Final Results - Part 1 Amend

Amlin PLC 28 February 2008 The following replaces Amlin plc's final results released at 7:01am under RNS number 91290. Please note that the record date for the proposed final dividend stated in the above announcement made earlier today was incorrect. The record date should have read 25 March 2008. A corrected version of the full announcement appears below. AMLIN PLC PRESS RELEASE For immediate release 28 February 2008 Preliminary Results for the year ended 31 December 2007 'AMLIN DELIVERS RECORD RESULT' Highlights: Income statement â€¢ Record return on equity of 37.8% (2006: 34.0%). â€¢ Weighted average return on equity over past five years of 32.0% (2006: 27.9%). â€¢ Profit before tax up 29.9% at Â£445.0 million (2006: Â£342.7 million). â€¢ Strong underwriting contribution up 32.5 % to Â£355.0 million (2006: Â£267.9 million). â€¢ Combined ratio at record 63% (2006: 72%). â€¢ Investment return increased by 36.4% to Â£157.0 million (2006: Â£115.1 million). Balance sheet and capital management â€¢ Net assets increased 12.4% to Â£1,052.2 million (Â£936.4 million). â€¢ Record run-off profits from reserves of Â£109.0 million (2006: Â£68.9 million). â€¢ Â£120.4 million return of capital via issue of B shares. â€¢ Dividends (paid and proposed) increased by 25.0% to 15.0 pence per share. Positive outlook â€¢ Underpinned by net unearned premium reserve of Â£474.3 million (2006: Â£507.8 million). â€¢ Underwriting margins remain good despite declining rates. â€¢ Strong cash flow supports future growth in dividends. Charles Philipps, Chief Executive, commented as follows: 'These results are exceptional and reflect a combination of strong pricing conditions, low catastrophe claims and good investment returns. Our average return on equity over the past five years shows that this is not a flash in the pan. However, underwriting returns have peaked in the short term. Our confidence in being able to continue to deliver more than acceptable returns for shareholders and our strong balance sheet supports a growing dividend going forward.' Enquiries: Charles Philipps, Chief Executive, Amlin plc 0207 746 1000 Richard Hextall, Finance Director, Amlin plc 0207 746 1000 Hannah Bale, Head of Communications, Amlin plc 0207 746 1118 David Haggie, Haggie Financial LLP 0207 417 8989 / 07768 332486 Peter Rigby, Haggie Financial LLP 0207 417 8989 / 07803 851426 Financial Highlights 2007 2006 2005 2004 2003 Â£m Â£m Â£m Â£m Â£m Gross premium written 1,044.7 1,113.8 993.5 945.6 937.4 Net premium written 938.3 1,013.5* 829.3* 790.2* 787.6* Net earned premium 972.3 973.9* 822.1* 722.4* 701.1* Profit before tax 445.0 342.7 186.7 119.7 117.8 Return on equity 37.8% 34.0% 29.6% 21.0% 26.6% Net assets 1,052.2 936.4 784.8 449.2 380.5 Net tangible assets 983.2 870.4 718.8 383.2 317.3 Per share amounts (in pence) Earnings 66.3 50.4 34.3 20.7 21.0 Net assets 220.6 175.6 148.7 113.7 98.7 Net tangible assets 206.2 163.2 136.2 97.0 82.3 Dividend under IFRS** 20.8*** 10.4 9.0 4.7 2.1 Dividends (paid and 15.0 20.0*** 10.2 8.0 2.5 proposed final) in respect of calendar year** Capital return via B 22.4 - - - - shares Group operating ratios Claims ratio 36% 41% 57% 50% 50% Expense ratio 27% 31% 25% 32% 36% Combined ratio 63% 72% 82% 82% 86% Amlin Bermuda Ltd combined 46% 48% - - - ratio Syndicate 2001 combined 69% 76% 82% 82% 86% ratio * Excluding premiums associated with the reinsurance to close of 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 I am delighted to report another year of excellent progress for Amlin. The financial results are exceptional, a product of strong underwriting and investment returns. The last few years have represented a period of sustained delivery, with our weighted average return on equity since 2002 now standing at 32.0%. Importantly for our business the senior underwriting team has again remained stable. Their exceptional underwriting skills have delivered the performance of recent years and places us in an excellent position to continue this into a more difficult underwriting climate. The strength of our business is now recognised by strong financial ratings from all of the rating agencies that we deal with. During the year AM Best upgraded both the Syndicate and Amlin Bermuda to A+ and A respectively. This places the Syndicate as the only current Lloyd's operation with this higher rating and Amlin Bermuda at a level that is ahead of many of its Class of 2005 Bermudian peers. Results and dividend Our profit before tax of Â£445.0 million (2006: Â£342.7 million) is a record result. It reflects strong underwriting returns, with a remarkable combined ratio of 63% (2006: 72%) following a second year of benign catastrophe events. The investment return of 6.6% across our portfolio was equally impressive given the volatile market environment. Our weighting towards high grade and government bonds helped, together with a reduction in our equity exposure in the autumn, as the extent of the credit market problems began to become apparent. The Board proposes a final ordinary dividend of 10.0p per share. Taken together with the interim dividend of 5.0p per share and the return of capital under the B share scheme approved at the EGM in December 2007 of 22.4 p per share, this gives total payments to shareholders for 2007 of 37.4p per share in issue at the time (equivalent to 34.4p per share following the share consolidation of December 2007). The final dividend will be paid on 30 April 2008, subject to shareholder approval at the Annual General Meeting to be held on 24 April 2008, in respect of shares on the register on 25 March 2008. The company dividend reinvestment plan is available to shareholders in respect of this dividend. Looking forward we would expect to be able to steadily grow the dividend and deliver healthy income returns for shareholders. Additionally the Board has authorised a buy back programme for our ordinary shares in order to continue to efficiently manage our equity capital. This, combined with the return of Â£120.4 million of capital at the end of the year and the special dividend announced this time last year, delivers on our commitment to actively manage our capital. Strategic progress The Board has continued to review the Group's strategic direction to ensure that Amlin builds upon its strengths and long term potential. We strive to lead change in the London market with a view to enhancing the service that our clients receive and our appeal to them. Good progress has been made. A solid foundation has also been built at our new Bermudian operation. While only modest growth was achieved in the year, in a competitive market, with an expanded team of underwriters, we look to the future with some confidence. With Amlin's core business in a good position we have examined the changing face of distribution in our markets during the year. The UK, global specialty and reinsurance markets are all evolving rapidly and we intend to be alert to the opportunities that are presented to us. During the year we purchased a UK insurance operation, Allied Cedar, with the intention of strengthening our UK property offering. We also set up Amlin Singapore to bring a local presence to the thriving Asia-Pacific region with a view to writing energy and property business. Outlook Undoubtedly, rating conditions became more challenging in 2007 and into the start of 2008. Nevertheless, our Non-marine, Marine and Bermuda businesses continue to enjoy good market conditions with the potential to deliver acceptable returns to shareholders. However, we have reduced our risk appetite as margins have fallen. In our other two areas of underwriting we believe that we are towards the trough of the cycle. The aviation market has been disappointing, with competitors seemingly happy to expand their underwriting with little prospect of an adequate return for the risk assumed. The UK commercial market has also been highly competitive with only limited signs to date of a return to more rational behaviour. However it is increasingly likely that these business areas will start to turn to provide a source of future growth. While conditions may now be more difficult, this is when we would expect our outperformance against our peers to grow. Our team shares a well understood underwriting philosophy that focuses on profitability, we are well reserved and we are constantly striving to improve our risk management and management information to enable us to steer a steady course. Board The Board welcomed Mr Marty Feinstein as a new non-executive Director in December 2007. Marty, as one of our US directors, brings considerable insurance industry experience to our deliberations, after a distinguished career at Farmers Group Inc., where he was CEO for 10 years. Tom Kemp, another of our US directors, retired from Amlin at our AGM in May 2007 after serving as a director since 1998. We received excellent advice from him throughout this period and thank him for his service to the company. At our AGM in April 2008, Roger Joslin will be retiring. Roger, who was previously Vice Chairman at State Farm, joined the Board in 2001 and has taken a keen interest in the development of Amlin for which we are very grateful. The Amlin team A record breaking profit has been produced in 2007. The continued effort of Charles Philipps, his management colleagues and all our employees has allowed the Group to attain a market leadership position and strength that is so valuable in challenging times. I would like to thank them all for their skill and hard work. Roger Taylor Chairman FINANCIAL PERFORMANCE 2003 2004 2005 2006 2007 Â£m Â£m Â£m Â£m Â£m Gross premium 937.4 945.6 993.5 1,113.8 1,044.7 written Net premium 787.6 790.2 829.3 1,013.5 938.3 Net earned premium 701.1 722.4 822.1 973.9 972.3 Underwriting 117.1 106.6 137.1 267.9 355.0 contribution Investment 33.5 52.1 90.9 115.1 157.0 contribution Other costs 32.8 39.0 41.3 40.3 67.0 Profit before tax 117.8 119.7 186.7 342.7 445.0 Return on equity 26.6% 21.0% 29.6% 34.0% 37.8% The financial performance of the Group has again been excellent with a record profit before tax of Â£445.0 million (2006: Â£342.7 million) and return on equity of 37.8% (2006: 34.0%). Returns from both underwriting and investments were strong. Our underlying profit, after removing the positive effect of a Â£42.6 million swing in the foreign exchange translation of net non-monetary liabilities relative to 2006, increased by 16.1.