Final Results- Part 2

Amlin PLC 28 February 2008 PART 2 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. The table below shows the breakdown at 31 December 2007 of the exposure of the bond portfolio and reinsurance debtors by credit quality. 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 2007 as well as amounts expected to be recovered on unpaid outstanding claims (including IBNR) in respect of earned and unearned risks. The Group assesses its reinsurance assets for impairment on a quarterly basis by reviewing counterparty payment history and credit grades provided by rating agencies. Reinsurance debtors are stated net of provisions for bad and doubtful debts. As of 31 December 2007 reinsurance assets at a nominal value of Â£13.3 million (2006: Â£13.2 million) were greater than 3 months overdue and provided for on the basis of credit rating to the value of Â£8.7 million (2006: Â£10.3 million). The Group hold collateral of Â£0.3 million in relation to these assets. The Group recognise a total impairment gain in respect of the recovery during the year of Â£4.3 million (2006: Â£2.3 million) on reinsurance assets and insurance receivables. 31 December 2007 Bonds Premium Reinsurance debtors debtors Â£m % Â£m % Â£m % AAA 1,240.6 89 - -- 11.8 3 AA 59.8 4 - - 141.2 38 A 57.9 4 - - 206.4 55 BBB 45.2 3 - - 1.1 1 Other - - 364.9 100 12.3 3 1,403.5 100 364.9 100 372.8 100 31December 2006 Bonds Premium Reinsurance debtors debtors Â£m % Â£m % Â£m % AAA 1,305.9 81 - - 21.1 5 AA 88.2 5 - - 157.9 38 A 160.6 10 - - 217.6 52 BBB 58.0 4 - - 3.4 1 Other - - 388.2 100 17.9 4 1,612.7 100 388.2 100 417.9 100 The table above excludes Â£174.7 million (2006: Â£75.8 million) of pooled investments. 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. Additionally there are limits on the overall level of non-government bonds that the fund managers can hold in the bond portfolios. During 2007, markets became increasingly concerned about the ability of sub-prime borrowers, that is borrowers with a poor credit history, to meet their repayment commitments, particularly in the US. The impact of this spread to concerns about the ability of insurers', who have provided guarantees that enhance the credit of the issuer, to meet those guarantees. The consequence was a widening of the yield spread of these bonds over the yield of comparable sovereign debt. At the year end within the asset and mortgage backed holdings there was Â£24.0 million direct exposure to sub-prime home equity loans debt, of which Â£22.0 million AAA rated and Â£2.0 million AA rated. In addition there was Â£3.6m indirect exposure to sub-prime in the bond pooled vehicles. Â£34.7 million of the bond portfolio was guaranteed by insurers, so called monolines. At 31 December 2007 all these bonds were AAA rated. The managers have stress tested each bond and conservatively believe in the event of failure by the guarantors that 96% of the bonds will remain investment grade. There was an additional Â£1.1 million sub-prime mortgage debt that was all AAA rated, as well as Â£28.2 million short duration asset backed auto loans which were classified as sub-prime. 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 Standard & Poor's ratings and the Group's own ratings for each reinsurer. 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 1% variation in the total reinsurance debtors would be Â£3.7 million (2006: Â£4.2 million). % of total assets Total direct Total MBS & ABS AAA AA Indirect Total Â£m Â£m MBS incl agencies 5.6% 0.2% 2.4% 8.2% 154.3 217.3 ABS ABS other 1.9% 0.1% 0.1% 2.0% 51.4 53.8 ABS Home Equity 1.0% 0.1% 0.1% 1.2% 29.3 33.2 Total 8.5% 0.4% 2.6% 11.4% 235.0 304.3 Total direct Total Alt-A AAA AA Indirect Total Â£m Â£m Collateralised 0.4% 0.0% 0.4% 9.9 9.9 Mortgage Obligations ABS Auto 0.0% 0.0% 0.0% - - ABS Home Equity 0.1% 0.0% 0.1% 2.3 2.3 Indirect 0.2% 0.2% 6.4 Total 0.5% 0.0% 0.2% 0.7% 12.2 18.6 Total direct Total Sub-prime AAA AA Indirect Total Â£m Â£m Collateralised 0.0% 0.0% 0.0% 1.1 1.1 Mortgage Obligations ABS Auto 1.1% 0.0% 1.1% 28.2 28.2 ABS Home Equity 0.8% 0.1% 0.9% 24.0 24.0 Indirect 0.1% 0.1% 3.6 Total 1.9% 0.1% 0.1% 2.1% 53.3 56.9 4. Segmental reporting by business group The tables below show segmental information by business segment. Business segments are primary segments and represent the divisions by which the business is managed. Each segment underwrites sub-classes of business which fall within the broad classes of Aviation, Marine, Non-marine and UK Commercial business. The segments are discussed in more detail in the Profitability and return section. The non-marine business group is large and comprises direct and reinsurance books of business. The segmental disclosure excludes insurance premium, income and claims expenses from the receipt of reinsurance to close as detailed in note 5 as these have no impact on profit for the year. Income and expenses by business segment Total Intra Non- UK UK Amlin group Other Year ended 31 December 2007 Aviation marine Marine Commercial divisions Bermuda items technical Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Gross premium written Analysed by geographic segment UK 11.1 49.4 50.1 134.0 244.6 105.1 (90.3) 1.6 261.0 US 21.3 300.0 41.8 0.1 363.2 90.2 - - 453.4 Europe 13.6 39.3 34.7 4.9 92.5 8.3 - - 100.8 Worldwide 0.4 17.3 21.3 1.3 40.3 - - - 40.3 Other 17.2 94.6 39.3 8.9 160.0 29.2 - - 189.2 Total 63.6 500.6 187.2 149.2 900.6 232.8 (90.3) 1.6 1,044.7 Gross premium