Final Results

Amlin PLC 10 March 2006 AMLIN PLC PRESS RELEASE For immediate release 10 March 2006 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 (UNAUDITED) RECORD PROFITS DESPITE WORST NATURAL CATASTROPHES IN HISTORY Financial highlights •Record profit before tax of £182.7 million (2004: £128.9 million), after absorbing 2005 hurricane losses of £130.1 million (2004: £74.0 million) •Combined ratio stable at a healthy 82% •Record return on equity of 28.4% •Dividends (interim and proposed final) increased 27.5% to 10.2p per share •Rights issue successfully raised £215 million •$175 million of longer term debt raised •Net assets of the Group increased 72% to £792.6 million Operational highlights • Amlin Bermuda launched with US$1 billion of capital • Strong insurance financial strength ratings assigned to Syndicate 2001 and Amlin Bermuda • London market brokers rank Amlin as leading business for claims service • Continued leadership of process improvements for London market underwriting and claims • Turnover among senior underwriters was below 5% for fifth year in succession Outlook for 2006 • Strong opening position with unearned premium reserve of £523.8 million carried forward to 2006 • Stronger pricing in key classes, including reinsurance, property and energy • Good start to year with gross premiums up 26% in first two months • Higher cash and investments, totalling £2.1 billion, increases potential return 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 0207 417 8989/07768 332486 Peter Rigby, Haggie Financial 0207 417 8989/07803 851426 FINANCIAL HIGHLIGHTS *2005 *2004 **2003 **2002 **2001 £m £m £m £m £m -------------- --------- --------- -------- -------- --------- Gross premiums written 993.5 945.6 937.4 717.1 587.4 Net premiums written (1) 829.3 790.2 787.6 573.0 486.5 Net earned premiums (1) 822.1 722.4 701.1 493.3 339.1 -------------- --------- --------- -------- -------- --------- Profit (loss) before tax 182.7 128.9 117.8 44.8 (83.4) Return on equity 28.4% 24.1% 26.6% 16.7% (33.7)% -------------- --------- --------- -------- -------- --------- Per share amounts (in pence) Earnings 33.6 23.4 21.0 11.8 (34.2) Net assets 150.2 117.6 98.7 80.3 68.0 Net tangible assets 137.7 100.8 82.3 63.7 59.5 Dividends under IFRS 9.0 4.7 2.1 0.8 - Dividends (paid and proposed final) in respect of the calendar year 10.2 8.0 2.5 2.0 - -------------- --------- --------- -------- -------- --------- Syndicate 2001 operating ratios Claims ratio 57% 50% 50% 63% 89% Expense ratio 25% 32% 36% 33% 33% Combined ratio 82% 82% 86% 96% 122% -------------- --------- --------- -------- -------- --------- * The indicated column above are restated under International Accounting Standards. ** The indicated columns above have been restated for the following material changes under International Accounting Standards: • Write back of amortisation on syndicate capacity • Non-monetary assets foreign exchange adjustment • Retirement benefit obligation recognition • Mid to bid market valuation of financial assets • Accounting for dividends (1) Net premiums written and net earned premiums exclude premiums received by Amlin for reinsurance to close of non-aligned members of 2001. CHAIRMAN'S STATEMENT Hurricane losses reached an unprecedented level in 2005 and challenged the insurance industry. Amlin absorbed some large losses but, due to its approach to risk management and diverse portfolio, still produced excellent results. Our return on equity of 28.4% in 2005 brings our weighted average five year return to 17.4%. Our 2005 profit before tax, of £182.7 million, was up 42% on 2004 (£128.9 million) which, after losses of £130.1 million (2004: £74 million) from major catastrophes, highlights the strength of the underlying performance across the Group. The underwriting contribution increased by 29% to £137.1 million (2004: £106.6 million), with a combined ratio of 82% (2004: 82%), and investments contributed £90.9 million, up 74% (2004: £52.1 million). £16 million of the profit earned in 2005 was one off in nature, largely consisting of foreign exchange gains. Compared to our previous accounting treatment, a further £26 million has been recognised on foreign exchange translation of premium. Dividend The Board proposes a final dividend of 6.2p per share, making total dividends for 2005 of 10.2p per share (2004: 8p). This equates to 30% of earnings and is consistent with our commitment made two years ago to distribute at least the higher of 8p per share, adjusted for inflation, or 30% of earnings for each of 2005 and 2006. The 2005 final dividend is to be paid on 31 May 2006, subject to shareholder approval at the Annual General Meeting to be held on 25 May 2006, in respect of shares on the register on 31 March 2006 (other than shares issued in the rights issue in November 2005, which were issued on the basis that they do not rank for the 2005 final dividend). There will be no scrip dividend alternative but a dividend reinvestment plan is to be offered to shareholders for the first time. Strategy Having taken stock of the likely effect of the 2005 hurricane activity on the shape of the insurance cycle for many of our business areas, we accelerated our long term strategic plan to diversify beyond the Lloyd's market and set up Amlin Bermuda which opened for business on 1 December 2005. Our ability to react so quickly and to be up and running with a high quality team supported by proper systems is a testimony to both the depth of our underwriting skill base, as we transferred existing employees from London to Bermuda, the quality of operational management, and the successful development of our administrative processes and systems. Our strategy in Bermuda is to grow the premium in selected classes, with target new business to the Group of $350 million and $500 million for 2006 and 2007 respectively. We are making good progress in working towards our Vision of becoming the 'global reference point for quality' in our markets. The dynamics forcing change in our markets are accelerating and we believe that our focus on quality reinforces