ANNUAL REPORT WE RE GOING PLACES RUN WITH US

Transcription

1 2011 ANNUAL REPORT WE RE GOING PLACES RUN WITH US

2 2011 ANNUAL REPORT

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4 WE RE GOING PLACES RUN WITH US.. Financial highlights 02 Message from the CEO 04 A global message London 08 Zürich 10 Sydney 12 Operating report 14 Financial summary 16 Corporate social responsibility 18 Financials 20 01

5 FINANCIAL HIGHLIGHTS NET LOSS US $56.3 MILLION LOSS RATIO 82.2% COMBINED RATIO 122.2% STANDARD & POOR S AA- A.M. BEST A++ SUPERIOR * A.M. Best rating is associated with Tokio Millennium Re Ltd., Tokio Millennium Re Ltd. Zürich Branch and Tokio Millennium Re Ltd. Australia Branch only. 02 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

6 TOTAL ASSETS US $1,880.1 MILLION NET ASSETS US $1,050.9 MILLION NET PREMIUM WRITTEN US $537.8 MILLION 03

7 MESSAGE FROM THE CEO Dear Clients and Business Partners, For Tokio Millennium Re, 2011 was a year of expansion. We established offices in Zürich and Sydney and saw the rebranding of our UK office resulting in the growth of the company both geographically and in lines of business. This has been part of our stated goal to increase our international presence and provide greater capital efficiency for our parent company and we are delighted with our progress this year. L 3 PHOTO LOCATION : FRONT STREET COURSE START COURSE FINISH MILE MARKERS TOKIO S OFFICE LOCATION 04 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

8 THE ROAD TO HAMILTON We are now looking forward to the future, growing a business that is built upon long-term relationships and technical underwriting all with an excellent and growing staff L

9 MESSAGE FROM THE CEO Our stated goal is to grow our international presence and provide greater capital efficiency for our parent company and we are delighted with our progress this year. Tokio Millennium Re has seen positive signs in terms of pricing, and as a highly-rated reinsurer with a solid capital base, skilled teams, modelling proficiency and focus on technical underwriting, we are in a good position to benefit from opportunities as the reinsurance market improves in There is no doubt that 2011 was a challenging year. Natural catastrophes have caused devastation around the world and impacted the bottom line of the reinsurance market. The sequence of devastating earthquakes and a large number of weather-related catastrophes made 2011 the second costliest year on record for the insurance industry. Swiss Re estimated global insured catastrophe losses to be $116 billion and global economic losses of $370 billion. As a leading global catastrophe reinsurer, we were impacted by these events. While the 2011 catastrophic events resulted in a $56 million net operating loss, our strong capital base enabled us to withstand this series of catastrophe losses. We have a sound capital base with capital in excess of $1 billion. While we see improvements in pricing, as a company we try not to be opportunistic and have always had a long term vision when it comes to relationships. Our new office in Zürich, led by Stephan Ruoff, is in the heart of the city, based near a growing group of reinsurance companies. The office has been growing, both in number of staff with excellent technical skills and in the book of business we write from there. In 2012, we will continue to grow the office and look for new opportunities. Our office in Sydney, Australia, is led by Russell Brooke, and we have further expanded the underwriting team that will look after the key New Zealand and Australian markets. Our presence in this region will enable us to gain a better understanding of clients needs, the opportunities available to us, and the associated risks involved. The opening of this office has been timely, as reinsurance particularly in light of recent catastrophes has become ever more important in this region. Our London office has been re-aligning its business to become a key part of the Tokio Millennium Re Group, and as part of the overall group plan, it entered into both motor and casualty business for TOKIO MILLENNIUM RE ANNUAL REPORT 2011

10 Tatsuhiko Hoshina President & Chief Executive Officer We also expanded our office in Bermuda, which will allow for the continued growth of Tokio Millennium Re from our head office. The focus for each and every Tokio Millennium Re entity around the world continues to be operational excellence, as we expand and hire talented professionals and write business that meets our technical requirements. Solvency II will affect our operations not only in London and Zürich, but will also bring new opportunities to our Bermuda office. We understand the needs of our clients who are subject to the Solvency II capital requirements for insurers and reinsurers operating within the European Union. Not only are we an A++ rated reinsurer from A.M. Best and AA- from Standard & Poor s with a strong technical focus, but our capital strengths and analytical underwriting approach add value to our existing and future partners who are facing the challenges of Solvency II. With only one shareholder, we are seen as having a great deal of credibility in these markets. The January 1 renewals were very successful and we saw encouraging signs in most of our lines of business. Premium rate erosion appears to have been halted nearly everywhere, and rates increased in several areas some significantly, and some more modestly. We would like to thank our clients, partners and the brokers we have worked with during the year, as well as our parent company for the support they have given us in taking the company to its next stage of development. We would also like to thank our staff for all of their hard work during We are now looking forward to the future, growing a business that is built upon long-term relationships and technical underwriting all with an excellent and growing staff. We re going places. Run with us. Thank you. Tatsuhiko Hoshina Tokio Millennium Re has the opportunity to become a solid and long-standing business partner, especially for national and regional clients facing the upcoming requirements of Solvency II. 07

11 A GLOBAL MESSAGE Takayuki Sumi Chief Executive Officer Tokio Millennium Re (UK) Ltd was a year of transition for our London office as we successfully worked towards becoming an integrated part of the Tokio Millennium Re Group. Restructuring began in 2011, and during this time the marketing and perception of the brand of Tokio Millennium Re has improved significantly. In the London Market we are now known as Tokio Millennium Re and brokers and clients look to us as a strong, well established company that has offices not only in London, but also in Bermuda, Zürich and Sydney. As part of the restructuring, London has become key to offering diversity to the Company s portfolio, in both lines of business and geographically. As Tokio Millennium Re Ltd. writes a bigger portfolio of property catastrophe a profitable but volatile line of business Tokio Millennium Re (UK) Ltd., as part of the Group, is looking to reduce volatility of the combined group portfolio by writing more stable and diversified lines of business. As part of the group plan, we entered into both motor and casualty business in 2011 for the 2012 business year, and we are pleased to say that the motor business has been particularly well received. Due to this success, we are expecting to further develop the motor and casualty books for We have also been expanding into new territories. Tokio Millennium Re (UK) Ltd. looks after not only the UK and Ireland, but also the Middle East, South Africa, Latin America and Asia. There is particular promise in China, Israel, and southeast Asia and we especially see opportunity in China where the insurance and reinsurance market is growing at a rate of between 20 and 30 percent per annum. In terms of Solvency II, the UK market is ahead of other markets in terms of implementation and as a group, we have been diligently preparing for these requirements. We feel that London can be at the forefront in terms of compliance and implementing better governance into the Tokio Millennium Re Group. Solvency II will also provide opportunities as ceding companies see more value in reinsurers with higher security ratings and this applies group-wide. We have also been strengthening our team with a new casualty underwriter, an actuary and additions to our risk management team. We will continue to strengthen our team in All in all, we are very happy with the progress made with our restructuring, and have in place a growth strategy. In addition, clients and brokers now know about Tokio Millennium Re (UK) Ltd. and the lines of business we are in. We are looking forward to continuing to implement changes and growing the business in L 3 PHOTO LOCATION : LONDON EYE COURSE START COURSE FINISH MILE MARKERS TOKIO S OFFICE LOCATION L TOKIO MILLENNIUM RE ANNUAL REPORT 2011

12 THE ROAD TO LONDON As part of the restructuring, London has become key to offering diversity to the company s portfolio, in both lines of business and geographically

13 A GLOBAL MESSAGE Stephan Ruoff Chief Executive Officer Tokio Millennium Re Ltd., Zürich Branch In 2010, Tokio Millennium Re opened its Zürich office as part of the global expansion of the company, which has allowed us to grow our international presence and capitalise on the strategically important continental European markets. We believe that the opening of the office has been a great success so far and will be one of the drivers for Tokio Millennium Re s future growth and profitability. The expansion into continental Europe also contributes to the geographical diversification of the Tokio Millennium book of business, and ultimately to the book of our parent company. Not only are we a highly rated reinsurer with a technical focus, but our Japanese origins mean that maintaining long term relationships with our clients is embedded in the heart of our corporate culture. With this in mind, the company has the opportunity to strengthen its relationships with national and regional clients in Europe that put special emphasis on the same values. With all the above in mind, the expansion of our Zürich operation is timely because continental European markets are at a crucial point in shaping their future and offer a fertile environment to grow Tokio Millennium Re s value proposition further. In the past year, we have been adding to our team of experts in this office hiring seven team members in total in In 2012, we will continue to hire and increase the technical expertise of the group, which will help grow the knowledge base of the global company. Going forward, we think that the continental European market will provide real opportunities for Tokio Millennium Re. Our capital strengths, coupled with our technical and analytical underwriting approach, will be a good fit that adds value to our existing and future partners in the light of the impending Solvency II requirements. L PHOTO LOCATION : BELLEVUE COURSE START COURSE FINISH 5 KILOMETER MARKERS TOKIO S OFFICE LOCATION 10 TOKIO MILLENNIUM RE ANNUAL REPORT 2011 Photography provided by Zürich Marathon

14 40 10 L 5 THE ROAD TO ZÜRICH We believe that the opening of the office has been a great success so far and will be one of the drivers for Tokio Millennium Re s future growth and profitability. The expansion into continental Europe also contributes to the geographical diversification of the Tokio Millennium book of business, and ultimately to the book of our parent company

15 A GLOBAL MESSAGE Russell Brooke Managing Director Tokio Millennium Re Ltd., Australian Branch Shortly after establishing the Zürich branch, Tokio Millennium Re Ltd. formed the Australian branch in early 2011 to target property and casualty business emanating from Australia and New Zealand. The branch is an APRAauthorised general insurer and has been capitalised with $80 million of assets in Australia. Our timing has been opportune, not opportunistic! 2010 and early 2011 were characterised by severe loss activity in the form of multiple large earthquakes in New Zealand and floods and hailstorms in Australia. The formation of the branch has coincided with the most difficult time for many of our reinsurance clients. On the one hand, we have benefited from markedly higher pricing on property catastrophe covers, while on the other we have been able to provide locally authorised AA capacity to our clients when they need it the most. While the size of our commitments to the Australian and New Zealand markets will ebb and flow over time, we believe that 2011 marks the beginning of many long standing relationships in this market. We have also entered into a number of new casualty and specialty contracts that we believe will make a meaningful contribution to Tokio Millennium Re s profitability and diversification of risk. We expect this part of the book to grow steadily in the coming years. The branch has made solid progress in Our team in Australia aims to make the most of having a strong and supportive parent to grow with our clients in the region. L PHOTO LOCATION : SYDNEY HARBOUR BRIDGE COURSE START COURSE FINISH 5 KILOMETER MARKERS TOKIO S OFFICE LOCATION 12 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

16 THE ROAD TO SYDNEY Tthe branch has made solid progress in Our team in Australia aims to make the most of having a strong and supportive parent to grow with our clients in the region. L

17 OPERATING REPORT 2011 has been a record year for natural catastrophes, with insured losses estimated at $105 billion, exceeding the previous record set in 2005 of $101 billion, according to Munich Re. The earthquakes in Japan in March and New Zealand in February alone caused almost two-thirds of these losses. Tokio Millennium Re has, of course, been affected by these losses, but we are optimistic about our business going forward. The reinsurance and insurance pricing environment for 2012 is showing positive signs and we are fortunate to have a global platform that can take advantage of opportunities arising this coming year. We see the outlook as positive in many of our core areas. While the main book of Tokio Millennium Re s business continues to be property catastrophe reinsurance, we are looking to the future and growing our book of business as well as diversifying geographically. We have moved into new lines of business to diversify our portfolio, reduce volatility, widen our markets and offer returns to our shareholder. We have expanded our books to offer noncatastrophe property and casualty covers notably in D&O and E&O, excess casualty and medical malpractice, and are continuing to seek opportunities where they arise. Standard lines marked the second renewal season for standard lines where the target segment remains for regional, super regional and select national writers of US-domiciled risks. Our interest is to provide property, multiline and casualty products to the marketplace, supporting companies that target traditional middlemarket risk exposures. We can provide support on a quota share or an excess of loss basis. D&O and E&O. Tokio Millennium Re entered the D&O and E&O marketplace in July Our target exposures are mainly small and middle market risks; however we will consider larger exposures on a limited basis. We also write newer classes of business such as cyber liability. We have a very limited appetite for financial institution exposure and work diligently to limit this within our portfolio. Excess casualty. We entered the excess casualty marketplace in June We entered with a specific amount of capacity to deploy through a limited number of cedants. We have a strict mandate that we will only support treaties that have a loss ratio cap. We will consider all hazard classes and are willing to consider both quota share and excess of loss reinsurance structures. Medical malpractice. Tokio Millennium Re entered the medical malpractice marketplace in October of Our target cedants are Physician Insurers Association of America (PIAA) companies focusing in four or fewer states. We have a limited appetite for risk retention groups and hospitals provided that these entities are retaining meaningful risk. Our approach to medical malpractice will be a patient one as market conditions are not particularly attractive at the moment. Our focus is placed on cedants who have a historical track record and who have shown commitment to reinsurance relationships over market cycles. At Tokio Millennium Re, we have a strong focus on both research and modelling, which allows us to concentrate on profitable underwriting. We continue to use these principles as we grow. 14 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

