28th Feb 2008 07:01
Amlin PLC28 February 2008 PART 2 Credit risk Credit risk is the risk that the Group becomes exposed to loss if a counterpartyfails to perform its contractual obligations, including failure to perform themin a timely manner. Credit risk could therefore have an impact upon the Group'sability to meet its claims as they fall due. Credit risk can also arise fromunderlying causes that have an impact upon the creditworthiness of allcounterparties of a particular description or geographical location. Amlin isexposed to credit risk in its investment portfolio and with its premium andreinsurance debtors. The table below shows the breakdown at 31 December 2007 of the exposure of thebond portfolio and reinsurance debtors by credit quality. The table also showsthe total value of premium debtors, representing amounts due from policyholders. The quality of these debtors is not graded, but based on historicalexperience there is limited default risk relating to these amounts. Thereinsurance debtors represent the amounts due at 31 December 2007 as well asamounts expected to be recovered on unpaid outstanding claims (including IBNR)in respect of earned and unearned risks. The Group assesses its reinsuranceassets for impairment on a quarterly basis by reviewing counterparty paymenthistory and credit grades provided by rating agencies. Reinsurance debtors arestated net of provisions for bad and doubtful debts. As of 31 December 2007reinsurance assets at a nominal value of £13.3 million (2006: £13.2 million)were greater than 3 months overdue and provided for on the basis of creditrating to the value of £8.7 million (2006: £10.3 million). The Group holdcollateral of £0.3 million in relation to these assets. The Group recognise atotal impairment gain in respect of the recovery during the year of £4.3 million(2006: £2.3 million) on reinsurance assets and insurance receivables. 31 December 2007 Bonds Premium Reinsurance debtors debtors £m % £m % £m % AAA 1,240.6 89 - -- 11.8 3AA 59.8 4 - - 141.2 38A 57.9 4 - - 206.4 55BBB 45.2 3 - - 1.1 1Other - - 364.9 100 12.3 3 1,403.5 100 364.9 100 372.8 100 31December 2006 Bonds Premium Reinsurance debtors debtors £m % £m % £m % AAA 1,305.9 81 - - 21.1 5AA 88.2 5 - - 157.9 38A 160.6 10 - - 217.6 52BBB 58.0 4 - - 3.4 1Other - - 388.2 100 17.9 4 1,612.7 100 388.2 100 417.9 100 The table above excludes £174.7 million (2006: £75.8 million) of pooledinvestments. As well as actual failure of a counterparty to perform its contractualobligations, the price of corporate bond holdings will be affected by investors'perception of a borrower's ability to perform these duties in a timely manner.Credit risk within the investment funds is managed through the credit researchcarried out by the investment managers. The investment guidelines are designedto mitigate credit risk by ensuring diversification of the holdings. For eachportfolio there are limits to the exposure to single issuers and to the totalamount that can be held in each credit quality rating category, as determined byreference to credit rating agencies. Additionally there are limits on theoverall level of non-government bonds that the fund managers can hold in thebond portfolios. During 2007, markets became increasingly concerned about the ability ofsub-prime borrowers, that is borrowers with a poor credit history, to meet theirrepayment commitments, particularly in the US. The impact of this spread toconcerns about the ability of insurers', who have provided guarantees thatenhance the credit of the issuer, to meet those guarantees. The consequence wasa widening of the yield spread of these bonds over the yield of comparablesovereign debt. At the year end within the asset and mortgage backed holdings there was £24.0million direct exposure to sub-prime home equity loans debt, of which £22.0million AAA rated and £2.0 million AA rated. In addition there was £3.6mindirect exposure to sub-prime in the bond pooled vehicles. £34.7 million of thebond portfolio was guaranteed by insurers, so called monolines. At 31 December2007 all these bonds were AAA rated. The managers have stress tested each bondand conservatively believe in the event of failure by the guarantors that 96% ofthe bonds will remain investment grade. There was an additional £1.1 millionsub-prime mortgage debt that was all AAA rated, as well as £28.2 million shortduration asset backed auto loans which were classified as sub-prime. The credit risk in respect of reinsurance debtors is primarily managed by reviewand approval of reinsurance security, by the Group's Reinsurance SecurityCommittee, prior to the purchase of the reinsurance contract. Guidelines areset, and monitored, that restrict the purchase of reinsurance security based onStandard & Poor's ratings and the Group's own ratings for each reinsurer.Provisions are made against the amounts due from certain reinsurers, dependingon the age of the debt and the current rating assigned to the reinsurer. Theimpact on profit before tax of 1% variation in the total reinsurance debtorswould be £3.7 million (2006: £4.2 million). % of total assets Total direct TotalMBS & ABS AAA AA Indirect Total £m £mMBS incl agencies 5.6% 0.2% 2.4% 8.2% 154.3 217.3ABSABS other 1.9% 0.1% 0.1% 2.0% 51.4 53.8ABS Home Equity 1.0% 0.1% 0.1% 1.2% 29.3 33.2Total 8.5% 0.4% 2.6% 11.4% 235.0 304.3 Total direct TotalAlt-A AAA AA Indirect Total £m £mCollateralised 0.4% 0.0% 0.4% 9.9 9.9Mortgage ObligationsABS Auto 0.0% 0.0% 0.0% - -ABS Home Equity 0.1% 0.0% 0.1% 2.3 2.3Indirect 0.2% 0.2% 6.4Total 0.5% 0.0% 0.2% 0.7% 12.2 18.6 Total direct TotalSub-prime AAA AA Indirect Total £m £mCollateralised 