10th Mar 2006 07:01
Amlin PLC10 March 2006 AMLIN PLC PRESS RELEASEFor immediate release10 March 2006 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 (UNAUDITED) RECORD PROFITS DESPITE WORST NATURAL CATASTROPHES IN HISTORY Financial highlights •Record profit before tax of £182.7 million (2004: £128.9 million), after absorbing 2005 hurricane losses of £130.1 million (2004: £74.0 million) •Combined ratio stable at a healthy 82% •Record return on equity of 28.4% •Dividends (interim and proposed final) increased 27.5% to 10.2p per share •Rights issue successfully raised £215 million •$175 million of longer term debt raised •Net assets of the Group increased 72% to £792.6 million Operational highlights • Amlin Bermuda launched with US$1 billion of capital • Strong insurance financial strength ratings assigned to Syndicate 2001 and Amlin Bermuda • London market brokers rank Amlin as leading business for claims service • Continued leadership of process improvements for London market underwriting and claims • Turnover among senior underwriters was below 5% for fifth year in succession Outlook for 2006 • Strong opening position with unearned premium reserve of £523.8 million carried forward to 2006 • Stronger pricing in key classes, including reinsurance, property and energy • Good start to year with gross premiums up 26% in first two months • Higher cash and investments, totalling £2.1 billion, increases potential return from investments Enquiries:Charles Philipps, Amlin plc 0207 746 1000Richard Hextall, Amlin plc 0207 746 1000Hannah Bale, Head of Communication, Amlin plc 0207 746 1118David Haggie, Haggie Financial 0207 417 8989/07768 332486Peter Rigby, Haggie Financial 0207 417 8989/07803 851426 FINANCIALHIGHLIGHTS *2005 *2004 **2003 **2002 **2001 £m £m £m £m £m-------------- --------- --------- -------- -------- ---------Gross premiums written 993.5 945.6 937.4 717.1 587.4Net premiums written (1) 829.3 790.2 787.6 573.0 486.5Net earned premiums (1) 822.1 722.4 701.1 493.3 339.1-------------- --------- --------- -------- -------- ---------Profit (loss) before tax 182.7 128.9 117.8 44.8 (83.4)Return on equity 28.4% 24.1% 26.6% 16.7% (33.7)%-------------- --------- --------- -------- -------- ---------Per share amounts(in pence)Earnings 33.6 23.4 21.0 11.8 (34.2)Net assets 150.2 117.6 98.7 80.3 68.0Net tangible assets 137.7 100.8 82.3 63.7 59.5Dividends under IFRS 9.0 4.7 2.1 0.8 -Dividends (paid andproposed final) inrespect of the calendar year 10.2 8.0 2.5 2.0 --------------- --------- --------- -------- -------- ---------Syndicate 2001operating ratiosClaims ratio 57% 50% 50% 63% 89%Expense ratio 25% 32% 36% 33% 33%Combined ratio 82% 82% 86% 96% 122%-------------- --------- --------- -------- -------- --------- * The indicated column above are restated under International AccountingStandards. ** The indicated columns above have been restated for the following materialchanges under International Accounting Standards: • Write back of amortisation on syndicate capacity • Non-monetary assets foreign exchange adjustment • Retirement benefit obligation recognition • Mid to bid market valuation of financial assets • Accounting for dividends (1) Net premiums written and net earned premiums exclude premiums received byAmlin for reinsurance to close of non-aligned members of 2001. CHAIRMAN'S STATEMENT Hurricane losses reached an unprecedented level in 2005 and challenged theinsurance industry. Amlin absorbed some large losses but, due to its approach torisk management and diverse portfolio, still produced excellent results. Ourreturn on equity of 28.4% in 2005 brings our weighted average five year returnto 17.4%. Our 2005 profit before tax, of £182.7 million, was up 42% on 2004 (£128.9million) which, after losses of £130.1 million (2004: £74 million) from majorcatastrophes, highlights the strength of the underlying performance across theGroup. The underwriting contribution increased by 29% to £137.1 million (2004:£106.6 million), with a combined ratio of 82% (2004: 82%), and investmentscontributed £90.9 million, up 74% (2004: £52.1 million). £16 million of theprofit earned in 2005 was one off in nature, largely consisting of foreignexchange gains. Compared to our previous accounting treatment, a further £26million has been recognised on foreign exchange translation of premium. Dividend The Board proposes a final dividend of 6.2p per share, making total dividendsfor 2005 of 10.2p per share (2004: 8p). This equates to 30% of earnings and isconsistent with our commitment made two years ago to distribute at least thehigher of 8p per share, adjusted for inflation, or 30% of earnings for each of2005 and 2006. The 2005 final dividend is to be paid on 31 May 2006, subject to shareholderapproval at the Annual General Meeting to be held on 25 May 2006, in respect ofshares on the register on 31 March 2006 (other than shares issued in the rightsissue in November 2005, which were issued on the basis that they do not rank forthe 2005 final dividend). There will be no scrip dividend alternative but adividend reinvestment plan is to be offered to shareholders for the first time. Strategy Having taken stock of the likely effect of the 2005 hurricane activity on theshape of the insurance cycle for many of our business areas, we accelerated ourlong term strategic plan to diversify beyond the Lloyd's market and set up AmlinBermuda which opened for business on 1 December 2005. Our ability to react soquickly and to be up and running with a high quality team supported by propersystems is a testimony to both the depth of our underwriting skill base, as wetransferred existing employees from London to Bermuda, the quality ofoperational management, and the successful development of our administrativeprocesses and systems. Our strategy in Bermuda is to grow the premium in selected classes, with targetnew business to the Group of $350 million and $500 million for 2006 and 2007respectively. We are making good progress in working towards our Vision of becoming the"global