18 MARKET SOLUTIONS Tokio Millennium Re s Market Solutions division strives to take advantage of opportunities across a variety of capital markets products and services. It remains an active participant in the catastrophe bond (cat bond) arena, is a capacity seller and buyer of industry loss warranties (ILW) and provides its rated paper to the collateralised reinsurance market (including dedicated funds) through transformer services. This wide range of capital markets involvement gives Tokio Millennium Re a unique perspective on how protection buyers and investors are operating in the market and the potential impact on price and capacity. CATASTROPHE BONDS 2011 saw global cat bond new issuance of $4.42 billion, just below 2010 issuance. In total, 36 tranches were issued with an average size of $123 million. Investors were paid an average risk spread of 8.85% on an average expected loss of 2.25%.* Larger sponsors continued to look to cat bonds to transfer a good portion of their risk, and investors continued to meet the demand saw the first cat bond to cover the peril of earthquake-related workers compensation risk, sponsored by the California State Compensation Insurance Fund (SCIF). Tokio Millennium Re continues to review all new offerings that do not have exposure to Japan. Overall, it was more challenging to find great returns in 2011 due to tighter spreads and RMS 11 model changes. We still purchased $48.6 million of USD notional in 2011, up slightly from 2010 at good returns. At year end 2011, the total cat bond portfolio for Tokio Millennium Re stands at $138.6 million. Tokio Millennium Re invests in 21 tranches of cat bonds which all have Standard & Poor s credit ratings of B- to BB+. Maturities of these cat bonds range from 2012 to 2016 and cover wind and earthquake catastrophe risk in the US and Europe. Tokio Millennium was not an investor in the Japan earthquake and US wind bonds that suffered losses in 2011 due to the Tohoku Japan earthquake and the US tornado losses, respectively. INDUSTRY LOSS WARRANTIES Tokio Millennium Re optimised the overall property catastrophe book in 2011 by building an ILW portfolio that was primarily Florida wind-based. By providing capacity at a higher expected loss attachment and higher return than the traditional property catastrophe book, the company was able to increase the overall return of the portfolio. Tokio Millennium Re s ILW portfolio ran loss free in We provided a total of approximately $200 million of ILW capacity for US wind and earthquake in TRANSFORMERS Tokio Millennium Re continues to be the leading provider of fronting/transforming services and reinsurance cover to the collateralised reinsurance market. We transformed over $1 billion of limit in 2011 with an increase in revenue of 30%. We view this business strategy as an area of continued growth and expansion. * Swiss Re 2011 Year End ILS Market Update 15

19 FINANCIAL SUMMARY 2011 was an extremely challenging year for the reinsurance industry, with major catastrophe events in Japan, New Zealand and Thailand as well as large-scale tornadoes in the US. While Tokio Millennium Re (TMR) managed to avoid significant losses from most of these events, we did see a significant loss from the New Zealand earthquakes in Q1 and Q2. The Company s performance rallied well in Q3 and Q4; however this was not enough to offset the losses in the first half of the year. We finished the year with a net loss for only the second timein our history. Our net loss was $56.3 million and the combined ratio was 122%, equating to a 5% loss on average shareholder s equity. While posting a loss in any financial year is disappointing, we are heartened that our long term results have exceeded expectations. Gross written premium for the year was $664.1 million, compared to $509.2 million for the prior year, equating to a 30% increase year on year saw our continued cautious expansion into new lines of business in order to diversify our predominantly property catastrophe book. These new lines, which include US excess casualty, non-standard auto and specialty casualty, drove the top line increase. In addition, the establishment of our Zürich and Australian branch bore fruit. Net incurred losses for the year were $335.0 million, compared to $173.8 million for the prior year. As noted above, the New Zealand earthquake losses were the most significant loss events for TMR in 2011, contributing 43 points to our loss ratio. Smaller catastrophe events, as well as reserves for attritional losses on our non-catastrophe book, account for the balance of incurred losses. As part of our Market Solutions segment of operations, we purchase fully collateralised reinsurance protection in the form of catastrophe risk swap derivatives. From a US GAAP perspective, these derivatives are treated as non-underwriting income. However for the purposes of this commentary recoveries under these swaps (2011 $40.4 million) are included in net incurred losses and the KPI ratios. We feel that this treatment gives the reader a more informed view of our operating performance. Investment income for the year was $40.3 million, compared to $38.6 million for the prior year, equating to a 5% increase year on year. While we do not rely on investment income to drive profitability, we are pleased with this result given the general low interest rate environment. The year on year increase partly results from a strategic allocation to AUD and NZD assets to hedge obligations in those currencies. The average book yield on managed assets was 3.2%. Administrative expenses for the year were $53.5 million, compared to $43.1 million for the prior year, equating to a 24% increase year on year. The increase relates to our investment in people and infrastructure to expand our global platform and increase our product range. This investment paid dividends with the full year administrative expense ratio falling to 13%, compared to 14% for the prior year. From a capital perspective, we ended the year with shareholder s equity of $1.1 billion having paid a dividend of $84.9 million during the year. This leaves us well positioned for operations in TOKIO MILLENNIUM RE ANNUAL REPORT 2011

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21 CORPORATE SOCIAL RESPONSIBILITY Tokio Millennium Re Bermuda At Tokio Millennium Re Ltd., we have always been committed to the communities where we live and work, and in particular to bettering the lives of children in Bermuda. In 2011, we continued to support the local community through funding youth sports and educational programmes, as well as donating to charities and agencies that strive to improve the lives of families and children on the island. Here are some of the causes we support: Bermuda Foundation for Insurance Studies (BFIS) Tokio Millennium Re Ltd. supports BFIS, an organisation dedicated to providing scholarship opportunities for students pursuing a career in the insurance industry. Bermuda Optimist Dinghy Association Set up in 1998, the Bermuda Optimist Dinghy Association is for children under 15 with an interest in racing Optimist dinghies, the world s largest youth class. The association has helped the island produce world-class young sailors. Big Brothers Big Sisters of Bermuda This mentoring programme is aimed at increasing children s self esteem and confidence. The charity matches children with adult volunteers. Centre for Talented Youth The Centre for Talented Youth works with pre-college students of high academic ability. Children are provided tutoring after school and can participate in summer programmes in the US and Europe. Coalition for the Protection of Children This 20-year-old charity s objective is to heighten public awareness of children s issues. It is a flexible group that provides services that are not available or affordable elsewhere on the island and aims to help children grow up in a safe and nurturing environment. Hope Academy The academy assists children with special needs, particularly children attending the Dame Marjorie Bean Hope Academy. Donations support attendance at camps, enable the purchase of specialist equipment, and help with the cost of travel for medical reasons. Knowledge Quest Once again we offered scholarship and mentoring support to this charity that helps bright Bermudian students with limited financial means attend university abroad. Open Airways This charity supports people with asthma and chronic obstructive pulmonary diseases, provides education and promotion of self-care. We sponsor spacers for children to use with their inhalers. Raleigh International Summer Programme Raleigh International is a personal development programme for young Bermudians. Tokio Millennium Re Ltd. supports their summer programme that allows selected participants to travel to a developing country and provide help to people there and to gain a better understanding of other cultures. 18 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

22 Family Centre This charity helps children with family-based problems such as abuse, neglect and other emotional problems, through an early intervention programme. We were the main sponsor of their Children Come First fundraising drive and have sponsored their golf programme for many years. The Reading Clinic We are proud to support this charity whose primary aim is to help children overcome difficulties faced due to dyslexia. WindReach Bermuda WindReach exists to enrich the quality of life for people with special needs, and we were proud to sponsor the adaptive sports programme again this year. YouthNet We support YouthNet, a school-based mentoring programme that serves 1079 students in 24 schools in Bermuda. Its mission is to keep students focused through mentoring. Tokio Millennium Re (UK) Ltd. Tokio Millennium Re (UK) Ltd. (TMRUK) commits time and money each year to many worthwhile charitable events. In times of disaster we have rallied together, raising money for those in need through donations and sponsorships. Japanese Earthquake Appeal Following the earthquake and tsunami in Japan, TMRUK raised funds by holding an in-house auction, auctioning football tickets, participating in a raffle held by TMRUK and a book sale. Standard Chartered Great City Race Each year staff from TMRUK participate in the Standard Chartered Great City Race. Entry fees and funds raised go to the Seeing is Believing charity, helping tackle avoidable blindness across the world. Raise and Match Scheme TMRUK matches monies raised by their employees, for charitable events that they do in their personal time. Great Ormond Street Donation Instead of sending Christmas cards, TMRUK sends e-cards and donates the money saved to the Great Ormond Street Hospital, one of the world s leading children s hospitals. 19

23 FINANCIAL SECTION BERMUDA TOKIO MILLENNIUM RE LTD. 20 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

24 INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholder Tokio Millennium Re Ltd. We have audited the accompanying consolidated balance sheets of Tokio Millennium Re Ltd. and subsidiary as of December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income, changes in shareholder s equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tokio Millennium Re Ltd. and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Chartered Accountants Hamilton, Bermuda March 29,

25 CONSOLIDATED BALANCE SHEETS 31 December 2011 and US$ 000 US$ 000 Assets Cash and cash equivalents (Note 3) $ 288,336 $ 137,759 Short term investments (Note 3) 81,085 59,510 Investments in fixed interest securities (Notes 3, 4, 5 and 11) 932,275 1,021,262 Investments in catastrophe bonds (Notes 4 and 5) 138, ,545 Collateral held on behalf of counterparties (Note 3) 31,508 Accrued interest receivable 9,530 8,715 Premiums receivable (Note 3) 145, ,781 Prepaid reinsurance premiums (Note 3) 27,017 23,622 Fair value of derivatives (Notes 3 and 5) 37,893 21,992 Outstanding losses recoverable from reinsurers (Notes 3 and 7) 97,662 19,459 Deferred acquisition expenses 75,567 48,839 Unearned profit commission 539 1,480 Prepaid expenses 3,587 3,234 Capital assets (Note 9) 13,140 10,804 Funds withheld (Note 3) 25,105 24,308 Deferred tax asset (Note 16) 3, Other assets 1,283 1,356 Total assets $ 1,880,096 $ 1,640,674 Liabilities Outstanding losses and loss expenses (Note 7) $ 511,089 $ 213,020 Liability for collateral held on behalf of counterparties (Note 3) ,615 Reinsurance balances payable 39,370 18,655 Unearned premiums 263, ,071 Deferred commission income 2,376 2,358 Accounts payable and accrued expenses (Note 13) 11,034 7,306 Pension liability (Note 12) 790 Deferred fee income Deferred tax liability and provision for income tax (Note 16) 686 Total liabilities 829, ,031 Shareholder s equity Authorised, issued and fully paid, shares of $1 par value each 250, ,000 Contributed surplus (Note 10) 400, ,000 Retained earnings 368, ,089 Foreign currency translation adjustment 2,201 1,618 Accumulated other comprehensive income 29,809 25,936 Total shareholder s equity 1,050,865 1,187,643 Total liabilities and shareholder s equity $ 1,880,096 $ 1,640,674 See accompanying notes to consolidated financial statements 22 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