0.0% 0.0% 0.0% 1.1 1.1Mortgage ObligationsABS Auto 1.1% 0.0% 1.1% 28.2 28.2ABS Home Equity 0.8% 0.1% 0.9% 24.0 24.0Indirect 0.1% 0.1% 3.6Total 1.9% 0.1% 0.1% 2.1% 53.3 56.9 4. Segmental reporting by business group The tables below show segmental information by business segment. Businesssegments are primary segments and represent the divisions by which the businessis managed. Each segment underwrites sub-classes of business which fall withinthe broad classes of Aviation, Marine, Non-marine and UK Commercial business.The segments are discussed in more detail in the Profitability and returnsection. The non-marine business group is large and comprises direct andreinsurance books of business. The segmental disclosure excludes insurance premium, income and claims expensesfrom the receipt of reinsurance to close as detailed in note 5 as these have noimpact on profit for the year. Income and expenses by business segment Total Intra Non- UK UK Amlin group OtherYear ended 31 December 2007 Aviation marine Marine Commercial divisions Bermuda items technical Total £m £m £m £m £m £m £m £m £m Gross premium writtenAnalysed by geographic segmentUK 11.1 49.4 50.1 134.0 244.6 105.1 (90.3) 1.6 261.0US 21.3 300.0 41.8 0.1 363.2 90.2 - - 453.4Europe 13.6 39.3 34.7 4.9 92.5 8.3 - - 100.8Worldwide 0.4 17.3 21.3 1.3 40.3 - - - 40.3Other 17.2 94.6 39.3 8.9 160.0 29.2 - - 189.2Total 63.6 500.6 187.2 149.2 900.6 232.8 (90.3) 1.6 1,044.7 Gross premium earned 71.3 534.0 198.0 151.3 954.6 216.2 (84.3) 1.5 1,088.0 Reinsurance premium ceded (24.3) (107.8) (40.9) (21.0) (194.0) - 78.3 - (115.7)Net premium earned 47.0 426.2 157.1 130.3 760.6 216.2 (6.0) 1.5 972.3Insurance claims and claims (34.0) (148.7) (83.6) (84.8) (351.1) (73.6) 45.2 (0.6) (380.1)settlement expensesReinsurance recoveries 19.4 31.0 15.8 4.8 71.0 - (45.2) 0.1 25.9Underwriting expenses (17.2) (133.2) (59.3) (31.4) (241.1) (26.4) 6.0 (1.6) (263.1)Profit attributable to 15.2 175.3 30.0 18.9 239.4 116.2 - (0.6) 355.0underwritingInvestment return 114.1 42.9 157.0Other operating income 2.8 2.8Agency expenses (1) (2.1) (15.3) (4.4) (4.1) (25.9) 25.9 -Other non-underwriting expenses (49.8)(2)Finance costs (2) (20.0)Profit before taxation 445.0Combined ratio 68% 59% 81% 85% 69% 46% 63% Included within the UK gross premium written of Amlin Bermuda Ltd is premiumceded from Syndicate 2001 amounting to £90.3 million (2006: £100.8 million) onreinsurance contracts undertaken at commercial rates. (1) Agency expenses allocated to segments represent fees andcommission payable to Amlin Underwriting Limited; (2) Other non-underwriting expenses and finance costs are incurred insupport of the entire business of the Group and have not been allocated toparticular segments. Assets and liabilities by business segment Total Intra Non- UK UK Amlin group OtherAt 31 December 2007 Aviation marine Marine Commercial divisions Bermuda items technical Total £m £m £m £m £m £m £m £m £m Assets Assets attributable to business 272.8 934.7 382.5 534.5 2,124.5 959.4 (34.8) 10.9 3,060.0segmentsAssets allocated between the UK 519.5 519.5and BermudaTotal assets 3,579.5LiabilitiesLiabilities attributable to 251.3 729.2 346.5 493.4 1,820.4 217.7 (34.8) 9.8 2,013.1business segmentsLiabilities allocated between 514.1 514.1the UK and BermudaTotal liabilities 2,527.2Total net assets 1,052.3 The net assets of Amlin Bermuda Ltd are located in Bermuda and the US. Themajority of the other assets of the Group are located in the UK, the US andCanada. The corresponding liabilities are also concentrated in these countries,but given the nature of the Group's business some of the liabilities will belocated elsewhere in the world. During the year, Amlin Bermuda Ltd purchased £2.8 million (2006: £1.7 million;Amlin Bermuda £1.9 million) of fixed assets. These cannot be allocated to aspecific segment. Depreciation has been charged on property and equipment forthe year amounting to £3.0 million (2006: £3.1 million) of which £0.1 millionhas been charged to Aviation, £0.7 million to Non-marine, £0.3 million toMarine, £0.7 million to UK Commercial, £0.6 million to Amlin Bermuda Ltd withthe remainder not being allocated to a specific segment. 4 Segmental reporting by business group (continued) Income and expenses by business segment Total Intra Non- UK UK Amlin group OtherYear ended 31 December 2006 Aviation marine Marine Commercial divisions Bermuda items technical Total £m £m £m £m £m £m £m £m £m Gross premium writtenAnalysed by geographic segmentUK 12.7 49.5 53.1 133.7 249.0 110.3 (100.8) - 258.5US 29.5 344.2 51.6 0.3 425.6 88.8 - - 514.4Europe 14.1 37.9 39.5 5.8 97.3 3.7 - - 101.0Worldwide 0.4 15.8 19.2 1.6 37.0 1.8 - - 38.8Other 19.0 107.2 47.5 8.6 182.3 18.9 - (0.1) 201.1Total 75.7 554.6 210.9 150.0 991.2 223.5 (100.8) (0.1) 1,113.8 Gross premium earned 88.8 569.5 192.7 163.2 1,014.2 132.5 (59.3) (0.1) 1,087.3 Reinsurance premium ceded (29.2) (87.3) (31.8) (21.4) (169.7) - 56.3 - (113.4)Net premium earned 59.6 482.2 160.9 141.8 844.5 132.5 (3.0) (0.1) 973.9Insurance claims and claims (48.9) (179.8) (111.0) (103.0) (442.7) (47.5) 29.8 (0.3) (460.7)settlement expensesReinsurance recoveries 19.6 7.7 41.2 20.6 89.1 - (30.8) 0.2 58.5Underwriting expenses (24.0) (162.4) (67.6) (37.8) (291.8) (16.0) 4.0 - (303.8)Profit attributable to 6.3 147.7 23.5 21.6 199.1 69.0 - (0.2) 267.9underwritingInvestment return 83.1 32.0 115.1Other operating income 1.8 1.8Agency expenses (1) (2.6) (14.3) (3.3) (4.5) (24.7) 24.7 -Other non-underwriting expenses (18.3)(2)Finance costs (2) (23.8)Profit before taxation 342.7Combined ratio 89% 69% 85% 85% 76% 48% 72% (1) Agency expenses allocated to segments