28th Feb 2008 13:04
Amlin PLC28 February 2008 The following replaces Amlin plc's final results released at 7:01am under RNSnumber 91290. Please note that the record date for the proposed final dividend stated in theabove announcement made earlier today was incorrect. The record date should haveread 25 March 2008. A corrected version of the full announcement appears below. AMLIN PLCPRESS RELEASEFor immediate release28 February 2008 Preliminary Results for the year ended 31 December 2007 "AMLIN DELIVERS RECORD RESULT" Highlights: Income statement • Record return on equity of 37.8% (2006: 34.0%). • Weighted average return on equity over past five years of 32.0% (2006: 27.9%). • Profit before tax up 29.9% at £445.0 million (2006: £342.7 million). • Strong underwriting contribution up 32.5 % to £355.0 million (2006: £267.9 million). • Combined ratio at record 63% (2006: 72%). • Investment return increased by 36.4% to £157.0 million (2006: £115.1 million). Balance sheet and capital management • Net assets increased 12.4% to £1,052.2 million (£936.4 million). • Record run-off profits from reserves of £109.0 million (2006: £68.9 million). • £120.4 million return of capital via issue of B shares. • Dividends (paid and proposed) increased by 25.0% to 15.0 pence per share. Positive outlook • Underpinned by net unearned premium reserve of £474.3 million (2006: £507.8 million). • Underwriting margins remain good despite declining rates. • Strong cash flow supports future growth in dividends. Charles Philipps, Chief Executive, commented as follows: "These results are exceptional and reflect a combination of strong pricingconditions, low catastrophe claims and good investment returns. Our averagereturn on equity over the past five years shows that this is not a flash in thepan. However, underwriting returns have peaked in the short term. Our confidencein being able to continue to deliver more than acceptable returns forshareholders and our strong balance sheet supports a growing dividend goingforward." Enquiries: Charles Philipps, Chief Executive, Amlin plc 0207 746 1000Richard Hextall, Finance Director, Amlin plc 0207 746 1000Hannah Bale, Head of Communications, Amlin plc 0207 746 1118David Haggie, Haggie Financial LLP 0207 417 8989 / 07768 332486Peter Rigby, Haggie Financial LLP 0207 417 8989 / 07803 851426 Financial Highlights 2007 2006 2005 2004 2003 £m £m £m £m £mGross premium written 1,044.7 1,113.8 993.5 945.6 937.4Net premium written 938.3 1,013.5* 829.3* 790.2* 787.6*Net earned premium 972.3 973.9* 822.1* 722.4* 701.1*Profit before tax 445.0 342.7 186.7 119.7 117.8Return on equity 37.8% 34.0% 29.6% 21.0% 26.6%Net assets 1,052.2 936.4 784.8 449.2 380.5Net tangible assets 983.2 870.4 718.8 383.2 317.3Per share amounts (inpence)Earnings 66.3 50.4 34.3 20.7 21.0Net assets 220.6 175.6 148.7 113.7 98.7Net tangible assets 206.2 163.2 136.2 97.0 82.3Dividend under IFRS** 20.8*** 10.4 9.0 4.7 2.1Dividends (paid and 15.0 20.0*** 10.2 8.0 2.5proposed final)in respect of calendaryear**Capital return via B 22.4 - - - -sharesGroup operating ratiosClaims ratio 36% 41% 57% 50% 50%Expense ratio 27% 31% 25% 32% 36%Combined ratio 63% 72% 82% 82% 86%Amlin Bermuda Ltd combined 46% 48% - - -ratioSyndicate 2001 combined 69% 76% 82% 82% 86%ratio * Excluding premiums associated with the reinsurance to close of increased shareof capacity. ** All per share dividends are the actual dividends paid or proposed for eachshare in issue at the time. *** Includes special dividend of 8.0p per share. Claims ratio is net claims incurred divided by net earned premium for the year.Expense ratio is underwriting expense incurred divided by net earned premium.The expense ratio does not include expenses that have not been attributed tounderwriting or finance costs. Combined ratio is the total of the claims andexpense ratio. CHAIRMAN'S STATEMENT I am delighted to report another year of excellent progress for Amlin. Thefinancial results are exceptional, a product of strong underwriting andinvestment returns. The last few years have represented a period of sustaineddelivery, with our weighted average return on equity since 2002 now standing at32.0%. Importantly for our business the senior underwriting team has again remainedstable. Their exceptional underwriting skills have delivered the performance ofrecent years and places us in an excellent position to continue this into a moredifficult underwriting climate. The strength of our business is now recognised by strong financial ratings fromall of the rating agencies that we deal with. During the year AM Best upgradedboth the Syndicate and Amlin Bermuda to A+ and A respectively. This places theSyndicate as the only current Lloyd's operation with this higher rating andAmlin Bermuda at a level that is ahead of many of its Class of 2005 Bermudianpeers. Results and dividend Our profit before tax of £445.0 million (2006: £342.7 million) is a recordresult. It reflects strong underwriting returns, with a remarkable combinedratio of 63% (2006: 72%) following a second year of benign catastrophe events.The investment return of 6.6% across our portfolio was equally impressive giventhe volatile market environment. Our weighting towards high grade and governmentbonds helped, together with a reduction in our equity exposure in the autumn, asthe extent of the credit market problems began to become apparent. The Board proposes a final ordinary dividend of 10.0p per share. Taken togetherwith the interim dividend of 5.0p per share and the return of capital under theB share scheme approved at the EGM in December 2007 of 22.4 p per share, thisgives total payments to shareholders for 2007 of 37.4p per share in issue at thetime (equivalent to 34.4p per share following the share consolidation ofDecember 2007). The final dividend will be paid on 30 April 2008, subject toshareholder approval at the Annual General Meeting to be held on 24 April 2008,in respect of shares on the register on 25 March 2008. The company dividendreinvestment plan is available to shareholders in respect of this dividend.Looking forward we would expect to be able to steadily grow the dividend anddeliver healthy income returns for shareholders. Additionally the Board has authorised a buy back programme for our ordinaryshares in order to continue to efficiently manage our equity capital. This,combined with the return of £120.4 million of capital at the end of the year andthe special dividend announced this time last year, delivers on our commitmentto actively manage our capital. Strategic progress The Board has continued to review the Group's strategic direction to ensure thatAmlin builds upon its strengths and long term potential. We strive to leadchange in the London market with a view to enhancing the service that ourclients receive and our appeal to them. Good progress has been made. A solidfoundation has also been built at our new Bermudian operation. While only modestgrowth was achieved in the year, in a competitive market, with an expanded teamof underwriters, we look to the future with some confidence. With Amlin's core business in a good position we have examined the changing faceof distribution in our markets during the year. The UK, global specialty andreinsurance markets are all evolving rapidly and we intend to be alert to theopportunities that are presented to us. During the year we purchased a UK insurance operation, Allied Cedar, with theintention of strengthening our UK property offering. We also set up AmlinSingapore to bring a local presence to the thriving Asia-Pacific region with aview to writing energy and property business. Outlook Undoubtedly, rating conditions became more challenging in 2007 and into thestart of 2008. Nevertheless, our Non-marine, Marine and Bermuda businessescontinue to enjoy good market conditions with the potential to deliveracceptable returns to shareholders. However, we have reduced our risk appetiteas margins have fallen. In our other two areas of underwriting we believe that we are towards the troughof the cycle. The aviation market has been disappointing, with competitorsseemingly happy to expand their underwriting with little prospect of an adequatereturn for the risk assumed. The UK commercial market has also been highlycompetitive with only limited signs to date of a return to more rationalbehaviour. However it is increasingly likely that these business areas willstart to turn to provide a source of future growth. While conditions may now be more difficult, this is when we would expect ouroutperformance against our peers to grow. Our team shares a well understoodunderwriting philosophy that focuses on profitability, we are well reserved andwe are constantly striving to improve our risk management and managementinformation to enable us to steer a steady course. Board The Board welcomed Mr Marty Feinstein as a new non-executive Director inDecember 2007. Marty, as one of our US directors, brings considerable insuranceindustry experience to our deliberations, after a distinguished career atFarmers Group Inc., where he was CEO for 10 years. Tom Kemp, another of our US directors, retired from Amlin at our AGM in May 2007after serving as a director since 1998. We received excellent advice from himthroughout this period and thank him for his service to the company. At our AGM in April 2008, Roger Joslin will be retiring. Roger, who waspreviously Vice Chairman at State Farm, joined the Board in 2001 and has taken akeen interest in the development of Amlin for which we are very grateful. The Amlin team A record breaking profit has been produced in 2007. The continued effort ofCharles Philipps, his management colleagues and all our employees has allowedthe Group to attain a market leadership position and strength that is sovaluable in challenging times. I would like to thank them all for their skilland hard work. Roger TaylorChairman FINANCIAL PERFORMANCE 2003 2004 2005 2006 2007 £m £m £m £m £mGross premium 937.4 945.6 993.5 1,113.8 1,044.7writtenNet premium 787.6 790.2 829.3 1,013.5 938.3Net earned premium 701.1 722.4 822.1 973.9 972.3Underwriting 117.1 106.6 137.1 267.9 355.0contributionInvestment 33.5 52.1 90.9 115.1 157.0contributionOther costs 32.8 39.0 41.3 40.3 67.0Profit before tax 117.8 119.7 186.7 342.7 445.0Return on equity 26.6% 21.0% 29.6% 34.0% 37.8% The financial performance of the Group has again been excellent with a recordprofit before tax of £445.0 million (2006: £342.7 million) and return on equityof 37.8% (2006: 34.0%). Returns from both underwriting and investments werestrong. Our underlying profit, after removing the positive effect of a £42.6million swing in the foreign exchange translation of net non-monetaryliabilities relative to 2006, increased by 16.1.