Final Results - Part 1

RNS Number : 0823O

Amlin PLC

02 March 2009

 



AMLIN PLC

PRESS RELEASE

For immediate release

2 March 2009

Preliminary Results for the year ended

31 December 2008

Highlights

Income statement

• Robust performance delivered, despite impact of major hurricanes and economic crisis.

• Profit before tax of £121.6 million (2007: £445.0 million).

• Return on equity of 7.8% (2007: 37.8%).

• Excellent combined ratio of 76% (2007: 63%).

• Positive investment return of 0.6% (2007: 6.6%) despite equity and bond market sell-off.

Balance sheet and capital management

• Net assets increased 15.6% to £1,216.1 million (2007: £1,052.3 million).

• Net tangible assets per share increased 14.5% to 236.0 pence (2007: 206.2 pence).

• Run-off profits from reserves of £114.7 million (2007: £109.0 million). 

• £27.6 million shares purchased through share buy-back programme.

• Dividend (paid and proposed) increased by 13.3% to 17.0 pence per share.

Outlook

• Strong capital position to support growth.

• Net unearned premium reserves of £518.4 million (2007: £474.3 million).

• Premium rate increases now expected in a number of key classes.

• Continued prospects for strong dividend growth.

Charles Philipps, Chief Executive, commented as follows:

'Our results again demonstrate the quality of our underwriting businesses as well as our focus on risk management. The outlook for 2009 and 2010 underwriting is improving and we expect to see good opportunities for growth supported by a robust balance sheet and superior financial strength ratings.'

Enquiries:
Charles Philipps, Chief Executive, Amlin plc	0207 746 1000
Richard Hextall,  Finance Director, Amlin plc	0207 746 1000
Julianne Jessup, Head of Investor Relations, Amlin plc	0207 746 1961
Hannah Bale, Head of Communications, Amlin plc	0207 746 1118
David Haggie, Haggie Financial LLP	0207 417 8989
Juliet Tilley, Haggie Financial LLP	0207 417 8989

Financial Highlights	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Gross written premium	1,034.0	1,044.7	1,113.8	993.5	945.6
Net written premium	915.7	938.3	1,013.5*	829.3*	790.2*
Net earned premium	913.5	972.3	973.9*	822.1*	722.4*
Profit before tax	121.6	445.0	342.7	186.7	119.7
Return on equity	7.8%	37.8%	34.0%	29.6%	21.0%
Net assets	1,216.1	1,052.3	936.4	784.8	449.2
Net tangible assets	1,105.9	983.3	870.4	718.8	383.2
Per share amounts (in pence)
Earnings	17.1	66.3	50.4	34.3	20.7
Net assets	259.5	220.7	175.6	148.7	113.7
Net tangible assets	236.0	206.2	163.2	136.2	97.0
Dividend under IFRS**	16.0	20.8***	10.4	9.0	4.7
Dividends (paid and proposed final)  in respect of calendar year**	17.0	15.0	20.0***	10.2	8.0
Capital return via B shares	-	22.4	-	-	-
Group operating ratios
Claims ratio	55%	36%	41%	57%	50%
Expense ratio	21%	27%	31%	25%	32%
Combined ratio	76%	63%	72%	82%	82%
Amlin Bermuda Ltd combined ratio	83%	46%	48%	-	-
Syndicate 2001 combined ratio	73%	69%	76%	82%	82%

*     Excluding premiums associated with the reinsurance to close of our increased share of capacity.

**     All per share dividends are the actual dividends paid or proposed for each share 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 to underwriting or finance costs. Combined ratio is the total of the claims and expense ratio.

CHAIRMAN'S STATEMENT

The 2008 financial results illustrate the robust structure of our business in a year of severe catastrophe activity combined with the biggest financial crisis of the last fifty years.  

Results and dividend

Our profit before tax of £121.6 million (2007: £445.0 million) is a good result, reflecting a satisfactory underlying underwriting performance despite major loss activity and a materially lower investment return of 0.6% (2007 6.6%). While in absolute terms the investment return is low, it is an excellent performance in the context of the markets and reflects our cautious investment strategy. 

Stepping back to take a longer term view it is encouraging to see that, despite a more challenging year, our long term weighted average return on equity since 2003 is 25.5%: a sustained high quality financial performance.  

Much of our business activity is conducted overseas and exchange rate volatility has also impacted the business in 2008. With sterling, our Group reporting currency, weakening materially against the US dollar and the Euro, profit potential on this overseas income has increased. Equally our investment in our Bermudian business was made in US dollars and we have recorded a net gain of £140.9 million on that investment, much of which has been taken to reserves.

The Board proposes a final dividend of 11.0 pence per share making total dividends declared for the year of 17.0 pence per share. This is a 13.3% increase on the 2007 ordinary dividend. Going forward, our goal remains to steadily grow the dividend and deliver healthy income returns for our shareholders.  

The Group operated a share buy back programme during the year and purchased 10.8 million shares at an average price of 256.6p per share. With conditions in a number of our key markets improving, whilst the buy back authority from the Board remains, we do not expect to make further purchases in the near term. 

Strategic progress

Amlin's core business is undoubtedly strong: it is well capitalised, has an excellent stable underwriting team and strong operational management. This is reflected in our Financial Strength Ratings from leading rating agencies.  

Amlin achieved another milestone on being elevated to the FTSE 100 in December 2008.

Good risk management is at the heart of any insurance operation. Our underwriting catastrophe management and investment skills were tested this year and both stood up well. However, in an uncertain world, we recognise that it is important to continually challenge ourselves to think the unthinkable and to stress test the business.  

Looking to the future we continue to review the Group's strategic direction to ensure that we are able to build upon our recent achievements and develop our potential.

During 2008, the Group's structure was broadened to ensure that Amlin is not only well positioned to sustain and develop existing business, but also to support future strategic growth plans. The new structure includes the establishment of Amlin London as a separate division, operating alongside Amlin UK, Amlin Bermuda and the formation of a Group Executive distinct from divisional management. 

We were also pleased to welcome new colleagues in France and the UK. The acquisition of Anglo French Underwriters SAS (AFU) based in Paris in November 2008, was an important step. AFU is the largest Lloyd's approved coverholder in France, focusing on SME specialty business. It is intended to provide a platform for growth in property and casualty business in continental Europe.

  Outlook

The outlook for trading is in marked contrast to six months ago.  Overall our expectation is that the rating environment will continue to improve for many of our classes, though the speed and extent of change will vary. 

Hurricanes Ike and Gustav would probably have been sufficient to halt downward pressure on reinsurance rates in themselves. However, the financial impact of the 'credit crunch' has added to the pressure across the whole industry. We expect that reinsurance, our largest business segment, will see a strong rise in pricing levels in 2009 and catastrophe exposed insurance business, such as energy and large commercial property, will also benefit from rate increases.

We expect that the response in other areas will be slower but we have started to see more signs of rate increases in our commercial motor account.

Amlin is in an excellent position to respond to improving markets. The Group has a strong balance sheet with sufficient capital to support organic growth in the business. 

Board

The Board welcomed Mrs Christine Bosse as a new non-executive director in November 2008. Christine is from Denmark and brings additional insurance industry experience to our deliberations as CEO of TrygVesta.

Roger Joslin retired from Amlin at our AGM in April 2008 after serving as a non-executive director since 2001. We appreciate the excellent contribution that Roger made over the years and thank him for his service to the Group.

At our AGM in May 2009, Ram Mylvaganam will be retiring from the Board after a long involvement which started at Murray Lawrence before the creation of Amlin. He has always been keenly interested and helpful in the development of the Group for which we are very grateful.  

The Amlin team

A key member of our team, Tony Holt, retired from his executive role as Group Underwriting Director on 31 December 2008. However, he is continuing to participate in our business as a member of the Board in a non-executive capacity. Tony built his career as an underwriter at Lloyd's and was promoted to join the Amlin board in 2000. He has not only demonstrated great personal skill but also developed a team of colleagues who I am confident will build on his well deserved reputation for underwriting excellence. We acknowledge Tony's valued contribution and wish him a very happy retirement.

The combination of major insurance losses and economic turbulence has been a stern challenge, yet we have still produced a sound result. This is due to the excellent performance of Charles Philipps, his management colleagues and all our employees who have continued to reach new goals whilst maintaining high service standards. I would like to thank them all for a job well done.

Roger Taylor

Chairman  FINANCIAL PERFORMANCE

	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Gross premium written	945.6	993.5	1,113.8	1,044.7	1,034.0
Net premium	790.2	829.3	1,013.5	938.3	915.7
Net earned premium	722.4	822.1	973.9	972.3	913.5
Underwriting contribution	106.6	137.1	267.9	355.0	222.2
Investment contribution	52.1	90.9	115.1	157.0	18.0
Other costs	39.0	41.3	40.3	67.0	118.6
Profit before tax	119.7	186.7	342.7	445.0	121.6
Return on equity	21.0%	29.6%	34.0%	37.8%	7.8%

The financial performance of the Group for 2008 was robust, particularly in the context of a turbulent year in financial markets and major catastrophic activity. The Group recorded a profit before tax of £121.6 million and a return on equity of 7.8% (2007: £445.0 million and 37.8%). The lower result is due to losses incurred from Hurricanes Gustav and Ike of $302.3 million, which contrasts with a lack of major natural catastrophe events in 2007 and a lower investment return of 0.6%, down from 6.6% in the previous year.

Our long term performance has been excellent with a weighted average return on equity since 2004 of 25.5%. This compares well to our cross cycle target of 15% and our estimated cost of capital over that period of around 10%.

Underwriting contributed £222.2 million (2007: £355.0 million) to the pre tax result. Syndicate 2001 and Amlin Bermuda contributed £176.0 million (2007: £238.8 million) and £46.2 million (2007: £116.2 million) respectively. The fall in contributions reflect the impact of Hurricanes Gustav and Ike of $140.3 million and $162.0 million for the Syndicate and Bermuda respectively.

The underwriting contribution includes run off profits from reserves of £114.7 million (2007: £109.0 million). We have continued to maintain consistent levels of reserving strength for liabilities assessed at 31 December 2008 with reserves set at a level above an actuarial best estimate of possible outcomes. With this approach, if 'normal' claims development is experienced, releases will be made from reserves over time. At the year end, the level of surplus above the actuarial best estimate remained in excess of £200 million (2007: in excess of £200 million).

Investment return was £18.0 million (2007: £157.0 million). This is a significant reduction in contribution reflecting difficult markets in 2008 for all investment classes with the exception of government bonds and cash. Our investment allocation has been more cautious over the last year and high levels of cash and government bond holdings more than offset the lower returns on equities and non government bonds. We avoided material losses from the major defaults in equity and bond markets in the year.

Another feature of the results is the impact of foreign exchange. 2008 was a volatile year for exchange rates and sterling, our Group reporting currency, weakened materially against the US dollar and the euro. This has had a number of effects:

• Margins on overseas income have generally increased.

• A gain of £75.5 million is recorded in the income statement relating to foreign exchange translation of net non-monetary liabilities.

• A loss of £41.3 million is recorded in the income statement for sterling corporate assets of £182.1 million that were held by Amlin Bermuda. These holdings were part of the hedging strategy for the Group's new investment in Bermuda. However, as Amlin Bermuda reports in US dollars, an exchange loss is recorded in their financial statements and this is recognised in the Group income statement.  An offsetting foreign exchange gain is recognised in the Statement of Changes in Equity. 

• Other losses of £15.3 million include the impact of revaluing the Group's US dollar subordinated debt.

  Underwriting performance

Catastrophe insured losses in 2008 were the second largest in history contrasting sharply with a benign 2006 and 2007. Inevitably, a number of these losses impacted the Group's financial performance. In that context, the combined ratio of 76% is impressive (2007: 63%). 

Gross written premium was £1,034.0 million, largely consistent with the prior year (2007: £1,044.7 million). Overall, the renewal rate reduction was 6.8%, with a renewal retention ratio of 84% (2007: reduction of 5.5% and 77% respectively). This was largely offset by the positive impact of foreign exchange.

Syndicate 2001's gross written premium was £842.5 million (2007: £900.6 million). This includes £36.3 million (2007:£31.0 million) of business specifically written to be ceded to Amlin Bermuda. The reduction in Syndicate premium reflects the impact of rate reductions across divisions offset by foreign exchange gains. In contrast, Amlin Bermuda increased its direct written premium by 23.4% to $353.3 million (2007: $286.3 million), as the company benefited from increased shares of client's reinsurance programmes following the improvement in its financial strength rating in October 2007.

Syndicate 2001 purchased additional retrocessional reinsurance in 2008, as the availability of cover increased in the first half. For 2008, reinsurance expenditure as a proportion of gross written premium was 11.4% (2007: 10.2%). 

Net earned premium was 6.0% lower at £913.5 million (2007: £972.3 million), reflecting the purchase of additional reinsurance in the year. However, net unearned premium now stands at £518.4 million (2007: £474.3 million), the increase mostly from the stronger US dollar.

The claims ratio for the year was 55% (2007: 36%). As noted above natural catastrophe activity was significant. In the second half, Hurricanes Gustav and Ike were major losses, with the Group incurring total losses of $302.3 million across both events. Hurricane Ike is expected to be the third most costly hurricane in recorded history, with current industry losses estimated at $21 billion.  

The first half also witnessed some notable catastrophe losses and an increase in the number of individual large risk losses. However, Amlin's estimated exposure to these events was modest, reflecting in part our relatively small line size.  

The divisional combined ratios referred to below are after removing the exchange difference on the translation of non-monetary assets and liabilities.

Divisional performance

Underwriting performance - Syndicate & Amlin Bermuda

	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Gross premium written	942.2	992.9	1,113.8	1044.7	1,034.0
Net earned premium	782.0	827.4	973.9	972.3	913.5
Claims ratio %	50	57	41	36	55
Expense ratio %	32	25	31	27	21
Combined ratio %	82	82	72	63	76
Combined ratio % *	80	85	70	64	81
Underwriting contribution	139.3	152.0	267.9	355.0	222.2

*excluding the exchange difference on non monetary assets and liabilities.

  Amlin London

Reinsurance and Property & Casualty (Non-marine1)

Non-marine accounted for £443.6 million of gross written premium in 2008 (2007: £500.6million), with Reinsurance and Property and Casualty providing 62% and 38% respectively.

The combined ratio was 78% (2007: 60%). The claims ratio was 48% (2007: 28%) with the increase reflecting the impact of Gustav and Ike compared to a benign 2007. Reserve releases of £34.5 million were made (2007: £50.0 million). The expense ratio was 30% (2007: 31%).

Marine

The Marine business unit contributed £189.5 million to gross written premium in 2008 (2007: £187.2 million).  The combined ratio was 87% (2007: 83%). Reserve releases totalled £14.3 million (2007: £8.0 million) as claims development has been better than expected.

Aviation

The Aviation business unit accounted for £56.6 million of gross written premium in 2008 (2007: £63.6 million). Written premium remained low as our underwriters remained disciplined in a highly competitive market.  

Despite the number of losses in the market the combined ratio was low at 84% (2007: 70%). The underlying expense ratio has improved marginally at 34%. Reserve releases amounted to £9.8 million (2007: £15.9 million) with little claims development in the year.

Amlin UK

£152.8 million of gross premium was written in the year (2007: £149.2 million). 

Faced with difficult rating conditions, our underwriters have continued to demonstrate excellent discipline, focusing on risk selection and underwriting profitability. The acquisition of the renewal rights to the commercial motor account of HCC generated £4.5 million of renewed income in the year with further renewals due in 2009. 

Property insurance grew by 89% in the year. This follows a number of new business initiatives and the full year impact of the 2007 acquisition of Allied Cedar. This growth whilst retaining profitability is pleasing given the build up of a competitive market. It results partly from increased marketing activity, with additional resources recruited in 2007.

With market conditions once again proving challenging, the combined ratio of 80% (after removing the exchange difference on translation on non-monetary assets and liabilities) is a strong result (2007: 86%). The claims ratio was 48% compared to 61% in the prior year. The higher expense ratio of 32% (2007: 24%) reflects a modestly higher expense base against reduced net earned premium. Reserve releases of £34.4 million (2007: £22.1 million) represent the release of case reserves as claims settle below expectations.

Amlin Bermuda

Amlin Bermuda wrote gross premium of US$549.5 million in the year (2007: US$466.8 million). Of this US$196.2 million was attributable to quota share and other reinsurances of Syndicate 2001 (2007: US$180.5 million). The biggest contributing class was catastrophe reinsurance which generated US$211.1 million of premium (2007: US$172 million). 

Given the impact of the hurricanes the combined ratio of 83% (2007: 46%) is a strong result. Reserve releases amounted to US$40.1 million (2007: US$24.1 million). The expense ratio of 15% is low relative to the London operations due to the high operational gearing.

  Investment performance

The Group's cash and investments increased to £2.9 billion (2007: £2.6 billion). £547.5 million of the increase related to the translation effect of the weakening of sterling during 2008 on the non-sterling assets that the Group owns. Cash and investments represent a multiple of 2.4 times (2007: 2.5 times) shareholders' equity.  

The investment environment in 2008 was marked by both extreme volatility and extreme pessimism, culminating in the panic deleveraging during the final quarter. Consequently it was a difficult year to make a positive return. Overall investments generated a profit of £18.0 million for the year (2007: £157.0 million) representing a return of 0.6% (2007: 6.6%) on average assets of £2.6 billion (2007: £2.5 billion). 

		2008				2007
		Average				Average
		Asset Allocation		Return		Asset Allocation	Return
		£m		£m		£m	£m
Bonds		1539		87		1,598	96
Other liquid investments	818		31		542		28
Equities		206		(91)		286	28
Property		80		(9)		59	6
Total		2,643		18		2,485	158
Bonds		58%		3.5%		64%	6.3%
Other liquid investments		31%		4.0%		22%	5.5%
Equities		8%		(26.5%)		12%	10.2%
Property		3%		(6.3%)		2%	9.8%
Total		100%		0.6%		100%	6.6%

The full extent of the financial crisis that hit markets in the autumn was difficult to anticipate. The subsequent need for institutions to deleverage meant that, in many cases, investors were forced to sell their highest quality assets in order to shore up their balance sheets, as these were the only assets with any material value and liquidity. As a result many non-government bonds finished the year with substantial liquidity premiums in excess of their credit risk premiums. That is, the price of bonds do not reflect their long term cash characteristics but rather what market participants can realise if assets are sold due to dislocation in investment markets.

Our average cash balance during the year was 31%, which is around three times the level we would usually hold. Cash is held in large AAA rated liquidity funds. On average 58% of the investment portfolio was held in short-dated bonds. 