our ability to seize opportunities which will enable us to accelerate our progress towards our overall strategic goals. Outlook Property insurance and reinsurance markets have been badly shaken by the size of hurricane losses in 2005, particularly from Katrina and Wilma, with many companies forced to re-examine their business models and reduce risk exposures, particularly in major catastrophe zones. Consequently, rates today are considerably better in our non-marine and marine businesses than we had expected they would be this time last year and for US catastrophe exposed risk, in particular, we are experiencing significant price increases. Retrocessional reinsurance, which is the reinsurance of reinsurance portfolios and which we have historically purchased to protect against extreme frequency and severity of loss, has become so expensive that we believe it appropriate to run more catastrophe risk internally whilst reducing our peak exposures. The adjustment is being managed through this year. An unearned premium reserve has been brought forward into 2006 of £523.8 million, broadly equivalent to last year. Substantially all of this will be earned this year and, with stronger overall pricing, 2006 has the potential to be another very good year for Amlin. We expect conditions for our non-marine and marine businesses to remain favourable through 2006 which would bode well for 2007. Our airline and UK commercial classes have continued to come under increasing pressure but we expect that competitors in these areas will realise the need to positively adjust prices before too long. Amlin Bermuda has made a promising start. All in all, we look to the future with confidence. Board Richard Davey joined the Board as a non-executive director in December 2005 and brings with him a broad City experience. At our AGM in May 2006 my deputy Lord Stewartby will not be standing for re-election. Ian has been involved with the companies that preceded Amlin and has served as Deputy Chairman since our formation in 1998. The Company has grown and prospered throughout this period and we owe a great deal to him for his constant support and valuable contribution. Michael Davies has been Chairman of our principal subsidiary Amlin Underwriting Limited since 2000. Now that the last year in which Lloyd's Names participated has closed, Michael has decided to retire from that Board and I would like to place on record our warm thanks for his contribution. The Amlin Team 2005 has been a challenging year yet we have produced records results and launched an important new company in Bermuda. This is due to the strong leadership of Charles Philipps and his excellent management team who are supported by all the employees in Amlin. Sustained progress continues to be made and this is not achieved without a combination of skill and hard work for which we owe our thanks. Roger Taylor Chairman FINANCIAL PERFORMANCE Financial performance *2001 *2002 *2003 *2004 *2005 £m £m £m £m £m ---------------- --------- --------- -------- -------- -------- Gross premium 587.4 717.1 937.4 945.6 993.5 Net premium 486.5 573.0 787.6 790.2 829.3 Net earned premium 339.1 493.3 701.1 722.4 822.1 ---------------- --------- --------- -------- -------- -------- Underwriting contribution (85.5) 17.1 117.1 106.6 137.1 Investment contribution 9.5 43.7 33.5 52.1 90.9 Net other costs 7.4 16.0 32.8 29.8 45.3 ---------------- --------- --------- -------- -------- -------- Profit before tax (83.4) 44.8 117.8 128.9 182.7 ---------------- --------- --------- -------- -------- -------- Return on equity (33.7)% 16.7% 26.6% 24.1% 28.4% ---------------- --------- --------- -------- -------- -------- * see financial highlights for basis of preparation. The financial performance of the Group has once again been excellent with a record profit before tax of £182.7 million (2004: £128.9 million) and return on equity of 28.4%. This includes a one-off accounting gain on foreign exchange of £16 million arising out of the initial investment in Amlin Bermuda. This year's performance is particularly notable given the £130.1 million of hurricane losses incurred for the 2005 storms (2004: £74 million for hurricane and typhoon losses). Underwriting contributed £137.1 million (2004: £106.6 million) to the pre tax result. The hurricane losses noted above increased the claims ratio by 15.1% but releases from prior period reserves amounted to £79.7 million (for Amlin's share of the syndicate). However, consistent reserving strength has been maintained for liabilities assessed at 31 December 2005 when compared to last year. Investments produced a £90.9 million (2004: £52.1 million) return as investment balances continued to grow and returns from both bonds and equities were greater than for the previous year. Net costs amounted to £45.3 million (2004: £29.8 million) after financing costs. Looking to the longer term, our performance has been strong with the weighted average return on equity since 2001 of 17.4% against our cross cycle return target of 15% and our estimated cost of equity of 8.5%. To put this into context, this period includes three years with the worst cumulative catastrophe insured losses on record, namely 2001, 2004 and 2005. The weighted average combined ratio since 2001 for Syndicate 2001 is 91%. At a time when gross premium income has grown by 69% to £993.5 million. Underwriting performance Underwriting performance - 100% Syndicate *2001 *2002 *2003 *2004 *2005 £m £m £m £m £m ---------------- --- --------- -------- -------- -------- ------ Gross premium 874.1 988.3 1,097.50 942.2 990.0 Net earned premium 547.8 699.4 890.6 782.0 827.5 Claims ratio % 89 63 50 50 57 Expense ratio % 33 33 36 32 25 Combined ratio % 122 96 86 82 82 Underwriting contribution (118.8) 21.7 134.2 139.3 152.0 ---------------- --- --------- -------- -------- -------- ------ * see financial highlights for basis of preparation. Note: This table includes 100% of Syndicate 2001. The commentary until divisional performance is for Amlin's share. Underwriting made a strong contribution to profit despite an extraordinary year of catastrophe losses. 