8th Mar 2005 07:02
Amlin PLC08 March 2005 AMLIN plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 (UNAUDITED) Financial highlights • Excellent profit before tax of £121.6 million, after the £74 million impact of 2004 windstorms • Record Syndicate 2001 combined ratio at 82% (2003: 83%) • Third consecutive year of return on equity in excess of 20% • Average return on equity of 23% over last three years • Dividend per share increased 220% to 8.0p • Real net gearing reduced to nil at year end Operational highlights • London market brokers confirm Amlin as the leading Lloyd's business for financial strength and usage • Moody's upgrades Syndicate 2001's financial strength rating to A1 (from A2) • Turnover among senior underwriters was below 5% for fourth year in succession • Continued progress in leading process change in the Lloyd's market • New vision set for 2009 Outlook for 2005 • 2005 expected to be another good year for earnings • Record unearned premium reserve of £501 million carried forward to 2005 • Good January renewal season - £267 million written by 28 February with average renewal rate reductions of only 3% • Strong cashflow has increased potential for contribution 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 Limited 0207 417 8989/07768 332486Peter Rigby, Haggie Financial Limited 0207 417 8989/07803 851426 FINANCIAL HIGHLIGHTS 2004 2003 2002 2001 2000 £m £m £m £m £mGross premiums written 945.6 937.4 717.1 587.4 363.3Net premiums written 790.2 787.6 573.0 486.5 284.1Earned premium 696.3 684.7 494.1 342.9 231.1 Operating profit (loss) before tax 128.1 124.4 45.6 (61.7) (5.9)(based on longer term investment returns)Profit (loss) on ordinary activities 121.6 120.3 55.4 (81.5) (26.4)before taxReturn on equity 22.3% 27.0% 20.1% (33.0)% (8.4)% Per share amountsOperating profit (loss) 31.3p 30.9p 17.7p (40.5)p (9.7)pEarnings 22.1p 21.6p 14.1p (33.3)p (9.6)pNet assets 113.6p 99.3p 80.3p 66.4p 100.1pNet tangible assets 99.1p 84.6p 64.5p 59.0p 92.1pDividends 8.0p 2.5p 2.0p - 4.0p Syndicate 2001 operating ratiosClaims ratio 52% 51% 63% 87% 84%Expense ratio 30% 32% 32% 30% 27%Combined ratio 82% 83% 95% 117% 111% CHAIRMAN'S STATEMENT 2004 was a year of contrasts. Continued excellent trading conditions and in thefirst six months a lower than normal level of claims activity. In the secondhalf there was an almost unprecedented amount of windstorm activity with each ofthe hurricanes hitting Florida estimated to be among the ten most costly naturalcatastrophes ever recorded in the United States. Our achievement of a return onequity of 22.3%, the third year in succession in excess of 20%, after theseevents, is a demonstration of the present strength of the business. Our profit before tax for the year was £121.6 million, modestly up on 2003(£120.3 million) and an excellent result after the windstorm costs of £74million. After tax, this yielded earnings per share of 22.1p (2003: 21.6p). Allareas of the Group performed well. The combined ratio was an excellent 82%,investment returns were strong and expenses were well controlled. Dividend The Board proposes a final dividend of 5.0p per share making total dividends for2004 of 8.0p per share (2003: 2.5p) which represent 36% of 2004 earnings. Thisexceeds our commitment made last year to distribute at least 30% of ourearnings, and for 2005 and 2006 we aim, in the absence of unusual circumstances,to pay dividends equivalent to at least the higher of 8.0p, adjusted forinflation, and 30% of earnings. The Board will keep under review the Company's ongoing capital requirementstaking account of medium term needs, our underwriting strategy of managingexposures over the insurance cycle and our cross cycle target return on equityof 15%. We expect to consider further possibilities for returning capital toshareholders over and above the anticipated dividends referred to above. The 2004 final dividend, in respect of which a scrip dividend alternative isbeing offered, is to be paid (subject to shareholder approval) on 24 May 2005 toshareholders on the register on 29 March 2005. Strategy The successful growth of the business into an excellent market for the lastthree years has resulted in a far stronger market position and reputation forAmlin and has also delivered a shareholder return ahead of most of our peers. In October 2004 the Board reviewed and endorsed management's plans for the nextphase of the insurance cycle and for ensuring that Amlin continues to build uponits strengths and long term potential. As discussed later in this preliminarystatement, Amlin intends to become the "global reference point for quality" inits markets and is currently putting in place a number of strategies to achievethis goal. Outlook With the increased momentum for change in insurance markets, as Lloyd's, the FSAand others seek to enforce higher standards of efficiency, service andtransparency, there is huge scope for strong and well organised businesses, suchas Amlin, to extend their leadership position. Even though we are past the peak of this insurance pricing cycle, conditionsremain favourable and there is every prospect of 2005 being another goodunderwriting year. At this stage in the cycle, however, we are not seeking togrow our top line, focusing on retention of margin and return on equity. There are signs of increased discipline in the Lloyd's market, although sadlythis is not universal. However, Amlin had a good January renewal season andrenewal terms have to date remained relatively robust. Much of the 2005 underwriting result will be earned from business written in2004 and, at 1 January 2005, we carried forward a record unearned premiumreserve of £501 million, up 17% over the reserve brought forward at 1 January2004. Similarly, a significant proportion of business written in 2005 will beearned in 2006. Our asset base has grown dramatically over the past four years. We areestablishing a track record for managing these assets astutely to complement ourunderwriting returns