% to £430.3 million (2006:£370.6 million). Underwriting contributed £355.0 million (2006: £267.9 million) to the pre taxresult; £238.8 million (2006: £198.9 million) for London and £116.2 million(2006: £69.0 million) for Amlin Bermuda. The result reflects the relativelybenign claims environment experienced in 2007. The underwriting contribution includes run off profits from reserves of £109.0million (2006: £68.9 million). This is the largest release that we have made.However, we have continued to maintain consistent levels of reserving strengthfor liabilities assessed at 31 December 2007 as in previous years, with reservesset at a level above an actuarial best estimate of possible outcomes. With thisapproach, if 'normal' claims development is experienced, releases will be madefrom reserves over time. On an underwriting year basis, net claims reserves areat least £200 million above the actuarial best estimate. Investment return was an impressive £157.0 million (2006: £115.1 million) withstrong returns made from all asset classes. Over the longer term, our performance has been very strong with a weightedaverage return on equity since 2002 of 32.0% compared to our cross cycle targetof 15% and our estimated cost of capital of 10.0%. Rating indices in key classes Rating levels across a number of major classes of business are shown in thetable below. Class 2000 2001 2002 2003 2004 2005 2006 2007US catastrophe 100 115 146 150 143 144 185 188reinsuranceInternational catastrophe 100 120 157 161 145 131 138 131reinsuranceProperty reinsurance 100 122 189 191 170 146 170 144Property insurance 100 125 171 163 143 136 165 143US casualty 100 123 172 217 234 239 237 223Marine hull 100 115 148 171 183 189 191 192Offshore energy 100 140 172 189 170 175 262 243War 100 250 288 244 220 206 191 175Fleet motor 100 121 136 143 141 137 135 134UK employers' liability 100 115 144 158 159 144 135 120UK professional indemnity 100 110 149 178 181 165 154 141Airline hull and 100 301 283 235 216 201 158 122liabilities Underwriting performance With a low level of catastrophe incidence in the year, a good underwritingresult is to be expected but the Group's overall combined ratio of 63% (2006:72%) is exceptional. Gross premium written remained relatively unchanged in original currency, withgrowth in well priced classes such as US catastrophe reinsurance offset byfurther volume reductions in classes that have continued to come under pressure,such as UK Commercial motor. With 62% of gross premium written in US dollars,which weakened relative to sterling by 8% during the year, reported grosspremium written of £1,044.7 million, is 6.2% less than in the prior year (2006:£1,113.8 million). Overall, the renewal rate reduction across all business was 5% with a renewalretention ratio of 77%. In 2006 we took the decision to operate with significantly less retrocessionalreinsurance cover than we had in previous years on the basis that the price ofcover had become uneconomic. In 2007 the price of retrocessional cover becamemore reasonably priced and Syndicate 2001 purchased more cover, albeit not asmuch as had been in force during 2005. However reinsurance expenditure as a proportion of gross premium written hasincreased only modestly from 9.0% to 10.2%. This is due to two factors. Firstly,Amlin Bermuda now represents a larger part of the Group and has so far operatedwithout the purchase of any reinsurance. Secondly, more reinsurance is boughtfor the Syndicate dollar account than for the sterling business. As the dollarweakens, this lowers the apparent reinsurance expenditure. Net earned premium (excluding the premium associated with reinsurance to close)was marginally lower at £972.3 million (2006: £973.9 million), reflecting theearnings lag on premium income written in 2006, particularly with Amlin Bermudain start up mode in the first part of that year, offset by the impact of aweakening US dollar. 2007 catastrophe loss activity The Group claims ratio for the year was 36% (2006: 41%). Natural catastropheactivity in the United States was again below long term averages. Our mostsignificant loss was the California bush fires in October, where we currentlyestimate a net exposure of up to US$25.8 million. The UK and Australian floodsin June and July (UK only) were also major losses to the international insuranceindustry together with Windstorm Kyrill, which swept across Northern Europe inJanuary. Our exposures to these events has been limited, in part due to thereinsurance programmes we have in place and the risk retained by cedants, butalso due to our comparatively small exposure to the UK direct household andsmall commercial sectors. Conservative estimates of the losses incurred by Amlinfrom the UK, Australian floods and Windstorm Kyrill are £13.0 million, £4.2million and £1.2 million respectively. Divisional performance Underwriting performance - Syndicate & Amlin Bermuda 2003 2004 2005 2006 2007 £m £m £m £m £mGross premium 1,097.5 942.2 992.9 1,113.8 1044.7writtenNet earned premium 890.6 782.0 827.4 973.9 972.3Claims ratio % 50 50 57 41 36Expense ratio % 36 32 25 31 27Combined ratio % 86 82 82 72 63Combined ratio % * 84 80 85 70 64Underwriting 134.2 139.3 152.0 267.9 355.0contribution *excluding the exchange difference on non monetary assets and liabilities. The divisional combined ratios referred to below are after removing the exchangedifferences on the translation of non-monetary assets and liabilities. Non-marine Non-marine is the Group's largest division accounting for £500.6 million ofgross premium written in 2007 (2006: £554.6 million). The business written is amix of classes which are exposed to catastrophic loss (for example catastrophereinsurance), large claim events (for example aviation reinsurance) andattritional claims (for example auto and casualty). In 2007 the catastrophereinsurance and property classes wrote £371.4 million of premium, representing74% of divisional gross premium written. Geographically the division's largest market is the United States, whichrepresented 63% of business written in 2007. Diversity is significant, however.In the United States our property catastrophe underwriting is centred onregional insurers and regional exposures are monitored closely. Internationally,our insurance and reinsurance programmes include windstorm cover in Europe,earthquake and windstorm exposure for Japan and earthquake protection inAustralia and New Zealand. The average rate of renewal for the division was a reduction of 5.4% (2006:increase of 11.5%). US catastrophe reinsurance pricing remained relativelystrong with rates increasing by 1.5%. However this should be viewed in thecontext of the prior year when rates increased by 28.3% as a response to thehurricanes of 2005. International catastrophe pricing was more disappointing with rates falling by5.0% as more reinsurers looked to diversify their portfolios. However, pricingin more capacity constrained zones, such as Europe and the Caribbean remainedadequate. The renewal retention rate was 80% (2006: 80%). A combined ratio of 60% is another excellent result (2006: 66%). The key driverwas the low level of catastrophe losses in the year, aided by good claimsdevelopment on prior years, resulting in a claims ratio of 29%. Run off profitsfrom reserves of £50.0 million were made (2006: £21.9 million). Marine The Marine division contributed £187.2 million to gross premium written in 2007(2006: £210.9 million). The division writes a combination of volatile classesincluding energy, specie and war, but also attritional classes such as hull,cargo and yacht. Business written is worldwide, however the bloodstock and yachtaccounts have a UK bias. Rating conditions remained relatively good in the year, with an averagedivisional renewal rate reduction of 4.1% (2006: 4.5% increase). The averagerate reduction within the energy account was 7.5% and war continued toexperience more challenging pricing conditions, with limited loss activityexperienced in the year and increased competition as a result. Attritionalclasses, such as hull, cargo and yacht experienced more modest rate reductions.The renewal retention rate was 76% (2006: 79%). The Marine division's combined ratio increased modestly to 83% (2006: 81%).Reserve releases totalled £8.0 million (2006: £19.1 million). Aviation