The bond portfolios are benchmarked against government securities. However, we permit the investment managers to take non-benchmark positions. These non-government holdings led to substantial underperformance of our benchmarks. In particular, our holdings in asset/mortgage backed securities and corporate bonds were hit hard. Although there has undoubtedly been a deterioration in fundamentals, some of this underperformance is due to the impact of deleveraging and should be made up as prices 'pull to par' on maturity.  

The bond portfolio remains high quality.  Our asset/mortgage backed securities are high grade with 88.4% rated AAA and 3.2% AA.  Only a small number of our bond holdings were downgraded during the year. At the year end financial sector (banks and other financial services) corporate bond exposure was 4.8%. In addition 2.8% was held in government guaranteed financial bonds. Our overall exposure to Tier 1 bank bonds, perpetual bonds which sit immediately above equity in bank capital structures, was only 0.3% or £7.9 million.  

In total we had £4.3 million of exposure to corporate bonds where the connected company went into liquidation during the year. Some of this was recovered by subsequent sales and at the year end the exposure to impaired assets was not material.  

  The average allocation to equities during the year was 8%, 5% lower than its peak in 2007. However, the actual exposure held was even lower as we employed tactical hedges to derisk the portfolio which provided some protection against the full extent of the decline in equity indices.  

	Policyholders' assets	Capital assets	Total assets	Total assets
	£m	£m	£m	%	£m	%
Type of asset
Bonds	1,132.5	688.5	1,821.0	63.1%	1,578.2	59.6%
Other liquid investments	262.9	527.0	789.9	27.4%	762.4	28.8%
Equities	-	190.8	190.8	6.6%	232.1	8.8%
Property	-	83.5	83.5	2.9%	75.4	2.8%
	1,395.4	1,489.8	2,885.2	100.0%	2,648.1	100.0%
Type of bonds
Government securities	550.7	331.7	882.4	30.6%	837.7	31.6%
Government index-linked securities	11.7	-	11.7	0.4%	3.0	0.1%
Government agencies / guaranteed	163.5	8.7	172.2	6.0%	122.0	4.6%
Supranational	33.7	-	33.7	1.2%	46.6	1.8%
Asset backed securities	50.0	86.0	136.0	4.6%	80.7	3.0%
Mortgage backed securities	68.7	44.1	112.8	3.9%	107.3	4.1%
Corporate bonds	153.7	67.4	221.1	7.7%	206.2	7.8%
Pooled vehicles	100.5	127.7	228.2	7.9%	174.7	6.6%
Insurance linked securities	-	22.9	22.9	0.8%	-	-
	1,132.5	688.5	1,821.0	63.1%	1,578.2	59.6%
Assets by region (excluding pooled vehicles)
United Kingdom	226.6	226.0	452.6	17.0%	637.6	25.8%
USA and Canada	861.9	776.1	1,638.0	61.6%	1,337.7	54.1%
Europe (ex UK)	180.8	307.1	487.9	18.4%	402.9	16.3%
Far East	20.1	48.5	68.6	2.6%	72.5	2.9%
Emerging markets	5.5	4.4	9.9	0.4%	22.7	0.9%
	1,294.9	1,362.1	2,657.0	100.0%	2,473.4	100.0%
Credit rating of corporate bonds (including government guaranteed bonds)
AAA	129.3	1.7	131.0	43.3%	110.2	41.5%
AA	32.2	4.9	37.1	12.3%	56.9	21.4%
A	56.4	30.4	86.8	28.7%	53.1	20.0%
BBB	16.2	31.3	47.5	15.7%	45.3	17.1%
	234.1	68.3	302.4	100.0%	265.5	100.0%

Note: £49.1 million of government agencies / guaranteed assets are mortgage backed and £81.3 million are government guaranteed corporate bonds. Pooled vehicles are excluded. The regional table excludes bond pooled vehicles.

Expenses

Total expenses, including underwriting, non-underwriting and finance costs, decreased to £311.9 million from £332.9 million in the prior year. Included within total expenses are net foreign exchange gains of £18.9 million (2007: £8.0 million).

Business acquisition costs of £193.0 million, representing 19% of gross earned premium, were broadly consistent with the prior year (2007: £196.0 million, 18%). 

Non-underwriting costs (excluding finance costs and exchange losses) decreased by 14.4% to £43.5 million. Within this, total staff costs decreased from £42.3 million to £31.0 million. Staff incentive plans accounted for £21.5 million of these costs (2007: £31.4 million) with the decrease largely due to lower profitability levels.

Taxation

The effective rate of tax for the period is 33.9% (2007: 20.7%). This increase, with the effective rate above the UK corporate tax rate, is attributable to losses made by Amlin Bermuda, which receive no tax relief at Group level. Bermudian losses are principally the result of negative foreign exchange movements in the period.

  We continue to believe that Amlin Bermuda is exempt from the Controlled Foreign Corporation tax provisions of the UK tax regime. Existing legislation has meant that the Group would pay tax to the UK tax authorities only when distributions were made back to its UK holding companies. 

However, on 25 November 2008, the UK government announced in its Pre Budget Report that legislation will be enacted such that dividends paid to UK companies by foreign subsidiaries would be exempt from UK corporate tax. At 31 December 2008, this announcement was still to be signed into statute and therefore, consistent with previous years, we have continued to recognise a future tax charge by holding a deferred tax provision of £16.1 million (2007: £20.3 million) in expectation of distribution of Amlin Bermuda's retained profits.

Dividends

The Board proposes a final ordinary dividend, subject to shareholder approval at the Annual General Meeting to be held on 13 May 2009, of 11.0 pence per share (2007: 10.0 pence per share), payable on 20 May 2009 to shareholders on the register on 27 March 2009. Taken together with the interim dividend of 6.0 pence per share, this provides total dividends of 17.0 pence per share (2007: 15.0 pence per share) an increase of 13.3%. Part of this increase recognises the enhanced per share dividend paying capacity which resulted from the B share and associated share consolidation.

BALANCE SHEET

Capital strength

Amlin uses a Dynamic Financial Analysis (DFA) to model its capital. The model predicts a range of possible financial outcomes for each area of our business, incorporating underwriting and investments, and for the business as a whole, by running thousands of simulations through a stochastic model, which is derived from historic and expected variability in claims. We operate separate DFA models for Syndicate 2001, Amlin Bermuda and the Group.  

For the Syndicate, Amlin is required to submit an Individual Capital Assessment (ICA) to Lloyd's. The ICA sets out the level of capital required in the business to contain the risk of insolvency to no greater than a probability of 0.5%.  This is equivalent to a BBB insurance financial strength rating level.  Lloyd's reviews the submissions for all syndicates in the market with the intent of bringing all ICAs to an equivalent level.  At that point the ICA figure is uplifted by 35% to support a higher financial strength rating.

For Syndicate 2001, our uplifted ICA for 2009 is 47% of the expected premium income, after deduction of brokerage. This ratio has increased by 5% on the modelled ratio since 2008, an expected movement as profit margins decreased as rates fell.  Our ICA is currently under review to take account of the current trading environment and changes to expected investment returns and exchange rates. We expect this to lead to an increase in capital at Lloyd's.

Our Bermudian underwriting business has grown in the year and it now has net assets of nearly US$1.4 billion. We continue to believe that US$1 billion is the minimum amount of capital required to trade with our preferred client base, an amount that is in excess of the local regulatory capital requirement of US$274.5 million.

The Group's capital strength relative to these capital needs, is demonstrated by the table below:

	At 31 December 2008 £m	At 31 December 2007 £m
Total equity and reserves	1,216.1	1,052.3
Subordinated debt	295.9	277.5
Facilities (*)	250.0	250.0
Available capital(*)	1,762.0	1,579.8
Minimum required capital(**)	1,059.1	883.0
Headroom	702.9	696.8

(*) Bank facilities are subject to a number of covenants.

(**) Lloyd's FAL requirements are currently under review.

We believe that we should retain a level of capital within the Group to allow material growth in the aftermath of a major insurance disaster, but also to respond to other opportunities to enhance long term growth, for example through acquisition.

  The events of 2008 illustrate the need for prudence in capital management. The insurance industry has had to face losses from both hurricanes and financial markets in the year. We believe that the market will improve as a consequence, as explained in the Outlook section. Amlin's strong capital position will allow us to expand our core underwriting business in 2009, review business opportunities for further expansion and take steps to increase risk in our investment portfolio at an appropriate time.  

We use subordinated debt as part of our capital management strategy. The subordinated debt is regulatory compliant, longer term, unsecured and contains no financial covenants that could lead to early forced repayment. Additionally, the debt is recognised as capital by a number of the ratings agencies.  

We have also recently renegotiated existing banking facilities which provides further flexibility. On 3 September 2008 Amlin plc entered into an amended five year debt facility with its banks. The new facility provides an unsecured £250 million multicurrency revolving credit facility available by way of cash advances or letter of credit (LOC). At the same time, Amlin Bermuda cancelled its existing unsecured revolving credit facility for US$100 million.

Liquidity and cash management

The strength and liquidity of the balance sheet is fundamental to our proposition as an insurer of choice, providing us with the ability to respond quickly to claims, particularly relevant in the event of a large catastrophic loss such as Hurricane Ike. Current difficulties in investment markets, particularly the illiquidity of many financial assets, provide an additional challenge in this regard. However, Amlin's investment management approach and capital strength, as described above, means the Group can absorb the losses from the worst of our single event realistic disaster scenarios without suffering from liquidity constraints.  

Bank facilities augment the working capital strength of the Group. On 3 September 2008, Amlin entered into a secured US$200 million LOC working capital facility which is also available for five years from the date of signing. The facility allows Syndicate 2001 to fund its US regulatory requirements by way of LOC rather than investments and therefore reduces funding pressures at the time of a major catastrophe loss. If drawn, security is provided by a fixed charge over a portfolio of assets. The facility is currently undrawn. 

On 23 October 2008 Amlin Bermuda extended its existing secured $200 million LOC facility to 31 December 2009. The facility is secured by a fixed charge over a portfolio of assets. As at 31 December 2008 $28.7 million LOCs had been issued.

Efficient cashflow management is a key source of value to an insurer. We retain premiums for an average of approximately three years before claims are settled. On large claims where reinsurance recoverables are due, we have to pay out the claim before collection is made from reinsurers and rapid reinsurance response is important. Accordingly, strong credit management of premiums and reinsurance collectibles improves our performance. 

The rapid collection of reinsurance following settlement of hurricane claims is a key priority for our reinsurance team. At the end year reinsurance balances totalled £532.1 million with collateral in place of £104.6 million (2007: £372.8 million with collateral in place of £28.4 million) representing the impact of Hurricane Ike and Gustav.

Estimation of outstanding claims reserves

Estimation of the Group's outstanding claims is another important part of our financial management. Not only is there a direct impact on overall profitability, but it also affects investment as different approaches are adopted for capital and policyholders' funds. At 31 December 2008 net claims reserves totalled £1,332.0 million (2007: £1,080.0 million).

Insurance is an uncertain business and much of Amlin's business is large commercial insurance or reinsurance which can be volatile. Our reserve estimation is completed on a regular quarterly basis at individual class level. The subjectivities which must be considered when assessing the level of outstanding liabilities include the risk profile of an insurance policy, class of business, timeliness of notification of claims, validity of claims made against a policy and validity of the quantum of the claim. At any time there are a range of possible outcomes at which the claims reserves could ultimately settle. As time passes the uncertainty surrounding likely claims settlement reduces and the level of caution is reduced.

Given this uncertainty we believe it is appropriate to adopt a cautious stance to the assessment of liabilities. Our underwriting teams are responsible for proposing the level of reserves to be set. We believe that this ensures that they are accountable for the evaluation and uses their detailed knowledge of the underlying exposures underwritten, particularly as these change through time. We compare these reserves proposals with actuarial 'best estimates', which are set by the in-house actuarial team. Any necessary adjustments to the underwriters proposed reserve are then made and these are the accounted reserves. Consistency of reserving strength is our overall goal. On an underwriting year basis net reserves remain at least £200 million above the actuarial best estimate (2007: at least £200 million). 

  Net tangible assets

In addition to profit after tax of £80.4 million, the Group recognised additional net gains of £83.4 million through the Consolidated Statement of Changes in Equity during the year. At the year end total equity and reserves were £1,216.1 million (2007: £1,052.3 million).

A gain of £256.5 million was made on the sterling revaluation of the Group's US dollar investment in Amlin Bermuda, offset by losses of £74.7 million on associated hedge instruments. Offsetting these gains were dividend payments of £75.6 million and the purchase of £27.6 million of shares through our share buy-back programme.

Net tangible assets increased by 12.5% from £983.3 million at 31 December 2007 to £1,105.9 million at 31 December 2008.

OUTLOOK 2009

A changing rating environment

Compared to last summer, when we were expecting continuing downward pressure on rates through 2009, the rating environment has begun to improve and the outlook is much more positive. 

The rating environment across our business in 2008 was mixed. Reinsurance classes remained adequately priced, particularly for US peak catastrophe zones. The marine account was also past its peak but still capable of returning a reasonable margin. Following a sustained period of competition, airline insurance and UK commercial motor were beginning to show signs of bottoming out.  

In contrast the international property and casualty accounts were starting to become highly competitive and rates were falling sharply in some classes, particularly large commercial property insurance.

We believe that the toll of 2008's catastrophe losses, both natural and financial, on the insurance industry will change the ability and willingness of insurers and reinsurers to compete for business at lower and lower prices. Hurricanes Gustav and Ike reminded everyone, after two years of relatively benign insured events, that windstorms can be devastating. The combined insured claims for these events is estimated to be $31 billion. The cost was borne by the reinsurance industry; both primary reinsurers and retrocessional reinsurers.  

On their own, we believe that this would have been enough to halt the decline in US reinsurance pricing. However the financial impact of the credit crunch on the industry increased the pressure in dramatic style. Modest investment performance in the first three quarters of the year turned into poor performance in the final quarter, particularly following the collapse of Lehman. Almost simultaneously, AIG, the world's largest insurance company, suffered a dramatic liquidity squeeze and had to be bailed out by the US government. Both equity and non government bond investment returns collapsed. Given the capital intensive nature of insurance, it was inevitable that the industry would be put under pressure, despite relatively conservative investment strategies adopted by many non-life insurers.  

Insurance pricing cycles are driven by capital supply; pricing falls when capital is oversupplied and pricing rises when capital is scarce. The industry was adequately supplied at the start of 2008 - hence the pressure on prices described above. The combined impact of natural events and the credit crunch is estimated to have reduced capital in the non-life industry by more than $100 billion.  

Equally importantly, capital market activity in reinsurance went into reverse. We had seen increasing hedge fund involvement in reinsurance following Hurricane Katrina, through participation in temporary reinsurance vehicles; so called sidecars. The direct involvement of hedge funds through their own reinsurance companies also increased with many operating in the retrocessional market. As these vehicles provided letter of credit collateral to give financial assurance to clients, substantial amounts of debt leverage was needed to allow adequate returns to be made. The withdrawal of leverage through the year, coinciding with the impact of Hurricane Ike, saw a withdrawal of much of this capital from the retrocessional market. It also meant that sidecars were unlikely to emerge to fill the temporary capital gap.  

Finally the potential future returns from low risk investment, through government bonds or cash, fell sharply as interest rates were reduced to historic lows in many Western economies. This increases the pressure on insurers to seek higher margins from their core underwriting business.  

  Amlin's ability to benefit in 2009 

Our view of likely pricing trends is now very different. While it is difficult to be precise about timing, we now expect improving margins across most classes of business and we expect that this improvement will accelerate through the year and into 2010.

The reinsurance market is the easiest area to predict. The reduction in retrocessional capacity means that the ability to transfer risk for peak catastrophe zones, such as US States on the Eastern seaboard, is limited. Where available this cover is also considerably more expensive. Therefore, to provide better risk/reward balance, rates should rise in peak zones.  

For the 1 January 2009 renewals, a major renewal season, US catastrophe pricing was up on average by 9.6%. International catastrophe reinsurance was less strong with average rate increases of 3.1% but this is a sharp reversal of our previous expectation of double digit rate falls. As the impact of lower retrocessional capacity is better appreciated we expect that the pressure for improvement in rates will increase. This, combined with a concentration of US windstorm renewals in the middle of the year, supports our view that the full year 2009 average rate rise will improve on 1 January levels. 

Similarly we expect a strong reaction for catastrophe exposed insurance, such as energy and large commercial property. Energy rates for Gulf of Mexico risks should return to levels seen in 2006, post Katrina. Large commercial property rates have already stabilised, compared to reductions of up to 20% in 2008 and we expect rises in the latter half of 2009.  

The impact on non catastrophe exposed classes, such as US casualty, will be slower. There was already little margin evident in much of the US insurance market and as companies appreciate the full impact of the events of last year we expect that rates will strengthen gradually through the year.  

In lines where rates were inadequate across the sector, such as airline and UK commercial motor, we are already seeing improvements. In December 2008, the major renewal season for airline risk, rates were on average up by 4.3%. Expectations for 2009 are higher, and resolve will be strengthened by a spate of losses including the recent disaster in Buffalo, New York, which is estimated to have an insured cost in the region of $250 million.

The UK commercial motor account is also showing sustained rate rises, with rate increases for the four months to the end of January 2009 at 7.9%, 4.2%, 10.2% and 7.7% respectively.

Amlin is in a strong position to take advantage of these improved conditions. Our portfolios are currently weighted towards reinsurance, energy and property insurance risks. Our underwriters have performed well, with most areas continuing to deliver good margins. Consequently they have the confidence, available capital and management support to expand.  

Importantly we entered 2008 with surplus capital and did not suffer the reductions of capital during the year which were suffered by many in the industry. We believe that, even after the boost our reported income will get from movements in exchange rates, we have sufficient capital to grow organically our premium income by over £500 million. The more we can grow our non catastrophe classes the more efficient our capital usage will be and the more we can expand.  

Lloyd's and Amlin: markets of choice

In addition to the general improvement in the rating environment for much of our business, we believe that we are in a position to be a market of choice for clients. Counterparty risk is at the forefront of many commercial risk manager's minds. Therefore we expect that for large insurance placements there will be a trend towards placing in subscription markets, where insurers take a share of the insurance contract, rather than the whole contract being written by one company. The travails of a number of our large competitors, and the uncertainty of their futures, should accelerate that trend.  

The Lloyd's market is positioned well to take advantage of this trend if it emerges. It was the largest subscription market in the world in 2008 and was the second largest US surplus lines insurance market after AIG. Its capital position is robust, with the Central Fund at record levels. The rating agency ratings are strong and stable.  