and, with continued success in this area, we expect agreater return from this source. Amlin has made tremendous progress developing its underwriting skills. New riskmanagement techniques and information systems are enabling our underwriters tobetter price risk as well as producing higher quality and more timely managementinformation. This places Amlin in a strong position to manage well in a tougher marketenvironment. In the meantime, rates remain at a healthy level and we believe theoutlook for 2005 and 2006 is good. Board The past 12 months has seen the size of the Board reduced to ten, including fivenon-executive directors and myself. The Board has been working well, and we arepresently in the process of recruiting an additional non-executive director toaddress the Higgs requirement for there to be at least parity betweenindependent non-executives and others (excluding the chairman) on the Board. Nigel Buchanan joined the Board in March 2004 and brings with him experience ofthe financial services sector and an excellent understanding of regulation. I reiterate our thanks to those who retired in 2004, John Kennedy, John Sanders,and John Stace for their contributions going back to the formation of theCompany in 1993. The Amlin Team Well done again to our management team, so ably led by Charles Philipps, and allemployees at Amlin for turning in yet another excellent set of results. Verygood progress continues to be made in building a solid business with greatpotential and this is not achieved without real effort and commitment for whichwe owe our thanks. Roger TaylorChairman FINANCIAL PERFORMANCE The £121.6 million (2003: £120.3 million) before tax profit is another strongfinancial performance, particularly given the £74 million of net hurricane andtyphoon claims incurred in the year. Return on equity was 22% (2003: 27%). Underwriting contributed £102.5 million (2003: £119.4 million) to the pre taxresult with a small rise in the claims ratio being offset by a fall in theexpense ratio. Different levels of ownership of capacity across the recent yearsof account meant that the Group's underwriting performance was slightly worsethan for Syndicate 2001 as a whole. Specifically, the impact of the hurricanesfell on 2004 but reserve releases benefited prior years of account. Investmentsadded £50.6 million (2003: £32.0 million) reflecting increased investmentbalances, a greater allocation of funds to cash, which generated good averagereturns, away from bonds and a strong performance from our equity investments.Net other costs amounted to £31.5 million (2003: £31.1 million) largelyunchanged for the year. Trading conditions and written premium The contribution from underwriting remained healthy in 2004, despite claims fromthe hurricane and typhoon catastrophes in the third quarter. Underlying tradingconditions were strong in 2004 with an overall renewal rate reduction of only4%. Our retention ratio was 79%. Gross premiums grew by 0.9%. The 14% increasein participation in our managed syndicate was offset by the impact of thestronger dollar against sterling (average rate for 2004: $1.83/£1; 2003: $1.64/£1). At constant rates, gross premium written by Syndicate 2001 fell by 8%. Net premiums written increased by 0.3%. The reinsurance protection was largelyunchanged for the full year but less business was ceded to reinsurers throughwhole account quota share arrangements. This was offset to a degree byreinstatement costs from the windstorm losses. Overall, 17% of gross income wasceded to reinsurers, the same percentage as 2003. Net earned premium was up by 1.7% to £696.3 million (2003: £684.7 million). 1%,44% and 55% of the earned premium was written in the 2002, 2003 and 2004 yearsof account respectively. The total cost of the US hurricanes is now estimated to be $265 million grossand $118.6 million net of reinsurance. Overall, the gross loss has increased by8% against our original estimate. Frances has increased substantially, whilstJeanne has reduced, as claimants have allocated losses from these hurricaneswhich followed similar paths. Net of reinsurance, the movement is 3%. Incontrast our loss estimate for Typhoon Songda has increased by £5 million fromour initial forecast which was at a very early stage. This loss is now morefully developed and our reserve estimate appears prudent. Underwriting performance (100% Syndicate) The following commentary is provided as if we owned 100% of Syndicate 2001across all recent years of account. This removes any distortion in performancewhich is attributable to changing levels of our ownership of Syndicate 2001. Overall the combined ratio improved to 82% from 83% in 2003. This is a highlycreditable performance given the higher level of natural catastrophes. Thisratio reflects strong trading in the 2003 and 2004 underwriting years. Inaddition the year benefited from £62.7 million (2003: £34.3 million) of releasesfrom reserves established in prior periods. This once again highlights theprudent reserving policy that we pursue. Non-marine The business written is a blend of classes exposed to catastrophic, or largeloss events, and attritional property and casualty classes. The divisionremained US focused with 68% of business written in US$. After adjusting forforeign exchange movements gross premium income fell by only 2%. Across theportfolio the average renewal rate reduced by 6%, with a retention rate of 81%.This reflected a 6.5% reduction in property related classes and a continuedsmall increase in rates on casualty business. The combined ratio remained at an excellent 79% (2003: 78%). Naturally thedivision bore the majority of the windstorm losses which increased the combinedratio by 15%. The only other major natural catastrophe in 2004 was the AsianEarthquake and Tsunami which had no material impact on the division's result.Continued reserve releases of £36.6 million offset much of the cost of thewindstorms. Marine The marine division writes a blend of volatile classes, such as