The division writes a mixture of classes including airline, general aviation,airport and product liabilities and satellite insurance. The classes are exposedto large loss events and potential catastrophic loss. As such, a comprehensivereinsurance programme is fundamental to writing this business. The Aviation division accounted for £63.6 million of gross premium written in2007, down 16% on the prior year (2006: £75.7 million). The largest contributionto written premium was provided by airline (hull and liabilities), generalaviation and airport liability which together count for 77% of the portfolio.33% of business was ceded to reinsurers. With additional capacity entering the aviation market during the year, intenserating competition has continued to exist and disciplined underwriting has meantour portfolio has reduced as intended. The average divisional renewal ratereduction was 13.0% (2006: 19%). The overall renewal retention rate has remainedsteady at 80% (2006: 81%). The combined ratio of 70% is a pleasing result (2006: 84%), the consequence of afalling claims ratio to 33%. During 2007 there were 20 large insurance lossevents to the airline industry, resulting in total airline losses exceedingglobal premium. Having reduced the portfolio, becoming more selective in theface of falling prices, Amlin were involved in only two of these losses at atotal cost of £2.0 million. Run off profits from reserves amounted to £15.9million (2006: £8.0 million) with little claims development in the year. UK Commercial The UK Commercial division writes business principally for UK based clients andthe majority of risks are not written in the subscription market but are assumedentirely by the division. The division underwrites a balanced portfolio of motorand liability business, combined with a small property account. Catastrophe riskis reinsured and, inherently, the divisional profile is attritional in nature. £149.2 million of gross premium was written in the year (2006: £150.0 million).The division has continued to experience rating pressure in all classes and ourteam has focused its efforts on risk selection and underwriting profitability,together with delivery of high levels of client service to a core client basewhich has a strong record of continuity with the business. The average renewal rate reduction was 5.2% (2006: 2.7%). Claims inflation alsocontinues to erode margins. The relatively low renewal retention rate of 71%(2006: 68%) reflects our disciplined underwriting approach. Within this challenging market, the combined ratio of 86% is a strong result(2006: 84%). Run off profits from reserves of £22.1 million (2006: £19.8million) reflect the release of case reserves as claims settle belowexpectations. Amlin Bermuda Amlin Bermuda underwrites reinsurance in most areas of the world, but does nothave the ability to write insurance as it does not hold relevant licenses. Inorder to gain exposure to the diversity offered by some non catastropheinsurance accounts, Amlin Bermuda has written specific class reinsurances plus a10% quota share reinsurance of Syndicate 2001. During 2007 no third partyreinsurance was purchased by Amlin Bermuda. Amlin Bermuda wrote £232.8 million, or US$465.8 million, of gross premium in theyear (2006: £223.5 million, or US$411.2 million). Of this £90.3 million, orUS$180.6 million, of premium was attributable to quota share and otherreinsurances of Syndicate 2001 (2006: £100.8 million, or US$185.5 million). Theaverage renewal rate was a reduction of 7% and the average renewal retentionrate was 76%. Growth has been constrained as primary carriers have chosen to maintain ourshare of risk at levels consistent with the previous year, in the face ofgrowing competition for lines. This is more satisfactory than fierce competitionon price. Importantly, the quality and diversity of the book is good and we havenot compromised standards simply to hit premium income targets. The combined ratio of 46% is a strong result (2006: 48%). This reflects the lowlevel of catastrophe losses and limited development on claims in the year,resulting in a claims ratio of 34%. Run off profits on reserves amounted to£13.0 million (2006: nil). The expense ratio of 12% is low relative to theLondon operations due to the high operational gearing of the reinsurancebusiness written in Bermuda and the effect of intra-Group reinsurance. Investment performance Investment mix and return 2007 2006 Average Average Asset Return Asset Return Allocation Allocation £m £m £m £mEquities 286 28 196 31Bonds 1,598 96 1,440 50Property 59 6 17 1Other liquid 542 28 670 33investmentsTotal 2,485 158 2,323 115Equities 12% 10.2% 8% 15.3%Bonds 64% 6.3% 62% 3.3%Property 2% 9.8% 1% 3.0%Other liquid 22% 5.5% 29% 4.7%investmentsTotal 100% 6.6% 100% 4.8% Note: the above table excludes a £1 million loss from derivative instruments. The contribution to profit for the year from investments increased by 36.4% to£157.0 million (2006: £115.1 million). The return on average cash and investmentbalances of £2.4 billion was 6.6% (2006: £2.3 billion, 4.8%). The increase inassets under management was due to strong organic cash flows and profitabletrading. The investment environment in 2007 has been volatile as the potential economiccost of defaults from sub-prime borrowers in the United States and the weak UShousing market, led to a liquidity crisis in the financial system. The diverseportfolio structure of the Group's assets helped to weather the storm through2007. The global equity portfolio produced a return of 10.2% - our managersinvested defensively and were not over exposed to the US market. In the face of an increasingly uncertain economic outlook, particularly withliquidity issues being experienced by the banking system, the Board decided toreduce its investment risk appetite in August. Consequently the equity weightingof Group assets was reduced, and option strategies were put in place coveringthe remaining 25% of equity holdings. The latter provided protection for thatproportion of the equity portfolio against a fall in major indices of more than5% from 19 September to 31 December 2007, at a cost of limiting gains over thesame period to approximately 4%. This option strategy was rolled over on 5December to 31 March 2008. On the whole, our bond portfolios were conservative in nature. The tables belowshow the breakdown of our portfolios by asset type, our asset/mortgage backedsecurities and corporate bond by credit quality, and the geographic make up ofthe bond portfolio. Investment disposition at 31 December 2007 Policyholders' Capital assets Total assets assets £m £m £mType of assetEquities - 232.1 232.1Bonds 1,018.4 559.8 1,578.2Property - 75.4 75.4Other liquid investments 461.4 301.0 762.4 1,479.8 1,168.3 2,648.1Type of bondsGovernment securities 585.6 252.1 837.7Government index-linked 3.0 - 3.0securitiesGovernment agencies 76.4 8.0 84.4Supranational 44.5 2.1 46.6Asset backed securities 25.2 55.5 80.7Mortgage backed 18.0 67.6 85.6securitiesCorporate bonds 212.4 53.1 265.5Pooled vehicles 53.3 121.4 174.7 1,018.4 559.8 1,578.2Bonds by regionUnited Kingdom 179.5 85.7 265.2USA and Canada 544.8 315.2 860.0Europe (ex UK) 212.8 34.9 247.7Far East 18.2 - 18.2Emerging markets 9.4 - 9.4Other 0.4 2.6 3.0 965.1 438.4 1,403.5 Credit rating of asset/mortgage backedsecurities and corporatebondsAAA 210.9 133.1 344.0AA 45.1 13.3 58.4A 43.7 9.3 53.0BBB 16.6 28.6 45.2 316.3 184.3 500.6 Note: credit rating includes £68.8 million of government agencies that aremortgage backed. Most sub-prime debt is included in the asset backed securities category. Amlinhas limited exposure to sub-prime mortgages, with most of our mortgage bondexposure focused on the prime end of the market. Just 0.9% of the Group's assetswere in bonds backed by sub-prime mortgages and of these 92% and 8% were stillrated AAA and AA respectively as at 31 December. We also have £28.2 million ofassets in short duration auto loans, all AAA rated, which are designatedsub-prime. The sub-prime mortgage market remains an area of concern. However, all our bondmanagers are confident about the holdings in our portfolio. The underlying performance of bond assets was markedly divergent with strongperformance from the government portfolios, as investors factored in likelyinterest rate cuts in the anticipation that central banks would respondproactively to economic slowdown. The underperformance of our bond investment managers against their governmentbenchmarks amounted to £19.8 million. This illustrates the impact of creditmarket dynamics on our portfolio. Expenses Total expenses, including underwriting, non-underwriting and finance costs,decreased to £332.9 million from £345.9 million in the prior year. This decreaseis a result of a favourable swing in non-monetary foreign exchange adjustmentsoffset by an increase in staff incentive payments. Business acquisition costs of £196.0 million, representing 18% of gross earnedpremium, were consistent with the prior year (2006: £195.4 million, 18%). Theseinclude an element of the foreign exchange translation of non-monetary assetsand liabilities and other foreign exchange movements, which in total increased2007 expenses by £5.1 million (2006: 0.4 million). Non-underwriting costs (excluding finance costs) increased by £31.5 million to£49.8 million. Within this, total staff costs increased from £25.0 million to£42.3 million. Staff incentive plans accounted for £31.4 million of these costs(2006: £18.6 million). Taxation The effective rate of