Amlin Bermuda Ltd. Annual Report Strength Focus Delivery

Transcription

1 Amlin Bermuda Ltd. Annual Report Strength Focus Delivery

2 In this report 1 Directors, officers and advisors 2 Directors report 2 Statement of Directors responsibilities 3 Independent auditors report 4 Profit and loss account 4 Statement of total recognised gains and losses 5 Balance sheet 6 Notes to the accounts

3 Directors, officers and advisors Directors C E L Philipps (Chairman) R A Hextall (Deputy Chairman) S K MacKellar (Principal Representative) J D P W Andrews (resigned effective 28 July ) A W Holt (appointed 5 January ) E A Murphy (appointed 4 February ) R M Wyatt Secretary A J Dill Registered office Clarendon House 2 Church Street Hamilton HM11 Bermuda Auditors PricewaterhouseCoopers Chartered Accountants Dorchester House 7 Church Street Hamilton HM11 Bermuda 1

4 Amlin Bermuda Ltd. Annual Report Directors report For the year ended 31 December The directors present their annual report and the audited financial statements for the year ended 31 December. Amlin (Bermuda) Ltd. ( the Company ) was incorporated on 28 October Business review and principal activities The Company carries out reinsurance business on a geographically spread catastrophe and property account. In addition, Syndicate 2001 ( the Syndicate ), a Lloyd s Syndicate managed within the Amlin group, has placed a number of reinsurance contracts with the Company. The reinsurance contracts are: a number of proportional treaty contracts covering various cessions including marine, direct property, special risks, specie, war, excess of loss treaty and miscellaneous classes of business; and a whole account quota share which covers a specific cession from all classes of business written by the Syndicate, including marine, non-marine, aviation and UK commercial on a global basis. Results and dividends The profit of the Company for the year ended 31 December amounted to US$391.0 million, full details of which are set out in the profit and loss account on page 4 and the related notes. On 29 October, the directors approved the payment of a $200.0 million dividend to Amlin Bermuda Holdings Ltd. In July, the Company advanced a loan of $368.8 million to Amlin plc and the dividend was settled by assignment of $200.0 million of this loan to Amlin Bermuda Holdings Ltd. On 3 February 2010 the directors approved the payment of a $170.9 million dividend. This was settled by assignment of the remaining balance of the loan to Amlin plc of $168.8 million and forgiving the loan and intercompany balance due from Amlin Bermuda Holdings Ltd. of $2.1 million. By Order of the Board A J Dill Secretary Statement of Directors responsibilities The directors are responsible for preparing the financial statements in accordance with applicable laws and regulations in Bermuda. The directors have elected to prepare the financial statements in accordance with United Kingdom Accounting Standards. The financial statements are required to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for the year. In preparing those financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business, in which case there should be supporting assumptions or qualifications as necessary. The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with applicable law and United Kingdom Accounting Standards. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 2

5 Independent auditors report To the members of Amlin Bermuda Ltd. We have audited the financial statements (the financial statements ) of Amlin Bermuda Ltd. (the Company ) for the year ended 31 December which comprise the Profit and Loss Account, the Balance Sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law in Bermuda and United Kingdom ( UK ) Accounting Standards as issued by the UK Accounting Standards Board. Respective responsibilities of directors and auditors As explained more fully in the Directors Responsibilities Statement set out on page 2, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law in Bermuda and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the UK Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinion, has been prepared for and only for the Company s members as a body in accordance with Section 90 of The Companies Act 1981 (Bermuda) and for no other purpose. We do not, in giving the opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Company s affairs as at 31 December and of the Company s profit for the year then ended; have been properly prepared in accordance with United Kingdom Accounting Standards; and have been prepared in accordance with the requirements of the Companies Act 1981 (Bermuda). PricewaterhouseCoopers Chartered Accountants and Registered Auditors Hamilton, Bermuda 5 March

