Final Results

6th March 2012

Omega Insurance Holdings Limited

Full Year results 2011

Omega Insurance Holdings Limited ("Omega" or "The Group") today announces its preliminary results for the year ended 31 December 2011. 

Highlights

Business and Financial Performance

·; Gross premiums written reduction of 14.5% to US$304.6 million in line with plan (2010: US$356.1 million)

·; Combined ratio of 134.3% (2010: 114.4%)

·; Claims ratio of 102.2% (2010: 84.4%), of which 37.5% arising from catastrophe losses

·; US$85.6 million of catastrophe losses net of reinstatement premiums (2010: US$55.0 million); 2011 industry CAT losses are approximately US$82 billion (2010 industry CAT losses approximately US$17 billion)*

·; Net prior year attritional reserve release of US$0.6 million (2010: strengthening of US$6.0 million)

·; Investment return of 1.2% (2010: 1.9%)

·; Loss before tax of US$94.7 million (2010: loss of US$42.9 million)

·; Basic earnings per share of (36.5)cents (2010: (17.6)cents)

·; Total dividend of nil cents for the year (2010: 6.0 cents)

·; Rates improving in Cat business

*Source: Swiss Re Sigma

Richard Pexton, Chief Executive Officer of Omega, said:

"This has been a difficult year, with an unprecedented frequency of large catastrophe losses, together with a frustrating corporate activity process. During 2011, we have continued the repositioning of our business which is now aligned with the Board's current risk appetite.

We are seeing encouraging signs in the market with re-pricing in our core classes, with 60% of our portfolio showing increases of more than 5%.

We remain a well capitalised business. The transformation of our business mix and positive pricing movements we are now seeing leave us in a good position to take advantage of market opportunities in 2012".

Media Enquiries:

David Haggie/Juliet Tilley, Haggie Financial +44 (0)20 7417 8989

Analyst Enquiries:

David Coles, Head of Investor Relations, Omega +44 (0)20 7767 3000

Chairman's Statement

2011 was a difficult and costly year for the Company and the industry. With the 2011 insured natural catastrophes second only to those in 2005, the Company has experienced substantial losses, although the repositioning of the book of business which began in 2010, to a large extent mitigated these losses. Corporate activity was intense and time consuming during the year with various approaches leading to one unconditional offer. The outcome of this process was unsatisfactory for shareholders, the Board and management who have invested considerable time and effort in trying to deliver value. Naturally, during this period, it has been difficult to look too far forward and grow the business. However, I commend the Company's employees for focussing on their jobs during the period of uncertainty.

We have now repositioned the business which will enable us to focus more on our Lloyd's underwriting, and as a result, going forward, we are in a position to implement a more optimal capital structure. In November, we increased our share in the Lloyd's business by 10%, taking the total economic interest in our Lloyd's operations to just over 60%. We have completed a successful 1 January renewal season which saw rate increases in over 60% of the classes in which we underwrite business. Lastly, the investments that began in 2010 in people and resource continue to bear fruit, as we make significant progress with the development and use of our internal capital models and enterprise risk management.

Chief Executive Officer's Business Review

Overview of 2011

The Group is reporting a loss before tax for the year of US$94.7 million (2010: US$42.9 million loss). The post tax loss for the year was US$89.2 million (2010: US$42.8 million loss) equating to earnings per share of (36.5) US cents (2010: 17.6 US cents loss).

The result is clearly disappointing. However, in mitigation, the past twelve months was one of the worst on record for natural catastrophe events, with insured catastrophe losses exceeding US$100 billion. Major loss events included the Japanese earthquake and ensuing tsunami ("the Japanese earthquake"), New Zealand earthquake, Hurricane Irene, storms and tornadoes in the United States and flooding in Thailand and Australia. These catastrophe losses, which together totalled US$85.6 million, net of reinsurance and reinstatement premiums, had a significant impact on the Group's underwriting result.