energy and war,alongside more attritional classes, such as hull, cargo and yacht. Rates were stable during 2004 (2003: 8% increase). However the underlying classmovement reflected the recent changes in conditions. For example, energy whichwas significantly repriced in 2001, 2002 and 2003 began to weaken in 2004 withan average decline in rates of 11% for the year. In contrast hull risks, whichwere slower to improve than many other classes, achieved a 7% rate improvement.Overall gross premium income fell by 16% to £158 million partly as a result ofexchange rate changes. The combined ratio was once again strong at 86% (2003: 82%). Steady, goodperformance across most classes, with very strong results in energy and war,combined to deliver an excellent outturn. The offshore energy industry loss fromHurricane Ivan is estimated to be $2.5 billion. However, the marine division'sgross loss from this is estimated to be a modest $8.5 million and, withsignificant reinsurance protection available, the net energy loss is robustlyreserved. Reserve releases were slightly lower than last year at £9.4 million(2003: £10.4 million). Aviation The airline portfolio was again an area where competition increased during 2004and for this account, premium income was down £15.6 million. Average rate fallswere 10% (2003: 1.5% fall). However, as air traffic continued to increase duringthe year, this offset the underlying fall in rates. Other aviation classes continued to experience renewal rate increases,particularly on the products account where, after a number of disappointingyears, we pressed for and achieved rating improvements. Overall the division'srenewal rate reduction was 0.1% with 73% of 2003 business being renewed. There were no significant airline losses during the year. For the fourthconsecutive year, the number of fatal revenue passenger airline accidentsdiminished with only 11 being recorded in 2004. Amlin had an exposure to onlytwo of these. Consequently the combined ratio remained low at 88% (2003: 92%). UK Commercial Premium income in the UK commercial division reduced by £51 million during theyear. Competition in UK commercial motor increased during the year. Althoughrenewal rates were largely unchanged and retention rates were a good 82%,competition for new business was more intense and levels of new business fell by£18 million. Also final income received from liability business was lower thananticipated last year and this had a knock-on effect to levels in 2004. However, the overall combined ratio was 83% (2003: 92%). Reserve releases of£13.1 million were high as both motor and liability accounts ran off well. Theunderlying ratio of 92% reflects the healthy environment that has existed in theUK in recent years. Investment performance In 2004 investment return was £50.6 million, up 58% on the previous year. Thiswas achieved through good returns from asset classes and an increase in assetsinvested. The Group's cash and investments increased by 25% to £1.3 billion. Technical funds Amlin's technical funds are invested in short duration investment grade bondsand cash. Bond yields started the year at relatively low levels with anexpectation of interest rate rises beginning to be factored in. This acceleratedin the second quarter of the year leading to only modest returns at the interimreporting stage. However in the third quarter expectations of interest rateincreases moderated and this helped deliver acceptable full year bond returnsacross all currencies relative to cash yields. High levels of cash have been held through the year in sterling as the risk/reward trade off between cash and short duration bonds appeared to us to favourcash. Good returns were achieved on our sterling portfolios. Solvency funds The strong performance of equities, particularly in the latter part of the year,justified our decision to increase our equity allocation to 25% in 2003. Theequity portfolio, managed by Taube Hodson Stonex Partners, produced a return of14.4%, exceeding the FTSE All World Index benchmark return by 5.6%. Through most of the year our strategic asset allocation was 25% equities, 70%cash and cash equivalents and 5% long duration bonds. In November, following areappraisal of our risk appetite as the cycle peaked and forecast leveragereduced, the Board approved a change in the strategic asset allocation to 50%equities and 50% cash. By the end of December, the equity proportion of thesolvency funds had risen to 33%. Cash was used to balance the potentialvolatility of equities. The cash funds generated a 4.7% return that compareswith the total return on UK government bonds of 6.6%. Expenses Operating expenses increased by £2.4 million, or 1.1%, for the year. Theincrease in expenses from our larger share of syndicate operating expense wasoffset by a £15.7 million reduction in the 2% premium levy, as it was withdrawnby Lloyd's. The underlying Syndicate 2001 operating expense reduced by 2%. Other charges rose £2.2 million to £37.4 million. This includes a £17.3 million(2003: £18.9m) cost of incentives to staff. We have accrued a further £4.1million under the capital builder plan, with the total accrual under the schemenow amounting to £10 million. BALANCE SHEET MANAGEMENT Financial leverage We believe that debt capital should be a significant part of capital employedwhen underwriting margins are strong but leverage should reduce whenunderwriting margins are weak. This strategy should ensure that we optimisereturn on equity whilst having due regard to the associated financial risk. The debt that has been deployed by Amlin over this period has been in the formof letters of credit (LOCs). Under the Lloyd's capital framework LOCs are anaccepted form of capital. However, another important feature of the Lloyd'sframework is that only a limited proportion of profits recognised on our annualaccounting basis to date have been allowable for capital purposes. This isinconsistent with insurance companies where reported profit is Tier 1 