tax for the period is 20.7% (2006: 21.9%). The reductionis mainly attributable to the fall in the rate of UK corporation tax. The effective rate is below the UK rate of corporation tax primarily due toAmlin Bermuda. We believe that Amlin Bermuda is exempt from the ControlledForeign Corporation tax provisions of the UK tax regime. Accordingly, the Groupwill pay tax to the UK tax authorities only when distributions are made back toits UK holding companies. We have again provided for tax on possible futuredistribution through deferred tax of 9% of Amlin Bermuda's profit. The standard rate of UK corporation tax is due to fall from 30% to 28% from 1April 2008, which affects the deferred tax provision in two ways. Firstly, anadjustment was required to those elements of the deferred tax provision at 1January 2007 which were expected to reverse after 31 December 2007. Thisadjustment generated a credit to the deferred tax charge of £1.7 million.Secondly, temporary differences arising in 2007 will affect the 2007 corporationtax charge at a rate of 30%, but will generate deferred tax at a rate of 28% or28.5% (the effective corporation tax rate for 2008). This has generated a creditto the tax charge of £5.1 million. CAPITAL STRATEGY We have consistently articulated that our key performance metric, that which weconsider is most relevant to the delivery of shareholder value, is return onequity. This means that we will actively manage our capital over the insurancecycle. We currently expect that conditions for our London market business willsoften over the next two years and that with this, in line with our underwritingstrategy, we will reduce exposures. We therefore believe that, for our existingbusiness, our capital requirements are likely to have peaked for the time being. The Group's success in generating significant levels of profit over recent yearshas resulted in very strong free cash flow and capital which is in excess of ourrequirements. Accordingly, in 2007 we started to deliver on our commitment tomanage the balance sheet by paying £42.7 million in a special dividend andannouncing a further £120.4 million return to shareholders by means of a B shareissue which was completed in January this year. In addition to the dividend and share buyback referred to in the Chairman'sstatement, we will continue to keep under review our capital needs with theintention of managing our capital to enhance returns on equity. OUTLOOK 2008 While the underwriting environment is softening, good margin potential remainsfor selective underwriters. Rates in many classes are coming off exceptionallyprofitable peaks and the two areas of, airlines and UK Commercial are notexpected to worsen much further before improving. Assuming an average level ofcatastrophe activity we are targeting a return on equity for 2008 of in excessof 15%, our average cross cycle target. A softening market, but off historic peaks 1 January is a major renewal date for a number of key classes. Amlin has writtentotal income (before deduction of brokerage) to 31 January 2008 of £324 million.This is a 5% reduction on the previous year. Overall renewal rates for Amlinhave declined by 8% with a retention ratio of 86%. We believe that at theserating levels we continue to write business which will produce an acceptablereturn. Amlin Bermuda increased gross premium written by 25% to US$142 million(2007: US$114 million). Amlin's objective is to deliver a market leading return on equity. Through thesoft part of the underwriting cycle we seek to achieve this via disciplinedunderwriting, with a sustained focus on the acceptability of underwritingmargin, rather than seeking growth in increasingly competitive markets. In recent years, we have established a track record of out performance againstmany of our competitors, but historically the outperformance of the coresyndicate has grown as market conditions soften. This has resulted fromdisciplined underwriting, with exposures reducing as rates fall. We intend tostick to our successful core underwriting principles in the coming period. In 2008 we believe that our underwriting performance will be supported byhealthy rates in reinsurance, areas of our property account and the Marinedivision. Rates in these classes have been near historic peaks through 2007 andour portfolio will remain capable of generating a satisfactory margin over thenext twelve months. Two of our divisions continue to experience significant pressure from poorpricing - Aviation and UK Commercial. Most airlines renew in the fourth quarter, and in December 2007, there was stillno sign of a change in direction of rates as competitors chased market sharebased on historic profitability. The UK commercial market is trading at low profit margins and, while weanticipate market conditions may remain competitive in 2008, we expect to seesome signs of improvement towards the end of 2008 and into 2009. Since Hurricane Katrina in 2005 we have experienced increased divergence in thecyclical patterns between our classes. It is very possible that we willexperience an upturn in the UK commercial market as deterioration in marine,property and reinsurance markets takes place. If this occurs, it will providethe potential for better returns than previously envisaged during the next lowin the London market insurance cycle. Business development Amlin Bermuda's business is well placed for further growth in 2008. During theyear, two additional underwriters were hired who will help broaden AmlinBermuda's marketing capability. Additionally, in October Amlin Bermuda wasupgraded from A- to A by AM Best and our expectation is that this willcontribute to generate greater premium income through higher shares of clients'programmes. We will consider acquisitions where strategically they will help build thediversity of the portfolio so that we can maintain a good balance of risk. InJuly we purchased the Allied Cedar Insurance Group in the UK, which whilstmodest, will provide us with greater access to the UK property market, an areawhere we are keen to grow when conditions improve. In November, we opened AmlinSingapore to develop access to regional Asian business which typically is notseen in the London market. We anticipate building this business through 2008 andhope that in time it will make an important contribution to the Group. Healthy unearned premium reserves At 31 December 2007, net unearned premium reserves totalled £474.3 million.While 6.6% less than in the prior year (2006: £507.8 million), they contain asignificant proportion of reinsurance and other income which was written atstrong rates. This provides a sound base for 2008 earnings. Continued prudently reserved balance sheet Our policy of reserving above the level of actuarial best estimate has resultedin material run off profits from reserves in recent years. Assuming claimsdevelopment which is no worse than normal expectations, this policy shoulddeliver further run-off profits in 2008. Catastrophe risks Our largest modelled event at 1 January 2008, being a European windstormaffecting each of the UK, France, the Low countries and Germany, was a potentialaggregate claim of £316 million, equivalent to 32% of net tangible assets at 31December 2007. This compares with our largest modelled loss at 1 January 2007 of£364 million for the same scenario, which represented 42% of net tangible assetsat 31 December 2006. For 2008 our modelling indicates that our mean expected profit will cover eachof our modelled US single zone catastrophe events. The largest of these iscurrently a US$119 billion Florida windstorm for which the modelled occurrenceprobability is approximately one in one hundred years. However, it may not covereither very significant multi zone events, such as the major windstorm describedabove, or a very major Japanese earthquake. As rates soften further, we willlook to maintain an acceptable balance by purchasing more reinsurance, includingretrocessional reinsurance, which we have started to do. Investment outlook Markets continue to be volatile, reflecting the uncertainty created by events inthe United States. As always we will monitor markets closely and adjust assetallocations to reflect potential returns and perceived risk. January 2008 has proven to be a difficult month for investment markets withsharp falls in equity markets and further price falls for credit related bonds.The diversity of our asset allocation again proved helpful with the losses onequity and credit offset by good returns on government bonds and interest earnedon cash. With the gain in value of the equity option, overall January 2008'sreturns were 0.4%. Consolidated Income StatementFor the year ended 31 December 2007 2007 2006 Notes £m £mGross premium earned 4,5 1,088.0 1,087.3Insurance premium revenue from the 5 - 78.8receipt of reinsurance to closeReinsurance premium ceded 4,5 (115.7) (113.4)Net earned premium revenue 5 972.3 1,052.7 Investment return 4,6 157.0 115.1Other operating income 2.8 1.8Total income 1,132.1 1,169.6 Insurance claims and claims settlement 4,7 (380.1) (460.7)expensesInsurance claims and claims settlement 7 - (78.8)expenses relating to the receipt ofreinsurance to closeInsurance claims and claims settlement 4,7 25.9 58.5expenses recoverable from reinsurersNet insurance claims 7 (354.2) (481.0) Expenses for the acquisition of insurance 8 (196.0) (195.4)contractsOther operating expenses 9 (116.9) (126.7)Total expense (312.9) (322.1) Results of operating activities 465.0 366.5Finance costs 10 (20.0) (23.8)Profit before tax 445.0 342.7Tax 11 (92.2) (74.9)Total recognised profit for the year 352.8 267.8 Attributable to:Equity holders of the Parent Company 352.7 267.5Minority interests 0.1 0.3 352.8 267.8Earnings per share from continuingoperations attributable to equity holdersof the Parent CompanyBasic 21 66.3p 50.4pDiluted 21 65.5p 49.8p Consolidated Statement of Changes in Equity For the year ended 31 December 2007 Notes Share Share Other Treasury Minority Retained Total capital premium reserves shares interest earnings £m £m £m £m £m £m £mAt 1 January 2007 133.5 347.6 (21.8) (0.6) 0.3 477.4 936.4Net purchase of treasury - - - (1.5) - - (1.5)sharesGains on revaluation of - - (0.1) - - - (0.1)employee share ownershiptrust recogniseddirectly in equityCurrency translation - - (8.2) - - - (8.2)differences on overseasoperationsDeferred tax - - (1.3) - - - (1.3)Profit for the financial - - - - 0.1 352.7 352.8yearTotal recognised income - - (9.6) (1.5) 0.1 352.7 341.7for the yearEmployee share optionscheme:- share based payment - - 1.2 - - - 1.2reserve- proceeds from shares 0.9 3.6 - - - - 4.5issuedDividends paid 22 - - - - - (111.1) (111.1)Return of capital 17 - (120.4) - - - - (120.4) 0.9 (116.8) 1.2 - - (111.1) (225.8)At 31 December 2007 134.4 230.8 (30.2) (2.1) 0.4 719.0 1,052.3 Consolidated Statement of Changes in Equity (continued) For the year ended 31 December 2006 Notes Share Share Other Treasury Minority Retained Total capital premium reserves shares interest earnings £m £m £m £m £m £m £mAt 1 January 2006 132.5 344.0 52.7 (1.7) - 257.3 784.8Net sale of treasury - - - 1.1 - - 1.1sharesGains on revaluation of - - 0.2 - - - 0.2employee share ownershiptrust recogniseddirectly in equityCurrency translation - - (77.2) - - - (77.2)differences on overseasoperationsGain on defined benefit - - 0.1 - - - 0.1schemeDeferred tax - - 1.3 - - - 1.3Profit for the financial - - - - 0.3 267.5 267.8yearTotal recognised income - - (75.6) 1.1 0.3 267.5 193.3for the yearEmployee share optionscheme:- share based payment - - 1.1 - - - 1.1reserve- proceeds from shares 1.0 3.6 - - - - 4.6issuedDividends paid 22 - - - - - (47.4) (47.4) 1.0 3.6 1.1 - - (47.4) (41.7)At 31 December 2006 133.5 347.6 (21.8) (0.6) 0.3 477.4 936.4 Consolidated Balance Sheet At 31 December 2007 2007 2006ASSETS Notes £m £mCash and cash equivalents 13 11.6 16.5Financial investments at fair 14 2,638.9 2,367.7value through incomeReinsurance assets 15- reinsurers share of 270.2 357.0outstanding claims- reinsurers share of unearned 27.5 37.7premium- debtors arising from 319.2 300.6reinsurance operationsLoans and receivables,including insurancereceivables- insurance receivables 16 183.1 216.3- loans and receivables 16 36.8 51.6Current income tax asset 4.0 6.3Deferred tax assets 11 13.4 20.9Property and equipment 5.8 6.2Intangible assets 69.0 66.0Total assets 3,579.5 3,446.8EQUITYShare capital 17 134.4 133.5Share premium 18 230.8 347.6Other reserves 18 (30.2) (21.8)Treasury shares 18 (2.1) (0.6)Retained earnings 18 719.0 477.4Equity attributable to equity 1,051.9 936.1holders of the parentMinority interest 18 0.4 0.3Total equity and reserves 1,052.3 936.4LIABILITIESInsurance contracts 15- outstanding claims 1,350.2 1,417.5- unearned premium 501.8 545.5- creditors arising from 34.0 68.6insurance operationsTrade and other payables 19 207.1 68.4Current income tax liabilities 25.7 28.7Borrowings 20 277.5 278.8Retirement benefit obligations 2.8 7.5Deferred tax liabilities 11 128.1 95.4Total liabilities 2,527.2 2,510.4Total equity, reserves and 3,579.5 3,446.8liabilities The financial statements were approved by the Board of Directors and authorisedfor issue on 27 February 2008. They were signed on its behalf by: Roger Taylor Chairman Richard Hextall Finance Director Consolidated Cash Flow Statement For the year ended 31 December 2007 2007 2006 Notes £m £mCash generated from operations 25 70.5 (20.2)Income taxes paid (53.8) (50.4)Net cash flows from operations 16.7 (70.6)Cash flows from investingactivitiesInterest received 99.0 97.5Dividends received 12.5 4.5Acquisition of subsidiary, net 26 (3.3) -of cash acquiredPurchase of property and (2.7) (3.6)equipmentNet cash from investing 105.5 98.4activities Cash flows used in financingactivitiesProceeds from issue of 4.5 4.6ordinary sharesProceeds from borrowings - 227.7Repayment of borrowings - (238.0)Dividends paid to shareholders 22 (111.1) (47.4)Interest paid (19.1) (24.1)Purchase of treasury shares (1.5) -Net cash flows used in (127.2) (77.2)financing activities Net decrease in cash and cash (5.0) (49.4)equivalentsCash and cash equivalents at 16.5 65.6beginning of yearEffect of rate changes on cash 0.1 0.3and cash equivalentsCash and cash equivalents at 13 11.6 16.5end of year The Group classifies cash flows from purchase and disposal of financial assetsin its operating cash flows as these transactions are generated by the cashflows associated with the origination and settlement of insurance contractliabilities or capital requirements to support underwriting. Net cash of £232.1million (2006: £271.8 million) was generated in the period and has been used topurchase financial investments. Cash flows relating to participations on syndicates not managed by the Group areincluded only to the extent that cash is transferred between the Premium TrustFunds and the Group. 1. Summary of significant accounting policies The basis of preparation, basis of consolidation and significant accountingpolicies adopted in the preparation of Amlin plc's (the Group's) financialstatements are set out below. Basis of preparation Whilst the financial information included in this preliminary announcement hasbeen compiled in accordance with International Financial Reporting Standards(IFRS), this announcement does not itself contain sufficient information tocomply with IFRS. The Company published full financial statements that complywith IFRS in February 2008. The financial statements have been prepared on the historical cost basis exceptfor cash and cash equivalents, financial investments, loans and receivables,share options and pension assets and liabilities which are measured at theirfair value. The accounting policies adopted in preparing these financial statements areconsistent with those followed in the preparation of the Group's annualfinancial statements for the year ended 31 December 2006. Basis of consolidation The financial statements consolidate the accounts of the Company and subsidiaryundertakings, including the Group's underwriting through participation onLloyd's syndicates. Subsidiaries are those entities in which the Group, directlyor indirectly, has the power to govern the operating and financial policies inorder to gain economic benefits and includes the Group's Employee BenefitTrusts. The financial statements of subsidiaries are prepared for the samereporting year as the parent company. Consolidation adjustments are made toconvert subsidiary accounts prepared under UK GAAP into IFRS so as to remove theeffects of any different accounting policies that may exist. Subsidiaries areconsolidated from the date that control is transferred to the Group and cease tobe consolidated from the date that control is transferred out. All inter-companybalances, profits and transactions are eliminated. Changes to International Financial Reporting Standards In the current year, the Group has adopted IFRS 7, Financial Instruments:Disclosures and the related amendments to IAS 1, Presentation of FinancialStatements, and IFRS 4, Accounting for Insurance Contracts which are effectivefor annual reporting periods beginning on or after 1 January 2007. The impact ofthe adoption of IFRS 7 and the changes to IAS 1 and IFRS 4 have been to expandthe disclosures provided in the financial statements regarding the Group'smanagement of capital and financial instruments (see notes 2 and 3). Three Interpretations issued by the International Financial ReportingInterpretations Committee (IFRIC) are effective for the current period. Theseare: IFRIC 8, which clarifies IFRS 2, Share-based Payments; IFRIC 9,Reassessment of Embedded Derivatives; and IFRIC 10, Interim Financial Reportingand Impairment. The adoption of these Interpretations has not led to any changesin the Group's accounting policies. At the date of authorisation of these financial statements a number of standardsand interpretations had been published but were not yet effective. Theseinclude: • IFRS 8, Operating Segments; • IFRIC 11, IFRS 2: Group and Treasury Share Transactions; • IFRIC 12, Service Concession Arrangements; and • IFRIC 14, IAS 19: The Limit of Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The directors anticipate that the adoption of these standards andinterpretations will have no material impact on the financial statements exceptfor additional disclosures. In accordance with IFRS 4, the Group has applied existing accounting practicesfor insurance contracts, modified as appropriate, to comply with the IFRSframework and applicable standards. Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements requires the use of estimates andassumptions that affect the reported amounts of assets and liabilities, and thedisclosure of contingent assets and liabilities. Although these estimates arebased on management's best knowledge of current events and actions, actualresults may ultimately differ from those estimates. Insurance contract liabilities The most significant estimate made in the financial statements relates to theinsurance unpaid claim reserves and related loss adjustment expenses of theGroup. The estimated provision for ultimate incurred losses changes as more informationbecomes known about the actual losses for which the initial provisions were setup. The change in claims costs for prior period insurance claims represents theclaims development of earlier reported years incurred in the current accountingperiod. In 2007 there has been a net positive development of £109.0 million(2006: £68.9 million) for the Group, reflecting the favourable experience in the2006 and prior reported years. Note 3 provides further details of the method theGroup applies in estimating insurance contract liabilities. Financial investments The methods and assumptions used by the Group in estimating the fair value offinancial assets are described in note 3. Deferred tax The estimates of deferred tax assets and tax liabilities have been adjusted inthe current period to reflect the reduction in the UK Corporate tax rate to 28%on 1 April 2008. (2006: 30%). Staff incentive plans The Group recognises a liability and expense for staff incentive plans based ona formula that takes into consideration the underwriting year profit aftercertain adjustments. Underwriting year profit is estimated based on currentexpectation of premiums and claims and will change as more information is known.Where estimates change related staff incentive plan liabilities may also change. Foreign currency translation The Group presents its accounts in sterling since it is subject to regulation inthe United Kingdom and the net assets, liabilities and income of the Group arecurrently weighted towards sterling. US dollar revenue is significant but thesterling revenue stream is also currently material. All group entities areincorporated in the United Kingdom with the exception of Amlin Bermuda HoldingsLtd and Amlin Bermuda Ltd which are incorporated in Bermuda and Amlin SingaporePte Ltd which is incorporated in Singapore. All Group entities conduct businessin a range of economic environments, primarily the United Kingdom, United Statesof America and Europe. Due to the regulatory environment and the fact that theGroup trades through the Lloyd's market, all Group companies incorporated in theUnited Kingdom have adopted sterling as their functional currency. The Groupcompanies incorporated in Bermuda have adopted the US dollar as their functionalcurrency. The Group company incorporated in Singapore has adopted the Singaporedollar as its functional currency. Where sterling is the functional currency, income and expenditure in US dollars,Euros and Canadian dollars is translated at average rates of exchange for theperiod. Transactions denominated in other foreign currencies are translatedusing the exchange rates prevailing at the dates of the transactions. Monetaryassets and liabilities are translated into sterling at the rates of exchange atthe balance sheet date. Non-monetary assets and liabilities are translated atthe average rate prevailing in the period in which the asset or liability firstarose. Exchange differences arising from the conversion of overseas operations areaccounted for through reserves. Where contracts to sell currency have been entered into prior to the year end,the contracted rates have been used. Differences arising on the translation offoreign currency amounts on such items are included in other operating expenses. Insurance contracts premium Gross premium written comprise premium on insurance contracts incepting duringthe financial year. The estimated premium income in respect of facilitycontracts is deemed to be written in full at the inception of the contract.Premium is disclosed before the deduction of brokerage and taxes or dutieslevied on them. Estimates are included for premium receivable after the periodend but not yet notified, as well as adjustments made in the year to premiumwritten in prior accounting periods. Premium is earned over the policy contract period. The earned element iscalculated separately for each contract on a 365ths basis. For premium writtenunder facilities, such as under binding authorities, the earned element iscalculated based on the estimated risk profile of the individual contractsinvolved. The proportion of gross premium written, gross of commission payable,attributable to periods after the balance sheet date is deferred as a provisionfor unearned premium. The change in this provision is taken to the incomestatement in order that revenue is recognised over the period of the risk. Acquisition costs comprise brokerage incurred on insurance contracts writtenduring the financial year. They are incurred on the same basis as the earnedproportions of the premium they relate to. Deferred acquisition costs areamortised over the period in which the related revenues are earned. Deferredacquisition costs are reviewed at the end of each reporting period and arewritten off where they are no longer considered to be recoverable. Reinsurance premium ceded Reinsurance premium ceded comprises the cost of reinsurance arrangements placedand is accounted for in the same accounting period as the related insurancecontracts. The provision for reinsurers' share of unearned premium representsthat part of reinsurance premium written which is estimated to be earned infollowing financial years. Insurance contracts liabilities: claims Claims paid are defined as those claims transactions settled up to the balancesheet date including the internal and external claims settlement expensesallocated to those transactions. The reinsurers' share represents recoveriesreceived from reinsurance protections in the period plus recoveries receivableagainst claims paid that have not been received at the balance sheet date, netof any provision for bad debt. Unpaid claims reserves are made for known or anticipated liabilities underinsurance contracts which have not been settled up to the balance sheet date.Included within the provision is an allowance for the future costs of settlingthose claims. This is estimated based on past experience and currentexpectations of future cost levels. Unpaid claims reserves are estimated on an undiscounted basis. Provisions aresubject to a detailed quarterly review where forecast future cash flows andexisting amounts provided are reviewed and reassessed. Any changes to theamounts held are adjusted through the income statement. Provisions areestablished above an actuarial best estimate so that there is a reasonablechance of release of reserves from one underwriting year to the next. The unpaid claims reserves also include, where necessary, a reserve forunexpired risks where, at the balance sheet date, the estimated costs of futureclaims and related deferred acquisition costs are expected to exceed theunearned premium provision. In determining the need for an unexpired riskprovision the underwriting divisions within the Syndicate have been regarded asgroups of business that are managed together. Although the unpaid claims reserves are considered to be reasonable, havingregard to previous claims experience (including the use of certain statisticallybased projections) and case by case reviews of notified claims, on the basis ofinformation available at the date of determining the provision, the ultimateliabilities will vary as a result of subsequent information and events. Thisuncertainty is discussed further in the risk disclosures in note 3. Net investment income Dividends and any related tax credits are recognised as income on the date thatthe related listed investments are marked ex-dividend. Other investment income,interest receivable, expenses and interest payable are recognised on an accrualsbasis. Intangible assets i. Syndicate capacity The cost of Lloyd's syndicate participations that have been purchased in theLloyd's capacity auctions is capitalised at cost. Syndicate capacity isconsidered to have an indefinite life and is not subject to an annualamortisation charge. The continuing value of the capacity is reviewed forimpairment annually by reference to the expected future profit streams to beearned from Syndicate 2001, with any impairment in value being charged to theincome statement. ii. Goodwill Goodwill arising on acquisitions prior to 1 January 1999 was written off toreserves. Goodwill recognised between 1 January 1999 and the date of transitionto IFRS (1 January 2004) was capitalised and amortised on a straight line basisover its estimated useful life. Following the transition to IFRS this goodwillis stated at net book value at 1 January 2004. Goodwill that was recognisedsubsequent to 1 January 2004, representing the excess of the purchaseconsideration over fair value of net assets acquired, is capitalised. Goodwillis tested for impairment annually, or when events or changes in circumstanceindicate that it might be impaired, by comparing the net present value of thefuture earnings stream from the acquired subsidiary, for the next five yearsagainst the carrying value of the goodwill and the carrying value of the relatednet assets. iii. Other intangible assets Other intangible assets comprise costs directly attributable to securing theintangible rights to customer contractual relationships. Costs are recognised asintangible assets where they can be identified separately and measured reliablyand it is probable that they will be recovered by directly related futureprofits. Other intangible assets are carried at cost less accumulatedamortisation and impairment losses. Amortisation is calculated on astraight-line basis over the