6 Amlin Bermuda Ltd. Annual Report Profit and loss account For the year ended 31 December Technical Account General Business Notes Gross premium written 628, ,516 Reinsurance premium ceded (6,025) (600) Net premium written 4 622, ,916 Change in the provision for unearned premium: gross amount (40,009) (46,791) reinsurers share Earned premium, net of reinsurance 4 582, ,131 Allocated investment return transferred from the non-technical account 1,692 12,971 Claims incurred, net of reinsurance Claims paid (154,515) (184,669) Change in the provision for claims: gross amount (62,914) (142,277) reinsurers share Claims incurred, net of reinsurance 4 (217,353) (326,834) Net operating expenses 6 (86,413) (172,594) Balance on the technical account for general business 280,669 15,674 Non-technical account Balance on the technical account for general business 280,669 15,674 Investment income 5 32,788 69,307 Net realised losses on financial investments 5 (77,608) (11,532) Net unrealised gain/(losses) on financial investments 5 161,379 (147,409) Investment expenses and charges 5 (4,565) (2,186) Allocated investment return transferred to general business technical account (1,692) (12,971) Profit/(loss) for the financial year 390,971 (89,117) All activities were continuing throughout both the current and preceding year. Statement of total recognised gains and losses There are no recognised gains and losses in the current or preceding years other than those included in the profit and loss account therefore no statement of total recognised gains and losses has been presented. 4

7 Balance sheet At 31 December Notes Assets Investments Financial investments 8 1,844,037 1,723,960 Reinsurers share of technical provisions Provision for unearned premiums Claims reserves Debtors Debtors arising out of reinsurance operations 228, ,544 Intercompany loans ,909 2,064 Other Assets 399, ,608 Tangible fixed assets Cash 14,767 22,557 Prepayments and accrued income 15,578 23,193 Deferred acquisition costs 38,795 36,274 Other prepayments and accrued income 3,463 4,477 42,258 40,751 Total assets 2,302,271 1,995,964 Liabilities Capital and reserves Called-up share capital 11 1,000 1,000 Share premium account 12 1,000,765 1,000,765 Other reserves Profit and loss account , ,720 Technical provisions 1,580,569 1,389,485 Provision for unearned premiums 297, ,970 Claims reserves 386, ,715 Creditors , ,685 Creditors arising out of reinsurance operations 1,911 3,226 Other creditors and accruals 35,989 17,568 Total liabilities 2,302,271 1,995,964 The financial statements were approved by the Board of Directors on 5 March 2010 and signed on its behalf by: S K MacKellar Managing Director E A Murphy Chief Financial Officer 5

8 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December 1. Summary of significant accounting policies The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and in accordance with the Bermuda Companies Act. The Company has also adopted the recommendations of the Statement of Recommended Practice on Accounting for Insurance Business, issued by the Association of British Insurers (the ABI SORP ) issued in December 2005 (updated in 2006). As the Company is a wholly owned subsidiary within the group headed by Amlin plc (the Group ), the Company has taken advantage of the exemption contained in Financial Reporting Standard No. 8 Related Party Disclosures and it has therefore not disclosed transactions or balances with entities which form part of the Group or investees of the Group qualifying as related parties, except as disclosed in Note 14. The Company has taken advantage of the exemption contained in Financial Reporting Standard No. 1 Cash Flow Statements and it has therefore not prepared a cash flow statement. This forms part of the Group financial statements. Accounting policies The principal accounting policies are summarised below. They have all been applied consistently throughout the current and preceding years. Use of estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management s best knowledge of current events and actions, actual results may ultimately differ from those estimates. Foreign currency translation The Company presents its accounts in US dollars. Transactions denominated in foreign currencies are translated into US dollars at exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at the rate prevailing in the period in which the asset or liability first arose. Differences arising on the translation of foreign currency amounts on such items are included in net operating expenses. Insurance contracts premium Gross premium written comprise premium on insurance contracts incepting during the financial year. Premium is disclosed before the deduction of brokerage and taxes or duties levied on them. Estimates are included for premiums receivable after the period end but not yet notified, as well as adjustments made in the year to premium written in prior accounting periods. The proportion of gross premium written, gross of commission or acquisition costs payable, attributable to periods after the balance sheet date is deferred as a provision for unearned premium. The change in this provision is taken to the profit and loss account in order that revenue is recognised over the period of the risk. Premium is earned over the policy contract period. The earned element is calculated separately for each contract on a 365ths basis. For premium written under proportional contracts, the earned element is calculated based on the estimated risk profile of the individual contracts involved. Acquisition costs comprise brokerage, ceding commissions and taxes incurred on insurance contracts written during the financial year. They are incurred on the same basis as the earned proportions of the premium they relate to. Deferred acquisition costs are amortised over the period in which the related revenues are earned. Deferred acquisition costs are reviewed at the end of each reporting period and are written off where they are no longer considered to be recoverable. Reinsurance premium ceded Reinsurance premium ceded comprise the cost of reinsurance arrangements placed and are accounted for in the same accounting period as the related insurance contracts. The provision for reinsurers share of unearned premium represents that part of reinsurance premium written which is estimated to be earned in the following financial years. Technical provisions: claims Claims paid are defined as those claims transactions settled up to the balance sheet date including external claims settlement expenses allocated to those transactions. Claims reserves are made for known or anticipated liabilities under insurance contracts which have not been settled up to the balance sheet date. Included within the provision is an allowance for the future costs of settling those claims. This is estimated based on past experience and current expectations of future cost levels. Claims reserves are estimated on an undiscounted basis. Provisions are subject to a detailed quarterly review where forecasted future cash flows and existing amounts provided are reviewed and reassessed. Any changes to the amounts held are adjusted through the income statement. The claims reserves also include, where necessary, a reserve for unexpired risks where, at the balance sheet date, the estimated costs of future claims and related deferred acquisition costs are expected to exceed the unearned premium provision. Although the claims reserves are considered to be reasonable, having regard to previous claims experience (including the use of certain statistically based projections) and case by case reviews of notified claims on the basis of information available at the date of determining the provision, the ultimate liabilities will vary as a result of subsequent information and events. Claims reserves are calculated and recorded gross of any reinsurance recoveries. Investment income 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. Tangible fixed assets Tangible fixed assets are stated at historical cost less accumulated depreciation and a provision for impairment where appropriate. Depreciation is calculated on the straight line method to write down the cost of such assets to their residual values over their estimated useful lives as follows: Computer equipment Furniture, fixtures and leasehold improvements 33% per annum 20% per annum The carrying values of property and equipment are reviewed for impairment when events or changes in circumstance indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the profit and loss account. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken to the income statement. Repairs and renewals are charged to the profit and loss account when the expenditure is incurred. 6