earned 71.3 534.0 198.0 151.3 954.6 216.2 (84.3) 1.5 1,088.0 Reinsurance premium ceded (24.3) (107.8) (40.9) (21.0) (194.0) - 78.3 - (115.7) Net premium earned 47.0 426.2 157.1 130.3 760.6 216.2 (6.0) 1.5 972.3 Insurance claims and claims (34.0) (148.7) (83.6) (84.8) (351.1) (73.6) 45.2 (0.6) (380.1) settlement expenses Reinsurance recoveries 19.4 31.0 15.8 4.8 71.0 - (45.2) 0.1 25.9 Underwriting expenses (17.2) (133.2) (59.3) (31.4) (241.1) (26.4) 6.0 (1.6) (263.1) Profit attributable to 15.2 175.3 30.0 18.9 239.4 116.2 - (0.6) 355.0 underwriting Investment return 114.1 42.9 157.0 Other operating income 2.8 2.8 Agency expenses (1) (2.1) (15.3) (4.4) (4.1) (25.9) 25.9 - Other non-underwriting expenses (49.8) (2) Finance costs (2) (20.0) Profit before taxation 445.0 Combined ratio 68% 59% 81% 85% 69% 46% 63% Included within the UK gross premium written of Amlin Bermuda Ltd is premium ceded from Syndicate 2001 amounting to Â£90.3 million (2006: Â£100.8 million) on reinsurance contracts undertaken at commercial rates. (1) Agency expenses allocated to segments represent fees and commission payable to Amlin Underwriting Limited; (2) Other non-underwriting expenses and finance costs are incurred in support of the entire business of the Group and have not been allocated to particular segments. Assets and liabilities by business segment Total Intra Non- UK UK Amlin group Other At 31 December 2007 Aviation marine Marine Commercial divisions Bermuda items technical Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Assets Assets attributable to business 272.8 934.7 382.5 534.5 2,124.5 959.4 (34.8) 10.9 3,060.0 segments Assets allocated between the UK 519.5 519.5 and Bermuda Total assets 3,579.5 Liabilities Liabilities attributable to 251.3 729.2 346.5 493.4 1,820.4 217.7 (34.8) 9.8 2,013.1 business segments Liabilities allocated between 514.1 514.1 the UK and Bermuda Total liabilities 2,527.2 Total net assets 1,052.3 The net assets of Amlin Bermuda Ltd are located in Bermuda and the US. The majority of the other assets of the Group are located in the UK, the US and Canada. The corresponding liabilities are also concentrated in these countries, but given the nature of the Group's business some of the liabilities will be located elsewhere in the world. During the year, Amlin Bermuda Ltd purchased Â£2.8 million (2006: Â£1.7 million; Amlin Bermuda Â£1.9 million) of fixed assets. These cannot be allocated to a specific segment. Depreciation has been charged on property and equipment for the year amounting to Â£3.0 million (2006: Â£3.1 million) of which Â£0.1 million has been charged to Aviation, Â£0.7 million to Non-marine, Â£0.3 million to Marine, Â£0.7 million to UK Commercial, Â£0.6 million to Amlin Bermuda Ltd with the remainder not being allocated to a specific segment. 4 Segmental reporting by business group (continued) Income and expenses by business segment Total Intra Non- UK UK Amlin group Other Year ended 31 December 2006 Aviation marine Marine Commercial divisions Bermuda items technical Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Gross premium written Analysed by geographic segment UK 12.7 49.5 53.1 133.7 249.0 110.3 (100.8) - 258.5 US 29.5 344.2 51.6 0.3 425.6 88.8 - - 514.4 Europe 14.1 37.9 39.5 5.8 97.3 3.7 - - 101.0 Worldwide 0.4 15.8 19.2 1.6 37.0 1.8 - - 38.8 Other 19.0 107.2 47.5 8.6 182.3 18.9 - (0.1) 201.1 Total 75.7 554.6 210.9 150.0 991.2 223.5 (100.8) (0.1) 1,113.8 Gross premium earned 88.8 569.5 192.7 163.2 1,014.2 132.5 (59.3) (0.1) 1,087.3 Reinsurance premium ceded (29.2) (87.3) (31.8) (21.4) (169.7) - 56.3 - (113.4) Net premium earned 59.6 482.2 160.9 141.8 844.5 132.5 (3.0) (0.1) 973.9 Insurance claims and claims (48.9) (179.8) (111.0) (103.0) (442.7) (47.5) 29.8 (0.3) (460.7) settlement expenses Reinsurance recoveries 19.6 7.7 41.2 20.6 89.1 - (30.8) 0.2 58.5 Underwriting expenses (24.0) (162.4) (67.6) (37.8) (291.8) (16.0) 4.0 - (303.8) Profit attributable to 6.3 147.7 23.5 21.6 199.1 69.0 - (0.2) 267.9 underwriting Investment return 83.1 32.0 115.1 Other operating income 1.8 1.8 Agency expenses (1) (2.6) (14.3) (3.3) (4.5) (24.7) 24.7 - Other non-underwriting expenses (18.3) (2) Finance costs (2) (23.8) Profit before taxation 342.7 Combined ratio 89% 69% 85% 85% 76% 48% 72% (1) Agency expenses allocated to segments represent fees and commission payable to Amlin Underwriting Limited; (2) Other non-underwriting expenses and finance costs are incurred in support of the entire business of the Group and have not been allocated to particular segments. Assets and liabilities by business segment Total Intra Non- UK UK Amlin group Other At 31 December 2006 Aviation marine Marine Commercial divisions Bermuda items technical Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Assets Assets attributable to business 268.1 1,012.8 417.4 546.0 2,244.3 739.4 (99.6) 13.5 2,897.6 segments Assets allocated between the UK 549.2 549.2 and Bermuda Total assets 3,446.8 Liabilities Liabilities attributable to 255.4 873.2 374.0 492.4 1,995.0 135.7 (99.6) 11.7 2,042.8 business segments Liabilities allocated between 467.6 467.6 the UK and Bermuda Total liabilities 2,510.4 Total net assets 936.4 5 Net earned premium 2007 2006 Â£m Â£m Insurance contracts premium Gross premium written 1,044.7 1,113.8 Change in unearned premium provision 43.3 (26.5) Gross premium earned 1,088.0 1,087.3 Insurance premium revenue from the receipt of - 78.8 reinsurance to close Reinsurance premium ceded Reinsurance premium payable (106.4) (100.3) Change in unearned reinsurance premium (9.3) (13.1) provision (115.7) (113.4) Net earned premium 972.3 1,052.7 The insurance premium revenue from the receipt of reinsurance to close represents the premium received from the third party syndicate members on the 2003 year of account who sold their capacity to Amlin, for use by Amlin's corporate members, for the following year of account of Syndicate 2001. An identical amount is recorded as a movement in claims, representing the additional liabilities taken on by Amlin from the third party members. Overall these transactions have no impact on profit for the year. For the 2004 year of account and onwards 100% of Syndicate 2001 capacity is owned by the Group. 