Despite the high levels of natural catastrophes, and continuing corporate activity throughout the year, the Group has made significant progress in stabilising and repositioning the business for future profitability. This has included:

·; Realignment of the underwriting portfolio: reduced aggregates and premium income in the more volatile, catastrophe exposed classes. Reduced basis risk between aggregates and reinsurance protection;

·; Increased capacity ownership: capacity ownership on Syndicate 958 was increased from 40.5% to 50.9% for the 2012 year of account, giving the Group an economic interest in Syndicate 958 of 60.7% taking into account the whole account quota share;

·; Non-renewal of Bermuda third-party reinsurance: We began non-renewal of Omega Specialty's third-party reinsurance account in the second quarter of 2011;

·; Completion of US licences: Omega US has obtained eligibility to write excess and surplus lines licences in all remaining US mainland states including California;

·; Continued operational improvement: the Group made significant progress during the year on its risk and Solvency II frameworks, together with successful introduction of our internal model.

Plans for 2012

The focus throughout 2011 was to de-risk and reposition the business. The result is that we have reshaped the underwriting portfolio, which no longer includes underwriting third-party reinsurance business in Bermuda, and reduction of aggregate exposures to match our revised risk appetite. We have continued to progress our ability to model our business.

Our underwriting strategy for 2012 will maintain focus on risk appetite and pricing. We were encouraged by the recent January renewal season, where we increased rates on our US catastrophe account by 5% to 15%. The US SME business also benefitted from rate increases, especially in catastrophe exposed areas, of between 7% and 15%. These accounts make up over 60% of our portfolio.

Our areas of priority for 2012 will include:

·; Underwriting: concentrating our underwriting in Syndicate 958, where capital can be deployed most efficiently within the Group;

·; Omega US: using existing relationships, continue to build our footprint in the United States and expanding into selected jurisdictions where new licences were obtained during 2011;

·; Embedding operational improvements: continuing to embed the infrastructure and operational improvements made over the past two years, including those related to Solvency II;

·; Capital Management: improving the capital efficiency of the Group;

Underwriting performance

Group gross premiums written reduced to US$304.6 million in line with plan (2010: US$356.1 million) and reflecting the non-renewal of Omega Specialty business during 2011. The net earned premiums reduced by only 1.4% to US$243.9 million (2010: US$247.4 million) as we earned more of our increased share of the syndicate. The net loss ratio was 102.2% (2010: 84.4%) with natural catastrophes accounting for 37.5%. The gross attritional loss ratio - which excludes large catastrophe losses but includes the small catastrophe losses - was 54.0% (2010: 44.0%) due to an increased incidence of smaller catastrophe losses principally in the USA. Unlike 2010, there was no prior year strengthening of reserves.

Lloyd's Syndicate 958

In 2011 the Group's participation on Syndicate 958 including quota share reinsurance accounted for gross written premiums of US$222.6 million (2010: US$244.9 million) and net earned premium of US$179.2 million (2010: US$169.7 million). The Group's participation in Syndicate 958 generated a combined ratio of 126.2% (2010: 112.7%) and a loss of US$54.8 million (2010: US$25.3 million loss). This loss was primarily due to the increased incidence of natural catastrophe losses.

The 2009 year of account has closed with a profit on capacity of 8.3% which is above the most recent published forecast range of 3% to 8%. The forecast range for each of the 2010 and 2011 years of account is a loss between 5% and 15%.

For the 2012 year of account, the Syndicate has maintained its capacity at £280 million. In dollar terms this represents an increase from US$420 million to US$448 million although we have reduced our planned gross premium income due to the realignment of the portfolio and expect to utilise 74% of capacity.

Group participation in Syndicate 958 and Syndicate 958 forecasts for the open years of account

* Declared result at 31 December 2011.

Omega Specialty (Bermuda Reinsurance)

In 2011 Omega Specialty's gross written premium decreased by 51.5% to US$31.6 million (2010: US$65.2 million) due to the non renewal of third party business in the second quarter of the year. The combined ratio was 267.9% (2010: 129.9%) due to the increased incidence of natural catastrophes events during the year, especially the New Zealand and Japan earthquakes and the lower premium base.