26 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years ended 31 December 2011 and US$ 000 US$ 000 Income Reinsurance premiums assumed $ 664,135 $ 509,173 Change in unearned premiums (84,780) (76,274) Reinsurance premiums earned assumed 579, ,899 Reinsurance premiums ceded (Note 8) 126,323 90,846 Change in prepaid reinsurance (3,830) (6,182) Reinsurance premiums earned ceded 122,493 84,664 Net premiums earned 456, ,235 Catastrophe bond income 9,535 8,239 Agency fee income Total operating income 466, ,495 Net investment income (Note 4) 40,309 38,628 Total income 506, ,123 Expenses Loss and loss expenses incurred 527, ,839 Losses recoverable from reinsurers (151,857) (15,000) Net loss and loss expenses incurred (Note 7) 375, ,839 Acquisition expenses 126,021 59,037 Profit commission 1,442 5,350 Net derivative expense (Note 6) 1,911 34,758 General and administrative expenses (Note 11) 53,484 43,145 Foreign exchange losses 6,830 1,445 Total expenses 565, ,574 (Loss) income before tax (58,392) 64,549 Income tax benefit 2, Net (loss) income (56,320 ) 65,044 Other comprehensive income Net change in unrealised gains on investments 4,663 4,120 Net change in pension cost (Note 12) (790) Other comprehensive income 3,873 4,120 Comprehensive (loss) income $ (52,447 ) $ 69,164 See accompanying notes to consolidated financial statements 23

27 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER S EQUITY Years ended 31 December 2011 and US$ 000 US$ 000 Share capital Balance at beginning and end of year $ 250,000 $ 250,000 Contributed surplus Balance at beginning and end of year 400, ,000 Retained earnings Balance at beginning of year 510, ,687 Net (loss) income (56,320) 65,044 Dividends (84,914) (124,642) Balance at end of year 368, ,089 Foreign currency translation adjustment Balance at beginning of year 1,618 Net change during the year 583 1,618 Balance at end of year 2,201 1,618 Accumulated other comprehensive income Balance at beginning of year 25,936 21,816 Net change in unrealised gains on investments 4,663 4,120 Net change in pension cost (790) Balance at end of year 29,809 25,936 Total shareholder s equity $ 1,050,865 $ 1,187,643 See accompanying notes to consolidated financial statements 24 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

28 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended 31 December 2011 and US$ 000 US$ 000 Cash flows from operating activities Net (loss) income $ (56,320) $ 65,044 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation of capital assets 5,494 4,527 Amortisation of fixed interest securities 4,910 4,214 Gain on sale of fixed interest securities (4,641) (5,866) Gain on sale of catastrophe bonds (340) (60) Gain on disposal of capital assets (2) Foreign exchange loss (gains) on cash and cash equivalents 4,987 (711) Other than temporary impairment charge on fixed interest securities 1,120 Change in: Collateral held on behalf of counterparties 31,508 (10,397) Accrued interest receivable (815) 1,826 Premiums receivable (39,445) (1,158) Prepaid reinsurance premiums (3,395) (6,182) Fair value of derivatives (15,901) 7,984 Outstanding losses recoverable from reinsurers (78,203) (2,377) Deferred acquisition expenses (26,728) (38,732) Unearned profit commission 941 (941) Prepaid expenses (353) (623) Funds withheld (797) (2,715) Deferred tax asset (2,726) (500) Other assets 73 (1,026) Outstanding losses and loss expenses 298, ,608 Liability for collateral held on behalf of counterparties (32,355) 10,004 Reinsurance balances payable 20,715 (24,649) Unearned premiums 84,065 76,275 Deferred commission income Accounts payable and accrued expenses 3,728 2,921 Deferred fee income 484 Deferred tax liability and provision for income tax 686 Net cash provided by operating activities 193, ,752 Cash flows from investing activities Purchase of short term investments (83,747) (58,286) Proceeds on maturity of short term investments 59, ,000 Purchase of fixed interest securities (227,087) (442,311) Proceeds on sales and maturity of fixed interest securities 322, ,116 Purchase of catastrophe bonds (48,603) (47,281) Proceeds on sales and maturity of catastrophe bonds 29,003 7,060 Purchase of capital assets (7,830) (5,738) Net cash provided by (used in) investing activities 43,574 (27,440) Cash flows from financing activities Dividends paid (84,914) (124,642) Net cash used in financing activities (84,914) (124,642) Net increase in cash and cash equivalents 152,319 54,670 Foreign exchange (losses) gains on cash and cash equivalents (1,742) 1,107 Cash and cash equivalents at beginning of year 137,759 81,982 Cash and cash equivalents at end of year $ 288,336 $ 137,759 See accompanying notes to consolidated financial statements 25

29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 1. General Tokio Millennium Re Ltd. (the Company ) was incorporated under the laws of Bermuda on 15 March 2000 and is licenced as a Class 3B reinsurer under the Insurance Act, 1978 of Bermuda and related regulations to write all classes of property and casualty business. The Company is a wholly-owned subsidiary of the Tokio Marine and Nichido Fire Insurance Co., Ltd. The ultimate parent company is Tokio Marine Holdings, Inc. (formerly Millea Holdings, Inc.), a company incorporated in Japan. The Company participates in various excess of loss property catastrophe, workers compensation catastrophe, crop/hail and terrorism reinsurance contracts. Catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, freezes, floods and other man-made or natural disasters. Because the Company has large aggregate exposures to these risks, the Company expects that its claims experience will be characterised by relatively low frequency and high severity claims. The occurrence of claims from catastrophic events is likely to result in substantial volatility in the Company s financial results for any particular period. The Company endeavours to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone. From 2010, the Company began to offer non-catastrophe property and casualty covers on both proportional and per risk excess of loss treaties, with an emphasis on the higher frequency/lower severity category of exposures. Casualty lines of business include general liability, auto liability, workers compensation, directors and officers, errors and omissions and medical malpractice. The Company also provides non-traditional customised reinsurance and financial solutions for its clients world-wide property and casualty exposures on both a treaty and facultative basis. The Company formed branches in Switzerland on 31 August 2010 and in Australia on 22 October The Australian Prudential Regulation Authority issued a license to the Company s Australian branch to conduct business as a general insurer on 1 March The branch in Switzerland will be solely regulated by the Bermuda Monetary Authority. Tokio Millennium Agency Ltd. ( TMA ), a wholly-owned subsidiary of the Company, was incorporated in Bermuda on 6 June 2003, with an initial share capital of $12,000. Its primary activity is to facilitate risk swap agreements between Tokio Marine and Nichido Fire Insurance Co., Ltd. and other insurance companies for which it receives agency fees. 2. Summary of significant accounting policies The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ( US GAAP ). The consolidated financial statements include the accounts of the Company, its branches and its wholly-owned subsidiary, TMA. All significant intercompany transactions and balances are eliminated on consolidation. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected in the Company s consolidated financial statements include, but are not limited to, the outstanding losses and loss expenses, outstanding losses recoverable from reinsurers, estimates of written and earned premiums and the fair value of catastrophe swap derivatives. The following are the significant accounting policies adopted by the Company: (a) Premiums earned and acquisition expenses Premiums assumed are recorded on the accruals basis and are included in income over the period of exposure to risk with the unearned portion deferred in the balance sheet. Reinsurance premiums ceded are similarly earned over the period of exposure to risk with the unearned portion being deferred in the balance sheet as prepaid reinsurance premiums. For excess of loss contracts, the ultimate premium is estimated at contract inception. Subsequent premium adjustments, if any, are recorded in the period in which they are determined. For proportional treaties, the amount of premium is normally estimated at inception by the ceding company. The Company accounts for such premium using initial estimates, which are reviewed regularly with respect to the actual premium reported by the ceding company, changes in estimates are recognised in the period in which they are determined. 26 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Acquisition expenses, mainly commissions and brokerage, related to unearned premiums are deferred and amortised to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of the deferral to its realisable value by giving consideration to losses and expenses expected to be incurred as premiums are earned. Where applicable, no claims bonuses and profit commissions are accrued based on claims experience. (b) Outstanding losses and loss expenses Losses and loss expenses paid are recorded when advised by the ceding insurance companies. Outstanding losses comprise estimates of the amount of reported losses and loss expenses received from the ceding insurance companies plus a provision for losses incurred but not reported ( IBNR ). The IBNR provision is estimated by management based on reports from industry sources, including initial estimates of aggregate industry losses, individual loss estimates received from ceding companies and brokers, output from commercially available catastrophe loss models and actuarial analysis using historical data available to the Company on the business assumed together with industry data. Given the inherent nature of major catastrophic events, considerable uncertainty underlies the assumptions and associated estimated reserve for losses and loss expenses. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in income in the period in which they are determined. Due to the inherent uncertainty in estimating the liability for losses and loss expenses, there can be no assurance that the ultimate liability will not be settled for a significantly greater or lesser amount than that recorded. Based on the current assumptions used, management believes that the Company s recorded amount is a reasonable estimate of the ultimate cost of losses incurred to the balance sheet date. Reserves for non-catastrophe property and casualty covers are based on individual claims, case reserve and other reserve estimates reported by insureds and ceding companies as well as the Company s actuarial estimates of ultimate losses. Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors which could vary significantly as claims are settled. The Company does not have the benefit of a significant amount of its own historical experience with non-catastrophe lines of business. Accordingly, the setting and reserving for incurred losses in these lines of business could be subject to greater variability. Ultimate losses may vary materially from the amounts provided in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in the consolidated statements of operations in the period in which they become known and are accounted for as changes in estimates. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities. (c) Investments Short term investments, investments in fixed interest securities and investments in catastrophe bonds are classified as available for sale and are carried at fair value, with any unrealised gains and losses included in accumulated other comprehensive income as a separate component of shareholder s equity. Short term investments represent bank deposits with an original term of greater than 90 days but less than one year. The carrying value reported in the consolidated balance sheets for these instruments approximates their fair values due to the short term nature of the investments. The fair value of fixed interest securities is based on prices provided by internationally recognised independent pricing services. The independent pricing sources obtain actual transaction prices for securities that have quoted prices in active markets. For securities that are not actively traded, the pricing services typically use matrix pricing which uses observable inputs including reported trades, benchmark yields, broker/dealer quotes, interest rate spreads, prepayment spreads and other such inputs from market sources to determine a reasonable fair value. Fair value for catastrophe bonds is based on independent broker quotes. The cost of investments is adjusted for amortisation of premiums and discounts. Realised gains and losses on investments are recognised in net income using the specific identification method. Interest income on short term investments, fixed interest securities and catastrophe bonds is accrued to the balance sheet date. 27