2005 is estimated to be the costliest on record for hurricane losses with estimates of the insurance cost ranging from US$60 billion to $80 billion. For Amlin, the 2005 storms cost US$ 236.7 million, net of reinsurance. Reserve releases were again material contributing £79.7 million (2004: £49.7 million) to profit. This is a welcome contribution in a difficult trading year. Development of prior underwriting years has been considerably better than expected. The estimation of outstanding claims that the Group has to settle is a vital element of overall management of the balance sheet. It is a major factor in determining profitability and also knocks on to investment management, as very different approaches are adopted for capital assets and policyholders' funds. By its nature insurance is an uncertain business and much of Amlin's business is large commercial insurance which can be volatile. The subjectivities that we have to deal with when considering the level of outstanding liabilities include the risk profile of an insurance policy, class of business, timeliness of notification of claims, validity of the claims made against the policy and validity of the quantum of the claim. At any time, there are a range of possible outcomes that the Group faces when considering the population of claims that remain to be settled. Therefore we believe that it is appropriate to adopt a cautious stance to the assessment of liabilities. Consequently reserves carried are in excess of a best estimate of the likely outcome. As time passes the level of caution in respect of an underwriting year is reduced to reflect the greater certainty that is reached. However it should be noted that individual claim estimates may remain highly subjective until a final settlement is made. Importantly a consistent reserving strength has been adopted at the end of 2005 compared with the previous year. That said, there are a number of classes, most notably our UK commercial liability classes, where our actual claims experience has now provided a better guide to future development than we have had hitherto. For such classes, we have improved our view of expected performance which does generate a single year gain. Gross premiums were up 4.6% despite a fall in renewal rates of 4% during 2005. Net premiums written increased by 5.5%. The reinsurance premium ceded to reinsurers was 17%, consistent with 2004. Net earned premium was up 6% at £827.5 million (excluding premiums associated with the reinsurance to close). Hurricanes Total Cost Property Property Energy Other insurance reinsurance $m $m $m $m $m ----------- ----------- -------- --------- ------- ------- Katrina 527.4 218.2 267.4 32.0 9.8 Rita 160.7 17.8 89.0 51.0 2.9 Wilma 172.8 16.5 155.9 - 0.4 ----------- ----------- -------- --------- ------- ------- Gross loss 860.9 252.5 512.3 83.0 13.1 Reinsurance recovery (619.5) (214.2) (319.6) (73.2) (12.5) ----------- ----------- -------- --------- ------- ------- Sub-total 241.4 38.3 192.7 9.8 0.6 Reinstatement premiums (4.7) 11.9 (28.8) 10.1 2.1 ----------- ----------- -------- --------- ------- ------- Net loss 236.7 50.2 163.9 19.9 2.7 ----------- ----------- -------- --------- ------- ------- The cost of the storm losses is greater than those experienced in 2004. Gross estimated ultimate claims were significantly larger at US$860.9 million (2004 storms: US$ 265.0 million) which reflects the severity of the 2005 hurricanes. This is true of not only Katrina, which is estimated to be the costliest natural disaster on record, but also Wilma, which is estimated to be the seventh costliest natural disaster on record since 1970. The resultant claims were better absorbed by the reinsurance programme purchased by the Group which is designed to deal with severity of losses. This is illustrated by the retention rate (ie the net loss to gross loss ratio) which stands at an estimated 27% for 2005 and 53% for 2004. We estimate the potential losses from large events on a contract by contract basis rather than relying entirely on computer modelled output. At an early stage our estimates are subject to material uncertainty as it takes several months before loss adjusters and assessors can visit every damaged property. However, by the year end they reflect formally advised claims or good indications of likely loss received from intermediaries or clients. The principal uncertainties that remain relate to final determination of the value of claims, particularly for business interruption on property and energy claims, and in a few cases, possible disputes. The reinsurance recoverable from these events is significant. However our reinsurance credit quality is generally good and our collections to date have been made quickly. For the 2004 hurricanes we have collected recoveries of US$171 million, almost 100% of total reinsurance recoveries requested. For 2005 we have already made reinsurance collections of US$148 million, 87% of total collections requested. Divisional performance The following commentary is provided for the Syndicate business across all years of account irrespective of the identity of the underlying capital support. This removes any distortion in performance which is attributable to changing levels of ownership of Syndicate 2001. Non-marine The non-marine division is the Group's largest business segment, accounting in 2005 for 56% (2004: 55%) of gross premiums written. The business is a blend of classes which are exposed to catastrophic loss (eg catastrophe reinsurance), large claim events (eg aviation reinsurance) and attritional claims (auto or casualty). Geographically the division's largest market is the United States with 55% of business written there for 2005. However, diversity is important. For example, in the United States our property catastrophe underwriting is focused on regional insurance companies and regional exposures are closely monitored. Internationally, our insurance and reinsurance include the provision of cover for earthquake and wind storm in Japan, windstorm exposure in Europe and earthquake