% to Â£430.3 million (2006: Â£370.6 million). Underwriting contributed Â£355.0 million (2006: Â£267.9 million) to the pre tax result; Â£238.8 million (2006: Â£198.9 million) for London and Â£116.2 million (2006: Â£69.0 million) for Amlin Bermuda. The result reflects the relatively benign claims environment experienced in 2007. The underwriting contribution includes run off profits from reserves of Â£109.0 million (2006: Â£68.9 million). This is the largest release that we have made. However, we have continued to maintain consistent levels of reserving strength for liabilities assessed at 31 December 2007 as in previous years, 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. On an underwriting year basis, net claims reserves are at least Â£200 million above the actuarial best estimate. Investment return was an impressive Â£157.0 million (2006: Â£115.1 million) with strong returns made from all asset classes. Over the longer term, our performance has been very strong with a weighted average return on equity since 2002 of 32.0% compared to our cross cycle target of 15% and our estimated cost of capital of 10.0%. Rating indices in key classes Rating levels across a number of major classes of business are shown in the table below. Class 2000 2001 2002 2003 2004 2005 2006 2007 US catastrophe 100 115 146 150 143 144 185 188 reinsurance International catastrophe 100 120 157 161 145 131 138 131 reinsurance Property reinsurance 100 122 189 191 170 146 170 144 Property insurance 100 125 171 163 143 136 165 143 US casualty 100 123 172 217 234 239 237 223 Marine hull 100 115 148 171 183 189 191 192 Offshore energy 100 140 172 189 170 175 262 243 War 100 250 288 244 220 206 191 175 Fleet motor 100 121 136 143 141 137 135 134 UK employers' liability 100 115 144 158 159 144 135 120 UK professional indemnity 100 110 149 178 181 165 154 141 Airline hull and 100 301 283 235 216 201 158 122 liabilities Underwriting performance With a low level of catastrophe incidence in the year, a good underwriting result is to be expected but the Group's overall combined ratio of 63% (2006: 72%) is exceptional. Gross premium written remained relatively unchanged in original currency, with growth in well priced classes such as US catastrophe reinsurance offset by further volume reductions in classes that have continued to come under pressure, such as UK Commercial motor. With 62% of gross premium written in US dollars, which weakened relative to sterling by 8% during the year, reported gross premium written of Â£1,044.7 million, is 6.2% less than in the prior year (2006: Â£1,113.8 million). Overall, the renewal rate reduction across all business was 5% with a renewal retention ratio of 77%. In 2006 we took the decision to operate with significantly less retrocessional reinsurance cover than we had in previous years on the basis that the price of cover had become uneconomic. In 2007 the price of retrocessional cover became more reasonably priced and Syndicate 2001 purchased more cover, albeit not as much as had been in force during 2005. However reinsurance expenditure as a proportion of gross premium written has increased only modestly from 9.0% to 10.2%. This is due to two factors. Firstly, Amlin Bermuda now represents a larger part of the Group and has so far operated without the purchase of any reinsurance. Secondly, more reinsurance is bought for the Syndicate dollar account than for the sterling business. As the dollar weakens, this lowers the apparent reinsurance expenditure. Net earned premium (excluding the premium associated with reinsurance to close) was marginally lower at Â£972.3 million (2006: Â£973.9 million), reflecting the earnings lag on premium income written in 2006, particularly with Amlin Bermuda in start up mode in the first part of that year, offset by the impact of a weakening US dollar. 2007 catastrophe loss activity The Group claims ratio for the year was 36% (2006: 41%). Natural catastrophe activity in the United States was again below long term averages. Our most significant loss was the California bush fires in October, where we currently estimate a net exposure of up to US$25.8 million. The UK and Australian floods in June and July (UK only) were also major losses to the international insurance industry together with Windstorm Kyrill, which swept across Northern Europe in January. Our exposures to these events has been limited, in part due to the reinsurance programmes we have in place and the risk retained by cedants, but also due to our comparatively small exposure to the UK direct household and small commercial sectors. Conservative estimates of the losses incurred by Amlin from the UK, Australian floods and Windstorm Kyrill are Â£13.0 million, Â£4.2 million and Â£1.2 million respectively. Divisional performance Underwriting performance - Syndicate & Amlin Bermuda 2003 2004 2005 2006 2007 Â£m Â£m Â£m Â£m Â£m Gross premium 1,097.5 942.2 992.9 1,113.8 1044.7 written Net earned premium 890.6 782.0 827.4 973.9 972.3 Claims ratio % 50 50 57 41 36 Expense ratio % 36 32 25 31 27 Combined ratio % 86 82 82 72 63 Combined ratio % * 84 80 85 70 64 Underwriting 134.2 139.3 152.0 267.9 355.0 contribution *excluding the exchange difference on non monetary assets and liabilities. The divisional combined ratios referred to below are after removing the exchange differences on the translation of non-monetary assets and liabilities. Non-marine Non-marine is the Group's largest division accounting for Â£500.6 million of gross premium written in 2007 (2006: Â£554.6 million). The business written is a mix of classes which are exposed to catastrophic loss (for example catastrophe reinsurance), large claim events (for example aviation reinsurance) and attritional claims (for example auto and casualty). In 2007 the catastrophe reinsurance and property classes wrote Â£371.4 million of premium, representing 74% of divisional gross premium written. Geographically the division's largest market is the United States, which represented 63% of business written in 2007. Diversity is significant, however. In the United States our property catastrophe underwriting is centred on regional insurers and regional exposures are monitored closely. Internationally, our insurance and reinsurance programmes include windstorm cover in Europe, earthquake and windstorm exposure for Japan and earthquake protection in Australia and New Zealand. The average rate of renewal for the division was a reduction of 5.4% (2006: increase of 11.5%). US catastrophe reinsurance pricing remained relatively strong with rates increasing by 1.5%. However this should be viewed in the context of the prior year when rates increased by 28.3% as a response to the hurricanes of 2005. International catastrophe pricing was more disappointing with rates falling by 5.0% as more reinsurers looked to diversify their portfolios. However, pricing in more capacity constrained zones, such as Europe and the Caribbean remained adequate. The renewal retention rate was 80% (2006: 80%). A combined ratio of 60% is another excellent result (2006: 66%). The key driver was the low level of catastrophe losses in the year, aided by good claims development on prior years, resulting in a claims ratio of 29%. Run off profits from reserves of Â£50.0 million were made (2006: Â£21.9 million). Marine The Marine division contributed Â£187.2 million to gross premium written in 2007 (2006: Â£210.9 million). The division writes a combination of volatile classes including energy, specie and war, but also attritional classes such as hull, cargo and yacht. Business written is worldwide, however the bloodstock and yacht accounts have a UK bias. Rating conditions remained relatively good in the year, with an average divisional renewal rate reduction of 4.1% (2006: 4.5% increase). The average rate reduction within the energy account was 7.5% and war continued to experience more challenging pricing conditions, with limited loss activity experienced in the year and increased competition as a result. Attritional classes, such as hull, cargo and yacht experienced more modest rate reductions. The renewal retention rate was 76% (2006: 79%). The Marine division's combined ratio increased modestly to 83% (2006: 81%). Reserve releases totalled Â£8.0 million (2006: Â£19.1 million). Aviation The division writes a mixture of classes including airline, general aviation, airport and product liabilities and satellite insurance. The classes are exposed to large loss events and potential catastrophic loss. As such, a comprehensive reinsurance programme is fundamental to writing this business. The Aviation division accounted for Â£63.6 million of gross premium written in 2007, down 16% on the prior year (2006: Â£75.7 million). The largest contribution to written premium was provided by airline (hull and liabilities), general aviation and airport liability which together count for 77% of the portfolio. 33% of business was ceded to reinsurers. With additional capacity entering the aviation market during the year, intense rating competition has continued to exist and disciplined underwriting has meant our portfolio has reduced as intended. The average divisional renewal rate reduction was 13.0% (2006: 19%). The overall renewal retention rate has remained steady at 80% (2006: 81%). The combined ratio of 70% is a pleasing result (2006: 84%), the consequence of a falling claims ratio to 33%. During 2007 there were 20 large insurance loss events to the airline industry, resulting in total airline losses exceeding global premium. Having reduced the portfolio, becoming more selective in the face of falling prices, Amlin were involved in only two of these losses at a total cost of Â£2.0 million. Run off profits from reserves amounted to Â£15.9 million (2006: Â£8.0 million) with little claims development in the year. UK Commercial The UK Commercial division writes business principally for UK based clients and the majority of risks are not written in the subscription market but are assumed entirely by the division. The division underwrites a balanced portfolio of motor and liability business, combined with a small property account. Catastrophe risk is reinsured and, inherently, the divisional profile is attritional in nature. Â£149.2 million of gross premium was written in the year (2006: Â£150.0 million). The division has continued to experience rating pressure in all classes and our team has focused its efforts on risk selection and underwriting profitability, together with delivery of high levels of client service to a core client base which has a strong record of continuity with the business. The average renewal rate reduction was 5.2% (2006: 2.7%). Claims inflation also continues to erode margins. The relatively low renewal retention rate of 71% (2006: 68%) reflects our disciplined underwriting approach. Within this challenging market, the combined ratio of 86% is a strong result (2006: 84%). Run off profits from reserves of Â£22.1 million (2006: Â£19.8 million) reflect the release of case reserves as claims settle below expectations. Amlin Bermuda Amlin Bermuda underwrites reinsurance in most areas of the world, but does not have the ability to write insurance as it does not hold relevant licenses. In order to gain exposure to the diversity offered by some non catastrophe insurance accounts, Amlin Bermuda has written specific class reinsurances plus a 10% quota share reinsurance of Syndicate 2001. During 2007 no third party reinsurance was purchased by Amlin Bermuda. Amlin Bermuda wrote Â£232.8 million, or US$465.8 million, of gross premium in the year (2006: Â£223.5 million, or US$411.2 million). Of this Â£90.3 million, or US$180.6 million, of premium was attributable to quota share and other reinsurances of Syndicate 2001 (2006: Â£100.8 million, or US$185.5 million). The average renewal rate was a reduction of 7% and the average renewal retention rate was 76%. Growth has been constrained as primary carriers have chosen to maintain our share of risk at levels consistent with the previous year, in the face of growing competition for lines. This is more satisfactory than fierce competition on price. Importantly, the quality and diversity of the book is good and we have not compromised standards simply to hit premium income targets. The combined ratio of 46% is a strong result (2006: 48%). This reflects the low level of catastrophe losses and limited development on claims in the year, resulting in a claims ratio of 34%. Run off profits