reference point for quality" in our markets. The dynamics forcing changein our markets are accelerating and we believe that our focus on qualityreinforces our ability to seize opportunities which will enable us to accelerateour progress towards our overall strategic goals. Outlook Property insurance and reinsurance markets have been badly shaken by the size ofhurricane losses in 2005, particularly from Katrina and Wilma, with manycompanies forced to re-examine their business models and reduce risk exposures,particularly in major catastrophe zones. Consequently, rates today are considerably better in our non-marine and marinebusinesses than we had expected they would be this time last year and for UScatastrophe exposed risk, in particular, we are experiencing significant priceincreases. Retrocessional reinsurance, which is the reinsurance of reinsurance portfoliosand which we have historically purchased to protect against extreme frequencyand severity of loss, has become so expensive that we believe it appropriate torun more catastrophe risk internally whilst reducing our peak exposures. Theadjustment is being managed through this year. An unearned premium reserve has been brought forward into 2006 of £523.8million, broadly equivalent to last year. Substantially all of this will beearned this year and, with stronger overall pricing, 2006 has the potential tobe another very good year for Amlin. We expect conditions for our non-marine and marine businesses to remainfavourable through 2006 which would bode well for 2007. Our airline and UKcommercial classes have continued to come under increasing pressure but weexpect that competitors in these areas will realise the need to positivelyadjust prices before too long. Amlin Bermuda has made a promising start. All inall, we look to the future with confidence. Board Richard Davey joined the Board as a non-executive director in December 2005 andbrings with him a broad City experience. At our AGM in May 2006 my deputy Lord Stewartby will not be standing forre-election. Ian has been involved with the companies that preceded Amlin andhas served as Deputy Chairman since our formation in 1998. The Company has grownand prospered throughout this period and we owe a great deal to him for hisconstant support and valuable contribution. Michael Davies has been Chairman of our principal subsidiary Amlin UnderwritingLimited since 2000. Now that the last year in which Lloyd's Names participatedhas closed, Michael has decided to retire from that Board and I would like toplace on record our warm thanks for his contribution. The Amlin Team 2005 has been a challenging year yet we have produced records results andlaunched an important new company in Bermuda. This is due to the strongleadership of Charles Philipps and his excellent management team who aresupported by all the employees in Amlin. Sustained progress continues to be madeand this is not achieved without a combination of skill and hard work for whichwe owe our thanks. Roger Taylor Chairman FINANCIAL PERFORMANCE Financial performance *2001 *2002 *2003 *2004 *2005 £m £m £m £m £m---------------- --------- --------- -------- -------- --------Gross premium 587.4 717.1 937.4 945.6 993.5Net premium 486.5 573.0 787.6 790.2 829.3Net earned premium 339.1 493.3 701.1 722.4 822.1---------------- --------- --------- -------- -------- --------Underwriting contribution (85.5) 17.1 117.1 106.6 137.1Investment contribution 9.5 43.7 33.5 52.1 90.9Net other costs 7.4 16.0 32.8 29.8 45.3---------------- --------- --------- -------- -------- --------Profit before tax (83.4) 44.8 117.8 128.9 182.7---------------- --------- --------- -------- -------- --------Return on equity (33.7)% 16.7% 26.6% 24.1% 28.4%---------------- --------- --------- -------- -------- -------- * see financial highlights for basis of preparation. The financial performance of the Group has once again been excellent with arecord profit before tax of £182.7 million (2004: £128.9 million) and return onequity of 28.4%. This includes a one-off accounting gain on foreign exchange of£16 million arising out of the initial investment in Amlin Bermuda. This year's performance is particularly notable given the £130.1 million ofhurricane losses incurred for the 2005 storms (2004: £74 million for hurricaneand typhoon losses). Underwriting contributed £137.1 million (2004: £106.6 million) to the pre taxresult. The hurricane losses noted above increased the claims ratio by 15.1% butreleases from prior period reserves amounted to £79.7 million (for Amlin's shareof the syndicate). However, consistent reserving strength has been maintainedfor liabilities assessed at 31 December 2005 when compared to last year. Investments produced a £90.9 million (2004: £52.1 million) return as investmentbalances continued to grow and returns from both bonds and equities were greaterthan for the previous year. Net costs amounted to £45.3 million (2004: £29.8million) after financing costs. Looking to the longer term, our performance has been strong with the weightedaverage return on equity since 2001 of 17.4% against our cross cycle returntarget of 15% and our estimated cost of equity of 8.5%. To put this intocontext, this period includes three years with the worst cumulative catastropheinsured losses on record, namely 2001, 2004 and 2005. The weighted averagecombined ratio since 2001 for Syndicate 2001 is 91%. At a time when grosspremium income has grown by 69% to £993.5 million. Underwriting performance Underwriting performance - 100% Syndicate *2001 *2002 *2003 *2004 *2005 £m £m £m £m £m---------------- --- --------- -------- -------- -------- ------Gross premium 874.1 988.3 1,097.50 942.2 990.0Net earned premium 547.8 699.4 890.6 782.0 827.5Claims ratio % 89 63 50 50 57Expense ratio % 33 33 36 32 25Combined ratio % 122 96 86 82 82Underwriting contribution (118.8) 21.7 134.2 139.3 152.0---------------- --- --------- -------- -------- -------- ------* see financial highlights for basis of preparation. Note: This table includes 100% of Syndicate 2001. The commentary until divisional performance is for Amlin's share. Underwriting made a strong contribution to profit despite an extraordinary yearof catastrophe losses. 