represent fees and commissionpayable to Amlin Underwriting Limited; (2) Other non-underwriting expenses and finance costs are incurred insupport of the entire business of the Group and have not been allocated toparticular segments. Assets and liabilities by business segment Total Intra Non- UK UK Amlin group OtherAt 31 December 2006 Aviation marine Marine Commercial divisions Bermuda items technical Total £m £m £m £m £m £m £m £m £m Assets Assets attributable to business 268.1 1,012.8 417.4 546.0 2,244.3 739.4 (99.6) 13.5 2,897.6segmentsAssets allocated between the UK 549.2 549.2and BermudaTotal assets 3,446.8LiabilitiesLiabilities attributable to 255.4 873.2 374.0 492.4 1,995.0 135.7 (99.6) 11.7 2,042.8business segmentsLiabilities allocated between 467.6 467.6the UK and BermudaTotal liabilities 2,510.4Total net assets 936.4 5 Net earned premium 2007 2006 £m £mInsurance contracts premiumGross premium written 1,044.7 1,113.8Change in unearned premium provision 43.3 (26.5)Gross premium earned 1,088.0 1,087.3Insurance premium revenue from the receipt of - 78.8reinsurance to closeReinsurance premium cededReinsurance premium payable (106.4) (100.3)Change in unearned reinsurance premium (9.3) (13.1)provision (115.7) (113.4)Net earned premium 972.3 1,052.7 The insurance premium revenue from the receipt of reinsurance to closerepresents the premium received from the third party syndicate members on the2003 year of account who sold their capacity to Amlin, for use by Amlin'scorporate members, for the following year of account of Syndicate 2001. Anidentical amount is recorded as a movement in claims, representing theadditional liabilities taken on by Amlin from the third party members. Overallthese transactions have no impact on profit for the year. For the 2004 year ofaccount and onwards 100% of Syndicate 2001 capacity is owned by the Group. 6 Investment return 2007 2006 £m £mInvestment income- dividend income 12.5 4.5- interest income 77.8 67.7Cash and cash equivalents interest income 25.1 26.5 115.4 98.7Net realised gains/(losses) on assets heldfor trading- equity securities 21.6 7.4- debt securities (1.5) (0.3)- property (0.1) - 20.0 7.1Net fair value gains/(losses) on assets heldfor trading- equity securities (7.1) 10.3- debt securities 30.2 (1.0)- property (0.1) -- derivative instruments (1.4) - 21.6 9.3 157.0 115.1 7 Insurance claims and loss adjustment expenses 2007 2006 £m £mGrossCurrent year insurance claims and loss 502.7 515.7adjustment expensesReduced costs for prior period insurance (122.6) (55.0)claims 380.1 460.7Insurance claims and loss adjustment expenses - 78.8relating to the receipt of reinsurance toclose (note 5) ReinsuranceCurrent year insurance claims and loss (39.5) (44.7)adjustment expenses recoverable fromreinsurersReduced/(additional) costs for prior period 13.6 (13.8)claims recoverable from reinsurers (25.9) (58.5)Total net insurance claims and loss 354.2 481.0adjustment expenses 8 Expenses for the acquisition of insurance contracts 2007 2006 £m £mExpenses for the acquisition of insurance 187.0 203.4contractsChanges in deferred expenses for the 9.0 (8.0)acquisition of insurance contracts 196.0 195.4 9 Other operating expenses 2007 2006 £m £mExpenses related to underwritingEmployee expenses, excluding employee 26.1 24.9incentivesLloyd's expenses 22.5 21.0Other administrative expenses 25.5 26.0Underwriting exchange (gains)/ losses (7.0) 36.5 67.1 108.4Other expensesEmployee expenses, excluding employee 10.9 6.4incentivesEmployee incentives 31.4 18.6Asset management fees 3.1 1.3Other administrative expenses 5.4 1.6Group company exchange gains (1.0) (9.6) 49.8 18.3Total 116.9 126.7 10 Finance costs 2007 2006 £m £mLetter of credit commission 1.1 1.3Subordinated bond interest 18.8 21.0Loan interest 0.1 1.5 20.0 23.8 11 Tax 2007 2006 £m £mCurrent taxUK corporation tax 52.6 57.0Foreign tax suffered 4.1 (0.1)Double tax relief (3.2) - 53.5 56.9Deferred tax - current yearMovement in assets 5.5 4.8Movement in liabilities 35.5 13.2 41.0 18.0Deferred tax - prior yearMovement in assets 0.2 -Movement in liabilities (0.8) - (0.6) -Deferred tax - change in tax rateMovement in assets 0.5 -Movement in liabilities (2.2) - (1.7) -Taxes on income 92.2 74.9 In addition to the above, deferred tax £1.3 million has been charged directly toequity (2006: £1.3 million credit). Underwriting profits and losses are recognised in the technical account on anannual accounting basis, recognising the results in the period in which they areearned. UK corporation tax is charged in the period in which the underwritingprofits are actually paid by the Syndicate to the corporate members. Deferred tax is provided on the annually accounted underwriting result withreference to the forecast ultimate result of each of the years of accountincluded in the annually accounted underwriting. Where the forecast ultimateresult for a year of account is a taxable profit, deferred tax is provided infull on the movement on that year of account included in the period's annuallyaccounted underwriting result. Where the forecast ultimate result for a year ofaccount is a loss, deferred tax is only provided for on the movement on thatyear of account included in the period's annually accounted Syndicateunderwriting result to the extent that forecasts show that the taxable loss willbe utilised in the foreseeable future. Deferred tax has been provided on theannually accounted underwriting result for this accounting period of £288.5million (2006: £218.4 million). Deferred tax assets on loss provisions in respect of non-aligned syndicateparticipations (see note 15) are only provided for, to the extent