on reserves amounted to Â£13.0 million (2006: nil). The expense ratio of 12% is low relative to the London operations due to the high operational gearing of the reinsurance business written in Bermuda and the effect of intra-Group reinsurance. Investment performance Investment mix and return 2007 2006 Average Average Asset Return Asset Return Allocation Allocation Â£m Â£m Â£m Â£m Equities 286 28 196 31 Bonds 1,598 96 1,440 50 Property 59 6 17 1 Other liquid 542 28 670 33 investments Total 2,485 158 2,323 115 Equities 12% 10.2% 8% 15.3% Bonds 64% 6.3% 62% 3.3% Property 2% 9.8% 1% 3.0% Other liquid 22% 5.5% 29% 4.7% investments Total 100% 6.6% 100% 4.8% Note: the above table excludes a Â£1 million loss from derivative instruments. The contribution to profit for the year from investments increased by 36.4% to Â£157.0 million (2006: Â£115.1 million). The return on average cash and investment balances of Â£2.4 billion was 6.6% (2006: Â£2.3 billion, 4.8%). The increase in assets under management was due to strong organic cash flows and profitable trading. The investment environment in 2007 has been volatile as the potential economic cost of defaults from sub-prime borrowers in the United States and the weak US housing market, led to a liquidity crisis in the financial system. The diverse portfolio structure of the Group's assets helped to weather the storm through 2007. The global equity portfolio produced a return of 10.2% - our managers invested defensively and were not over exposed to the US market. In the face of an increasingly uncertain economic outlook, particularly with liquidity issues being experienced by the banking system, the Board decided to reduce its investment risk appetite in August. Consequently the equity weighting of Group assets was reduced, and option strategies were put in place covering the remaining 25% of equity holdings. The latter provided protection for that proportion of the equity portfolio against a fall in major indices of more than 5% from 19 September to 31 December 2007, at a cost of limiting gains over the same period to approximately 4%. This option strategy was rolled over on 5 December to 31 March 2008. On the whole, our bond portfolios were conservative in nature. The tables below show the breakdown of our portfolios by asset type, our asset/mortgage backed securities and corporate bond by credit quality, and the geographic make up of the bond portfolio. Investment disposition at 31 December 2007 Policyholders' Capital assets Total assets assets Â£m Â£m Â£m Type of asset Equities - 232.1 232.1 Bonds 1,018.4 559.8 1,578.2 Property - 75.4 75.4 Other liquid investments 461.4 301.0 762.4 1,479.8 1,168.3 2,648.1 Type of bonds Government securities 585.6 252.1 837.7 Government index-linked 3.0 - 3.0 securities Government agencies 76.4 8.0 84.4 Supranational 44.5 2.1 46.6 Asset backed securities 25.2 55.5 80.7 Mortgage backed 18.0 67.6 85.6 securities Corporate bonds 212.4 53.1 265.5 Pooled vehicles 53.3 121.4 174.7 1,018.4 559.8 1,578.2 Bonds by region United Kingdom 179.5 85.7 265.2 USA and Canada 544.8 315.2 860.0 Europe (ex UK) 212.8 34.9 247.7 Far East 18.2 - 18.2 Emerging markets 9.4 - 9.4 Other 0.4 2.6 3.0 965.1 438.4 1,403.5 Credit rating of asset/mortgage backed securities and corporate bonds AAA 210.9 133.1 344.0 AA 45.1 13.3 58.4 A 43.7 9.3 53.0 BBB 16.6 28.6 45.2 316.3 184.3 500.6 Note: credit rating includes Â£68.8 million of government agencies that are mortgage backed. Most sub-prime debt is included in the asset backed securities category. Amlin has limited exposure to sub-prime mortgages, with most of our mortgage bond exposure focused on the prime end of the market. Just 0.9% of the Group's assets were in bonds backed by sub-prime mortgages and of these 92% and 8% were still rated AAA and AA respectively as at 31 December. We also have Â£28.2 million of assets in short duration auto loans, all AAA rated, which are designated sub-prime. The sub-prime mortgage market remains an area of concern. However, all our bond managers are confident about the holdings in our portfolio. The underlying performance of bond assets was markedly divergent with strong performance from the government portfolios, as investors factored in likely interest rate cuts in the anticipation that central banks would respond proactively to economic slowdown. The underperformance of our bond investment managers against their government benchmarks amounted to Â£19.8 million. This illustrates the impact of credit market dynamics on our portfolio. Expenses Total expenses, including underwriting, non-underwriting and finance costs, decreased to Â£332.9 million from Â£345.9 million in the prior year. This decrease is a result of a favourable swing in non-monetary foreign exchange adjustments offset by an increase in staff incentive payments. Business acquisition costs of Â£196.0 million, representing 18% of gross earned premium, were consistent with the prior year (2006: Â£195.4 million, 18%). These include an element of the foreign exchange translation of non-monetary assets and liabilities and other foreign exchange movements, which in total increased 2007 expenses by Â£5.1 million (2006: 0.4 million). Non-underwriting costs (excluding finance costs) increased by Â£31.5 million to Â£49.8 million. Within this, total staff costs increased from Â£25.0 million to Â£42.3 million. Staff incentive plans accounted for Â£31.4 million of these costs (2006: Â£18.6 million). Taxation The effective rate of tax for the period is 20.7% (2006: 21.9%). The reduction is mainly attributable to the fall in the rate of UK corporation tax. The effective rate is below the UK rate of corporation tax primarily due to Amlin Bermuda. We believe that Amlin Bermuda is exempt from the Controlled Foreign Corporation tax provisions of the UK tax regime. Accordingly, the Group will pay tax to the UK tax authorities only when distributions are made back to its UK holding companies. We have again provided for tax on possible future distribution through deferred tax of 9% of Amlin Bermuda's profit. The standard rate of UK corporation tax is due to fall from 30% to 28% from 1 April 2008, which affects the deferred tax provision in two ways. Firstly, an adjustment was required to those elements of the deferred tax provision at 1 January 2007 which were expected to reverse after 31 December 2007. This adjustment generated a credit to the deferred tax charge of Â£1.7 million. Secondly, temporary differences arising in 2007 will affect the 2007 corporation tax charge at a rate of 30%, but will generate deferred tax at a rate of 28% or 28.5% (the effective corporation tax rate for 2008). This has generated a credit to the tax charge of Â£5.1 million. CAPITAL STRATEGY We have consistently articulated that our key performance metric, that which we consider is most relevant to the delivery of shareholder value, is return on equity. This means that we will actively manage our capital over the insurance cycle. We currently expect that conditions for our London market business will soften over the next two years and that with this, in line with our underwriting strategy, we will reduce exposures. We therefore believe that, for our existing business, our capital requirements are likely to have peaked for the time being. The Group's success in generating significant levels of profit over recent years has resulted in very strong free cash flow and capital which is in excess of our requirements. Accordingly, in 2007 we started to deliver on our commitment to manage the balance sheet by paying Â£42.7 million in a special dividend and announcing a further Â£120.4 million return to shareholders by means of a B share issue which was completed in January this year. In addition to the dividend and share buyback referred to in the Chairman's statement, we will continue to keep under review our capital needs with the intention of managing our capital to enhance returns on equity. OUTLOOK 2008 While the underwriting environment is softening, good margin potential remains for selective underwriters. Rates in many classes are coming off exceptionally profitable peaks and the two areas of, airlines and UK Commercial are not expected to worsen much further before improving. Assuming an average level of catastrophe activity we are targeting a return on equity for 2008 of in excess of 15%, our average cross cycle target. A softening market, but off historic peaks 1 January is a major renewal date for a number of key classes. Amlin has written total income (before deduction of brokerage) to 31 January 2008 of Â£324 million. This is a 5% reduction on the previous year. Overall renewal rates for Amlin have declined by 8% with a retention ratio of 86%. We believe that at these rating levels we continue to write business which will produce an acceptable return. Amlin Bermuda increased gross premium written by 25% to US$142 million (2007: US$114 million). Amlin's objective is to deliver a market leading return on equity. Through the soft part of the underwriting cycle we seek to achieve this via disciplined underwriting, with a sustained focus on the acceptability of underwriting margin, rather than seeking growth in increasingly competitive markets. In recent years, we have established a track record of out performance against many of our competitors, but historically the outperformance of the core syndicate has grown as market conditions soften. This has resulted from disciplined underwriting, with exposures reducing as rates fall. We intend to stick to our successful core underwriting principles in the coming period. In 2008 we believe that our underwriting performance will be supported by healthy rates in reinsurance, areas of our property account and the Marine division. Rates in these classes have been near historic peaks through 2007 and our portfolio will remain capable of generating a satisfactory margin over the next twelve months. Two of our divisions continue to experience significant pressure from poor pricing - Aviation and UK Commercial. Most airlines renew in the fourth quarter, and in December 2007, there was still no sign of a change in direction of rates as competitors chased market share based on historic profitability. The UK commercial market is trading at low profit margins and, while we anticipate market conditions may remain competitive in 2008, we expect to see some signs of improvement towards the end of 2008 and into 2009. Since Hurricane Katrina in 2005 we have experienced increased divergence in the cyclical patterns between our classes. It is very possible that we will experience an upturn in the UK commercial market as deterioration in marine, property and reinsurance markets takes place. If this occurs, it will provide the potential for better returns than previously envisaged during the next low in the London market insurance cycle. Business development Amlin Bermuda's business is well placed for further growth in 2008. During the year, two additional underwriters were hired who will help broaden Amlin Bermuda's marketing capability. Additionally, in October Amlin Bermuda was upgraded from A- to A by AM Best and our expectation is that this will contribute to generate greater premium income through higher shares of clients' programmes. We will consider acquisitions where strategically they will help build the diversity of the portfolio so that we can maintain a good balance of risk. In July we purchased the Allied Cedar