in New Zealand. Premiums written increased by £35 million or 6.7%, to £557 million. Overall, rates fell during 2005 by 5% but renewal retention remained high at 83% (2004: 81%). Experience by class was varied. For example US catastrophe reinsurance rates remained stable following the hurricane losses of 2004 but international catastrophe reinsurance rates fell by 10%. However, following the active US hurricane season rates began to rise again in the final quarter of the year. The division's combined ratio was 93% (2004: 80%). The division again bore the brunt of the windstorm losses which increased the combined ratio by 22.7% (2004: 16.7%). This was partially offset by reserve releases of £23.7 million. Underlying performance remained strong with the limited impact from other catastrophes in the year and no other major loss events. Marine The marine division accounted for 18% of gross premiums written in 2005 (2004: 17%). Business written includes volatile classes, such as energy, specie and war, and attritional classes such as hull, cargo and yacht. The business is written worldwide reflecting the nature of much of the marine business underwritten. However the yacht and bloodstock accounts have a UK bias. During 2005 renewal rates across the division were stable (2004: stable). As with the previous year this masked a shifting rating environment between classes. Encouragingly attritional classes such as hull, bloodstock and yacht experienced modest improvements to overall rates. The energy account experienced modest increases and strengthened further in the fourth quarter as the impact of the 2005 windstorms on the energy market was rapidly felt. However the war account, which has experienced low loss incidence in recent years, became increasingly competitive with rates falling by 8% for the year. In this environment the gross premium written increased by 9% to £172.7 million. The combined ratio was an excellent 63% (2004: 87%). The only significant catastrophe losses incurred in 2005 were hurricane related. The division's 2005 gross windstorm losses were US$96 million, (2004: US$ 9 million). This is a reflection of two severe storms, Katrina and Rita, hitting concentrations of rigs in the Gulf of Mexico, compared to just Hurricane Ivan in 2004. Offsetting this were reserve releases of £29.5 million (2004: £9.4 million). Aviation The aviation division accounted for 8% of gross premium written in 2005 (2004: 10%). The division writes a mix of aviation related classes including airline, general aviation, airport and product liabilities and satellite risks. All classes are exposed to large event losses and the purchase of a comprehensive reinsurance programme is fundamental to our ability to underwrite this class. In 2005, 42% of business written was ceded to reinsurers. The airline portfolio, which renews in the final quarter of the year, has reduced again as rates have continued to decline from their peak in 2002. Average airline renewal rates in 2005 were 11% below those in 2004. The lack of major airline losses has caused this decline but we believe that the risk exposure has risen as air traffic continues to increase. During the 2005 renewal season we declined to renew 15% of our airline accounts. We achieved stable or positive renewal rate movements on other aviation classes, and overall, the divisional renewal rate reduction was 2%. However the renewal retention rate has fallen to 69% (2004: 73%) reflecting the changes to the composition of the airline account. There were a number of airline losses during 2005, but the aggregate expected loss cost was a modest US$1.2 billion and Amlin had little exposure to them. The combined ratio was a very respectable 70% (2004: 84%). UK Commercial Gross premium written by our UK commercial divisions represented 18% of 2005 income (2004: 18%). Business written in this area is largely for UK based clients, with incidental overseas exposures, and unlike in Amlin's other divisions which operate in the London subscription market, each risk is written entirely by the division. Whilst the business written is exposed to catastrophe risk, particularly the UK motor and property accounts, this element is reinsured. Inherently this division is attritional in nature. Over recent years the level of liability business written has increased. This provides balance to the UK commercial motor account which has been the longstanding core of the division's business. Importantly it allows costs, particularly claims handling costs, to be spread over a broader income base with classes that have different rating cycles. The UK commercial motor account continued to experience strong competition with rates reducing by 5%. The liability business began to witness greater competition in 2005, particularly for professional indemnity risks as new entrants increased competition. However, overall liability rates reduced by 6.5%. Consequently gross premium written, net of brokerage, reduced by around £9 million to £63 million. Overall the retention rates were 78% (2004: 82%). The combined ratio was strong at 72%. Reserve releases of £27.8 million (2004: £13.1 million) again bolstered the result. This reflects strong reserving on a claim by claim basis as well as a reduction in caution applied to the liability account as the claims development continued to be good and claims patterns became more mature. Amlin Bermuda Amlin Bermuda, which commenced trading on 1 December 2005, underwrote US$5.5 million of income on risks which incepted in 2005. This premium will largely be earned in 2006. Amlin's Katrina experience Hurricane Katrina was a major test of our catastrophe management capabilities. The hurricane was extraordinary due to its size and severity as well as its track over New Orleans that eventually led to the breach of levees and catastrophic flooding of the city. It affected a number of classes of Amlin's business with claims arising from damage to energy installations in the Gulf of Mexico, damage from wind and flood to large commercial property in New Orleans and Mississippi, and claims