capital. Our response to this has been to deploy the recognised but inadmissible profitinto our allowable capital base by securing LOCs against these assets and usingthem as solvency capital with Lloyd's - essentially "bridging finance". Lookingto the future, we believe that we have now reached the point in the cycle whereunderwriting margins will reduce over the next few years. However our 'real'debt has already been extinguished. In the short term we will look to increaseour financial leverage but not to the peak levels it reached in recent years. Insurance leverage Amlin benefits from insurance leverage which affects its potential investmentreturns. Cash and investments, including the Company's share of syndicateassets, now represent a 3 times multiple of shareholders' equity. This hasincreased significantly over recent years with the growth of Syndicate 2001 andour increased ownership of the syndicate. At 30 June 2004, when the multiple was2.8, it was one of the highest among Lloyd's listed companies, and we wouldexpect that it continues to be at 31 December 2004. Changes to the distribution regime Currently Lloyd's operates a three year distribution system and a restrictivecapital regime. Consequently, Amlin, to date, has not had free funds availablefrom the successful underwriting years from 2002 onwards. However, the 2002profits are released from trust funds in June 2005 and 2003 profits are releasedin June 2006. From 1 January 2005, Lloyd's has moved the syndicate accounting requirementsonto an annual accounted basis. As a consequence, cash distribution from thesyndicate will also switch to that basis. Changes to the capital regime Positively, the Lloyd's capital framework is also about to change. The FSA tookover regulation of Lloyd's in December 2001 and, as a policy, have been pushingfor greater consistency in the regulation of all non-life insurance underwritersin the UK, including Lloyd's. Three important changes are being made to theregulatory capital framework. First, annual accounted profits will be allowable as solvency capital and willbe available to support underwriting from 1 January 2006. Given the scale ofthe disallowance for Amlin this is a welcome change for the Group. Cumulativefinancing costs would have been reduced by £6.0 million over the last threeyears if this regime had operated throughout. Second, each regulated firm is expected to complete an 'Individual CapitalAssessment'(ICA). Essentially this means that we will have to assess andmaintain a level of capital so that the risk of insolvency in any year is nogreater than a probability of 0.5%. In the past our capital has been set usingthe Lloyd's risk based capital framework, which uses market wide data to assesscapital needs. Given that our performance has been consistently better than themarket we would expect that over time, as Lloyd's moves towards accepting ICAsubmissions rather than its risk based capital figure, our relative capitalrequirement will fall. Third, the type of capital that can be utilised is now more closely defined.Equity capital is admissible and is unlimited. For the time being this alsoapplies to LOCs. Other debt capital will be restricted. For example unsecured,subordinated term debt will be restricted to 25% of the total capital employedand the terms of the debt are very closely defined by the FSA. With this Lloyd's is changing its capital release tests. Under current rules, ascapacity at Lloyd's is reduced, there is a delay in the release of capital. Thisis changing from June 2005 with capital requirements simply matching the riskbased capital assessed. We expect that this will lead to a further release of£50 million into free funds in 2005. Preparing for the new capital regime A considerable amount of effort has been made at Amlin to develop our ICA modeland we submitted our assessment to Lloyd's in the first tranche of agents inOctober 2004. Amlin issued $50 million of FSA compliant subordinated debt in November 2004.This is callable by Amlin after ten years. In addition to enhancing our abilityto meet the new capital tests, this long term debt issue increases Amlin'savailable capital to be deployed for underwriting purposes, particularly inperiods of growth, at lower cost than the subordinated LOCs that it replaced. Capital planning As capacity reduces in line with our underwriting strategy, we expect thatsurplus capital will grow within the business. Our financial focus remains onmeeting our long term return on equity targets. Given this aim, we intend tocarefully assess the need to retain this capital in the business. It is important for long term value creation that we plan the level of capitalrequired to support the business as we enter the next upswing, and the potentialsource of this capital. We will also need to assess the level of capitalrequired to meet our strategic goal of setting up a non-Lloyd's operation.However, this should still leave room for good dividends over this next phase ofthe cycle. International Financial Reporting Standards From 1 January 2005, the Group is required to prepare its accounts under IFRS.The following summarises the main changes to the Group's accounting policieswhich will have an effect on the opening net asset position: • Dividends: the final dividend for each financial year is usually declared after the balance sheet date. Under IFRS this represents a post balance sheet event and therefore our final dividend will not be shown as a liability at the end of the financial period. Rather, the proposal will be disclosed in the notes to the financial statements; • Intangible assets: Our current accounting policy for syndicate capacity and goodwill on recent acquisitions has been to capitalise the payments and to amortise the balances over the useful economic life of the capacity/ goodwill. Under IFRS syndicate capacity will be treated as an indefinite life intangible asset. It will therefore be initially carried at cost but will be subject to an annual impairment