Omega Specialty's business consists of a portfolio of third-party catastrophe reinsurance covering both US and international risks. During 2011 the decision was taken not to underwrite this account for 2012. This was driven by the poor loss experience over the past two years, sub-scale premium income and its impact on the capital efficiency of the Group. The Group's Bermuda subsidiary, Omega Specialty Insurance Company Limited (OSIL) will continue to underwrite the intra-group quota share reinsurances and the 20% quota share of Syndicate 958.

Omega US (Chicago)

Gross written premium increased 9.6% to $50.4 million (2010: $46.0 million). Gross earned premium of $48.3 million in 2011 was a 15.3% increase from $41.9 million earned in 2010. Our combined ratio was 104.0%, down from 106.0% in 2010. While the catastrophe losses in the US were not as severe as the headline events occurring in the rest of the world, the high frequency of tornado activity in a number of US states together with Hurricane Irene meant that 2011 was still a very challenging year for US property insurers. While these events impacted Omega US, the losses incurred from these events were at the lower end of our expected range.

During 2011 Omega US obtained eligibility to write surplus lines business in a further eight US states, including California, bringing its total to 49 states and Washington DC, providing opportunities to write additional business in 2012.

The market in the US Excess & Surplus Lines ("E&S") sector started to change towards the end of 2011 and property rate increases have been achieved in a number of territories since that time. In the short term, rate increases have largely been in those territories and lines of business which have had catastrophe activity or those that have been impacted by the catastrophe model revisions - not an insignificant part of the E&S marketplace. As 2012 continues, it is anticipated that rate increases will become more widespread and incremental throughout the year, and could also impact the non-property lines as primary insurers and reinsurers respond to the impact of 2011 catastrophe events.

Underwriting Result

Net premium

The decrease in net written premium is reflective of the actions taken in 2010 and 2011 to reposition the business described above.

Net earned premiums, when compared to the same period last year, have decreased marginally. Although the effect of the premium changes are now coming through earned premium, this has been offset by the Group's increase in its share of the Syndicate for the 2010 year of account and the growth in Omega US. Premium ceded to reinsurers, excluding whole account reinsurance premiums totalled 20.7% of gross premium written (2010: 20.0%).

Loss experience

\* The accounting treatment of whole account reinsurance premiums and recoveries is set out in note 1 of the Financial Statements. The effect of these policies is shown separately in this review where relevant.

The catastrophe loss ratio is comprised of US$98.7 million of estimated losses net of class specific reinsurance recoveries. After taking into account net inwards reinstatement premiums of US$13.1 million, the effect of the catastrophe losses total US$85.6 million (2010: US$55.0 million). Estimates for the 2010 calendar year catastrophe losses net of class specific reinsurance recoveries increased by US$3.1 million during 2011. Excluding whole account reinsurance, the reinsurance recovery ratio for 2011 is 14.2% which is substantially higher than 6.7% in 2010.

The net attritional and large loss ratio of 66.9% is affected by reinsurance premiums protecting catastrophe exposures. Hence, the gross attritional loss ratio is more representative of performance. The current accident year gross attritional loss ratio is 54.0% (2010: 44.0%). The increase in the attritional loss ratio is due in a large part to an unusually high occurrence of smaller US and international catastrophes as previously disclosed in the Group's November interim management statement. Additionally, the ultimate loss ratio on US liability business for the 2011 year has been increased as a result of the general economic environment in the US.

The overall net prior year attritional reserve movement for 2011 is negligible at a US$ 0.6 million release (2010: strengthening of US$6.0 million).

Underwriting Agency

The Group's subsidiary, Omega Underwriting Agency Ltd ("OUAL"), receives agency fees and profit commission from unaligned capacity for its management of Syndicate 958. The Syndicate 2009 Year of Account has closed at a profit of US$38.4 million (100% Syndicate), after personal expenses but before managing agency profit commission. The result is an improvement over the position at the end of 2010 which had the effect of the recognition of additional profit commission of US$1.2 million during the year. The 2010 and 2011 years of account are each currently projected at a loss of between 5% and 15% of capacity and as a result, the Group has not recognised any related profit commission. Although future profit commission will be reduced in accordance with the deficit clause contained in the Agency agreement, the effect of this will be lessened by the Group's increase in participation on the Syndicate to 50.9% for the 2012 year of account.