Amlin is a major Lloyd's participant and importantly its rating for Syndicate 2001 from AM Best is a notch above the market rating as a whole. Equally, Amlin Bermuda has a robust level of capital and provides the Group with opportunities for growth. This should make us a preferred market. For example it was evident at 1 January that the share of client's risk that was offered was increasing as clients were downsizing exposure to some of our larger competitors.

  The impact of exchange rate movements

Another important variable for an international company such as Amlin is the level of exchange rates. Over recent years the strength of sterling has eroded trading margins in our core US market. The dramatic weakening of sterling against the dollar, yen and the euro should be highly beneficial for reported profitability. In simple terms, all other things being equal, the level of premium for 2009 will increase by 18% to £1.2 billion if the sterling/dollar exchange rate stays at around $1.46:£1.00.  

However, a consequence of sterling weakness is that risk exposures have increased. Amlin's robust capital position will allow some increased exposure to be absorbed but we will reduce some peak net exposures as a result of this and lower retrocessional capacity. Consequently in late 2008 we set up a Special Purpose Lloyd's Syndicate (Syndicate 6106) which will write a 15% share of our excess of loss reinsurance account. This is supported by individual Lloyd's members and benefits from the security of the Lloyd's Central Fund. From a financial perspective, Amlin will receive a fee for providing the syndicate and a profit share if a pre determined level of profit is met.  

Developing the Amlin business model

Over the past year the Group has taken a number of steps to position itself to be able to grow through acquisition. Strategically we believe that this will allow us to continue to develop Amlin in a balanced way. Over the last few years we have been able to grow our reinsurance and catastrophe exposed accounts. However this growth is at times constrained by our risk appetite and our desire to keep the business model diversified such that we can absorb much of the cost of disaster scenarios within the profitability of the business.  

In order to address this, during 2008 we acquired AFU which increases our European insurance offering. The business underwrites in a similar style to Amlin and we expect that they will be able to grow their business in a pro cyclical manner. Their level of catastrophe exposure is limited.  

In the UK we purchased a £20 million UK motor renewal account from Houston Casualty and acquired stakes in two UK insurance brokers to facilitate product development in the property market.  

We continue to explore acquisition opportunities where we perceive there to be strong benefits from increasing the diversity to our catastrophe exposed accounts and a good cultural fit.

Unearned premium and reserving 

Due to the effect of exchange rates and growth in Amlin Bermuda through 2008, the level of net unearned premium rose to £518.4 million (2007: £474.3). Notwithstanding that rates were falling in 2008, through selective underwriting our margins across the business remained good and most of this premium will earn in the first half of 2009. This provides a very good base for 2009 earnings.  

Similarly, Amlin's reserving policy remains prudent and consistent - we reserve with a margin above an actuarial best estimate. If development is normal this means that run off profits will be recognised in following accounting periods. Our track record is consistently strong and we continue to hold a margin, for 2008 and prior underwriting years, of over £200 million above the best estimate.  

Investment outlook

The outlook for investment markets is perhaps the most difficult area of our business to predict. Our defensive portfolio protected us from the worst effects of the financial markets in 2008. On average 64.4% of our assets were invested in government bonds or cash. With interest rates at historic low levels the return potential from these classes of asset is now less attractive.  

Risk assets remain volatile and the non government bond market continues to suffer from liquidity issues. Liquidity is an important factor in our investment decisions because of the catastrophe nature of much of our business. Therefore, we expect to slowly increase our allocation to non government bonds during 2009, with a focus on higher grade credits and taking advantage of the attractive yields currently available. In the short term our equity exposure will remain at low levels. 

Summary

Overall we see an improving outlook for the Group through 2009. January renewals confirmed an upward trend in rates which we expect to accelerate in many classes through the remainder of the year as capacity constraints become more onerous. Investment markets remain challenging but we will continue to seek to optimise returns with cautious risk parameters. With ample capital to deploy and superior ratings Amlin is already benefiting from increased demand for its capacity and all areas of the business are well positioned to take advantage of further opportunities for profitable growth.

Consolidated Income Statement

For the year ended 31 December 2008

		2008	2007
	Notes
		£m	£m
Gross premium earned	4,5	1,027.8	1,088.0
Reinsurance premium ceded	4,5	(114.3)	(115.7)
Net earned premium revenue	5	913.5	972.3
Investment return	4,6	18.0	157.0
Other operating income		2.7	2.8
Total income		934.2	1,132.1
Insurance claims and claims settlement expenses	4,7	(627.8)	(380.1)
Insurance claims and claims settlement expenses recoverable from reinsurers	4,7	127.1	25.9
Net insurance claims	7	(500.7)	(354.2)
Expenses for the acquisition of insurance contracts	8	(193.0)	(196.0)
Other operating expenses	9	(97.7)	(116.9)
Total expense		(290.7)	(312.9)
Results of operating activities		142.8	465.0
Finance costs	12	(21.2)	(20.0)
Profit before tax		121.6	445.0
Tax	11	(41.2)	(92.2)
Total recognised profit for the year		80.4	352.8
Attributable to:
Equity holders of the Parent Company		80.3	352.7
Minority interests		0.1	0.1
		80.4	352.8
Earnings per share from continuing operations attributable to equity holders of the Parent Company
Basic	23	17.1p	68.8p
Diluted	23	16.9p	68.0p

The attached notes form an integral part of these consolidated financial statements.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2008

Notes		Share capital £m	Share premium  £m	Other reserves £m	Treasury shares £m	Minority interest £m	Retained earnings £m	Total £m
At 1 January 2008		134.4	230.8	(30.2)	(2.1)	0.4	719.0	1,052.3
Purchase of treasury shares	18	-	-	-	(28.0)	-	-	(28.0)
Defined benefit pension fund actuarial losses	22	-	-	(5.9)	-	-	-	(5.9)
Currency translation differences on overseas operations	3	-	-	256.1	-	-	-	256.1
Losses on revaluation of hedge instruments	3	-	-	(74.7)	-	-	-	(74.7)
Foreign exchange gains on translation of intangibles arising from investments in overseas operations	12	-	-	4.7	-	-	-	4.7
Deferred tax	11	-	-	2.8	-	-	-	2.8
Profit for the financial year		-	-	-	-	0.1	80.3	80.4
Total recognised income/(expenses) for the year		-	-	183.0	(28.0)	0.1	80.3	235.4
Employee share option scheme:
- share based payment reserve		-	-	0.4	-	-	-	0.4
- proceeds from shares issued	18	0.2	0.7	-	5.0	-	(2.1)	3.8
Dividends paid	24	-	-	-	-	(0.2)	(75.6)	(75.8)
Return of capital	18	-	-	119.2	-	-	(119.2)	-
		0.2	0.7	119.6	5.0	(0.2)	(196.9)	(71.6)
At 31 December 2008 At 31 December 2007		134.6	231.5	272.4	(25.1)	0.3	602.4	1,216.1

  Consolidated Statement of Changes in Equity (continued)

For the year ended 31 December 2007

Notes		Share capital £m	Share premium  £m	Other reserves £m	Treasury shares £m	Minority interest £m	Retained earnings £m	Total £m
At 1 January 2007		133.5	347.6	(21.8)	(0.6)	0.3	477.4	936.4
Net purchase of treasury shares	18	-	-	-	(1.5)	-	-	(1.5)
Gains on revaluation of employee share ownership trust recognised directly in equity		-	-	(0.1)	-	-	-	(0.1)
Currency translation differences on overseas operations	3	-	-	(8.2)	-	-	-	(8.2)
Deferred tax	11	-	-	(1.3)	-	-	-	(1.3)
Profit for the financial year		-	-	-	-	0.1	352.7	352.8
Total recognised (expense)/income for the year		-	-	(9.6)	(1.5)	0.1	352.7	341.7
Employee share option scheme:
- share based payment reserve		-	-	1.2	-	-	-	1.2
- proceeds from shares issued	18	0.9	3.6	-	-	-	-	4.5
Dividends paid	24	-	-	-	-	-	(111.1)	(111.1)
Return of Capital	18	-	(120.4)	- 1.2	-	-	-	(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

The attached notes form an integral part of these consolidated financial statements.

Consolidated Balance Sheet

At 31 December 2008

		2008	2007
ASSETS	Notes	£m	£m
Cash and cash equivalents	13	14.1	11.6
Financial investments at fair value through income	14	2868.1	2,638.9
Reinsurance assets	15
- reinsurers share of outstanding claims		360.8	270.2
- reinsurers share of unearned premium		31.0	27.5
- debtors arising from reinsurance operations		325.1	319.2
Loans and receivables, including insurance receivables
- insurance receivables	16	305.5	183.1
- loans and receivables	16	68.7	36.8
Current income tax assets		13.3	4.0
Deferred tax assets	11	11.1	13.4
Property and equipment		8.4	5.8
Intangible assets	17	110.2	69.0
Investment in jointly owned entity		1.5	-
Total assets		4,117.8	3,579.5
EQUITY AND RESERVES
Share capital	18	134.6	134.4
Share premium	19	231.5	230.8
Other reserves	19	272.4	(30.2)
Treasury shares	19	(25.1)	(2.1)
Retained earnings	19	602.4	719.0
Equity attributable to equity holders of the parent		1,215.8	1,051.9
Minority interest	19	0.3	0.4
Total equity and reserves		1,216.1	1,052.3
LIABILITIES
Insurance contracts	15
- outstanding claims		1,692.8	1,350.2
- unearned premium		549.4	501.8
- creditors arising from insurance operations		84.9	34.0
Trade and other payables	20	123.2	207.1
Current income tax liabilities		6.9	25.7
Borrowings	21	295.9	277.5
Retirement benefit obligations	22	4.0	2.8
Deferred tax liabilities	11	144.6	128.1
Total liabilities		2,901.7	2,527.2
Total equity, reserves and liabilities		4,117.8	3,579.5

The attached notes form an integral part of these consolidated financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 27 February 2009. They were signed on its behalf by:

Roger Taylor Chairman        Richard Hextall Group Finance Director

  Consolidated Cash Flow Statement 

For the year ended 31 December 2008

	Notes	2008 £m		2007 £m
Cash generated from operations	28	222.4		70.5
Income taxes paid		(47.6)		(53.8)
Net cash flows from operations		174.8		16.7
Cash flows from investing activities
Interest received			97.5	99.0
Dividends received			11.9	12.5
Acquisition of subsidiary, net of cash acquired	29		(31.6)	(3.3)
Deferred payment for acquired subsidiary			(2.1)	-
Investment in jointly owned entity			(1.5)	-
Purchase of property and equipment			(5.9)	(2.7)
Purchase of intangible assets	17		(2.5)	-
Net cash flows from investing activities			65.8	105.5
Cash flows used in financing activities
Proceeds from issue of ordinary shares			3.8	4.5
Dividends paid to shareholders	24		(75.6)	(111.1)
Dividend paid to minority interest			(0.2)	-
Interest paid			(20.0)	(19.1)
Purchase of treasury shares	18		(28.0)	(1.5)
Return of capital	18		(119.2)	-
Net cash flows used in financing activities			(239.2)	(127.2)
Net increase / (decrease) in cash and cash equivalents			1.4	(5.0)
Cash and cash equivalents at beginning of year			11.16	16.5
Effect of exchange rate changes on cash and cash equivalents			1.1	0.1
Cash and cash equivalents at end of year	13		14.1	11.6

The attached notes form an integral part of these consolidated financial statements 

The Group classifies cash flows from purchase and disposal of financial assets in its operating cash flows as these transactions are generated by the cash flows associated with the origination and settlement of insurance contract liabilities or capital requirements to support underwriting. Cash of £155.4 million from net sales of financial investments was utilised in operations during the period (2007: £232.1 million net purchases of financial investments generated from operations).

Cash flows relating to participations on syndicates not managed by the Group are included only to the extent that cash is transferred between the Premium Trust Funds and the Group.  1.  Summary of significant accounting policies

The basis of preparation, basis of consolidation and significant accounting policies adopted in the preparation of Amlin plc's (the Group's) financial statements are set out below.

Basis of preparation

These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union (EU). The consolidated financial statements comply with Article 4 of the EU IAS regulation. 

The consolidated financial statements have been prepared on the historical cost basis except for cash and cash equivalents, financial investments, loans and receivables, share options and pension assets and liabilities which are measured at their fair value. 

Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of British pounds sterling (sterling) shown as £m rounded to the nearest £100,000.

The accounting policies adopted in preparing these financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2007. 

In accordance with IFRS 4, the Group has applied existing accounting practices for insurance contracts, modified as appropriate, to comply with the IFRS framework and applicable standards.

Going concern

The Group has considerable financial resources to meet its financial needs and manages a mature portfolio of insurance risk through an experienced and stable team. The directors believe that the Group is well positioned to manage its business risks sucessfully in the current uncertain economic environment.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they contine to adopt the going concern basis in preparing the annual report and accounts.

Basis of consolidation

The financial statements consolidate the accounts of the Company and subsidiary undertakings, including the Group's underwriting through participation on Lloyd's syndicates. Subsidiaries are those entities in which the Group, directly or indirectly, has the power to govern the operating and financial policies in order to gain economic benefits and includes the Group's Employee Benefit Trusts. The financial statements of subsidiaries are prepared for the same reporting year as the parent company except for the Financiere Europe Assurances SAS group which was acquired during the year and has a reporting year ending 31 January. Consolidation adjustments are made to convert subsidiary accounts prepared under different accounting standards into IFRS so as to remove the effects of any different accounting policies that may exist. Subsidiaries are consolidated from the date that control is transferred to the Group and cease to be consolidated from the date that control is transferred out. All inter-company balances, profits and transactions are eliminated. 

Adoption of new and revised Standards

Two Interpretations issued by the International Financial Reporting Interpretations Committee 'IFRIC' have become effective for the current year. These are: IFRIC 11 IFRS 2 - Group and Treasury Share Transactions and IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The adoption of these Interpretations has not led to any changes in the Group's accounting policies or disclosures.

  At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 1 (amended) IAS 27 (amended)	Cost of an Investment in a Subsidiary, Jointly Controlled
	Entity or Associate
IFRS 2 (amended)	Share-based Payment - Vesting Conditions and Cancellations
IFRS 3 (revised 2008)	Business Combinations
IFRS 8	Operating Segments
IAS 1(revised 2007)	Presentation of Financial Statements
IAS 23 (revised 2007)	Borrowing Costs
IAS 27 (revised 2008)	Consolidated and Separate Financial Statements
IAS 32 (amended)/IAS 1 (amended)	Puttable Financial Instruments and Obligations Arising on Liquidation
IFRIC 12	Service Concession Arrangements
IFRIC 16	Hedges of a Net Investment in a Foreign Operation

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group except for:

additional segment disclosures when IFRS 8 comes into effect for periods commencing on or after 1January 2009;

treatment of acquisition of subsidiaries when IFRS 3 comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 July 2009;

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

Insurance contract liabilities

The most significant estimate made in the financial statements relates to the insurance of unpaid claim reserves and related loss adjustment expenses of the Group. 

The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up. The change in claims costs for prior period insurance claims represents the claims development of earlier reported years incurred in the current accounting period. In 2008 there has been a net positive development of £114.7 million (2007: £109.0 million) for the Group, reflecting favourable experience in the 2007 and prior reported years. Note 3 provides further details of the method the Group applies in estimating insurance contract liabilities.

Financial investments

The methods and assumptions used by the Group in estimating the fair value of financial assets are described in note 3.

Intangible assets

An intangible asset is recognised on the purchase of insurance underwriting through the acquisition of a subsidiary or the specific rights to renew a particular underwriting binder.

The value of this intangible is largely based on the expected cash flows of the underwriting acquired and contractual rights on that business. Certain key assumptions are used to assess the value of the intangible such as past underwriting performance and past renewal values of underwriting business. These are the subject of specific uncertainty and a reduction in underwriting profitability or renewal values of business acquired may result in the value of the intangible being impaired and written off in the current accounting period.

Staff incentive plans

The Group recognises a liability and expense for staff incentive plans based on a formula that takes into consideration the underwriting profit after certain adjustments. Underwriting profit is estimated based on current expectation of premiums and claims and will change as more information is known or future events occur. Where estimates change related staff incentive plan liabilities may also change.

Retirement benefit obligations

Following the departure of other key remaining employers in the scheme in the year the Group is now able to value reliably its proportionate share of the defined benefit obligation, plan assets and post-employment costs associated with its participation in The Lloyd's Superannuation Fund defined benefit scheme. An expense of £5.9 million has been recognised in the Statement of Changes in Equity and a credit of £2.6 million has been recognised in the income statement. Note 22 provides further details on the Group's retirement benefit obligations. 

Foreign currency translation

The Group presents its accounts in sterling since it is subject to regulation in the United Kingdom and the net assets, liabilities and income of the Group are currently weighted towards sterling. US dollar revenue is significant but the sterling revenue stream is also currently material. All group entities are incorporated in the United Kingdom with the exception of Amlin Bermuda Holdings Ltd, Amlin Bermuda Ltd, Amlin Illinois, Inc., Financière Europe Assurance Group SAS and Amlin Singapore Pte Limited which are incorporated in Bermuda, the United States of America, France and Singapore respectively. All Group entities conduct business in a range of economic environments, primarily the United Kingdom, United States of America and Europe. Due to the regulatory environment and the fact that the Group trades through the Lloyd's market, all Group companies incorporated in the United Kingdom have adopted sterling as their functional currency. The Group companies incorporated in Bermuda and the United States of America have adopted the US dollar as their functional currency. Amlin Singapore Pte Limited has adopted the Singapore dollar as its functional currency. The Group companies incorporated in France have adopted the Euro as their functional currency.

Transactions denominated in foreign currencies are translated using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at the average rate prevailing in the period in which the asset or liability first arose.

The results and financial position of those Group entities whose functional currency is not Sterling are translated into Sterling as follows:

• Assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of the balance sheet

• Income and expenses for each income statement are translated at average exchange rates during the period

• On consolidation all resulting exchange differences are recognised as a component of equity

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

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 of foreign currency amounts on such items are included in other operating expenses.

Insurance contracts premium

Gross premium written comprise premium on insurance contracts incepting during the financial year. The estimated premium income in respect of facility contracts is deemed to be written in full at the inception of the contract. Premium is disclosed before the deduction of brokerage and taxes or duties levied on them. Estimates are included for premium receivable after the period end but not yet notified, as well as adjustments made in the year to premium written in prior accounting periods.

The proportion of gross premium written, gross of commission payable, attributable to periods after the balance sheet date is deferred as a provision for unearned premium. The change in this provision is taken to the income statement in order that revenue is recognised over the period of the risk.