review. Similarly goodwill will be initially carried at cost and will then be subject to an annual impairment review. • Share options and incentives: Amlin has a number of share incentive schemes for executives. Historically they have been disclosed in the notes and on exercise have been recognised immediately as share capital. Under IFRS, we will charge the income statement with the fair value of the options over the period from grant date to vesting date. Given the size and nature of our incentive schemes we do not believe that this change will be material to the Group. Our accruals for our share based incentives are currently held at nominal value. Under IFRS these need to be accounted for at fair value. The adjustment to fair value will more than offset the initial cost of other share based payments. • Pension scheme: The Group has three main pension schemes. The multi- employer scheme and the defined contribution scheme will be accounted for in a similar way to their current treatment. However the net liability for the Angerstein scheme, which is modest, will be accounted for within the Group's consolidated balance sheet. OUTLOOK 2005 We anticipate another year of strong performance with a good return on equity in2005. There are a number of positive factors influencing financial performancein this year. Unearned premium reserve: the premium written in 2003 and 2004, which remainedunearned at 31 December 2004, amounted to £501 million, up 16.6% over the equivalent figureat the end of 2003. This premium has been written at very good rates and, inclasses other than airline insurance, a large part of the associated risk willexpire at either the end of March or the end of June. Subject to unexpectedlevels of catastrophe experience between now and then, the unearned premiumreserve is expected to contribute good margins to the 2005 result. Consistent reserving strength: the 2004 result included a release from prioryear reserves of £62.7 million for Syndicate 2001. We make every effort toensure that we maintain a consistent prudency in our reserving and, therefore,we would expect there to be a further release of reserves which will benefit the2005 result if we experience normal claims development on previously earnedpremium. Solid rating achieved on £267 million of 2005 premium written: we have written£267 million of premium (net of brokerage) in the first two months, which isapproximately 34% of our current plan for the year. Of the £231 million of thiswhich was renewal income, the average rate reduction was only 3%. Among the classes where pricing is now below 2002 levels, airline hull andliability insurance has little room for further decline before margins fall intoquestionable territory. Rating pressure in this class has been affected by thepaucity of major losses over the past four years with some in the industrysuggesting that this is a new trend which is set to continue owing to increasedsafety measures, new equipment and a more cautious culture. However, we believeit is too early to form such conclusions. International property reinsurance became more competitive at the major Januaryrenewal season as some companies sought to increase their spread of risk,although rates are still technically sound. For US property insurance, whichcame under pressure in 2004, rate reductions currently appear to be moderating alittle which is a good sign of discipline in the market. Encouragingly, we arestill able to find areas to write new property business at attractive rates. The renewal seasons for reinsurance risks affected in 2004 by windstorms inJapan and the United States are in April and July respectively and we wouldexpect pricing in these areas to improve. We are also still seeing rateincreases in a small number of classes such as marine hull and aviationproducts. Offshore energy rates, which were reducing in 2004, are showing signsof greater stability following the larger than originally anticipated industrylosses from Hurricane Ivan. All in all, 2005 has every prospect of being another good underwriting year. Larger investment funds: the Group's cash and investments amounted to £1.3billion at 31 December 2004. We believe the investment outlook for this year tobe reasonable. Lower Lloyd's costs: Our Central Fund contributions, excluding the new loan tothe central fund, have fallen by £8.2 million for 2005. The largest threats to our 2005 performance are abnormal loss activity and thesterling/dollar exchange rate, given that 52% of our gross premium in 2004 wasUS $ denominated. 2006 and Beyond We believe that the non-life insurance industry will remain cyclical, but we areseeing some signs of greater discipline. It is too early to assess whether thiswill last as the industry's capital and surplus builds, but there are somedynamics which should help to sustain reasonable margins. These include: • A stated determination by Lloyd's to manage underwriting activities over the insurance cycle so as to avoid the poor performance experienced in the troughs of past cycles; • Security ratings which remain below the desired level for many companies. With an increased focus of rating agencies on financial return as a measure of long term company health, we would expect those companies to exercise greater discipline; • Companies are still reporting prior year reserving deficiencies and this is expected to continue. Reserving inadequacy in the US property/casualty industry was recently estimated by Fitch to be between $43.5 billion and $61.5 billion at the end of 2003. Some of this has been recognised in 2004. However, insurance losses arising from the massive corporate failures such as Enron and other financial scandals have not, we believe, yet been fully recognised by the industry; • The industry is showing signs of managing its capital base in recognition of cyclical pressures. For example, among the Bermudian insurers, whose capital and surplus has grown significantly over the past three years, there have been