useful economic life which is estimated to be 3years. Property and equipment Property and equipment are stated at historical cost less accumulateddepreciation and provision for impairment where appropriate. Depreciation iscalculated on the straight line method to write down the cost of such assets totheir residual values over their estimated useful lives as follows: Leasehold land and buildings over period of lease Motor vehicles 33% per annum Computer equipment 33% per annum Furniture, fixtures and leasehold improvements 20% per annum The carrying values of property and equipment are reviewed for impairment whenevents or changes in circumstance indicate that the carrying value may beimpaired. If any such condition exists, the recoverable amount of the asset isestimated in order to determine the extent of impairment and the difference ischarged to the income statement. Gains and losses on disposal of property and equipment are determined byreference to their carrying amount and are taken to the income statement.Repairs and renewals are charged to the income statement when the expenditure isincurred. Financial investments The Group has classified its financial investments as "fair value throughincome" (FV) to the extent that they are not reported as cash and cashequivalents. This classification requires all fair value changes to berecognised immediately within the investment return line in the incomestatement. Investments are assigned this classification at the time ofacquisition. Within the FV category, fixed maturity and equity securities areclassified as 'trading' as the Group buys with the intention to resell. Allother securities are classified as 'other than trading' within the FV category. Purchases and sales of investments are recognised on the trade date, which isthe date the Group commits to purchase or sell the assets. These are initiallyrecognised at fair value, and are subsequently re-measured at fair value basedon quoted bid prices. Changes in the fair value of investments are included inthe income statement in the period in which they arise. The uncertainty aroundbond valuation is discussed further in note 3. In the Company's accounts, other financial investments in Group undertakings arestated at cost and are reviewed for impairment annually or when events orchanges in circumstances indicate the carrying value may be impaired. Derivative financial instruments Derivatives are initially recognised at fair value on the date on which aderivative contract is entered into. Changes in the fair value of derivativeinstruments are recognised immediately in the income statement. Fair values forover the counter derivatives, are supplied by the relevant counterparty. TheGroup has opted not to seek hedge accounting for its derivative instruments inthe year. Loans and receivables Loans and receivables are measured at fair value. Appropriate allowances forestimated irrecoverable amounts are recognised in the income statement whenthere is evidence that the asset is impaired. These are reversed when payment isreceived. Borrowings Borrowings are stated initially at the consideration received net of transactioncosts incurred. Borrowings are subsequently stated at amortised cost using theeffective interest method. Any difference between amortised cost and theredemption value is recognised in the income statement over the period of theborrowings. Transaction costs on borrowings are charged through the incomestatement over the period of the borrowings. Borrowing costs Borrowing costs comprise interest payable on loans and bank overdrafts andcommissions charged for the utilisation of letters of credit. These costs arecharged to the income statement as financing costs, as incurred. In additionfees paid for the arrangement of debt and letter of credit facilities arecharged to borrowing costs over the life of the facility. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at fair value. Forthe purposes of the cash flow statement, cash and cash equivalents comprise cashon hand, deposits held on call with banks and other short-term, highly liquidinvestments which are subject to insignificant risk of change in fair value. Treasury shares Treasury shares are deducted from equity. No gain or loss is recognised on thepurchase, sale, issue or cancellation of the treasury shares. Any considerationpaid or received is recognised directly in equity. Leases Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards to the Group. All other leases areclassified as operating leases. Assets held under finance leases and hire purchase transactions are capitalisedin the balance sheet and depreciated over their useful lives. The initialcapital value is the lower of the fair value of the leased asset and the presentvalue of the minimum lease payments. Payments under finance leases areapportioned between finance charges and the reduction of the lease obligation soas to achieve a consistent rate of interest on the remaining balance of thelease liability. Rentals payable under operating leases are charged to income in the period inwhich they become payable in accordance with the terms of the lease. Employee benefits i. Pension obligations The Group participates in a number of pension schemes, including one definedbenefit scheme, defined contribution schemes and personal pension schemes. The Lloyd's Superannuation Fund scheme is a multi-employer scheme. There isinsufficient information available to reliably identify the Group'sproportionate share of the defined benefit obligation, plan assets andpost-employment costs associated with scheme. Therefore it is accounted for as adefined contribution scheme and not a defined benefit scheme. For this scheme,where contractual obligations have been agreed, the net present value of thesepayments is recognised as a liability on the balance sheet. The JE Mumford (Underwriting Agencies) Limited defined benefit scheme wastransferred into the Lloyd's Superannuation Fund scheme in February 2007. Pension contributions to schemes that are accounted for as defined contributionplans are charged to the income statement when due. ii. Equity compensation plans The Group operates a number of executive and employee share schemes. Optionsissued after 7 November 2002 are accounted for using the fair value method wherethe cost for providing equity compensation is based on the fair value of theshare option or award at the date of the grant. The fair value is calculatedusing an option pricing model and the corresponding expense is recognised in theincome statement over the vesting period. The accrual for this charge isrecognised in equity shareholders' funds. When the options are exercised, theproceeds received net of any transaction costs are credited to share capital forthe par value and the surplus to share premium. iii. Other benefits Other employee incentive schemes and long-term service awards, includingsabbatical leave, are recognised when they accrue to employees. A provision ismade for the estimated liability for long-service leave as a result of servicesrendered by employees up to the balance sheet date. Other income Information fee income is recognised on an earned basis. Taxation Income tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears or that are never taxable or deductible. The Group's liability for currenttax is calculated using tax rates that have been enacted or substantivelyenacted by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the financial statements and the corresponding tax bases usedin the computation of taxable profit, and is accounted for using the balancesheet liability method. Deferred tax liabilities are generally recognised forall taxable temporary differences and deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill or from theinitial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the tax profit nor theaccounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered, or to the extent that it has been utilised. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity. Deferred tax is provided for on the profits of overseas subsidiaries where it isreasonably foreseeable that distribution of the profit back to the UK will takeplace. 