6 Investment return 2007 2006 Â£m Â£m Investment income - dividend income 12.5 4.5 - interest income 77.8 67.7 Cash and cash equivalents interest income 25.1 26.5 115.4 98.7 Net realised gains/(losses) on assets held for trading - equity securities 21.6 7.4 - debt securities (1.5) (0.3) - property (0.1) - 20.0 7.1 Net fair value gains/(losses) on assets held for trading - equity securities (7.1) 10.3 - debt securities 30.2 (1.0) - property (0.1) - - derivative instruments (1.4) - 21.6 9.3 157.0 115.1 7 Insurance claims and loss adjustment expenses 2007 2006 Â£m Â£m Gross Current year insurance claims and loss 502.7 515.7 adjustment expenses Reduced costs for prior period insurance (122.6) (55.0) claims 380.1 460.7 Insurance claims and loss adjustment expenses - 78.8 relating to the receipt of reinsurance to close (note 5) Reinsurance Current year insurance claims and loss (39.5) (44.7) adjustment expenses recoverable from reinsurers Reduced/(additional) costs for prior period 13.6 (13.8) claims recoverable from reinsurers (25.9) (58.5) Total net insurance claims and loss 354.2 481.0 adjustment expenses 8 Expenses for the acquisition of insurance contracts 2007 2006 Â£m Â£m Expenses for the acquisition of insurance 187.0 203.4 contracts Changes in deferred expenses for the 9.0 (8.0) acquisition of insurance contracts 196.0 195.4 9 Other operating expenses 2007 2006 Â£m Â£m Expenses related to underwriting Employee expenses, excluding employee 26.1 24.9 incentives Lloyd's expenses 22.5 21.0 Other administrative expenses 25.5 26.0 Underwriting exchange (gains)/ losses (7.0) 36.5 67.1 108.4 Other expenses Employee expenses, excluding employee 10.9 6.4 incentives Employee incentives 31.4 18.6 Asset management fees 3.1 1.3 Other administrative expenses 5.4 1.6 Group company exchange gains (1.0) (9.6) 49.8 18.3 Total 116.9 126.7 10 Finance costs 2007 2006 Â£m Â£m Letter of credit commission 1.1 1.3 Subordinated bond interest 18.8 21.0 Loan interest 0.1 1.5 20.0 23.8 11 Tax 2007 2006 Â£m Â£m Current tax UK corporation tax 52.6 57.0 Foreign tax suffered 4.1 (0.1) Double tax relief (3.2) - 53.5 56.9 Deferred tax - current year Movement in assets 5.5 4.8 Movement in liabilities 35.5 13.2 41.0 18.0 Deferred tax - prior year Movement in assets 0.2 - Movement in liabilities (0.8) - (0.6) - Deferred tax - change in tax rate Movement in assets 0.5 - Movement in liabilities (2.2) - (1.7) - Taxes on income 92.2 74.9 In addition to the above, deferred tax Â£1.3 million has been charged directly to equity (2006: Â£1.3 million credit). Underwriting profits and losses are recognised in the technical account on an annual accounting basis, recognising the results in the period in which they are earned. UK corporation tax is charged in the period in which the underwriting profits are actually paid by the Syndicate to the corporate members. Deferred tax is provided on the annually accounted underwriting result with reference to the forecast ultimate result of each of the years of account included in the annually accounted underwriting. Where the forecast ultimate result for a year of account is a taxable profit, deferred tax is provided in full on the movement on that year of account included in the period's annually accounted underwriting result. Where the forecast ultimate result for a year of account is a loss, deferred tax is only provided for on the movement on that year of account included in the period's annually accounted Syndicate underwriting result to the extent that forecasts show that the taxable loss will be utilised in the foreseeable future. Deferred tax has been provided on the annually accounted underwriting result for this accounting period of Â£288.5 million (2006: Â£218.4 million). Deferred tax assets on loss provisions in respect of non-aligned syndicate participations (see note 15) are only provided for, to the extent that forecasts show that it is more likely than not that the ultimate taxable underwriting losses represented by these provisions will be utilised within the foreseeable future. Deferred tax has been provided in full on non-aligned syndicate loss participation provisions of Â£3.6 million (2006: Â£3.8 million). Reconciliation of tax expense The UK standard rate of corporation tax is 30% (2006: 30%), whereas the current tax assessed for the year ended 31 December 2007 as a percentage of profit before tax is 20.7% (2006: 21.9%). The reasons for this difference are explained below: 2007 2007 2006 2006 Â£m % Â£m % Profit before tax 445.0 342.7 Taxation on profit on ordinary 133.5 30.0 102.8 30.0 activities calculated at the standard rate of corporation tax in the UK Non-deductible or non-taxable items (2.3) (0.5) 4.5 1.3 Utilisation