that forecastsshow that it is more likely than not that the ultimate taxable underwritinglosses represented by these provisions will be utilised within the foreseeablefuture. Deferred tax has been provided in full on non-aligned syndicate lossparticipation provisions of £3.6 million (2006: £3.8 million). Reconciliation of tax expense The UK standard rate of corporation tax is 30% (2006: 30%), whereas the currenttax assessed for the year ended 31 December 2007 as a percentage of profitbefore tax is 20.7% (2006: 21.9%). The reasons for this difference are explainedbelow: 2007 2007 2006 2006 £m % £m %Profit before tax 445.0 342.7Taxation on profit on ordinary 133.5 30.0 102.8 30.0activities calculated at thestandard rate of corporation tax inthe UKNon-deductible or non-taxable items (2.3) (0.5) 4.5 1.3Utilisation of unprovided for - - (3.8) (1.1)capital lossesTax rate differences on overseas (32.2) (7.2) (29.3) (8.5)subsidiariesUnder/(over) provision in respect (0.9) (0.2) 0.8 0.2of prior periodsReduction in future UK tax rate (6.8) (1.6) - -Irrecoverable overseas tax 0.9 0.2 (0.1) -Taxes on income 92.2 20.7 74.9 21.9 The Group's tax provision for 2007 has been prepared on the basis that theGroup's Bermudian subsidiaries are non-UK resident for UK corporation taxpurposes. The corporation tax rate for Bermudian companies is currently 0%(2006: 0%). A deferred tax liability of £20.3 million (2006: £8.9 million) has been providedfor on profits of the Group's overseas subsidiaries expected to be distributedin the foreseeable future. A deferred tax liability has not been provided on theundistributed profits of the overseas subsidiaries of £169.5 million (2006:£69.1 million) because the company is not expected to distribute these profitsin the foreseeable future. No deferred tax asset has been recognised on capital losses on investments asthese were all utilised by the Group during 2007 (2006: £5.4 million asset). Adeferred tax provision of £0.1 million (2006: £6.4 million) has been made onunrealised capital gains arising within the Group during this accounting period. Deferred tax has been provided for at the tax rate in force when the temporarydifferences are expected to reverse. The tax rates used are 28.5% for temporarydifferences expected to reverse in 2008 and 28% for temporary differencesexpected to reverse in 2009 or later. The Group is subject to US tax on US underwriting profits. No provision has beenmade in respect of such tax arising in 2007 (2006: £nil) as any net provision islikely to be immaterial and would be offset by brought forward US tax losses inthe Group. Deferred income tax The deferred tax asset is attributable to temporary differences arising on thefollowing: Other Provisions Other Capital Pension timing for losses provisions losses provisions differences Total £m £m £m £m £m £m At 1 January 2007 1.1 5.7 5.4 2.0 6.7 20.9Movements in the - (0.3) (5.4) (1.1) 1.1 (5.7)yearEffect of changein tax rate- Income (0.1) (0.2) - (0.1) (0.1) (0.5)statement- Equity - - - - (1.3) (1.3)At 31 December 1.0 5.2 - 0.8 6.4 13.42007 The deferred tax liability is attributable to temporary differences arising onthe following: Unrealised Syndicate Other Underwriting capital capacity Overseas timing results gains £m earnings differences Total £m £m £m £m £m At 1 January 2007 76.0 6.4 4.1 8.9 - 95.4Movements in the 28.2 (6.3) 0.7 12.0 - 34.6yearEffect of change (1.3) - (0.3) (0.6) - (2.2)in tax rateAcquisition of - - - - 0.3 0.3subsidiaryAt 31 December 102.9 0.1 4.5 20.3 0.3 128.12007 No deferred tax asset has been provided for on capital losses as these were allutilised during the year (2006: £18 million) Deferred tax assets have not been provided on US net operating losses of £30.2million (2006: £31.0 million) carried forward due to uncertainty over theirfuture use. 12 Net foreign exchange gains/(losses) The Group recognised foreign exchange gains of £8.0 million (2006: £26.9 millionloss) during the year. The Group writes business in many currencies and although a large amount of theGroup's balance sheet assets and liabilities are matched, minimising the effectof movements in foreign exchange rates on the Group's result, it is notpossible, or practical, to match exactly all assets and liabilities in currencyand accounting standards dictate that certain classes of assets and liabilitiesbe translated at different rates (see Foreign currency translation accountingpolicy). Included within the Group's foreign exchange gains is £14.7 million (2006: £27.9million loss) due to the translation of non-monetary assets and liabilities athistoric average rates. Foreign exchange gains and losses on investments in overseas subsidiaries aretaken directly to reserves in accordance with IAS21, The Effects of Changes inForeign Exchange Rates. Amlin Bermuda Holdings Ltd and Amlin Bermuda Ltd reportin US dollars. Amlin Singapore Pte Limited reports in Singapore dollars. Theloss taken to reserves for the year ended 31 December 2007 was £8.2 million(2007: £77.3 million). This reflects the Group's investment of $1 billion ofcapital in Amlin Bermuda Ltd adjusted for the movement in the dollar rate from1.96 at the start of the year to 1.99 at the balance sheet date. 13 Cash and cash equivalents Cash and cash equivalents represents cash at bank and in hand and short-termbank deposits which can be recalled within 24 hours. 