2005 is estimated to be the costliest on record forhurricane losses with estimates of the insurance cost ranging from US$60 billionto $80 billion. For Amlin, the 2005 storms cost US$ 236.7 million, net ofreinsurance. Reserve releases were again material contributing £79.7 million (2004: £49.7million) to profit. This is a welcome contribution in a difficult trading year.Development of prior underwriting years has been considerably better thanexpected. The estimation of outstanding claims that the Group has to settle is a vitalelement of overall management of the balance sheet. It is a major factor indetermining profitability and also knocks on to investment management, as verydifferent approaches are adopted for capital assets and policyholders' funds. By its nature insurance is an uncertain business and much of Amlin's business islarge commercial insurance which can be volatile. The subjectivities that wehave to deal with when considering the level of outstanding liabilities includethe risk profile of an insurance policy, class of business, timeliness ofnotification of claims, validity of the claims made against the policy andvalidity of the quantum of the claim. At any time, there are a range of possibleoutcomes that the Group faces when considering the population of claims thatremain to be settled. Therefore we believe that it is appropriate to adopt a cautious stance to theassessment of liabilities. Consequently reserves carried are in excess of a bestestimate of the likely outcome. As time passes the level of caution in respectof an underwriting year is reduced to reflect the greater certainty that isreached. However it should be noted that individual claim estimates may remainhighly subjective until a final settlement is made. Importantly a consistent reserving strength has been adopted at the end of 2005compared with the previous year. That said, there are a number of classes, mostnotably our UK commercial liability classes, where our actual claims experiencehas now provided a better guide to future development than we have had hitherto.For such classes, we have improved our view of expected performance which doesgenerate a single year gain. Gross premiums were up 4.6% despite a fall in renewal rates of 4% during 2005.Net premiums written increased by 5.5%. The reinsurance premium ceded toreinsurers was 17%, consistent with 2004. Net earned premium was up 6% at £827.5million (excluding premiums associated with the reinsurance to close). Hurricanes Total Cost Property Property Energy Other insurance reinsurance $m $m $m $m $m ----------- ----------- -------- --------- ------- -------Katrina 527.4 218.2 267.4 32.0 9.8Rita 160.7 17.8 89.0 51.0 2.9Wilma 172.8 16.5 155.9 - 0.4----------- ----------- -------- --------- ------- -------Gross loss 860.9 252.5 512.3 83.0 13.1Reinsurancerecovery (619.5) (214.2) (319.6) (73.2) (12.5)----------- ----------- -------- --------- ------- -------Sub-total 241.4 38.3 192.7 9.8 0.6Reinstatementpremiums (4.7) 11.9 (28.8) 10.1 2.1----------- ----------- -------- --------- ------- -------Net loss 236.7 50.2 163.9 19.9 2.7----------- ----------- -------- --------- ------- ------- The cost of the storm losses is greater than those experienced in 2004. Grossestimated ultimate claims were significantly larger at US$860.9 million (2004storms: US$ 265.0 million) which reflects the severity of the 2005 hurricanes.This is true of not only Katrina, which is estimated to be the costliest naturaldisaster on record, but also Wilma, which is estimated to be the seventhcostliest natural disaster on record since 1970. The resultant claims werebetter absorbed by the reinsurance programme purchased by the Group which isdesigned to deal with severity of losses. This is illustrated by the retentionrate (ie the net loss to gross loss ratio) which stands at an estimated 27% for2005 and 53% for 2004. We estimate the potential losses from large events on a contract by contractbasis rather than relying entirely on computer modelled output. At an earlystage our estimates are subject to material uncertainty as it takes severalmonths before loss adjusters and assessors can visit every damaged property.However, by the year end they reflect formally advised claims or goodindications of likely loss received from intermediaries or clients. Theprincipal uncertainties that remain relate to final determination of the valueof claims, particularly for business interruption on property and energy claims,and in a few cases, possible disputes. The reinsurance recoverable from these events is significant. However ourreinsurance credit quality is generally good and our collections to date havebeen made quickly. For the 2004 hurricanes we have collected recoveries ofUS$171 million, almost 100% of total reinsurance recoveries requested. For 2005we have already made reinsurance collections of US$148 million, 87% of totalcollections requested. Divisional performance The following commentary is provided for the Syndicate business across all yearsof account irrespective of the identity of the underlying capital support. Thisremoves any distortion in performance which is attributable to changing levelsof ownership of Syndicate 2001. Non-marine The non-marine division is the Group's largest business segment, accounting in2005 for 56% (2004: 55%) of gross premiums written. The business is a blend ofclasses which are exposed to catastrophic loss (eg catastrophe reinsurance),large claim events (eg aviation reinsurance) and attritional claims (auto orcasualty). Geographically the division's largest market is the United States with 55% ofbusiness written there for 2005. However, diversity is important. For example,in the United States our property catastrophe underwriting is focused onregional insurance companies and regional exposures are closely monitored.Internationally, our