Final Results

Amlin PLC 08 March 2005 AMLIN plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 (UNAUDITED) Financial highlights â€¢ Excellent profit before tax of Â£121.6 million, after the Â£74 million impact of 2004 windstorms â€¢ Record Syndicate 2001 combined ratio at 82% (2003: 83%) â€¢ Third consecutive year of return on equity in excess of 20% â€¢ Average return on equity of 23% over last three years â€¢ Dividend per share increased 220% to 8.0p â€¢ Real net gearing reduced to nil at year end Operational highlights â€¢ London market brokers confirm Amlin as the leading Lloyd's business for financial strength and usage â€¢ Moody's upgrades Syndicate 2001's financial strength rating to A1 (from A2) â€¢ Turnover among senior underwriters was below 5% for fourth year in succession â€¢ Continued progress in leading process change in the Lloyd's market â€¢ New vision set for 2009 Outlook for 2005 â€¢ 2005 expected to be another good year for earnings â€¢ Record unearned premium reserve of Â£501 million carried forward to 2005 â€¢ Good January renewal season - Â£267 million written by 28 February with average renewal rate reductions of only 3% â€¢ Strong cashflow has increased potential for contribution from investments Enquiries: Charles Philipps, Amlin plc 0207 746 1000 Richard Hextall, Amlin plc 0207 746 1000 Hannah Bale, Head of Communication, Amlin plc 0207 746 1118 David Haggie, Haggie Financial Limited 0207 417 8989/07768 332486 Peter Rigby, Haggie Financial Limited 0207 417 8989/07803 851426 FINANCIAL HIGHLIGHTS 2004 2003 2002 2001 2000 Â£m Â£m Â£m Â£m Â£m Gross premiums written 945.6 937.4 717.1 587.4 363.3 Net premiums written 790.2 787.6 573.0 486.5 284.1 Earned premium 696.3 684.7 494.1 342.9 231.1 Operating profit (loss) before tax 128.1 124.4 45.6 (61.7) (5.9) (based on longer term investment returns) Profit (loss) on ordinary activities 121.6 120.3 55.4 (81.5) (26.4) before tax Return on equity 22.3% 27.0% 20.1% (33.0)% (8.4)% Per share amounts Operating profit (loss) 31.3p 30.9p 17.7p (40.5)p (9.7)p Earnings 22.1p 21.6p 14.1p (33.3)p (9.6)p Net assets 113.6p 99.3p 80.3p 66.4p 100.1p Net tangible assets 99.1p 84.6p 64.5p 59.0p 92.1p Dividends 8.0p 2.5p 2.0p - 4.0p Syndicate 2001 operating ratios Claims ratio 52% 51% 63% 87% 84% Expense ratio 30% 32% 32% 30% 27% Combined ratio 82% 83% 95% 117% 111% CHAIRMAN'S STATEMENT 2004 was a year of contrasts. Continued excellent trading conditions and in the first six months a lower than normal level of claims activity. In the second half there was an almost unprecedented amount of windstorm activity with each of the hurricanes hitting Florida estimated to be among the ten most costly natural catastrophes ever recorded in the United States. Our achievement of a return on equity of 22.3%, the third year in succession in excess of 20%, after these events, is a demonstration of the present strength of the business. Our profit before tax for the year was Â£121.6 million, modestly up on 2003 (Â£120.3 million) and an excellent result after the windstorm costs of Â£74 million. After tax, this yielded earnings per share of 22.1p (2003: 21.6p). All areas of the Group performed well. The combined ratio was an excellent 82%, investment returns were strong and expenses were well controlled. Dividend The Board proposes a final dividend of 5.0p per share making total dividends for 2004 of 8.0p per share (2003: 2.5p) which represent 36% of 2004 earnings. This exceeds our commitment made last year to distribute at least 30% of our earnings, and for 2005 and 2006 we aim, in the absence of unusual circumstances, to pay dividends equivalent to at least the higher of 8.0p, adjusted for inflation, and 30% of earnings. The Board will keep under review the Company's ongoing capital requirements taking account of medium term needs, our underwriting strategy of managing exposures over the insurance cycle and our cross cycle target return on equity of 15%. We expect to consider further possibilities for returning capital to shareholders over and above the anticipated dividends referred to above. The 2004 final dividend, in respect of which a scrip dividend alternative is being offered, is to be paid (subject to shareholder approval) on 24 May 2005 to shareholders on the register on 29 March 2005. Strategy The successful growth of the business into an excellent market for the last three years has resulted in a far stronger market position and reputation for Amlin and has also delivered a shareholder return ahead of most of our peers. In October 2004 the Board reviewed and endorsed management's plans for the next phase of the insurance cycle and for ensuring that Amlin continues to build upon its strengths and long term potential. As discussed later in this preliminary statement, Amlin intends to become the 'global reference point for quality' in its markets and is currently putting in place a number of strategies to achieve this goal. Outlook With the increased momentum for change in insurance markets, as Lloyd's, the FSA and others seek to enforce higher standards of efficiency, service and transparency, there is huge scope for strong and well organised businesses, such as Amlin, to extend their leadership position. Even though we are past the peak of this insurance pricing cycle, conditions remain favourable and there is every prospect of 2005 being another good underwriting year. At this stage in the cycle, however, we are not seeking to grow our top line, focusing on retention of margin and return on equity. There are signs of increased discipline in the Lloyd's market, although sadly this is not universal. However, Amlin had a good January renewal season and renewal terms have to date remained relatively robust. Much of the 2005 underwriting result will be earned from business written in 2004 and, at 1 January 2005, we carried forward a record unearned premium reserve of Â£501 million, up 17% over the reserve brought forward at 1 January 2004. Similarly, a significant proportion of business written in 2005 will be earned in 2006. Our asset base has grown dramatically over the past four years. We are establishing a track record for managing these assets astutely to complement our underwriting returns and, with continued success in this area, we expect a greater return from this source. Amlin has made tremendous progress developing its underwriting skills. New risk management techniques and information systems are enabling our underwriters to better price risk as well as producing higher quality and more timely management information. This places Amlin in a strong position to manage well in a tougher market environment. In the meantime, rates remain at a healthy level and we believe the outlook for 2005 and 2006 is good. Board The past 12 months has seen the size of the Board reduced to ten, including five non-executive directors and myself. The Board has been working well, and we are presently in the process of recruiting an additional non-executive director to address the Higgs requirement for there to be at least parity between independent non-executives and others (excluding the chairman) on the Board. Nigel Buchanan joined the Board in March 2004 and brings with him experience of the financial services sector and an excellent understanding of regulation. I reiterate our thanks to those who retired in 2004, John Kennedy, John Sanders, and John Stace for their contributions going back to the formation of the Company in 1993. The Amlin Team Well done again to our management team, so ably led by Charles Philipps, and all employees at Amlin for turning in yet another excellent set of results. Very good progress continues to be made in building a solid business with great potential and this is not achieved without real effort and commitment for which we owe our thanks. Roger Taylor Chairman FINANCIAL PERFORMANCE The Â£121.6 million (2003: Â£120.3 million) before tax profit is another strong financial performance, particularly given the Â£74 million of net hurricane and typhoon claims incurred in the year. Return on equity was 22% (2003: 27%). Underwriting contributed Â£102.5 million (2003: Â£119.4 million) to the pre tax result with a small rise in the claims ratio being offset by a fall in the expense ratio. Different levels of ownership of capacity across the recent years of account meant that the Group's underwriting performance was slightly worse than for Syndicate 2001 as a whole. Specifically, the impact of the hurricanes fell on 2004 but reserve releases benefited prior years of account. Investments added Â£50.6 million (2003: Â£32.0 million) reflecting increased investment balances, a greater allocation of funds to cash, which generated good average returns, away from bonds and a strong performance from our equity investments. Net other costs amounted to Â£31.5 million (2003: Â£31.1 million) largely unchanged for the year. Trading conditions and written premium The contribution from underwriting remained healthy in 2004, despite claims from the hurricane and typhoon catastrophes in the third quarter. Underlying trading conditions were strong in 2004 with an overall renewal rate reduction of only 4%. Our retention ratio was 79%. Gross premiums grew by 0.9%. The 14% increase in participation in our managed syndicate was offset by the impact of the stronger dollar against sterling (average rate for 2004: $1.83/Â£1; 2003: $1.64/ Â£1). At constant rates, gross premium written by Syndicate 2001 fell by 8%. Net premiums written increased by 0.3%. The reinsurance protection was largely unchanged for the full year but less business was ceded to reinsurers through whole account quota share arrangements. This was offset to a degree by reinstatement costs from the windstorm losses. Overall, 17% of gross income was ceded to reinsurers, the same percentage as 2003. Net earned premium was up by 1.7% to Â£696.3 million (2003: Â£684.7 million). 1%, 44% and 55% of the earned premium was written in the 2002, 2003 and 2004 years of account respectively. The total cost of the US hurricanes is now estimated to be $265 million gross and $118.6 million net of reinsurance. Overall, the gross loss has increased by 8% against our original estimate. Frances has increased substantially, whilst Jeanne has reduced, as claimants have allocated losses from these hurricanes which followed similar paths. Net of reinsurance, the movement is 3%. In contrast our loss estimate for Typhoon Songda has increased by Â£5 million from our initial forecast which was at a very early stage. This loss is now more fully developed and our reserve estimate appears prudent. Underwriting performance (100% Syndicate) The following commentary is provided as if we owned 100% of Syndicate 2001 across all recent years of account. This removes any distortion in performance which is attributable to changing levels of our ownership of Syndicate 2001. Overall the combined ratio improved to 82% from 83% in 2003. This is a highly creditable performance given the higher level of natural catastrophes. This ratio reflects strong trading in the 2003 and 2004 underwriting years. In addition the year benefited from Â£62.7 million (2003: Â£34.3 million) of releases from reserves established in prior periods. This once again highlights the prudent reserving policy that we pursue. Non-marine The business written is a blend of classes exposed to catastrophic, or large loss events, and attritional property and casualty classes. The division remained US focused with 68% of business written in US$. After adjusting for foreign exchange movements gross premium income fell by only 2%. Across the portfolio the average renewal rate reduced by 6%, with a retention rate of 81%. This reflected a 6.5% reduction in property related classes and a continued small increase in rates on casualty business. The combined ratio remained at an excellent 79% (2003: 78%). Naturally the division bore the majority of the windstorm losses which increased the combined ratio by 15%. The only other major natural catastrophe in 2004 was the Asian Earthquake and Tsunami which had no material impact on the division's result. Continued reserve releases of Â£36.6 million offset much of the cost of the windstorms. Marine The marine division writes a blend of volatile classes, such as energy and war, alongside more attritional classes, such as hull, cargo and yacht. Rates were stable during 2004 (2003: 8% increase). However the underlying class movement reflected the recent changes in conditions. For example, energy which was significantly repriced in 2001, 2002 and 2003 began to weaken in 2004 with an average decline in rates of 11% for the year. In contrast hull risks, which were slower to improve than many other classes, achieved a 7% rate improvement. Overall gross premium income fell by 16% to Â£158 million partly as a result of exchange rate changes. The combined ratio was once again strong at 86% (2003: 82%). Steady, good performance across most classes, with very strong results in energy and war, combined to deliver an excellent outturn. The offshore energy industry