Group Expenses

Total other underwriting operating expenses have increased marginally from 4.5% to 5.4% of net earned premium which reflects the ongoing cost associated with Solvency II. The investment incurred by the Group in 2010 and early 2011 in order to enhance the quality of its infrastructure has been completed and the cost base has stabilised.

 Investments

Assets under the Group's management were US$661.7 million at 31 December 2011 (2010: US$657.4 million) and the investment return for the year was 1.21% (2010: 1.94%), yielding investment income of US$8.3 million (2010:US$12.4 million). The investment portfolio is conservatively invested in US dollar fixed income assets where returns on government bonds and cash are at historically low levels. The return achieved is in line with our expectations for the period.

During 2011, the Group began implementing the new investment strategy agreed in late 2010 which moved away from the historical concentration in government bonds towards a cautious diversification into Corporate Bonds and Agency MBS. In the second half of the year, further diversification was put on hold until market conditions improve. At 31 December 2011, the Group had no direct holdings in securities issued by the governments of Greece, Portugal, Spain, Italy or Ireland.

*Includes government bonds, government agency and government guaranteed bonds

*Includes US government and government backed securities.

Taxation

Omega's effective tax rate for the period is 5.8% (2010: 0.3%). The rate reflects the distribution of underwriting losses according to the relevant jurisdiction. Tax credits have been accrued on underwriting losses incurred as well as for tax relief on Syndicate capacity which is amortised in the Group's UK tax returns. The balance sheet includes a deferred tax asset of US$3.1 million (2010: US$3.1 million) in respect of tax losses expected to be offset against future taxable profits in the US.

Dividends and Capital

Given the results for 2011, the Board believes it would be inappropriate to declare a dividend at this time.

The Group's minimum capital requirement is the higher of the rating agency or regulatory requirement for the each of the Group's risk taking subsidiaries. Actual capital carried has historically been well in excess of these requirements. Regulators include the Bermuda Monetary Authority (BMA), the Delaware Department of Insurance and the National Association of Insurance Commissioners (NAIC) and the Financial Services Authority (FSA) which regulates Lloyd's as a whole. For Omega US and Omega Specialty, the Group has maintained the AM Best capital requirements to maintain an A- insurer financial strength rating (IFSR). For Omega US, the AM Best rating is commercially necessary to underwrite its business.

Historically, Omega Specialty Insurance Company Limited (OSIL) underwrote third party business which necessitated both the BMA Classification of 3B and the AM Best rating, which resulted in a capital requirement of the higher of the two. However, in addition to the Omega Specialty business, OSIL also underwrote the intra-group quota share treaties for business which originated from the Group's underwriting at Lloyd's and Omega US. As a result, a substantial part of the Group's business which originated from its underwriting at Lloyd's has been subject to the higher capital requirements in support of OSIL's AM Best rating.

As a result of the non-renewal of the OSIL third party business, the BMA Classification of 3B and the AM Best stand-alone rating are not required, and the Group is currently in the process of addressing each of these issues. The effect of these changes will be that the Group's minimum capital requirements will primarily be those required by Lloyd's. Consequently, the Group will be able to benefit from the capital efficiencies of underwriting at Lloyd's for the business it originates from its economic participation on Syndicate 958.

Lloyd's assesses capital via its Economic Capital Adequacy (ECA) model. This takes as its starting point the FSA's Individual Capital Adequacy (ICA) approach which is then loaded by 35% to meet the Lloyd's higher financial strength rating objectives. Under the ICA approach, the Syndicate assesses its capital needs based on its own internal model. Lloyd's maintains a rigorous process under which it agrees the ICA annually based upon the Syndicate's business plan.

Implementation of the changes described above would enable the Group to employ a more capital efficient model for which, going forward, the ECA (instead of rating agency requirements) would be the basis for assessing its capital requirement for the majority of its business. Additional capital over and above the regulatory capital would be held as is the industry norm. The Group estimates that the capital currently held which is necessary to satisfy rating agency requirements is in excess of that which it would hold under the more capital efficient approach described above. Additionally, the Group currently does not carry any leverage, which is unusual compared to its peers. Going forward, introduction of a cautious amount of leverage will be considered.