of unprovided for - - (3.8) (1.1) capital losses Tax rate differences on overseas (32.2) (7.2) (29.3) (8.5) subsidiaries Under/(over) provision in respect (0.9) (0.2) 0.8 0.2 of prior periods Reduction in future UK tax rate (6.8) (1.6) - - Irrecoverable overseas tax 0.9 0.2 (0.1) - Taxes on income 92.2 20.7 74.9 21.9 The Group's tax provision for 2007 has been prepared on the basis that the Group's Bermudian subsidiaries are non-UK resident for UK corporation tax purposes. The corporation tax rate for Bermudian companies is currently 0% (2006: 0%). A deferred tax liability of Â£20.3 million (2006: Â£8.9 million) has been provided for on profits of the Group's overseas subsidiaries expected to be distributed in the foreseeable future. A deferred tax liability has not been provided on the undistributed profits of the overseas subsidiaries of Â£169.5 million (2006: Â£69.1 million) because the company is not expected to distribute these profits in the foreseeable future. No deferred tax asset has been recognised on capital losses on investments as these were all utilised by the Group during 2007 (2006: Â£5.4 million asset). A deferred tax provision of Â£0.1 million (2006: Â£6.4 million) has been made on unrealised capital gains arising within the Group during this accounting period. Deferred tax has been provided for at the tax rate in force when the temporary differences are expected to reverse. The tax rates used are 28.5% for temporary differences expected to reverse in 2008 and 28% for temporary differences expected to reverse in 2009 or later. The Group is subject to US tax on US underwriting profits. No provision has been made in respect of such tax arising in 2007 (2006: Â£nil) as any net provision is likely to be immaterial and would be offset by brought forward US tax losses in the Group. Deferred income tax The deferred tax asset is attributable to temporary differences arising on the following: Other Provisions Other Capital Pension timing for losses provisions losses provisions differences Total Â£m Â£m Â£m Â£m Â£m Â£m At 1 January 2007 1.1 5.7 5.4 2.0 6.7 20.9 Movements in the - (0.3) (5.4) (1.1) 1.1 (5.7) year Effect of change in tax rate - Income (0.1) (0.2) - (0.1) (0.1) (0.5) statement - Equity - - - - (1.3) (1.3) At 31 December 1.0 5.2 - 0.8 6.4 13.4 2007 The deferred tax liability is attributable to temporary differences arising on the following: Unrealised Syndicate Other Underwriting capital capacity Overseas timing results gains Â£m earnings differences Total Â£m Â£m Â£m Â£m Â£m At 1 January 2007 76.0 6.4 4.1 8.9 - 95.4 Movements in the 28.2 (6.3) 0.7 12.0 - 34.6 year Effect of change (1.3) - (0.3) (0.6) - (2.2) in tax rate Acquisition of - - - - 0.3 0.3 subsidiary At 31 December 102.9 0.1 4.5 20.3 0.3 128.1 2007 No deferred tax asset has been provided for on capital losses as these were all utilised during the year (2006: Â£18 million) Deferred tax assets have not been provided on US net operating losses of Â£30.2 million (2006: Â£31.0 million) carried forward due to uncertainty over their future use. 12 Net foreign exchange gains/(losses) The Group recognised foreign exchange gains of Â£8.0 million (2006: Â£26.9 million loss) during the year. The Group writes business in many currencies and although a large amount of the Group's balance sheet assets and liabilities are matched, minimising the effect of movements in foreign exchange rates on the Group's result, it is not possible, or practical, to match exactly all assets and liabilities in currency and accounting standards dictate that certain classes of assets and liabilities be translated at different rates (see Foreign currency translation accounting policy). Included within the Group's foreign exchange gains is Â£14.7 million (2006: Â£27.9 million loss) due to the translation of non-monetary assets and liabilities at historic average rates. 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. Amlin Bermuda Holdings Ltd and Amlin Bermuda Ltd report in US dollars. Amlin Singapore Pte Limited reports in Singapore dollars. The loss taken to reserves for the year ended 31 December 2007 was Â£8.2 million (2007: Â£77.3 million). This reflects the Group's investment of $1 billion of capital in Amlin Bermuda Ltd adjusted for the movement in the dollar rate from 1.96 at the start of the year to 1.99 at the balance sheet date. 13 Cash and cash equivalents Cash and cash equivalents represents cash at bank and in hand and short-term bank deposits which can be recalled within 24 hours. 14 Financial investments At At valuation valuation At cost At cost 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Financial assets held for trading at fair value through income Shares and other variable yield 232.1 248.3 230.4 218.7 securities Debt and other fixed income 1,506.7 1,599.6 1,485.6 1,599.8 securities Overseas deposits 60.2 55.9 60.2 55.9 Property 75.4 43.1 72.7 42.1 Other financial assets at fair value through income Participation in investment pools 748.0 126.6 748.0 111.7 Deposits with credit institutions 17.9 294.2 17.9 268.0 Derivative instruments (1.4) - - - 2,638.9 2,367.7 2,614.8 2,296.2 In Group owned companies 1,061.0 1,105.0 1,051.1 1,140.3 In Syndicate 2001 1,573.6 1,257.1 1,559.4 1,150.3 In non-aligned syndicates 4.3 5.6 4.3 5.6 participations (see note 15) 2,638.9 2,367.7 2,614.8 2,296.2 Listed investments included in Group: owned total are as follows: Shares and other variable yield 232.1 291.4 230.4 230.7 securities Debt and other fixed income 1,506.5 1,596.7 1,485.6 1,599.6 securities 1,738.6 1,888.1 1,716.0 1,830.3 As explained in note 24, Â£16.7 million (2006: Â£382.1 million) of the Group's investments are charged to Lloyd's to support the Group's underwriting activities. Overseas deposits represent balances held with overseas regulators to permit underwriting in certain territories. The assets are managed by Lloyd's on a pooled basis. 