loss from Hurricane Ivan is estimated to be $2.5 billion. However, the marine division's gross loss from this is estimated to be a modest $8.5 million and, with significant reinsurance protection available, the net energy loss is robustly reserved. Reserve releases were slightly lower than last year at Â£9.4 million (2003: Â£10.4 million). Aviation The airline portfolio was again an area where competition increased during 2004 and for this account, premium income was down Â£15.6 million. Average rate falls were 10% (2003: 1.5% fall). However, as air traffic continued to increase during the year, this offset the underlying fall in rates. Other aviation classes continued to experience renewal rate increases, particularly on the products account where, after a number of disappointing years, we pressed for and achieved rating improvements. Overall the division's renewal rate reduction was 0.1% with 73% of 2003 business being renewed. There were no significant airline losses during the year. For the fourth consecutive year, the number of fatal revenue passenger airline accidents diminished with only 11 being recorded in 2004. Amlin had an exposure to only two of these. Consequently the combined ratio remained low at 88% (2003: 92%). UK Commercial Premium income in the UK commercial division reduced by Â£51 million during the year. Competition in UK commercial motor increased during the year. Although renewal rates were largely unchanged and retention rates were a good 82%, competition for new business was more intense and levels of new business fell by Â£18 million. Also final income received from liability business was lower than anticipated last year and this had a knock-on effect to levels in 2004. However, the overall combined ratio was 83% (2003: 92%). Reserve releases of Â£13.1 million were high as both motor and liability accounts ran off well. The underlying ratio of 92% reflects the healthy environment that has existed in the UK in recent years. Investment performance In 2004 investment return was Â£50.6 million, up 58% on the previous year. This was achieved through good returns from asset classes and an increase in assets invested. The Group's cash and investments increased by 25% to Â£1.3 billion. Technical funds Amlin's technical funds are invested in short duration investment grade bonds and cash. Bond yields started the year at relatively low levels with an expectation of interest rate rises beginning to be factored in. This accelerated in the second quarter of the year leading to only modest returns at the interim reporting stage. However in the third quarter expectations of interest rate increases moderated and this helped deliver acceptable full year bond returns across all currencies relative to cash yields. High levels of cash have been held through the year in sterling as the risk/ reward trade off between cash and short duration bonds appeared to us to favour cash. Good returns were achieved on our sterling portfolios. Solvency funds The strong performance of equities, particularly in the latter part of the year, justified our decision to increase our equity allocation to 25% in 2003. The equity portfolio, managed by Taube Hodson Stonex Partners, produced a return of 14.4%, exceeding the FTSE All World Index benchmark return by 5.6%. Through most of the year our strategic asset allocation was 25% equities, 70% cash and cash equivalents and 5% long duration bonds. In November, following a reappraisal of our risk appetite as the cycle peaked and forecast leverage reduced, the Board approved a change in the strategic asset allocation to 50% equities and 50% cash. By the end of December, the equity proportion of the solvency funds had risen to 33%. Cash was used to balance the potential volatility of equities. The cash funds generated a 4.7% return that compares with the total return on UK government bonds of 6.6%. Expenses Operating expenses increased by Â£2.4 million, or 1.1%, for the year. The increase in expenses from our larger share of syndicate operating expense was offset by a Â£15.7 million reduction in the 2% premium levy, as it was withdrawn by Lloyd's. The underlying Syndicate 2001 operating expense reduced by 2%. Other charges rose Â£2.2 million to Â£37.4 million. This includes a Â£17.3 million (2003: Â£18.9m) cost of incentives to staff. We have accrued a further Â£4.1 million under the capital builder plan, with the total accrual under the scheme now amounting to Â£10 million. BALANCE SHEET MANAGEMENT Financial leverage We believe that debt capital should be a significant part of capital employed when underwriting margins are strong but leverage should reduce when underwriting margins are weak. This strategy should ensure that we optimise return on equity whilst having due regard to the associated financial risk. The debt that has been deployed by Amlin over this period has been in the form of letters of credit (LOCs). Under the Lloyd's capital framework LOCs are an accepted form of capital. However, another important feature of the Lloyd's framework is that only a limited proportion of profits recognised on our annual accounting basis to date have been allowable for capital purposes. This is inconsistent with insurance companies where reported profit is Tier 1 capital. Our response to this has been to deploy the recognised but inadmissible profit into our allowable capital base by securing LOCs against these assets and using them as solvency capital with Lloyd's - essentially 'bridging finance'. Looking to the future, we believe that we have now reached the point in the cycle where underwriting margins will reduce over the next few years. However our 'real' debt has already been extinguished. In the short term we will look to increase our financial leverage but not to the peak levels it reached in recent years. Insurance leverage Amlin benefits from insurance leverage which affects its potential investment returns. Cash and investments, including the Company's share of syndicate assets, now represent a 3 times multiple of shareholders' equity. This has increased significantly over recent years with the growth of Syndicate 2001 and our increased ownership of the syndicate. At 30 June 2004, when the multiple was 2.8, it was one of the highest among Lloyd's listed companies, and we would expect that it continues to be at 31 December 2004. Changes to the distribution regime Currently Lloyd's operates a three year distribution system and a restrictive capital regime. Consequently, Amlin, to date, has not had free funds available from the successful underwriting years from 2002 onwards. However, the 2002 profits are released from trust funds in June 2005 and 2003 profits are released in June 2006. From 1 January 2005, Lloyd's has moved the syndicate accounting requirements onto an annual accounted basis. As a consequence, cash distribution from the syndicate will also switch to that basis. Changes to the capital regime Positively, the Lloyd's capital framework is also about to change. The FSA took over regulation of Lloyd's in December 2001 and, as a policy, have been pushing for greater consistency in the regulation of all non-life insurance underwriters in the UK, including Lloyd's. Three important changes are being made to the regulatory capital framework. First, annual accounted profits will be allowable as solvency capital and will be available to support underwriting from 1 January 2006. Given the scale of the disallowance for Amlin this is a welcome change for the Group. Cumulative financing costs would have been reduced by Â£6.0 million over the last three years if this regime had operated throughout. Second, each regulated firm is expected to complete an 'Individual Capital Assessment'(ICA). Essentially this means that we will have to assess and maintain a level of capital so that the risk of insolvency in any year is no greater than a probability of 0.5%. In the past our capital has been set using the Lloyd's risk based capital framework, which uses market wide data to assess capital needs. Given that our performance has been consistently better than the market we would expect that over time, as Lloyd's moves towards accepting ICA submissions rather than its risk based capital figure, our relative capital requirement will fall. Third, the type of capital that can be utilised is now more closely defined. Equity capital is admissible and is unlimited. For the time being this also applies to LOCs. Other debt capital will be restricted. For example unsecured, subordinated term debt will be restricted to 25% of the total capital employed and the terms of the debt are very closely defined by the FSA. With this Lloyd's is changing its capital release tests. Under current rules, as capacity at Lloyd's is reduced, there is a delay in the release of capital. This is changing from June 2005 with capital requirements simply matching the risk based capital assessed. We expect that this will lead to a further release of Â£50 million into free funds in 2005. Preparing for the new capital regime A considerable amount of effort has been made at Amlin to develop our ICA model and we submitted our assessment to Lloyd's in the first tranche of agents in October 2004. Amlin issued $50 million of FSA compliant subordinated debt in November 2004. This is callable by Amlin after ten years. In addition to enhancing our ability to meet the new capital tests, this long term debt issue increases Amlin's available capital to be deployed for underwriting purposes, particularly in periods of growth, at lower cost than the subordinated LOCs that it replaced. Capital planning As capacity reduces in line with our underwriting strategy, we expect that surplus capital will grow within the business. Our financial focus remains on meeting our long term return on equity targets. Given this aim, we intend to carefully assess the need to retain this capital in the business. It is important for long term value creation that we plan the level of capital required to support the business as we enter the next upswing, and the potential source of this capital. We will also need to assess the level of capital required to meet our strategic goal of setting up a non-Lloyd's operation. However, this should still leave room for good dividends over this next phase of the cycle. International Financial Reporting Standards From 1 January 2005, the Group is required to prepare its accounts under IFRS. The following summarises the main changes to the Group's accounting policies which will have an effect on the opening net asset position: â€¢ Dividends: the final dividend for each financial year is usually declared after the balance sheet date. Under IFRS this represents a post balance sheet event and therefore our final dividend will not be shown as a liability at the end of the financial period. Rather, the proposal will be disclosed in the notes to the financial statements; â€¢ Intangible assets: Our current accounting policy for syndicate capacity and goodwill on recent acquisitions has been to capitalise the payments and to amortise the balances over the useful economic life of the capacity/ goodwill. Under IFRS syndicate capacity will be treated as an indefinite life intangible asset. It will therefore be initially carried at cost but will be subject to an annual impairment review. Similarly goodwill will be initially carried at cost and will then be subject to an annual impairment review. â€¢ Share options and incentives: Amlin has a number of share incentive schemes for executives. Historically they have been disclosed in the notes and on exercise have been recognised immediately as share capital. Under IFRS, we will charge the income statement with the fair value of the options over the period from grant date to vesting date. Given the size and nature of our incentive schemes we do not believe that this change will be material to the Group. Our accruals for our share based incentives are currently held at nominal value. Under IFRS these need to be accounted for at fair value. The adjustment to fair value will more than offset the initial cost of other share based payments. â€¢ Pension scheme: The Group has three main pension schemes. The multi- employer scheme and the defined contribution scheme will be accounted for in a similar way to their current treatment. However the net liability for the Angerstein scheme, which is modest, will be accounted for within the Group's consolidated balance sheet. OUTLOOK 2005 We anticipate another year of strong performance with a good return on equity in 2005. There are a number of positive factors influencing financial performance in this year. Unearned premium reserve: the premium written in 2003 and 2004, which remained unearned at 31 December 2004, amounted to Â£501 million, up 16.6% over the equivalent figure at the end of 2003. This premium has been written at very good rates and, in classes other than airline insurance, a large part of the associated risk will expire at either the end of March or the end of June. Subject to unexpected levels of catastrophe experience between now and