9 Financial investments The Company classifies its financial investments as fair value through the profit and loss account. The classification requires all fair value changes to be recognised immediately within the profit and loss account. Within the fair value category fixed maturity, equity securities and participation in investment pools are classified as trading as the Company buys with the intent to resell. Property and the investment in insurance linked securities are classified as other than trading within the fair value category. Purchases and sales of investments are recognised on the trade date, which is the date the Company commits to purchase or sell the assets. These are initially recognised at fair value, and are subsequently remeasured at fair value based on quoted bid prices. Changes in the fair value of investments are included in the profit and loss account in the period in which they arise. Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into. Fair values for over the counter derivatives are supplied by the relevant counterparty. Changes in the fair value of derivative instruments are recognised immediately in the profit and loss account. Investment return The investment return comprises investment income, realised and unrealised investment gains less losses, and is net of investment expenses and charges. Realised gains or losses are calculated as the difference between the net sale proceeds and their purchase price. Unrealised gains and losses are calculated as the difference between the valuation of investments at the balance sheet date and their purchase price. The investment return arising in the year is initially recorded in the non-technical account. A transfer is then made from the non-technical account to the technical account. The investment return allocated to the technical account is proportionate to the funds received from underwriting during the year. Leases All leases are classified as operating leases. Rental costs payable under operating leases are charged to income in the period in which they become payable in accordance with the terms of the lease. Dividends Dividends payable are recognised in the period in which they are declared and become a present obligation of the Company. Taxation Under section 2 of the Exempted Undertakings Tax Protection Act 1966 in Bermuda the Company tax rate is 0% and consequently no provision for taxation is made. This rate remains in effect until 28 March Pension Costs The Company operates a defined contribution scheme. Pension contributions to defined contribution plans are charged to the profit and loss account when due. No contributions are outstanding at year end. 2. Principal risks and uncertainties Underwriting risk The Company accepts underwriting risk in a range of classes of business. The bias of the Company s portfolio is towards short-tail property risk. In underwriting reinsurance polices the Company s underwriters use their skill, knowledge and data on past claims experience to evaluate the likely claims cost and therefore the premium that should be sufficient (across a portfolio of risks) to cover claims costs, expenses and to produce an acceptable profit. However, due to the nature of insurance risk there is no guarantee that the premium charged will be sufficient to cover claim costs. This shortfall may originate either from insufficient premium being calculated and charged or may result from an unexpected or unprecedented, high level of claims. A number of controls are deployed to limit the amount of insurance exposure underwritten. Each year a business plan is prepared and agreed which is used to monitor the amount of premium income, and exposure, to be written in total and for each class of business. Progress against this plan is monitored during the year. The Company also operates under a line guide which determines the maximum liability per policy which can be written for each class and for each underwriter. These can be exceeded in exceptional circumstances but only with the approval of senior management. All polices have a per loss limit which caps the size of any individual claims. The Company is also exposed to catastrophe losses which may impact many risks in a single event and reinsurance may be purchased to limit the impact of loss aggregation from such events. Insurance liabilities are written through reinsurance treaties. The insurance liabilities underwritten by the Company are reviewed on an individual risk, or contract basis and through review of portfolio performance. Claims arising are reserved upon notification. Each quarter, the entire portfolio of business is subject to a reserving process whereby levels of paid and outstanding (advised but not paid) claims are reviewed. Potential future claims are assessed with a provision for incurred but not reported ( IBNR ) claims being made. This provision is subject to review by senior executives and an independent internal actuarial assessment is carried out by the Group s in-house actuarial team to determine the adequacy of the provision. Whilst a detailed and disciplined exercise is carried out to provide for claims notified, it is possible that known claims could develop and exceed the reserves carried. Furthermore, there is increased uncertainty in establishing an accurate provision for IBNR claims and there is a possibility that claims may arise which in aggregate exceed the reserve provision established. Reinsurance arrangements The Company may purchase reinsurance to protect itself from severe frequency or size of losses and in purchased a limited amount of catastrophe excess of loss protection. The structure of the Company s programme and type of protection bought will vary from year to year depending on the availability and price of cover. Realistic Disaster Scenario ( RDS ) analysis The Company has a defined event risk appetite which determines the probable maximum net loss that the Company intends to limit its exposure to major modelled catastrophe event scenarios. Currently these are a maximum of $330 million for any one zone and $360 million for a multi-zonal loss. These probable maximum losses are expected only to be incurred in extreme events with an estimated occurrence of less than 1 in 50 years estimated for the natural peril or elemental losses. The risk appetite policy recognises that there may be circumstances in which the net event limit could be exceeded. Such circumstances include non renewal or delay in renewal of reinsurance protection, reinsurance security failure, or regulatory and legal requirements. A detailed analysis of catastrophe exposures is carried out every quarter and measured against risk appetite. The following assumptions and procedures are used in the process: The data used reflects the information supplied to the Company by insureds and ceding companies. This may prove to be inaccurate or could develop during the policy period; 7