2007 2006 Â£m Â£m At 1 January 2,367.7 2,078.2 Exchange adjustments (2.5) (68.5) Net purchases 232.1 341.6 Realised gains on disposals 20.0 7.1 Unrealised investment gains 21.6 9.3 At 31 December 2,638.9 2,367.7 15 Insurance contracts and reinsurance assets Other Unearned insurance Claims premium assets and reserves reserves liabilities Total Â£m Â£m Â£m Â£m Insurance liabilities At 1 January 1,704.3 523.8 114.8 2,342.9 2006 Movement in the (156.8) 27.7 (36.1) (165.2) year Exchange (130.0) (6.0) (10.1) (146.1) adjustments At 31 December 1,417.5 545.5 68.6 2,031.6 2006 Movement in the (70.9) (42.4) (35.7) (149.0) year Exchange 3.6 (1.3) 1.1 3.4 adjustments At 31 December 1,350.2 501.8 34.0 1,886.0 2007 Reinsurance assets At 1 January 604.6 24.2 387.3 1,016.1 2006 Movement in the (198.7) 13.5 (54.5) (239.7) year Exchange (48.9) - (32.2) (81.1) adjustments At 31 December 357.0 37.7 300.6 695.3 2006 Movement in the (89.4) (10.2) 21.3 (78.3) year Exchange 2.6 - (2.7) (0.1) adjustment At 31 December 270.2 27.5 319.2 616.9 2007 Other insurance liabilities are comprised principally of premium payable for reinsurance, including reinstatement premium. Other insurance assets are comprised principally of amounts recoverable from reinsurers in respect of paid claims and premium receivable on inward reinsurance business, including reinstatement premium. Further information on the calculation of claims reserves and the risks associated with them is provided in the risk disclosures in note 3. Claims reserves are further analysed between notified outstanding claims and incurred but not reported claims below: 2007 2006 Â£m Â£m Notified outstanding claims 800.3 843.4 Claims incurred but not 549.9 574.1 reported Insurance contracts claims 1,350.2 1,417.5 reserve It is estimated, using historical settlement trends, that Â£568.4 million (2006: Â£564.2 million) of the claims reserves included, as at 31 December 2007, will settle in the next twelve months. From 1994 to 1999 the Group participated on a number of Lloyd's syndicates other than those managed by the Group. From 2000 the Group ceased to underwrite directly on non-aligned syndicates. However, a number of syndicates remain 'open' and Amlin's final liabilities are still to be finalised. Provisions are made for potential future insurance claims. Included within the claims provisions in the table above are provisions in respect of 'non-aligned syndicate participations' of Â£3.9 million (2006: Â£4.2 million). Syndicates that remain open at 31 December 2007 are set out in the table below. Syndicate capacity Managing agent Non-aligned 1999 1998 1997 syndicate Â£m Â£m Â£m Non-marine Jago Managing Agency Ltd 205 2.25 - - A E Grant (Underwriting 991 2.93 2.35 - Agencies) Ltd Duncanson & Holt Syndicate 1101 - 2.50 2.50 Management Ltd Total Non-marine 5.18 4.85 2.50 Aviation Duncanson & Holt Syndicate 957 - 3.00 3.00 Management Ltd Total capacity Capacity remaining open at 31 5.18 7.85 5.50 December 2007 2007 2006 Â£m Â£m Reinsurers' share of insurance liabilities 638.5 722.2 Less provision for impairment of receivables from (21.6) (26.9) reinsurers' Reinsurance assets 616.9 695.3 16 Loans and receivables, including insurance receivables 2007 2006 Â£m Â£m Receivables arising from insurance contracts 77.0 99.3 Less provision for impairment of receivables from (2.1) (1.3) contract holders and agents Deferred acquisition costs 108.2 118.3 Insurance receivables 183.1 216.3 Other debtors 11.4 22.6 Prepayments and other accrued income 25.4 29.0 Other loans and receivables 36.8 51.6 219.9 267.9 2007 2006 Â£m Â£m Current portion 210.0 267.1 Non-current portion 9.9 0.8 219.9 267.9 The reconciliation of opening and closing deferred acquisition costs is as follows: 2007 2006 Â£m Â£m At 1 January 118.3 110.4 Exchange adjustments (0.2) (0.1) Movements in the year (9.9) 8.0 At 31 December 108.2 118.3 17 Share capital 2007 2007 2006 2006 Number Â£m Number Â£m Authorised ordinary shares At 1 January authorised ordinary 800,000,000 200.0 800,000,000 200.0 shares of 25p each Reduction of authorised ordinary (88,888,889) - - - shares Cancelled ordinary shares (7) - - - At 31 December authorised 711,111,104 200.0 800,000,000 200.0 ordinary shares of 28.125p (2006: 25p) Authorised redeemable non-cumulative preference shares ('B shares') Authorised B shares 544,624,000 122.0 - - At 31 December authorised B 544,624,000 122.0 - - shares of 22.4p each Allotted, called up and fully paid ordinary shares At 1 January Authorised ordinary 534,006,720 133.5 530,113,127 132.5 shares at 25p Shares issued 3,695,766 0.9 3,893,593 1.0 Reduction of issued ordinary (59,718,291) - - - shares At 31 December allotted ordinary 477,984,195 134.4 534,006,720 133.5 shares of 28.125p Issued redeemable non-cumulative preference shares ('B shares') Issued B shares 537,464,619 120.4 - - At 31 December issued B shares 537,464,619 120.4 - - of 22.4p each The ordinary shares issued on exercise of options were issued for a total consideration of Â£4.5 million at an