31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 2. Summary of significant accounting policies (continued) (c) Investments (continued) Impairment losses are recognised on investments on an individual security basis when the investment is considered to be other than temporarily impaired. Impairment occurs when it is deemed probable that the Company will be unable to collect all amounts due according to contractual terms of the individual security. If there is no objective evidence to support recovery in value before disposal and the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its adjusted amortised cost basis, these impairments will be included as a separate component of investment income and the cost basis of the investment reduced accordingly. If the Company does not intend to sell the security and it is unlikely that the Company will be required to sell the security before recovery of its adjusted amortised cost basis, the other than temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other than temporary impairment related to credit loss is recognised in earnings. The amount of the total other than temporary impairment related to other factors is recognised in other comprehensive income. The Company will not change the revised cost basis for subsequent recoveries in value. The Company s investments are managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. (d) Derivative financial instruments From time to time, the Company enters into catastrophe swap derivatives, under which certain catastrophe reinsurance exposures are ceded to or assumed from the swap counterparty. The Company does this to facilitate institutional investors who seek to diversify their portfolios by adding non-correlated reinsurance risks to their portfolio. The Company transforms such risks by selling reinsurance and buying derivatives from the institutional investors, or vice versa. The Company earns a fee for its role in facilitating such transactions. Since there is no right of offset, all transactions are presented on a gross basis in the financial statements. Although the derivatives provide an economic hedge against the assumed or ceded reinsurance contract, the Company designates its derivatives as non-hedging derivative instruments based upon criteria established by FASB ASC 815, Derivative and Hedging Activities. Catastrophe swaps are recorded at fair value with changes in fair values recorded in the income statement. (e) Capital assets Capital assets are stated at cost less accumulated depreciation calculated on a straight-line basis over the estimated useful lives of the assets. The specific depreciable rates of significant assets are as follows: Computer equipment Computer software Fixtures and fittings Leasehold improvements Motor vehicles Office equipment 3 years 3 years 5 years Over the term of the underlying lease 5 years 4 years (f) Translation of foreign currencies Foreign currency assets and liabilities considered monetary items are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated at the transaction date exchange rates. Exchange gains and losses are included in the determination of net income. The reporting currency of the Company is the US dollar. The functional currencies of the Company s Switzerland and Australia branches are the Euro and Australian dollar, respectively. In translating the financial statements of those branches whose functional currency is other than the US dollar, assets and liabilities are converted into US dollars using the rates of exchange in effect at the balance sheet dates, and revenues and expenses are converted using the average foreign exchange rates for the period. The effect of translation adjustments are reported in the consolidated balance sheets as foreign currency translation adjustment, a separate component of shareholder s equity. 28 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) (g) Cash and cash equivalents For purposes of the statements of cash flows, the Company considers all instruments and deposits with a maturity of ninety days or less at the date of purchase, and money market funds which can be redeemed without penalty, as equivalent to cash. (h) Bad debt provision The Company reviews receivables on a quarterly basis. A bad debt provision is generally provided for any receivables that are greater than six months overdue. In addition the Company considers known and emerging credit events to determine if other provisions are necessary. The Company had no provision for doubtful debts in 2011 or (i) Long term incentive compensation plan In 2008, the Board approved a compensation program for employees. The compensation program consists of accumulation units which are based on movements in the net asset value of the Company and are settled in cash once a cliff vesting service period has been rendered. The Company accounts for the compensation program in accordance with FASB ASC 718, Compensation Stock Compensation ( FASB ASC 718 ). FASB ASC 718 requires the Company to measure the cost of employee services received in exchange for an accumulation unit award based on the grant date fair value of the award. As a liability award, the cost is remeasured each reporting period. The cost of such services is recognised over the service period. The fair value of the accumulation units is accounted for as a liability classified award. The Company has applied a narrow based interpretation of authorisation, as defined in FASB ASC 718, for the determination of the grant date of the awards. As such, the grant date of the units is determined to be upon authorisation of the awards in accordance with the Company s governance structure. (j) Taxation The Company adopted FASB ASC 740 (FIN 48) for the fiscal year beginning on 1 January 2009 with no resulting impact on the Company s operating results or financial condition. The branches of the Company operate in jurisdictions where they are subject to taxation. Income taxes have been provided in accordance with the provisions of FASB ASC 740, Income Taxes. Current and deferred income taxes are charged or credited to net income. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the consolidated balance sheets and those used in the various jurisdictional tax returns. When management s assessment indicates that it is more likely than not that deferred income tax assets will not be realised, a valuation allowance is recorded against the deferred tax assets. The Company recognises a tax benefit relating to uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability must be recognised for any tax benefit (along with any interest and penalty, if applicable) claims in a tax return in excess of the amount allowed to be recognised in the financial statements under US GAAP. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date. (k) Pension plan The Company has a defined benefit postretirement plan in relation to the branch in Switzerland. The net pension obligation in relation to this plan is based on, among other things, assumptions of the discount rate, estimate return on plan assets, and salary increases. The Company recognises the over funded or under funded status of the defined benefit postretirement plan as an asset or liability in its balance sheet and recognises changes in the funded status in the year in which the changes occur through comprehensive income. 29

33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 3. Concentrations of credit risk Assets that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, funds withheld, investments, reinsurance premiums receivable and reinsurance recoverable balances, unrated counterparties to ceded reinsurance agreements and counterparties to catastrophe swap agreements. As at 31 December 2011, 35% (2010: 75.5%) of cash and cash equivalents are held on deposit at a British domiciled bank rated AA- by Standard & Poor s, 45% (2010: Nil%) at another British domiciled bank rated A by Standard & Poor s, and a further 6% (2010: 0.5%) are held on deposit with other banks. The remaining 14% (2010: 24%) of cash and cash equivalents are held in money market funds with ratings of AAA. The Company s management evaluates the financial strength and stability of these institutions on a periodic basis. As at 31 December 2011, 17% (2010: 100%) of short-term investments are held at a British domiciled bank rated AA- by Standard & Poor s, 50% (2010: Nil%) at an Australian domiciled bank rated AA- by Standard & Poor s and 33% (2010: Nil%) at another Australian domiciled bank rated AA- by Standard & Poor s. The Company s management evaluates the financial strength and stability of these institutions on a periodic basis. As at 31 December 2011, 28% and 57% of the Company s funds withheld is held in trust by two trustees with credit ratings of AA- and BBB+, respectively. At 31 December 2010, 51% and 38% of the Company s funds withheld was held by two trustees with credit ratings of AA- and BB+, respectively. The remaining funds withheld balance consists of several small amounts held by various cedents and does not represent a significant concentration of credit risk. The Company s investment portfolio is managed by an external investment manager in accordance with the Company s investment guidelines. These guidelines follow prudent standards of diversification and a prudent investment philosophy. Within the fixed income portfolio, the Company attempts to limit credit exposure by limiting purchases of fixed income securities to those rated A- and higher. The Company is not exposed to any significant concentration risk on its investments. The Company has exposure to credit risk related to premiums receivable and reinsurance recoverable on paid and unpaid losses. The credit risk exposure related to these balances is mitigated by several factors, including but not limited to, collateralisation of exposures ceded to unrated counterparties and right of offset against losses payable. Management performs credit checks as part of the underwriting process and monitors ageing of receivables. As at 31 December 2011 and 2010, the Company has no significant aged receivables. The creditworthiness of any counterparty is evaluated by the Company, taking into account credit ratings assigned by rating agencies. The credit approval process involves an assessment of factors including, among others, the counterparty, country and credit exposure limits. At 31 December 2011, the maximum credit risk exposure in relation to unrated counterparties to reinsurance ceded agreements is $563.7 million (2010 $359.6 million). The Company s credit risk in relation to reinsurance ceded is fully collateralised. The collateral consists of assets held in trusts by the reinsurance counterparty for the benefit of the Company of $117.9 million (2010 $121.1 million) and letters of credit of $453.2 million (2010 $253.0 million). The Company has no entitlement to income earned on the collateral held, and any diminution in the market value of these assets is the responsibility of the counterparty. At 31 December 2011, the maximum exposure to credit risk of the counterparties to catastrophe swap agreements is $537.5 million (2010 $488.4 million) which is fully collateralised. The collateral consists of assets held in trust by the swap counterparty for the benefit of the Company of $2.5 million (2010 $12.5 million), letters of credit of $535.0 million (2010 $474.4 million), and cash held by the Company of $Nil (2010 $31.5 million). The Company has no entitlement to income earned on the collateral held, and any diminution in the market value of these assets is the responsibility of the counterparty. The Company also has exposure to credit risk as it relates to its business written through brokers, if any of the Company s brokers is unable to fulfill their contractual obligations with respect to payments to the Company. In addition, in some jurisdictions, if the broker fails to make payments to the insured under the Company s policy, the Company might remain liable to the insured for any deficiency. 30 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 4. Investments (a) Fixed interest securities (i) The amortised cost, fair value and unrealised gains and losses of investments in fixed interest securities are as follows: Amortised Unrealised Unrealised Fair cost gains losses value At 31 December 2011 US$ 000 US$ 000 US$ 000 US$ 000 US treasuries $ 354,503 $ 19,227 $ $ 373,730 Agencies 82,410 3,930 86,340 Non-US government 10, ,271 Corporate 246,183 4,066 (3,124) 247,125 Agency mortgage-backed 184,440 6, ,434 Asset-backed 23, (1) 23,375 $ 900,823 $ 34,577 $ (3,125) $ 932,275 Amortised Unrealised Unrealised Fair cost gains losses value At 31 December 2010 US$ 000 US$ 000 US$ 000 US$ 000 US treasuries $ 402,407 $ 13,252 $ (1,947) $ 413,712 Agencies 162,759 9, ,093 Non-US government 10, ,618 FDIC guaranteed corporate 13, ,774 Corporate 207,977 2,806 (2,261) 208,522 Agency mortgage-backed 190,132 3,196 (340) 192,988 Asset-backed 9, ,555 $ 996,334 $ 29,476 $ (4,548) $ 1,021,262 31

35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 4. Investments (continued) (a) Fixed interest securities (continued) (ii) The following table summarises for all fixed interest securities in an unrealised loss position at 31 December 2011, the unrealised loss and fair value by the length of time the security has been continuously in an unrealised loss position: Less than 12 months Greater than 12 months Fair Unrealised Fair Unrealised value losses value losses At 31 December 2011 US$ 000 US$ 000 US$ 000 US$ 000 Corporate $ 62,960 $ (2,169) $ 13,591 $ (955) Asset-backed 5,169 (1) $ 68,129 $ (2,170) $ 13,591 $ (955) Less than 12 months Greater than 12 months Fair Unrealised Fair Unrealised value losses value losses At 31 December 2010 US$ 000 US$ 000 US$ 000 US$ 000 US treasuries $ 69,408 $ (1,947) $ $ Corporate 111,391 (2,261) Agency mortgage-backed 22,173 (340) $ 202,972 $ (4,548) $ $ As at 31 December 2011, the Company held seventeen out of a total of one-hundred and two fixed interest securities in an unrealised loss position. The securities have been in an unrealised loss position for five to fourteen months. These seventeen fixed interest securities in an unrealised loss position, for which an other-than-temporary impairment charge has not been taken, are rated between BBB and AAA. The Company concluded that these securities as well as the remaining securities in an unrealised loss position are temporarily depressed and are expected to recover in value as the securities approach maturity or as market spreads return to more normalised levels. Further, at 31 December 2011, the Company did not intend to sell these securities in an unrealised loss position and it is more likely than not that it will not be required to sell these securities before the anticipated recovery of their amortised costs. (iii) The amortised cost and estimated fair value of fixed interest securities as at 31 December 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to repay obligations with or without prepayment penalties. Amortised Fair cost value US$ 000 US$ 000 Within one year $ 60,491 $ 61,589 From one to five years 561, ,173 From five to ten years 71,304 75,704 Subtotal 693, ,466 Agency mortgage-backed 184, ,434 Asset-backed 23,286 23,375 Total $ 900,823 $ 932, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) (iv) The Company s investments in fixed interest securities carry a weighted average credit rating of AA, as assigned by Standard & Poor s. The minimum credit rating of securities within the fixed interest securities portfolio is BBB. The rating profile of the Company s fixed interest securities is shown in the table below US$ 000 US$ 000 AAA $ 33,646 $ 814,590 AA 748, ,857 A 142,181 74,815 BBB 8,072 $ 932,275 $ 1,021,262 (v) The components of net investment income for the years ended 31 December 2011 and 2010 were as follows: US$ 000 US$ 000 Interest on fixed interest securities $ 32,817 $ 37,094 Amortisation of fixed interest securities (4,910) (4,214) Interest on cash and cash equivalents 4, Interest on short term investments 4, Interest on funds withheld Realised gains 4,641 5,866 Other-than-temporary impairment charge (1,119) Investment management fees (1,018) (952) Net investment income $ 40,309 $ 38,628 (vi) In the normal course of business, fixed interest securities and cash and cash equivalents with fair values of $156.0 million as at 31 December 2011 (2010 $103.2 million), were deposited in trust for the benefit of ceding companies and credit institutions. (vii) During the year ended 31 December 2010, the Company recorded an other-than-temporary impairment charge of $1.1 million on a fixed interest investment due to an unexpected credit event. The impairment charge was recorded as part of investment income in the consolidated statements of operations. There was no impairment charge recorded during (b) Catastrophe bonds The Company s investments in catastrophe bonds comprise twenty-one bonds. All catastrophe bonds have credit ratings with Standard and Poor s ranging from B to BB+. Maturities on these bonds range from 2012 to The issuers of these securities have used the proceeds raised to collateralise certain catastrophe reinsurance obligations, mainly North American and European wind and earthquake risks. The investment in these securities is therefore at risk of loss, in whole or in part, if a covered catastrophe occurs. 33