2. Capital The capital structure of the Group consists of equity attributable to equityholders of the Company, comprising issued capital, reserves and retainedearnings as disclosed in notes 17 and 18, and subordinated debt as disclosed innote 20. For business planning purposes account is also taken of the Group'suncalled debt facilities. The Amlin corporate members which support Syndicate 2001 are required to holdregulatory capital in compliance with the rules issued by the UK's FinancialServices Authority (FSA). In addition, being Lloyd's operations, they are alsosubject to Lloyd's capital requirements. Under FSA rules, the corporate membersmust hold capital in excess of the higher of two amounts. The first is thePillar 1 requirement, as prescribed by EU directives, calculated by applyingfixed percentages to premiums and claims. The second, Pillar 2, is an IndividualCapital Assessment (ICA) calculated internally by the firm. The ICA is definedas the level of capital that is required to contain the probability ofinsolvency to no greater than 0.5%. The ICA calculation considers all ultimatelosses incurred over a one year business planning horizon, and any prior yearreserve movements. The ICA calculation basis is generally considered to be broadly equivalent to aBBB insurance financial strength rating. For the purposes of setting Lloyd'scapital requirements, Lloyd's currently uplifts all ICAs by 35% to bring thecapital to a level to support a higher financial strength rating. The finalcapital requirement is then subject to a minimum of 40% of the syndicate'sagreed regulatory premium capacity limit. The Syndicate also benefits from mutualised capital within the Lloyd's CentralFund, for which a variable annual levy, which is 0.5% of syndicate gross premiumfor 2008, is payable. The ICA is reviewed annually by Lloyd's and periodically by the FSA. The FSAexpect management to apply their rules continuously. If a firm breaches itsPillar 1 capital it must cease trading; if Pillar 2 capital is breached stepsmust be urgently taken to restore capital to the required level. Due to thenature of the Lloyd's capital setting process, Funds at Lloyd's requirements areformally assessed and funded twice yearly at discrete periods and must be metfor the Syndicate to continue underwriting. At 31 December 2007 the level of capital held by the Amlin corporate members wasmore than £150 million in excess of the Pillar 1 requirement and more than £75million in excess of the Pillar 2 requirement. The Group does not seek to retain any assets in excess of the Lloyd's capitalrequirement within the Lloyd's framework and any surplus is paid to thecorporate entities in the Amlin group. For Amlin Bermuda, minimum capital requirements are dictated by the rules laiddown by the Bermuda Monetary Authority (BMA). Amlin Bermuda is classified as aClass IV insurer, for which the minimum solvency margin is the greater of $100m,50% of net premiums written in the current financial year (subject to a 25% capon reinsurance expenditure) and 15% of claims reserves. In the case of AmlinBermuda at 31 December 2007, the premium test is currently the largest of thethree criteria at $232.8 million, although the entity is in the early years ofoperation. In addition, as a Class IV insurer Amlin Bermuda is required tomaintain a minimum liquidity ratio such that the value of "relevant assets" isnot less than 75% of its "relevant liabilities". Amlin Bermuda met thisrequirement at 31 December 2007. For wider commercial reasons we believe that itis necessary to hold at least $1 billion of capital for Amlin Bermuda, which iscurrently far in excess of the required minimum. In addition to regulatory capital requirements we believe we should retain alevel of capital within the Group which allows it to grow exposures materiallyin the aftermath of a major insurance disaster. The capital held by Syndicate2001 and Amlin Bermuda, is driven by the business mix, nature and objectives ofeach entity and its context within the wider Amlin Group. 3. Risk disclosures 3.1 Insurance risk The Group accepts insurance risk in a range of classes of business throughLloyd's Syndicate 2001's four distinct underwriting businesses and AmlinBermuda. The bias of the portfolio is towards short-tail property and accidentrisk but liability coverage is also underwritten. In underwriting insurance or reinsurance policies the Group's underwriters usetheir skill, knowledge and data on past claims experience to evaluate the likelyclaims cost and therefore the premium that should be sufficient (across aportfolio of risks) to cover claims costs, expenses and to produce an acceptableprofit. However due to the nature of insurance risk there is no guarantee thatthe premium charged will be sufficient to cover claims costs. This shortfall mayoriginate either from insufficient premium being calculated and charged orresult from an unexpected, or unprecedented, high level of claims. A number of controls are deployed to limit the amount of insurance exposureunderwritten. Each year a business plan is prepared and agreed which is used tomonitor the amount of premium income, and exposure, to be written in total andfor each class of business. Progress against this plan is monitored during theyear. The Group also operates under a line guide which determines the maximumliability per policy which can be written for each class and for eachunderwriter. These can be exceeded in exceptional circumstances but only withthe approval of senior management. Apart from the UK, and some of theinternational, comprehensive motor liability portfolio, which has unlimitedliability, all policies have a per loss limit which caps the size of anyindividual claims. For larger sum insured risks reinsurance coverage may bepurchased. The Group is also exposed to catastrophe losses which may impact manyrisks in a single event and again reinsurance is purchased to limit the impactof loss aggregation from such events. These reinsurance arrangements aredescribed in the reinsurance arrangements section below. Insurance liabilities are written through individual risk acceptances,reinsurance treaties or through facilities whereby Amlin is bound by otherunderwriting entities. Facility arrangements delegate underwriting authority toother underwriters, or to agents acting as coverholders, that use theirjudgement to write risks on our behalf under clear authority levels. The insurance liabilities underwritten by the Group are reviewed on anindividual risk, or contract, basis and through review of portfolio performance.All claims arising are reserved upon notification. Each quarter the entireportfolio of business is subject to a reserving process whereby levels of paidand outstanding (advised but not paid) claims are reviewed. Potential futureclaims are assessed with a provision for incurred but not reported (IBNR) claimsbeing made. This provision is subject to review by senior executives and anindependent internal actuarial assessment is carried out by the in-houseactuarial team to determine the adequacy of the provision. Whilst a detailed anddisciplined exercise is carried out to provide for claims notified, it ispossible that known claims could develop and exceed the reserves carried. Furthermore there is increased uncertainty in establishing an accurate provisionfor IBNR claims and there is a possibility that claims may arise which inaggregate exceed the reserve provision established. This is partly mitigated bythe reserving policy adopted by the Group which is to carry reserves with amargin in excess of the in-house actuarial best estimate. The review of claims arising may result in underwriters adjusting pricing levelsto cater for an unexpectedly higher trend of claims advices or payments.However, this may not be possible in a competitive market and underwriters mayrespond either by accepting business with lower expected profit margins ordeclining to renew policies and thus reducing income. Also, there is a portfolioof risk already underwritten which cannot be re-priced until renewal at the endof the policy period. Sections A to D below describe the business and the risks of Amlin's Syndicateoperations. Amlin Bermuda is described in section E. A. Non-marine risks A.i Non-marine property risks 2007 gross premium written by geography Caribbean 3%Central & Eastern 1%EuropeCentral & Southern 1%AfricaCentral America 1%Central Asia 5 yrs amountShares and other 307.5 - - - - 307.5variable yieldsecuritiesDebt and other fixed 174.7 172.6 387.7 541.2 302.0 1,578.2income securitiesCash and liquid funds 762.4 - - - - 762.4Total 1,244.6 172.6 387.7 541.2 302.0 2,648.1 No stated Expected cash Carrying flows (undiscounted)Insurance liabilities Maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amountInsurance contracts - - 568.4 415.3 181.6 184.9 1,350.2short termLess assets arising - (100.8) (82.8) (39.1) (47.5) (270.2)from reinsurancecontracts held - shortterm contractsTotal - 467.6 332.5 142.5 137.4 1,080.0Difference in 1,244.6 (295.0) 55.2 398.7 164.6 1,568.1contractual cash flows As at 31 December 2006 No stated Contractual cash Carrying flows (undiscounted)Financial assets maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amountShares and other 291.4 - - - - 291.4variable yieldsecuritiesDebt and other fixed 75.7 260.5 293.4 669.2 389.6 1,688.4income securitiesCash and liquid funds 413.6 - - - - 413.6Total 780.7 260.5 293.4 669.2 389.6 2,393.4 No stated Expected cash Carrying flows (undiscounted)Insurance liabilities Maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amountInsurance contracts - 658.2 452.1 181.1 126.1 1,417.5Less assets arising - (177.7) (116.9) (37.7) (24.7) (357.0)from reinsurancecontracts heldTotal - 480.5 335.2 143.4 101.4 1,060.5Difference in 780.7 (220.0) (41.8) 525.8 288.2 1,332.9contractual cash flows The assets in the above table include £18.0 million (2006: £16.7 million)accrued income which is shown separately in the notes to the accounts. The tableabove does not include the derivative positions that Amlin plc had outstandingat the year end. Liquidity in the event of a major disaster is tested regularly using internalcash flow forecasts and realistic disaster scenarios. In addition, the Londonunderwriting asset investment guidelines require at least 25% of the funds to beheld in government bonds and/or cash equivalents, which are highly liquid. Thisfigure is 100% for Bermuda. In addition pre-arranged revolving credit facilitiesare available from bank facilities. As discussed above, the capital assets arenot matched to liabilities. However, if a major insurance event occurs theinvestment strategy is reviewed to ensure that sufficient liquidity is alsoavailable in the capital assets. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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