insurance and reinsurance include the provision of coverfor earthquake and wind storm in Japan, windstorm exposure in Europe andearthquake in New Zealand. Premiums written increased by £35 million or 6.7%, to £557 million. Overall,rates fell during 2005 by 5% but renewal retention remained high at 83% (2004:81%). Experience by class was varied. For example US catastrophe reinsurancerates remained stable following the hurricane losses of 2004 but internationalcatastrophe reinsurance rates fell by 10%. However, following the active UShurricane season rates began to rise again in the final quarter of the year. The division's combined ratio was 93% (2004: 80%). The division again bore thebrunt of the windstorm losses which increased the combined ratio by 22.7% (2004:16.7%). This was partially offset by reserve releases of £23.7 million.Underlying performance remained strong with the limited impact from othercatastrophes in the year and no other major loss events. Marine The marine division accounted for 18% of gross premiums written in 2005 (2004:17%). Business written includes volatile classes, such as energy, specie andwar, and attritional classes such as hull, cargo and yacht. The business is written worldwide reflecting the nature of much of the marinebusiness underwritten. However the yacht and bloodstock accounts have a UK bias. During 2005 renewal rates across the division were stable (2004: stable). Aswith the previous year this masked a shifting rating environment betweenclasses. Encouragingly attritional classes such as hull, bloodstock and yachtexperienced modest improvements to overall rates. The energy account experiencedmodest increases and strengthened further in the fourth quarter as the impact ofthe 2005 windstorms on the energy market was rapidly felt. However the waraccount, which has experienced low loss incidence in recent years, becameincreasingly competitive with rates falling by 8% for the year. In this environment the gross premium written increased by 9% to £172.7 million.The combined ratio was an excellent 63% (2004: 87%). The only significantcatastrophe losses incurred in 2005 were hurricane related. The division's 2005gross windstorm losses were US$96 million, (2004: US$ 9 million). This is areflection of two severe storms, Katrina and Rita, hitting concentrations ofrigs in the Gulf of Mexico, compared to just Hurricane Ivan in 2004. Offsettingthis were reserve releases of £29.5 million (2004: £9.4 million). Aviation The aviation division accounted for 8% of gross premium written in 2005 (2004:10%). The division writes a mix of aviation related classes including airline,general aviation, airport and product liabilities and satellite risks. Allclasses are exposed to large event losses and the purchase of a comprehensivereinsurance programme is fundamental to our ability to underwrite this class. In2005, 42% of business written was ceded to reinsurers. The airline portfolio, which renews in the final quarter of the year, hasreduced again as rates have continued to decline from their peak in 2002.Average airline renewal rates in 2005 were 11% below those in 2004. The lack ofmajor airline losses has caused this decline but we believe that the riskexposure has risen as air traffic continues to increase. During the 2005 renewalseason we declined to renew 15% of our airline accounts. We achieved stable or positive renewal rate movements on other aviation classes,and overall, the divisional renewal rate reduction was 2%. However the renewalretention rate has fallen to 69% (2004: 73%) reflecting the changes to thecomposition of the airline account. There were a number of airline losses during 2005, but the aggregate expectedloss cost was a modest US$1.2 billion and Amlin had little exposure to them. Thecombined ratio was a very respectable 70% (2004: 84%). UK Commercial Gross premium written by our UK commercial divisions represented 18% of 2005income (2004: 18%). Business written in this area is largely for UK basedclients, with incidental overseas exposures, and unlike in Amlin's otherdivisions which operate in the London subscription market, each risk is writtenentirely by the division. Whilst the business written is exposed to catastrophe risk, particularly the UKmotor and property accounts, this element is reinsured. Inherently this divisionis attritional in nature. Over recent years the level of liability business written has increased. Thisprovides balance to the UK commercial motor account which has been thelongstanding core of the division's business. Importantly it allows costs,particularly claims handling costs, to be spread over a broader income base withclasses that have different rating cycles. The UK commercial motor account continued to experience strong competition withrates reducing by 5%. The liability business began to witness greatercompetition in 2005, particularly for professional indemnity risks as newentrants increased competition. However, overall liability rates reduced by6.5%. Consequently gross premium written, net of brokerage, reduced by around £9million to £63 million. Overall the retention rates were 78% (2004: 82%). The combined ratio was strong at 72%. Reserve releases of £27.8 million (2004:£13.1 million) again bolstered the result. This reflects strong reserving on aclaim by claim basis as well as a reduction in caution applied to the liabilityaccount as the claims development continued to be good and claims patternsbecame more mature. Amlin Bermuda Amlin Bermuda, which commenced trading on 1 December 2005, underwrote US$5.5million of income on risks which incepted in 2005. This premium will largely beearned in 2006. Amlin's Katrina experience Hurricane Katrina was a major test of our catastrophe management capabilities.The hurricane was extraordinary due to its size and severity as well as itstrack over New Orleans that eventually led to the breach of levees andcatastrophic flooding of the city. It affected a number of classes of Amlin's business with claims arising