then, the unearned premium reserve is expected to contribute good margins to the 2005 result. Consistent reserving strength: the 2004 result included a release from prior year reserves of Â£62.7 million for Syndicate 2001. We make every effort to ensure that we maintain a consistent prudency in our reserving and, therefore, we would expect there to be a further release of reserves which will benefit the 2005 result if we experience normal claims development on previously earned premium. Solid rating achieved on Â£267 million of 2005 premium written: we have written Â£267 million of premium (net of brokerage) in the first two months, which is approximately 34% of our current plan for the year. Of the Â£231 million of this which was renewal income, the average rate reduction was only 3%. Among the classes where pricing is now below 2002 levels, airline hull and liability insurance has little room for further decline before margins fall into questionable territory. Rating pressure in this class has been affected by the paucity of major losses over the past four years with some in the industry suggesting that this is a new trend which is set to continue owing to increased safety measures, new equipment and a more cautious culture. However, we believe it is too early to form such conclusions. International property reinsurance became more competitive at the major January renewal season as some companies sought to increase their spread of risk, although rates are still technically sound. For US property insurance, which came under pressure in 2004, rate reductions currently appear to be moderating a little which is a good sign of discipline in the market. Encouragingly, we are still able to find areas to write new property business at attractive rates. The renewal seasons for reinsurance risks affected in 2004 by windstorms in Japan and the United States are in April and July respectively and we would expect pricing in these areas to improve. We are also still seeing rate increases in a small number of classes such as marine hull and aviation products. Offshore energy rates, which were reducing in 2004, are showing signs of greater stability following the larger than originally anticipated industry losses from Hurricane Ivan. All in all, 2005 has every prospect of being another good underwriting year. Larger investment funds: the Group's cash and investments amounted to Â£1.3 billion at 31 December 2004. We believe the investment outlook for this year to be reasonable. Lower Lloyd's costs: Our Central Fund contributions, excluding the new loan to the central fund, have fallen by Â£8.2 million for 2005. The largest threats to our 2005 performance are abnormal loss activity and the sterling/dollar exchange rate, given that 52% of our gross premium in 2004 was US $ denominated. 2006 and Beyond We believe that the non-life insurance industry will remain cyclical, but we are seeing some signs of greater discipline. It is too early to assess whether this will last as the industry's capital and surplus builds, but there are some dynamics which should help to sustain reasonable margins. These include: â€¢ A stated determination by Lloyd's to manage underwriting activities over the insurance cycle so as to avoid the poor performance experienced in the troughs of past cycles; â€¢ Security ratings which remain below the desired level for many companies. With an increased focus of rating agencies on financial return as a measure of long term company health, we would expect those companies to exercise greater discipline; â€¢ Companies are still reporting prior year reserving deficiencies and this is expected to continue. Reserving inadequacy in the US property/casualty industry was recently estimated by Fitch to be between $43.5 billion and $61.5 billion at the end of 2003. Some of this has been recognised in 2004. However, insurance losses arising from the massive corporate failures such as Enron and other financial scandals have not, we believe, yet been fully recognised by the industry; â€¢ The industry is showing signs of managing its capital base in recognition of cyclical pressures. For example, among the Bermudian insurers, whose capital and surplus has grown significantly over the past three years, there have been over $1.5 billion of share buy-backs announced since the beginning of 2004. For Amlin, the 2006 result will be influenced by 2005 underwriting in the same way that 2004 is influencing 2005. With our strong focus on profit and return on equity, and the proven experience of our team, we are confident, without being complacent, of being able to continue to deliver good returns relative to the industry. STRATEGY Since October 2000 Amlin has been focused on delivering its Vision for 2005. In 2000 we set out to: â€¢ Become the most astute leader of insurance risks, with exceptional risk management expertise; â€¢ Become recognised by brokers, insureds and reinsurers for financial strength, durability and client responsiveness; â€¢ Become 'the place to work' in the industry; â€¢ Deliver excellent returns to shareholders. We have made good progress and this is evidenced by: â€¢ Syndicate 2001's performance, measured as average return on capacity for the 2001, 2002 and 2003 years of account1, has been the highest among the 10 largest managing agents in Lloyd's - a sign of astute underwriting and risk management; â€¢ In a survey conducted during 2004 among some 400 placing brokers Syndicate 2001 was top ranked for perceived financial strength among Lloyd's businesses; â€¢ In a survey of employees conducted by MORI in May 2004, Amlin compared extremely favourably against financial services company norms for employee satisfaction. Retention of our senior underwriters has been greater than 95% for the fourth year in succession; â€¢ Amlin's total shareholder return since 1 January 2000, of 74%, has been high relative to insurers internationally. The progress made to date provides the platform for future success. During 2004, we have set a new Vision for 2009 which is intended to stretch our leadership position in the London insurance market. Our aim is to become 'the global reference point for quality' in our markets. In achieving this we will concentrate on: â€¢ Profit focused underwriting excellence - this is the principal driver of our financial performance. â€¢ Improving our understanding of client's needs and market trends - so that we can target good areas of growth in the future. â€¢ The delivery of first class client service standards - so that we can grow our appeal to clients and attract the quality and volume of business that we want to underwrite; â€¢ Cycle management, combining underwriting, reinsurance, capital and investment strategies - to optimise risk weighted shareholder returns over the insurance cycle. We expect 2009 to coincide with the bottom of the insurance pricing cycle. Financially, our aims are to: â€¢ Deliver a cross cycle return on equity (covering the period 2002 to 2009) of at least 15%, considerably above our cross cycle cost of equity of approximately 8.5%; and â€¢ Trade profitably through the soft part of the cycle, something we along with most of our peers failed to do in the last soft market. The achievement of these goals will make Amlin a rare breed in our industry. We recognise that the most difficult part of the cycle lies ahead. However, the Group's positioning in terms of skills, shared understanding of underwriting strategy and management information is significantly better than in the last downturn. The achievement of our Vision and financial goals will require the successful implementation of strategies covering: â€¢ Underwriting and the proper contraction of exposures as competitive forces drive down margins to less attractive levels; â€¢ Investments, so that we optimise returns from our pool of investment assets (up 186% over the past four years) in a period when we expect lower underwriting returns; â€¢ Clients, their needs and our ability to deliver the level of service to which we aspire; â€¢ People, their expertise, experience and motivation to meet the standards we require; 1 Based on managing agents' published results and forecasts as at 30 September 2004 â€¢ Infrastructure, in particular our use of technology to support our underwriting and client service plans; â€¢ Risk management, so that we can more clearly and easily identify risks to the achievement of our ambitions, giving us more scope to successfully address them; â€¢ Balance sheet management, so that we successfully balance the need for capital to support the business over the long term, with the aim of meeting our return on equity target and of continuing to deliver superior total shareholder returns In some areas these strategies are well developed. In others, such as the claims aspects of client service, they are undergoing detailed review and enhancement so that their implementation gives us the best possible prospects of becoming ' the global reference point for quality' in our markets. With our focus on ' quality' we intend that we will be in an enviable position to successfully deliver and manage good long term organic growth recognising that, in the period to 2009, there will most likely be a period of contraction as insurance rates soften. New phase of the insurance cycle The insurance rating cycle, having reached a plateau in the first part of 2004, is now into a new phase during which we anticipate a softening of rates and terms. While this has already started, for now rates remain at acceptable levels and we believe that we will be capable of generating a good return. There are signs of increased discipline in many quarters, although not all. We are hopeful that management in other firms will, as we intend to, place a greater focus on maintaining margins which reflect the risk assumed rather than on growing senselessly. At Amlin, we expect to downscale our business if margins become unacceptable. Through this next phase our strategy is intended to deliver year on year growth in net assets per share. We also anticipate very strong free cash flow over the next several years. This provides scope for the larger dividends which we are now paying and the return of surplus capital which, when combined with more modest growth in net assets per share, should help to continue to deliver a good positive total shareholder return. CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004 TECHNICAL ACCOUNT Notes 2004 2003 Â£m Â£m Gross premiums written 1 945.6 937.4 Outward reinsurance premiums (155.4) (149.8) Net premiums written 790.2 787.6 Change in the provision for unearned premiums: - gross amount (89.7) (100.0) - reinsurers' share (4.2) (2.9) Earned premiums, net of reinsurance 696.3 684.7 Allocated investment return transferred 57.2 36.1 from the non-technical account Claims paid: - gross amount (395.0) (327.2) - reinsurers' share 95.3 114.3 Claims paid, net of reinsurance (299.7) (212.9) Change in the provision for claims: - gross amount (147.2) (86.2) - reinsurers' share 67.7 (54.0) Claims incurred, net of reinsurance (379.2) (353.1) Net operating expenses 4 (214.6) (212.2) Balance on the technical account 159.7 155.5 for general business NON-TECHNICAL ACCOUNT Balance on the technical account for general business 159.7 155.5 Investment income 2 52.3 36.6 Unrealised gains (losses) on investments 2 0.2 (3.1) Investment expenses and charges 2 (1.9) (1.5) Allocated investment return transferred (57.2) (36.1) to the technical account 153.1 151.4 Other income 5 5.9 4.1 Other charges 6 (37.4) (35.2) Operating profit 121.6 120.3 Comprising: Operating profit based on longer term investment return 128.1 124.4 Short term fluctuations in investment return (6.5) (4.1) Profit on ordinary activities before taxation 8 121.6 120.3 Tax on profit on ordinary activities 9 (35.6) (37.0) Profit on ordinary activities after taxation 86.0 83.3 Equity dividends 10 (31.3) (9.7) Retained profit for the financial year 19 54.7 73.6 Earnings per ordinary share 11 Basic 22.1p 21.6p Diluted 21.8p 21.4p All of the operations of the Group are continuing. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES There were no recognised gains or losses in the current or preceding year other than those included in the profit and loss account and therefore no statement of total recognised gains and losses has been presented. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 ASSETS Notes 2004 2003 Â£m Â£m Intangible assets 12 56.7 57.0 Investments Other financial investments 13 1,301.4 1,048.4 Reinsurers' share of technical provisions Provision for unearned premiums 21 24.1 29.3 Claims outstanding 21 318.6 265.4 342.7 294.7 Debtors Debtors arising out of direct insurance operations 15 110.1 134.1 Debtors arising out of reinsurance operations 261.2 223.9 Other debtors 125.4 52.6 496.7 410.6 Other assets Tangible fixed assets 16 6.2 6.4 Cash at bank and in hand 42.8 26.5 49.0 32.9 Prepayments and accrued income Deferred acquisition costs 104.0 88.8 Other prepayments and accrued income 21.6 19.0 125.6 107.8 Total assets 2,372.1 1,951.4 LIABILITIES Notes 2004 2003 Â£m Â£m Capital and reserves Called up share capital 17 98.8 97.7 Share premium account 19 154.2 150.2 Own shares 19 (1.6) (2.4) Merger reserve 19 41.9 41.9 Capital redemption reserve 19 2.7 2.7 Profit and loss account 19 147.9 93.2 Equity shareholders' funds 20 443.9 383.3 Technical provisions Provision for unearned premiums 21 500.8 429.6 Claims outstanding 21 1,175.3 999.5 1,676.1 1,429.1 Provisions for other risks and charges 22 57.0 19.9 Creditors Creditors arising out of direct insurance operations 20.3 15.5 Creditors arising out of reinsurance operations 25.6 39.8 Other creditors including taxation and social security 23 72.7 32.1 118.6 87.4 Creditors: amounts falling due after more than one year 24 46.7 19.8 Accruals and deferred income 29.8 11.9 Total liabilities 2,372.1 1,951.4 Net assets per ordinary share 11 113.6p 99.3p Net tangible assets per ordinary share 11 99.1p 84.6p PARENT COMPANY BALANCE SHEET AT 31 DECEMBER 2004 Notes 2004 2003 Â£m Â£m Fixed assets Tangible fixed assets 16 1.8 1.8 Other investments 14 208.6 205.4 210.4 207.2 Current assets Amounts owed by subsidiary undertakings 205.0 177.8 Dividend receivable from subsidiaries 64.0 - Other debtors 6.3 4.1 Investments 13 12.5 12.2 Cash at bank and in hand 0.9 0.4 288.7 194.5 Creditors: amounts falling due within one year Amounts owed to subsidiary undertakings (14.6) (28.2) Other creditors (39.0) (0.4) Accruals and deferred income (0.6) (0.5) Proposed dividend 10 (19.6) (6.4) (73.8) (35.5) Net current assets 214.9 159.0 Total assets less current liabilities 425.3 366.2 Creditors: amounts falling due after more than one year 24 (28.3) (3.0) Net assets 397.0 363.2 Capital and reserves Called up share capital 17 98.8 97.7 Share premium account 19 154.2 150.2 Own shares 19 (1.6) (2.4) Capital redemption reserve 19 2.7 2.7 Profit and loss account 19 142.9 115.0 Equity shareholders' funds 20 397.0 363.2 CONSOLIDATED CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2004 Notes 2004 2003 Â£m Â£m Net cash inflow from operating activities 26 243.6 289.2 Servicing of finance Interest paid on loan capital (0.9) (0.4) Letter of credit charges (4.2) (6.2) (5.1) (6.6) Taxation Corporation tax paid (0.5) - Capital expenditure Purchase of tangible assets (2.4) (1.5) Acquisition and disposals Acquisition of subsidiary (3.2) - Net cash acquired on acquisition 0.7 - (2.5) - Equity dividends paid (15.3) (6.3) Financing Issue of new shares net of issue costs 3.2 1.2 New loans 30.0 3.4 Proceeds from issue of debt 25.6 - Repayment of borrowings (7.3) (3.5) Net cash inflow from financing activities 51.5 1.1 Net cash flows 27 269.3 275.9 Cash flows were invested as follows Decrease in cash holdings (4.3) (5.2) Increase in deposits 20.9 0.1 16.6 (5.1) Net portfolio investment Purchase of investments 2,507.4 2,015.5 Sale of investments (2,254.7) (1,734.5) Net purchases of investments 252.7 281.0 Net investment of cash flows 27 269.3 275.9 Cash flows relating to non-aligned syndicate participations are included only to the extent that cash is transferred between the Premium Trust Funds and the Group. ACCOUNTING POLICIES Basis of preparation and consolidation The consolidated financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules, modified to include the revaluation of investments, in accordance with the provisions of Section 255A, Schedule 9A and other requirements of the Companies Act 1985. The Group has also adopted the recommendations of the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers (ABI SORP) in 2003. The balance sheet of the parent company has been prepared in accordance with the provisions of Section 230 of, and Schedule 4 to, the Companies Act 1985. In accordance with the exemption permitted under this section, the profit and loss account of the Company is not presented as part of these accounts. The financial statements consolidate the accounts of the Company, its subsidiary undertakings, and the Group's underwriting through participation on Lloyd's syndicates. The accounting information in respect of non-aligned syndicate participations has been provided by the managing agents of those syndicates through an information exchange facility operated by Lloyd's and has been audited by the respective syndicates' auditors. The actual information in respect of these non-aligned participations is included to the extent that it is available or, where this is not the case, provisions are made for the expected impact. Syndicate participations Premiums Written premiums comprise premiums on contracts incepting during the financial year. Premiums are disclosed gross of brokerage and exclude taxes and duties levied on them. Estimates are included for 'pipeline' premiums, representing amounts due to the Group but not yet notified, as well as adjustments made in the year to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period as the related direct insurance or inwards reinsurance business. Unearned premiums A provision for unearned premiums represents that part of premiums written, and reinsurers' share of premiums written, which is estimated to be earned in following financial years. It is calculated separately for each insurance contract on the 24ths or 365ths basis, where the incidence of risk is the same throughout the contract. Where the incidence of risk varies during the term of the contract, the provision is based on the estimated risk profile of business written. Acquisition costs Acquisition costs comprise brokerage incurred on insurance contracts written during the financial year. They are spread over an equivalent period to that which the premiums on the underlying business are earned. Deferred acquisition costs represent the proportion of acquisition costs incurred in respect of unearned premiums at the balance sheet date. Claims paid Claims paid comprise claims and claims handling expenses paid during the financial year. Claims provisions Provisions for claims outstanding comprise notified claims and claims incurred but not reported (IBNR). The change in the provision for claims represents the movement in the provision for claims outstanding. The gross provision for claims outstanding is included as a liability on the balance sheet. The technical claims provision represents management's estimate of the cost of settling all claims incurred but unpaid at the balance sheet date, whether reported or not. The reinsurers' share of these anticipated future claims is calculated by applying the gross provisions against the Group's reinsurance protection and is net of any provision for bad debt based on an assessment of the underlying security of the reinsurers on the policies. The reinsurers' share of technical provisions is included as an asset on the balance sheet. Notified claims are estimates of future claims payments in respect of reported claims based on the latest information available including advices from claims assessors and lawyers. ACCOUNTING POLICIES The IBNR element is calculated initially by each of the Group's divisions using statistical analysis of historical trends, balanced with interpretation of current underwriting trends and market and case loss information, in order to calculate the ultimate loss projection of the business on risk. Where Amlin leads business it has control over the agreement of claims and where it does not lead it relies on the lead underwriter to keep it informed of the latest developments. These claims provisions are reviewed to ensure judgements made are reasonable and supportable. This review process includes comparison of technical claims provisions, on an underwriting year basis, with independent actuarial projections produced on a best estimate basis by our in-house actuarial team. The underwriting year loss ratios are then adjusted to remove assumed future major losses. This process is repeated each quarter with the actuarial assessment reviewed at the end of the financial year by an independent external actuary. Although the claims provision is considered to be reasonable, having regard to previous claims experience, the statistical projections and case reviews of notified losses, the ultimate liabilities will vary as a result of subsequent developments and events. These adjustments are reflected in the financial statements for the period in which the related adjustments are made. Unexpired risks provision Provision is made for unexpired risks where, at the balance sheet date, the costs of outstanding claims and related deferred acquisition costs are expected to exceed the unearned premium provision. The unexpired risks provision is included within technical provisions in the balance sheet. Other accounting policies Exchange rates Income and expenditure in US dollars, Euros and Canadian dollars are translated at average rates of exchange for the period. Underwriting transactions denominated in other foreign currencies are included at their historical rates. Syndicate assets and liabilities, expressed in US dollars, Euros and Canadian dollars are translated into sterling at the rates of exchange at the balance sheet date. Differences arising on translation of foreign currency amounts on insurance transactions are included in the technical account. Other assets, liabilities, income and expenditure expressed in foreign currencies have been translated at the rates of exchange at the balance sheet date unless contracts to sell currency for sterling have been entered into prior to the year end, in which case the contracted rates have been used. Differences arising on translation of foreign currency amounts on such items are included in the non-technical account. Investments Listed investments are stated at market value at the close of business on the balance sheet date. Unlisted investments are valued by the directors on a prudent basis with regard to their likely realisable value. In the Company's accounts, investments in Group undertakings are stated at cost less provisions for impairment. Syndicate investments and investment income Syndicate investments and cash are held on a pooled basis, the return from which is allocated to underwriting years of account proportionately to the funds contributed by the year of account. Investment return All dividends and any related tax credits are recognised as income on the date the related listed investments are marked ex-dividend. Other investment income, interest receivable, expenses and interest payable are recognised on an accruals basis. ACCOUNTING POLICIES Realised gains or losses are calculated as the difference between the net sales proceeds and their purchase price in the financial year or their valuation at the commencement of the year. Unrealised gains and losses are calculated as the difference between the valuation of investments at the balance sheet date and their purchase price in the financial year or valuation at the commencement of the year. Allocation of investment return All of the investment return arising in the year is reported initially in the non-technical account. A transfer is made from the non-technical account to the technical account representing: â€¢ for aligned syndicate participations, the longer term investment return on investments supporting the technical provisions and related shareholders' funds. The longer term investment return is an estimate of the expected return over time for each relevant category of investments having regard to past performance, current trends and future expectations; and â€¢ for non-aligned syndicate participations, the actual return on investments supporting the technical provisions and related shareholders' funds. Intangible fixed assets The cost of syndicate participations is capitalised and amortised on a straight line basis over its estimated useful economic life of twenty years beginning in the underwriting year in which the purchased syndicate participation commences. Goodwill arising on consolidation of acquisitions prior to 31 May 1998, representing the excess of the fair value of the consideration over the fair value of the assets acquired, has been written off against reserves. The goodwill on other acquisitions is capitalised and is amortised on a straight line basis over its estimated useful life. Other income and charges Agency fees are recognised on an accruals basis. Profit commission receivable is accrued in direct relation to underwriting income earned and is subject to the normal managing agent's terms. Tangible fixed assets The cost of other fixed assets is depreciated over their expected useful lives on a straight line basis. Depreciation rates are within the following ranges: Leasehold land and buildings Over period of lease Motor vehicles 25 - 33% per annum Computer equipment 33 - 50% per annum Furniture and office equipment 20 - 50% per annum Internal property improvements 20 - 33% per annum Pensions Pension contributions to defined benefit schemes are charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the Group, based on actuarial triennial valuations. Pension contributions to employees' money purchase schemes are charged to the profit and loss account when due. Amlin contributes to a defined benefit scheme, which is, for the purposes of both Statement of Standard Accounting Practice 24 and Financial Reporting Standard 17, considered to be a multi-employer scheme. Consequently, contributions to this scheme are charged to the profit and loss account when due. ACCOUNTING POLICIES Deferred tax Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. Leased assets Assets held under finance leases and hire purchase transactions are capitalised in the balance sheet and depreciated over their useful lives. The outstanding instalments are included in creditors and the interest element is charged against profits over the period of the contract. Payments made under operating leases are charged to the profit and loss account evenly over the period of the lease. Where there are rent free periods in property leases, the cost of the lease is spread evenly up to the period of the first rent review. NOTES TO THE ACCOUNTS for the year ended 31 December 2004 1 SEGMENTAL INFORMATION The segmental analysis of the Group's share of the underwriting activities is reported using the divisional structure of the Group as this is how performance is monitored by management. 