on property reinsurance and catastrophe reinsurance programmes for clients with their own exposures in the area. The table below illustrates the sources of the loss and compares it to our modelled US$60 billion Gulf of Mexico hurricane realistic disaster scenario ('RDS'). Class Katrina claim RDS claim Difference $m $m $m Catastrophe reinsurance 175 281 (106) Property reinsurance 85 38 47 Property insurance 217 65 152 Energy 32 92 (60) Marine reinsurance 7 13 (6) Other 11 16 (5) -------------------- ------------- ---------- ---------- Gross claims 527 505 22 Reinsurance recoveries (429) (392) (37) Net reinstatement premiums 6 (9) 15 -------------------- ------------- ---------- ---------- Total 104 104 0 -------------------- ------------- ---------- ---------- Overall, the estimated gross loss was remarkably close to our modelled event loss, although as can be seen above, the property insurance and reinsurance losses were higher than modelled and other classes were less than modelled. The loss emanating from the property insurance portfolio was greater than envisaged due to the severe surge and flood losses to commercial property. The models employed did not cater well for these eventualities. Conversely our modelled event had a more severe impact upon the gulf energy installations than the actual Katrina event because the wind path of the storm passed over a lower concentration of values. What is also clear from the loss numbers is the extent of reinsurance protection that we had last year to reduce the volatility from such extreme events. Investment performance The investment contribution of £90.9 million, up 76% on the previous year, was a strong performance. This reflected improved returns across most asset classes and increased assets available for investment. Our investment management approach is consistent with our underwriting based on experience, diversity, risk management and management of market cycles. We have in recent years invested in our investment management competencies recruiting a Chief Investment Officer in 2003 and building a new investment framework which includes market experts as a sounding board for investment management decisions. For the purposes of deciding investment strategy we divide the Group's investments into two distinct parts: first Group capital which supports the underwriting business and second, policyholders funds where premiums are received in advance of claim settlement. The investment strategy of each part is then driven by the returns available on particular asset classes for a given level of modelled investment risk. The strategies determined are distinct because the level of risk that we are prepared to accept for each part is different. For policyholders' funds we have a relatively low risk appetite. The aim is to match liability currency and duration with assets. This leads us to invest in highly liquid short term bonds and cash. Return on short dated sterling bonds was 5.3% (2004: 5.0%) compared to a total return on dollar assets of 1.6% (2004: 2.1%). This reflects the trend of the interest rate cycles in the UK compared to the US. UK interest rates peaked at 4.75% followed by a first rate cut of 0.25% in August as the UK economy slowed. In comparison, US interest rates were raised by 0.25% eight times in 2005 as the US economy performed strongly and interest rates were moved back to a more neutral position. For the Group's capital the investment horizon is longer term and this allows investment in more volatile asset classes, such as longer duration bonds and equities. A value at risk ('VaR') asset model is used to determine the most efficient benchmark for our solvency capital. In September 2004 a strategic decision was taken to increase our investment risk. At this point, with underwriting markets becoming more competitive, the balance sheet growing and debt leverage reducing, we wanted to increase our exposure to equities, and stock market conditions appeared supportive. During 2005 our average equity to bond/cash ratio was 41% compared to 26% in 2004. The equity return for 2005 was an excellent return of 26.6% (2004: 14.4%). Cash remained the asset of choice to balance the volatility of the equity portfolio for the Group's capital and this generated a return of 4.8% (2004: 4.7%). Amlin Bermuda holds its assets in US$ and trades predominantly in that currency. As the Group's Bermuda operations grow and become a more material part of trading activities, it will be necessary to reconsider the Group's presentational currency. Expenses The expense ratio has decreased by 7%. Of the reduction, 4.9% results from an exchange gain on the conversion of assets at the balance sheet date compared to a loss in the comparative period. A further 2% is attributable to increased premium written on a relatively stable cost base. After exchange gains have been removed, operating expense increased by £15.7 million, or 17%, in the year. This includes an increase in performance based employee incentives, to £24.2 million, from £17.2 million. We have accrued a further £8.8 million under the capital builder plan, with the total accrued now amounting to £18.8 million. Taxes The Group tax charge for 2005 is £45.3 million (2004: £37.9 million), which gives an effective tax rate of 24.8% (2004: 29.4%). This compares to a standard corporation tax rate of 30%. The lower 2005 tax charge is partly due to the utilisation of capital gains tax losses incurred in previous years against investment capital gains, realised and unrealised on the equities held by the Group. The potential deferred tax asset from these previous capital losses was not recognised until it was utilised. During the year, £11 million of the losses were used with £12.7 million remaining unprovided at 31 December 2005. In addition, the effective rate was lowered by offsetting US dollar trading losses against previous US tax provisions. Balance sheet Cash and investments increased in the year by £794 million reflecting: • Further increase in Amlin's share of Syndicate 2001. From 1 January 2006 Amlin owns 100% of