14 Financial investments At At valuation valuation At cost At cost 2007 2006 2007 2006 £m £m £m £mFinancial assets held for trading atfair value through incomeShares and other variable yield 232.1 248.3 230.4 218.7securitiesDebt and other fixed income 1,506.7 1,599.6 1,485.6 1,599.8securitiesOverseas deposits 60.2 55.9 60.2 55.9Property 75.4 43.1 72.7 42.1Other financial assets at fair valuethrough incomeParticipation in investment pools 748.0 126.6 748.0 111.7Deposits with credit institutions 17.9 294.2 17.9 268.0Derivative instruments (1.4) - - - 2,638.9 2,367.7 2,614.8 2,296.2In Group owned companies 1,061.0 1,105.0 1,051.1 1,140.3In Syndicate 2001 1,573.6 1,257.1 1,559.4 1,150.3In non-aligned syndicates 4.3 5.6 4.3 5.6participations (see note 15) 2,638.9 2,367.7 2,614.8 2,296.2Listed investments included in Group:owned total are as follows:Shares and other variable yield 232.1 291.4 230.4 230.7securitiesDebt and other fixed income 1,506.5 1,596.7 1,485.6 1,599.6securities 1,738.6 1,888.1 1,716.0 1,830.3 As explained in note 24, £16.7 million (2006: £382.1 million) of the Group'sinvestments are charged to Lloyd's to support the Group's underwritingactivities. Overseas deposits represent balances held with overseas regulators to permitunderwriting in certain territories. The assets are managed by Lloyd's on apooled basis. 2007 2006 £m £mAt 1 January 2,367.7 2,078.2Exchange adjustments (2.5) (68.5)Net purchases 232.1 341.6Realised gains on disposals 20.0 7.1Unrealised investment gains 21.6 9.3At 31 December 2,638.9 2,367.7 15 Insurance contracts and reinsurance assets Other Unearned insurance Claims premium assets and reserves reserves liabilities Total £m £m £m £m InsuranceliabilitiesAt 1 January 1,704.3 523.8 114.8 2,342.92006Movement in the (156.8) 27.7 (36.1) (165.2)yearExchange (130.0) (6.0) (10.1) (146.1)adjustmentsAt 31 December 1,417.5 545.5 68.6 2,031.62006Movement in the (70.9) (42.4) (35.7) (149.0)yearExchange 3.6 (1.3) 1.1 3.4adjustmentsAt 31 December 1,350.2 501.8 34.0 1,886.02007 ReinsuranceassetsAt 1 January 604.6 24.2 387.3 1,016.12006Movement in the (198.7) 13.5 (54.5) (239.7)yearExchange (48.9) - (32.2) (81.1)adjustmentsAt 31 December 357.0 37.7 300.6 695.32006Movement in the (89.4) (10.2) 21.3 (78.3)yearExchange 2.6 - (2.7) (0.1)adjustmentAt 31 December 270.2 27.5 319.2 616.92007 Other insurance liabilities are comprised principally of premium payable forreinsurance, including reinstatement premium. Other insurance assets arecomprised principally of amounts recoverable from reinsurers in respect of paidclaims and premium receivable on inward reinsurance business, includingreinstatement premium. Further information on the calculation of claims reserves and the risksassociated with them is provided in the risk disclosures in note 3. Claims reserves are further analysed between notified outstanding claims andincurred but not reported claims below: 2007 2006 £m £mNotified outstanding claims 800.3 843.4Claims incurred but not 549.9 574.1reportedInsurance contracts claims 1,350.2 1,417.5reserve It is estimated, using historical settlement trends, that £568.4 million (2006:£564.2 million) of the claims reserves included, as at 31 December 2007, willsettle in the next twelve months. From 1994 to 1999 the Group participated on a number of Lloyd's syndicates otherthan those managed by the Group. From 2000 the Group ceased to underwritedirectly on non-aligned syndicates. However, a number of syndicates remain"open" and Amlin's final liabilities are still to be finalised. Provisions aremade for potential future insurance claims. Included within the claimsprovisions in the table above are provisions in respect of "non-alignedsyndicate participations" of £3.9 million (2006: £4.2 million). Syndicates that remain open at 31 December 2007 are set out in the table below. Syndicate capacityManaging agent Non-aligned 1999 1998 1997 syndicate £m £m £mNon-marineJago Managing Agency Ltd 205 2.25 - -A E Grant (Underwriting 991 2.93 2.35 -Agencies) LtdDuncanson & Holt Syndicate 1101 - 2.50 2.50Management LtdTotal Non-marine 5.18 4.85 2.50AviationDuncanson & Holt Syndicate 957 - 3.00 3.00Management LtdTotal capacityCapacity remaining open at 31 5.18 7.85 5.50December 2007 2007 2006 £m £mReinsurers' share of insurance liabilities 638.5 722.2Less provision for impairment of receivables from (21.6) (26.9)reinsurers'Reinsurance assets 616.9 695.3 16 Loans and receivables, including insurance receivables 2007 2006 £m £mReceivables arising from insurance contracts 77.0 99.3Less provision for impairment of receivables from (2.1) (1.3)contract holders and agentsDeferred acquisition costs 108.2 118.3Insurance receivables 183.1 216.3Other debtors 11.4 22.6Prepayments and other accrued income 25.4 29.0Other loans and receivables 36.8 51.6 219.9 267.9 2007 2006 £m £mCurrent portion 210.0 267.1Non-current portion 9.9 0.8 219.9 267.9 The reconciliation of opening and closing deferredacquisition costs is as follows: 2007 2006 £m £mAt 1 January 118.3 110.4Exchange adjustments (0.2) (0.1)Movements in the year (9.9) 8.0At 31 December 108.2 118.3 17 Share capital 2007 2007 2006 2006 Number £m Number £mAuthorised ordinary sharesAt 1 January authorised ordinary 800,000,000 200.0 800,000,000 200.0shares of 25p eachReduction of authorised ordinary (88,888,889) - - -sharesCancelled ordinary shares (7) - - -At 31 December authorised 711,111,104 200.0 800,000,000 200.0ordinary shares of 28.125p(2006: 25p) Authorised redeemable non-cumulative preference shares ('B shares')Authorised B shares 544,624,000 122.0 - -At 31 December authorised B 544,624,000 122.0 - -shares of 22.4p each Allotted, called up and fully paid ordinary sharesAt 1 January Authorised ordinary 534,006,720 133.5 530,113,127 132.5shares at 25pShares issued 3,695,766 0.9 3,893,593 1.0Reduction of issued ordinary (59,718,291) - - -sharesAt 31 December allotted ordinary 