Premium is earned over the policy contract period. The earned element is calculated separately for each contract on a 365ths basis. For premium written under facilities, such as under binding authorities, the earned element is calculated based on the estimated risk profile of the individual contracts involved.

Acquisition Costs

Acquisition costs comprise brokerage incurred on insurance contracts written during the financial year. They are incurred on the same basis as the earned proportions of the premium they relate to. Deferred acquisition costs are amortised over the period in which the related revenues are earned. Deferred acquisition costs are reviewed at the end of each reporting period and are written off where they are no longer considered to be recoverable.

Reinsurance premium ceded

Reinsurance premium ceded comprise the cost of reinsurance arrangements placed and are accounted for in the same accounting period as the related insurance contracts. The provision for reinsurers' share of unearned premium represents that part of reinsurance premium written which is estimated to be earned in following financial years. 

Insurance contracts liabilities: claims

Claims paid are defined as those claims transactions settled up to the balance sheet date including the internal and external claims settlement expenses allocated to those transactions. The reinsurers' share represents recoveries received from reinsurance protection in the period plus recoveries receivable against claims paid that have not been received at the balance sheet date, net of any provision for bad debt.

Unpaid claims reserves are made for known or anticipated liabilities under insurance contracts which have not been settled up to the balance sheet date. Included within the provision is an allowance for the future costs of settling those claims. This is estimated based on past experience and current expectations of future cost levels.

Unpaid claims reserves are estimated on an undiscounted basis. Provisions are subject to a detailed quarterly review where forecast future cash flows and existing amounts provided are reviewed and reassessed. Any changes to the amounts held are adjusted through the income statement. Provisions are established above an actuarial best estimate so that there is a reasonable chance of release of reserves from one underwriting year to the next.

The unpaid claims reserves also include, where necessary, a reserve for unexpired risks where, at the balance sheet date, the estimated costs of future claims and related deferred acquisition costs are expected to exceed the unearned premium provision. In determining the need for an unexpired risk provision the underwriting divisions within the Syndicate have been regarded as groups of business that are managed together.

Although the unpaid claims reserves are considered to be reasonable, having regard to previous claims experience (including the use of certain statistically based projections) and case by case reviews of notified claims, on the basis of information available at the date of determining the provision, the ultimate liabilities will vary as a result of subsequent information and events. This uncertainty 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 that the related listed investments are marked ex-dividend. Other investment income, interest receivable, expenses and interest payable are recognised on an accruals basis.

Business combinations

The acquisitions of subsidiaries are accounted for using the purchase method. The cost of acquisition is measured as the fair value of assets given, liabilities incurred or assumed, and equity instruments issued by the Group at the date of exchange, plus any costs directly attributable to the business combination. Identifiable assets acquired and liabilities and contingent liabilities assumed, meeting the conditions for recognition under IFRS 3, are recognised at their fair value at the acquisition date.

Interests in joint ventures

Investments in joint ventures are accounted for using the equity method.

Intangible assets

i. Syndicate capacity

The cost of Lloyd's syndicate participations that have been purchased in the Lloyd's capacity auctions is capitalised at cost. Syndicate capacity is considered to have an indefinite life and is not subject to an annual amortisation charge. The continuing value of the capacity is reviewed for impairment annually by reference to the expected future profit streams to be earned from Syndicate 2001, with any impairment in value being charged to the income statement. 

ii. Goodwill

Goodwill arising on acquisitions prior to 1 January 1999 was written off to reserves. Goodwill recognised between 1 January 1999 and the date of transition to IFRS (1 January 2004) was capitalised and amortised on a straight line basis over its estimated useful life. Following the transition to IFRS this goodwill is stated at net book value at 1 January 2004. Goodwill that was recognised subsequent to 1 January 2004, representing the excess of the purchase consideration over fair value of net assets acquired, is capitalised. Goodwill is tested for impairment annually, or when events or changes in circumstance indicate that it might be impaired, by comparing the net present value of the future earnings stream from the acquired subsidiary, for the next five years against the carrying value of the goodwill and the carrying value of the related net assets.

iii. Other intangible assets

Other intangible assets comprise costs directly attributable to securing the intangible rights to customer contractual relationships. Costs are recognised as intangible assets where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. Other intangible assets are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis based on the estimated useful economic life of the customer contractual relationship.

Property and equipment

Property and equipment are stated at historical cost less accumulated depreciation and provision for impairment where appropriate. Depreciation is calculated on the straight line method to write down the cost of such assets to their residual values over their estimated useful lives as follows:

Leasehold land and buildings	over period of lease
Freehold buildings	5% per annum
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 when events or changes in circumstance indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the income statement.

Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken to the income statement. Repairs and renewals are charged to the income statement when the expenditure is incurred.

Financial investments

The Group classifies its financial assets as fair value through income (FV) or available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

The Group classifies its financial investments as FV to the extent that they are not reported as cash and cash equivalents. This classification requires all fair value changes to be recognised immediately within the investment return line in the income statement. Within the FV category, fixed maturity and equity securities are classified as 'trading' as the Group buys with the intention to resell. All other securities are classified as 'other than trading' within the FV category.

The Group has investments in certain unlisted insurance intermediaries which are treated as available-for-sale and are measured at fair value. The values of these investments are initially measured at cost, including transaction costs and tested for impairment annually, or when events or changes in circumstances indicate that it might be impaired. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as 'gains and losses from investment securities'.

Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and are subsequently re-measured at fair value based on quoted bid prices. Changes in the fair value of investments are included in the income statement in the period in which they arise. The uncertainty around bond valuation is discussed further in Note 3.

In the Company's accounts, other financial investments in Group undertakings are stated at cost and are reviewed for impairment annually or when events or changes in circumstances indicate the carrying value may be impaired.

Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into. Fair values for over the counter derivatives are supplied by the relevant counterparty. Changes in the fair value of derivative instruments are recognised immediately in the income statement unless the derivative is designated as a hedging instrument. As defined by IFRS 39 Financial Instruments: Recognition and Measurement, the Group designates certain foreign currency derivatives as hedges of net investments in foreign operations. The Group documents at the inception of each hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of hedged items.

Any gain or loss on the hedging instrument related to the effective portion is recognised in shareholders' equity and shown in note 19. The fair values of derivative instruments used for hedging purposes are disclosed in note 14. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold.

Loans and receivables

Loans and receivables are measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired. These are reversed if the payment is received.

Borrowings

Borrowings are stated initially at the consideration received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between amortised cost and the redemption value is recognised in the income statement over the period of the borrowings. Transaction costs on borrowings are charged through the income statement over the period of the borrowings.

Borrowing costs

Borrowing costs comprise interest payable on loans and bank overdrafts and commissions charged for the utilisation of letters of credit. These costs are charged to the income statement as financing costs, as incurred. In addition fees paid for the arrangement of debt and letter of credit facilities are charged 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. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks and other short-term, highly liquid investments which are believed to be subject to insignificant risk of change in fair value.

Treasury shares

Treasury shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the treasury shares. Any consideration paid or received is recognised directly in equity.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards to the Group. All other leases are classified as operating leases.

Assets held under finance leases and hire purchase transactions are capitalised in the balance sheet and depreciated over their useful lives. The initial capital value is the lower of the fair value of the leased asset and the present value of the minimum lease payments. Payments under finance leases are apportioned between finance charges and the reduction of the lease obligation so as to achieve a consistent rate of interest on the remaining balance of the lease liability.

Rentals payable under operating leases are charged to income in the period in which 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 defined benefit scheme and several defined contribution schemes and personal pension schemes.

The Lloyd's Superannuation Fund scheme is a multi-employer defined benefit scheme.  The Group recognises actuarial gains and losses arriving from the recognition and funding of the Group's pension obligations in the Statement of Changes in Equity during the period in which they arrive.

  The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the fair value of plan assets less the defined benefit obligation at the balance sheet date, together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds, and that have terms to maturity approximating to the terms of the related pension liability. 

Pension contributions to defined contribution plans are charged to the income statement when due. 

ii. Equity compensation plans 

The Group operates a number of executive and employee share schemes. Options issued after 7 November 2002 are accounted for using the fair value method where the cost for providing equity compensation is based on the fair value of the share option or award at the date of the grant. The fair value is calculated using an option pricing model and the corresponding expense is recognised in the income statement over the vesting period. The accrual for this charge is recognised in equity shareholders' funds. When the options are exercised, the proceeds received net of any transaction costs are credited to share capital for the par value and the surplus to share premium.

iii. Other benefits 

Other employee incentive schemes and long-term service awards, including sabbatical leave, are recognised when they accrue to employees. A provision is made for the estimated liability for long-service leave as a result of services rendered by employees up to the balance sheet date.

Other income 

Fee income from providing information services is recognised on an earned basis.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years or that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

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

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax is provided for on the profits of overseas subsidiaries where it is reasonably foreseeable that distribution of the profit back to the UK will take place. 

2.    Capital

The capital structure of the Group consists of equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in notes 18 and 19, and subordinated debt as disclosed in note 21. For business planning purposes, account is also taken of the Group's undrawn debt facilities as disclosed in note 21.

  The Amlin corporate members which support Syndicate 2001 are required to hold regulatory capital in compliance with the rules issued by the UK's Financial Services Authority (FSA). In addition, being Lloyd's operations they are also subject to Lloyd's capital requirements. Under FSA rules, the corporate members must hold capital in excess of the higher of two amounts. The first is the Pillar 1 requirement, as prescribed by EU directives, calculated by applying fixed percentages to premiums and claims. The second, Pillar 2, is an Individual Capital Assessment (ICA) calculated internally by the firm. The ICA is defined as the level of capital that is required to contain the probability of insolvency, over a one year timeframe, to no greater than 0.5%. 

The ICA calculation basis is generally considered to be broadly equivalent to a BBB insurance financial strength rating. The ICA calculation considers all ultimate losses incurred over a one year business planning horizon, and any prior year reserve movements.

For the purposes of setting Lloyd's capital requirements, Lloyd's currently uplifts all ICAs by 35% to bring the capital to a level to support a higher financial strength rating. The final capital requirement is then subject to a minimum of 40% of the syndicate's agreed regulatory premium capacity limit.

The Syndicate also benefits from mutualised capital within the Lloyd's Central Fund, for which a variable annual levy, which is 0.5% of syndicate gross premium for 2008, is payable.

The ICA is reviewed annually by Lloyd's and periodically by the FSA. The FSA expect management to apply their rules continuously. If a firm breaches its Pillar 1 capital it must cease trading; if Pillar 2 capital is breached steps must be urgently taken to restore capital to the required level. Due to the nature of the Lloyd's capital setting process, Funds at Lloyd's requirements are formally assessed and funded twice yearly at discrete periods and must be met for the Syndicate to continue underwriting.

At 31 December 2008 the level of capital held by the Amlin corporate members was more than £200 million (2007: £150 million) in excess of the Pillar 1 requirement and more than £45 million (2007: £75 million) in excess of the Pillar 2 requirement.

The Group does not seek to retain any assets in excess of the Lloyd's capital requirement within the Lloyd's framework and any surplus is paid to the corporate entities in the Amlin group.

For Amlin Bermuda, minimum capital requirements are dictated by the rules laid down by the Bermuda Monetary Authority (BMA). Amlin Bermuda is classified as a Class IV reinsurer and the minimum solvency margin is the greater of $100m, 50% of net premiums written in the current financial year (subject to a 25% cap on reinsurance expenditure), 15% of claims reserves or the Enhanced Capital Requirement (ECR). In the case of Amlin Bermuda at 31 December 2008, the premium test was the largest of the four criteria at $274.5 million (2007: $232.8 million). The ECR is calculated on an annual basis through either the Bermuda Solvency Capital Requirement (BSCR) model or an approved internal model.  At 31 December 2008 the minimum solvency margin is equivalent to the minimum solvency calculation.  In addition, as a Class IV reinsurer Amlin Bermuda is required to maintain a minimum liquidity ratio such that the value of 'relevant assets' is not less than 75% of its 'relevant liabilities'. Amlin Bermuda met this requirement at 31 December 2008. For wider commercial reasons we believe that it is necessary to hold at least $1 billion of capital for Amlin Bermuda, which is currently far in excess of the required minimum.

The method by which the Group actively manages its capital base is described in the Review section under Financial Management.

In addition to regulatory capital requirements, we believe that we should retain a level of capital within the Group to allow it to grow its exposures materially in the aftermath of a major insurance disaster, but also to respond to other opportunities to enhance long term growth, for example through acquisition. The capital held by Syndicate 2001 and Amlin Bermuda, is driven by the business mix, nature and objectives of each entity and its context within the wider Amlin Group.

3.     Risk disclosures

3.1    Underwriting risk

The Group accepts underwriting risk in a range of classes of business through Lloyd's Syndicate 2001 and Amlin Bermuda. The bias of the portfolio is towards short-tail property and accident risk but liability coverage is also underwritten.

  In underwriting insurance or reinsurance policies the Group's underwriters use their skill, knowledge and data on past claims experience to evaluate the likely claims cost and therefore the premium that should be sufficient (across a portfolio of risks) to cover claims costs, expenses and to produce an acceptable profit. However, due to the nature of insurance risk there is no guarantee that the premium charged will be sufficient to cover claims costs. This shortfall may originate either from insufficient premium being calculated and charged or may result from an unexpected, or unprecedented, high level of claims. 

A number of controls are deployed to limit the amount of insurance exposure underwritten. Each year a business plan is prepared and agreed which is used to monitor the amount of premium income, and exposure, to be written in total and for each class of business. Progress against this plan is monitored during the year. The Group also operates under a line guide that determines the maximum liability per policy that can be written for each class and for each underwriter. These can be exceeded in exceptional circumstances but only with the approval of senior management. Apart from the UK motor liability, and some of the international comprehensive motor liability portfolio, which has unlimited liability, all policies have a per loss limit which caps the size of any individual claims. For larger sum insured risks reinsurance coverage may be purchased. 

The Group is also exposed to catastrophe losses which may impact many risks in a single event and again reinsurance is purchased to limit the impact of loss aggregation from such events. These reinsurance arrangements are described in the reinsurance arrangements section below.

Insurance liabilities are written through individual risk acceptances, reinsurance treaties or through facilities whereby Amlin is bound by other underwriting entities. Facility arrangements delegate underwriting authority to other underwriters, or to agents acting as coverholders, that use their judgement to write risks on our behalf under clear authority levels.

The insurance liabilities underwritten by the Group are reviewed on an individual risk, or contract, basis and through review of portfolio performance. Claims arising are reserved upon notification. Each quarter the entire portfolio of business is subject to a reserving process whereby levels of paid and outstanding (advised but not paid) claims are reviewed. Potential future claims are assessed with a provision for incurred but not reported (IBNR) claims being made. This provision is subject to review by senior executives and an independent internal actuarial assessment is carried out by the in-house actuarial team to determine the adequacy of the provision. Whilst a detailed and disciplined exercise is carried out to provide for claims notified, it is possible that known claims could develop and exceed the reserves carried. Furthermore, there is increased uncertainty in establishing an accurate provision for IBNR claims and there is a possibility that claims may arise which in aggregate exceed the reserve provision established. This is partly mitigated by the reserving policy adopted by the Group which is to carry reserves with a margin in excess of the in-house actuarial best estimate.

The review of claims arising may result in underwriters adjusting pricing levels to cater for an unexpectedly higher trend of claims advices or payments. However, this may not be possible in a competitive market and underwriters may respond either by accepting business with lower expected profit margins or declining to renew policies and thus reducing income. Also, there is a portfolio of risk already underwritten which cannot be re-priced until renewal at the end of the policy period.

The Group is exposed to the impact of large catastrophe events such as windstorms, earthquakes or terrorist incidents. Exposure to such events is controlled and measured through loss modelling, but the accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. The Group's broad risk appetite guidelines are set out in the Risk section of the Annual Report. It is possible that a catastrophe event exceeds the maximum expected event loss. This is particularly the case for the direct property proportion of the loss exposure where models are used to calculate a damage factor representing the amount of damage expected to exposed aggregate insured values. Errors, or incorrect assumptions, in the damage factor calculation can result in incurred catastrophe event claims higher, or lower, than predicted due to unforeseen circumstances or inadequacies in the models used. As explained below the Syndicate buys a reinsurance programme to protect against the impact of any individual or series of severe catastrophes. However, the price and availability of such cover is variable and the amount of loss retained by the Group may therefore also increase or reduce. The Group will alter its insurance and reinsurance exposures to take account of the change in reinsurance availability in order to remain within the risk appetite guidelines.  

Sections A to E below describe the business and the risks of Amlin's Syndicate 2001 five business units. During 2008, the Non-marine business was reorganised into Reinsurance and Property and Casualty business units. Together, Reinsurance, Property and Casualty, Marine and Aviation constitute Amlin London. Amlin Bermuda is described in section F. Anglo French Underwriters is described in section G.

A. Reinsurance risks

A.i Property reinsurance risks

Reinsurance property classes

	2008 Gross  Premium £m	Current maximum  line size £m	2008  Average  line size £m
Catastrophe reinsurance	171	50	4.4
(per programme)
Per risk property reinsurance	54	20	1.8
(per programme)
Proportional reinsurance	35	5	1.0

Notes:

1) Limits are set in US dollars converted to sterling at a rate of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits. 

2) Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.

3) Premium are stated gross of acquisition costs.

Catastrophe reinsurance protects insurance companies against catastrophic losses, such as windstorm or earthquake, which may impact more than one risk written by the client. This portfolio is a key part of the insurance risk written by the Group. Programmes are placed on a layered or excess of loss basis. Territorial exposures, from a number of programmes, are much higher, but are carefully recorded and analysed through loss simulations or realistic disaster scenarios. 

Per risk property reinsurance is also written on an excess of loss basis but covers loss or damage to a single risk within the reinsured's portfolio. This portfolio protects insureds against large individual property losses and will also be affected by large catastrophes. Proportional reinsurance covers a proportional share of a reinsureds portfolio of business subject to payment of commission and/or profit commission. Almost all proportional reinsurance written by the Group in this class is property business and risk exposure is limited to $7.5 million for any one risk.  

The portfolio of Reinsurance business is written with the aim of achieving territorial diversification. However, a severe catastrophe to a major economic zone in Europe, Japan, Australasia or the USA is likely to result in an overall loss to the portfolio prior to retrocessional reinsurance.  

A.ii Other reinsurance risks

The Group also writes other reinsurance classes which contribute diversified exposure to the portfolio. The main classes with the maximum sum insured lines are shown below:

Aviation, marine and special risks reinsurance classes

	2008  Gross  premium  £m	Current  maximum  line size  £m	2008  Average  line size  £m
Aviation reinsurance (per programme)	1	27	6.7
Marine reinsurance (per programme)	18	67	2.6
Special risks	13	20	4.8

Notes:

1) Limits are set in US dollars converted to sterling at a rate of £1=US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits. 

2) Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.

3) Premium are stated gross of acquisition costs.

The business writes a portfolio of aviation and marine reinsurance risk which protects insurers against losses to their direct portfolios of business. This is written on an excess of loss basis.

The special risks account is mostly terrorism excess of loss reinsurance which is written from all parts of the world and is written without reinsurance protection. 

The geographical spread of all Reinsurance classes is shown below:

Africa	1%
Asia	8%
Caribbean	5%
Europe	8%
North America	62%
Oceania	3%
South & Central America	1%
UK	10%
Other	2%

B. Property and casualty risks

B.i Property insurance risks

Property classes

	2008  Gross premium £m	Current maximum line size £m	2008 Average line size £m
Direct and facultative property	68	21	2.5
Binding authorities	27	2	0.3

Property cover is provided to large commercial enterprises with high value locations and/or many locations and also for small commercial property. The perils covered include fire, flood, wind and earthquake damage. Business interruption cover is also provided for loss of earnings sustained due to the perils and properties covered but may also be extended to connected enterprises. Terrorism cover is given on a limited basis particularly where required by local regulation, but nuclear and bio-chemical coverage is excluded in most territories. 

Direct and facultative property insurance is written for the full value of the risk, on a primary or excess of loss basis, through individual placements, or by way of delegated underwriting facilities given to coverholders ('binding authorities'). Binding authority arrangements delegate the day to day underwriting to underwriting agents working on our behalf. For these contracts, we are reliant on a coverholder exercising underwriting judgement on our behalf. Coverholders have to have local regulatory approval, be Lloyd's registered and also approved by the Amlin Binding Authority Committee. For all binding authorities facilities we receive a monthly or quarterly bordereau which is checked by our underwriting staff. We control the underwriting by setting clear authority levels for coverholders stipulated within the binding authority agreement, regularly monitoring performance and periodically carrying out underwriting visits and or commissioning third party audits. The coverholder is incentivised to produce an underwriting profit through the payments of profit commission. However, with the day to day underwriting not controlled by Amlin, there is a risk that coverholder underwriting or claim decisions are made which would not have been made by Amlin underwriters or claims staff. The maximum value insured under binding authorities is currently limited to $4 million at any one location. 

The property portfolio is also exposed to an above average frequency of individual fire, explosion or weather related claims. The premium charged for the coverage given may not be sufficient to cover all claims made in any year, particularly in a year in which there is an abnormal frequency of claims. This account is mainly situated in the USA and is therefore exposed to large catastrophe events such as California earthquake and hurricane losses. 

  The geographical spread of property classes is shown below:

Africa	1%
Asia	2%
Caribbean	4%
Europe	10%
North America	69%
Oceania	1%
South & Central America	5%
UK	7%
Other	1%

B.ii US casualty risks

The US casualty portfolio of business provides insurance and reinsurance cover to individuals, or companies, in order to indemnify them against legal liability arising from their activities and actions or for incidents occurring on their property. The account is currently written to a maximum liability of $6 million on any one claim but average lines are $0.6 million on any one claim. 2008 gross premium was £25 million. 

The portfolio is made up of specialist general casualty, professional indemnity, medical malpractice and errors and omissions cover. Small amounts of directors' and officers' liability and auto liability are also written. The class is mostly written on a claims notified basis (responding to all claims made during a defined period) except for small amounts of general liability business which may be written on a losses occurring basis (the policy responds to losses which occur during the period even if reported after the policy has expired). 

Claims from this class emanate from professional error, negligence or an accident which causes injury, damage or financial loss. The account is vulnerable to a high frequency of claims, but not individual large losses as the cost to Amlin of any individual claim is small. Claims frequency may be impacted by a generic claim type which impacts many individuals and (re)insurance policies such as poor housing design or bad medical practice. 

The size of many individual claims is subject to the decisions arising from the US court system which can be higher than anticipated. There is also the potential for US courts to impose a 'bad faith' judgement on insurers if it is deemed that the insurer has acted improperly in trying to avoid contractual obligations. Such awards can, in exceptional circumstances, be much higher than the value of the insurance claim.

B.iii Accident and health, credit, auto and special risks

The Group also writes other property and casualty classes which contribute diversified exposure to the portfolio. The main classes with the maximum sum insured lines are shown below:

Property and casualty other classes

	2008  Gross premium £m	Current maximum line size £m	2008 Average line size £m
Accident & health	24	3	1.2
Credit insurance	11	15	15.0
Auto	24	4	0.3

Notes:

1) Limits are set in US dollars converted to sterling at a rate of £1=US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits. 

2) Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.

3) Premium are stated gross of acquisition costs.

The accident and health class is written through medical expense schemes in the USA and direct personal accident cover, or personal accident reinsurance, worldwide. Medical expense cover is subject to a high frequency of claim and significant medical cost inflation. Personal accident insurance and reinsurance could be impacted by a single or series of accidents to high value insured individuals or from a multiple death and injury event such as an air crash or natural catastrophe. 

Credit insurance was written for UK and Irish companies only with coverage provided to protect against insolvency of debtors in the normal course of trading. This unit ceased underwriting in 2008. The principal risk is from a large corporate collapse which may impact many of our assureds or a serious economic downturn as currently experienced which impacts many sectors and companies. 

The auto class covers property damage only (fire, theft and collision) in the USA and property damage and third party motor liability combined cover in other international territories. This class could be impacted by unexpected claim frequency, a multi vehicle event such as a severe flood and also large bodily injury award claims emanating from an accident.

The geographical spread of Property and casualty other classes is shown below:

Africa	1%
Asia	1%
Caribbean	14%
Europe	7%
North America	36%
Oceania	3%
South & Central America	<1%
UK	30%
Other	7%

C. Marine risks 

The Group writes a broad account of marine risks with maximum lines as follows: 

Marine classes

	2008  Gross premium £m	Current maximum line size £m	2008 Average line size £m
Hull	17	10	1.4
Cargo	32	17	3.5
Energy	39	20	3.3
War and terrorism	25	17	8.7
Specie	9	24	6.3
Bloodstock	21	4	0.6
Yacht (hull and liability)	30	4	1.0
Liability	21	57	4.3

Notes:

1) Limits are set in US dollars converted at a rate of exchange of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits. 

2) Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.

3) Premium are stated gross of acquisition costs.

The hull and cargo account is worldwide, covering property damage to ships and loss, or damage, to a large variety of cargo or goods in transit. The hull account can include machinery breakdown and the account written is generally targeted towards lower value tonnage, smaller 'brownwater' vessels and fishing boats. These accounts can be impacted by attritional claims of a small size as well as a single individual large claim. The cargo account in particular could also be involved in a major natural catastrophe loss. In an economic recession, it is expected that premium income will fall from these areas as trade reduces and hull values are impacted by reduced freight rates. It is also possible that claims frequency increases due to increased economic pressures affecting fraud and theft claims.

The energy portfolio is mainly offshore rig and construction policies which may be impacted by large individual claims from construction fault or property damage such as fire or explosion, but is also exposed to severe catastrophe losses in the North Sea and Gulf of Mexico. The account includes control of well to limit loss of oil and avoid pollution and also some business interruption cover which indemnifies companies for loss of production.

War business includes aviation, marine and on land terrorism coverage and is exposed to single incidents or a series of losses arising from concerted action. A small amount of political risk, confiscation and contract frustration is written. 

Specie business consists of the insurance against damage or theft to fine art, the contents of vaults and other high value goods including jewellers' block and cash in transit. The fine art may be shown at exhibitions which have very high aggregate values at risk. The class is therefore exposed to the potential for a frequency of small claims and also large individual losses. Some specie is written in catastrophe zones e.g. California.

The bloodstock account protects for death, illness or injury to horses mainly in the UK but business from the USA, Australia and South Africa is also written. This covers racing or eventing horses and breeding studs. The average value insured is below £1 million but there is the potential for an aggregate loss, such as a stable fire, which could cause multiple claims. 

Yacht business covers property damage and third party injury for small leisure boats and craft. The bulk of the account is smaller value yachts in the UK and Europe, although there are a number of binders written by coverholders elsewhere, such as Scandinavia, Canada and Australia. There is an expectation of a large number of small claims, as average values are low in comparison to other claims written in the Group. Third party liability yacht claims arise from injury or damage caused by one of our policyholders to third parties. There is also the potential for a large catastrophe loss such as a UK windstorm where there are large aggregate sums insured in coastal regions such as southern England. 

The marine liability portfolio is written to protect ship-owners, harbours, charterers and energy companies against damage or injury to third parties. This includes the potential for pollution damage and clean up claims. The account could suffer a large catastrophe incident from a collision causing death of crew and passengers or an oil, or chemical, spill which could incur large clean up costs. 

The geographical spread of Marine classes is shown below:

Africa	2%
Asia	7%
Caribbean	2%
Europe	19%
North America	24%
Oceania	3%
South & Central America	3%
UK	27%
Other	13%

D. Aviation risks 

The Group underwrites a direct and facultative reinsurance account domiciled in most parts of the world. The portfolio is made up of the following classes with maximum lines. 

Aviation classes

	2008  Gross premium £m	Current maximum line size £m	2008 Average line size £m
Airline (hull & liability)	17	84	14.0
General aviation (hull & liability)	14	57	9.8
Airports liability	13	57	25.8
Products	7	57	16.4
Space (hull & liability)	6	46	6.9

Notes:

1) Limits are set in US dollars converted at a rate of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits.

2) Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.

3) Premium are stated gross of acquisition costs.

The airline account is exposed to large claims arising from property damage, death or injury arising from aircraft accidents. The domicile of the airline and passengers has a notable influence on the cost of claims, for example US court awards are generally higher. 

The general aviation account covers smaller aircraft or cargo and covers owners or operators, against loss or damage and third party injury. The risk excess account is a book of general aviation reinsurance business written to protect a small number of insurers against large general aviation claims.

Airport liability insurance covers airport operators, refuellers and air traffic controllers against losses arising from injury caused by their activities or occurring on their premises. Product liability covers manufacturers against accidents arising from faulty parts or equipment, or poor servicing of aircraft. Both airport and product liability coverage is written on a losses occurring basis meaning that claims advices can be made after the policy has expired. Space insurance covers property and liability during launch and the operation of satellites whilst in orbit for a limited period, normally of one year. 

The aviation account is subject to both small and large claims. Claims involving loss of life or serious injury to high earning passengers or third parties are subject to the ongoing inflation of court awards particularly in the USA. Large accidents involving the potential death of 500 or more passengers are feasible and could potentially result in a gross claim to the business of more than $175 million before reinsurance if, for example, two large aircraft were to collide. Space losses are generally large single claim amounts caused by launch failure or operational failure in orbit.  

The principal Aviation accounts are protected by a reinsurance programme on both a risk sharing (proportional) and excess of loss basis. The Group reinsurance arrangements are discussed in the Reinsurance section below. The space account is written with risks shared with Amlin Bermuda but is not protected by excess of loss reinsurance.

The geographical spread of Aviation classes is shown below:

Africa	2%
Asia	10%
Caribbean	1%
Europe	22%
North America	41%
Oceania	1%
South & Central America	2%
UK	16%
Other	5%

E. Amlin UK risks

E.i. Liability risks

Liability classes

	2008  Gross premium £m	Current maximum line size £m	2008 Average line size £m
Employers' liability	23	27	9.9
Public/products liability	11	12	3.8
Professional indemnity	20	7	1.3
UK commercial package	10	27	0.4
Financial institutions fidelity and liability	4	6	1.2

Notes:

1) Premium are stated gross of acquisition costs.

The Group writes three classes of mainly UK liability. The vast majority of the business emanates from the UK with the balance mainly from Ireland and Canada. 

Employers' liability insurance protects employers against accident or injury to employees. This is written on a losses occurring basis (covering events that occurred in the policy period even if they are not notified until after expiry) for limits up to £27 million per employer. 

Public liability insurance provides coverage, often written in conjunction with employers' liability, for accident or injury occurring to clients, customers or another third party as a result of contact with the insured's personnel, property or products. This is written on a losses occurring basis currently for limits up to £12 million per assured. 

Professional indemnity covers liability which may arise from services provided by the assured, for example as a result of negligence or error which may lead to financial or physical loss. This includes, but is not limited to, services from architects, engineers, surveyors, advertising firms, medical professionals and financial advisors and is written on a claims made basis (covering losses notified in the policy period).

Amlin UK package policies combine one or more of the liability coverages mainly employers' and public liability with motor and/or property damage protection. Stand alone property protection is also within this class, mainly on a 100% basis for small commercial and household properties.

The Group also writes a small account of financial institutions policies covering fidelity, professional indemnity and directors' and officers' liability for companies providing financial services. The current maximum line is £6 million. Approximately half of the income is from Western Europe financial institutions with the balance spread broadly by territory. Coverage is given on a claims made basis.

The expected claims costs from these lines of business may be impacted by larger than anticipated damage awards to injured parties as well as due to an unforeseen increase in generic claims such as industrial disease or other health hazards. It is expected that claims frequency will increase during an economic downturn as unemployment leads to an increase in action against employers and people are more likely to seek redress for third party advice or behaviour which may have led to financial loss or injury. It is also possible that many claims could arise under many policies from a common cause such as financial advice or generic building defect. The financial institutions account could be affected by a major fraud or a series of related liability claims arising from banking, investment activity, stockbroking or other practices. The property portfolio could sustain a large loss from the effects of a UK windstorm or flood event.

E.ii. UK motor insurance risks

The Group's motor insurance risk is predominantly UK business covering fire, theft, collision and third party property and bodily injury liability. 2008 gross premium was £59 million. Under the requirements of UK law third party liability coverage is unlimited, but matching reinsurance is purchased. The account is biased towards commercial clients such as coach operators, haulage companies, commercial vehicle fleets and company executive fleets. The Syndicate leads two facilities for fleets involved in the transportation of hazardous waste. There is also a UK agriculture and a specialist private car account written. 

Claims frequency has improved in recent years due to car and road safety measures but can fluctuate due to factors such as weather conditions. UK inflation is a key factor in determining the size of motor claims. Car values affect the size of theft claims and for physical damage claims size is linked to repair costs. Inflationary pressure on court awards within the UK and Irish legal systems impacts liability claim values. Government intervention such as liability award limit changes or expense recoveries for government bodies, including the National Health Service, will also impact claim size. For the motor account, severe bodily injury and catastrophe damage claims (e.g. UK flood) are limited through the purchase of a reinsurance programme, the highest layer of which is unlimited. 

Motor insurance is a highly competitive area of insurance and pricing levels fluctuate. Whilst underwriters accept business subject to sufficient rates per vehicle, in a year where there is an unexpectedly high level of claims the total premium may not be sufficient to cover all the claims. There is also a risk that legal changes impact bodily injury payments and result in a requirement to increase reserves for outstanding claims.

F. Amlin Bermuda risks

Amlin Bermuda was formed in December 2005 to directly write a short tail portfolio of reinsurance business and to reinsure part of the Syndicate 2001 portfolio. The direct written portfolio consists of the following classes with maximum line sizes and split by territory.

  Amlin Bermuda direct business risks

	2008 Gross Premium	Current Maximum line size	2008 Average Line Size
	$m	$m	$m
Catastrophe reinsurance (per programme)	211.1	75.0	8.7
Proportional reinsurance	70.4	12.5	1.5
Per risk property reinsurance (per programme)	55.7	12.5	3.2
Special risks	9.5	30.0	3.5
Marine reinsurance	4.2	20.0	4.9
Aviation reinsurance	0.8	20.0	4.5
Accident & health	0.9	10.0	1.9
Bloodstock	0.5	10.0	1.7
Casualty	0.2	10.0	2.5

Notes:

1) Premium are stated gross of acquisition costs.

Amlin Bermuda's direct business has strong similarities to the portfolio of the Reinsurance business unit of Syndicate 2001. A large proportion of the business written emanates from London broker markets and is frequently seasoned business already underwritten by Syndicate 2001. Risk balance is provided by a whole account quota share of Syndicate 2001. This is further supplemented by a number of specific variable quota share treaties on short tail classes such as property and energy. 

Property reinsurance is written through treaty arrangements on a proportional, individual risk excess of loss, or catastrophe excess of loss basis. The catastrophe reinsurance portfolio is the largest class of insurance risk written by Amlin Bermuda. Exposures to each programme are currently limited to $12.5 million per risk and $75 million any one catastrophe programme, with modelled maximum event limits of $300 million any one zone and $320 million for losses affecting more than one zone. 

The special risks account includes small premium classes mostly relating to terrorism reinsurance but also includes nuclear and contingency which is written in all parts of the world. 

The accident and health class is written through medical expense schemes in the USA and provides personal accident reinsurance worldwide. Personal accident reinsurance could be impacted by a single or series of accidents to high value insured individuals or from a multiple death and injury event such as an air crash or natural catastrophe. 

To date the Bermuda subsidiary has written risks without the protection of a reinsurance programme and therefore it has higher net retained exposures to individual risk losses or catastrophe than the Syndicate currently bears.

Africa	1%
Asia	6%
Caribbean	5%
Europe	9%
North America	65%
Oceania	4%
South & Central America	1%
UK	10%
Other	<1%

  G. Anglo French Underwriters risks

In November 2008, the Group acquired Financière Europe Assurance SAS, which has been renamed Amlin France SAS. Amlin France SAS owns Anglo French Underwriters SAS (AFU). Drawing its strength from a large network of brokers across France, AFU is able to offer a wide range of insurance products designed to respond to the needs of both individuals and small to medium-sized corporate clients. AFU's business is situated mainly in France but also includes some exposure in Spain. It writes a diverse book of business including property, cargo, professional liability and specie through a network of more than 1,300 independent retail brokers. The portfolio consists of the following classes with maximum and average line sizes. Amlin did not underwrite much of these risks in 2008. Syndicate 2001 will commence writing the majority of these risks in 2009.

AFU classes

	Current maximum line size  Euro m
Property	55
Marine	11
Specie	4
Professional Indemnity	3
General Liability	10

In respect of property, AFU acts as both a leading underwriter and co-insurer for industrial high hazard risks providing material damage insurance for the industrial and commercial premises of small and medium sized enterprises. AFU also provides a comprehensive package, including liability cover for discotheques, bowling alleys, restaurants, bars and casinos. Perils offered include fire, lightning and associated risks, electrical damage, water damage, storm, tempest, hail, snow and glass breakage. Optional coverages include business interruption, indirect losses, theft from individuals and theft from break-ins. Building insurance is also offered for owners who are not occupiers.