Insurance Group in the UK, which whilst modest, will provide us with greater access to the UK property market, an area where we are keen to grow when conditions improve. In November, we opened Amlin Singapore to develop access to regional Asian business which typically is not seen in the London market. We anticipate building this business through 2008 and hope that in time it will make an important contribution to the Group. Healthy unearned premium reserves At 31 December 2007, net unearned premium reserves totalled Â£474.3 million. While 6.6% less than in the prior year (2006: Â£507.8 million), they contain a significant proportion of reinsurance and other income which was written at strong rates. This provides a sound base for 2008 earnings. Continued prudently reserved balance sheet Our policy of reserving above the level of actuarial best estimate has resulted in material run off profits from reserves in recent years. Assuming claims development which is no worse than normal expectations, this policy should deliver further run-off profits in 2008. Catastrophe risks Our largest modelled event at 1 January 2008, being a European windstorm affecting each of the UK, France, the Low countries and Germany, was a potential aggregate claim of Â£316 million, equivalent to 32% of net tangible assets at 31 December 2007. This compares with our largest modelled loss at 1 January 2007 of Â£364 million for the same scenario, which represented 42% of net tangible assets at 31 December 2006. For 2008 our modelling indicates that our mean expected profit will cover each of our modelled US single zone catastrophe events. The largest of these is currently a US$119 billion Florida windstorm for which the modelled occurrence probability is approximately one in one hundred years. However, it may not cover either very significant multi zone events, such as the major windstorm described above, or a very major Japanese earthquake. As rates soften further, we will look to maintain an acceptable balance by purchasing more reinsurance, including retrocessional reinsurance, which we have started to do. Investment outlook Markets continue to be volatile, reflecting the uncertainty created by events in the United States. As always we will monitor markets closely and adjust asset allocations to reflect potential returns and perceived risk. January 2008 has proven to be a difficult month for investment markets with sharp falls in equity markets and further price falls for credit related bonds. The diversity of our asset allocation again proved helpful with the losses on equity and credit offset by good returns on government bonds and interest earned on cash. With the gain in value of the equity option, overall January 2008's returns were 0.4%. Consolidated Income Statement For the year ended 31 December 2007 2007 2006 Notes Â£m Â£m Gross premium earned 4,5 1,088.0 1,087.3 Insurance premium revenue from the 5 - 78.8 receipt of reinsurance to close Reinsurance premium ceded 4,5 (115.7) (113.4) Net earned premium revenue 5 972.3 1,052.7 Investment return 4,6 157.0 115.1 Other operating income 2.8 1.8 Total income 1,132.1 1,169.6 Insurance claims and claims settlement 4,7 (380.1) (460.7) expenses Insurance claims and claims settlement 7 - (78.8) expenses relating to the receipt of reinsurance to close Insurance claims and claims settlement 4,7 25.9 58.5 expenses recoverable from reinsurers Net insurance claims 7 (354.2) (481.0) Expenses for the acquisition of insurance 8 (196.0) (195.4) contracts Other operating expenses 9 (116.9) (126.7) Total expense (312.9) (322.1) Results of operating activities 465.0 366.5 Finance costs 10 (20.0) (23.8) Profit before tax 445.0 342.7 Tax 11 (92.2) (74.9) Total recognised profit for the year 352.8 267.8 Attributable to: Equity holders of the Parent Company 352.7 267.5 Minority interests 0.1 0.3 352.8 267.8 Earnings per share from continuing operations attributable to equity holders of the Parent Company Basic 21 66.3p 50.4p Diluted 21 65.5p 49.8p Consolidated Statement of Changes in Equity For the year ended 31 December 2007 Notes Share Share Other Treasury Minority Retained Total capital premium reserves shares interest earnings Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 January 2007 133.5 347.6 (21.8) (0.6) 0.3 477.4 936.4 Net purchase of treasury - - - (1.5) - - (1.5) shares Gains on revaluation of - - (0.1) - - - (0.1) employee share ownership trust recognised directly in equity Currency translation - - (8.2) - - - (8.2) differences on overseas operations Deferred tax - - (1.3) - - - (1.3) Profit for the financial - - - - 0.1 352.7 352.8 year Total recognised income - - (9.6) (1.5) 0.1 352.7 341.7 for the year Employee share option scheme: - share based payment - - 1.2 - - - 1.2 reserve - proceeds from shares 0.9 3.6 - - - - 4.5 issued Dividends paid 22 - - - - - (111.1) (111.1) Return of capital 17 - (120.4) - - - - (120.4) 0.9 (116.8) 1.2 - - (111.1) (225.8) At 31 December 2007 134.4 230.8 (30.2) (2.1) 0.4 719.0 1,052.3 Consolidated Statement of Changes in Equity (continued) For the year ended 31 December 2006 Notes Share Share Other Treasury Minority Retained Total capital premium reserves shares interest earnings Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 January 2006 132.5 344.0 52.7 (1.7) - 257.3 784.8 Net sale of treasury - - - 1.1 - - 1.1 shares Gains on revaluation of - - 0.2 - - - 0.2 employee share ownership trust recognised directly in equity Currency translation - - (77.2) - - - (77.2) differences on overseas operations Gain on defined benefit - - 0.1 - - - 0.1 scheme Deferred tax - - 1.3 - - - 1.3 Profit for the financial - - - - 0.3 267.5 267.8 year Total recognised income - - (75.6) 1.1 0.3 267.5 193.3 for the year Employee share option scheme: - share based payment - - 1.1 - - - 1.1 reserve - proceeds from shares 1.0 3.6 - - - - 4.6 issued Dividends paid 22 - - - - - (47.4) (47.4) 1.0 3.6 1.1 - - (47.4) (41.7) At 31 December 2006 133.5 347.6 (21.8) (0.6) 0.3 477.4 936.4 Consolidated Balance Sheet At 31 December 2007 2007 2006 ASSETS Notes Â£m Â£m Cash and cash equivalents 13 11.6 16.5 Financial investments at fair 14 2,638.9 2,367.7 value through income Reinsurance assets 15 - reinsurers share of 270.2 357.0 outstanding claims - reinsurers share of unearned 27.5 37.7 premium - debtors arising from 319.2 300.6 reinsurance operations Loans and receivables, including insurance receivables - insurance receivables 16 183.1 216.3 - loans and receivables 16 36.8 51.6 Current income tax asset 4.0 6.3 Deferred tax assets 11 13.4 20.9 Property and equipment 5.8 6.2 Intangible assets 69.0 66.0 Total assets 3,579.5 3,446.8 EQUITY Share capital 17 134.4 133.5 Share premium 18 230.8 347.6 Other reserves 18 (30.2) (21.8) Treasury shares 18 (2.1) (0.6) Retained earnings 18 719.0 477.4 Equity attributable to equity 1,051.9 936.1 holders of the parent Minority interest 18 0.4 0.3 Total equity and reserves 1,052.3 936.4 LIABILITIES Insurance contracts 15 - outstanding claims 1,350.2 1,417.5 - unearned premium 501.8 545.5 - creditors arising from 34.0 68.6 insurance operations Trade and other payables 19 207.1 68.4 Current income tax liabilities 25.7 28.7 Borrowings 20 277.5 278.8 Retirement benefit obligations 2.8 7.5 Deferred tax liabilities 11 128.1 95.4 Total liabilities 2,527.2 2,510.4 Total equity, reserves and 3,579.5 3,446.8 liabilities The financial statements were approved by the Board of Directors and authorised for issue on 27 February 2008. They were signed on its behalf by: Roger Taylor Chairman Richard Hextall Finance Director Consolidated Cash Flow Statement For the year ended 31 December 2007 2007 2006 Notes Â£m Â£m Cash generated from operations 25 70.5 (20.2) Income taxes paid (53.8) (50.4) Net cash flows from operations 16.7 (70.6) Cash flows from investing activities Interest received 99.0 97.5 Dividends received 12.5 4.5 Acquisition of subsidiary, net 26 (3.3) - of cash acquired Purchase of property and (2.7) (3.6) equipment Net cash from investing 105.5 98.4 activities Cash flows used in financing activities Proceeds from issue of 4.5 4.6 ordinary shares Proceeds from borrowings - 227.7 Repayment of borrowings - (238.0) Dividends paid to shareholders 22 (111.1) (47.4) Interest paid (19.1) (24.1) Purchase of treasury shares (1.5) - Net cash flows used in (127.2) (77.2) financing activities Net decrease in cash and cash (5.0) (49.4) equivalents Cash and cash equivalents at 16.5 65.6 beginning of year Effect of rate changes on cash 0.1 0.3 and cash equivalents Cash and cash equivalents at 13 11.6 16.5 end of year 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. Net cash of Â£232.1 million (2006: Â£271.8 million) was generated in the period and has been used to purchase financial investments. 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 Whilst the financial information included in this preliminary announcement has been compiled in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Company published full financial statements that comply with IFRS in February 2008. The 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. 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 2006. 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. Consolidation adjustments are made to convert subsidiary accounts prepared under UK GAAP 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. Changes to International Financial Reporting Standards In the current year, the Group has adopted IFRS 7, Financial Instruments: Disclosures and the related amendments to IAS 1, Presentation of Financial Statements, and IFRS 4, Accounting for Insurance Contracts which are effective for annual reporting periods beginning on or after 1 January 2007. The impact of the adoption of IFRS 7 and the changes to IAS 1 and IFRS 4 have been to expand the disclosures provided in the financial statements regarding the Group's management of capital and financial instruments (see notes 2 and 3). Three Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are effective for the current period. These are: IFRIC 8, which clarifies IFRS 2, Share-based Payments; IFRIC 9, Reassessment of Embedded Derivatives; and IFRIC 10, Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Group's accounting policies. At the date of authorisation of these financial statements a number of standards and interpretations had been published but were not yet effective. These include: â€¢ IFRS 8, Operating Segments; â€¢ IFRIC 11, IFRS 2: Group and Treasury Share Transactions; â€¢ IFRIC 12, Service Concession Arrangements; and â€¢ IFRIC 14, IAS 19: The Limit of Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The directors anticipate that the adoption of these standards and interpretations will have no material impact on the financial statements except for additional disclosures. 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. 