37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 4. Investments (continued) (b) Catastrophe bonds (continued) The cost, fair value and unrealised gains and losses of catastrophe bonds are as follows: Unrealised Unrealised Fair At 31 December 2011 Cost gains losses value Catastrophe bonds $ 139,478 $ 1,218 $ (2,071) $ 138,625 At 31 December 2010 Catastrophe bonds $ 119,538 $ 2,723 $ (1,716) $ 120,545 Unrealised losses on catastrophe bonds held as at 31 December 2011 and 2010 comprise an accumulation of relatively small unrealised losses on a security by security basis caused by general market movements and foreign currency translations rather than credit events. As at 31 December 2011 and 2010, the Company had no significant unrealised losses caused by other factors or circumstances, including issuer specific credit risks or due to exposures to catastrophe events. 5. Fair value measurements Fair value measurements are established in accordance with the framework provided by FASB ASC 820, Fair Value Measurements and Disclosures ( FASB ASC 820 ). FASB ASC 820 establishes a fair value hierarchy with the highest priority given to quoted prices in active markets and the lowest priority given to unobservable inputs. The following are the levels within the fair value hierarchy. Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices. Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These measurements include circumstances where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management s best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability. 34 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis: Significant Quoted prices in other Significant active markets observable unobservable At 31 December, 2011 Total for identical assets inputs inputs (Level 1 ) (Level 2 ) (Level 3 ) Investment in fixed interest securities US treasuries $ 373,730 $ 373,730 $ $ Agencies 86,340 86,340 Non-US government 10,271 10,271 Corporate 247, ,125 Agency mortgage-backed 191, ,434 Asset-backed 23,375 23,375 Investments in catastrophe bonds 138, ,625 Fair value of derivatives 37,893 37,893 $ 1,108,793 $ 373,730 $ 697,170 $ 37,893 Investments in fixed interest securities Investments in fixed interest securities included in Level 1 consist of the Company s investments in US Treasuries. Investments in fixed interest securities included in Level 2 consist of the Company s investments in agencies, non-us government, corporate, agency mortgage-backed and asset-backed securities. The Company s fixed interest securities are priced using pricing services, such as index providers and pricing vendors. The pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilise market data and other observable inputs in pricing models to determine prices. Prices are generally verified using third party data. The Company considers these Level 2 inputs as they are corroborated with other externally obtained information. The techniques generally used to determine the fair value of our fixed interest securities are detailed below by asset class. US treasuries These securities are primarily priced by pricing vendors. When pricing these securities, the vendor may utilise daily data from many real time market sources, including active trades, as such, the Company considers its US Treasury fixed interest securities as Level 1. Agencies The issuers of the Company s agency fixed interest securities primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies debentures. Fixed interest securities included in agencies are primarily priced by pricing vendors. When evaluating these securities, the vendor may gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. These are considered observable inputs therefore, the fair value of the securities are classified as Level 2. Non-US government The issuers for securities in this sector are supranational organisations. Fixed interest investments included in non-us government are primarily priced by pricing vendors. When evaluating these securities, the vendor may gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trades, when available. For securities in which trade volume is low, the pricing vendor may also utilise data from more frequently traded securities with similar attributes. These are considered observable inputs therefore, the fair value of the securities are classified as Level 2. 35

39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 5. Fair value measurements (continued) Corporate The issuers consist of well known corporate issuers with ratings ranging from BBB to AA assigned by major rating agencies. The Company s corporate fixed interest securities are primarily priced by pricing vendors and are considered as Level 2. When evaluating these securities, the vendor may gather information from market sources regarding the issuer of the security, obtain credit data, as well as other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trades, when available. The pricing vendor may also consider the specific terms and conditions of the securities, including any specific features which may influence risk. These are considered observable inputs therefore, the fair value of the securities are classified as Level 2. Agency mortgage-backed The issuers of the Company s agency mortgage-backed fixed interest securities primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other agencies. The Company s agency mortgage-backed fixed interest securities are primarily priced by pricing vendors utilising daily inputs from the active TBA market which is extremely liquid, as well as the US treasury market. The vendor inputs may also utilise additional information, such as the weighted average maturity, weighted average coupon and other pool level data which is provided by the sponsoring agency. Valuations may also be corroborated by daily active market quotes. These are considered observable inputs therefore, the fair value of the securities are classified as Level 2. Asset-backed The underlying collateral for the Company s asset-backed fixed interest securities consists of automobile and credit card loans. Securities held in this sector are primarily priced by pricing vendors and are considered as Level 2 by the Company as inputs are observable. The pricing vendor may apply dealer quotes and other available trade information such as bid and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the US treasury curve, swap curve and TBA values as well as cash settlement. Investments in catastrophe bonds The Company s investments in catastrophe bonds are recorded at fair value based on quoted market prices, or when such prices are not available, by reference to published broker or underwriter bid and offer indications. As such, the Company considers its investments in catastrophe bonds as Level 2. Fair value of derivatives Included in Level 3 are the Company s catastrophe swap derivatives. Catastrophe swap derivatives are stated at fair value as estimated by management primarily based on the unexpired period of risk, an evaluation of the probability of loss and other unobservable inputs. The Company s catastrophe swap derivatives are initially priced at fair value in a non-stressed market and amortisation reflects the change in fair value in the absence of any loss events. The inputs for catastrophe swap derivatives are purely based on management s evaluation and are unobservable. 36 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) Below is a reconciliation of the beginning and ending balances of derivatives measured at fair value on a recurring basis using Level 3 inputs: Year ended 31 December 2011 Fair value measurements using significant unobservable inputs (Level 3 ) Fair value of derivatives Balance 1 January $ 21,992 Net unrealised losses Included in net derivative expense (23,309 ) Net realised gains Included in net derivative expense 3,221 Purchases 86,144 Sales (50,155 ) Net transfers in and/or out of Level 3 Balance 31 December $ 37,893 The following methods and assumptions are used by the Company in estimating fair value disclosures for other financial instruments: Cash and cash equivalents, short term investments and collateral held on behalf of counterparties The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Other assets and liabilities The fair value of accrued interest receivable, premiums receivable, funds withheld, other assets, reinsurance balances payable, accounts payable and accrued expenses approximates their carrying value due to their short term nature. The estimates of fair values are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realise in a current market exchange. However, any differences would not be expected to be material. Certain instruments such as prepaid reinsurance premiums, deferred acquisition expenses, outstanding losses recoverable from reinsurers, unearned profit commission, prepaid expenses, capital assets, outstanding losses and loss expenses, unearned premiums, deferred fee income and deferred commission income are excluded from fair value disclosure. Thus, the total fair value amounts cannot be aggregated to determine the underlying economic value of the Company. 6. Net derivative expense Net derivative expense consists of catastrophe swap derivative premiums expensed of $42.3 million (2010 $47.8 million), offset by recoveries made under the Company s catastrophe swap derivatives of $40.4 million (2010 $13.1 million). As discussed in Note 3, the Company s maximum exposure to unrated counterparties is fully collateralised. 37

41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 7. Outstanding losses and loss expenses The summary of changes in outstanding losses and loss expenses for 2011 and 2010 is as follows: Gross balance as at 1 January $ 213,020 $ 84,412 Less outstanding losses recoverable from reinsurers (19,459) (17,083) Net balance at 1 January 193,561 67,329 Incurred losses related to: Current year 369, ,527 Prior years 5,741 16,312 Total incurred 375, ,839 Paid losses related to: Current year 75,533 17,181 Prior years 82,179 43,426 Total paid 157,712 60,607 Loss assumed by novation 2,562 Effect of currency translation adjustment (407) Net balance at 31 December 413, ,561 Plus outstanding losses recoverable from reinsurers 97,662 19,459 Gross balance at 31 December $ 511,089 $ 213,020 During 2011, the Company incurred net losses of $375.4 million (2010 $186.8 million), of which $191.0 million related to the two 2011 New Zealand earthquakes, $32.5 million related to US tornadoes, $15.0 million related to the Japanese earthquake and resulting tsunami (Japan earthquake) and $12.0 million related to Australian floods. Under catastrophe swap derivatives, the Company can recover $5.0 million for New Zealand earthquakes, $15.0 million for US tornadoes, $15.0 million for Japanese earthquake and $5.4 million for other events. The remaining net losses in 2011 mostly relate to expected losses on proportional and non-catastrophe property and casualty contracts, as well as loss development from prior years. 38 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) The Company experienced $5.7 million ( $16.3 million) of incurred losses related to previous years. Out of this total, $6.4 million is related to adverse development on a 2010 Australian aggregate cover and $5.4 million related to various prior year covers written under the transformer line of business. The transformer losses are fully recoverable under catastrophe swap derivatives. The Company also experienced favourable development of $7.0 million on the 2010 New Zealand earthquake as a result of changes in estimates for this event. As at 31 December 2011, the Company assumed three retroactive contracts by way of a novation deal. Loss reserves of $2.6 million were recorded on the balance sheet together with a deferred income asset of $0.5 million. The deferred income will be amortised to the income statement over the remaining settlement period. During 2010, the Company incurred net losses of $186.8 million, of which $101.7 million related to the 2010 New Zealand earthquake. The Company recorded a total of $45.7 million incurred losses related to quota share business written. Of the total incurred net losses for 2010, $13.1 million was recoverable under catastrophe swap derivatives. The Company experienced $16.3 million of adverse development related to prior years, during Of this total, $6.4 million related to Hurricane Ike losses and $8.1 million related to various prior year covers written under the transformer line of business. The transformer losses are fully recoverable under catastrophe swap derivatives. For certain catastrophic events there is considerable uncertainty underlying the assumptions and associated estimated reserves for losses and loss adjustment expenses. Reserves are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments could require a material change in the amount estimated. The uncertainty surrounding reserves for property catastrophe exposures arises from problems such as policy coverage issues, multiple events affecting one geographic area and the impact on claims adjusting by ceding companies. These issues can cause significant delays to the timing of notification of changes to loss estimates reported by ceding companies. In particular the estimate for the New Zealand earthquakes has been based on a review of contracts potentially affected by the events, information received from both clients and brokers, industry insured loss estimates, output from both industry and proprietary models and management judgment. It has also been assumed that underlying policy terms and conditions are upheld during the loss adjustment process. The magnitude and recent occurrence of these events as well as the long reporting period, the occurrence of aftershocks and limited access by claims adjusters, introduce additional uncertainty to the normally difficult process of estimating catastrophic losses. This is compounded by the potential for legal and regulatory issues arising regarding the scope of coverage. Consequently, the ultimate net impact of losses from these events on the Company s net income might differ substantially from the foregoing estimate. Such adjustments, if necessary, are reflected in results of operations in the period in which they become known. At the balance sheet date the Company is reserved for this event at its maximum exposure. 39