10 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December The exposures are modelled using a mixture of stochastic models and underwriter input to arrive at damage factors these factors are then applied to the assumed aggregate exposure to produce gross loss estimates. The damage factors may prove to be inadequate; The reinsurance programme as purchased is applied a provision for reinsure counterparty failure is included but may prove to be inadequate; and Reinstatement premiums both payable and receivable are included. There is no guarantee that the assumptions and techniques deployed in calculating these event loss estimate figures are accurate. Furthermore there could also be an unmodelled loss which exceeds these figures. The likelihood of such a catastrophe is considered to be remote but the most severe scenarios modelled are simulated events and these simulations could prove to be unreliable. Claims reserves Claims reserves established can be more or less than adequate to meet eventual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate case reserves for known large losses and catastrophes or from inadequate provision for IBNR. Property catastrophe claims such as earthquake or hurricane losses can take several months, or years, to develop as adjusters visit damaged property and agree claim valuations. Until all the claims are settled it requires an analysis of the area damaged, contracts exposed, and the use of models to simulate the losses against the portfolio of exposure in order to arrive at an estimate of the ultimate loss to the Company. There is uncertainty over the adequacy of information and modelling of major losses for a period of several months after a catastrophe loss. Account should also be taken of factors which may influence the size of claims such as increased inflation or a change in law. Valuation risk The Company s earnings are directly affected by changes in the valuations of the investments held in the portfolios. These valuations vary according to the movements in the underlying markets. Factors affecting markets include changes in the economic and political environment, risk appetites, liquidity, interest rates and exchange rates. These factors have an impact on the Company s investments and are taken into consideration when setting strategic benchmarks and tactical asset allocation. The price of holdings can also vary due to specific risks, such as the corporate strategy and companies balance sheet structures, which may impact the value of individual equity and corporate bond holdings. This is mitigated by holding diversified portfolios, as specified in the investment guidelines given to the fund managers. These guidelines limit the exposure to any one company, which also mitigates credit risk. In addition, the equity mandate limits the exposure to any one geographic region or industrial sector and the bond mandates limit the overall exposure to non-government holdings. The Company s assets are marked to market at bid price. Prices are supplied by the custodians whose pricing processes are covered by their published annual audits. In accordance with their pricing policy, prices are sourced from two market recognised pricing vendor sources including: FT Interactive, Bloomberg and Reuters. These pricing sources use closing trades, or where more appropriate in illiquid markets, pricing models. These prices are reconciled to the fund managers records to check for reasonableness. Property funds are based on the most recent prices available, which in some instances may be a quarter in arrears. Where a property transaction has taken place, the transaction price is used if it is the most recent price available. As an additional check, where available, prices as at 31 December have been verified by the Company using available quoted prices on Bloomberg to verify that the prices used are a good estimation for fair value. A month to month price check was completed to ensure any stale prices, defined as prices which are one month old or more, are identified and investigated. At 31 December no stale prices were identified. Interest rate risk Investors expectations for interest rates will impact bond yields. The value of the Company s bond holdings is therefore subject to fluctuation as bond yields rise and fall. If the yield falls the capital value will rise, and vice versa. The sensitivity of the price of a bond is indicated by its duration. The greater the duration of a security the greater its price volatility. Typically the longer the maturity of a bond the greater its duration. Foreign exchange risk Foreign exchange exposures arise when business is written in currencies other than US dollars. These transactions are converted into US dollars at the prevailing spot rate when the premium is received. Consequently there is exposure to currency movements between the exposure being written and the premium being converted on receipt. Payments in currencies other than US dollars are converted back into the underlying currency at the time a claim is to be settled; therefore the Company is exposed to exchange rate risk between the claim being made and the settlement being paid. Credit risk Credit risk is the risk that the Company becomes exposed to a loss if a counterparty fails to perform its contractual obligations, including failure to perform them in a timely manner. Credit risk could therefore have an impact upon the Company s ability to meet its claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. The Company is exposed to credit risk in its investment portfolio and with its debtors arising out of reinsurance operations. As well as actual failure of a counterparty to perform its contractual obligations, the price of corporate bond holdings will be affected by investors perception of a borrower s ability to perform these duties in a timely manner. Credit risk within the investment funds is managed through the credit research carried out by the investment managers. The Company s investment guidelines are designed to mitigate the credit risk by ensuring diversification of the holdings. For each portfolio there are limits to the exposure to single issuers and to the total amount that can be held in each credit quality rating category, as determined by reference to credit risk agencies. At 31 December, investments amounted to $1,844.0 million. Debt and other fixed income securities accounted for 55.7% of the portfolio; shares and other variable yield securities accounted for 7.1% of the portfolio; participation in investment pools accounted for 27.4% of the portfolio; insurance linked securities accounted for 5.5%; property accounted for 3.4%; and the residual of the portfolio was held in deposits with credit institutions. The bond portfolio remains high quality, as illustrated by the credit quality table shown in Note 8. Credit risk in respect of debtors arising out of reinsurance operations is managed through the employment of key controls including broker approval; annual financial review; internal rating of brokers; and regular monitoring of premium settlement performance. The quality of these debtors is not graded, but based on historical experience there is limited default risk relating to these amounts. 8