average price of 122 pence per share (2006: Â£3.7 million, average price 98 pence). Return of capital On 14 November, the Group announced its intention to return approximately Â£120 million of capital to shareholders by way of a B share issue combined with a consolidation of Amlin's existing shares on the basis of 8 new ordinary shares for 9 existing ones. This was subsequently approved by the shareholders' at an Extraordinary General Meeting held on 12 December 2007. B shares were issued on 17 December 2007 to existing shareholders on the basis of one B share for each ordinary share held on 14 December 2007. Each B share enabled the shareholder to redeem the share at 22.4 pence per share at various dates in the future up to August 2009 or alternatively to receive a B share initial dividend in January 2008 of 22.4 pence per share. Following such dividend receipt, the relevant B shares were converted into deferred shares which were themselves redeemed on 14 January 2008 for a total redemption value of one penny in all. Holders of B shares not redeemed or converted into deferred shares on or around the initial redemption date in January 2008 have the right, subject to the Company having profits available for distribution, to receive continuing dividends at the rate of 75% of the sterling six month LIBOR. The B shares have no right to vote at general meetings of the Company other than to wind up the Company. They are fully transferable but are not listed on any stock exchange. The amount outstanding to be returned to B shareholders at 31 December 2007 has been recognised as a liability in note 19. The total cost of the issue including expenses was Â£120.4 million which has been charged against share premium. 18 Reserves Share Other ESOT Retained Minority premium reserves shares earnings interest Â£m Â£m Â£m Â£m Â£m At 1 January 2007 347.6 (21.8) (0.6) 477.4 0.3 Issues of share 3.6 - - - - capital on exercise of options over new shares (note 17) Gains on revaluation - (0.1) - - - of employee share ownership trust recognised directly in equity Net purchase of - - (1.5) - - treasury shares Share option valuation - 1.2 - - - charge Deferred tax - (1.3) - - - Currency translation - (8.2) - - - differences on overseas operations Profit for the - - - 352.7 0.1 financial year Dividends (note 22) - - - (111.1) - Return of capital (120.4) - - - - (note 17) At 31 December 2007 230.8 (30.2) (2.1) 719.0 0.4 Share Other ESOT Retained Minority premium reserves shares earnings interest Â£m Â£m Â£m Â£m Â£m At 1 January 2006 344.0 52.7 (1.7) 257.3 - Issues of share 3.6 - 1.1 - - capital on exercise of options over new shares Gains on revaluation 0.2 - - - of employee share ownership trust recognised directly in equity Gain on defined - 0.1 - - - benefit pension scheme Share option valuation - 1.1 - - - charge Deferred tax - 1.3 - - - Currency translation - (77.2) - - - differences on overseas operations Profit for the - - - 267.5 0.3 financial year Dividends (note 22) - - - (47.4) - At 31 December 2006 347.6 (21.8) (0.6) 477.4 0.3 Other reserves is comprised of Â£45.7 million (2006: Â£45.7 million) being the cumulative amount of goodwill written off to reserves on acquisitions prior to January 1999, a capital redemption reserve, charges for share options issued, deferred tax in respect of share options and the cumulative foreign exchange losses of Â£59.3 million (2006: Â£73.4 million) on investments in overseas operations. In January 2008, 423,449,598 B shares were redeemed by shareholders. 102,635,603 B share holders elected to take a dividend and these shares were converted into deferred shares and redeemed. The remaining 11,379,418 B shares remain outstanding. Consequently Â£117.8 million has been charged to retained earnings in 2008 and a capital redemption reserve created. 19 Trade and other payables and deferred income 2007 2006 Â£m Â£m Trade payables and accrued expenses 84.3 66.3 Social security and other tax payables 2.4 2.1 Issued redeemable non-cumulative preference 120.4 - shares (note 17) 207.1 68.4 2007 2006 Â£m Â£m Current portion 201.4 57.9 Non-current 5.7 10.5 portion 207.1 68.4 20 Borrowings 2007 2006 Â£m Â£m Bank loans 0.1 0.9 Subordinated 277.4 277.9 debt 277.5 278.8 2007 2006 Â£m Â£m Current portion 0.1 0.9 Non-current 277.4 277.9 portion 277.5 278.8 The Group's borrowings comprise three issues of subordinated debt. Details of the subordinated debt issues are as follows: Issue date Principal Reset date Maturity Interest Interest amount date rate to rate from reset reset date date to maturity % date % 23 November $50m November November 7.11 LIBOR + 2004 2014 2019 3.48 15 March 2005 $50m March 2015 March 2020 7.28 LIBOR + 3.32 25 April 2006 Â£230m December December 6.50 LIBOR + 2016 2026 2.66 The debt will be redeemed on the maturity dates at the principal amounts, together with any outstanding accrued interest. The Company has the option to redeem the bonds in whole, subject to certain requirements, on the reset dates or any interest payment date thereafter at the principal amount plus any outstanding accrued interest. The directors' estimation of the fair value of the Group's borrowings is Â£322.2 million (2006: Â£306.3 million). On 13 November 2006 the Company entered into a new debt facility with its banks which is available for three years from the signing date and provides an unsecured Â£200 million multicurrency revolving credit facility available by way of cash advances or