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 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 2007 there has been a net positive development of Â£109.0 million (2006: Â£68.9 million) for the Group, reflecting the favourable experience in the 2006 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. Deferred tax The estimates of deferred tax assets and tax liabilities have been adjusted in the current period to reflect the reduction in the UK Corporate tax rate to 28% on 1 April 2008. (2006: 30%). Staff incentive plans The Group recognises a liability and expense for staff incentive plans based on a formula that takes into consideration the underwriting year profit after certain adjustments. Underwriting year profit is estimated based on current expectation of premiums and claims and will change as more information is known. Where estimates change related staff incentive plan liabilities may also change. Foreign currency translation The Group presents its accounts in sterling since it is subject to regulation 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 and Amlin Bermuda Ltd which are incorporated in Bermuda and Amlin Singapore Pte Ltd which is incorporated in Singapore. 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 have adopted the US dollar as their functional currency. The Group company incorporated in Singapore has adopted the Singapore dollar as its functional currency. Where sterling is the functional currency, income and expenditure in US dollars, Euros and Canadian dollars is translated at average rates of exchange for the period. Transactions denominated in other foreign currencies are translated using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated into sterling 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. Exchange differences arising from the conversion of overseas operations are accounted for through reserves. Where contracts to sell currency have been entered into prior to the year end, the contracted rates have been used. Differences arising on the translation 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. 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. 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. 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 comprises the cost of reinsurance arrangements placed and is 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 protections 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. 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 over the useful economic life which is estimated to be 3 years. 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 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 has classified its financial investments as 'fair value through income' (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. Investments are assigned this classification at the time of acquisition. 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. 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. Changes in the fair value of derivative instruments are recognised immediately in the income statement. Fair values for over the counter derivatives, are supplied by the relevant counterparty. The Group has opted not to seek hedge accounting for its derivative instruments in the year. 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 when 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 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, defined contribution schemes and personal pension schemes. The Lloyd's Superannuation Fund scheme is a multi-employer scheme. There is insufficient information available to reliably identify the Group's proportionate share of the defined benefit obligation, plan assets and post-employment costs associated with scheme. Therefore it is accounted for as a defined contribution scheme and not a defined benefit scheme. For this scheme, where contractual obligations have been agreed, the net present value of these payments is recognised as a liability on the balance sheet. The JE Mumford (Underwriting Agencies) Limited defined benefit scheme was transferred into the Lloyd's Superannuation Fund scheme in February 2007. Pension contributions to schemes that are accounted for as 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 Information fee income 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 17 and 18, and subordinated debt as disclosed in note 20. For business planning purposes account is also taken of the Group's uncalled debt facilities. 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 to no greater than 0.5%. The ICA calculation considers all ultimate losses incurred over a one year business planning horizon, and any prior year reserve movements. The ICA calculation basis is generally considered to be broadly equivalent to a BBB insurance financial strength rating. 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 2007 the level of capital held by the Amlin corporate members was more than Â£150 million in excess of the Pillar 1 requirement and more than Â£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 insurer, for which the minimum solvency margin is the greater of $100m, 50% of net premiums written in the current financial year (subject to a 25% cap on reinsurance expenditure) and 15% of claims reserves. In the case of Amlin Bermuda at 31 December 2007, the premium test is currently the largest of the three criteria at $232.8 million, although the entity is in the early years of operation. In addition, as a Class IV insurer 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 2007. 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. In addition to regulatory capital requirements we believe we should retain a level of capital within the Group which allows it to grow exposures materially in the aftermath of a major insurance disaster. 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 Insurance risk The Group accepts insurance risk in a range of classes of business through Lloyd's Syndicate 2001's four distinct underwriting businesses 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 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 which determines the maximum liability per policy which 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, 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. All 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. Sections A to D below describe the business and the risks of Amlin's Syndicate operations. Amlin Bermuda is described in section E. A. Non-marine risks A.i Non-marine property risks 2007 gross premium written by geography Caribbean 3% Central & Eastern 1% Europe Central & Southern 1% Africa Central America 1% Central Asia <1% East Asia 5% Middle East 1% North America 63% Northern Africa <1% Oceania 3% South America 1% South Asia 1% UK 9% Western Europe 8% (exl. UK) Worldwide / Other 3% Non-marine property classes 2007 Gross Current maximum 2007 Average premium line size line size Â£m Â£m Â£m Catastrophe 158 50 4.0 reinsurance (per programme) Per risk property 43 20 1.7 reinsurance (per programme) Proportional 24 5 0.7 reinsurance Direct and facultative 68 20 2.4 property Binding authorities 20 2 0.3 Notes: 1) Limits are set in US dollars converted to sterling at a rate of Â£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 net 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 company. 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. 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 any one risk. 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. 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. The portfolio of property insurance and reinsurance business is written with the aim of achieving territorial diversification. However, a severe catastrophe to a major economic zone in Europe, Japan or the USA is likely to result in an overall loss to the property portfolio prior to reinsurance. 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 on page 24. 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 in the reinsurance arrangements section, the Syndicate buys a reinsurance programme to protect against the impact of, 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. However, there may be some period of delay before this can be achieved. 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. A.ii US casualty risk The US casualty portfolio of business provides insurance and reinsurance cover to individuals or companies in order to indemnify 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. 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 to the direct and reinsurance portfolio may be impacted by a generic claim type which impacts many individual policies such as poor housing design or bad medical practice. The size of individual claims is subject to 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. A.iii Other Non-marine classes The Group also writes other non-marine classes which contribute diversified exposure to the portfolio. The main classes with the maximum sum insured lines together with the geographical spread are shown below: 2007 gross premium written by geography Caribbean 3% Central & Eastern 1% Europe Central & Southern 1% Africa Central America <1% Central Asia <1% East Asia 3% Middle East 2% North America 44% Northern Africa <1% Oceania 2% South America <1% South Asia <1% UK 23% Western Europe 10% (exl. UK) Worldwide / Other 11% Non-marine class 2007 Gross Current maximum 2007 Average premium line size line size Â£m Â£m Â£m Accident & health 15 2 1.0 Credit insurance 10 15 15.0 Auto 26 4 0.2 Aviation 3 27 5.2 reinsurance (per programme) Marine 15 67 1.7 reinsurance (per programme) US Casualty 21 3 0.3 Special risks 13 20 4.0 Notes: 1) Limits are set in US dollars converted to sterling at a rate of Â£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 net of acquisition costs. The accident and health class is written through medical expense schemes in the US 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. The division writes a portfolio of aviation and marine reinsurance business which protects insurers against losses to their direct portfolios of business. This is written on an excess of loss basis. Credit insurance is written for UK and Irish companies only and the coverage is provided to protect against insolvency of debtors in the normal course of trading. The principal risk is from a very large corporate collapse which may impact many of our assureds or a serious economic downturn which impacts many sectors and companies. The auto class covers property damage only (fire, theft and collision) in the US 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 special risks account includes small premium classes such as nuclear, contingency business and terrorism reinsurance which is written in all parts of the world. Because of the small premium and specialist nature of these classes they are generally written without reinsurance protection. B. UK Commercial risks 2007 gross premium written by geography Caribbean <1% Central & Eastern <1% Europe Central & Southern <1% Africa Central Asia <1% East Asia <1% Middle East <1% North America 5% Oceania <1% UK 89% Western Europe 5% (exl. UK) Worldwide / Other 1% B.i. Non-US liability risks Liability classes 2007 Gross Current 2007 Average premium maximum line size Â£m line size Â£m Â£m Employers' liability 15 27 10.0 Public/products liability 8 12 2.0 Professional indemnity 20 6 1.3 UK commercial package 10 27 1.0 Financial institutions 4 6 0.9 fidelity and liability The Group writes three classes of non-US liability. 89% of the business emanates from the UK with the balance mainly from Ireland and Canada. Employers' liability (EL) - protecting 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 Â£27 million per employer. Public liability (PL) - this coverage, often written in conjunction with employers' liability covers 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 Â£12 million per assured. Professional indemnity - this 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). UK commercial package policies combine one or more of the liability coverages mainly EL and PL with motor and/or property damage protection. 