477,984,195 134.4 534,006,720 133.5shares of 28.125p Issued redeemable non-cumulative preference shares ('B shares')Issued B shares 537,464,619 120.4 - -At 31 December issued B shares 537,464,619 120.4 - -of 22.4p each The ordinary shares issued on exercise of options were issued for a totalconsideration of £4.5 million at an average price of 122 pence per share (2006:£3.7 million, average price 98 pence). Return of capital On 14 November, the Group announced its intention to return approximately £120million of capital to shareholders by way of a B share issue combined with aconsolidation of Amlin's existing shares on the basis of 8 new ordinary sharesfor 9 existing ones. This was subsequently approved by the shareholders' at anExtraordinary General Meeting held on 12 December 2007. B shares were issued on 17 December 2007 to existing shareholders on the basisof one B share for each ordinary share held on 14 December 2007. Each B share enabled the shareholder to redeem the share at 22.4 pence per shareat various dates in the future up to August 2009 or alternatively to receive a Bshare initial dividend in January 2008 of 22.4 pence per share. Following suchdividend receipt, the relevant B shares were converted into deferred shareswhich were themselves redeemed on 14 January 2008 for a total redemption valueof one penny in all. Holders of B shares not redeemed or converted into deferredshares on or around the initial redemption date in January 2008 have the right,subject to the Company having profits available for distribution, to receivecontinuing dividends at the rate of 75% of the sterling six month LIBOR. The Bshares have no right to vote at general meetings of the Company other than towind up the Company. They are fully transferable but are not listed on any stockexchange. The amount outstanding to be returned to B shareholders at 31 December 2007 hasbeen recognised as a liability in note 19. The total cost of the issue includingexpenses was £120.4 million which has been charged against share premium. 18 Reserves Share Other ESOT Retained Minority premium reserves shares earnings interest £m £m £m £m £mAt 1 January 2007 347.6 (21.8) (0.6) 477.4 0.3Issues of share 3.6 - - - -capital on exercise ofoptions over newshares (note 17)Gains on revaluation - (0.1) - - -of employee shareownership trustrecognised directly inequityNet purchase of - - (1.5) - -treasury sharesShare option valuation - 1.2 - - -chargeDeferred tax - (1.3) - - -Currency translation - (8.2) - - -differences onoverseas operationsProfit for the - - - 352.7 0.1financial yearDividends (note 22) - - - (111.1) -Return of capital (120.4) - - - -(note 17)At 31 December 2007 230.8 (30.2) (2.1) 719.0 0.4 Share Other ESOT Retained Minority premium reserves shares earnings interest £m £m £m £m £m At 1 January 2006 344.0 52.7 (1.7) 257.3 - Issues of share 3.6 - 1.1 - - capital on exercise ofoptions over new shares Gains on revaluation 0.2 - - - of employee share ownership trust recognised directly inequity Gain on defined - 0.1 - - - benefit pension schemeShare option valuation - 1.1 - - - charge Deferred tax - 1.3 - - - Currency translation - (77.2) - - - differences on overseas operations Profit for the - - - 267.5 0.3 financial year Dividends (note 22) - - - (47.4) - At 31 December 2006 347.6 (21.8) (0.6) 477.4 0.3 Other reserves is comprised of £45.7 million (2006: £45.7 million) being thecumulative amount of goodwill written off to reserves on acquisitions prior toJanuary 1999, a capital redemption reserve, charges for share options issued,deferred tax in respect of share options and the cumulative foreign exchangelosses of £59.3 million (2006: £73.4 million) on investments in overseasoperations. In January 2008, 423,449,598 B shares were redeemed by shareholders. 102,635,603B share holders elected to take a dividend and these shares were converted intodeferred shares and redeemed. The remaining 11,379,418 B shares remainoutstanding. Consequently £117.8 million has been charged to retained earningsin 2008 and a capital redemption reserve created. 19 Trade and other payables and deferred income 2007 2006 £m £mTrade payables and accrued expenses 84.3 66.3Social security and other tax payables 2.4 2.1Issued redeemable non-cumulative preference 120.4 -shares (note 17) 207.1 68.4 2007 2006 £m £mCurrent portion 201.4 57.9Non-current 5.7 10.5portion 207.1 68.4 20 Borrowings 2007 2006 £m £mBank loans 0.1 0.9Subordinated 277.4 277.9debt 277.5 278.8 2007 2006 £m £mCurrent portion 0.1 0.9Non-current 277.4 277.9portion 277.5 278.8 The Group's borrowings comprise three issues of subordinated debt. Details ofthe subordinated debt issues are as follows: Issue date Principal Reset date Maturity Interest Interest amount date rate to rate from reset reset date date to maturity % date % 23 November $50m November November 7.11 LIBOR +2004 2014 2019 3.4815 March 2005 $50m March 2015 March 2020 7.28 LIBOR + 3.3225 April 2006 £230m December December 6.50 LIBOR + 2016 2026 2.66 The debt will be redeemed on the maturity dates at the principal amounts,together with any outstanding accrued interest. The Company has the option toredeem the bonds in whole, subject to certain requirements, on the reset datesor any interest payment date thereafter at the principal amount plus anyoutstanding accrued interest. The directors' estimation of the fair value of the Group's borrowings is £322.2million (2006: £306.3 million). On 13 November 2006 the Company entered into a new debt facility with its bankswhich is available for three years from the signing date and provides anunsecured £200 million multicurrency revolving credit