43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 8. Ceded reinsurance The Company uses retrocessional agreements to reduce its exposure to risk of loss on reinsurance assumed. These agreements generally provide for recovery of a portion of losses and loss expenses from retrocessionaires. The Company remains liable to its cedants to the extent that the retrocessionaires do not meet their obligations under these agreements. Failure of reinsurers to honour their obligations could result in losses to the Company. The Company defines rated reinsurers as companies with a minimum Standard & Poor s or A.M. Best rating of A-, and net assets of more than $100 million and where the retroceded amount is equal to or less than 10% of the reinsurer s net assets. The Company evaluates the financial condition of its rated reinsurers and monitors concentration of credit risk, on an ongoing basis, arising from similar geographic regions, activities, or economic characteristics of the reinsurers in order to minimise its exposure to significant losses from rated reinsurer insolvencies. Provisions are made for amounts considered potentially uncollectible. The Company requires non-rated reinsurers to fully collateralise their reinsurance obligations. As further discussed in Note 3, the Company s maximum exposure to unrated reinsurers is fully collateralised. 9. Capital assets Capital assets comprise: Accumulated Net book Net book Cost depreciation value value Computer equipment $ 4,599 $ 3,041 $ 1,558 $ 1,078 Computer software 15,674 10,841 4,833 4,929 Fixtures and fittings 1, Leasehold improvements 6,789 1,036 5,753 3,782 Motor vehicles Office equipment $ 29,106 $ 15,966 $ 13,140 $ 10, Contributed surplus Contributed surplus represents cash contributed by the shareholder in excess of the issued share capital. 40 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 11. Commitments (a) The Company leases office space under operating leases which expire at various dates. The Company renews and enters into new leases in the ordinary course of business as required. Total rent expense with respect to these operating leases for the year ended 31 December 2011 was $2.6 million (2010 $2.1 million). Future minimum lease payments under the leases are expected to be as follows: Year Amount 2012 $ 2, , , , Later years 2,678 Total $ 11,633 (b) The above lease agreements also include a maintenance commitment. Maintenance expense for the current year amounts to $0.7 million (2010 $0.6 million) which has been included in general and administrative expenses. (c) Some lease agreements for office space provide an option to extend the lease beyond the expiration date. (d) Effective 6 August 2010, the Company entered into a Revolving Letter of Credit Facility Agreement ( the Credit Agreement ) with Barclays Bank PLC ( the Bank ). The Credit Agreement provides commitments from the Bank in an aggregate amount of $100 million and provides for the issuance and renewal of letters of credit which are used to support the Company s reinsurance obligations. The Credit Agreement was renewed effective 19 December 2011 with an amended expiry date of 31 December The maturity of any letters of credit issued under the Credit Agreement will not extend beyond this expiry date. Under the Credit Agreement, the Company is required to pledge cash or eligible securities with collateral value (as determined as therein provided) that equals or exceeds 100% of the aggregate amount of its outstanding letters of credit. The unutilised portion of the Credit Agreement may be cancelled in whole or in part (if in part, in minimum amounts of $0.5 million) by the Company without penalty upon due written notice to the Bank. Amounts so cancelled may not be re-instated. The Credit Agreement contains representations, warranties and covenants customary for facilities of this type. In addition to the customary covenants, the Company is required to maintain a financial strength rating of at least A- by A.M. Best and A by Standard & Poor s. The Bank has issued letters of credit of $78.0 million (2010 $45.2 million) in favour of ceding companies. The Company pledged as security $87.9 million (2010 $40.0 million) worth of fixed interest securities and $5.9 million (2010 $Nil) worth of cash to collateralise the letters of credit. Effective 9 August 2011 and 31 December, 2011, the Company entered into Revolving Letter of Credit Facility Agreements ( the Additional Credit Agreements ) with Barclays Bank PLC ( the Bank ). The Additional Credit Agreements provide commitments from the Bank in an aggregate amount of Australian dollar $0.8 million and United States dollar $35.0 million and provide for the issuance and renewal of letters of credit which are used to support the Company s reinsurance obligations. The Additional Credit Agreements expire on 30 June 2013 and 31 December 2012, respectively, and the maturity of any letters of credit issued under the Additional Credit Agreements will not extend beyond these expiry dates. Under the Additional Credit Agreements, the Company is required to pledge cash that equals or exceeds 110% of the aggregate amount of its outstanding letters of credit. The unutilised portion of the Additional Credit Agreements may be cancelled in whole or in part (if in part, in minimum amounts of $0.5 million) by the Company without penalty upon due written notice to the Bank. Amounts so cancelled may not be re-instated. The Additional Credit Agreements contain representations, warranties and covenants customary for facilities of this type. The Bank has issued letters of credit of United States dollar equivalent of $0.8 million (2010 $Nil) and $35.0 million (2010 $Nil) in favour of ceding companies. At year-end, the Company held as security United States dollar equivalent of $0.8 million (2010 $Nil) to collateralise the letter of credit (that was effective 9 August 2011). On 19 January 2012, the Company held as a security United States dollar equivalent of $40.8 million (2010 $Nil) in cash to collateralise the letter of credit (that was effective 31 December 2011). 41

45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 12. Pension plan The Company s branch in Switzerland entered into individual pension arrangements with specific employees. The Company and the members contribute a defined percentage of salary to the pension arrangement and a guaranteed rate of credited accumulation is granted on these contributions. At retirement, the accumulated contributions are converted to a pension at a fixed rate. In accordance with FASB ASC 715, Compensation Retirement Benefits, these plans are deemed to be contributory defined benefit plans. Independent actuarial reviews of the ongoing benefit obligations were undertaken at 31 December A summary of the status of the defined benefit pension plans is provided below: Change in benefit obligation Projected benefit obligation, beginning of year $ Service cost 93 Interest cost 2 Actuarial assumption gain/loss for the year Experience loss for the year 824 Benefits paid 2,886 Employee contributions 47 Projected benefit obligation, end of year $ 3,852 Change in plan assets Fair value of assets, beginning of year $ Actual return on plan assets 33 Employer contributions 96 Employee contributions 47 Benefits paid 2,886 Fair value of assets, end of year $ 3,062 Funded status, end of year $ (790) Amounts recognised in accumulated other comprehensive income, end of year Net loss $ 790 Prior service cost Total amount recognised, end of year $ 790 Components of net periodic benefit cost Service cost $ 93 Interest cost 2 Net periodic benefit cost $ 95 Accumulated benefit obligation, end of year Accumulated benefit obligation $ 3,062 In accordance with ASC 715, liability of $0.8 million is recorded in the balance sheet in the accompanying consolidated financial statements as the projected benefit obligation exceeded the fair value of the plan assets. Actuarial assumptions used in estimating obligations are a discount rate of 2.25%, expected return on assets of 2.5% and average compensation increases of 2.60%. Estimated benefit payments are as follows: Year Amount 2012 $ ,511 Total $ 4, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 13. Long term incentive compensation plan On 1 April 2011, 2010 and 2009, the Company granted its accumulation units under its long term incentive compensation plan. The value of the units are based on movements in the net asset value of the Company and will be settled in cash four years from the date of issue if the fair value of units at that date exceeds the grant date fair value. At 31 December 2011, there were 652,924; 456,949 and 288,297 units with the grant date fair values of $1.45; $3.14 and $3.16 for the 2011, 2010 and 2009 grants, respectively. In accordance with FASB ASC 718, the fair value of options granted is estimated using a pricing model with the following assumptions: Grant year Expected unit life 4 years 4 years 4 years Expected volatility (108%) 473% 58% Risk-free interest rate 0.4% 0.3% 0.2% Forfeiture rate 25.9% 20.0% 11.1% At year end, the fair value per unit discounted at the risk free rates for the 2011, 2010 and 2009 grants were ($0.5), $0.2 and $1.9, respectively. The table below shows the recognised and unrecognised expense for 2011, 2010 and 2009: Grant year Expense during the year ($180) ($173) Unrecognised expense (to be recognised over remaining service period) $44 $179 Remaining service period (in months) The Company revises fair value on a quarterly basis based on the latest estimate of fair value and number of units in issue. The activity during 2011 related to number of accumulation units is summarised as follows: Grant year Outstanding at beginning of year 526, ,296 Adjustment 43,545 Granted 717,559 Exercised Forfeited (64,635) (112,792) (78,999) Outstanding at end of year 652, , ,297 43

47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 14. Related parties During 2011, the Company entered into two quota share reinsurance agreements with Tokio Millennium Re (UK) Limited, a related party. The Company believes that the terms of these reinsurance agreements are similar to those of an arm s length transaction with an unrelated party. During 2011, net ceded premiums earned under these agreements were $1.4 million and acquisition cost of $0.1 million. These current agreements expired on 31 December 2011 and were renewed for a further year. 15. Statutory requirements The Company is registered under The Insurance Act 1978 (Bermuda), Amendments thereto and Related Regulations (the Insurance Act ) as a Class 3B insurer. Under the Insurance Act, the Company is required to annually prepare and file statutory and GAAP financial statements and a statutory financial return. The Insurance Act also requires the Company to maintain minimum levels of statutory capital and surplus. At 31 December 2011 and 2010, this amount was $81.0 million and $63.0 million, respectively. Actual statutory capital and surplus was $957.6 million and $1,125.1 million, respectively. The Bermuda Statutory Capital Requirement ( BSCR ) is a risk-based capital model used to determine an enhanced capital requirement and target capital level (defined as 120% of the enhanced capital requirement) for Class 3B insurers. The Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by the Company in any year which would exceed 25% of its prior year statutory capital and surplus or reduce its prior year statutory capital by 15% or more, without the prior approval of the BMA. During 2011, the Company distributed a total of $84.9 million to Tokio Marine Holdings, Inc. and therefore no approval was required. The Bermuda Companies Act 1981 also limits the Company s ability to pay dividends and distributions to its shareholders. The Company is not permitted to declare or pay a dividend, or make a distribution out of contributed surplus, if the realisable value of its assets would be less than the aggregate of its liabilities, issued share capital and share premium accounts. Actual statutory capital and surplus, as determined using statutory accounting principles, is as follows: Total shareholder s equity $ 1,050,865 Less non-admitted assets: Deferred acquisition expenses 75,567 Prepaid expenses 3,581 Deferred commission income (2,859) Unearned profit commission 539 Capital assets 13,140 Deferred tax asset 3,226 Investment in subsidiary 35 Statutory capital and surplus $ 957,636 The Company is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and cash equivalents, short term investments, catastrophe bonds, fixed interest securities, accrued interest receivable, premiums receivable, funds withheld and other assets. Certain categories of assets do not qualify as relevant assets under the statute. Relevant liabilities are outstanding losses and loss expenses, unearned premiums, deferred fee income, funds withheld ceded, accounts payable and accrued expenses, net of outstanding losses recoverable from reinsurers and prepaid reinsurance premiums. At 31 December 2011, the Company was required to maintain relevant assets of $526.3 million. At that date, relevant assets were $1,659.1 million and the minimum liquidity ratio was therefore met. 44 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 2011 and 2010 (Expressed in United States Dollars) 16. Taxation Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that in the event of any such taxes being imposed, the Company will be exempted from taxation until the year The Company s branches in Switzerland and Australia are subject to income taxes at effective rates of 21.17% and 30%, respectively. The Company s deferred tax asset is included in other assets on the balance sheet and results from an operating loss carry forward. No provision has been made for tax benefits which will not be realised as the Company believes that the full amount will be utilised against future taxable profits. 17. Subsequent events The Company has completed its subsequent events evaluation for the period subsequent to the balance sheet date of 31 December 2011, through 29 March 2012, the date the consolidated financial statements were available for issuance. 45

49 HISTORICAL FINANCIAL DATA 31 December 2011, 2010, 2009, 2008 and 2007 (Expressed in United States Dollars) Consolidated Balance Sheets US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Assets Cash and cash equivalents $ 288,336 $ 137,759 $ 81,982 $ 322,034 $ 308,442 Short term investments 81,085 59, ,000 69,748 Investments in fixed interest securities 932,275 1,021, , , ,932 Investments in catastrophe bonds 138, ,545 81,889 62,421 66,935 Collateral held on behalf of counterparties 31,508 21,111 58, ,620 Reinsurance balances receivable 145, , ,623 87,636 77,802 Outstanding losses recoverable from reinsurers 97,662 19,459 17,083 20,500 5,773 Deferred acquisition expenses 75,567 48,839 10,107 10,998 10,269 Funds withheld 25,105 24,308 21,592 40,610 31,998 Other assets 96,215 71,703 71,029 71,259 65,266 Total assets $ 1,880,096 $ 1,640,674 $ 1,501,207 $ 1,381,840 $ 1,303,037 Liabilities Outstanding losses and loss expenses $ 511,089 $ 213,020 $ 84,412 $ 103,939 $ 62,964 Liability for collateral held on behalf of counterparties ,615 22,611 60, ,620 Unearned premiums 263, , , ,118 92,829 Other liabilities 54,746 28,325 49,884 56, ,256 Total liabilities 829, , , , ,669 Shareholder s equity Share capital 250, , , , ,000 Contributed surplus 400, , , , ,000 Retained earnings 368, , , , ,540 Foreign currency translation adjustment 2,201 1,618 Other comprehensive income 29,809 25,936 21,816 34,847 13,828 Total shareholder s equity 1,050,865 1,187,643 1,241,503 1,054, ,368 Total liabilities and shareholder s equity $ 1,880,096 $ 1,640,674 $ 1,501,207 $ 1,381,840 $ 1,303,037 Consolidated Statements of Operations and Comprehensive Income US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Income Net reinsurance premiums written $ 537,812 $ 418,327 $ 360,578 $ 318,276 $ 246,023 Net premiums earned 456, , , , ,796 Other operating income 9,548 8,260 6,395 5,112 5,607 Total operating income 466, , , , ,403 Net investment income 40,309 38,628 28,833 36,205 43,164 Total income 506, , , , ,567 Expenses Net loss and loss expenses incurred 375, ,839 20,785 59,349 2,644 Acquisition expenses 126,021 59,037 53,633 51,261 40,076 General and administrative expenses 53,484 43,145 33,391 27,059 20,687 Net derivative expense 1,911 34,758 54,093 37,012 19,543 Other expenses 8,272 6,795 29,492 40,972 20,902 Total expenses 565, , , , ,852 (Loss) income before tax $ (58,392) $ 64,549 $ 200,520 $ 126,627 $ 167,715 Income tax benefit 2, Net (loss) income $ (56,320) $ 65,044 $ 200,520 $ 126,627 $ 167, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