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 Â£6 million. Approximately 54% 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 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. B.ii. UK motor risks The Group's motor insurance risk written in the UK commercial division is 99% UK which covers fire, theft, collision and third party property and bodily injury liability. 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. C. Marine risks The Group writes a broad account of marine risks with maximum lines set out below: 2007 gross premium written by geography Caribbean 1% Central & Eastern 1% Europe Central & Southern 2% Africa Central America <1% Central Asia <1% East Asia 6% Middle East 2% North America 29% Northern Africa <1% Oceania 3% South America 1% South Asia 1% UK 25% Western Europe 18% (exl. UK) Worldwide / Other 11% Marine classes 2007 Gross Current maximum 2007 Average premium line size line size Â£m Â£m Â£m Hull 12 10 1.0 Cargo 22 17 2.6 Energy 35 20 2.5 War and terrorism 18 17 7.3 Specie 7 34 6.3 Bloodstock 17 4 0.5 Yacht (hull and 20 4 0.9 liability) Liability 16 57 3.6 Notes: 1) Limits are set in US dollars converted at a rate of exchange of Â£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 net 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 by Amlin is generally targeted towards 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. The energy portfolio is mainly offshore rig and construction policies which may be impacted by large individual claims 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 and eventing horses or breeding studs. The average value insured is below Â£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 and there is an expectation of a large number of small claims. Third party liability yacht claims arise from injury or damage caused by one of our policyholders. 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 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 require large clean up costs. 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 and split by territory. 2007 gross premium written by geography Caribbean <1% Central & Eastern 3% Europe Central & Southern 2% Africa Central America 1% Central Asia <1% East Asia 7% Middle East 2% North America 44% Northern Africa 1% Oceania 1% South America 1% South Asia 1% UK 18% Western Europe 19% (exl. UK) Worldwide / Other <1% Aviation classes 2007 Gross Current 2007 Average premium maximum line size Â£m line size Â£m Â£m Airline (hull & 15 84 19.3 liability) General aviation (hull & 5 57 15.4 liability) Risk excess (hull & 6 57 11.1 liability) Airports liability 12 57 21.9 Products 8 50 14.7 Space (hull & liability) 5 46 7.7 Notes: 1) Limits are set in US dollars converted at a rate of Â£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 net of acquisition costs. The airline account is exposed to large claims arising from property damage, death or injury arising from aircraft accident. The domicile of the airline and passengers has a notable influence on the cost of claims as US court awards are generally higher. The general aviation book covers smaller aircraft or cargo and covers owner 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. 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 of normally 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 US. Large accidents involving the potential death of 500 or so passengers are feasible and could potentially result in a gross claim to the division 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. E. Amlin Bermuda 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. 2007 gross premium written by geography Caribbean 4% Central & Eastern 1% Europe Central & Southern 1% Africa Central America <1% Central Asia <1% East Asia 5% Middle East <1% North America 63% Northern Africa <1% Oceania 4% South America 1% South Asia <1% UK 12% Western Europe (exl. 9% UK) Worldwide / Other <1% Direct written business 2007 Current 2007 Gross maximum Average line premium line size size $m $m $m Catastrophe reinsurance 150.1 75.0 6.0 (per programme) Proportional reinsurance 38.5 7.5 1.4 Per risk property reinsurance 34.3 12.5 2.8 (per programme) Special risks 10.5 15.0 6.6 Marine reinsurance 4.2 20.0 10.1 Aviation reinsurance 1.6 20.0 3.8 Accident & health 1.0 7.5 4.1 US Casualty 0.3 5.0 2.1 Amlin Bermuda's direct business has strong similarities to the reinsurance portfolio of the Non-marine division 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 tolerance 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. These are utilised by Syndicate 2001 underwriters on an individual risk basis when deemed appropriate. 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 maximum event limits of $300 million any one zone and $350 million probable maximum loss for losses affecting more than one zone. Catastrophe event exposures per territory are carefully recorded and analysed through loss simulations or realistic disaster scenarios. Amlin Bermuda 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. 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, which Amlin Bermuda would receive through the whole account and specific variable quota shares, 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 an incurred catastrophe event higher than predicted due to unforeseen circumstances. A significant element of the Amlin Bermuda book is catastrophe reinsurance relating to US windstorm. However, a severe catastrophe to a major economic zone in Europe, Japan or the USA is likely to result in an overall loss to the property portfolio. The accident and health class is written through medical expense schemes in the US 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. 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. 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 than the Syndicate currently bears. Reinsurance arrangements The Syndicate purchases proportional reinsurance to supplement line size and to reduce exposure on individual risks. A part of the premium ceded under such facilities is placed with Amlin Bermuda and a separate proportional facility is placed for the US catastrophe excess of loss portfolio. The Syndicate 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 a 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. For instance, unlimited cover is bought for our UK motor portfolio where unlimited third party cover is given on original policies. 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. The Syndicate may also purchase multi-class umbrella protection which responds to a catastrophe loss which could exceed any of the specific programmes bought for aviation, property or excess of loss reinsurance losses. However, since 2006, the amount of excess of loss reinsurance purchased is lower and only responds to losses in excess of $50 million. Also very little multi-class umbrella protection has been purchased for 2008. 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 Syndicate. 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 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 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 Â£165 million for the Syndicate and $300 million any one zone or $350 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 100 years estimated for the natural peril or elemental losses. The Group also adopts risk appetite maximum net limits for a number of other scenarios including aviation collision (Â£140 million) and North Sea rig loss (Â£100 million). The risk appetite policy recognises that there may be circumstances in which the net event limit could be exceeded. Such circumstances include 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: â€¢ The data used reflects the information supplied to the Group by insureds and ceding companies. This may prove to be inaccurate or could develop during the policy period. â€¢ 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, â€¢ The reinsurance programme as purchased is applied - a provision for reinsurer counterparty failure is included but may prove to be inadequate; â€¢ 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 consistent 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. Reserving 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 our UK Commercial 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. Underwriters and claims staff are responsible for setting case reserves for outstanding claims. 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 or lower case 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 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. 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. These provisions are also reviewed annually by external actuaries who examine the work carried out and opine on the sufficiency of reserves. 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. Reserving 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 +/- Â£10.9 million (2006: Â£11.0 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 is an example of a case 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: â€¢ The model is based on a best estimate view of business volumes and rate expectations which may not be borne out in practice; â€¢ A significant change in the portfolio of business could result in the past not being a reliable guide to the future; â€¢ Changing external environmental factors may not be assessed accurately; â€¢ Model risk may be significant in such a complex and developing discipline; â€¢ Key assumptions over levels of correlation between classes may over time prove to be incorrect; â€¢ 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 (larger) levels of capital which are sufficient in the eyes of rating agencies and clients. This is modelling for a single year's outcome only. All figures are based on business plan forecast and assumptions consistent with the work for the October 2007 ICA submission (for the 2008 Year of Account) and thus include the previously projected year end asset and liability position. Risk category after diversification 2008 forecast Â£m Underwriting (new business risk) (459) Reserving (68) Credit (reinsurance counterparty (15) risk) Investment (market risk) 74 Liquidity risk (8) Discounting credit 90 Diversified result (386) Notes: â€¢ 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. â€¢ 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. â€¢ Figures exclude; - Any additional capital provision for operation risk - Dividend or tax considerations - Effects of currency risk - Credit for carried reserve margins â€¢ Non-sterling amounts have been converted at Lloyd's required rates, including for US Dollars $1.92 to Â£1.0. 