2011 Group Financial Statements

Consolidated Income Statement

Year ended 31 December 2011

Consolidated Statement of Comprehensive Income

Year ended 31 December 2011

Consolidated Statement of Financial Position

As at 31 December 2011

Consolidated Statement of Changes in Equity

Year ended 31 December 2011

Year ended 31 December 2010

Consolidated Cash Flow Statement

Year ended 31 December 2011

Notes to the Consolidated Financial Statements

1. GENERAL INFORMATION AND ACCOUNTING POLICIES

Omega Insurance Holdings Limited ("the Company") is a limited liability company incorporated and domiciled in Bermuda, whose shares are publicly traded on the London Stock Exchange. The address of the registered office is provided on page 55.

Details of the Omega Group's principal activities are included in the Director's Report in the 2011 Report and Accounts.

Basis of Preparation

The consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), both as adopted for use by the European Union ("EU"), and applied in accordance with the provisions of the Bermuda Companies Act 1981.

Consolidated financial statement values are presented in US dollars rounded to the nearest US$'000 unless otherwise stated.

Basis of Consolidation

The consolidated Financial Statements incorporate the accounts of Omega Insurance Holdings Limited and all its subsidiary undertakings ("the Group") drawn up to 31 December 2011.

The Financial Statements of subsidiaries are prepared for the same reporting year as the parent company. Consolidation adjustments are made to convert subsidiary Financial Statements prepared under local GAAP into IFRS so as to remove any accounting policy differences that may exist.

The Group's share of the transactions, assets and liabilities relating to its Syndicate participation is included in the consolidated Financial Statements.

Intra-group transactions and balances between Group companies are eliminated.

Changes to accounting requirements applicable to these Financial Statements

New and amended standards and interpretations

The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2011:

·; IFRS 1 Limited exemption from comparative IFRS 7 disclosures for first-time adopters effective 1 July

2010

·; IAS 24 Related Party Disclosure effective 1 January 2011

·; IAS 32 Classification of Rights Issue effective 1 February 2010

·; IFRIC 14 Prepayment of a Minimum Funding Requirement effective 1 January 2011

·; IFRIC 19 Extinguishing financial liabilities with equity instruments effective 1 July 2010

·; Improvements to IFRSs (May 2010), the effective date of each amendment is included in the IFRS affected

Adoption of these revised standards and interpretations did not have any material effect on the financial performance or position of the Group. They did, however, give rise to additional disclosures in some areas.

Listed below are standards and interpretations that have been issued, but not yet effective as of 1 January 2011

Standards issued but not yet effective up to the date of issuance of the Group's financial statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective.

Amendments to IAS 19 Employee Benefits

The amendments to IAS 19 remove the option to defer the recognition of actuarial gains and losses, the corridor mechanism. All changes in the value of defined benefit plans will be recognised in profit or loss and other comprehensive income. The effective date of the standard is 1 January 2013. These amendments do not impact the financial statements as the Group does not operate a defined benefit pension scheme.

Amendments to IAS 1 Presentation of Financial Statements

The amendments to IAS 1 require changes to the presentation of other comprehensive income. Items that could be reclassified to profit or loss at a future point in time would be presented separately from items which will never be reclassified. The effective date of the standard is 1 January 2013. The Group has not adopted this amendment early.

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 9 as issued reflects the first phase of the Boards work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities. The standard is effective for annual periods beginning on or after 1 January 2015. In subsequent phases, the Board will address impairments, and hedge accounting. The completion of this project is expected in 2012. The adoption of IFRS 9 will have an effect on the classification and measurement of the Group's financial assets. The effect of this change will be quantified only in conjunction with the other phases when issued, to present a comprehensive picture.

IFRS 10 Consolidated Financial Statements

IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation - Special Purpose Entities. The standard establishes a single control model that applies to all entities. It will require management to exercise judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent. It is effective for annual periods beginning on or after 1 January 2013. The Group does not expect the adoption of IFRS 10 to change which entities are consolidated by the group.