facility available by wayof cash advances or sterling letters of credit (LOC). The facility is guaranteedby the Company's subsidiaries Amlin Corporate Services Limited and AmlinInvestments Limited. In December 2006 Amlin Bermuda Ltd entered into a $300 million LOC and RevolvingCredit Facility. The facility comprised a secured LOC facility for $200 millionfor a three year term and an unsecured revolving credit facility for $100million for a term of 364 days, twice renewable, which has been renewed once inDecember 2007. The secured LOC facility is secured by a registered charge overa portfolio of assets managed by Aberdeen Asset Management Limited with StateStreet Bank and Trust Company as custodian. As at 31 December 2007 $28.7million(31 December 2006: $1.7 million) LOCs were issued with an additional $1.8m LOCsissued in January 2008. Obligations due under finance leases and hire purchase contracts are payable asfollows: 2007 2006 £m £mWithin one - 0.1year 21 Earnings and net assets per share Earnings per share are based on the profit attributable to shareholders and theweighted average number of shares in issue during the period. Shares held by theEmployee Share Ownership Trust (ESOT) are excluded from the weighted averagenumber of shares. Basic and diluted earnings per share are 2007 2006as follows: Profit attributable to equity holders of £352.7m £267.5mthe Parent CompanyWeighted average number of shares in 532.0m 531.8missueDilutive shares 6.1m 6.4mAdjusted average number of shares in 538.1m 538.2missueBasic earnings per share 66.3p 50.4pDiluted earnings per share 65.5p 49.8p Basic and tangible net assets per share 2007 2006are as follows:Net assets £1,052.3m £936.4mAdjustments for intangible assets (£69.0m) (£66.0m)Tangible net assets £983.3m £870.4mNumber of shares in issue at end of 478.0m 534.0mperiodAdjustment for ESOT shares (1.1m) (0.8m)Basic number of shares after ESOT 476.9m 533.2madjustmentNet assets per share 220.7p 175.6pTangible net assets per share 206.2p 163.2p 22 Dividends The amounts recognised as distributions to equity holders are as follows: Group 2007 2006 £m £mFinal dividend for the year ended:- 31 December 2006 of 7.8 pence per ordinary 41.7 -share- 31 December 2005 of 6.2 pence per ordinary - 25.0shareInterim dividend for the year ended:- 31 December 2007 of 5.0 pence per ordinary 26.7 -share- 31 December 2006 of 4.2 pence per ordinary - 22.4shareSpecial dividend for the year ended:- 31 December 2006 of 8.0 pence per ordinary 42.7 -share 111.1 47.4 The final ordinary dividend of 10.0 pence per ordinary share for 2007, amountingto £47.8 million, payable in cash was approved by the Board on 27 February 2008and has not been included as a liability as at 31 December 2007. 23 Principal exchange rates The principal exchange rates used in translating foreign currency assets,liabilities, income and expenditure in the production of these financialstatements were: Average rate Year end rate 2007 2006 2007 2006US dollar 2.00 1.84 1.99 1.96Canadian 2.15 2.09 1.96 2.28dollarEuro 1.46 1.47 1.36 1.48 24 Contingent liabilities The Group has entered into various deeds of covenant in respect of certaincorporate member subsidiaries to meet each such subsidiary's obligations toLloyd's. At 31 December 2007, the total guarantee given by the Group under thesedeeds of covenant (subject to limited exceptions) amounted to £16.7 million(2006: £382.1 million). The obligations under the deeds of covenant are securedby a fixed charge over investments of the same value at the relevant valuationdate and a floating charge over all the investments and other assets of AmlinInvestments Limited, in favour of Lloyd's. Lloyd's has the right to retain theincome on the charged investments, although it is not expected to exercise thisright unless it considers there to be a risk that one or more of the covenantsmight need to be called and, if called, might not be honoured in full. InOctober 2007, the Group transferred £397.5 million of assets from AmlinInvestments Limited to Syndicate 2001 Premium Trust Fund. The charges in favourof Lloyd's over these investments were released at that time. The transfer toSyndicate 2001 Premium Trust Fund was made by way of sale from Amlin InvestmentsLimited to Amlin Corporate Member Limited (both wholly owned subsidiaries of theGroup) in its capacity as the corporate member of the Syndicate. As liability under each deed of covenant is limited to a fixed monetary amount,the enforcement by Lloyd's of any deed of covenant in the event of a default bya corporate member, where the total value of investments has fallen below thetotal of all amounts covenanted, may result in the appropriation of a share ofthe Group's Funds at Lloyd's that is greater than the proportion which thatsubsidiary's overall premium limit bears to the total overall premium limit ofthe Group's Lloyd's underwriting. 