50 FINANCIAL SECTION UK TOKIO MILLENNIUM RE (UK) LIMITED 47

51 STATEMENT ON STATUTORY ACCOUNTS OF TOKIO MILLENNIUM RE (UK) LIMITED Tokio Millennium Re (UK) Limited Year ended 31 December 2011 The subsequent pages in this document contain financial information excerpts from the statutory accounts of Tokio Millennium Re (UK) Limited for the year ended 31 December This document does not constitute the statutory accounts of Tokio Millennium Re (UK) Limited within the meaning of Section 434 of the Companies Act 2006 in the United Kingdom. The complete statutory accounts of Tokio Millennium Re (UK) Limited for the year ended 31 December 2011 are available from 10th Floor, 2 Minster Court, London EC3R 7BB, United Kingdom. These were approved by its Board of Directors on 14 March The statutory accounts of Tokio Millennium Re (UK) Limited were delivered on 16 March 2012 to the Registrar of Companies at Companies House, Crown Way, Cardiff CF14 3UZ, United Kingdom. Copies are also available from here. The Independent Auditors Report by PricewaterhouseCoopers LLP - of 7 More London Riverside, London SE1 2RT, United Kingdom - on the statutory accounts of Tokio Millennium Re (UK) Limited was unqualified, was not modified, did not contain an emphasis-of-matter paragraph, and did not contain any statement under Sections 498(2) and 498(3) of the Companies Act 2006 in the United Kingdom. 48 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

52 PROFIT AND LOSS Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Group Company Notes Earned premiums, net of reinsurance Premiums written Continuing operations - other 80,416 86,183 80,416 86,183 Discontinued operations 3,670 25,846 3,670 25,846 Gross amount 1(a),1(b) 84, ,029 84, ,029 Reinsurers share (1,187) (201) (1,187) (201) 82, ,828 82, ,828 Change in the provision for unearned premiums Gross amount 23 19,712 12,593 19,712 12,593 Reinsurers share 23 (11) 11 (11) 11 19,701 12,604 19,701 12,604 Earned premiums, net of reinsurance 2 102, , , ,432 Claims incurred, net of reinsurance Claims paid Gross amount 3 (62,934) (49,964) (62,934) (49,964) Reinsurers share 3 (62,934) (49,964) (62,934) (49,964) Change in the provision for claims Gross amount 3,22(a) 4,877 (18,359) 4,877 (18,359) Reinsurers share 3,22(a) ,236 (18,359) 5,236 (18,359) Claims incurred, net of reinsurance 3 (57,698) (68,323) (57,698) (68,323) Operating expenses, net of reinsurance Gross amount 4 (37,019) (48,262) (37,172) (48,875) Reinsurers share (36,992) (48,262) (37,145) (48,875) Change in the equalisation provision 1(a),22(c) (1,313) (3,106) (1,313) (3,106) Balance on the technical account for general business 1(a) 6,597 4,741 6,444 4,128 Investment return Investment income 9 8,540 7,730 8,686 7,727 Realised gain/(loss) on investments (2,985) 1,906 (2,985) 1,906 Unrealised loss on investments (1,147) (3,813) (1,147) (3,813) Investment expenses and charges (451) (387) (449) (383) Total investment return 3,957 5,436 4,105 5,437 Other income and charges Other income 10(a) 3,444 3, Other charges 10(b) (3,428) (3,533) (369) (333) 16 (488) (86) (208) Operating profit and profit on ordinary activities before tax Continuing operations - other 1(b),28(c) 6,983 8,448 6,876 8,575 Discontinued operations 1(b),28(c) 3,587 1,241 3, ,570 9,689 10,463 9,357 Tax charge on profit on ordinary activities 11(a) (2,757 ) (2,906 ) (2,663 ) (2,795 ) Profit for the financial year after tax 1(b),21 7,813 6,783 7,800 6,562 See accompanying notes to consolidated financial statements 49

53 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Group Company Notes Profit for the financial year 7,813 6,783 7,800 6,562 Unrealised (loss)/gain on revaluation of group undertaking Currency translation differences on brought forward balances , ,363 Currency translation differences on consolidation Total recognised gains relating to the year 8,154 8,175 8,154 8,175 See accompanying notes to consolidated financial statements 50 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

54 BALANCE SHEET : ASSETS Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Group Company Notes Investments Investments in group undertakings 12 (0) 2,165 2,150 Other financial investments , , , ,385 Deposits with ceding undertakings , , , ,125 Reinsurers share of technical provisions Provision for unearned premiums Claims outstanding 22(a) Debtors Debtors arising out of direct insurance operations 15 1,506 3,666 1,506 3,666 Debtors arising out of reinsurance operations 16 38,701 48,715 38,701 48,715 Other debtors including taxation and social security 17 2,250 2,298 2,050 1,946 42,457 54,679 42,257 54,327 Other assets Tangible assets 18 1,021 1, Cash at bank and in hand 22,377 41,595 20,880 40,064 Deferred tax asset 11(d) ,856 43,174 21,974 41,355 Prepayments and accrued income Accrued interest 2,940 3,089 2,939 3,089 Deferred acquisition costs 24 13,421 17,729 13,421 17,729 Other prepayments and accrued income ,690 21,545 16,619 21,497 Total assets 402, , , ,315 See accompanying notes to consolidated financial statements 51

55 BALANCE SHEET : LIABILITIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Group Company Notes Capital and reserves Called up share capital , , , ,000 Revaluation reserve 1,043 1,028 Profit and loss account 21 62,614 62,635 61,571 61,607 Total shareholder s funds , , , ,635 Technical provisions Provision for unearned premium 23 53,814 73,794 53,814 73,794 Claims outstanding 22(a) 142, , , ,645 Equalisation provision 22(c) 15,750 14,437 15,750 14, , , , ,876 Provisions for other risks and charges Deferred taxation 11(d) Creditors Creditors arising out of reinsurance operations Other creditors including taxation and social security Accruals and deferred income Other accruals and deferred income 26 2,061 3,029 1,817 2,636 2,061 3,029 1,817 2,636 Total liabilities 402, , , ,315 See accompanying notes to consolidated financial statements 52 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

56 STATEMENT OF ACCOUNTING POLICIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Basis of accounting (a) Basis of preparation The Group and Company financial statements are prepared in accordance with: The provision of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 within schedule 3 of Statutory Instrument 2008 no. 410 ( SI 2008/410 ) relating to insurance groups; and The Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers (the ABI SORP ) dated December 2005 as amended in December The financial statements have also been prepared on the going concern basis in accordance with applicable accounting standards. During the year, the Company and Group reclassified m and m respectively of cash at bank and in hand to other financial investments. The reclassification follows the fact that there are time restrictions in respect of fund withdrawals. The impact of this reclassification has been: To increase other financial investments as at 31 December 2010 from m to m for the Company, and m to m for the Group; and To decrease cash at bank and in hand as at December 2010 from m to m for the Company, and m to m for the Group. There is no impact on the profit and loss account or on shareholder s funds in the balance sheet from this reclassification. A consistent treatment in regards to these funds has been adopted at 31 December (b) Basis of consolidation The Group financial statements incorporate the assets, liabilities and results of the Company and its subsidiary undertaking drawn up to 31 December each year. The results of subsidiary undertakings acquired or sold during the period are included in the consolidated results from the date of acquisition, or up to the date of disposal. On the acquisition of a subsidiary undertaking, all of its assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date. (c) Exemption from preparing cash flow statement The Group availed itself of the exemption under Financial Reporting Standard 1 ( FRS 1 ) (Revised 1996) - Cash Flow Statements - on grounds that it is wholly owned by Tokio Marine Holdings, Inc. (registered in Japan) which includes a consolidated cash flow statement in its financial statements. Accordingly, no cash flow statement is presented. (d) Exemption from disclosing related party transactions and balances The Group availed itself of the exemption under Financial Reporting Standard 8 ( FRS 8 ) - Related Party Disclosures - on grounds that it is wholly owned by Tokio Marine Holdings, Inc. (registered in Japan). Accordingly, it has not disclosed any transactions or balances with related entities. (e) Basis of accounting for underwriting activities The results are determined on an annual basis whereby the incurred cost of claims, commissions and related expenses are charged against the earned proportion of premiums, net of reinsurance, as described below. (f) Written, earned and unearned premiums Premiums written Premiums written are recognised within the profit and loss technical account, with the gross and ceded amounts disclosed separately. Premiums written are stated gross of acquisition costs payable to intermediaries, but net of any premium levies or indirect taxes. Premiums written relate to business incepted during the financial period, together with any differences between booked premiums and those previously accrued on contracts which incepted in prior financial periods. Premiums written also include accruals of premium estimates due on all incepted contracts, but not yet receivable or notified to the Group, less an allowance for cancellations. 53

57 STATEMENT OF ACCOUNTING POLICIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Basis of accounting (continued) Earned premiums Premiums written are earned on a time-apportionment basis to reflect the risk profile of each contract written. Unearned premium reserves ( UPR ) Premiums written not earned are deferred within the balance sheet as unearned premium reserves ( UPR ). UPR will be recognised as earned premiums in future financial periods profit and loss technical accounts. (g) Claims incurred Claims incurred are recognised within the profit and loss technical account, with the gross and ceded amounts disclosed separately. Claims incurred comprise: Claims paid during the financial period; Movements in claim provisions during the financial period; Related internal and external claims handling costs attributable to the above; and Where applicable, deductions for salvage and other recoveries. Claims provisions and related reinsurance recoveries Claims provisions within the balance sheet comprise the following: Estimated costs of claims notified but not yet settled at the financial period end ( outstandings ); Incurred but not reported claims at the financial period end ( IBNRs ); Related internal and external claims handling costs attributable to the above; and Salvage and subrogation deductions, plus other non-reinsurance recoveries where applicable. Claims provisions are estimated at each financial period end based on best available information. The Group takes all reasonable steps to ensure that it has appropriate information regarding its estimated claim exposures and these are set so that no adverse run-off deviation is envisaged. Given the uncertainties in establishing claims provisions, it is likely that the final liability will prove different from the original estimates established. Where such uncertainty is deemed considerable, a degree of caution is exercised in setting claims provisions. Notified outstanding claims In estimating outstanding claims within the balance sheet, the Group considers the claim circumstances as reported, including any information available from loss adjusters. The Group s gross outstanding claim estimates of large losses are based on best estimates of claims given the currently available information from: industry assessments of exposures; preliminary claims information obtained from policyholders, cedants and brokers to-date; and a review of in-force contracts. Actual gross losses from these events may vary materially from initial estimates due to the inherent uncertainties in making such determinations. Incurred but not reported ( IBNR ) claims The estimation of IBNR claims within the balance sheet is generally subject to a greater degree of uncertainty than the estimation of notified outstanding claims as less information is available. IBNR claims may often not be apparent to the insured until many years have passed following the event which trigger such claims. Business classes where the proportion of IBNR claims are high in relation to total claims provisions will typically display greater variations between initial estimates and the final outcomes because of greater difficulties estimating these. Business classes where claims are typically reported relatively quickly after the claim event tend to display lower levels of volatility. In calculating IBNR claims, the Group applies the three reserving methods of a priori loss ratio, link ratio and Bornhuetter Ferguson. The Group then selects the most appropriate method based on information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data where appropriate. These methods consider, among other things, premium rate changes, claims inflation and changes in terms and conditions that have been observed in the market. 54 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