Syndicate assets having closed the 2003 underwriting year as at 31 December 2005; • Strong organic cash flow as the Syndicate continued to trade profitably; and • Debt and equity capital raised of £458 million to support the investment of $1 billion in Amlin Bermuda and the expansion of Syndicate 2001. Cash and investments now represents a multiple of 2.7 times (2004:3 times) shareholders' equity. International Financial Reporting Standards (IFRS) This is the first year that the Group has reported its financial statements under IFRS. The impact of the changes on opening net assets at 1 January 2004 was a modest reduction of £2.8 million. The changes introduced under IFRS are set our in note 25 to the accounts. Most of the changes are relatively immaterial. The more notable items include translation of earned premium at historic rates when the transactions arose rather than the average rate for the period that it is recognised in the income statement. Compared to the previous accounting treatment, this change increased profit by £26 million. Dividends are only recognised when declared or paid. This means that the proposed final dividend for the year is not recognised in the income statement or balance sheet until it is approved at the Annual General Meeting. OUTLOOK FOR 2006 The outlook for 2006 is again strong, although the final out turn will be influenced by the extent of major catastrophe events. Strong opening position Like 2005, 2006 will benefit from a strong opening position with an unearned premium reserve of £523.8 million, broadly at the same level as last year. With renewal rates having held up well during 2005, recording an average decline of only 4%, this unearned reserve is expected to yield a healthy margin in 2006. Additionally, unless we experience abnormally adverse claims development on prior year underwriting risks, we would expect further reserve releases in 2006. 2005 experienced exceptionally good claims development on prior year reserving and the Syndicate result benefited from a release of £90.3 million (2004: £62.7 million), after the consistent application of our reserving policy. Stronger pricing environment The US hurricane losses of 2004 and 2005 have led to a reappraisal of risk and claims costs for affected portfolios. This is having a marked effect on pricing of catastrophe exposed risks, particularly in the United States. Further, it is leading to greater stability than we would have otherwise expected in certain other classes. Margins across the business remain strong in most classes with much of the business priced at 2001/2 levels and above. Rating indices Class 2000 2001 2002 2003 2004 2005 Airline hull and liabilities 100 296 278 234 215 191 Marine hull 100 115 148 171 183 188 Employers' liability 100 115 144 158 160 145 Energy 100 140 172 189 165 171 Professional indemnity 100 110 149 178 180 164 US large property insurance 100 125 180 166 143 139 Non US catastrophe reinsurance 100 120 157 162 146 131 US catastrophe reinsurance 100 115 146 150 143 146 US casualty 100 125 170 211 230 237 War 100 250 288 244 220 206 Fleet motor 100 121 136 142 140 136 For our US catastrophe reinsurance renewals we have achieved 15% increases at 1 January and we expect a continued strengthening as the year progresses. Gulf of Mexico and Florida risks, which renew in the middle of the year are expected to see very material increases in price. Competition for international catastrophe premium is greater and whilst we expect that prices will rise, increases are expected to be more modest. This is partly due to the behaviour of large European reinsurers who are seeking to aggressively grow market share and partly as other reinsurers seek greater diversity to balance their portfolios away from US catastrophe risk. For our January international catastrophe reinsurance renewals we achieved average rate rises of 5%. Property insurance rates remain competitive internationally, but are beginning to see greater rate increases in the United States. Offshore energy insurance pricing also continues to be very firm. We also expect that higher marine reinsurance costs should lead to increases in marine pricing beyond off shore energy. The two areas which remain subject to downward pricing pressure are airlines and UK commercial business. For the latter we believe that some of our competitors' performance is now poor enough to require a positive pricing response, although for airlines we expect that it may take a major loss to turn the market. If this is the case we will continue to increase selectivity, declining risks which we believe are under priced. Growth We have increased the capacity of Syndicate 2001 by 17.6% to £1 billion for 2006 and have started Amlin Bermuda which has a 2006 target of new premium income to the Group of US$350 million, including an estimated US$70 million of new business which is expected to be ceded to it by Syndicate 2001. Growth in premium income is expected to be greatest in those areas where rating is strongest, so that our exposures increase by less than the growth in income. Indeed, in some areas exposure will be reduced. Reinsurance, US property and energy insurance are expected to increase proportionately their share of overall income, whilst the two areas under pressure, airlines and UK commercial, are budgeted to reduce. We believe that our excellent broker relations, combined with the superior service for which we are becoming known, will help us achieve the growth we desire for 2006. Additionally, the award to Amlin Bermuda of an 'A' rating from Standard & Poor's differentiates us from the other start ups in 2005 and should help that business gain access to the international risks which are part of its plan. Growth in net premiums may be more noticeable than growth in gross premiums if, as we have done to date in 2006, we continue to run the business with less reinsurance protection. In this event we will seek to reduce peak catastrophe exposures and this may result in reduced gross premiums as well as a reduction in our outward reinsurance spend. Good start to 