over $1.5 billion of share buy-backs announced since the beginning of 2004. For Amlin, the 2006 result will be influenced by 2005 underwriting in the sameway that 2004 is influencing 2005. With our strong focus on profit and return onequity, and the proven experience of our team, we are confident, without beingcomplacent, of being able to continue to deliver good returns relative to theindustry. STRATEGY Since October 2000 Amlin has been focused on delivering its Vision for 2005. In2000 we set out to: • Become the most astute leader of insurance risks, with exceptional risk management expertise; • Become recognised by brokers, insureds and reinsurers for financial strength, durability and client responsiveness; • Become "the place to work" in the industry; • Deliver excellent returns to shareholders. We have made good progress and this is evidenced by: • Syndicate 2001's performance, measured as average return on capacity for the 2001, 2002 and 2003 years of account1, has been the highest among the 10 largest managing agents in Lloyd's - a sign of astute underwriting and risk management; • In a survey conducted during 2004 among some 400 placing brokers Syndicate 2001 was top ranked for perceived financial strength among Lloyd's businesses; • In a survey of employees conducted by MORI in May 2004, Amlin compared extremely favourably against financial services company norms for employee satisfaction. Retention of our senior underwriters has been greater than 95% for the fourth year in succession; • Amlin's total shareholder return since 1 January 2000, of 74%, has been high relative to insurers internationally. The progress made to date provides the platform for future success. During 2004,we have set a new Vision for 2009 which is intended to stretch our leadershipposition in the London insurance market. Our aim is to become "the globalreference point for quality" in our markets. In achieving this we willconcentrate on: • Profit focused underwriting excellence - this is the principal driver of our financial performance. • Improving our understanding of client's needs and market trends - so that we can target good areas of growth in the future. • The delivery of first class client service standards - so that we can grow our appeal to clients and attract the quality and volume of business that we want to underwrite; • Cycle management, combining underwriting, reinsurance, capital and investment strategies - to optimise risk weighted shareholder returns over the insurance cycle. We expect 2009 to coincide with the bottom of the insurance pricing cycle.Financially, our aims are to: • Deliver a cross cycle return on equity (covering the period 2002 to 2009) of at least 15%, considerably above our cross cycle cost of equity of approximately 8.5%; and • Trade profitably through the soft part of the cycle, something we along with most of our peers failed to do in the last soft market. The achievement of these goals will make Amlin a rare breed in our industry. Werecognise that the most difficult part of the cycle lies ahead. However, theGroup's positioning in terms of skills, shared understanding of underwritingstrategy and management information is significantly better than in the lastdownturn. The achievement of our Vision and financial goals will require the successfulimplementation of strategies covering: • Underwriting and the proper contraction of exposures as competitive forces drive down margins to less attractive levels; • Investments, so that we optimise returns from our pool of investment assets (up 186% over the past four years) in a period when we expect lower underwriting returns; • Clients, their needs and our ability to deliver the level of service to which we aspire; • People, their expertise, experience and motivation to meet the standards we require; 1 Based on managing agents' published results and forecasts as at 30 September2004 • Infrastructure, in particular our use of technology to support our underwriting and client service plans; • Risk management, so that we can more clearly and easily identify risks to the achievement of our ambitions, giving us more scope to successfully address them; • Balance sheet management, so that we successfully balance the need for capital to support the business over the long term, with the aim of meeting our return on equity target and of continuing to deliver superior total shareholder returns In some areas these strategies are well developed. In others, such as the claimsaspects of client service, they are undergoing detailed review and enhancementso that their implementation gives us the best possible prospects of becoming "the global reference point for quality" in our markets. With our focus on "quality" we intend that we will be in an enviable position to successfullydeliver and manage good long term organic growth recognising that, in the periodto 2009, there will most likely be a period of contraction as insurance ratessoften. New phase of the insurance cycle The insurance rating cycle, having reached a plateau in the first part of 2004,is now into a new phase during which we anticipate a softening of rates andterms. While this has already started, for now rates remain at acceptable levelsand we believe that we will be capable of generating a good return. There aresigns of increased discipline in many quarters, although not all. We are hopefulthat management in other firms will, as we intend to, place a greater focus onmaintaining margins which reflect the risk assumed rather than on growingsenselessly. At Amlin, we expect to downscale our business if margins become unacceptable. Through this next phase our strategy is intended to deliver year on year growthin net assets per share. We also anticipate very strong free cash flow over thenext several years. This provides scope for the larger dividends which we arenow paying and the return of surplus capital which, when combined with moremodest growth in net assets per share, should help to continue