IFRS 11 Joint Arrangements

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-monetary Contributions by Venturers. The standard addresses two forms of joint arrangements i.e. joint operations and joint ventures. To assess whether there is joint control IFRS 11 uses the principle of control in IFRS 10. The existing option to account for jointly controlled entities under IAS 31 using proportionate consolidation is removed in this standard. The effective date of this standard is 1 January 2013. The Group has no joint arrangements, the adoption of this standard is therefore not expected to impact on the financial statements of the Group.

IFRS 12 Disclosure of Interests in Other Entities

IFRS 12 includes all the disclosures that were previously in IAS 27, IAS 31 and IAS 28 Investment in Associates. A number of new disclosures are added to the existing requirements such as the judgments made to determine whether it controls another entity. This standard is effective for the annual periods beginning on or after 1 January 2013. IFRS 12 is a disclosure only standard and therefore will have no effect on profit or loss nor equity of the Group.

IFRS 13 Fair Value Measurement

IFRS 13 provides guidance on how to measure the fair value of financial and non-financial assets and liabilities when required or permitted by IFRS. The standard is effective for annual periods on or after 1 January 2013.

Significant accounting judgements, estimates and assumptions

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods.

Judgements

The key accounting judgements applied by management in these Financial Statements relate to accounting estimates. The judgements applied in significant accounting estimates are set out below.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. These related primarily to valuation of insurance liabilities, investments and intangible assets.

Foreign currency translation

The Group's results and financial position are presented in US dollars which is also the parent company's functional currency. Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates of the transactions or a suitable average rate. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Exchange differences arising on retranslation are included in the income statement. Non-monetary assets and liabilities, being those without a corresponding cash flow such as unearned premium reserves and deferred acquisition costs, are translated in the balance sheet at the exchange rate prevailing at the date of the original transaction.

The results and financial position of Group entities which have a different functional currency are translated into the Group's presentational currency as follows:

·; assets and liabilities are translated at the closing rate at the balance sheet date

·; income and expenses are translated at average exchange rates

All resulting exchange differences are recognised in the statement of comprehensive income.

Insurance contracts

a) Premiums

Written premiums comprise premiums on contracts incepted during the financial year as well as adjustments made in the year to premiums written in prior accounting periods. Estimates are made for pipeline premiums, representing amounts due but not yet notified.

For delegated authority business estimates of how much business will attach to a facility are based on experience and information provided by the broker. Estimates are updated on a regular basis. It is assumed that risks attaching to the master facility incept evenly across the period of the facility and therefore only that proportion of risks that have incepted to the master facility by the balance sheet date are reported within written premium in these Financial Statements.

All premiums are shown gross of commission payable to intermediaries and are exclusive of taxes and duties levied thereon.

Written premiums are earned over the period of the policy on a time apportionment or more appropriate basis, having regard to the exposure of the risk.

b) Reinsurance premium ceded

Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards business being reinsured.

The Group enters into whole account reinsurance policies which contain a proportion of premium which is refundable as loss recovery or return premium dependant on ultimate loss experience. The Group's accounting policy is to reflect the whole premium as reinsurance premium and to reflect the proportion of loss recoveries which would otherwise be received as return premium as reinsurance recoveries in the period in which they arise. Where applicable return premiums are recognised as a reduction to reinsurance premium in the year following the inception of the contract.

c) Unearned premiums

The provision for unearned premiums represents the proportion of gross written premium which is estimated to relate to exposures in subsequent financial periods. The change in the unearned premium provision is taken to income so that revenue is recognised in accordance with the period of risk.

d) Acquisition costs

Acquisition costs, comprising commission and other costs related to the acquisition of insurance contracts are deferred to the extent that they are attributable to premiums unearned at the balance sheet date. Deferred acquisition costs are amortised over the period in which the related revenue is earned.