2006 We have written £337 million of gross premium income across the Group in the first two months of the year, which is 26% more than in the first two months of 2005. £263 million of this was renewal business for Syndicate 2001 and the average rate increase was 4.5%. Of this Amlin Bermuda has written new business of US $73 million. Improving investment return potential The Group's cash and investments now total £2.1 billion. Whilst we do not expect to match last year's equity returns, we believe good returns overall should be possible in 2006. Importantly US bond yields have risen over the last 2 years and sterling bonds and cash yields remain adequate. Increased catastrophe risk The largest threat to our performance in 2006 is another year of high catastrophe incidence. With Amlin Bermuda focused on reinsurance, writing an unprotected account, and with Syndicate 2001's retocessional cover currently provided by Amlin Bermuda, we are running greater catastrophe downside risk as a percentage of net assets than in 2005, although until the commencement of the US and Japanese wind seasons, our main exposure is limited to earthquake risk. We intend to manage the Group's overall exposures so that they are within a maximum risk appetite of £320 million for events with a probability of less than 1 in 100 years. This will be achieved by either purchasing more reinsurance for Syndicate 2001, if the pricing of cover becomes more acceptable, or by reducing our peak exposures in relevant zones. Underwriting expertise and a consistent approach to underwriting risk management and control is critical to the success of Amlin, making the retention of skilled underwriters a business priority. Our senior underwriters have on average 23 years' experience in the insurance industry and an average of 11 years with Amlin. We aim to keep voluntary turnover, excluding retirements, of our leading class underwriters below 10% per annum and our overall employee turnover below 15%. For 2005, Amlin's employee turnover remained within these targets. For senior underwriters, turnover was below 5% for the fifth year in sccession. Amlin Bermuda's underwriting team was transferred from our non-marine London market business, providing the new business with an experienced team who have a good knowledge of our client distribution networks as well as a thorough understanding of the Group's underwriting philosophy and controls. The depth of talent in our London market business enabled us to achieve this while promoting a number of employees to more senior positions in London. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2005 2005 2004 Notes £m £m ---------------------------- ------- ----------- ---- ---------- Gross premiums earned 1, 2 986.7 883.7 Insurance premium revenue from the receipt of reinsurance to close 2 78.8 15.3 Reinsurance premiums ceded 1, 2 (164.6) (161.3) ---------------------------- ------- ----------- ---- ---------- Net insurance earned premiums revenue 900.9 737.7 ---------------------------- ------- ----------- ---- ---------- Investment return 1, 6 90.9 52.1 Other operating income 7 1.4 7.4 ---------------------------- ------- ----------- ---- ---------- Net Income 993.2 797.2 ---------------------------- ------- ----------- ---- ---------- Insurance claims and loss adjustment expenses 1, 3 (912.1) (542.2) Insurance claims and loss adjustment expenses relating to the receipt of reinsurance to close 3 (78.8) (15.3) Insurance claims and loss adjustment expenses recoverable from reinsurers 1, 3 436.4 163.0 ---------------------------- ------- ----------- ---- ---------- Net insurance claims (554.5) (394.5) ---------------------------- ------- ----------- ---- ---------- Expenses for the acquisition of insurance contracts 4 (170.2) (161.7) Expenses for asset management fees (2.3) (1.3) Other operating expenses 5 (73.1) (106.0) ---------------------------- ------- ----------- ---- ---------- Expenses (245.6) (269.0) ---------------------------- ------- ----------- ---- ---------- ---------------------------- ------- ----------- ---- ---------- Results of operating activities 193.1 133.7 ---------------------------- ------- ----------- ---- ---------- Finance costs 8 (10.4) (4.8) ---------------------------- ------- ----------- ---- ---------- Profit before tax 182.7 128.9 ---------------------------- ------- ----------- ---- ---------- Tax 9 (45.3) (37.9) ---------------------------- ------- ----------- ---- ---------- Profit for the financial year attributable to equity shareholders 137.4 91.0 ---------------------------- ------- ----------- ---- ---------- Earnings per share Basic 20 33.6p 23.4p Diluted 20 33.1p 23.1p ---------------------------- ------- ----------- ---- ---------- CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2005 Notes Share Share Other Retained Total capital Premium reserves earnings £m £m £m £m £m ------------------ ------ ------- -------- ------- ------- ------- At 1 January 2005 98.8 154.2 43.5 163.3 459.8 Gains on revaluation of employee share ownership trust recognised directly in equity - - 1.3 - 1.3 Currency translation differences on overseas operations - - 3.8 - 3.8 Deferred tax - - 1.7 - 1.7 Profit for the financial year - - - 137.4 137.4 ------------------ ------ ------- -------- ------- ------- ------- Total recognised income for the year - - 6.8 137.4 144.2 Rights issue proceeds, net of issue costs 16 31.9 182.8 - - 214.7 Employee share option scheme: - share based payment reserve - - 0.7 0.7 - proceeds from shares issued 1.8 7.0 - - 8.8 Dividends paid 21 - - - (35.6) (35.6) ------------------ ------ ------- -------- ------- ------- ------- 33.7 189.8 0.7 (35.6) 188.6 ------------------ ------ ------- -------- ------- ------- ------- At 31 December 2005 132.5 344.0 51.0 265.1 792.6 ------------------ ------ ------- -------- ------- ------- ------- ------------------ ------ ------- -------- ------- ------- ------- Share Share Other Retained Total capital Premium reserves earnings £m £m £m £m £m ------------------ ------ ------- -------- ------- ------- ------- At 1 January 