to deliver a goodpositive total shareholder return. CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 DECEMBER 2004 TECHNICAL ACCOUNT Notes 2004 2003 £m £mGross premiums written 1 945.6 937.4Outward reinsurance premiums (155.4) (149.8)Net premiums written 790.2 787.6Change in the provision for unearned premiums:- gross amount (89.7) (100.0)- reinsurers' share (4.2) (2.9)Earned premiums, net of reinsurance 696.3 684.7Allocated investment return transferred 57.2 36.1 from the non-technical accountClaims paid:- gross amount (395.0) (327.2)- reinsurers' share 95.3 114.3Claims paid, net of reinsurance (299.7) (212.9)Change in the provision for claims:- gross amount (147.2) (86.2)- reinsurers' share 67.7 (54.0)Claims incurred, net of reinsurance (379.2) (353.1)Net operating expenses 4 (214.6) (212.2)Balance on the technical account 159.7 155.5 for general business NON-TECHNICAL ACCOUNTBalance on the technical account for general business 159.7 155.5Investment income 2 52.3 36.6Unrealised gains (losses) on investments 2 0.2 (3.1)Investment expenses and charges 2 (1.9) (1.5)Allocated investment return transferred (57.2) (36.1) to the technical account 153.1 151.4Other income 5 5.9 4.1Other charges 6 (37.4) (35.2)Operating profit 121.6 120.3Comprising:Operating profit based on longer term investment return 128.1 124.4Short term fluctuations in investment return (6.5) (4.1)Profit on ordinary activities before taxation 8 121.6 120.3Tax on profit on ordinary activities 9 (35.6) (37.0)Profit on ordinary activities after taxation 86.0 83.3Equity dividends 10 (31.3) (9.7)Retained profit for the financial year 19 54.7 73.6Earnings per ordinary share 11Basic 22.1p 21.6pDiluted 21.8p 21.4p All of the operations of the Group are continuing. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESThere were no recognised gains or losses in the current or preceding year other than those included in theprofit and loss account and therefore no statement of total recognised gains and losses has been presented. CONSOLIDATED BALANCE SHEETAT 31 DECEMBER 2004ASSETS Notes 2004 2003 £m £mIntangible assets 12 56.7 57.0InvestmentsOther financial investments 13 1,301.4 1,048.4Reinsurers' share of technical provisionsProvision for unearned premiums 21 24.1 29.3Claims outstanding 21 318.6 265.4 342.7 294.7DebtorsDebtors arising out of direct insurance operations 15 110.1 134.1Debtors arising out of reinsurance operations 261.2 223.9Other debtors 125.4 52.6 496.7 410.6Other assetsTangible fixed assets 16 6.2 6.4Cash at bank and in hand 42.8 26.5 49.0 32.9Prepayments and accrued incomeDeferred acquisition costs 104.0 88.8Other prepayments and accrued income 21.6 19.0 125.6 107.8Total assets 2,372.1 1,951.4 LIABILITIES Notes 2004 2003 £m £mCapital and reservesCalled up share capital 17 98.8 97.7Share premium account 19 154.2 150.2Own shares 19 (1.6) (2.4)Merger reserve 19 41.9 41.9Capital redemption reserve 19 2.7 2.7Profit and loss account 19 147.9 93.2Equity shareholders' funds 20 443.9 383.3Technical provisionsProvision for unearned premiums 21 500.8 429.6Claims outstanding 21 1,175.3 999.5 1,676.1 1,429.1Provisions for other risks and charges 22 57.0 19.9CreditorsCreditors arising out of direct insurance operations 20.3 15.5Creditors arising out of reinsurance operations 25.6 39.8Other creditors including taxation and social security 23 72.7 32.1 118.6 87.4Creditors: amounts falling due after more than one year 24 46.7 19.8Accruals and deferred income 29.8 11.9Total liabilities 2,372.1 1,951.4Net assets per ordinary share 11 113.6p 99.3pNet tangible assets per ordinary share 11 99.1p 84.6p PARENT COMPANY BALANCE SHEETAT 31 DECEMBER 2004 Notes 2004 2003 £m £mFixed assetsTangible fixed assets 16 1.8 1.8Other investments 14 208.6 205.4 210.4 207.2Current assetsAmounts owed by subsidiary undertakings 205.0 177.8Dividend receivable from subsidiaries 64.0 -Other debtors 6.3 4.1Investments 13 12.5 12.2Cash at bank and in hand 0.9 0.4 288.7 194.5Creditors: amounts falling due within one yearAmounts owed to subsidiary undertakings (14.6) (28.2)Other creditors (39.0) (0.4)Accruals and deferred income (0.6) (0.5)Proposed dividend 10 (19.6) (6.4) (73.8) (35.5)Net current assets 214.9 159.0Total assets less current liabilities 425.3 366.2Creditors: amounts falling due after more than one year 24 (28.3) (3.0)Net assets 397.0 363.2Capital and reservesCalled up share capital 17 98.8 97.7Share premium account 19 154.2 150.2Own shares 19 (1.6) (2.4)Capital redemption reserve 19 2.7 2.7Profit and loss account 19 142.9 115.0Equity shareholders' funds 20 397.0 363.2 CONSOLIDATED CASH FLOWFOR THE YEAR ENDED 31 DECEMBER 2004 Notes 2004 2003 £m £mNet cash inflow from operating activities 26 243.6 289.2Servicing of financeInterest paid on loan capital (0.9) (0.4)Letter of credit charges (4.2) (6.2) (5.1) (6.6)TaxationCorporation tax paid (0.5) -Capital expenditurePurchase of tangible assets (2.4) (1.5)Acquisition and disposalsAcquisition of subsidiary (3.2) -Net cash acquired on acquisition 0.7 - (2.5) -Equity dividends paid (15.3) (6.3)FinancingIssue of new shares net of issue costs 3.2 1.2New loans 30.0 3.4Proceeds from issue of debt 25.6 -Repayment of borrowings (7.3) (3.5)Net cash inflow from financing activities 51.5 1.1Net cash flows 27 269.3 275.9Cash flows were invested as followsDecrease in cash holdings (4.3) (5.2)Increase in deposits 20.9 0.1 16.6 (5.1)Net portfolio investmentPurchase of investments 2,507.4 2,015.5Sale of investments (2,254.7) (1,734.5)Net purchases of investments 252.7 281.0Net investment of cash flows 27 269.3 275.9 Cash flows relating to non-aligned syndicate participations are included only tothe extent that cash is transferred between the Premium Trust Funds and theGroup. ACCOUNTING POLICIES Basis of preparation and consolidation The consolidated financial statements have been prepared in accordance withapplicable accounting standards and under the historical cost accounting rules,modified to include the revaluation of