fromdamage to energy installations in the Gulf of Mexico, damage from wind and floodto large commercial property in New Orleans and Mississippi, and claims onproperty reinsurance and catastrophe reinsurance programmes for clients withtheir own exposures in the area. The table below illustrates the sources of the loss and compares it to ourmodelled US$60 billion Gulf of Mexico hurricane realistic disaster scenario("RDS"). Class Katrina claim RDS claim Difference $m $m $mCatastrophe reinsurance 175 281 (106)Property reinsurance 85 38 47Property insurance 217 65 152Energy 32 92 (60)Marine reinsurance 7 13 (6)Other 11 16 (5)-------------------- ------------- ---------- ----------Gross claims 527 505 22Reinsurance recoveries (429) (392) (37)Net reinstatement premiums 6 (9) 15-------------------- ------------- ---------- ----------Total 104 104 0-------------------- ------------- ---------- ---------- Overall, the estimated gross loss was remarkably close to our modelled eventloss, although as can be seen above, the property insurance and reinsurancelosses were higher than modelled and other classes were less than modelled. The loss emanating from the property insurance portfolio was greater thanenvisaged due to the severe surge and flood losses to commercial property. Themodels employed did not cater well for these eventualities. Conversely ourmodelled event had a more severe impact upon the gulf energy installations thanthe actual Katrina event because the wind path of the storm passed over a lowerconcentration of values. What is also clear from the loss numbers is the extent of reinsurance protectionthat we had last year to reduce the volatility from such extreme events. Investment performance The investment contribution of £90.9 million, up 76% on the previous year, was astrong performance. This reflected improved returns across most asset classesand increased assets available for investment. Our investment management approach is consistent with our underwriting based onexperience, diversity, risk management and management of market cycles. We havein recent years invested in our investment management competencies recruiting aChief Investment Officer in 2003 and building a new investment framework whichincludes market experts as a sounding board for investment management decisions. For the purposes of deciding investment strategy we divide the Group'sinvestments into two distinct parts: first Group capital which supports theunderwriting business and second, policyholders funds where premiums arereceived in advance of claim settlement. The investment strategy of each part is then driven by the returns available onparticular asset classes for a given level of modelled investment risk. Thestrategies determined are distinct because the level of risk that we areprepared to accept for each part is different. For policyholders' funds we have a relatively low risk appetite. The aim is tomatch liability currency and duration with assets. This leads us to invest inhighly liquid short term bonds and cash. Return on short dated sterling bondswas 5.3% (2004: 5.0%) compared to a total return on dollar assets of 1.6% (2004:2.1%). This reflects the trend of the interest rate cycles in the UK compared tothe US. UK interest rates peaked at 4.75% followed by a first rate cut of 0.25%in August as the UK economy slowed. In comparison, US interest rates were raisedby 0.25% eight times in 2005 as the US economy performed strongly and interestrates were moved back to a more neutral position. For the Group's capital the investment horizon is longer term and this allowsinvestment in more volatile asset classes, such as longer duration bonds andequities. A value at risk ("VaR") asset model is used to determine the mostefficient benchmark for our solvency capital. In September 2004 a strategic decision was taken to increase our investmentrisk. At this point, with underwriting markets becoming more competitive, thebalance sheet growing and debt leverage reducing, we wanted to increase ourexposure to equities, and stock market conditions appeared supportive. During2005 our average equity to bond/cash ratio was 41% compared to 26% in 2004. The equity return for 2005 was an excellent return of 26.6% (2004: 14.4%). Cashremained the asset of choice to balance the volatility of the equity portfoliofor the Group's capital and this generated a return of 4.8% (2004: 4.7%). Amlin Bermuda holds its assets in US$ and trades predominantly in that currency.As the Group's Bermuda operations grow and become a more material part oftrading activities, it will be necessary to reconsider the Group'spresentational currency. Expenses The expense ratio has decreased by 7%. Of the reduction, 4.9% results from anexchange gain on the conversion of assets at the balance sheet date compared toa loss in the comparative period. A further 2% is attributable to increasedpremium written on a relatively stable cost base. After exchange gains have been removed, operating expense increased by £15.7million, or 17%, in the year. This includes an increase in performance based employee incentives, to £24.2million, from £17.2 million. We have accrued a further £8.8 million under thecapital builder plan, with the total accrued now amounting to £18.8 million. Taxes The Group tax charge for 2005 is £45.3 million (2004: £37.9 million), whichgives an effective tax rate of 24.8% (2004: 29.4%). This compares to a standardcorporation tax rate of 30%. The lower 2005 tax charge is partly due to theutilisation of capital gains tax losses incurred in previous years againstinvestment capital gains, realised and unrealised on the equities held by theGroup. The potential deferred tax asset from these previous capital losses was notrecognised until it was utilised. During the year, £11 million of the losseswere used with £12.7 million remaining unprovided at 31 December 2005. In addition, the effective rate was lowered by offsetting US dollar tradinglosses against previous US tax provisions. Balance sheet Cash and investments