2004 UK Other Total Non-marine Marine Aviation Commercial Technical Â£m Â£m Â£m Â£m Â£m Â£m Gross premiums written 525.0 160.2 90.8 170.6 (1.0) 945.6 Gross premiums earned 472.7 142.6 82.7 158.9 (1.0) 855.9 Gross claims incurred (302.7) (79.0) (48.0) (117.0) 4.5 (542.2) Reinsurance balance 8.9 (4.5) (9.1) 15.0 (6.9) 3.4 Gross operating expenses (112.5) (44.0) (18.5) (37.6) (2.0) (214.6) Balance on the technical account before 66.4 15.1 7.1 19.3 (5.4) 102.5 allocated investment return Investment return 50.6 Net non-technical expenses (31.5) Profit before tax 121.6 Segmental net assets Net assets attributable to a business segment 125.1 16.3 4.0 30.5 (2.9) 173.0 Net assets notionally allocated to a business 150.2 45.9 26.0 48.8 - 270.9 segment Net assets 443.9 2003 UK Other Total Non-marine Marine Aviation Commercial Technical Â£m Â£m Â£m Â£m Â£m Â£m Gross premiums written 499.3 160.4 90.2 187.5 - 937.4 Gross premiums earned 445.0 133.4 91.2 167.8 - 837.4 Gross claims incurred (169.3) (65.3) (45.5) (131.8) (1.5) (413.4) Reinsurance balance (82.0) (7.3) (17.3) 14.2 - (92.4) Gross operating expenses (114.0) (41.7) (20.5) (38.1) 2.1 (212.2) Balance on the technical account before 79.7 19.1 7.9 12.1 0.6 119.4 allocated investment return Investment return 32.0 Net non-technical expenses (31.1) Profit before tax 120.3 Segmental net assets Net assets attributable to a business segment 61.6 21.9 24.3 28.2 1.5 137.5 Net assets notionally allocated to a business 130.8 42.1 23.7 49.2 - 245.8 segment Net assets 383.3 Net assets notionally allocated to a business segment comprise assets and liabilities which are managed collectively to support all group underwriting activities. They have been allocated using gross premiums written. Gross premiums written analysed by location of risk 2004 2003 Â£m Â£m UK 282.3 277.5 USA 343.6 349.4 Europe (excl. UK) 91.6 87.1 Canada, Central and South America 65.0 62.8 Asia 65.5 62.6 Other locations 49.2 42.6 Worldwide 48.4 55.4 Total 945.6 937.4 2 INVESTMENT RETURN 2004 2003 Â£m Â£m Income from investments 52.6 40.0 Losses on realisation of investments (0.3) (3.4) 52.3 36.6 Unrealised gains (losses) on investments 0.2 (3.1) Investment management fees (1.6) (1.1) Interest on loan stock and bank loans (0.3) (0.4) (1.9) (1.5) Total investment return 50.6 32.0 The longer term rate of return in respect of equity investments and fixed interest securities has been determined by having regard to the Group's historical and expected returns and current portfolio strategy. The longer term rates of return assumed are: 2004 2003 UK equities 7.0% 7.0% Fixed interest securities 4.5% 4.5% These returns are applied to the average, over the year, of the investments attributable to the shareholders and insurance technical provisions of the aligned syndicate participations. The attributable shareholders' funds are based on the Funds at Lloyd's supporting the insurance business. The actual return on investments since 1 January 2000, compared with the aggregate longer term return over the same period, is set out below. All figures are gross of expenses. 1 Jan 2000 1 Jan 1999 to 31 Dec to 31 Dec 2004 2003 Actual return attributable to the technical account 155.9 119.4 Longer term return attributable to the technical account 185.1 140.2 Effect of short term fluctuations over the period (29.2) (20.8) 3 PRIOR PERIODS' CLAIMS PROVISIONS Material over provisions for claims at the beginning of the year as compared with net payments and provisions at the end of the year in respect of prior periods' claims reserves are as follows: 2004 2003 Â£m Â£m Movement in reserves 49.7 24.5 4 NET OPERATING EXPENSES 2004 2003 Â£m Â£m Acquisition costs 177.4 177.2 Changes in deferred acquisition costs (19.0) (24.4) Administrative expenses 53.9 56.8 Syndicate exchange losses 2.3 2.6 214.6 212.2 5 OTHER INCOME 2004 2003 Â£m Â£m Managing agent's fee income - 0.8 Managing agent's profit commission 2.6 3.3 Other income 3.3 - 5.9 4.1 6 OTHER CHARGES 2004 2003 Â£m Â£m Central, management and other expenses 12.2 6.6 Amortisation of intangible assets 3.5 3.1 Financing charges 4.4 6.6 Employee incentives 17.3 18.9 37.4 35.2 7 PENSIONS The Group participates in a number of pension schemes, including defined benefit, defined contribution and personal pension schemes. The total charges for all schemes are shown in the table below, together with the Group's share. Total charge Group share 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Defined benefit schemes Lloyd's Superannuation Fund 8.1 10.2 6.8 7.5 The Angerstein Underwriting Ltd scheme 0.1 0.6 0.1 0.4 8.2 10.8 6.9 7.9 Defined contribution schemes 1.7 1.5 1.6 1.2 9.9 12.3 8.5 9.1 a) Lloyd's Superannuation Fund funded defined benefit scheme The scheme is operated as part of the Lloyd's Superannuation Fund (the Fund). Historically the Fund has catered for a number of employers in the Lloyd's market. As a consequence of the consolidation in the market, employers closing final salary schemes and some companies failing, there are now only around eight employers with active members in the Fund. A large proportion of the liability of the Fund relates to employers no longer participating in the Fund. The assets of the Fund are pooled and the current active employers are responsible collectively for the funding of the Fund as a whole. For the purposes of determining contributions to be paid, the Trustees have split the Fund into a number of notional sections. This is a notional split and has no legal force. Previously this notional split allowed for separate sections in respect of each employer's active members and one combined section for non-employed members of all current and former employers. With effect from 31 December 2002, the Trustees altered this notional split so that, from that date, the active employers contributing to the Fund, including the Amlin Group, have individual notional sections comprising the notionally allocated assets in respect of their active employees, deferred pensioners and pensioners, and their corresponding liabilities. A separate notional fund is maintained for members whose former employers no longer contribute to the Fund (Orphan Schemes). Amlin is also liable for a proportion of the Orphan Scheme's liabilities. 7 PENSIONS (continued) Since this alteration Amlin can now more clearly identify its expected contribution requirement to the Fund. However, as the asset allocation is notional and at the discretion of the Trustees, it is not possible for Amlin to be certain of its overall surplus or deficit position at any time. For this reason, the scheme is classified as a multi-employer scheme for the purposes of Financial Reporting Standard No. 17 (FRS 17) - Retirement benefits. The total charge for this scheme for Syndicate 2001 and Amlin group companies is analysed in the table below, together with the Group's share. Total charge 2004 2003 Â£m Â£m Contributions relating to: 2001 valuation deficit - Amlin scheme 2.0 2.0 2004 valuation deficit - Amlin scheme 1.2 - 2002 valuation deficit - Orphan scheme - 6.8 2004 valuation deficit - Orphan scheme 3.5 - Ongoing funding 1.4 1.4 8.1 10.2 Group share of total charge 6.8 7.5 The funding position of the Fund is assessed every three years by an independent qualified actuary. Contributions are made at the funding rates recommended by the actuary, which vary across different sections of the Fund reflecting the notional sections then adopted, and typically include adjustments to amortise any funding surplus or shortfall over a period. Amounts borne under the scheme are charged to Syndicate 2001 or other Group companies. However, actuarial amounts quoted below are for Syndicate 2001 as a whole, irrespective of capital provider, and other Group companies. The latest actuarial assessment of the scheme, at 31 March 2004, used the projected unit actuarial method and was based on the following assumptions: Long term annual rate Amlin section Orphans % section % Pre retirement - Inflation 2.8 2.8 - Investment return 6.3 5.9 Post retirement - Inflation 3.0 3.0 - Investment return 5.4 4.7 Increases to pensions in payment - Limited price indexation 3.0 3.0 - Limited price indexation (minimum 3%) 3.2 3.2 - Discretionary increases 0.0 0.0 General pay escalation 4.5 4.5 Investment strategy - Equities 50% 20% - Bonds 50% 80% 7 PENSIONS (continued) The assessment showed that the assets relating to the Amlin section of the Fund were Â£107.2 million, being Â£6.2 million less than the amount required to fund members' accrued liabilities on the assumptions adopted, resulting in a shortfall of 6%. To rectify this shortfall, Amlin has agreed with the Trustees that it will make six annual payments to the Fund of Â£1.2 million, with the first paid in December 2004 and subsequent payments falling due each 31 March, commencing on 31 March 2005. In addition, Amlin has agreed to pay contributions to the notional orphans' section to rectify a share of the funding shortfall revealed in the actuarial valuation at 31 March 2004 of Â£17 million based on the assumptions described above. (The assets notionally allocated to this section of Â£181 million were 91% of the amount expected to be required to provide the benefits of this section.) The Group and Syndicate's share of this shortfall is currently estimated to be Â£11.4 million and Â£12.8 million respectively. On 31 December 2004, a payment of Â£3.5 million was made in order to reduce this deficit. Three subsequent annual payments of Â£3.5 million are falling due each 31 March, commencing on 31 March 2005. Contributions will also be paid to provide for the cost of benefit accrual after the date of the valuation. The rate of contribution agreed with the Trustees is 30% paid by the employer plus 5% member contributions, in each case of pensionable earnings. These contributions will be backdated to take effect from 1 April 2004. In 2004, funding rates and charges to the profit and loss account were at 30.2% of pensionable salaries as recommended by the 2001 valuation, and totalled Â£1.4 million (2003: Â£1.4 million). b) The Angerstein Underwriting Ltd funded defined benefit scheme SSAP 24 disclosures The scheme consists of a closed funded defined benefit scheme for certain past employees of a subsidiary of the Company, Angerstein Underwriting Limited. Contributions to the scheme are determined by an independent qualified actuary, based upon triennial valuations, using the attained age actuarial method. A valuation at 1 July 2004 was carried out, and the market value of the scheme assets was Â£1.2 million representing 59% of the benefits accrued to the members. Group contributions made to this scheme in respect of the year ended 31 December 2004 were Â£0.1 million (2003: Â£0.1 million), and the agreed contribution rate for future years is an employer contribution of 31% plus 5% member contributions, in each case of pensionable salaries. An accrual of Â£0.5 million was made at 31 December 2003 and 31 December 2004 to rectify the deficit of Â£0.8 million at the end of 2004. A 2% per annum differential between investment returns and salary increases is assumed. FRS 17 disclosures - Angerstein Underwriting Ltd defined benefit scheme For the purposes of the FRS 17 disclosures, the 1 July 2004 valuation has been reviewed and updated to 31 December 2004. The disclosures are based upon the following annual financial assumptions: 2004 2003 % % Inflation 2.9 2.8 Increase in salaries 4.9 4.8 Increase in pensions in payment 2.8 2.7 Increase in pensions in deferment 2.9 2.8 Discount rate for scheme liabilities 5.3 5.4 Return on equities 6.5 6.8 7 PENSIONS (continued) Under these assumptions the valuation of the scheme at 31 December would have been: 2004 2003 Â£m Â£m Assets Equities 1.3 1.1 Liabilities Present value of scheme liabilities (2.8) (2.3) Scheme deficit (1.5) (1.2) Scheme deficit attributable to the Group (1.5) (1.2) Related deferred tax asset 0.5 0.4 Net scheme deficit (1.0) (0.8) The members of the scheme are, or were, employed for the benefit of Syndicate 2001 or its predecessors. Due to the varying ownership of capacity for the years of account to which the contributions are charged, the following amounts which would have been recognised in the performance statements for the year ended 31 December 2004 under FRS 17, are shown on the assumption that any charges would be taken to the 2004 year of account, when Amlin owns all of the capacity and therefore would receive all charges (Amlin's share of the 2003 year of account was 86.18%). 