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 2007 closing exchange rates to aide comparability. All premium is gross of acquisition costs. Group 2001 2002 2003 2004 2005 2006 2007 Gross written premium Â£m Â£m Â£m Â£m Â£m Â£m Â£m Underwriting year At end of underwriting year 668.4 794.5 945.3 926.7 939.2 1,145.1 1,114.2 One year later 629.1 835.3 946.3 935.3 941.0 1,167.6 Two years later 645.3 812.0 950.4 943.0 947.6 Three years later 651.0 811.7 951.8 945.4 Four years later 652.7 813.1 951.9 Five years later 655.3 812.8 Six years later 655.4 Current ultimate gross 655.4 812.9 951.9 945.4 953.3 1,178.2 1,136.9 written premium Gross earned premium 2001 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Â£m At end of underwriting year 333.2 411.0 505.8 471.6 484.8 624.5 620.8 One year later 594.3 811.7 900.5 889.2 899.1 1,122.3 Two years later 645.3 812.0 950.4 943.0 947.6 Three years later 651.0 811.6 951.8 945.4 Four years later 652.7 813.1 951.9 Five years later 655.3 812.8 Six years later 655.4 Syndicate 2001 Total 2001 2002 2003 2004 2005 2006 2007 Gross written premium Â£m Â£m Â£m Â£m Â£m Â£m Â£m Underwriting year At end of underwriting year 668.4 794.5 945.3 926.7 936.1 937.3 880.1 One year later 629.1 835.3 946.3 935.3 939.2 959.2 Two years later 645.3 812.0 950.4 943.0 945.9 Three years later 651.0 811.7 951.8 945.4 Four years later 652.7 813.1 951.9 Five years later 655.3 812.8 Six years later 655.4 Current ultimate gross 655.4 812.9 951.9 945.4 951.6 969.8 902.8 written premium Gross earned premium 2001 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Â£m At end of underwriting year 333.2 411.0 505.8 471.6 484.8 503.5 474.1 One year later 594.3 811.7 900.5 889.2 897.6 921.0 Two years later 645.3 812.0 950.4 943.0 945.9 Three years later 651.0 811.6 951.8 945.4 Four years later 652.7 813.1 951.9 Five years later 655.3 812.8 Six years later 655.4 Amlin Bermuda Ltd Total Gross written premium 2005 2006 2007 Underwriting year $m $m $m At the end of underwriting 6.1 413.6 465.8 year One year later 3.6 414.7 Two years later 3.4 Current ultimate gross 3.4 414.7 465.8 written premium Gross earned premium 2005 2006 2007 Underwriting year $m $m $m At the end of underwriting - 240.8 292.0 year One year later 3.0 400.5 Two years later 3.4 Claims development The table below illustrates the development of the estimate of cumulative claims for Syndicate 2001 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 2007 exchange rates to aide comparability. Non-marine Gross basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Current ultimate gross 409.7 509.4 504.3 529.1 567.9 522.6 written premium Estimate of cumulative claims At end of underwriting year 231.1 257.2 355.3 553.3 237.6 246.3 One year later 157.9 178.0 373.2 541.0 163.9 Two years later 136.1 167.0 364.6 536.8 Three years later 132.9 155.8 354.6 Four years later 132.2 152.5 Five years later 128.5 Cumulative payments 114.7 128.8 312.4 453.1 79.2 14.9 Estimated balance to pay 13.8 23.7 42.2 83.7 84.7 231.4 Net basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Estimate of cumulative claims At end of underwriting year 192.5 212.7 365.5 299.9 191.2 191.2 One year later 143.6 149.4 246.1 287.8 132.4 Two years later 125.0 136.9 237.2 283.5 Three years later 121.8 126.1 225.6 Four years later 121.0 122.3 Five years later 117.3 Cumulative payments 111.8 109.1 187.9 199.9 73.3 13.7 Estimated balance to pay 5.5 13.2 37.7 83.6 59.1 177.5 Marine Gross basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Current ultimate gross 124.2 165.4 163.8 177.7 199.3 186.8 written premium Estimate of cumulative claims At end of underwriting year 74.3 97.7 92.8 129.3 97.9 97.0 One year later 74.3 93.1 85.3 177.0 92.0 Two years later 63.4 70.9 70.8 164.2 Three years later 61.9 69.7 71.8 Four years later 60.1 71.6 Five years later 58.5 Cumulative payments 52.0 60.7 57.4 97.4 38.6 8.9 Estimated balance to pay 6.5 10.9 14.4 66.8 53.4 88.1 Net basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Estimate of cumulative claims At end of underwriting year 66.6 84.5 87.2 87.5 77.2 72.5 One year later 63.6 77.0 74.8 99.6 72.2 Two years later 52.3 57.6 59.1 93.2 Three years later 51.2 56.4 60.7 Four years later 49.7 56.1 Five years later 48.1 Cumulative payments 45.9 51.8 46.0 58.0 35.4 8.3 Estimated balance to pay 2.2 4.3 14.7 35.2 36.8 64.2 Aviation Gross basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Current ultimate gross 91.8 82.1 86.5 76.5 75.9 58.4 written premium Estimate of cumulative claims At end of underwriting year 66.7 50.6 51.7 47.0 47.6 45.4 One year later 45.5 37.7 42.2 45.7 57.8 Two years later 46.2 30.8 38.0 38.1 Three years later 42.8 30.8 34.8 Four years later 42.5 27.7 Five years later 38.8 Cumulative payments 30.3 17.9 20.2 11.9 10.2 3.4 Estimated balance to pay 8.5 9.8 14.6 26.2 42.6 42.0 Net basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Estimate of cumulative claims At end of underwriting year 44.1 38.3 42.1 38.6 33.0 32.9 One year later 35.4 29.8 36.1 33.6 31.8 Two years later 34.7 24.3 32.6 28.0 Three years later 31.7 24.0 29.9 Four years later 30.9 21.5 Five years later 28.7 Cumulative payments 25.6 15.1 18.0 8.8 8.5 2.9 Estimated balance to pay 3.1 6.4 11.9 19.2 23.3 30.0 UK Commercial Gross basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Current ultimate gross 187.0 195.0 190.8 167.6 146.2 135.0 written premium Estimate of cumulative claims At end of underwriting year 136.0 144.2 125.6 114.3 101.6 100.0 One year later 122.7 129.1 111.4 110.5 105.5 Two years later 110.4 102.0 104.1 102.4 Three years later 106.4 96.4 91.3 Four years later 100.2 96.5 Five years later 95.9 Cumulative payments 73.3 59.3 50.3 39.4 26.2 8.2 Estimated balance to pay 22.6 37.2 41.0 63.0 79.3 91.8 Net basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Estimate of cumulative claims At end of underwriting year 112.2 125.2 110.1 103.6 84.7 84.8 One year later 104.7 109.2 101.4 100.2 88.3 Two years later 92.8 91.9 93.1 96.6 Three years later 87.1 87.9 87.7 Four years later 82.7 87.9 Five years later 77.1 Cumulative payments 69.5 59.3 48.2 39.3 26.2 8.2 Estimated balance to pay 7.6 28.6 39.5 57.3 62.1 76.6 Syndicate 2001 Total Gross basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Current ultimate gross 812.8 951.9 947.5 957.6 969.8 902.8 written premium Estimate of cumulative claims At end of underwriting year 508.0 549.6 625.3 844.0 484.7 488.7 One year later 400.4 437.9 612.2 874.4 414.2 Two years later 356.1 370.7 577.3 841.5 Three years later 344.0 352.8 552.5 Four years later 334.9 348.2 Five years later 321.7 Cumulative payments 270.1 266.6 440.2 601.7 154.2 35.4 Estimated balance to pay 51.6 81.6 112.3 239.8 260.0 453.3 Net basis 2002 2003 2004 2005 2006 2007 Underwriting year Â£m Â£m Â£m Â£m Â£m Â£m Estimate of cumulative claims At end of underwriting year 415.4 460.8 505.0 529.6 386.1 381.5 One year later 247.2 365.4 458.4 521.2 324.7 Two years later 304.8 310.7 422.0 501.3 Three years later 291.7 294.4 403.9 Four years later 284.2 287.8 Five years later 271.2 Cumulative payments 252.7 235.3 300.1 306.1 143.5 33.2 Estimated balance to pay 18.5 52.5 103.8 195.2 181.2 348.3 Amlin Bermuda Ltd Total Claims gross basis 2005 2006 2007 Underwriting year $m $m $m Estimate of cumulative claims At end of underwriting year - 86.2 94.5 One year later 1.2 64.3 Two years later 0.6 Cumulative payments 0.3 42.8 11.7 Estimated balance to pay 0.3 21.5 82.8 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 both of which have to be invested in accordance with the regulations applicable to where the underwriting business is being written. The asset categories are as follows. Underwriting assets These are the premium 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 or 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 and the Investment Advisory Panel. The Investment Management Executive comprises the Chief Executive, Finance Director, Underwriting Director and Chief Investment Officer. They meet 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 provides advice on investment regulations. Risk tolerance The investment process is formulated from the risk tolerance, which is determined by 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. 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 cashflows 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 (VaR(1)) 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 basis(2). 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 and are reviewed periodically using Watson Wyatt Worldwide. The managers as at 31 December 2007 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 Sterling bonds Management Morley Fund Management Global property manager of managers Robeco Investment US and Canadian dollar bonds Management THS Partners Global equities Western Asset Management US dollar and Euro bonds Pooled vehicles Barclays Global Investors Sterling, Euro and US dollar Money Market Funds Goldman Sachs Asset Sterling, Euro and US dollar Money Market Funds and Management LIBOR plus Fund HSBC Asset Management US dollar Money Market Funds Insight Investment Sterling Money Market Fund Management JP Morgan Asset US dollar Money Market Funds Management PIMCO Sterling and US dollar bonds Western Asset Management US dollar Money Market Fund Commingled funds Corporation of Lloyd's US dollar, Canadian dollar, Australian dollar, Treasury Services 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: Corporation Goldman Aberdeen AEGON BGI of Lloyd's Sachs HSBC ING Insight JPMorgan Morley PIMCO Robeco THS UBS Western Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Total as at 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 31 December 2007 % 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 Total as at 312.7 158.1 72.1 55.6 157.2 46.7 - 367.1 48.3 43.0 75.9 418.6 292.0 11.1 312.5 31 December 2006 % 13.2 6.7 3.0 2.3 6.6 2.0 - 15.5 2.0 1.8 3.2 17.7 12.3 0.5 13.2 Asset allocation The asset allocation at the year end is set out below. The analysis in this section covers the investments for which Amlin has direct responsibility together with Â£60 million (2006: Â£55 million) of overseas regulatory deposits managed by the Corporation of Lloyd's on Amlin's behalf in commingled funds. The assets in the table include Â£14.7 million (2006: Â£16.7 million) which relates to accrued income and net unsettled payables for investments which are shown separately in the notes to the accounts. The table does not include Â£5.5 million (2006: Â£9.2 million) which relates to spread syndicate exposure (note 17), derivative positions outstanding at year end and other liquid investments. 31 December 2007 31 December 2006 Underwriting Underwriting assets Capital Total assets Capital Total Â£m Â£m Â£m Â£m Â£m Â£m Global equities - 232.1 232.1 - 248.3 248.3 Government 585.6 252.1 837.7 643.8 239.1 882.9 securities Government 3.0 - 3.0 44.2 44.2 index-linked securities - Government 76.4 8.0 84.4 7.2 - 7.2 agencies Supranational 44.5 2.1 46.6 0.7 16.1 16.8 Asset backed 25.2 55.5 80.7 81.7 59.2 140.9 securities Mortgage backed 18.0 67.6 85.6 131.4 77.2 208.6 securities Corporate bonds 212.4 53.1 265.5 208.1 103.9 312.0 Pooled Vehicles 53.3 121.4 174.7 50.1 25.7 75.8 Bonds 1,018.4 559.8 1,578.2 1,167.2 521.2 1,688.4 Property(3) - 75.4 75.4 43.1 - 43.1 Cash with fund 3.4 8.3 11.7 1.6 14.9 16.5 manager Money market 458.0 292.7 750.7 168.7 228.4 397.1 funds Other liquid 461.4 301.0 762.4 170.3 243.3 413.6 investments 1,479.8 1,168.3 2,648.1 1,380.6 1,012.8 2,393.4 31 December 2007 31 December 2006 Underwriting Underwriting assets Capital Total assets Capital Total % % % % % % Global equities - 19.9 8.8 - 24.5 10.4 Government 39.6 21.5 31.6 46.6 23.6 36.9 securities Government 0.1 1.8 index-linked securities 0.2 - 3.2 - Government 5.2 0.7 3.2 0.5 - 0.3 agencies Supranational 3.0 0.2 1.8 0.1 1.6 0.7 Asset backed 1.7 4.8 3.0 5.9 5.8 5.9 securities Mortgage backed 1.2 5.8 3.2 9.5 7.6 8.7 securities Corporate bonds 14.4 4.5 10.1 15.0 10.3 13.0 Pooled Vehicles 3.6 10.3 6.6 3.6 2.5 3.2 Bonds 68.9 47.8 59.6 84.4 51.4 70.5 Property - 6.5 2.8 3.1 - 1.8 Cash with fund 0.2 0.7 0.4 0.3 1.5 0.7 manager Money market 30.9 25.1 28.4 12.2 22.6 16.6 funds Other liquid 31.1 25.8 28.8 12.5 24.1 17.3 investments 100.0 100.0 100.0 100.0 100.0 100.0 At 31 December 2007 the industry and geographical splits of global equities and bond portfolios were as follows: Global equities 2007 2006 2007 2006 Industry % % Region (based on % % domicile of issuer) Oil & Gas 9.3 9.0 United Kingdom 18.1 23.2 Basic Materials 3.9 1.8 USA and Canada 19.0 19.8 Industrials 5.9 13.3 Europe (ex UK) 37.2 34.9 Consumer Goods and 24.8 23.6 Far East 21.5 21.6 Services Health Care 3.4 5.3 Emerging markets 4.2 0.5 Telecommunications 14.9 11.4 Other Utilities 6.6 4.7 Financials 29.0 29.9 Technology 2.2 1.0 100.0 100.0 100.0 100.0 Bonds 2007 2006 2007 2006 Industry % % Region (based on % % domicile of issuer) Oil & Gas 3.5 3.8 United Kingdom 18.9 29.5 Basic Materials 0.5 0.1 USA and Canada 61.3 61.4 Industrials 1.9 12.8 Europe (ex UK) 17.7 7.5 Consumer Goods and 6.5 5.4 Far East 0.9 Services 1.3 Health Care 0.6 0.1 Emerging markets 0.8 0.6 Telecommunications 5.0 4.5 Other - 0.1 Utilities 1.2 6.3 Financials 80.8 67.0 100.0 100.0 100.0 100.0 Note: The two tables by industry and region exclude pooled investments. 