Claims

a) Insurance claims

Claims incurred comprise the estimated cost of all claims occurring during the period, whether reported or not, including related direct and indirect claims handling costs and adjustments to outstanding claims provisions from previous periods.

b) Insurance contract liabilities

The provision for claims outstanding is made on an individual case basis and is based on the estimated ultimate cost of all claims notified but not settled by the balance sheet date, together with the provision for related claims handling costs. The provision also includes the estimated cost of claims incurred but not reported ("IBNR") at the balance sheet date based on statistical methods.

These methods generally involve projecting from past experience of the development of claims over time to form a view of the likely ultimate claims to be experienced for more recent underwriting, having regard to variations in the business accepted and the underlying terms and conditions. For the most recent years, where a high degree of uncertainty arises from projections, estimates may be based on assessments of the business accepted and underwriting conditions. The Group does not discount its liabilities for unpaid claims. Where applicable, deductions are made for salvage and other recoveries.

The reinsurers' share of provisions for claims is based on the amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the year and the current security rating of the reinsurance companies involved.

The provision for claims outstanding is based on information available at the balance sheet date. Significant delays are experienced in notification and settlement of certain claims and accordingly the ultimate cost of such claims cannot be known with certainty at the balance sheet date. Subsequent information and events may result in the ultimate liability being less than, or greater than, the amount provided. Any differences between provisions and subsequent settlements are dealt with in the income statement of later periods.

c) Liability adequacy test

Provision is made where the expected cost of claims and expenses arising after the end of the financial period from contracts concluded before that date exceeds the provision for unearned premiums, net of deferred acquisition costs, premiums receivable and related investment return.

Investments

a) Financial assets at fair value through the income statement

The Group has classified its financial investments as "fair value through income" to the extent that they are not reported as cash and cash equivalents. This classification has been determined by management based on the decision at the time of acquisition and reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. The fair values of quoted financial investments are based on current bid prices. Unlisted investments for which a market exists are stated at the average price at which they are traded on the balance sheet date or the last trading day before that date. Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and subsequently re-measured at fair value based on quoted bid prices. Investments are derecognised when they have been sold. Changes in the fair value of investments are included in the income statement in the period in which they arise.

b) Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are based on observable market conditions. Changes in the fair value are recognised immediately in the income statement.

c) Investment return

Investment return comprises all investment income, realised investment gains and losses and movements in unrealised gains and losses.

Realised gains and losses on investments are calculated as the difference between sale proceeds and purchase price. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their valuation at the previous balance sheet date or purchase price if acquired during the year, together with the reversal of previously recognised unrealised gains and losses in respect of investments disposed of in the current year.

The Group's investment strategy is designed around the Board approved risk appetite and is based on an objective of maximising the Group's investment return whilst preserving the Group's capital. The investment return is measured based on the income received and the fluctuations in the market value of investments. Designation of the Group's investments at fair value through the profit and loss is therefore consistent with the Group's investment strategy.

Income from management of Lloyd's Syndicate

Income from management of Lloyd's Syndicate comprises; agency fees, management fees and profit commission charged by the Group to third party members of Syndicate 958.

Agency fees relating to a year of account are recognised by the Group over four years, with the majority recognised in the first year, in line with the services provided. Management fees relate to expenses incurred by the Group which are recharged to the Syndicate and are recognised in the same period as the related expense.

Profit commission is receivable on closure of the relevant Lloyd's year of account, normally after three years. It is recognised by the Group as earned on an annual basis to match the related underwriting profits. Profit commissions due after more than one year are held at fair value which is the discounted present value of the nominal amount expected to be received.

Other expenses

Other underwriting operating expenses are recognised on an accruals basis. These comprise expenses directly attributable to the Group's underwriting operations. They include the Group's share of Syndicate operating expenses and the costs of membership of Lloyd's. Also included are operating expenses in Bermuda and in the US which are attributable to underwriting operations.

Other corporate expenses are recognised on an accruals basis. They comprise other group operating expenses not attributable to underwriting.