investments, in accordance with theprovisions of Section 255A, Schedule 9A and other requirements of the CompaniesAct 1985. The Group has also adopted the recommendations of the Statement ofRecommended Practice on Accounting for Insurance Business issued by theAssociation of British Insurers (ABI SORP) in 2003. The balance sheet of the parent company has been prepared in accordance with theprovisions of Section 230 of, and Schedule 4 to, the Companies Act 1985. Inaccordance with the exemption permitted under this section, the profit and lossaccount of the Company is not presented as part of these accounts. The financial statements consolidate the accounts of the Company, its subsidiaryundertakings, and the Group's underwriting through participation on Lloyd'ssyndicates. The accounting information in respect of non-aligned syndicateparticipations has been provided by the managing agents of those syndicatesthrough an information exchange facility operated by Lloyd's and has beenaudited by the respective syndicates' auditors. The actual information inrespect of these non-aligned participations is included to the extent that it isavailable or, where this is not the case, provisions are made for the expectedimpact. Syndicate participations Premiums Written premiums comprise premiums on contracts incepting during the financialyear. Premiums are disclosed gross of brokerage and exclude taxes and dutieslevied on them. Estimates are included for 'pipeline' premiums, representingamounts due to the Group but not yet notified, as well as adjustments made inthe year to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period asthe related direct insurance or inwards reinsurance business. Unearned premiums A provision for unearned premiums represents that part of premiums written, andreinsurers' share of premiums written, which is estimated to be earned infollowing financial years. It is calculated separately for each insurancecontract on the 24ths or 365ths basis, where the incidence of risk is the samethroughout the contract. Where the incidence of risk varies during the term ofthe contract, the provision is based on the estimated risk profile of businesswritten. Acquisition costs Acquisition costs comprise brokerage incurred on insurance contracts writtenduring the financial year. They are spread over an equivalent period to thatwhich the premiums on the underlying business are earned. Deferred acquisitioncosts represent the proportion of acquisition costs incurred in respect ofunearned premiums at the balance sheet date. Claims paid Claims paid comprise claims and claims handling expenses paid during thefinancial year. Claims provisions Provisions for claims outstanding comprise notified claims and claims incurredbut not reported (IBNR). The change in the provision for claims represents themovement in the provision for claims outstanding. The gross provision forclaims outstanding is included as a liability on the balance sheet. Thetechnical claims provision represents management's estimate of the cost ofsettling all claims incurred but unpaid at the balance sheet date, whetherreported or not. The reinsurers' share of these anticipated future claims iscalculated by applying the gross provisions against the Group's reinsuranceprotection and is net of any provision for bad debt based on an assessment ofthe underlying security of the reinsurers on the policies. The reinsurers' shareof technical provisions is included as an asset on the balance sheet. Notifiedclaims are estimates of future claims payments in respect of reported claimsbased on the latest information available including advices from claimsassessors and lawyers. ACCOUNTING POLICIES The IBNR element is calculated initially by each of the Group's divisions usingstatistical analysis of historical trends, balanced with interpretation ofcurrent underwriting trends and market and case loss information, in order tocalculate the ultimate loss projection of the business on risk. Where Amlinleads business it has control over the agreement of claims and where it does notlead it relies on the lead underwriter to keep it informed of the latestdevelopments. These claims provisions are reviewed to ensure judgements made are reasonableand supportable. This review process includes comparison of technical claimsprovisions, on an underwriting year basis, with independent actuarialprojections produced on a best estimate basis by our in-house actuarial team.The underwriting year loss ratios are then adjusted to remove assumed futuremajor losses. This process is repeated each quarter with the actuarialassessment reviewed at the end of the financial year by an independent externalactuary. Although the claims provision is considered to be reasonable, having regard toprevious claims experience, the statistical projections and case reviews ofnotified losses, the ultimate liabilities will vary as a result of subsequentdevelopments and events. These adjustments are reflected in the financialstatements for the period in which the related adjustments are made. Unexpired risks provision Provision is made for unexpired risks where, at the balance sheet date, thecosts of outstanding claims and related deferred acquisition costs are expectedto exceed the unearned premium provision. The unexpired risks provision isincluded within technical provisions in the balance sheet. Other accounting policies Exchange rates Income and expenditure in US dollars, Euros and Canadian dollars are translatedat average rates of exchange for the period. Underwriting transactionsdenominated in other foreign currencies are included at their historical rates. Syndicate assets and liabilities, expressed in US dollars, Euros and Canadiandollars are translated into sterling at the rates of exchange at the balancesheet date. Differences arising on translation of foreign currency amounts on insurancetransactions are included in the technical account. Other assets, liabilities,Related Shares:
Aston Martin Lagonda