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. Amlin Group's 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. Prices for over the counter derivatives, are supplied by Bloomberg and checked to the relevant counterparty. 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 during the second half of 2007 meant that assessing fair value was more difficult than usual. As an additional check, the majority of prices as at 31 December 2007 have been verified by Amlin against publicly available quoted prices to verify that the prices used are a good estimation for fair value. In 2007 Amlin entered into a number of equity index options to limit the volatility of the equity exposure. Put options were bought limiting the downside risk of exposures to the FTSE 100, S&P 500, DAX and CAC indices to no more than five percentage points from the market levels at the dates of the trades. These transactions incurred no premiums as call options were simultaneously sold, which meant that the upside of market movements was capped to a few percentage points. At the end of the year these hedges covered 25% of the Group's equity exposure until the end of March 2008. The valuation of these transactions at the 31 December 2007 was Â£0.2 million. If global equity markets fell by 10% the pre-tax impact on the overall assets and profit as at 31 December 2007, pre-tax, would be a decline of Â£15.9 million (2006: Â£24.8 million). As explained above, the downside risk is mitigated by the hedges that were in place. These expire at the end of March. Without the hedges the downside risk would be Â£23.2 million. Interest rate risk Investors' expectations for interest rates will impact bond yields(4). 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 duration(5). 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 2007 31 December 2006 Underwriting Capital Total Underwriting Capital Total assets assets Â£m Â£m Â£m Â£m Â£m Â£m Less than 1 95.8 76.8 172.6 106.7 153.8 260.5 year 1-2 years 58.8 72.8 131.6 105.2 34.4 139.6 2-3 years 153.3 102.8 256.1 106.2 47.6 153.8 3-4 years 242.5 49.0 291.5 153.7 22.0 175.7 4-5 years 219.2 30.5 249.7 388.2 105.3 493.5 Over 5 years 195.6 106.4 302.0 257.0 132.5 389.5 965.2 438.3 1,403.5 1,117.0 495.6 1,612.6 Note: The table above excludes Â£174.7 million (2006:Â£75.8 million) of pooled investments. 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, the underwriting assets are currently all held in money market funds. For the London 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 2007 31 December 2006 Underwriting assets Assets Liabilities Assets Liabilities Years Years Years Years London Sterling 2.3 3.2 2.4 2.5 US Dollars 2.8 3.0 3.0 3.1 Euro 3.3 3.2 3.3 3.0 Canadian Dollars 2.7 3.3 3.0 3.2 The asset durations are based on Bloomberg prepayment data. In the few instances where this is not available, investment managers have provided independent proof of prepayment data used to calculate duration. Some differences occur between custodian durations and those of fund managers due to the use of different prepayment assumptions. The material differences are for the European portfolio, where the manager's duration is 11% shorter than the custodian and the US portfolios where the fund managers' duration is 9% below that of the custodian. In all instances the duration differences are within the tactical 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) Shift in Syndicate Capital Bermuda increase in yield Sterling US$ CAN$ Euro Sterling Underwriting Capital value (basis % % % % % % % Â£m points) 100 (2.5) (2.6) (2.3) (3.0) (0.6) (0.1) (1.0) (42) 75 (1.9) (1.9) (1.8) (2.2) (0.5) (0.1) (0.7) (32) 50 (1.2) (1.3) (1.2) (1.5) (0.3) - (0.5) (21) 25 (0.6) (0.6) (0.6) (0.7) (0.1) - (0.2) (10) -25 0.6 0.7 0.6 0.7 0.1 - 0.2 10 -50 1.2 1.3 1.2 1.5 0.3 - 0.4 20 -75 1.9 1.9 1.8 2.2 0.4 0.1 0.6 31 -100 2.5 2.6 2.3 3.0 0.6 0.1 0.8 41 Unpaid claims reserves are estimated on an undiscounted basis and therefore, are not subject to interest rate fluctuations. 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. The intention is to time the currency transactions in order to optimise the conversion rates. 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. A summary of the sales for 2007 is shown in the table below. US dollar Euro Canadian dollar Total Average Total Average Total Average Â£m rate Â£m rate Â£m Rate 31 December 2007 532 2.00 29 1.47 16 2.48 In order to reduce the foreign exchange risk at the Group level, during 2007 $200m of Amlin Bermuda's surplus underwriting assets have been converted into sterling at an average exchange rate of 1.9870. 31 December 2007 31 December 2006 Currency risk Sterling US$ CAN$ Euro Sterling US$ CAN$ Euro Cash and cash 8.4 3.0 - 2.1 13.5 3.6 - 1.7 equivalents Financial 1,224.9 2,471.0 110.4 157.9 955.8 2,501.2 105.1 132.7 investments at fair value through income Reinsurance assets 137.5 788.3 27.9 56.5 159.9 887.6 27.0 48.7 Loans and 28.7 319.0 21.9 26.7 59.7 348.0 28.6 26.8 receivables Current income tax 4.0 - - -- 0.4 11.6 - - assets Deferred tax assets 13.4 - - - 20.9 - - - Property and 5.8 - - - 5.6 1.2 - - equipment Total monetary 1,422.7 3,581.3 160.2 243.2 1,215.8 3,753.2 160.7 209.9 assets Insurance contracts 456.5 1,552.2 74.3 149.5 488.4 1,696.4 77.4 145.2 Trade and other 177.4 51.9 - 4.9 46.9 36.4 2.1 3.0 payables Current income tax 25.7 - - - 28.7 - - - liabilities Borrowings 227.6 99.4 - - 227.2 101.1 - - Retirement benefit 2.8 - - - 7.5 - - - obligations Deferred tax 128.1 - - - 95.4 - - - liabilities Total monetary 1,018.1 1,703.5 74.3 154.4 894.1 1,833.9 79.5 148.2 liabilities Net monetary assets 404.6 1,877.8 85.9 88.8 321.7 1,919.3 81.2 61.7 As at the end of December 2007 the investment managers held some forward foreign exchange contracts in their portfolios to hedge non-base currency investments. These are transacted with highly rated banks 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. 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. In order to mitigate the impact of these currency fluctuations, during 2007 the Group has implemented a policy of hedging up to 50% of the net dollar exposure resulting from Amlin Bermuda's capital assets. As the transactions are not currently 'hedge accounted', realised and unrealised gains and losses are recorded in the profit and loss account of the period in which they occur. At the year end hedges were in place for $400 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 a Â£2.5 million loss as at the year end. 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 Â£31.8 million foreign exchange loss/(gain) in the Group income statement at 31 December 2007. In relation to translation of overseas subsidiaries, the same exchange rate deterioration would result in a Â£68 million additional exchange loss through consolidated reserves. This loss would be offset by, a valuation gain of Â£10.6 million on the hedges in place. The same exchange rate improvement would result in a Â£68 million exchange gain through consolidated reserves. This gain would be offset by a valuation loss of Â£20.4 million on the hedges in place. 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 avoid us having to be 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 activity. The policy of limiting the extent of duration divergence between the underwriting assets and the liabilities helps to reduce the risk of a cash flow mismatch. The Group funds its insurance liabilities with a portfolio of equity and debt securities exposed to market 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 2007: As at 31 December 2007 No stated Contractual cash Carrying flows (undiscounted) Financial assets Maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amount Shares and other 307.5 - - - - 307.5 variable yield securities Debt and other fixed 174.7 172.6 387.7 541.2 302.0 1,578.2 income securities Cash and liquid funds 762.4 - - - - 762.4 Total 1,244.6 172.6 387.7 541.2 302.0 2,648.1 No stated Expected cash Carrying flows (undiscounted) Insurance liabilities Maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amount Insurance contracts - - 568.4 415.3 181.6 184.9 1,350.2 short term Less assets arising - (100.8) (82.8) (39.1) (47.5) (270.2) from reinsurance contracts held - short term contracts Total - 467.6 332.5 142.5 137.4 1,080.0 Difference in 1,244.6 (295.0) 55.2 398.7 164.6 1,568.1 contractual cash flows As at 31 December 2006 No stated Contractual cash Carrying flows (undiscounted) Financial assets maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amount Shares and other 291.4 - - - - 291.4 variable yield securities Debt and other fixed 75.7 260.5 293.4 669.2 389.6 1,688.4 income securities Cash and liquid funds 413.6 - - - - 413.6 Total 780.7 260.5 293.4 669.2 389.6 2,393.4 No stated Expected cash Carrying flows (undiscounted) Insurance liabilities Maturity 0-1 yr 1-3 yrs 3-5 yrs >5 yrs amount Insurance contracts - 658.2 452.1 181.1 126.1 1,417.5 Less assets arising - (177.7) (116.9) (37.7) (24.7) (357.0) from reinsurance contracts held Total - 480.5 335.2 143.4 101.4 1,060.5 Difference in 780.7 (220.0) (41.8) 525.8 288.2 1,332.9 contractual cash flows The assets in the above table include Â£18.0 million (2006: Â£16.7 million) accrued income which is shown separately in the notes to the accounts. The table above does not include the derivative positions that Amlin plc had outstanding at the year end. Liquidity in the event of a major disaster is tested regularly using internal cash flow forecasts and realistic disaster scenarios. In addition, the London underwriting asset investment guidelines require at least 25% of the funds to be held in government bonds and/or cash equivalents, which are highly liquid. This figure is 100% for Bermuda. In addition pre-arranged revolving credit facilities are available from bank facilities. As discussed above, the capital assets are not matched to liabilities. However, if a major insurance event occurs the investment strategy is reviewed to ensure that sufficient liquidity is also available in the capital assets. This information is provided by RNS The company news service from the London Stock Exchange

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