11 Liquidity risk It is important to ensure that claims are paid as they fall due. Levels of cash are therefore managed on a daily basis. Buffers of liquid assets are also held in excess of the immediate requirements to avoid the Company having to be a forced seller of any assets, which may result in prices below fair value being realised, especially in periods of below normal investment market liquidity. The Company funds its insurance liabilities with a portfolio of cash and debt securities exposed to market risk and foreign exchange risk. The following table indicates the contractual timing of cash flows arising from financial investments, as of 31 December : Financial Assets No stated maturity <1 year Contractual cashflows 1-3 years 3-5 years >5 years Carrying amount Shares and other variable yield securities 132, ,090 Debt and other fixed income securities 462,956 54, ,725 44,234 75,117 1,027,271 Insurance linked securities 102, ,543 Participation in investment pools 505, ,933 Property 64,043 64,043 Deposit with credit institutions 12,157 12,157 1,215,679 54, ,725 44, ,160 1,844,037 Fair value methodology The Company has categorised financial investments carried at fair value into a fair value hierarchy that prioritises the inputs to the respective valuation techniques used to measure fair value: Level 1 Quoted prices (unadjusted) in active markets for identical assets. An active market is one in which transactions for the asset occur with sufficient frequency and volume to provide readily and regularly available quoted prices; Level 2 Inputs to a valuation model other than quoted prices included within Level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 Inputs to a valuation model for the asset that are not based on observable market data (unobservable inputs) and are significant to the overall fair value measurement. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect the assumptions which it is considered that market participants would use in pricing the asset. Shares and other variable yield securities Listed equities traded on a primary exchange are classified as Level 1. Debt and other fixed income securities The fair value is based upon quotes from consensus pricing services where available. These consensus pricing services derive prices based on an average of quotes provided by brokers. Where multiple quotes are not available, the fair value is based upon evaluated pricing services, which typically use proprietary cash flow models and incorporate observable market inputs, such as credit spreads, benchmark quotes and other trade data. If such services do not provide coverage of the asset, then fair value is determined manually using indicative broker quotes, which are corroborated by recent market transactions in similar or identical assets. Where there is an active market for these assets and their fair value is the unadjusted quoted market price, these are classified as Level 1. This is typically the case for highly liquid government bonds. Level 1 also includes exchange-traded bond funds, where fair value is based upon quoted market prices and the funds are actively traded. Where the market is inactive or the price is adjusted, but significant market observable inputs have been used by the pricing sources, then these are considered to be Level 2 inputs. This is typically the case for government agency debt, corporate debt, and mortgage and asset backed securities. Certain assets, for which prices or other market inputs are unobservable, are classified as Level 3. Property funds The fair value is based upon valuations provided by the fund manager. The inputs into that valuation are primarily unobservable and, as such, these assets are classified as Level 3. 9