increased in the year by £794 million reflecting: • Further increase in Amlin's share of Syndicate 2001. From 1 January 2006 Amlinowns 100% of Syndicate assets having closed the 2003 underwriting year as at 31December 2005; • Strong organic cash flow as the Syndicate continued to trade profitably; and • Debt and equity capital raised of £458 million to support the investment of $1billion in Amlin Bermuda and the expansion of Syndicate 2001. Cash and investments now represents a multiple of 2.7 times (2004:3 times)shareholders' equity. International Financial Reporting Standards (IFRS) This is the first year that the Group has reported its financial statementsunder IFRS. The impact of the changes on opening net assets at 1 January 2004was a modest reduction of £2.8 million. The changes introduced under IFRS are set our in note 25 to the accounts. Mostof the changes are relatively immaterial. The more notable items includetranslation of earned premium at historic rates when the transactions aroserather than the average rate for the period that it is recognised in the incomestatement. Compared to the previous accounting treatment, this change increasedprofit by £26 million. Dividends are only recognised when declared or paid. This means that theproposed final dividend for the year is not recognised in the income statementor balance sheet until it is approved at the Annual General Meeting. OUTLOOK FOR 2006 The outlook for 2006 is again strong, although the final out turn will beinfluenced by the extent of major catastrophe events. Strong opening position Like 2005, 2006 will benefit from a strong opening position with an unearnedpremium reserve of £523.8 million, broadly at the same level as last year. Withrenewal rates having held up well during 2005, recording an average decline ofonly 4%, this unearned reserve is expected to yield a healthy margin in 2006. Additionally, unless we experience abnormally adverse claims development onprior year underwriting risks, we would expect further reserve releases in 2006.2005 experienced exceptionally good claims development on prior year reservingand the Syndicate result benefited from a release of £90.3 million (2004: £62.7million), after the consistent application of our reserving policy. Stronger pricing environment The US hurricane losses of 2004 and 2005 have led to a reappraisal of risk andclaims costs for affected portfolios. This is having a marked effect on pricingof catastrophe exposed risks, particularly in the United States. Further, it isleading to greater stability than we would have otherwise expected in certainother classes. Margins across the business remain strong in most classes withmuch of the business priced at 2001/2 levels and above. Rating indicesClass 2000 2001 2002 2003 2004 2005Airline hull and liabilities 100 296 278 234 215 191Marine hull 100 115 148 171 183 188Employers' liability 100 115 144 158 160 145Energy 100 140 172 189 165 171Professional indemnity 100 110 149 178 180 164US large property insurance 100 125 180 166 143 139Non US catastrophe reinsurance 100 120 157 162 146 131US catastrophe reinsurance 100 115 146 150 143 146US casualty 100 125 170 211 230 237War 100 250 288 244 220 206Fleet motor 100 121 136 142 140 136 For our US catastrophe reinsurance renewals we have achieved 15% increases at 1January and we expect a continued strengthening as the year progresses. Gulf ofMexico and Florida risks, which renew in the middle of the year are expected tosee very material increases in price. Competition for international catastrophepremium is greater and whilst we expect that prices will rise, increases areexpected to be more modest. This is partly due to the behaviour of largeEuropean reinsurers who are seeking to aggressively grow market share and partlyas other reinsurers seek greater diversity to balance their portfolios away fromUS catastrophe risk. For our January international catastrophe reinsurancerenewals we achieved average rate rises of 5%. Property insurance rates remain competitive internationally, but are beginningto see greater rate increases in the United States. Offshore energy insurancepricing also continues to be very firm. We also expect that higher marinereinsurance costs should lead to increases in marine pricing beyond off shoreenergy. The two areas which remain subject to downward pricing pressure are airlines andUK commercial business. For the latter we believe that some of our competitors'performance is now poor enough to require a positive pricing response, althoughfor airlines we expect that it may take a major loss to turn the market. If thisis the case we will continue to increase selectivity, declining risks which webelieve are under priced. Growth We have increased the capacity of Syndicate 2001 by 17.6% to £1 billion for 2006and have started Amlin Bermuda which has a 2006 target of new premium income tothe Group of US$350 million, including an estimated US$70 million of newbusiness which is expected to be ceded to it by Syndicate 2001. Growth in premium income is expected to be greatest in those areas where ratingis strongest, so that our exposures increase by less than the growth in income.Indeed, in some areas exposure will be reduced. Reinsurance, US property andenergy insurance are expected to increase proportionately their share of overallincome, whilst the two areas under pressure, airlines and UK commercial, arebudgeted to reduce. We believe that our excellent broker relations, combined with the superiorservice for which we are becoming known, will help us achieve the growth wedesire for 2006. Additionally, the award to Amlin Bermuda of an 'A' rating fromStandard & Poor's differentiates us from the other start ups in 2005 and shouldhelp that business gain access to the international risks which are part of itsplan. Growth in net premiums may be more noticeable than growth in gross premiums if,as we have done to date in 2006, we continue to run the business with lessreinsurance protection. In this event we will seek to