Employee benefits

a) Pension

The Group provides defined contribution pension schemes for the benefit of employees. Contributions are charged to the income statement in the same period as the related service is provided.

b) Share based payments

The Group operates a number of executive and employee share schemes. In accordance with IFRS 2 the fair value of equity-settled share-based payments to employees is determined at the date of grant and is expensed on a straight-line basis over the vesting period based on the Group's estimate of shares or options that will eventually vest. In the case of options granted, fair value is measured by a binomial model the material inputs of which are: share price at date of the grant; expected dividend yield; expected volatility; risk free interest rate and employee turnover.

When the options are exercised, the proceeds received, net of transaction costs, are credited directly to equity. When employees forfeit share options on departure from the Group, amounts previously charged to the income statements in relation to the forfeited options are credited to the income statement.

Income taxes

The tax expense represents the sum of the current tax and deferred tax.

a) Current income tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because items of income and expense are taxed in different periods, and it excludes items that are never taxed or deducted. The Group's liability for current tax is calculated using tax rates applicable as at the balance sheet date.

Current income tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the current tax is also dealt with in equity.

b) Deferred income tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding amounts used in the computation of taxable profit, and is accounted for using the balance sheet method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered, or to the extent that it has been utilised.

Deferred tax is calculated at the tax rates based on the enacted or substantially enacted tax laws expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows:

Fixtures and fittings - over 5 years

Computer hardware - over 3 years

An item of property and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. A gain or loss arising on de-recognition of the asset is calculated as the difference between the net disposal proceeds and the carrying amount of the item. Any such gain or loss is recognised directly in the income statement.

Intangible assets

a) Software development

Computer software development costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets, and are amortised using the straight line method over their useful lives. Amortisation commences when the asset is available for use.

Computer software development costs are subject to an annual impairment review. The amount of any impairment is recognised directly in the income statement.

b) Syndicate participation

Syndicate capacity purchased is recognised at cost. It is considered to have an indefinite useful economic life and is therefore not amortised.

Syndicate capacity is reviewed at each balance sheet date for impairment by reference to the future expected profit streams of Syndicate 958 and the amount of any impairment is recognised directly in the income statement.

Insurance receivables

Insurance receivables are recognised and carried at the recoverable amount. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount is greater than the recoverable amount, with the impairment adjustment recorded in the income statement.

Provisions

A provision is recognised when it is probable that a present legal or constructive obligation, as a result of a past event, will result in an outflow of resources and when a reliable estimate of the amount of the obligation can be made.

Leases

Rentals payable under operating leases are taken to the profit and loss account on a straight line basis over the lease term.

Trade and other payables

Trade and other payables are recognised on an accruals basis, based on amounts owed at the balance sheet date.

Operating segments

The Group's operating segments have been identified as follows:

·; Group reinsurance of, and participation on, Syndicate 958.

·; Omega Specialty (other reinsurance) which is the non-Syndicate and non-US derived business written by Omega Specialty in Bermuda.

·; Omega US Insurance which is the contribution to the Group from Omega US ignoring the effects of intra-group reinsurance.

·; Omega Underwriting Agents - which show the results for managing the non-Omega share of Syndicate 958 and includes profit commission and agency fees received for managing the Syndicate.

·; Other group activities - which show the results of transactions that do not relate to any of the segments above, being primarily those of the Group's ultimate and intermediate holding companies.

2. SEGMENTAL INFORMATION

(i) Income statement by segment

Year ended 31 December 2011

2. SEGMENTAL INFORMATION (continued)

(i) Income statement by segment

Year ended 31 December 2010

2. SEGMENTAL INFORMATION (continued)

(ii) Geographic information

US$258,859,844 (2010: US$310,546,000) of gross written premium is written in the country of the Group's domicile, Bermuda. This includes quota share reinsurance contracts with Omega US, Omega Dedicated and Syndicate 958.

Gross written premium information is based on the location of the insured.

Where cover is on a worldwide basis, the apportionment of premium to the categories has been estimated.

3. INVESTMENT RETURN

The 2010 derivative fair value gains related to gains on foreign exchange forward contracts entered into by Syndicate 958. These contracts were settled during 2010.

4. INCOME FROM MANAGEMENT OF LLOYD'S SYNDICATE

5. ACQUISITION COSTS

6. OTHER UNDERWRITING AND CORPORATE EXPENSES