2004 2003 Â£m Â£m Operating profit Current service cost 0.1 0.1 Other finance income Expected return on pension scheme assets 0.1 0.1 Interest on pension scheme liabilities (0.1) (0.1) Net return - - 7 PENSIONS (continued) 2004 2003 Â£m Â£m Statement of total recognised gains and losses (STRGL) Actual return less expected return on assets 0.1 0.1 Experience gains on liabilities 0.1 0.1 Changes in assumptions (0.4) (0.3) Actuarial loss recognised in STRGL (0.2) (0.1) Movement in deficit during the year Deficit in scheme at 1 January (1.2) (1.0) Current service cost (0.1) (0.1) Contributions made 0.1 0.1 Other finance costs (0.1) (0.1) Actuarial loss (0.2) (0.1) Deficit in scheme at 31 December (1.5) (1.2) 2004 2003 2002 History of experience gains and losses Difference between the expected and actual return on scheme assets Amount (Â£ million) 0.1 0.1 (0.6) Percentage of scheme assets 8% 12% (88%) Experience gains on scheme assets Amount (Â£ million) 0.1 0.1 0.1 Percentage of scheme assets 5% 3% 3% Total amount recognised in the STRGL Amount (Â£ million) (0.2) (0.1) (0.7) Percentage of scheme assets (7%) (5%) (43%) c) The defined contribution scheme Between 1998 and 31 August 2004, all new employees were invited to join the Amlin Group Money Purchase Scheme (AGMPS), which was part of the Lloyd's Superannuation Fund. Contributions made by the Group varied by age, seniority and the level of contribution that employees voluntarily made to the scheme. Employer contributions ranged from 4% to 21% and were fully expensed to the profit and loss account when due and payable. With effect from 1 September 2004, the scheme was replaced with a new stakeholder scheme (see (d) below). Contributions to the old scheme ceased with effect from 31 August 2004 and the Lloyd's Superannuation Fund decided to wind up the scheme and secure pension rights via a transfer to Section 32A policies with Merrill Lynch Investment Management, which was the investment manager for the AGMPS. All staff members of the scheme have been given the option to retain benefits with Merrill Lynch or alternately transfer their fund value to another approved arrangement, which includes the Amlin Retirement Investment Scheme (ARIS). d) The stakeholder defined contribution scheme With effect from 1 September 2004, the ARIS replaced the AGMPS. The ARIS is a stakeholder arrangement, which provides staff with greater choice and flexibility on contributions and investments, improved security of benefits, better information and administrative support, and improved portability. The employer contributions paid by Amlin have not changed as a result of these new arrangements, nor has the level of lump sum life assurance benefits. Winterthur Life has been chosen as the stakeholder provider, following a rigorous selection process and review of the stakeholder market. The total contributions for the year ended 31 December 2004 to the AGMPS and ARIS schemes are shown in the table at the beginning of this note. 7 PENSIONS (continued) e) Other arrangements Other pension arrangements include an occupational money purchase scheme which provides Death In Service protection for all employees. Regular contributions, expressed as a percentage of employees' earnings, are paid into this scheme and are allocated to accounts in the names of the individual members, which are independent of the Group's finances. The contributions are charged against profits in the period in which they are payable. There were no outstanding contributions at 31 December 2004 (2003: Â£nil). 8 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Profit on ordinary activities before taxation is stated after charging: 2004 2003 Â£m Â£m Depreciation - Owned assets 2.5 4.0 - Leased assets - 0.1 Operating lease charges 2.3 1.9 Amortisation of intangible assets 3.5 3.1 Auditors' remuneration - Group audit fees 0.3 0.3 - Other services 0.2 0.1 Company audit fees amounted to Â£38,850 (2003: Â£42,000). Group audit fees include Â£145,611 (2003: Â£131,819) representing the Group's share of fees paid in relation to the audit of the managed syndicates. Other services comprise taxation advice totalling Â£43,990 (2003: Â£38,905), internal audit and controls advice Â£39,625 (2003: Â£16,000), systems testing Â£28,000 (2003: Â£14,250), liquidation fees Â£12,100 (2003: Â£nil), service company FSA authorisation Â£21,143 (2003: Â£nil) and other fees of Â£880 (2003: Â£945). A further Â£26,000 was paid to the auditors for their work relating to the debt issue in November 2004 which has been added to the liability on the balance sheet. The Audit Committee Chairman is required to approve any non-audit work commissioned from the auditors where any single piece of work attracts a fee over Â£25,000. 9 TAX ON PROFIT ON ORDINARY ACTIVITIES a) Analysis of tax charge for the year 2004 2003 Â£m Â£m Current taxation UK corporation tax at 30% (2003: 30%) - - Adjustments in respect of prior periods (0.3) 0.3 Corporation tax (0.3) 0.3 Overseas taxation recoverable (4.6) (10.0) Irrecoverable overseas taxation 5.0 11.4 Total current tax (see note 9(b)) 0.1 1.7 Deferred taxation Origination and reversal of timing differences 35.5 35.2 Adjustments in respect of prior periods - 0.1 Total deferred taxation (see note 22) 35.5 35.3 Tax on profit on ordinary activities 35.6 37.0 9 TAX ON PROFIT ON ORDINARY ACTIVITIES (continued) b) Factors affecting current period tax charge The UK standard rate of corporation tax is 30% (2003: 30%), whereas the current tax assessed for the year ended 31 December 2004 as a percentage of profit before tax is 0.1% (2003: 1.4%). The reasons for this difference are explained below: 2004 2004 2003 2003 Â£m % Â£m % Profit on ordinary activities before taxation 121.6 120.3 Current taxation on profit on ordinary activities calculated at the 36.4 30.0% 36.1 30.0% standard rate of corporation tax in the UK Expenses not deductible for tax purposes (0.1) (0.1%) 0.4 0.3% Unprovided timing differences - - (1.3) (1.1%) Depreciation in excess of capital allowances (0.2) (0.2%) 0.3 0.3% Difference between the technical result for accounting purposes and (31.0) (25.5%) (41.7) (34.7%) the technical result for taxation purposes Deferred tax on loss provisions 0.3 0.2% 0.5 0.4% Other timing differences (5.4) (4.4%) 5.7 4.7% Under provision in respect of prior periods (0.3) (0.2%) 0.3 0.3% UK corporation tax for the year (0.3) (0.2%) 0.3 0.2% Net irrecoverable overseas tax 0.4 0.3% 1.4 1.2% Current tax charge for the year (see note 9(a)) 0.1 0.1% 1.7 1.4% c) Factors which may affect future tax charges Underwriting profits or losses are recognised in the technical account on an annual accounting basis, recognising the results in the period in which they are earned. Corporation tax is charged in the period in which the underwriting profits are actually paid by the Syndicate to the corporate names. Payment of the underwriting profit normally occurs in the first year after the commencement of a year of account. Deferred tax is provided on the annually accounted technical result with reference to the forecast ultimate result of each of the years of account included in the annually accounted technical result. Where the forecast ultimate result for a year of account is a taxable profit, deferred tax is provided in full on the movement on that year of account included in this period's annually accounted technical result. Where the forecast ultimate result for a year of account is a loss, deferred tax is only provided for on the movement on that year of account included in this period's annually accounted technical result to the extent that forecasts show that the taxable loss will be utilised in the foreseeable future. Deferred tax has been provided on the annually accounted technical result for this accounting period of Â£108 million (2003: Â£110.3 million). Deferred tax assets on non-aligned technical loss provisions are only provided for to the extent that forecasts show that it is more likely than not that the ultimate taxable underwriting losses represented by these provisions will be utilised within the foreseeable future. Deferred tax has been provided in full on non-aligned loss provisions of Â£4.2 million (2003: Â£3.0 million). The Inland Revenue has introduced final regulations to give effect to the General Insurance Reserves provisions contained in the Finance Act 2000. The Group's Lloyd's corporate members fall within the remit of these regulations by virtue of their greater than 4% participation on aligned and non-aligned syndicates. The corporation tax charge for this period contains an estimated adjustment in respect of a notional taxable charge as calculated under these regulations of Â£0.4 million (2003: Â£0.7 million). A deferred tax asset of Â£2.1 million (2003: Â£1.1 million) has been taken on existing capital losses to match against deferred tax provisions of Â£2.1 million (2003: Â£1.1 million) on unrealised capital gains arising within the Group during this accounting period. Deferred tax has not been provided on capital losses of Â£35.9 million (2003: Â£43.6 million). The Group expects to continue to suffer depreciation in excess of capital allowances in future periods albeit at a diminishing rate. 9 TAX ON PROFIT ON ORDINARY ACTIVITIES (continued) The Group has suffered US tax on its share of syndicate US underwriting profits. This US tax is recoverable against UK tax on the taxable syndicate profits for the appropriate years of account. Some US tax suffered will be irrecoverable due to the difference between UK and US tax rates and the difference between the timing of US and UK syndicate profits for tax purposes. During the period Â£0.4 million of US tax has been written off (2003: Â£1.4 million). 10 EQUITY DIVIDENDS 2004 2003 Â£m Â£m Interim dividend of 3.0 pence (2003: 0.85 pence) per ordinary share 11.7 3.3 Proposed final dividend of 5.0 pence (2003: 1.65 pence) per ordinary share 19.6 6.4 31.3 9.7 11 EARNINGS AND NET ASSETS PER ORDINARY SHARE Earnings per share is based on the profit attributable to shareholders for the year ended 31 December 2004 of Â£86 million (2003: Â£83.3 million) and the weighted average number of shares in issue during the period. Shares held by the Employee Share Ownership Trust (ESOT) are excluded from the weighted average number of shares. Basic and diluted earnings per share are as follows: 2004 2003 Profit for the financial year Â£86.0m Â£83.3m Weighted average number of shares in issue 388.4m 384.6m Dilutive shares 6.0m 4.9m Adjusted average number of shares in issue 394.4m 389.5m Basic earnings per share 22.1p 21.6p Diluted earnings per share 21.8p 21.4p Basic net assets per share are as follows: 2004 2003 Net assets at 31 December Â£ 443.9m Â£383.3m Adjustments for intangible assets (Â£56.7m) (Â£57.0m) Tangible net assets at 31 December Â£ 387.2m Â£326.3m Number of shares in issue at 31 December 395.1m 390.9m Adjustment for ESOT shares (4.2m) (5.2m) Basic number of shares after ESOT adjustment 390.9m 385.7m Net assets per share 113.6p 99.3p Tangible net assets per share 99.1p 84.6p 12 INTANGIBLE ASSETS Purchased syndicate participations Goodwill Total Â£m Â£m Â£m Cost At 1 January 2004 63.2 - 63.2 Additions - 3.2 3.2 At 31 December 2004 63.2 3.2 66.4 Amortisation At 1 January 2004 6.2 - 6.2 Charge for the year 3.1 0.4 3.5 At 31 December 2004 9.3 0.4 9.7 Net book value At 31 December 2004 53.9 2.8 56.7 At 1 January 2004 57.0 - 57.0 Acquisition of St Margaret's Insurance Services Limited On 13 May 2004, the Group purchased the entire share capital of St Margaret's Insurance Services Limited (formerly SM Marine Holdings Limited) and its subsidiary Amlin Underwriting Services Limited (formerly St. Margaret's Insurances Limited) (together, St Margaret's) by payment of a cash consideration. St Margaret's principal activity is broking and managing insurance for UK yacht owners. The goodwill arising in respect of the acquisition of St Margaret's is calculated as follows: Â£m Fair value of consideration 3.2 Expenses 0.3 Costs of acquisition 3.5 Less: fair value of net assets acquired (0.3) Goodwill at date of acquisition 3.2 The net assets of St Margaret's on 13 May 2004 were as follows: Book value and fair value at acquisition Â£m Debtors 0.1 Cash at bank and in hand 0.7 Creditors: amounts falling due within one year (0.5) 0.3 There are no fair value adjustments to the net assets of St Margaret's at the date of acquisition. The summarised profit and loss accounts