12 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December Participation in investment pools These are liquidity funds, which are valued using the funds manager s net asset valuation and are highly liquid. These are classified as Level 1. Level 1 Fair value hierarchy Shares and other variable yield securities 132, ,090 Debt and other fixed income securities 814, ,875 1,027,271 Property 64,043 64,043 Insurance linked securities 102, ,543 Participation in investment pools 505, ,933 Deposits with credit institutions 12,157 12,157 Total 1,464, ,418 64,043 1,844,037 Level 2 Level 3 Total The movements in financial investments classified as Level 3 are analysed below: Total Balance at 1 January 70,497 Total net losses recognised in the profit and loss account (16,297) Purchases 12,236 Foreign exchange rate movements (2,393) Balance at 31 December 64,043 Regulatory risk Regulatory risk is the risk that the Company fails to meet the regulatory requirements of the Bermuda Monetary Authority. The Company has a principal representative who monitors regulatory developments and assesses the impact on the Company. Operational risk Operational risk is the risk that failure of people, systems, or processes leads to losses to the Company. The Company manages these risks through internal compliance monitoring and the use of detailed procedure manuals. In addition, the Company has access to the Amlin Group s Risk Assessment and Monitoring department and an Internal Audit department which assist the Company in meeting the strategic and operational objectives through the provision of independent appraisal of the adequacy and effectiveness of internal controls in operation and to provide reasonable assurance as to the adequacy of systems and procedures to enable compliance with all relevant regulatory and legal requirements. 3. Capital The Company s minimum capital requirements are determined by the rules laid down by the Bermuda Monetary Authority (the BMA ) regulations. The Company is licensed as a Class IV insurer and the minimum solvency margin is the greatest of $100 million; 50% of net premiums written in the current financial year, 15% of claims reserves; and the Enhanced Capital Requirement (the ECR ). The ECR is calculated on an annual basis through either the Bermuda Solvency Capital Requirement (the BSCR ) model or an approved internal model. As at 31 December, the ECR was the largest of the four criteria at approximately $424.8 million (: $379.4 million). In addition, as a Class IV insurer, the Company is required to maintain a minimum liquidity ratio such that the value of relevant assets is not less than 75% of its relevant liabilities. The Company met this requirement at 31 December. For trading purposes, the Company believes that it is necessary to hold at least $1 billion of capital, which is currently in excess of the required minimum. 10

13 4. Segmental analysis An analysis of the underwriting result before investment return is set out below: Earned premium net of reinsurance Claims incurred net of reinsurance Net operating expenses Commission on net premiums earned Net premium written Total Property catastrophe reinsurance 225, ,721 (41,127) (27,052) 154,542 (30,462) Per risk property reinsurance 70,315 66,795 (18,127) (12,788) 35,880 (13,851) Proportional property reinsurance 61,877 64,206 (22,707) (17,159) 24,340 (18,096) Intra group reinsurance 246, ,357 (134,126) (27,476) 48,755 (27,474) Other classes of business 18,521 18,664 (1,266) (1,938) 15,460 (2,218) Total 622, ,743 (217,353) (86,413) 278,977 (92,101) Net premium written Earned premium net of reinsurance Claims incurred net of reinsurance Net operating expenses Total Commission on net premiums earned Property catastrophe reinsurance 211, ,923 (108,861) (90,069) 1,993 (24,689) Per risk property reinsurance 55,694 49,704 (28,081) (27,071) (5,448) (9,818) Proportional property reinsurance 70,446 50,336 (54,308) (36,442) (40,414) (14,620) Intra group reinsurance 195, ,169 (134,357) (11,644) 39,168 (11,644) Other classes of business 16,133 15,999 (1,227) (7,368) 7,404 (2,371) Total 548, ,131 (326,834) (172,594) 2,703 (63,142) All premiums are written in Bermuda. Net premium written analysed by location of cedent UK 290, ,309 US 253, ,450 Europe 31,227 30,947 Other 46,514 50, , ,916 11