25 Cash generated from operations 2007 2006 Notes £m £mProfit on ordinary activities 445.0 342.7before taxationAdjustments: -Depreciation charge 3.0 3.2Amortisation charge 0.8 -Finance costs 20.0 24.1Interest received 6 (102.9) (97.5)Dividends received 6 (12.5) (4.5)(Realised)/unrealised gains on 6 (41.6) (16.4)investmentsMovement in operating assetsand liabilities:Net purchases of financial (232.1) (349.4)investmentsDecrease in loans and 51.9 79.3receivablesDecrease in reinsurance 69.2 320.8contract assetsDecrease in insurance contract (136.4) (311.1)liabilitiesIncrease in trade and other 16.2 1.3payablesIncrease in retirement (4.7) (4.9)benefitsExchange gains on long term (0.8) (11.6)borrowingsOther non-cash movements (4.6) 3.8Cash generated from operations 70.5 (20.2) 26 Acquisition of subsidiary On 2 July 2007, the Group acquired 100% of the share capital and voting rightsin Allied Cedar Insurance Group Limited, the holding company of AlliedUnderwriting Agencies Limited and Cedar Insurance Company Limited. The AlliedCedar Insurance Group Limited is a general insurance underwriting operationspecialising in UK property personal lines business. Purchase consideration: £m- Initial consideration 3.4- Deferred consideration 2.7- Direct cost relating to the acquisition 0.1Total purchase consideration 6.2Fair value of assets acquired (see below) 6.2Goodwill - The assets and liabilities arising from the acquisition are as follows: Fair value Acquiree's carrying amount £m £m Cash and cash equivalents 0.1 0.1Property, plant and equipment 0.4 0.4Unlisted fixed assets - 0.3Insurance receivables 2.8 1.8Financial investments - 3.0 3.0available for saleIntangible assets 3.8 -Financial liabilities (2.2) (2.2)Insurance liabilities (1.1) (1.1)Net tax liability (0.6) (0.3)Net assets acquired 6.2 2.0 Intangible assets relate to the costs of acquiring rights to customercontractual relationships. The acquiree's carrying amount shown represents the balance sheet of AlliedCedar Insurance Group Limited as at 30 June 2007 prepared in accordance with UKGAAP. Allied Cedar Insurance Group Limited contributed £1.6 million gross earnedpremium and £0.2 million to the Group's profit before tax for the period between2 July 2007 and 31 December 2007. If the acquisition of Allied Cedar Insurance Group Limited had been completed onthe first day of the financial year, group gross earned premium for the periodwould have been £1,089.5 million and group profit attributable to equity holdersof the parent would have been £352.8 million. 27 Group owned net assets The assets and liabilities attributable to Group owned companies, as opposed tothe Group's syndicate participations, are summarised below: In In Group In Amlin In Group In In owned Syndicate Bermuda owned Syndicate Amlin companies 2001 Ltd Total companies 2001 Bermuda Ltd Total 2007 2007 2007 2007 2006 2006 2006 2006 £m £m £m £m £m £m £m £m InvestmentsFinancial 207.0 1,577.2 854.7 2,638.9 468.2 1,257.4 642.1 2,367.7investmentsOther assetsIntangible assets 69.0 - - 69.0 66.0 - - 66.0Property and 4.8 - 1.0 5.8 4.6 - 1.6 6.2equipmentCash and cash 7.0 3.9 0.7 11.6 14.4 (0.2) 2.3 16.5equivalentsLoans and (29.0) 113.5 98.5 183.0 (32.5) 159.3 89.5 216.3receivables -insurance assetsLoans and (3.8) 37.5 3.2 36.9 (10.6) 59.3 2.9 51.6receivables - otherDeferred income tax 13.4 - - 13.4 20.9 - - 20.9Current income tax 0.5 3.5 - 4.0 2.0 4.3 - 6.3Reinsurance assets (87.5) 704.5 (0.1) 616.9 (56.0) 751.3 - 695.3Total assets 181.4 2,440.1 958.0 3,579.5 477.0 2,231.4 738.4 3,446.8 Current liabilitiesTrade and other (172.1) (19.5) (10.4) (202.0) (35.9) (20.5) (1.5) (57.9)payablesCurrent income tax (25.7) - - (25.7) (28.7) - - (28.7)liabilitiesBorrowings (0.1) - - (0.1) - (0.9) - (0.9) (197.9) (19.5) (10.4) (227.8) (64.6) (21.4) (1.5) (87.5)Non-currentliabilitiesTrade and other (5.1) - - (5.1) (10.5) - - (10.5)payablesBorrowings (277.4) - - (277.4) (277.9) - - (277.9)Retirement benefit (2.8) - - (2.8) (7.5) - - (7.5)obligationsDeferred tax (128.1) - - (128.1) (95.4) - - (95.4)liabilities (413.4) - - (413.4) (391.3) - - (391.3) (611.3) (19.5) (10.4) (641.2) (455.9) (21.4) (1.5) (478.8)Insurance contracts 120.4 (1,801.1) (205.3) (1,886.0) 84.0 (1,981.8) (133.8) (2,031.6)Consolidated (309.5) 619.5 742.3 1,052.3 105.1 228.2 603.1 936.4shareholders' fundsat 31 December The assets of the Syndicate included above are held in regulated trust funds andare only available to pay syndicate related expenditure. 28 Financial information and posting of accounts The financial information set out above does not constitute the Company'sstatutory accounts for the year ended 31 December 2006 or 2007, but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered following theCompany's Annual General Meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985. The audited Annual Report and Accounts for 2007 are expected to be posted toshareholders by no later than 28 March 2008. Copies of the Report may beobtained from that date by writing to the Company Secretary, Amlin plc., StHelen's, 1 Undershaft, London, EC3A 8ND. The Annual General Meeting of theCompany will be held at the same address at noon on Thursday, 24 April 2008. The preliminary Results were approved by the Board on 27 February 2008. -------------------------- (1) VaR is a statistical measure, which calculates the possible loss over ayear, in normal market conditions. As VaR estimates are based on historicalmarket data this should not be viewed as an absolute gauge of the level of riskto the investments. (2) Segregated funds are managed separately for Amlin. Pooled funds arecollective investment vehicles in which Amlin and other investors purchaseunits. Commingled funds combine the assets of several clients. (3)The property valuations are based on the data available when the accountswere prepared. There were no material changes in value between the valuation inthe table and the actual year end valuation. (4) The yield is the rate of return paid if a security is held to maturity. Thecalculation is based on the coupon rate, length of time to maturity and themarket price. It assumes coupon interest paid over the life of the security isreinvested at the same rate. (5) The duration is the weighted average maturity of the security's cash flows,where the present values of the cash flows serve as the weights. 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