reduce peak catastropheexposures and this may result in reduced gross premiums as well as a reductionin our outward reinsurance spend. Good start to 2006 We have written £337 million of gross premium income across the Group in thefirst two months of the year, which is 26% more than in the first two months of2005. £263 million of this was renewal business for Syndicate 2001 and theaverage rate increase was 4.5%. Of this Amlin Bermuda has written new businessof US $73 million. Improving investment return potential The Group's cash and investments now total £2.1 billion. Whilst we do not expectto match last year's equity returns, we believe good returns overall should bepossible in 2006. Importantly US bond yields have risen over the last 2 yearsand sterling bonds and cash yields remain adequate. Increased catastrophe risk The largest threat to our performance in 2006 is another year of highcatastrophe incidence. With Amlin Bermuda focused on reinsurance, writing anunprotected account, and with Syndicate 2001's retocessional cover currentlyprovided by Amlin Bermuda, we are running greater catastrophe downside risk as apercentage of net assets than in 2005, although until the commencement of the USand Japanese wind seasons, our main exposure is limited to earthquake risk. Weintend to manage the Group's overall exposures so that they are within a maximumrisk appetite of £320 million for events with a probability of less than 1 in100 years. This will be achieved by either purchasing more reinsurance forSyndicate 2001, if the pricing of cover becomes more acceptable, or by reducingour peak exposures in relevant zones. Underwriting expertise and a consistent approach to underwriting risk managementand control is critical to the success of Amlin, making the retention of skilledunderwriters a business priority. Our senior underwriters have on average 23 years' experience in the insuranceindustry and an average of 11 years with Amlin. We aim to keep voluntary turnover, excluding retirements, of our leading classunderwriters below 10% per annum and our overall employee turnover below 15%.For 2005, Amlin's employee turnover remained within these targets. For seniorunderwriters, turnover was below 5% for the fifth year in sccession. Amlin Bermuda's underwriting team was transferred from our non-marine Londonmarket business, providing the new business with an experienced team who have agood knowledge of our client distribution networks as well as a thoroughunderstanding of the Group's underwriting philosophy and controls. The depth of talent in our London market business enabled us to achieve thiswhile promoting a number of employees to more senior positions in London. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2005 2005 2004 Notes £m £m---------------------------- ------- ----------- ---- ----------Gross premiums earned 1, 2 986.7 883.7Insurance premium revenue from thereceipt of reinsurance to close 2 78.8 15.3Reinsurance premiums ceded 1, 2 (164.6) (161.3)---------------------------- ------- ----------- ---- ----------Net insurance earned premiums revenue 900.9 737.7---------------------------- ------- ----------- ---- ---------- Investment return 1, 6 90.9 52.1Other operating income 7 1.4 7.4---------------------------- ------- ----------- ---- ----------Net Income 993.2 797.2---------------------------- ------- ----------- ---- ---------- Insurance claims and loss adjustment expenses 1, 3 (912.1) (542.2)Insurance claims and loss adjustmentexpenses relating to the receipt of reinsurance to close 3 (78.8) (15.3)Insurance claims and loss adjustmentexpenses recoverable from reinsurers 1, 3 436.4 163.0---------------------------- ------- ----------- ---- ----------Net insurance claims (554.5) (394.5)---------------------------- ------- ----------- ---- ---------- Expenses for the acquisition of insurance contracts 4 (170.2) (161.7)Expenses for asset management fees (2.3) (1.3)Other operating expenses 5 (73.1) (106.0)---------------------------- ------- ----------- ---- ----------Expenses (245.6) (269.0)---------------------------- ------- ----------- ---- -------------------------------------- ------- ----------- ---- ----------Results of operating activities 193.1 133.7---------------------------- ------- ----------- ---- ----------Finance costs 8 (10.4) (4.8)---------------------------- ------- ----------- ---- ----------Profit before tax 182.7 128.9---------------------------- ------- ----------- ---- ----------Tax 9 (45.3) (37.9)---------------------------- ------- ----------- ---- ----------Profit for the financial yearattributable to equity shareholders 137.4 91.0---------------------------- ------- ----------- ---- ---------- Earnings per shareBasic 20 33.6p 23.4pDiluted 20 33.1p 23.1p---------------------------- ------- ----------- ---- ---------- CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2005 Notes Share Share Other Retained Total capital Premium reserves earnings £m £m £m £m £m------------------ ------ ------- -------- ------- ------- -------At 1 January2005 98.8 154.2 43.5 163.3 459.8Gains onrevaluation ofemployee shareownershiptrustrecogniseddirectly inequity - - 1.3 - 1.3Currencytranslationdifferences onoverseasoperations - - 3.8 - 3.8Deferred tax - - 1.7 - 1.7Profit for thefinancial year - - - 137.4 137.4------------------ ------ ------- -------- ------- ------- -------Totalrecognisedincome for theyear - - 6.8 137.4 144.2Rights issueproceeds, netof issue costs 16 31.9 182.8 - - 214.7Employee share option scheme:- share based payment reserve - - 0.7 0.7- proceeds from shares issued 1.8 7.0 - - 8.8Dividends paid 21 - - - (35.6) (35.6)------------------ ------ ------- -------- ------- ------- ------- 33.7 189.8 0.7 (35.6) 188.6------------------ ------ ------- -------- ------- ------- -------At 31 December2005 132.5 344.0 51.0 265.1 792.6------------------ ------ ------- -------- ------- ------- ------------------------- ------ ------- -------- ------- ------- ------- Share Share Other Retained Total capital Premium