In the marine field, AFU provides yacht insurance which includes cover for damage, theft and liability as well as for the costs of marine assistance and marine personal accident. World-wide stock and transit insurance is also provided with All Risks coverage granted on a start to finish basis from the point of supplier to the point of delivery. Transit cover includes all periods when the goods are stocked, in whatever location and without any break in coverage.

AFU also provides jeweller's block for high value contents. All risks coverage is given for stock within the premises, including for break-in, hold-up, fire and water damage. Cover is also given for commercial retail premises such as gunsmiths, perfume and clothing shops and art galleries, including damage caused to art while on show at exhibitions and damage to art kept in private residences. A comprehensive multi-risk product is provided for retailers which includes an extension for fire and water damage within the premises, liability coverage and the preservation of goodwill or business interruption following a loss.

Professional indemnity and financial guarantee insurance is provided to insurance and banking intermediaries as well as financial advisers, real estate agents and financial and investment consultants. This is a multi-layered package which responds to the particular needs of several regulated professions which may require differing types of cover.

AFU also offers insurance for events, including cancellation cover, organisers' liability, all risks exhibition cover and all risks coverage on equipment belonging to, hired by or installed by the assured. AFU also provides personal accident insurance for professions involving risk and the practice of sporting activities which are deemed hazardous. 

Reinsurance arrangements

The Syndicate purchases proportional reinsurance to supplement line size and to reduce exposure on individual risks, notably for aviation and large property risks. A part of the premium ceded under such facilities is placed with Amlin Bermuda and, for risks incepting during 2009, a separate proportional facility is placed for the excess of loss reinsurance portfolio through a Special Purpose Syndicate at Lloyd's. Syndicate 2001 also purchases a number of excess of loss reinsurances to protect itself from severe frequency or size of losses. The structure of the programme and type of protection bought will vary from year to year depending on the availability and price of cover. 

On large risks individual facultative reinsurance may be bought which protects against a loss to that specific risk.

Specific risk excess of loss reinsurance is purchased for each class of business. The amount of cover bought depends upon the line size written for each class. The deductibles or amounts borne prior to recovery vary from class to class as do the amounts of co-reinsurance or unplaced protection. Specific programmes are purchased to deal with large individual risk losses, such as fire or large energy losses, and these programmes may be combined at a higher level into a general programme for larger losses.

The combined claims to the Syndicate from several losses which aggregate in a single catastrophe event are protected by catastrophe cover. A separate excess of loss on excess of loss programme may be purchased to protect the excess of loss reinsurance portfolio against such losses. Since 2006, the amount of excess of loss reinsurance purchased is lower and only responds to losses in excess of $60 million.

There is no guarantee that reinsurance coverage will be available to meet all potential loss circumstances as, for very severe catastrophe losses, it is possible that the full extent of the cover bought is not sufficient. Any loss amount which exceeds the programme would be retained by the Group. It is also possible that a dispute could arise with a reinsurer which reduces the recovery made. The reinsurance programme is bought to cover the expected claims arising on the original portfolio. However, it is possible for there to be a mismatch, or a gap in cover, which would result in a higher than expected retained loss.

Many parts of the programme also have limited reinstatements and therefore the number of claims which may be recovered from second or subsequent major losses is limited. It is possible for the programme to be exhausted by a series of losses in one annual period and it may not be possible to purchase additional reinsurance at all or for an acceptable price. This would result in the Group bearing higher losses from further events occurring. It should also be noted that the renewal date of the reinsurance programmes does not necessarily correspond to that of the business written. Where business is not protected by risk attaching reinsurance (which provides coverage for the duration of all the policies written) this reinsurance protection could expire resulting in an increase in possible loss retained by the Syndicate if renewal of the programme is not achieved. 

Amlin Bermuda is presently not protected by any reinsurance programme although the company may decide to purchase reinsurance in the future.

Realistic Disaster Scenario (RDS) analysis 

The Group has a defined event risk appetite which determines the maximum net loss that the Group intends to limit its exposure to major catastrophe event scenarios. Currently these are a maximum of £165 million for the Syndicate and $300 million for any one zone or $320 million for a multi-zonal loss for Amlin Bermuda. 

These maximum losses are expected only to be incurred in extreme events - with an estimated occurrence probability of less than 1 in 50 years estimated for the natural peril or elemental losses. The Group also adopts risk appetite maximum net limits for a number of other non-elemental scenarios, including aviation collision and North Sea rig loss.

The risk appetite policy recognises that there may be circumstances in which the net event limit could be exceeded. Such circumstances include changes in rates of exchange, non renewal or delay in renewal of reinsurance protection, reinsurance security failure, or regulatory and legal requirements. 

A detailed analysis of catastrophe exposures is carried out every quarter and measured against risk appetite. The following assumptions and procedures are used in the process:  

• The data used reflects the information supplied to the Group by insureds and ceding companies. This may prove to be incomplete, inaccurate or could develop during the policy period;

• The exposures are modelled using a mixture of stochastic models and underwriter input to arrive at 'damage factors' - these factors are then applied to the assumed aggregate exposure to produce gross loss estimates. The damage factors may prove to be inadequate;

• The reinsurance programme as purchased is applied - a provision for reinsurer counterparty failure is included but may prove to be inadequate; and

• Reinstatement premium both payable and receivable are included. 

There is no guarantee that the assumptions and techniques deployed in calculating these event loss estimate figures are accurate. Furthermore, there could also be an unmodelled loss which exceeds these figures. The likelihood of such a catastrophe is considered to be remote, but the most severe scenarios modelled are simulated events and these simulations could prove to be unreliable.  

  Insurance liabilities and reinsurance assets

Calculation of incurred but not reported (IBNR) and claims development

Amlin adopts a rigorous process in the calculation of an adequate provision for insurance claim liabilities. The overriding aim is to establish reserves which are expected to be at least adequate and that there is consistency from year to year. Therefore, the level of reserves are set at a level above the actuarial 'best estimate' position. However, there is a risk that, due to unforeseen circumstances, the reserves carried are not sufficient to meet insurance claim liabilities reported in future years on policy periods which have expired.

Process and methodology

The reserving process commences with the proper recording and reporting of claims information which consists of paid and notified or outstanding claims. For our London market business information is received through Xchanging (the London market bureau) and, in the case of Amlin UK business, service companies and Amlin Bermuda, directly from brokers and policyholders. Claims records are maintained for each class by the underwriting year to which the policy incepts. For notified, or outstanding claims, a case reserve is established based on the views of underwriting management and claims managers, using external legal or expert advice where appropriate. This reserve is expected to be sufficient to meet the claim payment when it is finally determined. For some classes of business, particularly liability business, settlement may be several years after the initial notification of the claim, as it may be subject to complexities or court action. For claims received from Xchanging, the market reserve is generally set by the lead underwriter, but there are circumstances on larger claims where Amlin will post higher reserves than those notified. 

To establish a provision for IBNR claims, the underwriting and claims teams use their experience and knowledge of the class of business to estimate the potential future development of each class for every underwriting year. The development period varies by class, by method of acceptance and is also determined by the deductible of each policy written. For casualty business, the policy form will determine whether claims can be made on a claims made (as advised) or as a losses occurring (determined by date of loss) basis. This has a significant impact on the reporting period in which claims can be notified. In setting the IBNR provision estimates are made for the ultimate premium and ultimate gross claims value for each underwriting year. Allowance is then made for anticipated reinsurance recoveries to reach a net claim position. Reinsurance recoveries are calculated for outstanding and IBNR claims, sometimes through the use of historical recovery rates or statistical projections, and provisions are made as appropriate for bad debt or possible disputes. The component of ultimate IBNR provision estimates and reinsurance recoveries that relates to future events occurring to the existing portfolio is removed in order to reflect GAAP accounting practice. During the year the process for calculating future events was changed in order to improve the accuracy of the GAAP provisions. This increased profit by approximately £15 million.

To assist with the process of determining the reserves, triangulation statistics for each class are produced which show the historical development of premium, as well as paid and incurred losses, for each underwriting year, from inception to the date of review. Each class triangulation is also independently analysed by the internal actuarial team using actuarial software as appropriate. The aim of the actuarial exercise is to produce 'best estimate' ultimate premium and claims amounts which can be compared to the figures proposed by divisional management. Meetings are held in which executive management, actuarial staff and business management discuss claims issues and analyse the proposed and independently generated reserves to conclude the provision to be carried. 

For Amlin Bermuda, which only commenced underwriting in 2005, historical statistics for the Syndicate's relevant classes of business have been used as a guide for actuarial review.

Areas of uncertainty

The reserves established can be more or less than adequate to meet eventual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate case reserves for known large losses and catastrophes or from inadequate provision for IBNR. The impact on profit before tax of a +/- 1% variation in the total net claims reserves would be +/- £13.3 million (2007: £10.9 million).

Large loss case reserves are determined through careful analysis of the individual claim, often with the advice of legal advisers. Liability claims arising from events such as the 11 September 2001 terrorist attacks in the US are examples of cases where there continues to be some uncertainty over the eventual value of claims. 

Property catastrophe claims, such as earthquake or hurricane losses, can take several months, or years, to develop as adjusters visit damaged property and agree claim valuations. Until all the claims are settled it requires an analysis of the area damaged, contracts exposed and the use of models to simulate the loss against the portfolio of exposure in order to arrive at an estimate of ultimate loss to the Group. There is uncertainty over the adequacy of information and modelling of major losses for a period of several months after a catastrophe loss. Account should also be taken of factors which may influence the size of claims such as increased inflation or a change in law. 

The long tail liability classes, for which a large IBNR has to be established, represent the most difficult classes to reserve because claims are notified and settled several years after the expiry of the policy concerned. This is particularly the case for US liability written on a losses occurring basis.

The use of historical development data, adjusted for known changes to wordings or the claims environment, is fundamental to reserving these classes. It is used in conjunction with the advice of lawyers and third party claims adjusters on material single claims.

The allocation of IBNR to the reinsurance programme is an uncertain exercise as there is limited knowledge of the size or number of future claims advices. The assumption over future reinsurance recoveries may be incorrect and unforeseen disputes could arise which would reduce recoveries made.

Dynamic financial analysis (DFA) modelling of risk

To improve our risk management capability, and our assessment of capital requirements, Amlin has developed a stochastic model to analyse the potential performance of the underwriting businesses. The output from the model includes a distribution of outcomes from reserves for prior written liabilities, investment performance, and new business underwriting performance. The result is a combined view of the expected best estimate mean result and the range of possibilities around it.  

The model requires the input of a large number of explicit parameters. Those inputs are based on many different sources of information including detailed historical data on premium and claims, forecast income and exposures, estimated rating levels and catastrophe loss data from proprietary models applied to Amlin's portfolio. It enables projection of an estimated mean ultimate loss ratio and the distribution of results around it. The model explicitly recognises diversification credit, since class results are not all strongly correlated and thus individual classes are unlikely to all produce losses (or profits) in the same year. Due to the inherent uncertainty of predicting the key drivers of business performance, including in particular claims levels, any individual simulation of the model viewed in isolation cannot be relied upon as an accurate forecast. However, the output from many thousands of simulated results can provide a picture of the possible distribution of insurance business results. This output is useful in developing an understanding of the losses which may be borne by the business at varying levels of probability.

There are a large number of uncertainties and difficulties in achieving accurate results from the model. Some of the key issues are:

• The model is based on a best estimate view of business volumes and rate expectations, which may not be borne out in practice;

• A significant change in the portfolio of business could result in the past not being a reliable guide to the future;

• Changing external environmental factors may not be assessed accurately;

• Model risk may be significant in such a complex and developing discipline;

• Key assumptions over levels of correlation between classes may over time prove to be incorrect; and

• Catastrophe model inputs, which estimate the severity and frequency of large catastrophes on the portfolio, may be incorrect.

The result reproduced below represents the modelled loss sustained by the business from a single 1 in 200 bad year i.e. at the 0.5 percentile. This probability is the calculation benchmark required by the FSA and Lloyd's. However, it does not represent the level of capital required for Amlin to support current and expected business levels, which should be considered over a longer period of modelling. Furthermore, Amlin is required to carry (higher) levels of capital which are sufficient in the eyes of rating agencies and clients.  

Risk category after diversification	2009 forecast £m
Underwriting (new business risk)	(476)
Reserving	(87)
Credit (reinsurance counterparty risk)	(32)
Investment (market risk)	42
Liquidity risk	(10)
Discounting credit	31
Diversified result	(532)

Notes: 

• All figures are based on business plan forecasts which are currently under review for changes in the trading environment, interest rate outlook and movements in rates of exchange. It is likely that capital requirements will increase as a consequence.

• Excluding any additional capital provision for operational risk.

• No dividend or tax is considered.

• Currency risk is not modelled explicitly.

• Non-sterling amounts have been converted at Lloyd's required rates, including for US Dollars $1.99 to £1.00.

• These figures are based on assumptions consistent with the work for the October 2008 ICA submission (for the 2009 Year of Account) and thus include the projected year end asset and liability position.

• Figures include an allowance for investment returns generated on assets backing the insurance liabilities (i.e. discounting). The discounting credit shown represents the release from the balance sheet by discounting the mean best estimate reserves.

• Investment income includes group corporate (surplus) assets. Investment risk after diversification remains positive since at around the 1 in 200 level total investment income (on both surplus and technical assets) exceeds the investment income implicitly assumed via discounting on the technical assets alone.

• No credit has been taken for carried reserve margins.

RISK DISCLOSURES

Premium development

The table below illustrates the development of the estimate of gross written premium and gross earned premium for Syndicate 2001 and Amlin Bermuda Ltd after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimate made. Non-sterling balances have been converted using 2008 closing exchange rates to aide comparability.

Group

Gross written premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	997.3	1,144.9	1,121.9	1,150.5	1,317.1	1,288.9	1,255.5
One year later	1,043.1	1,146.6	1,135.1	1,149.6	1,340.2	1,285.5
Two years later	1,011.3	1,152.2	1,145.5	1,160.9	1,333.2
Three years later	1,010.7	1,154.0	1,148.6	1,160.3
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3
Current ultimate gross written premium	1,012.3	1,154.0	1,140.5	1,160.3	1,333.2	1,312.5	1,290.2

Gross earned premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	493.8	609.4	568.4	593.3	712.3	712.4	693.4
One year later	984.3	1,090.6	1,076.8	1,097.4	1,284.2	1,234.7
Two years later	1,011.3	1,152.2	1,145.5	1,160.9	1,332.8
Three years later	1,010.8	1,154.0	1,148.6	1,160.3
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3

  Syndicate 2001 total

Gross written premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	997.3	1,144.9	1,121.9	1,146.7	1,160.4	1,091.2	1,006.2
One year later	1,043.1	1,146.6	1,135.1	1,147.5	1,184.9	1,094.8
Two years later	1,011.3	1,152.2	1,145.5	1,159.0	1,177.7
Three years later	1,010.7	1,154.0	1,148.6	1,159.0
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3
Current ultimate gross written premium	1,012.3	1,154.0	1,140.5	1,159.0	1,177.7	1,121.8	1,040.9

Gross earned premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	493.8	609.4	568.4	593.2	621.6	588.6	541.6
One year later	984.3	1,090.6	1,076.8	1,095.7	1,136.9	1,052.8
Two years later	1,011.3	1,152.2	1,145.5	1,159.0	1,177.7
Three years later	1,010.8	1,154.0	1,148.6	1,159.0
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3

  Amlin Bermuda - Direct business

Gross written premium Underwriting year				2005 $m	2006 $m	2007 $m	2008 $m
At end of underwriting year				5.5	228.8	288.7	364.0
One year later				3.0	226.7	278.4
Two years later				2.8	227.1
Three years later				1.9
Current ultimate gross written premium				1.9	227.1	278.4	364.0

Gross earned premium Underwriting year				2005 $m	2006 $m	2007 $m	2008 $m
At end of underwriting year				0.1	132.4	180.7	221.6
One year later				2.5	215.1	265.6
Two years later				2.8	226.5
Three years later				1.9

Claims development

The tables below illustrate the development of the estimates of ultimate cumulative claims for Syndicate 2001 and Amlin Bermuda after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimates made. Non-sterling balances have been converted using 2008 exchange rates to aide comparability.

  Non-marine

In 2008, the Non-marine division was reorganised into two business units: Reinsurance and Property and Casualty. The following claims development tables report these business units as Non-marine because this is how this information was reported internally for management purposes until the end of 2008.