for St Margaret's from 1 October 2003 (the beginning of its accounting period) to 13 May 2004 (the date of acquisition) and for the year ended 30 September 2003 (being its previous accounting period) were as follows: 12 INTANGIBLE ASSETS (continued) Period Period 1 Oct 2003 to 1 Oct 2002 to 13 May 2004 30 Sept 2003 Â£m Â£m Turnover 0.7 1.2 Administration expenses (0.5) (0.9) Profit on ordinary activities before taxation 0.2 0.3 Tax (0.1) (0.1) Retained profit for period 0.1 0.2 The profit and loss accounts of St Margaret's relate to the insurance activity of the company and exclude the profits for underwriting portfolios that it manages. Amlin will receive its share of this profit through underwriting the yacht portfolios as well as the net income of St Margaret's. 13 OTHER FINANCIAL INVESTMENTS At At valuation valuation At cost At cost 2004 2003 2004 2003 Group Â£m Â£m Â£m Â£m Shares and other variable yield securities 90.5 50.6 82.7 46.7 Debt and other fixed income securities 719.1 750.3 723.1 755.0 Participation in investment pools 305.4 128.3 305.4 128.6 Deposits with credit institutions 141.0 80.7 140.5 80.6 Overseas deposits 42.5 34.5 42.5 34.5 Other 2.9 4.0 2.9 4.0 1,301.4 1,048.4 1,297.1 1,049.4 In Group owned companies 309.7 235.7 301.9 232.1 In aligned syndicates 979.8 801.1 983.3 806.1 In non-aligned syndicates 11.9 11.6 11.9 11.2 1,301.4 1,048.4 1,297.1 1,049.4 Listed investments included in Group owned total are as follows: Shares and other variable yield securities 90.5 50.6 82.7 46.7 Debt and other fixed income securities 84.0 92.5 75.7 92.8 174.5 143.1 158.4 139.5 As explained in note 29, the majority of the Group investments are charged to Lloyd's to support the Group's underwriting activities. The table below sets out, by currency, the duration of the Group's share of the managed syndicate debt securities together with the Group's own debt portfolio, at 31 December: Syndicate Balance Duration Balance Duration 2004 2004 2003 2003 Â£m years Â£m years Sterling 202.8 2.6 212.1 2.7 US dollar 341.0 2.6 377.3 2.5 Canadian dollar 24.7 2.5 18.7 2.2 Euro 55.9 2.8 38.4 3.1 624.4 2.6 646.5 2.6 Corporate Sterling 84.0 0.3 92.5 0.3 13 OTHER FINANCIAL INVESTMENTS (continued) An indication of the potential impact on these funds of changes in the yield curve due to unexpected changes in underlying interest rates is given below: Bonds Net (reduction) Syndicate Corporate increase in Shift in yield Sterling US$ CAN$ Euro Sterling value (basis points) % % % % % Â£m 100 (0.8) (2.7) (3.1) (2.5) (0.2) (20) 75 (0.6) (2.0) (2.4) (1.9) (0.2) (15) 50 (0.4) (1.4) (1.6) (1.3) (0.1) (10) 25 (0.2) (0.7) (0.8) (0.6) (0.1) (5) -25 0.2 0.7 0.8 0.4 0.1 5 -50 0.4 1.4 1.6 1.3 0.1 10 -75 0.7 2.0 2.4 2.0 0.2 16 -100 0.9 2.7 3.1 2.6 0.2 21 Using Standard and Poor's and Moody's as rating sources, the credit ratings of the Group's share of the debt and other fixed income securities is set out below: 2004 2004 2003 2003 Â£m % Â£m % Government/Government Agency 364.0 50.6 481.0 64.1 AAA/Aaa 91.1 12.7 100.3 13.3 AA/Aa 90.6 12.6 60.5 8.1 A 137.2 19.1 88.4 11.8 BBB/Baa 25.5 3.5 8.8 1.2 708.4 98.5 739.0 98.5 In non-aligned syndicates 10.7 1.5 11.3 1.5 719.1 100.0 750.3 100.0 The cost and valuation of the Company's investments are as follows: At At valuation valuation At cost At cost 2004 2003 2004 2003 Company Â£m Â£m Â£m Â£m Participations in investment pools 12.5 12.2 12.5 12.2 The corporate and syndicate fund managers at 31 December 2004 were: Manager Funds Managed AIM Global Sterling, Euro and US dollar liquid funds Alliance Capital Sterling and Euro bonds and sterling liquid funds Barclays Global Investors Sterling, Euro and US dollar liquid funds Citigroup Assets Management US dollar liquid funds Insight Investment Management Sterling bonds Taube, Hodson Stonex Partners Global equities Weiss Peck & Greer Investments US and Canadian dollar bonds Western Asset Management US dollar bonds 14 OTHER INVESTMENTS Subsidiary Undertakings Â£m At 1 January 2004 205.4 Additions during the year 3.2 At 31 December 2004 208.6 The principal undertakings of Amlin plc at 31 December 2004 which are consolidated in these financial statements, all of which are wholly owned, operate in the UK and are registered in England and Wales, are listed below: Subsidiary undertakings Principal activity Amlin Underwriting Limited Lloyd's managing agency Lloyd's managing agency Investment company Amlin Investments Limited Group service and employing company Amlin Corporate Services Limited Corporate member at Lloyd's Amlin Corporate Member Limited Corporate member at Lloyd's AUT (No 2) Limited Corporate member at Lloyd's AUT (No 6) Limited Corporate member at Lloyd's AUT (No 7) Limited Corporate member at Lloyd's AUT (No 8) Limited Corporate member at Lloyd's Delian Beta Limited Corporate member at Lloyd's Delian Delta Limited Corporate member at Lloyd's 15 DEBTORS ARISING OUT OF DIRECT INSURANCE OPERATIONS 2004 2003 Â£m Â£m Amounts owed by policyholders 8.2 10.5 Amounts owed by intermediaries 101.9 123.6 110.1 134.1 16 TANGIBLE ASSETS Fixtures, Leasehold fittings and land and Motor Computer leasehold Group buildings vehicles Equipment improvements Total Â£m Â£m Â£m Â£m Â£m Cost At 1 January 2004 1.9 0.3 11.3 5.5 19.0 Additions - 0.1 2.3 - 2.4 Disposals - (0.1) - - (0.1) At 31 December 2004 1.9 0.3 13.6 5.5 21.3 Accumulated depreciation At 1 January 2004 0.1 0.1 9.2 3.2 12.6 Charge for the year - 0.1 1.4 1.1 2.6 Disposals - (0.1) - - (0.1) At 31 December 2004 0.1 0.1 10.6 4.3 15.1 Net book value At 31 December 2004 1.8 0.2 3.0 1.2 6.2 At 1 January 2004 1.8 0.2 2.1 2.3 6.4 16 TANGIBLE ASSETS (continued) The assets held under finance leases and hire purchase contracts included in the above had no net book value in either the current or previous year. Leasehold land and buildings Company Â£m Cost At 1 January and 31 December 2004 1.9 Accumulated depreciation At 1 January 2004 0.1 Charge for the year - At 31 December 2004 0.1 Net book value At 31 December 2004 1.8 At 1 January 2004 1.8 17 ORDINARY SHARE CAPITAL Authorised ordinary shares of 25p each Number Â£m At 1 January and 31 December 2004 562,000,000 140.5 Allotted, called up and fully paid Number Â£m At 1 January 2004 390,871,916 97.7 Scrip dividend alternative shares issued 1,765,318 0.5 Shares issued on exercise of options 2,452,374 0.6 At 31 December 2004 395,089,608 98.8 The scrip dividend shares were issued at reference share prices of 163.58 pence per share for the 2003 final dividend, at which 553,703 shares were issued, and 150.25 pence per share for the 2004 interim dividend, at which 1,211,615 shares were issued. The shares issued on exercise of options include 56,574 new shares issued on behalf of the Group's Employee Share Ownership Trust pursuant to the 1998 Murray Lawrence scheme and were issued for a total consideration of Â£2,364,130 at an average of 96.4 pence per share. 18 SHARE OPTIONS At 31 December 2004 the following options over new shares, which are potentially exercisable between three and ten years after grant, or earlier in special circumstances such as redundancy, were outstanding under these executive schemes: Usual first month of exercise Option price Number per share of shares June 2003 77.68p 457,607 November 2002 81.04p 135,552 May 2005 81.28p 2,945,727 October 2002 85.35p 698,605 May 2000 112.21p 642,103 May 2004 115.09p 893,540 September 2001 115.57p 451,148 April 2006 118.00p 2,305,500 March 2007 162.75p 2,812,954 11,342,736 18 SHARE OPTIONS (continued) The following changes in new shares under option pursuant to these executive schemes took place during the year: Number of shares Number of shares 2004 2003 At 1 January 10,577,840 9,077,946 Granted during the year 2,864,566 2,456,000 Exercised during the year (1,898,497) (797,506) Lapsed during the year (201,173) (158,600) At 31 December 11,342,736 10,577,840 In addition to these executive options, the following employee Sharesave options over new shares were outstanding at 31 December 2004: Savings period Usual first month of Option price per share Number of shares exercise 5 years December 2004 82.48p 76,919 3 years December 2005 84.00p 564,075 5 years December 2007 84.00p 184,965 3 years July 2004 97.82p 13,462 5 years July 2006 97.82p 63,455 3 years July 2007 142.80p 349,932 5 years July 2009 142.80p 164,387 1,417,195 The following changes in new shares under option pursuant to the Sharesave scheme took place during the year: Number of shares Number of shares 2004 2003 At 1 January 1,468,523 1,840,333 Granted during the year 546,791 - Exercised during the year (497,303) (289,912) Lapsed during the year (100,816) (81,898) At 31 December 1,417,195 1,468,523 The trustee of the Group's Employee Share Ownership Trust (ESOT) held 4,229,734 ordinary shares as at 31 December 2004 (2003: 5,209,922), of which 4,095,924 shares (2003: 5,132,686) were reserved to meet potential future exercises of executive options, in addition to the options over new shares detailed above. During the year 56,574 new shares were issued to satisfy options on behalf of the ESOT. In addition, there are arrangements whereby the ESOT will provide up to 508,902 Performance Share Plan shares, normally not until 2009. The ESOT shares are valued at the lower of cost and net realisable value. The market value of Amlin plc ordinary shares at 31 December 2004 was 141.5 pence per share (2003: 128.0 pence). The assets, liabilities, income and costs of the ESOT are incorporated into the consolidated financial statements. The ESOT waives the right to dividends in excess of 0.01 pence per share per interim or final dividend in respect of its total shareholding. 19 RESERVES Share Capital Profit Group premium Own Merger redemption and loss account shares reserve reserve account Â£m Â£m Â£m Â£m Â£m At 1 January 2004 150.2 (2.4) 41.9 2.7 93.2 Issues of share capital for scrip dividend 2.3 - - - - Issues of share capital on exercise of options over new shares 1.7 - - - - Exercise of options over shares held by ESOT - 0.8 - - - Retained profit for the financial year - - - - 54.7 At 31 December 2004 154.2 (1.6) 41.9 2.7 147.9 The cumulative amount of goodwill written off to reserves is Â£45.7 million (2003: Â£45.7 million). Share Capital Profit and Company premium Own redemption loss account shares reserve account Â£m Â£m Â£m Â£m At 1 January 2004 150.2 (2.4) 2.7 115.0 Issue of share capital for scrip dividend 2.3 - - - Issue of share capital on exercise of options over new shares 1.7 - - - Exercise of options over shares held by ESOT - 0.8 - - Retained profit for the financial year - - - 27.9 At 31 December 2004 154.2 (1.6) 2.7 142.9 20 RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS Group Group Company Company 2004 2003 2004 2003 Â£m Â£m Â£m Â£m Profit (loss) attributable to shareholders 86.0 83.3 59.2 (7.2) Less dividends (31.3) (9.7) (31.3) (9.7) Retained profit (loss) for the financial year 54.7 73.6 27.9 (16.9) Issue of share capital 5.1 2.6 5.1 2.6 Movement in shares held by ESOT 0.5 0.4 0.5 0.4 Realised profit (loss) on disposal of shares by ESOT 0.3 (0.1) 0.3 (0.1) Net increase (decrease) in equity shareholders' funds 60.6 76.5 33.8 (14.0) Equity shareholders' funds at 1 January 383.3 306.8 363.2 377.2 Equity shareholders' funds at 31 December 443.9 383.3 397.0 363.2 21 TECHNICAL PROVISIONS Provision for unearned Claims premiums outstanding Total Â£m Â£m Â£m Gross At 1 January 2004 429.6 999.5 1,429.1 Exchange adjustments (16.8) (37.2) (54.0) Movement in the provisions 88.0 213.0 301.0 At 31 December 2004 500.8 1,175.3 1,676.1 Reinsurance amount At 1 January 2004 (29.3) (265.4) (294.7) Exchange adjustments 1.1 10.8 11.9 Movement in the provisions 4.1 (64.0) (59.9) At 31 December 2004 (24.1) (318.6) (342.7) Net At 31 December 2004 476.7 856.7 1,333.4 At 1 January 2004 400.3 734.1 1,134.4 The claims outstanding balance is further analysed between notified outstanding claims and incurred but not reported claims below: 2004 2003 Â£m Â£m Notified outstanding claims 791.9 618.0 Claims incurred but not reported 383.4 381.5 Claims outstanding 1,175.3 999.5 22 PROVISIONS FOR OTHER RISKS, CHARGES AND DEFERRED TAX a) Spread portfolio and other provisions Provisions for spread underwriting losses Â£m At 1 January 2004 3.0 Utilised during the year (1.0) Additions 2.6 At 31 December 2004 4.6 Included in the provision above is Â£0.1 million (2003: Â£0.4 million) representing the estimated loss attributable to the Group in respect of its underwriting through Stace Barr Angerstein PLC and its subsidiary, SBA Underwriting Limited, the accounts of which are not yet available. b) The deferred tax (asset) liability is attributable to timing differences arising on the following: Unrelieved trading losses Other Underwriting Provisions carried timing results for losses forward differences Total Â£m Â£m Â£m Â£m Â£m At 1 January 2004 40.7 (1.0) (15.2) (7.6) 16.9 Deferred tax charge for the year 31.0 (0.3) 6.4 (1.6) 35.5 At 31 December 2004 71.7 (1.3) (8.8) (9.2) 52.4 23 OTHER CREDITORS INCLUDING TAXATION AND SOCIAL SECURITY 2004 2003 Â£m Â£m Loan stock - 6.9 Bank loan 30.3 0.4 Finance