2004 97.7 150.2 42.3 90.3 380.5 Gains on revaluation of employee share ownership trust recognised directly in equity - - 0.8 - 0.8 Profit for the financial year - - - 91.0 91.0 ------------------ ------ ------- -------- ------- ------- ------- Total recognised income for the year - - 0.8 91.0 91.8 Employee share option scheme: - share based payment reserve - - 0.4 - 0.4 - proceeds from shares issued 1.1 4.0 - 5.1 Dividends paid 21 - - - (18.0) (18.0) ------------------ ------ ------- -------- ------- ------- ------- 1.1 4.0 0.4 (18.0) (12.5) ------------------ ------ ------- -------- ------- ------- ------- At 31 December 2004 98.8 154.2 43.5 163.3 459.8 ------------------ ------ ------- -------- ------- ------- ------- CONSOLIDATED BALANCE SHEET For the year ended 31 December 2005 2005 2004 ASSETS Notes £m £m ------------------------------- ------ ---------- ---------- Cash and cash equivalents 11 65.6 47.6 Financial investments at fair value through 12 income - equity securities 116.2 90.1 - debt securities and other fixed income assets 1,962.0 1,212.4 Reinsurance assets 13 - reinsurers share of outstanding claims 604.6 318.6 - reinsurers share of unearned premiums 24.2 24.9 - debtors arising from reinsurance operations 387.3 261.3 Loans and receivables, including insurance 14 receivables - insurance receivables 214.3 214.1 - loans and receivables 132.9 67.7 Current income tax assets 3.7 4.8 Deferred tax assets 9 21.1 22.5 Property and equipment 6.0 6.2 Intangible assets 15 66.0 66.0 ------------------------------- ------ ---------- ---------- Total assets 3,603.9 2,336.2 ------------------------------- ------ ---------- ---------- EQUITY Share capital 16 132.5 98.8 Share premium account 17 344.0 154.2 Other reserves 17 51.3 45.1 Treasury shares 17 (0.3) (1.6) Retained earnings 17 265.1 163.3 ------------------------------- ------ ---------- ---------- Total shareholders' equity 792.6 459.8 ------------------------------- ------ ---------- ---------- LIABILITIES Insurance contracts 13 - outstanding claims 1,704.3 1,103.3 - unearned premiums 523.8 517.3 - creditors arising from insurance operations 114.8 46.0 Trade and other payables 18 67.1 71.6 Current income tax liabilities 19.6 5.5 Financial liabilities - borrowings 19 298.2 58.7 Retirement benefit obligations 1.3 1.5 Deferred tax liabilities 9 82.2 72.5 ------------------------------- ------ ---------- ---------- Total liabilities 2,811.3 1,876.4 ------------------------------- ------ ---------- ---------- Total liabilities and shareholders' equity 3,603.9 2,336.2 ------------------------------- ------ ---------- ---------- The financial statements were approved by the Board of Directors and authorised for issue on 9 March 2006. They were signed on its behalf by: Roger Taylor Chairman Richard Hextall Finance Director CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2005 Group cash generated from operations Notes 2005 2004 £m £m -------------------------------- ------- ---------- ---------- Profit on ordinary activities before taxation 182.7 128.9 Net movement on Premium Trust Funds for non-aligned participations (2.9) (3.0) Depreciation charge 2.1 2.6 Interest paid 9.2 5.1 Interest received (65.3) (50.8) Dividends received (2.0) (1.1) Unrealised (gains)/losses on investments (13.5) 0.1 Net purchases of financial investments (757.7) (252.0) Increase in loans and receivables (64.9) (12.3) Increase in reinsurance contract assets (411.4) (84.7) Increase in insurance contract liabilities 679.2 172.5 Increase/(decrease) in trade and other payables (2.7) 33.7 Increase in retirement benefits (0.2) 0.3 -------------------------------- ------- ---------- ---------- (447.4) (60.7) Income taxes paid (17.6) (0.5) Interest paid (9.2) (5.1) -------------------------------- ------- ---------- ---------- Cash generated from operations (474.2) (66.3) -------------------------------- ------- ---------- ---------- Cash flows from investing activities Interest received 65.3 50.8 Dividends received 2.0 1.1 Acquisition of subsidiary, net of cash acquired (0.2) (2.5) Purchase of property, plant and equipment (1.9) (2.4) -------------------------------- ------- ---------- ---------- Net cash used in investing activities 65.2 47.0 -------------------------------- ------- ---------- ---------- Cash flows from financing activities Proceeds from issue of ordinary shares 223.5 3.2 Proceeds from borrowings 266.1 55.6 Repayment of borrowings (32.0) (7.3) Dividends paid to shareholders (30.6) (15.3) -------------------------------- ------- ---------- ---------- Net cash from financing activities 427.0 36.2 -------------------------------- ------- ---------- ---------- Net increase in cash and cash equivalents 18.0 16.9 Cash and cash equivalents at beginning of year 47.6 30.7 -------------------------------- ------- ---------- ---------- Cash and cash equivalents at end of year 11 65.6 47.6 -------------------------------- ------- ---------- ---------- Cash flows relating to non-aligned syndicate participations (see note 13) are included only to the extent that cash is transferred between the Premium Trust Funds and the Group. As these syndicates are outside of the Group's management insufficient data is available to analyse the cash flows in any more detail. The Group classifies the cash flows for the purchase and disposal of financial assets in its operating cash flows, as the purchases are funded from the cash flows associated with the origination of insurance contracts or the capital required to support underwriting, net of the cash flows for payments of insurance claims. Therefore cash generated from operations is net of £757.7 million (2004: £251.7 million) being cash generated in the period that has been used to purchase financial investments. Paste the following link into your web browser to download the PDF document of the second part of this announcement: http://www.rns-pdf.londonstockexchange.com/rns/5977z_a-2006-3-10.pdf This information is provided by RNS The company news service from the London Stock Exchange

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