14 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December 5. Investment return Investment income dividend income 4,910 9,599 interest income 24,958 30,137 interest income on participation in investment pools 2,920 29,571 32,788 69,307 Net realised gains/(losses) on financial investments equity securities (84,641) (11,657) debt securities 1, insurance linked securities 5,575 (77,608) (11,532) Net unrealised gains/(losses) on financial investments equity securities 108,226 (107,754) debt securities 62,143 (40,225) property (11,533) 657 insurance linked securities 2,543 (87) 161,379 (147,409) Investment expenses and charges (4,565) (2,186) Total 111,994 (91,820) 6. Net operating expenses Acquisition costs 94,580 69,156 Change in deferred acquisition costs (2,479) (6,014) Administrative expenses 28,156 17,803 (Profit)/loss on foreign currency translation (33,844) 91,649 86, ,594 Administrative expenses include: Auditors remuneration

15 7. Employee benefit expenses The average number of persons employed by the Company, including individuals on fixed term contracts and directors, were: Underwriting, claims and reinsurance Administration and support 4 2 Operations 1 1 Finance 9 7 Average number of staff during the year The aggregate payroll costs incurred by the Company are analysed as follows: Wages and salaries 5,897 4,488 Employee incentives 13,714 4,752 Social security costs Healthcare costs Payroll taxes 1, Pension costs defined contribution schemes ,667 10, Financial investments At market value At market value Shares and other variable yield securities 132, , , ,359 Debt and other fixed income securities 1,027, , , ,154 Insurance linked securities 102,543 21, ,000 21,449 Participation in investment pools 505, , , ,801 Property 64,043 70,497 78,418 66,183 Deposits with credit institutions 12,157 11,013 12,157 11,013 1,844,037 1,723,960 1,816,144 1,859,959 All financial assets and liabilities are held at fair value, with all gains and losses, realised and unrealised, recorded through the profit and loss account. Fixed maturity and equity securities are classified as trading assets, as the Company buys with the intention to resell. Debt and other fixed income securities include pooled exchange-traded funds, investing in bonds. The valuation of these funds is $462.9 million (: $54.6 million). These funds are listed on the Irish Stock Exchange. Participation in investment pools includes units held in money market funds. In, the Company invested in insurance linked securities in the form of catastrophe bonds. The value of these bonds amounted to $21.3 million at 31 December. These bonds were not listed on any stock exchange. During, the company transferred these investments to Leadenhall Value Insurance Linked Investment Fund plc and Leadenhall Diversified Insurance Linked Investment Fund plc in partial exchange for the initial investment made by the Company to these funds. The Company is currently the only investor in the two funds but significant third party investment is anticipated in There is an expectation that sufficient external investment will be made, giving rise to a deemed disposal of the Company s majority shareholding in the funds. Therefore, the Company has accounted for its interest in the funds as investments in pooled investment vehicles and measured at fair value through income. These funds invest in a portfolio of catastrophe bonds and other alternative investments. These funds are listed on the Irish Stock Exchange and are valued at $102.5 million at 31 December. At cost At cost 13

16 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December Included in the values above are restricted assets with a value of $145.1 million as at 31 December. These assets provide collateral for the Letter of Credit Facility (Note 15). Included in the values above are the following amounts in respect of listed investments: At market value At market value Shares and other variable yield securities 132, , , ,359 Debt and other fixed income securities 1,027, , , ,154 Insurance linked securities 102, ,000 1,261, ,316 1,219, ,513 At cost At cost Using Standards & Poor s and Moody s as rating sources the credit ratings of debt and other fixed income securities are set out below: AAA/Aaa 422, % 461, % AA/Aa 492, % 73, % A 57, % 47, % BBB/Baa 37, % 70, % BB/Ba 16, % 1, % 1,027, % 654, % % % The Company fund managers through were: Manager Goldman Sachs Asset Management HSBC Global Asset Management (Bermuda) Ltd JP Morgan Asset Management Aberdeen Asset Management Inc Taube Hodson Stonex Partners Limited ING Real Estate Management (UK Funds) Ltd Pimco Funds: Global Investors Series plc Leadenhall Capital Partners LLP Asset Class Sterling, Euro and US dollar money market funds Sterling, Euro and US dollar money market funds Sterling and US dollar money market funds US dollar bonds Global equities Global property manager of managers Sterling and US dollar bonds Insurance Linked Securities 9. Tangible fixed assets Cost Computer equipment Furniture, fixtures and leasehold improvements At 1 January 2,463 1,019 3,482 Additions 1, ,085 Disposals (13) (71) (84) At 31 December 3,457 1,026 4,483 Accumulated depreciation At 1 January 2, ,846 Charge for the year Disposals (13) (48) (61) At 31 December 3, ,672 Net book value At 1 January At 31 December Total 14