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	640.3	643.6	674.2	718.0	668.0	595.9
Estimate of cumulative claims
At end of underwriting year	325.9	452.5	726.3	303.6	314.0	458.4
One year later	228.8	481.0	711.9	209.4	236.5
Two years later	215.7	471.1	707.3	200.5
Three years later	201.2	458.5	701.3
Four years later	196.8	452.3
Five years later	197.3
Cumulative payments	172.2	415.5	634.1	143.7	100.8	118.6
Estimated balance to pay	25.1	36.8	67.2	56.8	135.7	339.8

Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	269.6	338.3	389.9	245.7	244.6	296.5
One year later	192.3	315.9	370.2	170.7	189.8
Two years later	177.2	305.1	366.1	169.9
Three years later	162.9	290.2	353.7
Four years later	157.8	281.5
Five years later	157.4
Cumulative payments	146.8	249.9	282.5	133.4	90.2	84.0
Estimated balance to pay	10.6	31.6	71.2	36.5	99.6	212.5

  Marine

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	198.0	199.5	219.5	246.7	234.5	221.8
Estimate of cumulative claims
At end of underwriting year	118.2	112.8	164.7	121.7	120.2	151.1
One year later	113.0	105.3	228.0	113.7	129.1
Two years later	85.5	86.8	212.1	105.4
Three years later	83.8	88.1	194.4
Four years later	85.3	86.9
Five years later	84.9
Cumulative payments	74.8	73.5	149.7	69.7	49.1	10.6
Estimated balance to pay	10.1	13.4	44.7	35.7	80.0	140.5

Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	102.2	105.6	108.1	95.0	88.6	92.7
One year later	93.1	91.1	124.3	88.3	96.5
Two years later	69.2	70.9	116.7	81.9
Three years later	67.6	73.1	110.1
Four years later	66.9	71.3
Five years later	67.0
Cumulative payments	63.6	57.5	90.8	58.5	44.6	44.6
Estimated balance to pay	3.4	13.8	19.3	23.4	51.9	48.1

  Aviation

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	115.3	113.5	101.2	100.4	77.2	70.4
Estimate of cumulative claims
At end of underwriting year	67.0	69.0	62.0	63.3	59.8	50.7
One year later	49.8	55.2	60.7	70.8	62.7
Two years later	41.0	50.0	50.2	62.5
Three years later	41.1	45.7	50.2
Four years later	37.0	41.8
Five years later	37.3
Cumulative payments	25.7	28.7	25.4	23.0	18.7	3.3
Estimated balance to pay	11.6	13.1	24.8	39.5	44.0	47.4

Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	50.7	56.2	50.8	43.8	43.3	36.3
One year later	39.3	47.2	44.6	42.5	42.1
Two years later	32.3	42.9	36.9	37.7
Three years later	32.1	39.3	34.9
Four years later	28.7	36.1
Five years later	29.0
Cumulative payments	21.7	25.5	18.7	17.6	14.4	3.1
Estimated balance to pay	7.3	10.6	16.2	20.1	27.7	33.2

  Amlin UK

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	209.1	191.3	170.8	148.8	142.2	152.9
Estimate of cumulative claims
At end of underwriting year	146.6	127.5	116.3	103.9	102.4	119.1
One year later	131.3	113.5	112.2	108.0	103.8
Two years later	103.6	105.9	104.3	103.2
Three years later	97.7	92.8	90.8
Four years later	97.9	88.3
Five years later	88.5
Cumulative payments	66.7	60.3	48.9	38.4	28.7	9.4
Estimated balance to pay	21.8	28.0	41.9	64.8	75.1	109.7

Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	127.3	112.0	105.2	86.6	86.8	93.9
One year later	111.1	103.1	101.6	90.3	84.3
Two years later	93.4	94.6	98.4	87.6
Three years later	89.1	89.1	89.3
Four years later	89.2	84.9
Five years later	81.4
Cumulative payments	66.7	57.7	48.9	38.4	28.7	9.4
Estimated balance to pay	14.7	27.2	40.4	49.2	55.6	84.5

  Syndicate 2001 total

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	1,162.7	1,147.9	1,165.7	1,213.9	1,121.9	1,041.0
Estimate of cumulative claims
At end of underwriting year	657.7	761.8	1,069.4	592.5	596.4	779.3
One year later	522.9	755.0	1,112.8	501.9	532.1
Two years later	445.8	713.8	1,073.9	471.6
Three years later	423.8	685.1	1,036.7
Four years later	417.0	669.3
Five years later	408.0
Cumulative payments	339.4	578.0	858.1	274.9	197.3	141.8
Estimated balance to pay	68.6	91.3	178.6	196.7	334.8	637.4

Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	549.8	612.1	654.0	471.1	463.3	519.5
One year later	435.8	557.3	640.7	391.8	412.7
Two years later	372.1	513.5	618.1	377.1
Three years later	351.7	491.7	588.0
Four years later	342.6	473.8
Five years later	334.8
Cumulative payments	298.8	390.6	440.9	247.9	177.9	141.1
Estimated balance to pay	36.0	83.2	147.1	129.2	234.8	378.4

  Amlin Bermuda - Direct business 

Claims gross basis Underwriting year			2005 $m	2006 $m	2007 $m	2008 $m
Estimate of cumulative claims
At end of underwriting year			-	67.9	114.4	254.7
One year later			1.2	39.3	87.3
Two years later			0.6	46.4
Three years later			0.5
Cumulative payments			0.4	25.9	20.3	81.7
Estimated balance to pay			0.1	20.5	67.0	173.0

3.2    Financial investment risk disclosures

Market risk

Risk management

The following section describes Amlin's investment risk management from a quantitative and qualitative perspective. The Group has two main categories of assets which have to be invested in accordance with robust regulations. The asset categories are as follows:

• Underwriting assets. These are the premiums received and held to meet future insurance claims.  

• Capital assets. These are the capital required by the regulators to support the underwriting business plus working capital and surplus funds. Apart from the outstanding borrowings, these assets do not have specific current liabilities attached to them.  

Investment governance

Amlin manages its investments in accordance with investment frameworks that are set by the Boards of Amlin plc and its subsidiaries. These frameworks determine investment policy and the management of investment risk. They are reviewed on a regular basis to ensure that the Boards' fiduciary and regulatory responsibilities are being met. The Boards delegate responsibility for the management of the investments to the Investment Management Executive. 

The Investment Management Executive comprises the Chief Executive, Group Finance Director and Chief Investment Officer. They meet at least monthly to determine investment tactics, to ensure that asset allocation is appropriate for current market conditions and is in accordance with the investment frameworks. The Investment Management Executive appoints and monitors the external investment managers and the custodians that are responsible for the safekeeping of the assets.  

The Investment Advisory Panel, which consists of external investment professionals as well as members of the Investment Management Executive, meets quarterly. The Panel monitors and critiques investment strategy and tactics. In addition, Group Compliance and external lawyers provide advice on investment regulations.

Risk tolerance

The investment process is formulated from the risk tolerance which is determined by reference to factors such as the underwriting cycle and the requirements of the capital providers. In a hard underwriting market capital preservation is paramount in order to support the insurance business and, therefore, the risk tolerance for the capital assets will be low. Conversely, the risk tolerance for the underwriting assets under these circumstances will be relatively high due to the strong cash flows. In a soft underwriting market the opposite applies. However, the investment risk tolerance will never be set to such a level to undermine the Group's credit ratings.  

Strategic benchmarks

Strategic benchmarks are set for the neutral asset allocation taking account of the risk tolerance.  

For the London operations, the expected timescale for future cash flows in each currency is calculated by our Group Actuarial team. These durations form the basis for the strategic benchmarks for the underwriting assets against which the assets are invested. Due to the short tail nature of the Bermudian operations the underwriting assets are currently held in AAA rated stable net asset value money market funds.  

The strategic benchmarks for capital assets, for both London and Bermuda are set by using a Value at Risk (VaR2) model, to determine the optimum asset allocation for the current risk tolerance and to ensure that appropriate solvency levels are maintained.  

Tactical ranges around these strategic benchmarks provide sufficient flexibility to ensure that an appropriate risk/reward balance is maintained in changing investment markets.  

  Investment management

Specialist external investment managers are used to manage each asset class on a segregated, pooled or commingled basis3. For regulatory reasons, the Corporation of Lloyd's manages overseas regulatory deposits in commingled funds. Otherwise, manager selection is based on a range of criteria that leads to the expectation that the managers will add value to the funds over the medium to long-term. Investment guidelines are set for each manager to ensure that they comply with the investment frameworks. The managers have discretion to manage the funds on a day-to-day basis within these guidelines. The managers are monitored on an ongoing basis. 

The managers as at 31 December 2008 were as follows:

Manager	Asset class
Segregated funds
Aberdeen Asset Management	US dollar bonds
AEGON Asset Management	Sterling bonds
ING Real Estate	Global property manager of managers
Insight Investment Management	Sterling and Euro bonds
THS Partners	Global equities
Wellington Management International Ltd	US and Canadian dollar bonds
Western Asset Management	US dollar bonds
Leadenhall Capital Partners	Insurance linked securities
Pooled vehicles
Barclays Global Investors	Sterling, Euro and US dollar Money Market Funds
Goldman Sachs Asset Management	Sterling, Euro and US dollar Money Market Funds and LIBOR plus Fund
HSBC Asset Management	US dollar Money Market Funds
Insight Investment Management	Sterling Money Market Fund
JP Morgan Asset Management	US dollar Money Market Funds
PIMCO	Sterling and US dollar bonds
Western Asset Management	US dollar Money Market Fund
Commingled funds
Corporation of Lloyd's Treasury Services	US dollar, Canadian dollar, Australian dollar,
	South African and Japanese bonds
Union Bank of Switzerland	Canadian and US dollar liquid funds

The funds under management with each manager is shown below:

	Aberdeen	AEGON	BGI	Corporation of Lloyd's	Goldman Sachs	HSBC	ING	Insight	JPMorgan	Leadenhall Capital	Morley	PIMCO	Robeco	THS	UBS	Wellington	Western	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Total as at  31 December 2008	405.4	113.6	87.6	71.2	370.7	105.2	94.7	438.7	210.5	23.9	-	93.7	-	228.2	24.2	430.5	187.1	2,885.2
%	14.1	3.9	3.0	2.5	12.9	3.6	3.3	15.2	7.3	0.8	-	3.2	-	7.9	0.8	15.0	6.5	100.0
Total as at  31 December 2007	303.7	103.6	220.3	60.0	366.1	26.9	30.0	495.9	44.3	-	46.8	80.7	383.1	273.0	13.7	-	200.1	2,648.2
%	11.5	3.9	8.3	2.3	13.8	1.0	1.1	18.7	1.7	-	1.8	3.0	14.5	10.3	0.5	-	7.6	100.0

Asset allocation

The analysis in this section covers the investments for which Amlin has direct responsibility together with £71.1 million (2007: £60.2 million) of overseas regulatory deposits managed by the Corporation of Lloyd's on Amlin's behalf in commingled funds.  

  The total value of investments in the following tables is reconciled to note 14 financial investments as follows:

	2008 £m	2007 £m
Financial investments per note 14	2,868.1	2,638.9
Assets shown separately in the notes to the accounts:
Accrued income	16.1	16.0
Net unsettled payables for investments sold	(15.9)	(1.3)
Assets not analysed in the investment risk tables that follow:
Liquid investments	(10.7)	(2.5)
Unlisted equities	(8.6)	-
Spread syndicates	(3.8)	(4.3)
Derivative hedging instruments	40.0	1.4
Total investments in asset allocation tables	2,885.2	2,648.2

The asset allocation of the Group's investments at 31 December 2008 is set out below.

	31 December 2008					31 December 2007
	Underwriting assets	Capital		Total		Underwriting assets		Capital	Total
	£m	£m		£m		£m		£m	£m
Global equities	-	190.8		190.8		-		232.1	232.1
Bonds
Government securities	550.7	331.7		882.4		585.6		252.1	837.7
Government index-linked securities	11.7	-		11.7		3.0		-	3.0
Government agencies / guaranteed	163.5	8.7		172.2		108.5		13.5	122.0
Supranational	33.7	-		33.7		44.5		2.1	46.6
Asset backed securities - Home Equity	3.5	18.4		21.9		5.4		23.9	29.3
Asset backed securities - Autos	36.7	60.1		96.8		12.5		31.6	44.1
Asset backed securities - Cards	4.5	-		4.5		5.8		-	5.8
Asset backed securities - Other	5.3	7.5		12.8		1.5		-	1.5
Mortgage backed securities - Prime	65.9	40.7		106.6		38.7		61.6	100.3
Mortgage backed securities - Alt A	2.8	2.6		5.4		1.0		6.0	7.0
Mortgage backed securities - Subprime	-	0.8		0.8		-		-	-
Corporate bonds - Basic Resources/Materials	1.6	-		1.6		1.2		-	1.2
Corporate bonds - Consumer Goods	1.4	0.8		2.2		0.2		0.8	1.0
Corporate bonds - Consumer Services	16.5	14.0		30.5		5.3		11.0	16.3
Corporate bonds - Financials	114.6	23.8		138.4		135.0		20.2	155.2
Corporate bonds - Healthcare	1.2	-		1.2		1.6		-	1.6
Corporate bonds - Industrials	6.7	10.4		17.1		2.7		2.4	5.1
Corporate bonds - Oil & Gas	4.1	4.4		8.5		4.3		5.1	9.4
Corporate bonds - Technology	0.5	6.9		7.4		-		-	-
Corporate bonds - Telecoms	5.1	7.1		12.2		6.8		6.5	13.3
Corporate bonds - Utilities	2.0	-		2.0		1.5		1.6	3.1
Pooled vehicles	100.5	127.7		228.2		53.3		121.4	174.7
Insurance linked securities	-	22.9		22.9		-		-	-
	1,132.5	688.5		1,821.0		1,018.4		559.8	1,578.2
Property	-	83.5		83.5		-		75.4	75.4
Other liquid investments
Liquidity funds and other liquid investments	262.9	527.0		789.9		461.4		301.0	762.4
	1,395.4	1489.8		2,885.2		1,479.8		1,168.3	2,648.1

Government agencies / guaranteed bonds at 31 December 2008 include £81.3 million of corporate bonds and £49.1 million of mortgage backed securities

76.8% of the pooled vehicles held at 31 December 2008 are bond funds of which 35.5% were government / agency bonds. The remaining 23.2% was held in cash. 

	31 December 2008						31 December 2007
	Underwriting assets	Capital		Total		Underwriting assets			Capital	Total
	%	%		%		%			%	%
Global equities	-	12.8		6.6		-			19.9	8.8
Bonds
Government securities	39.5	22.3		30.6		39.6			21.5	31.6
Government index-linked securities	0.8	-		0.4		0.2			-	0.1
Government agencies / guaranteed	11.7	0.6		6.0		7.3			1.2	4.6
Supranational	2.5	-		1.2		3.0			0.2	1.8
Asset backed securities - Home Equity	0.3	1.2		0.8		0.4			2.1	1.1
Asset backed securities - Autos	2.6	4.0		3.3		0.8			2.7	1.7
Asset backed securities - Cards	0.3	-		0.1		0.4			-	0.2
Asset backed securities - Other	0.4	0.5		0.4		0.1			-	0.1
Mortgage backed securities - Prime	4.7	2.7		3.7		2.6			5.3	3.8
Mortgage backed securities - Alt A	0.2	0.2		0.2		0.1			0.5	0.3
Mortgage backed securities - Subprime	-	0.1		-		-			-	-
Corporate bonds - Basic Resources/Materials	0.1	-		-		0.1			-	-
Corporate bonds - Consumer Goods	0.1	0.1		0.1		-			0.1	-
Corporate bonds - Consumer Services	1.2	0.9		1.1		0.4			0.9	0.6
Corporate bonds - Financials	8.2	1.6		4.8		9.1			1.7	5.9
Corporate bonds - Healthcare	0.1	-		-		0.1			-	0.1
Corporate bonds - Industrials	0.5	0.7		0.6		0.2			0.2	0.2
Corporate bonds - Oil & Gas	0.3	0.3		0.6		0.3			0.4	0.3
Corporate bonds - Technology	-	0.5		0.3		-			-	-
Corporate bonds - Telecoms	0.4	0.5		0.4		0.5			0.6	0.5
Corporate bonds - Utilities	0.1	-		0.1		0.1			0.1	0.1
Pooled vehicles	7.2	8.6		7.9		3.6			10.3	6.6
Insurance linked securities	-	1.5		0.8
	81.2	46.3		63.1		68.9			47.8	59.6
Property	-	5.6		2.9		-			6.5	2.8
Other liquid investments
Liquidity funds and other liquid investments	18.8	35.3		27.4		31.1			25.8	28.8
	100.0	100.0		100.0		100.0			100.0	100.0

At 31 December 2008 the industry and geographical splits were as follows:
Global equities
Industry	Total %	Region	Total %
Oil & Gas	12.5	United Kingdom	12.0
Basic Materials	5.0	USA and Canada	17.1
Industrials	9.5	Europe (ex UK)	46.7
Consumer Goods and Services	29.1	Far East	22.9
Health Care	5.5	Emerging markets	1.3
Telecommunications	15.2
Utilities	4.0
Financials	16.7
Technology	2.5
	100.0		100.0
Corporate bonds
Industry	Total %	Region	Total %
Oil & Gas	2.7	United Kingdom	17.7
Basic Materials	0.5	USA and Canada	65.6
Industrials	5.3	Europe (ex UK)	14.9
Consumer Goods and Services	10.2	Far East	1.3
Health Care	0.4	Emerging markets	0.5
Telecommunications	3.8
Utilities	0.6
Financials	74.2
Technology	2.3
	100.0		100.0
Note: The tables by industry and location include £81.3 million of corporate bonds with government guarantees.

 Note: The tables by industry and location include £59.3 million of corporate bonds with government guarantees..

At 31 December 2007 the industry and geographical splits were as follows:
Global equities
Industry	Total %	Region	Total %
Oil & Gas	9.3	United Kingdom	18.1
Basic Materials	3.9	USA and Canada	19.0
Industrials	5.9	Europe (ex UK)	37.2
Consumer Goods and Services	24.8	Far East	21.5
Health Care	3.4	Emerging markets	4.2
Telecommunications	14.9
Utilities	6.6
Financials	29.0
Technology	2.2
	100.0		100.0
Corporate bonds
Industry	Total %	Region	Total %
Oil & Gas	3.5	United Kingdom	18.9
Basic Materials	0.5	USA and Canada	61.3
Industrials	1.9	Europe (ex UK)	17.7
Consumer Goods and Services	6.5	Far East	1.3
Health Care	0.6	Emerging markets	0.8
Telecommunications	5.0	Other	-
Utilities	1.2
Financials	80.8
	100.0		100.0

Valuation risk 

Amlin's earnings are directly affected by changes in the valuations of the investments held in the portfolios. These valuations vary according to the movements in the underlying markets. Factors affecting markets include changes in the economic and political environment, risk appetites, liquidity, interest rates and exchange rates. These factors have an impact on Amlin's investments and are taken into consideration when setting strategic benchmarks and tactical asset allocation. The price of holdings can also vary due to specific risks, such as the corporate strategy and companies' balance sheet structure, which may impact the value of individual equity and corporate bond holdings. This is mitigated by holding diversified portfolios, as specified in the investment guidelines given to the fund managers. These limit the exposure to any one company, which also mitigates credit risk. In addition, the equity mandate limits the exposure to any one geographic region or industrial sector and the bond mandates limit the overall exposure to non-government holdings.  

Group assets are marked to market at bid price. Prices are supplied by the custodians whose pricing processes are covered by their published annual audits. In accordance with their pricing policy, prices are sourced from two market recognised pricing vendor sources including: FT Interactive, Bloomberg and Reuters. These pricing sources use closing trades, or where more appropriate in illiquid markets, pricing models. Theses prices are reconciled to the fund managers' records to check for reasonableness. Marked to market valuations for over the counter derivatives are supplied by the custodian and checked to the relevant counterparty and Bloomberg. Property investments are based on the most recent price available, which in some instances may be a quarter in arrears. Where a property transaction has taken place the transaction price is used if it is the most recent price available. 

Low market liquidity provides challenges to assessing fair value. To establish a fair price for Amlin's assets where there is no quoted price on an active market the master custodian, State Street, uses their European Fair Valuation (FV) solution, which has two vendor sources: FT Interactive Data and Investment Technology Group. The process is fully automated through their Vendor web platform, NAVigator. The regression methodology is based on a Multifactor Ordinary Least Squares Regression model (FT Interactive Data); each regression uses an exponentially weighted historic sample of the most recent 250 trading days of data when available. 

