolvency Fund Scheme, the claims liabilities is estimated by reference to (i) the estimate of reported claims liabilities based on claims information submitted to the Bureau, (ii) the estimate of incurred-but-not-reported liabilities and (iii) future indirect claims handling expenses. This estimate of claims liability is subject to significant judgement made by the Bureau. 5 Remuneration of Council Members of the Bureau In accordance with the Bureau s Memorandum and Articles of Association, the Council Members of the Bureau are not entitled to any remuneration or compensation for services rendered to the Bureau. Accordingly, none of the Council Members of the Bureau received or was due any remuneration during the year. 6 Taxation The Bureau is exempt under Section 87 of the Hong Kong Inland Revenue Ordinance from payment of any tax chargeable under the Ordinance. - 24 -
7 Staff cost First Fund Scheme Insolvency Fund Scheme 2014 2013 2014 2013 HK$ HK$ HK$ HK$ Salaries and wages 2,382,204 1,965,021 4,177,710 4,359,712 Contributions to defined contribution plan 45,090 33,273 102,996 111,900 Other staff benefits 26,425 20,006 39,638 46,680 2,453,719 2,018,300 4,320,344 4,518,292 8 Property, plant and equipment (a) First Fund Scheme Cost: Leasehold improvements Furniture and fixtures Office equipment Computer equipment and software Total HK$ HK$ HK$ HK$ HK$ At 1 January 2014 832,499 256,939 75,491 496,983 1,661,912 Additions - - - 2,220 2,220 Write offs / Trade in - - - (4,035) (4,035) At 31 December 2014 832,499 256,939 75,491 495,168 1,660,097 ------------- ------------ ------------ ------------ ------------ Accumulated depreciation and impairment: At 1 January 2014 514,303 172,914 49,225 181,963 918,405 Charge for the year 108,500 31,386 7,390 71,704 218,980 Write offs - - - (3,630) (3,630) At 31 December 2014 622,803 204,300 56,615 250,037 1,133,755 ------------- ------------ ------------- ------------- ------------- Net book value: At 31 December 2014 209,696 52,639 18,876 245,131 526,342 At 31 December 2013 318,196 84,025 26,266 315,020 743,507-25 -
8 Property, plant and equipment (continued) (b) Insolvency Fund Scheme Leasehold land and Leasehold Furniture and Office Computer equipment property improvements fixtures equipment and software Total HK$ HK$ HK$ HK$ HK$ HK$ Cost: At 1 January 2014 99,982,750 1,391,802 279,355 75,491 581,481 102,310,879 Additions - - - - 2,220 2,220 Write offs/trade in - - - - (13,203) (13,203) At 31 December 2014 99,982,750 1,391,802 279,355 75,491 570,498 102,299,896 --------------- ------------- ------------ ------------ ------------ ----------------- Accumulated depreciation and impairment: At 1 January 2014 94,516,084 1,073,605 195,331 49,224 245,337 96,079,581 Charge for the year 1,366,667 108,500 31,386 7,390 84,378 1,598,321 Write offs - - - - (11,881) (11,881) At 31 December 2014 95,882,751 1,182,105 226,717 56,614 317,834 97,666,021 --------------- ------------- ------------ ------------ ------------ ----------------- Net book value: At 31 December 2014 4,099,999 209,697 52,638 18,877 252,664 4,633,875 At 31 December 2013 5,466,666 318,197 84,024 26,267 336,144 6,231,298 The leasehold property is situated in Hong Kong and is held on a long lease of more than 50 years. The Bureau believes that the lease payments for the leasehold land and leasehold property cannot be separated reliably. Accordingly, the carrying values of both the land element and property element are reported as property, plant and equipment. Operating leases The Bureau leased out leasehold properties under operating lease. The lease runs for a period of one year and three years for Room 901 and 903 respectively. The lease does not include contingent rentals. As at 31 December 2014, the Bureau had future aggregate minimum lease receipts under non-cancellable operating leases as follows: 2014 2013 HK$ HK$ Within one year 1,001,088 1,001,088 Later than one year and not later than five years 102,000 714,000 1,103,088 1,715,088-26 -
9 Cash and cash equivalents First Fund Scheme Insolvency Fund Scheme 2014 2013 2014 2013 HK$ HK$ HK$ HK$ Bank balances and cash - bank balances 11,753,789 14,474,666 10,822,001 19,232,542 - petty cash 1,514 3,000 - - Financial assets - cash deposits (note 10) 3,091,136 2,582,179 7,542,576 5,542,484 Cash and cash equivalents 14,846,439 17,059,845 18,364,577 24,775,026 10 Financial assets at fair value through profit or loss (a) First Fund Scheme 2014 2013 HK$ HK$ Mutual funds registered in Hong Kong - Listed bonds 130,983,442 125,575,874 - Listed equities 128,098,344 110,010,797 - Cash deposits 29,427,998 28,210,685 Listed bond outside Hong Kong 289,900,853 268,540,242 Cash deposits with custodian (note 9) 3,091,136 2,582,179 Accrued interest on bond funds 2,176,224 2,384,700 Forward foreign exchange contracts 4,648,130 1,425,773 Swaps 1,681,427 985,250 Future contracts 1,532,585 774,066 Margin variation receivable 571,946 52,921 Swaptions 30,638 514,313 Options - 49,014 592,142,723 541,105,814 The Bureau had investments in the following investment funds. These investment funds manage assets on behalf of third party investors. These funds are financed through the issue of units/shares to investors. Fair value 2014 2013 HK$ HK$ Investment Funds, at market value: Schroder Stable Growth Fund 144,946,720 133,178,133 Schroder Capital Stable Fund 143,563,064 130,619,223 288,509,784 263,797,356 The above investments at 31 December 2014 were classified as financial assets at fair value through profit and loss. - 27 -