reserves earnings £m £m £m £m £m------------------ ------ ------- -------- ------- ------- -------At 1 January2004 97.7 150.2 42.3 90.3 380.5Gains onrevaluation ofemployee shareownershiptrustrecogniseddirectly inequity - - 0.8 - 0.8Profit for thefinancial year - - - 91.0 91.0------------------ ------ ------- -------- ------- ------- -------Totalrecognisedincome for theyear - - 0.8 91.0 91.8Employee share option scheme: - share based payment reserve - - 0.4 - 0.4- proceeds from shares issued 1.1 4.0 - 5.1Dividends paid 21 - - - (18.0) (18.0)------------------ ------ ------- -------- ------- ------- ------- 1.1 4.0 0.4 (18.0) (12.5)------------------ ------ ------- -------- ------- ------- -------At 31 December2004 98.8 154.2 43.5 163.3 459.8------------------ ------ ------- -------- ------- ------- ------- CONSOLIDATED BALANCE SHEETFor the year ended 31 December 2005 2005 2004ASSETS Notes £m £m------------------------------- ------ ---------- ----------Cash and cash equivalents 11 65.6 47.6Financial investments at fair value through 12income- equity securities 116.2 90.1- debt securities and other fixed income assets 1,962.0 1,212.4Reinsurance assets 13- reinsurers share of outstanding claims 604.6 318.6- reinsurers share of unearned premiums 24.2 24.9- debtors arising from reinsurance operations 387.3 261.3Loans and receivables, including insurance 14receivables- insurance receivables 214.3 214.1- loans and receivables 132.9 67.7Current income tax assets 3.7 4.8Deferred tax assets 9 21.1 22.5Property and equipment 6.0 6.2Intangible assets 15 66.0 66.0------------------------------- ------ ---------- ----------Total assets 3,603.9 2,336.2------------------------------- ------ ---------- ---------- EQUITYShare capital 16 132.5 98.8Share premium account 17 344.0 154.2Other reserves 17 51.3 45.1Treasury shares 17 (0.3) (1.6)Retained earnings 17 265.1 163.3------------------------------- ------ ---------- ----------Total shareholders' equity 792.6 459.8------------------------------- ------ ---------- ---------- LIABILITIESInsurance contracts 13- outstanding claims 1,704.3 1,103.3- unearned premiums 523.8 517.3- creditors arising from insurance operations 114.8 46.0Trade and other payables 18 67.1 71.6Current income tax liabilities 19.6 5.5Financial liabilities - borrowings 19 298.2 58.7Retirement benefit obligations 1.3 1.5Deferred tax liabilities 9 82.2 72.5------------------------------- ------ ---------- ----------Total liabilities 2,811.3 1,876.4------------------------------- ------ ---------- ---------- Total liabilities and shareholders' equity 3,603.9 2,336.2------------------------------- ------ ---------- ---------- The financial statements were approved by the Board of Directors and authorisedfor issue on 9 March 2006. They were signed on its behalf by: Roger Taylor Chairman Richard Hextall Finance Director CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2005 Group cash generated from operations Notes 2005 2004 £m £m-------------------------------- ------- ---------- ----------Profit on ordinary activities before taxation 182.7 128.9Net movement on Premium Trust Funds for non-aligned participations (2.9) (3.0)Depreciation charge 2.1 2.6Interest paid 9.2 5.1Interest received (65.3) (50.8)Dividends received (2.0) (1.1)Unrealised (gains)/losses on investments (13.5) 0.1Net purchases of financial investments (757.7) (252.0)Increase in loans and receivables (64.9) (12.3)Increase in reinsurance contract assets (411.4) (84.7)Increase in insurance contract liabilities 679.2 172.5Increase/(decrease) in trade and other payables (2.7) 33.7Increase in retirement benefits (0.2) 0.3-------------------------------- ------- ---------- ---------- (447.4) (60.7)Income taxes paid (17.6) (0.5)Interest paid (9.2) (5.1)-------------------------------- ------- ---------- ----------Cash generated from operations (474.2) (66.3)-------------------------------- ------- ---------- ---------- Cash flows from investing activitiesInterest received 65.3 50.8Dividends received 2.0 1.1Acquisition of subsidiary, net of cash acquired (0.2) (2.5)Purchase of property, plant and equipment (1.9) (2.4)-------------------------------- ------- ---------- ----------Net cash used in investing activities 65.2 47.0-------------------------------- ------- ---------- ----------Cash flows from financing activitiesProceeds from issue of ordinary shares 223.5 3.2Proceeds from borrowings 266.1 55.6Repayment of borrowings (32.0) (7.3)Dividends paid to shareholders (30.6) (15.3)-------------------------------- ------- ---------- ----------Net cash from financing activities 427.0 36.2-------------------------------- ------- ---------- ---------- Net increase in cash and cash equivalents 18.0 16.9Cash and cash equivalents at beginning of year 47.6 30.7-------------------------------- ------- ---------- ----------Cash and cash equivalents at end of year 11 65.6 47.6-------------------------------- ------- ---------- ---------- Cash flows relating to non-aligned syndicate participations (see note 13) areincluded only to the extent that cash is transferred between the Premium TrustFunds and the Group. As these syndicates are outside of the Group's managementinsufficient data is available to analyse the cash flows in any more detail. The Group classifies the cash flows for the purchase and disposal of financialassets in its operating cash flows, as the purchases are funded from the cashflows associated with the origination of insurance contracts or the capitalrequired to support underwriting, net of the cash flows for payments ofinsurance claims. Therefore cash generated from operations is net of £757.7million (2004: £251.7 million) being cash generated in the period that has beenused to purchase financial investments. Paste the following link into your web browser to download the PDF document of the second part of this announcement: http://www.rns-pdf.londonstockexchange.com/rns/5977z_a-2006-3-10.pdf This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Aston Martin Lagonda