17 10. Technical provisions Insurance liabilities Claims reserves Provision for unearned premiums At 1 January 328, , ,685 Movement in the year 62,914 40, ,923 Reinsurance to close ( RITC ) 2006 whole account quota share (32,449) (32,449) Increase in claims payable, not yet due 15,076 15,076 Exchange differences 11, ,567 At 31 December 386, , ,802 Reinsurance assets At 1 January Movement in the year At 31 December Net technical provisions At 1 January 328, , ,233 At 31 December 385, , ,827 During, the whole account quota share for 2006 was settled by an RITC and the outstanding liabilities were settled for a payment of $32.4 million. The net claims reserves are further analysed between notified outstanding claims and incurred but not reported ( IBNR ) claims below: Notified outstanding claims 241, ,659 Claims incurred but not reported 144, , , , Share capital Authorised ordinary shares of $1 each Number Number Opening and closing 1,000,000 1,000 1,000,000 1,000 Total Allotted, called up and fully paid Opening balance and closing 1,000,000 1,000 1,000,000 1, Reconciliation of movement in capital and reserves Called-up share capital Share premium account Other reserves Profit and loss account At 1 January 1,000 1,000, ,720 1,389,485 Profit for the financial year 390, ,971 Employee share option scheme share based payment reserve Dividends (200,000) (200,000) At 31 December 1,000 1,000, ,691 1,580,569 The Group, through the ultimate parent company Amlin plc, operates a number of share incentive schemes on behalf of the Group s employees. The charge for these options is based on the number of employees in the employing Company and the fair value of the options and is included in net operating expenses and other reserves. Total 15

18 Amlin Bermuda Ltd. Annual Report Notes to the accounts For the year ended 31 December 13. Commitments There were no capital commitments or authorised but uncontracted commitments at the end of the financial year. The Company leases certain land and buildings on short-term operating leases, under which the minimum annual commitments are $0.4 million expiring in The Company has an option to extend the lease for another 5 years. 14. Intercompany loans In July, the Company advanced a loan of $368.8 million to Amlin plc. In, the Board of Directors approved the payment of a $200.0 million dividend to Amlin Bermuda Holdings Ltd. and the dividend was settled by assignment of $200.0 million of this loan to Amlin Bermuda Holdings Ltd. Interest is payable on the loan quarterly based on three month LIBOR plus 1.6%. The balance remaining on the loan as at 31 December is $168.8 million. At 31 December, Amlin Bermuda Holdings Ltd. owed the Company $2.1 million in loans. Interest is calculated at US Federal Funds Rate prevailing on the first day of trading each month, plus 1.5%. 15. Letter of Credit Facility In September, the Company entered into a secured $200.0 million Letter of Credit facility with Lloyds TSB Bank plc and The Royal Bank of Scotland plc as Lead Arrangers. The facility is secured by a registered charge over a portfolio of assets managed by Aberdeen Asset Management Inc and with State Street Bank and Trust Company as custodian. As at 31 December, $124.9 million of letters of credit were issued. The total value of restricted assets as at 31 December was $145.1 million. 16. Parent Company The Company s immediate parent company is Amlin Bermuda Holdings Ltd. which is incorporated in Bermuda. The ultimate parent company is Amlin plc, a company incorporated in Great Britain and registered in England and Wales. The consolidated accounts of this Company are available to the public and may be obtained from Amlin plc, St Helen s, 1 Undershaft, London EC3A 8ND. 17. Comparative figures Certain comparative figures have been reclassified for presentation purposes. 16

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20 Amlin Bermuda Ltd. 19 Par-La-Ville Road, Hamilton HM11, Bermuda T (441) F (441)