sterling letters of credit (LOC). The facility is guaranteed by the Company's subsidiaries Amlin Corporate Services Limited and Amlin Investments Limited. In December 2006 Amlin Bermuda Ltd entered into a $300 million LOC and Revolving Credit Facility. The facility comprised a secured LOC facility for $200 million for a three year term and an unsecured revolving credit facility for $100 million for a term of 364 days, twice renewable, which has been renewed once in December 2007. The secured LOC facility is secured by a registered charge over a portfolio of assets managed by Aberdeen Asset Management Limited with State Street Bank and Trust Company as custodian. As at 31 December 2007 $28.7million (31 December 2006: $1.7 million) LOCs were issued with an additional $1.8m LOCs issued in January 2008. Obligations due under finance leases and hire purchase contracts are payable as follows: 2007 2006 Â£m Â£m Within one - 0.1 year 21 Earnings and net assets per share Earnings per share are based on the profit attributable to shareholders and the weighted average number of shares in issue during the period. Shares held by the Employee Share Ownership Trust (ESOT) are excluded from the weighted average number of shares. Basic and diluted earnings per share are 2007 2006 as follows: Profit attributable to equity holders of Â£352.7m Â£267.5m the Parent Company Weighted average number of shares in 532.0m 531.8m issue Dilutive shares 6.1m 6.4m Adjusted average number of shares in 538.1m 538.2m issue Basic earnings per share 66.3p 50.4p Diluted earnings per share 65.5p 49.8p Basic and tangible net assets per share 2007 2006 are as follows: Net assets Â£1,052.3m Â£936.4m Adjustments for intangible assets (Â£69.0m) (Â£66.0m) Tangible net assets Â£983.3m Â£870.4m Number of shares in issue at end of 478.0m 534.0m period Adjustment for ESOT shares (1.1m) (0.8m) Basic number of shares after ESOT 476.9m 533.2m adjustment Net assets per share 220.7p 175.6p Tangible net assets per share 206.2p 163.2p 22 Dividends The amounts recognised as distributions to equity holders are as follows: Group 2007 2006 Â£m Â£m Final dividend for the year ended: - 31 December 2006 of 7.8 pence per ordinary 41.7 - share - 31 December 2005 of 6.2 pence per ordinary - 25.0 share Interim dividend for the year ended: - 31 December 2007 of 5.0 pence per ordinary 26.7 - share - 31 December 2006 of 4.2 pence per ordinary - 22.4 share Special dividend for the year ended: - 31 December 2006 of 8.0 pence per ordinary 42.7 - share 111.1 47.4 The final ordinary dividend of 10.0 pence per ordinary share for 2007, amounting to Â£47.8 million, payable in cash was approved by the Board on 27 February 2008 and has not been included as a liability as at 31 December 2007. 23 Principal exchange rates The principal exchange rates used in translating foreign currency assets, liabilities, income and expenditure in the production of these financial statements were: Average rate Year end rate 2007 2006 2007 2006 US dollar 2.00 1.84 1.99 1.96 Canadian 2.15 2.09 1.96 2.28 dollar Euro 1.46 1.47 1.36 1.48 24 Contingent liabilities The Group has entered into various deeds of covenant in respect of certain corporate member subsidiaries to meet each such subsidiary's obligations to Lloyd's. At 31 December 2007, the total guarantee given by the Group under these deeds of covenant (subject to limited exceptions) amounted to Â£16.7 million (2006: Â£382.1 million). The obligations under the deeds of covenant are secured by a fixed charge over investments of the same value at the relevant valuation date and a floating charge over all the investments and other assets of Amlin Investments Limited, in favour of Lloyd's. Lloyd's has the right to retain the income on the charged investments, although it is not expected to exercise this right unless it considers there to be a risk that one or more of the covenants might need to be called and, if called, might not be honoured in full. In October 2007, the Group transferred Â£397.5 million of assets from Amlin Investments Limited to Syndicate 2001 Premium Trust Fund. The charges in favour of Lloyd's over these investments were released at that time. The transfer to Syndicate 2001 Premium Trust Fund was made by way of sale from Amlin Investments Limited to Amlin Corporate Member Limited (both wholly owned subsidiaries of the Group) in its capacity as the corporate member of the Syndicate. As liability under each deed of covenant is limited to a fixed monetary amount, the enforcement by Lloyd's of any deed of covenant in the event of a default by a corporate member, where the total value of investments has fallen below the total of all amounts covenanted, may result in the appropriation of a share of the Group's Funds at Lloyd's that is greater than the proportion which that subsidiary's overall premium limit bears to the total overall premium limit of the Group's Lloyd's underwriting. 