lease creditors (see note 24) 0.1 0.1 Proposed dividend (see note 10) 19.6 6.4 Corporation tax 5.6 11.9 Other creditors 17.1 6.4 72.7 32.1 A subsidiary, Amlin Underwriting Group plc, had Â£6.9 million of unsecured loan stock outstanding at 31 December 2003, which was repaid in full to loan note holders in April 2004. A secured term facility of Â£30 million was arranged on 24 November 2004 for the Company by a group of banks led by Lloyds TSB Bank plc for a period of 12 months, with the first interest period being 25 November 2004 to 25 February 2005. The rate of interest is the aggregate of the LIBOR on the first day of the interest period, plus margin (fixed at 2.25%) and mandatory cost if any, the last of which is calculated by reference to banks' minimum reserve requirements. After the initial interest period, the Company is required to select an interest period of one, two, three or six months or any other period agreed by the lender. The Company may repay all or part of the loan at the end of any interest period by giving notice of no less than 10 business days. 24 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Group 2004 2003 Â£m Â£m Subordinated bond 25.6 - Bank loan 2.7 3.0 Finance lease creditors 0.1 0.1 Performance related incentive schemes 18.3 14.4 Other creditors - 2.3 46.7 19.8 Company 2004 2003 Â£m Â£m Subordinated bond 25.6 - Bank loan 2.7 3.0 28.3 3.0 Obligations due under finance leases and hire purchase contracts are payable as follows: 2004 2003 Â£m Â£m Within one year 0.1 0.1 Within two to five years 0.1 0.1 0.2 0.2 The Group's Employee Share Ownership Trust (ESOT) had a loan from Lloyds TSB Bank plc at the year end of Â£3.0 million (2003: Â£3.4 million) secured by a fixed charge over a proportion of the Company's shares held by the ESOT. This loan is pursuant to a new facility agreed in September 2003 which replaced the ESOT's previous such facility and also enabled the repayment by the ESOT of a loan from the Company of Â£2.3 million in 2003. The new loan is repayable over ten years and is guaranteed by the Company. It is anticipated that it will be repaid from the proceeds of exercises of options over Amlin plc ordinary shares held by the ESOT. 24 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (continued) A US$50 million subordinated bond was issued by the Company on 23 November 2004. The bond bears an interest rate of 7.11% from the issue date to a reset date of 23 November 2014, payable semi-annually in arrears on 23 May and 23 November in each year. The interest between the reset date and the maturity date, being the interest payment date in November 2019, is payable quarterly at the rate of three month US$ LIBOR plus 3.48%. The bond will be redeemed on the maturity date at the principal amount, together with the accrued interest. However, the Company has the option to redeem the bond in whole, subject to fulfilling certain requirements, on the reset date or any interest payment date thereafter at the principal amount plus accrued interest. 25 COMMITMENTS There were no capital commitments or authorised but uncontracted capital commitments at the end of the financial year. The Group leases certain land and buildings on short-term operating leases, under which the minimum annual commitments were Â£2.3 million (2003: Â£2.3 million). The leases expire in over five years. 26 RECONCILIATION OF PROFIT BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2004 2003 Â£m Â£m Profit on ordinary activities before taxation 121.6 120.3 Net movement on Premium Trust Funds for non-aligned participations (3.0) - Depreciation charge 2.6 4.1 Syndicate capacity amortisation charge 3.1 3.1 Amortisation of goodwill 0.4 - Realised losses on investments 0.3 3.4 Unrealised (gains) losses on investments (0.2) 3.1 (Increase) decrease in debtors (72.2) 3.7 Increase in prepayments and accrued income (2.7) (28.4) Increase in insurance debtors, prepayments and accrued income (29.8) (8.1) Increase in technical provisions 266.0 116.9 (Increase) decrease in reinsurers' share of technical provisions (58.3) 76.7 Increase in provisions for other risks and charges 7.7 17.0 Increase (decrease) in insurance creditors, accruals and deferred income 4.9 (73.9) (Decrease) increase in other creditors relating to operating activities (9.6) 27.7 Increase in accruals and deferred income 7.7 17.0 Finance servicing costs 5.1 6.6 Net cash inflow from operating activies 243.6 289.2 27 MOVEMENTS IN CASH, PORTFOLIO INVESTMENTS AND FINANCING Changes to market At 31 value and At 31 December rates of December 2003 Cash flow exchange 2004 Â£m Â£m Â£m Â£m Cash at bank and in hand 23.2 16.6 - 39.8 Shares and other variable yield securities 50.6 36.0 3.9 90.5 Debt and other fixed income securities 739.0 (26.7) (3.9) 708.4 Participations in investments pools 128.3 177.1 - 305.4 Deposits with credit institutions 80.4 60.4 - 140.8 Overseas deposits 34.5 7.0 - 41.5 Other investments 4.0 (1.1) - 2.9 Managed cash and investments 1,060.0 269.3 - 1,329.3 Non-aligned cash and investments 14.9 - - 14.9 Total cash and investments 1,074.9 269.3 - 1,344.2 Loans due within one year (7.3) (23.0) - (30.3) Loans due after one year (3.0) (25.3) - (28.3) (10.3) (48.3) - (58.6) 1,064.6 221.0 - 1,285.6 28 GROUP OWNED NET ASSETS The assets and liabilities attributable to Group owned companies, as opposed to the Group's syndicate participations, are summarised below: In Group In Group owned In owned In companies syndicates Total companies syndicates Total 2004 2004 2004 2003 2003 2003 Â£m Â£m Â£m Â£m Â£m Â£m Investments Other financial investments 309.7 991.7 1,301.4 235.7 812.7 1,048.4 Debtors Other debtors 49.6 75.8 125.4 12.6 40.0 52.6 Other assets Intangible assets 56.7 - 56.7 57.0 - 57.0 Tangible assets 6.2 - 6.2 6.4 - 6.4 Cash at bank and in hand 28.9 13.9 42.8 3.5 23.0 26.5 Prepayments and accrued income 13.6 8.0 21.6 9.8 9.2 19.0 Other syndicate assets - 818.0 818.0 - 741.5 741.5 Total assets 464.7 1,907.4 2,372.1 325.0 1,626.4 1,951.4 Provisions for other risks and (57.0) - (57.0) (19.9) - (19.9) charges Creditors Amounts due within one year (60.3) (12.4) (72.7) (14.3) (17.8) (32.1) Amounts due after more than one (46.7) - (46.7) (19.8) - (19.8) year Accruals and deferred income (29.8) - (29.8) (11.8) (0.1) (11.9) (136.8) (12.4) (149.2) (45.9) (17.9) (63.8) Other syndicate liabilities - (1,722.0) (1,722.0) - (1,484.4) (1,484.4) Consolidated shareholders' funds 270.9 173.0 443.9 259.2 124.1 383.3 at 31 December The assets of the syndicates included above are only available to pay syndicate related expenditure. 29 CONTINGENT LIABILITIES a) Funds at Lloyd's - deeds of covenant and letters of credit The Group has entered into various deeds of covenant in respect of certain corporate member subsidiaries to meet each such subsidiary's obligations to Lloyd's. At 31 December 2004, the total guarantee given by the Group under these deeds of covenant (subject to limited exceptions) amounted to Â£252.2 million (2003: Â£209.5 million). The obligations under the deeds of covenant are secured by a fixed charge of the same amount over investments, and a floating charge over the investments and other assets of the Group, in favour of Lloyd's. Lloyd's has the right to retain the income on the charged investments, although it is not expected to exercise this right unless it considers there to be a risk that one or more of the covenants might need to be called and, if called, might not be honoured in full. As liability under each deed of covenant is limited to a fixed monetary amount, the enforcement by Lloyd's of any deed of covenant in the event of a default by a corporate member, where the total value of investments has fallen below the total of all amounts covenanted, may result in the appropriation of a share of the Group's Funds at Lloyd's that is greater than the proportion which that subsidiary's overall premium limit bears to the total overall premium limit of the Group. The Group has also entered into Lloyd's deposit trust deeds for Funds at Lloyd's by which letters of credit (LOCs) for a total amount of Â£130 million (2003: Â£130 million and US$90 million) have been deposited. The sterling LOCs were deposited at Lloyd's in November 2003 pursuant to a bank LOC facility agreed in September 2003 which replaced the previous such facility. US$90 million of US dollar denominated LOCs, which were procured in 2001 by agreement with the Company's 9.8% shareholder State Farm Mutual Automobile Insurance Company, were released by Lloyd's in November 2004. b) Reinsurance to close (RITC) on spread portfolio RITC is a particular type of reinsurance contract entered into by Lloyd's syndicates whereby the members of a syndicate for a particular year of account (the closing year) agree with the members of that or another syndicate for a later year of account (the reinsuring members) that the reinsuring members will indemnify, discharge or procure the discharge of all the known and unknown liabilities of the closing year arising out of insurance business underwritten by the syndicate in the closing year of account. In the event that a corporate member resigns from a syndicate or reduces its participation relative to the other members of the syndicate, it will make a net payment of an RITC premium. The payment of the RITC premium does not release members from ultimate responsibility for claims payable on risks they have written and in the event that the reinsuring members were unable to pay and the other elements in the Lloyd's chain of security fail, the members would remain liable for the payment of any outstanding claims. Payment of an RITC premium is conventionally treated as settling a member's outstanding claims for the closing year and this convention has been adopted in these accounts. There is no mechanism for the Group to account for the gross claims payments and recoveries made from the reinsuring members or to quantify the ongoing exposure in respect of closed years of account. The directors consider that the possibility of the corporate members having to assume these liabilities is remote. 30 RELATED PARTY TRANSACTIONS During the period under review Mr B D Carpenter, a director, was a member of Syndicate 2001, managed by the Group, as set out below. Under the terms of an offer made in 2002 to all external members he exercised the right to participate in the 2003 year of account for 50% of his 2002 capacity and all profit commission payable to the Group was waived. As a result of the offer, Mr Carpenter does not participate in the Syndicate for the 2004 or subsequent years of account. Capacity underwritten Year of account 2002 2003 2004 2005 Â£000 Â£000 Â£000 Â£000 B D Carpenter 291 182 - - The aggregate of fees and profit commission paid by Mr Carpenter was Â£1,200 (2003: Â£1,527), of which none was overdue at 31 December 2004 (2003: Â£nil). State Farm Mutual Automobile Insurance Company, a major shareholder, procured for the Group unsecured letters of credit. This facility was provided at a commission rate of 5% and Â£2.2 million (2003: Â£4.0 million) was paid under this arrangement to State Farm in respect of the year. This arrangement concluded in November 2004 when the final part of the letters of credit were released by Lloyd's. The Group holds a 60% shareholding in Amlin Plus Limited (APL), a company which underwrites insurance business, principally bloodstock, on behalf of Syndicate 2001 at Lloyd's. APL placed Â£12,852,484 (2003: Â£5,467,973) of premium during 2004 and earned brokerage commission totalling Â£2,564,243 (2003: Â£962,472). 31 PRINCIPAL EXCHANGE RATES The principal exchange rates used in translating foreign currency assets, liabilities, income and expenditure in the production of these accounts were: Average rate Year end rate 2004 2003 2004 2003 US dollar 1.83 1.64 1.92 1.79 Canadian dollar 2.38 2.29 2.30 2.31 Euro 1.47 1.45 1.41 1.42 The table below sets out the Group's share of the currency exposures of the Syndicate at 31 December: Net Net Assets Liabilities 2004 2003 Â£m Â£m Â£m Â£m US dollar 960.7 939.1 21.6 84.6 Canadian dollar 50.3 40.0 10.3 10.0 Euro 80.1 72.1 8.0 5.3 1,091.1 1,051.2 39.9 99.9 32 FINANCIAL INFORMATION AND POSTING OF ACCOUNTS The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2003 or 2004, but is derived from those accounts. Statutory accounts for 2003 have been delivered to the Registrar of Companies and those for 2004 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 237 (2) or (3) of the Companies Act 1985. The audited Annual Report and Accounts for 2004 are expected to be posted to shareholders by no later than 4 April 2005. Copies of the Report may be obtained from that date by writing to the Company Secretary, Amlin plc, St Helen's, 1 Undershaft, London, EC3A 8ND. The Annual General Meeting of the Company will be held at the same address at noon on Wednesday 18 May 2005. The Preliminary Results were approved by the Board on 7 March 2005. This information is provided by RNS The company news service from the London Stock Exchange END FR PKOKDDBKBCNK

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