  Criteria such as corresponding Global Depositary Receipts / American Depository Receipts, foreign exchange rates, global and sector indices and related futures contracts are used by the FV vendors in order to determine the FV points applied to the actual closing price.  

As an additional check, where available, prices as at 31 December 2008 have been verified by Amlin using available quoted prices on Bloomberg to verify that the prices used are a good estimation for fair value. A month to month price check was completed to ensure any stale prices, defined as prices which are one month old or more are identified and investigated. As at 31 December 2008 no stale prices were identified.

Interest rate risk 

Investors' expectations for interest rates will impact bond yields4. The value of Amlin's bond holdings is therefore subject to fluctuation as bond yields rise and fall. If yields fall the capital value will rise, and visa versa. The sensitivity of the price of a bond is indicated by its duration5. The greater the duration of a security, the greater its price volatility. Typically, the longer the maturity of a bond the greater its duration.  

The maturity bands of the Group's bond holdings at year end are shown below.

	31 December 2008			31 December 2007
	Underwriting assets	Capital	Total	Underwriting assets	Capital	Total
	£m	£m	£m	£m	£m	£m
Less than 1 year	32.9	49.9	82.8	95.8	76.8	172.6
1-2 years	144.2	181.3	325.5	58.8	72.8	131.6
2-3 years	145.2	178.4	323.6	153.3	102.8	256.1
3-4 years	232.0	60.2	292.2	242.5	49.0	291.5
4-5 years	189.4	15.7	205.1	219.2	30.5	249.7
Over 5 years	288.3	75.3	363.6	195.6	106.4	302.0
	1,032.0	560.8	1,592.8	965.2	438.3	1,403.5

Note: The table above excludes pooled investments of £295.4 million (2007: £174.7 million).

The duration of underwriting assets for Syndicate 2001 is set with reference to the duration of the underlying liabilities. It should be noted that the liabilities are not currently discounted and therefore their value is not impacted by interest rate movements. Due to the inherently short tail nature of the Bermudian reinsurance exposures, these underwriting assets are all held in money market funds. For Syndicate 2001 underwriting assets, cash is raised, or the duration of the portfolio reduced, if it is believed that yields may rise, and therefore capital values fall.  

The duration of the bond and cash portfolios at year end was as follows:

	31 December 2008		31 December 2007
Underwriting assets	Assets Years	Liabilities Years	Assets Years	Liabilities Years
Syndicate 2001
Sterling	2.5	3.2	2.3	3.2
US Dollars	3.4	3.1	2.8	3.0
Euro	4.0	4.6	3.3	3.2
Canadian Dollars	3.0	4.0	2.7	3.3

Note: The table above excludes pooled vehicles. 

The asset durations above are calculated by the custodian. Some differences occur between custodian durations and those of fund managers due to the use of different prepayment assumptions. As an additional check, where available, durations as at 31 December 2008 have been verified by Amlin using Bloomberg data. In all instances the duration differences are within the ranges permitted by the investment guidelines.  

Sensitivity analysis

An indication of the potential sensitivity of the value of the bond and cash funds to changes in yield is shown below:

								Net
								(reduction)
	Syndicate 2001				Capital	Bermuda		increase in
Shift in yield	Sterling	US$	CAN$	Euro	Sterling	Underwriting	Capital	value
(basis points)	%	%	%	%	%	%	%	£m
100	(2.6)	(3.1)	(2.4)	(4.6)	(0.6)	(0.1)	(0.8)	(49)
75	(2.0)	(2.3)	(1.8)	(3.4)	(0.5)	(0.1)	(0.6)	(37)
50	(1.3)	(1.6)	(1.2)	(2.3)	(0.3)	(0.1)	(0.4)	(25)
25	(0.7)	(0.8)	(0.6)	(1.1)	(0.1)	(0.0)	(0.2)	(12)
-25	0.7	0.8	0.6	1.1	0.1	0.0	0.2	12
-50	1.3	1.6	1.2	2.3	0.2	0.1	0.4	25
-75	2.0	2.6	1.9	3.4	0.3	0.1	0.6	38
-100	2.7	3.3	2.5	4.6	0.4	0.1	0.8	50

Foreign exchange risk

Underwriting assets are held in the base currencies of sterling, euros, US dollars and Canadian dollars, which represent the majority of the Group's liabilities by currency. This limits the underwriting foreign exchange rate risk. However, foreign exchange exposure does arise when business is written in non-base currencies. These transactions are converted into sterling or US dollars (depending if the business is written out of London or Bermuda) at the prevailing spot rate once the premium is received. Consequently, there is exposure to currency movements between the exposure being written and the premium being converted. Payments in non-base currencies are converted back into the underlying currency at the time a claim is to be settled, therefore, Amlin is exposed to exchange rate risk between the claim being made and the settlement being paid.

Further foreign exchange risk arises until non-sterling profits or losses are converted into sterling. For Amlin's UK operations, it is policy to mitigate foreign exchange risk by systematically converting non-sterling profits into sterling. Given the inherent volatility in some business classes, a cautious approach is adopted on the speed and level of sales, but we seek to extinguish all currency risk on earned profit during the second year after the commencement of each underwriting year. This approach avoids the inherent dangers of 'lumpier' sales. It is not the intention to take speculative currency positions in order to make currency gains.  

  The Group's monetary assets and liabilities by currency are presented in the table below.

	31 December 2008				31 December 2007
Currency risk	Sterling	US$	CAN$	Euro	Sterling	US$	CAN$	Euro
Cash and cash equivalents	14.9	2.2	1.2	(3.0)	8.4	3.0	-	2.1
Financial investments at fair value through income	1,065.1	2,384.5	110.0	111.7	1,224.9	2,471.0	110.4	157.9
Reinsurance assets	91.2	798.0	28.2	34.0	137.5	788.3	27.9	56.5
Loans and receivables	44.2	449.2	21.5	28.7	28.7	319.0	21.9	26.7
Current income tax assets	6.9	9.0	0.3	-	4.0	-	-	-
Deferred tax assets	10.1	-	-	-	13.4	-	-	-
Property and equipment	9.1	-	-	-	5.8	-	-	-
Intangibles	76.3	-	-	39.0	-	-	-	-
Investment in jointly owned entity	1.5	-	-	-	-	-	-	-
Total monetary assets	1,320.3	3,641.9	161.2	210.4	1,422.7	3,581.3	160.2	243.2
Insurance contracts	439.5	1,711.0	84.9	117.1	456.5	1,552.2	74.3	149.5
Trade and other payables	56.8	83.6	-	7.1	177.4	51.9	-	4.9
Current income tax liabilities	2.4	6.6	-	-	25.7	-	-	-
Borrowings	233.3	99.5	-	-	227.6	99.4	-	-
Retirement benefit obligations	4.0	-	-	-	2.8	-	-	-
Deferred tax liabilities	144.6	-	-	-	128.1	-	-	-
Total monetary liabilities	880.6	1,900.7	84.9	124.2	1,018.1	1,703.5	74.3	154.4
Net monetary assets	419.3	1,742.3	76.3	86.2	404.6	1,877.8	85.9	88.8

As at the end of December 2008 the investment managers held some forward foreign exchange contracts in their portfolios to hedge non-base currency investments. These were transacted with banks with a short term rating of at least A1 and are marked to market in investment valuations.  

The Group is subject to foreign exchange risk as a result of the translation of the Group companies that have a functional currency different from the presentation currency of the Group which is sterling. In particular, as Amlin reports its financial statements in sterling, it is subject to foreign exchange risk due to the impact of changes in the sterling/US dollar exchange rate on the converted sterling value of Bermuda's dollar net assets. At 31 December 2008 these amounted to $1,389.5 million (2007: $1,478.6 million). Foreign exchange gains and losses on investments in overseas subsidiaries are taken directly to reserves in accordance with IAS21, The Effects of Changes in Foreign Exchange Rates. The profit taken to reserves for the year ended 31 December 2008 was £256.5 million (2007: £8.2 million loss). This reflects the movement in the dollar rate from 1.99 at the start of the year to 1.46 at the balance sheet date.

In order to mitigate the impact of these currency fluctuations, the Group adopts a policy of hedging up to 50% of the net dollar exposure resulting from Amlin Bermuda's capital assets. With effect from 7 March 2008, hedges in the form of options were accounted for as hedges of net investment in overseas subsidiaries in line with the hedge accounting rules of IAS 39 'Financial Instruments: Recognition and Measurement' such that all realised and unrealised fair value gains and losses on the hedging instruments are taken to reserves to match the underlying movement in the valuation of the net investment in Amlin Bermuda. At the year end hedges were in place for $460 million. These were in the form of long sterling calls/US dollar puts funded by short sterling puts/US dollar calls. The net valuation of these trades was £54.7 million loss (2007: £2.5 million loss) as at the year end. The accumulated realised and unrealised losses from hedging options recognised in reserves was £74.7 million (2007: £nil) as at the year end. A gain of £0.4 million was taken to the income statement for the period to 6 March 2008.

In addition to the hedges in the form of options, Amlin Bermuda held £182.1 million of its operating assets in Sterling at 31 December 2008. These produced a foreign exchange loss of £41.3 million during the year which is recognised in the Group's income statement.

If the USD/GBP exchange rate were to deteriorate/(improve) by 10%, the movement in the net underwriting assets and liabilities and borrowings of the Group, excluding overseas subsidiaries, would result in a £21.4 million foreign exchange gain/£17.5 million loss in the Group income statement at 31 December 2008.

  In relation to translation of overseas subsidiaries, the same exchange rate improvement would result in a £86.1 million decrease in exchange gains through consolidated reserves. This decrease would be offset by, a valuation gain of £27.2 million on the hedges in place and a £13.1 million gain through the income statement on Amlin Bermuda's Sterling operating assets. The same exchange rate deterioration would result in an additional £106.1 million exchange gain through consolidated reserves. This gain would be offset by a valuation loss of £34.0 million on the hedges in place and a £16.0 million loss through the income statement on Amlin Bermuda's Sterling operating assets.

In November 2008, the Group purchased Financière Europe Assurances SAS (FEA) a Lloyd's approved general insurance coverholder in France (note 29). The purchase resulted in intangible assets of €45.2 million, which are required to be revalued to sterling at each reporting date. Amlin is, therefore, subject to foreign exchange risk due to the impact of changes in the sterling/euro exchange rate. At year end, the net exchange gain on revaluing these assets was £4.1 million which is taken to consolidated reserves.

Liquidity risk

It is important to ensure that claims are paid as they fall due. Levels of cash are therefore managed on a daily basis. Buffers of liquid assets are also held in excess of the immediate requirements to reduce the risk of being forced sellers of any of our assets, which may result in prices below fair value being realised, especially in periods of below normal investment market liquidity.  The impact of the credit crunch intensified during 2008. As a result, global economic forecasts were reduced and institutions were forced to deleverage. In many cases, investors were forced to sell their highest quality assets in order to shore up their balance sheets, as these were the only assets with any material value and liquidity. This pushed prices down so that many non-government bonds finished the year with spreads over government bonds that represented substantial liquidity premiums in excess of their credit risk premiums.  

The Group funds its insurance liabilities with a portfolio of cash and debt securities exposed to market risk and foreign exchange risk. The following table indicates the contractual timing of cash flows arising from assets and liabilities for management of insurance contracts as of 31 December 2008:

As at 31 December 2008	No stated	Contractual cash flows (undiscounted)				Carrying
Financial assets	Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	amount
Shares and other variable yield securities	274.3	-	-	-	-	274.3
Debt and other fixed income securities	228.1	82.9	649.2	497.3	363.5	1,821.0
Cash and money market funds	789.9	-	-	-	-	789.9
Total	1,292.3	82.9	649.2	497.3	363.5	2,885.2
	No stated	Expected cash flows (undiscounted)				Carrying
Insurance liabilities	Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	amount
Insurance contracts	-	781.8	521.7	218.9	170.4	1,692.8
Less assets arising from reinsurance contracts held	-	(145.3)	(120.8)	(45.3)	(49.4)	(360.8)
Total	-	636.5	400.9	173.6	121.0	1,332.0
Difference in contractual cash flows	1,292.3	(553.6)	248.3	323.7	242.5	1,553.2
As at 31 December 2007	No stated	Contractual cash flows (undiscounted)				Carrying
Financial assets	maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	amount
Shares and other variable yield securities	307.5	-	-	-	-	307.5
Debt and other fixed income securities	174.7	172.6	387.7	541.2	302.0	1,578.2
Cash and money market funds	762.4	-	-	-	-	762.4
Total	1,244.6	172.6	387.7	541.2	302.0	2,648.1
	No stated	Expected cash flows (undiscounted)				Carrying
Insurance liabilities	Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	amount
Insurance contracts	-	568.4	415.3	181.6	184.9	1,350.2
Less assets arising from reinsurance contracts held	-	(100.8)	(82.8)	(39.1)	(47.5)	(270.2)
Total	-	467.6	332.5	142.5	137.4	1,080.0
Difference in contractual cash flows	1,244.6	(295.0)	55.2	398.7	164.6	1,568.1

Liquidity in the event of a major disaster is tested regularly using internal cash flow forecasts and realistic disaster scenarios. In addition pre-arranged revolving credit facilities are available from bank facilities (note 21). As discussed above, if a major insurance event occurs the investment strategy is reviewed to ensure that sufficient liquidity is also available in the capital assets. 

Credit risk

Credit risk is the risk that the Group becomes exposed to loss if a counterparty fails to perform its contractual obligations, including failure to perform them in a timely manner. Credit risk could therefore have an impact upon the Group's ability to meet its claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. Amlin is exposed to credit risk in its investment portfolio and with its premium and reinsurance debtors. 

As well as actual failure of a counterparty to perform its contractual obligations, 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 research carried out by the investment managers. The investment guidelines are designed to mitigate credit risk by ensuring diversification of the holdings. For each portfolio there are limits to the exposure to single issuers and to the total amount that can be held in each credit quality rating category, as determined by reference to credit rating agencies.  

£59.0 million bonds held at 31 December 2008 were subject to downgrades during the year. Amlin had £4.3 million direct exposure in bonds with companies that went into liquidation during the year, based on the last price available before the liquidation date. The majority of these holdings were subsequently sold giving a net loss, of £4.1 million. At the year end Amlin's exposure to impaired securities was de minimis.  

The table below shows the breakdown at 31 December 2008 of the exposure of the bond portfolio and reinsurance debtors by credit quality5. The table also shows the total value of premium debtors, representing amounts due from policy holders. The quality of these debtors is not graded, but based on historical experience there is limited default risk relating to these amounts. 

The reinsurance debtors represent the amounts due at 31 December 2008 as well as amounts expected to be recovered on unpaid outstanding claims (including IBNR) in respect of earned and unearned risks. Reinsurance debtors are stated net of provisions for bad and doubtful debts.

Credit risk in respect of premium debt is overseen by the Group's Broker Committee. The key controls include broker approval, annual financial review and internal rating of brokers and regular monitoring of premium settlement performance. The credit risk in respect of reinsurance debtors is primarily managed by review and approval of reinsurance security by the Group's Reinsurance Security Committee, prior to the purchase of the reinsurance contract. Guidelines are set, and monitored, that restrict the purchase of reinsurance security based on the Group's own ratings for each reinsurer and Standard & Poor's ratings. The Group holds collateral from certain reinsurers including those that are non-rated. Provisions are made against the amounts due from certain reinsurers, depending on the age of the debt and the current rating assigned to the reinsurer. The impact on profit before tax of a 1% variation in the total reinsurance debtors would be £3.9 million (2007: £3.7 million). 

31 December 2008

	Debt securities		Money Market funds and cash		Insurance and reinsurance premium debtors		Reinsurance debtors
	£m	%	£m	%	£m	%	£m	%
AAA5	1,406.4	77.2	779.3	100.0	-	-	8.3	2.1
AA	225.4	12.4	-	-	-	-	162.0	41.6
A	99.3	5.4	-	-	-	-	201.8	51.9
BBB	70.4	3.9	-	-	-	-	2.3	0.6
Other	19.5	1.1	-	-	467.3	100.0	14.5	3.8
	1,821.0	100.0	779.3	100.0	467.3	100.0	388.9	100.0

5 Credit ratings on debt securities are State Street composite ratings based on Standard & Poor's, Moody's and Fitch, depending on which agency / agencies rate each bond.

31 December 2007
	Debt securities		Money Market funds and cash		Insurance and reinsurance premium debtors		Reinsurance debtors
	£m	%	£m	%	£m	%	£m	%
AAA	1,387.9	87.9	750.6	100.0	-	-	11.8	3.2
AA	87.2	5.5	-	-	-	-	141.2	37.9
A	57.9	3.7	-	-	-	-	206.4	55.3
BBB	45.2	2.9	-	-	-	-	1.1	0.3
Other	-	-	-	-	364.9	100.0	12.3	3.3
	1,578.2	100.0	750.6	100.0	364.9	100.0	372.8	100.0

The table below shows the credit rating of the Group's asset and mortgage backed debt securities and corporate bonds.

31 December 2008	Total
Non-government bonds	£m	AAA	AA	A	BBB	Other
Corporate - Financials	138.4	29.9%	21.1%	43.0%	6.0%	-
Corporate - Other	82.7	16.2%	3.6%	32.8%	47.4%	-
Mortgage backed securities	161.9	95.7%	0.2%	1.6%	2.0%	0.5%
Asset backed securities	136.0	79.3%	6.8%	1.4%	12.4%	0.1%
Insurance linked securities	22.9	-	-	7.9%	10.8%	81.3%

The table excludes £81.3 million of corporate bonds with explicit government guarantees.  The table includes £49.1 million of government agency mortgage backed securities.

31 December 2007	Total
Non-government bonds	£m	AAA	AA	A	BBB
Corporate - Financials	214.5	49.3%	24.0%	21.2%	5.5%
Corporate - Other	51.0	8.8%	10.6%	15.2%	65.4%
Mortgage backed securities	149.5	100.0%	-	-	-
Asset backed securities	80.7	97.6%	2.4%	-	-

---

1 For 2008 and prior, Reinsurance and Property & Casualty were reported together as the Non-marine division.

2 VaR is a statistical measure, which calculates the possible loss over a year, in normal market conditions. As VaR estimates are based on historical market data this should not be viewed as an absolute gauge of the level of risk to the investments.

3 Segregated funds are managed separately for Amlin. Pooled funds are collective investment vehicles in which Amlin and other investors purchase units. Commingled funds combine the assets of several clients.

4 The yield is the rate of return paid if a security is held to maturity. The calculation is based on the coupon rate, length of time to maturity and the market price. It assumes coupon interest paid over the life of the security is reinvested 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.

 

END

 

 

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