25 Cash generated from operations 2007 2006 Notes Â£m Â£m Profit on ordinary activities 445.0 342.7 before taxation Adjustments: - Depreciation charge 3.0 3.2 Amortisation charge 0.8 - Finance costs 20.0 24.1 Interest received 6 (102.9) (97.5) Dividends received 6 (12.5) (4.5) (Realised)/unrealised gains on 6 (41.6) (16.4) investments Movement in operating assets and liabilities: Net purchases of financial (232.1) (349.4) investments Decrease in loans and 51.9 79.3 receivables Decrease in reinsurance 69.2 320.8 contract assets Decrease in insurance contract (136.4) (311.1) liabilities Increase in trade and other 16.2 1.3 payables Increase in retirement (4.7) (4.9) benefits Exchange gains on long term (0.8) (11.6) borrowings Other non-cash movements (4.6) 3.8 Cash generated from operations 70.5 (20.2) 26 Acquisition of subsidiary On 2 July 2007, the Group acquired 100% of the share capital and voting rights in Allied Cedar Insurance Group Limited, the holding company of Allied Underwriting Agencies Limited and Cedar Insurance Company Limited. The Allied Cedar Insurance Group Limited is a general insurance underwriting operation specialising in UK property personal lines business. Purchase consideration: Â£m - Initial consideration 3.4 - Deferred consideration 2.7 - Direct cost relating to the acquisition 0.1 Total purchase consideration 6.2 Fair value of assets acquired (see below) 6.2 Goodwill - The assets and liabilities arising from the acquisition are as follows: Fair value Acquiree's carrying amount Â£m Â£m Cash and cash equivalents 0.1 0.1 Property, plant and equipment 0.4 0.4 Unlisted fixed assets - 0.3 Insurance receivables 2.8 1.8 Financial investments - 3.0 3.0 available for sale Intangible assets 3.8 - Financial liabilities (2.2) (2.2) Insurance liabilities (1.1) (1.1) Net tax liability (0.6) (0.3) Net assets acquired 6.2 2.0 Intangible assets relate to the costs of acquiring rights to customer contractual relationships. The acquiree's carrying amount shown represents the balance sheet of Allied Cedar Insurance Group Limited as at 30 June 2007 prepared in accordance with UK GAAP. Allied Cedar Insurance Group Limited contributed Â£1.6 million gross earned premium and Â£0.2 million to the Group's profit before tax for the period between 2 July 2007 and 31 December 2007. If the acquisition of Allied Cedar Insurance Group Limited had been completed on the first day of the financial year, group gross earned premium for the period would have been Â£1,089.5 million and group profit attributable to equity holders of the parent would have been Â£352.8 million. 27 Group owned net assets The assets and liabilities attributable to Group owned companies, as opposed to the Group's syndicate participations, are summarised below: In In Group In Amlin In Group In In owned Syndicate Bermuda owned Syndicate Amlin companies 2001 Ltd Total companies 2001 Bermuda Ltd Total 2007 2007 2007 2007 2006 2006 2006 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Investments Financial 207.0 1,577.2 854.7 2,638.9 468.2 1,257.4 642.1 2,367.7 investments Other assets Intangible assets 69.0 - - 69.0 66.0 - - 66.0 Property and 4.8 - 1.0 5.8 4.6 - 1.6 6.2 equipment Cash and cash 7.0 3.9 0.7 11.6 14.4 (0.2) 2.3 16.5 equivalents Loans and (29.0) 113.5 98.5 183.0 (32.5) 159.3 89.5 216.3 receivables - insurance assets Loans and (3.8) 37.5 3.2 36.9 (10.6) 59.3 2.9 51.6 receivables - other Deferred income tax 13.4 - - 13.4 20.9 - - 20.9 Current income tax 0.5 3.5 - 4.0 2.0 4.3 - 6.3 Reinsurance assets (87.5) 704.5 (0.1) 616.9 (56.0) 751.3 - 695.3 Total assets 181.4 2,440.1 958.0 3,579.5 477.0 2,231.4 738.4 3,446.8 Current liabilities Trade and other (172.1) (19.5) (10.4) (202.0) (35.9) (20.5) (1.5) (57.9) payables Current income tax (25.7) - - (25.7) (28.7) - - (28.7) liabilities Borrowings (0.1) - - (0.1) - (0.9) - (0.9) (197.9) (19.5) (10.4) (227.8) (64.6) (21.4) (1.5) (87.5) Non-current liabilities Trade and other (5.1) - - (5.1) (10.5) - - (10.5) payables Borrowings (277.4) - - (277.4) (277.9) - - (277.9) Retirement benefit (2.8) - - (2.8) (7.5) - - (7.5) obligations Deferred tax (128.1) - - (128.1) (95.4) - - (95.4) liabilities (413.4) - - (413.4) (391.3) - - (391.3) (611.3) (19.5) (10.4) (641.2) (455.9) (21.4) (1.5) (478.8) Insurance contracts 120.4 (1,801.1) (205.3) (1,886.0) 84.0 (1,981.8) (133.8) (2,031.6) Consolidated (309.5) 619.5 742.3 1,052.3 105.1 228.2 603.1 936.4 shareholders' funds at 31 December The assets of the Syndicate included above are held in regulated trust funds and are only available to pay syndicate related expenditure. 28 Financial information and posting of accounts The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2006 or 2007, but is derived from those accounts. Statutory accounts for 2006 have been delivered to the Registrar of Companies and those for 2007 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 237 (2) or (3) of the Companies Act 1985. The audited Annual Report and Accounts for 2007 are expected to be posted to shareholders by no later than 28 March 2008. Copies of the Report may be obtained from that date by writing to the Company Secretary, Amlin plc., St Helen's, 1 Undershaft, London, EC3A 8ND. The Annual General Meeting of the Company will be held at the same address at noon on Thursday, 24 April 2008. The preliminary Results were approved by the Board on 27 February 2008. -------------------------- (1) VaR is a statistical measure, which calculates the possible loss over 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. (2) 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. (3)The property valuations are based on the data available when the accounts were prepared. There were no material changes in value between the valuation in the table and the actual year end valuation. (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. This information is provided by RNS The company news service from the London Stock Exchange

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