58 STATEMENT OF ACCOUNTING POLICIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Basis of accounting (continued) The IBNR for each class of business is set to represent the best estimate of future claims with appropriate allowance for all risks faced. There is no longer a margin included in the IBNR. The IBNR in previous years has included a margin to take into account uncertainties in its estimation that arise from the fact that the claims experience is underdeveloped and that industry benchmark data is at times used in the reserving methodologies. The level of this margin has generally been decreasing each year as these uncertainties have reduced. Assumed treaty contracts These contracts currently comprise a mixed portfolio of property, liability, accident/health and financial lines. These are short-to-medium tail in nature and there is generally not expected to be a significant delay between the occurrence of the claim and the claim being reported to the Group. Direct contracts, assumed facultative contracts These contracts comprise principally property and engineering lines. These are short-to-medium tail in nature and there is generally not expected to be a significant delay between the occurrence of the claim and the claim being reported to the Group. Reinsurance recoveries For ceded outstanding claims within the balance sheet, a separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provision. For ceded IBNR claims within the balance sheet, these are assumed to be consistent with the historical pattern of recoveries, and adjusted to reflect changes in the Group s reinsurance programme over time. An assessment is also made of their recoverability having regard to market data on the financial strength of the underlying reinsurers and their associated default probabilities. (h) Unexpired risk provisions ( URP ) Unexpired risk provisions ( URP ) are established within the balance sheet for any deficiencies arising when unearned premium reserves ( UPR ), net of associated deferred acquisition costs ( DAC ) are insufficient to meet expected claims and expenses. No account is taken of future investment return arising from investments supporting the URP and UPR. The expected claims are calculated based on information available at the balance sheet date. Unexpired risk surpluses and deficits are offset where business classes are managed together and a provision is made if an aggregate deficit arises. (i) Equalisation provisions Amounts are set aside as equalisation provisions in accordance with the FSA s Handbook for the purpose of mitigating exceptionally high loss ratios in future financial periods. Equalisation provisions are not liabilities because they are in addition to the claims provisions established as described in (g) above. Notwithstanding this, they are required by Schedule 3 to SI 2008/410 to be included within technical provisions. (j) Acquisition costs Acquisition costs Acquisition costs within the profit and loss technical account represent both external commissions and internal expenses associated with acquiring insurance contracts written during the financial period. Acquisition costs also include reinsurance commissions and profit participations - both receivable and payable. Acquisition costs are recognised in the financial period in which the related premiums are earned, with the gross and ceded amounts disclosed separately. Deferred acquisition costs ( DAC ) Acquisition costs which relate to unearned premium reserves ( UPR ) are recognised within the balance sheet as deferred acquisition costs ( DAC ). DAC will be charged in future financial periods profit and loss technical accounts. (k) Financial investments Debt securities are carried within the balance sheet at bid market values prevailing at the balance sheet date, or those prevailing during the last trading day before that date. Participations in investment pools, deposits with credit institutions and deposits with ceding undertakings are all carried within the balance sheet at book values. 55

59 STATEMENT OF ACCOUNTING POLICIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Basis of accounting (continued) (l) Investments in group undertakings Investments in group undertakings are valued on the balance sheet at current values which utilise net book values as a proxy. Movements in the balance sheet values are taken to the revaluation reserve through the statement of total recognised gains and losses. (m) Investment return Investment return is recognised within the profit and loss non technical account and comprises: Investment income earned during the financial period; Investment expenses, charges or interest incurred during the financial period; Movements in unrealised market value gains/losses during the financial period; and Realised investment gains/losses arising from the sale of investments during the financial period. Investment income Investment income comprises: Interest on bank balances, which are accounted for on an accruals basis; and Coupons on bonds, which are accounted for on an accruals basis. Returns on money market funds, which are accounted for on an accruals basis. Investment expenses, charges or interest These are recognised on an accruals basis. Movements in unrealised gains/losses Unrealised gains/losses on investments arising during the financial period represent the difference between: The current market value of investments at the balance sheet date, and their acquired cost if purchased during the financial period; or The current market value of investments at the balance sheet date, and their market value at the last balance sheet date if purchased in previous financial periods. Realised gains/losses These represent the difference between the net sales proceeds and acquired cost. Any unrealised gains/losses previously recognised will be reclassified as realised gains/losses upon the sale of investments. (n) Other income Fee income from group undertakings relate to income receivable by a subsidiary of the Company, Tokio Marine Technologies LLC ( TM Tech ) and comprises: Fee income that is recognised in proportion to the costs incurred in undertaking all software development and consulting activities necessary to support TM Tech s group-related clients operations. Licensing income from granting usage of all internally developed core technology software. (o) Foreign currency translations and settlements The Group operates in the three functional currencies of GBP/EUR/USD. All non-gbp/eur/usd transactions are translated into GBP/EUR/USD at the actual rates prevailing on the respective dates of the transactions. 56 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

60 STATEMENT OF ACCOUNTING POLICIES Tokio Millennium Re (UK) Limited Year ended 31 December 2011 Basis of accounting (continued) The Group s reporting currency is GBP. The net investment method is used whereby all balance sheet assets/liabilities denominated in the functional currencies of GBP/EUR/USD are translated at closing rates into GBP. The profit and loss account is also translated at closing rates. This is affected by translating individual line items at an average rate with the exchange gains/losses arising from the retranslation, of the profit and loss account from average to closing rates, taken to other income/charges in the profit and loss non-technical account. Exchange gains/losses arising on consolidation, into GBP, of its subsidiary undertaking are taken to the profit and loss reserve through the statement of total recognised gains and losses. Exchange gains/losses arising from cash settlements of balance sheet assets/liabilities, and from internal transfers of balance sheet assets/liabilities between the three functional currency ledgers of GBP/EUR/USD are taken to the profit and loss non-technical account. (p) Operating leases Operating lease rentals are charged to the profit and loss technical account evenly over the period of the lease. (q) Current and deferred taxation Current tax Current tax is recognised in the profit and loss non technical account and reflects: Estimated tax charges/credits associated with the current financial period s taxable profits/losses; and Changes in previously estimated tax charges/credits associated with previous financial periods taxable profits/losses. Deferred tax Deferred tax assets/liabilities within the balance sheet arise from differences in timing between the recognition of taxable profits/losses in the financial statements, versus their recognition in the tax computation. Provision is made for all material timing differences, including revaluations of investment gains/losses recognised within the profit and loss non technical account. Using the liability method, deferred tax is calculated at rates at which it is expected the tax will arise. This provision is not discounted. (r) Pension costs The Group only operates a defined contribution pension scheme. Contributions to the scheme are charged to the profit and loss technical account and represent the amounts payable during the current financial period. Contributions are accumulated and invested by an independent scheme manager across a portfolio of assets which are held separately from the Group s assets. (s) Tangible fixed assets and depreciation The costs of acquiring tangible fixed assets are capitalised on the balance sheet within the following categories, and depreciated on a straight line basis over the estimated useful lives stipulated below: Leasehold improvements 3 to 10 years Furniture/fixtures/fittings 2 years Computer hardware 2 years Computer software 2 to 3 years Office equipment 2 years (t) Dividends Interim dividends are recognised when paid and final dividends are booked as a liability when they are approved by the members passing a written resolution. 57

61 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Segmental information (a) Analyses by class of business Company 2011 Gross Gross Gross Gross premiums premiums claims operating Reinsurance Underwriting written earned incurred expenses balances profit/(loss) Continuing operations Assumed treaty business Proportional reinsurance 71,123 74,318 (32,354) (32,692) 9,272 Non-proportional reinsurance 9,293 9,040 (12,346) (1,221) (681) (5,208) 80,416 83,358 (44,700 ) (33,913 ) (681 ) 4,064 Discontinued operations Direct and assumed facultative business Fire and other damage to property 3,670 20,440 (13,357) (3,259) (131) 3,693 3,670 20,440 (13,357 ) (3,259 ) (131 ) 3,693 84, ,798 (58,057 ) (37,172 ) (812 ) 7,757 Change in equalisation provision (1,313 ) Underwriting profit 6,444 Company 2010 Gross Gross Gross Gross premiums premiums claims operating Reinsurance Underwriting written earned incurred expenses balances profit/(loss) Continuing operations Assumed treaty business Proportional reinsurance 80,481 83,703 (29,574) (35,637) 18,492 Non-proportional reinsurance 5,702 6,390 (18,192) (1,006) (12,808) 86,183 90,093 (47,766 ) (36,643 ) 5,684 Discontinued operations Direct and assumed facultative business Fire and other damage to property 25,846 34,529 (20,557) (12,232) (190) 1,550 25,846 34,529 (20,557 ) (12,232 ) (190 ) 1, , ,622 (68,323 ) (48,875 ) (190 ) 7,234 Change in equalisation provision (3,106 ) Underwriting profit 4, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

62 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Segmental information (continued) (b) Analyses by geographical area Company Company Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total By destination Gross premiums written United Kingdom 3, ,624 2,408 1,278 3,686 Europe (130) ,113 2,564 Asia and Australia 1,634 (25) 1,609 1,051 3,284 4,335 Africa and Middle East 1,435 1,096 2, ,789 2,914 North, Central and South America 15, ,282 21,989 9,703 31,692 Worldwide 58,192 1,038 59,230 60,159 6,679 66,838 80,416 3,670 84,086 86,183 25, ,029 Company Company Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total By origin United Kingdom Gross premiums written 80,416 3,670 84,086 86,183 25, ,029 Profit/(loss) before tax 6,876 3,587 10,463 8, ,357 Profit/(loss) after tax 5,126 2,674 7,800 6, ,562 Net assets/(liabilities) 246,394 (58,779) 187, ,948 (59,313) 187,635 59

63 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Earned premiums, net of reinsurance Group and Company 2011 Gross Reinsurance Net Premiums written 84,086 (1,187) 82,899 Change in the provision for unearned premiums (refer Note 23) 19,712 (11) 19,701 Earned premiums 103,798 (1,198) 102,600 Group and Company 2010 Gross Reinsurance Net Premiums written 112,029 (201) 111,828 Change in the provision for unearned premiums 12, ,604 Earned premiums 124,622 (190) 124, Claims incurred, net of reinsurance Group and Company 2011 Gross Reinsurance Net Claims paid Claims and allocated loss adjustment expenses paid (62,430) (62,430) Unallocated loss adjustment expenses paid (refer Note 4) (504) (504) (62,934) (62,934) Change in the provision for claims (refer Note 22(a)) Outstanding claims reserve movement 2,744 2,744 Claims incurred but not reported reserve movement 2, ,426 Unallocated loss adjustment expense reserve movement , ,236 Claims incurred (58,057 ) 359 (57,698 ) Group and Company 2010 Gross Reinsurance Net Claims paid Claims and allocated loss adjustment expenses paid (49,628) (49,628) Unallocated loss adjustment expenses paid (refer Note 4) (336) (336) (49,964) (49,964) Change in the provision for claims Outstanding claims reserve movement (15,044) (15,044) Claims incurred but not reported reserve movement (3,062) (3,062) Unallocated loss adjustment expense reserve movement (253) (253) (18,359) (18,359) Claims incurred (68,323 ) (68,323 ) 60 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

64 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Gross operating expenses Group Gross Gross Acquisition costs Acquisition costs and profit commissions (22,057) (33,444) Change in deferred acquisition costs and deferred profit commissions (refer Note 24) (4,273) (3,053) (26,330) (36,497) Administrative expenses Gross administrative expenses (11,932) (13,294) Transferred to unallocated loss adjustment expenses paid (refer Note 3) Transferred to investment expenses Transferred to acquisition costs Administrative expenses (refer Note 5) (10,689) (11,765) (37,019 ) (48,262 ) Company Gross Gross Acquisition costs Acquisition costs and profit commissions (22,057) (33,444) Change in deferred acquisition costs and deferred profit commissions (refer Note 24) (4,273) (3,053) (26,330) (36,497) Administrative expenses Gross administrative expenses (12,085) (13,907) Transferred to unallocated loss adjustment expenses paid (refer Note 3) Transferred to investment expenses Transferred to acquisition costs Administrative expenses (refer Note 5) (10,842) (12,378) (37,172 ) (48,875 ) 61

65 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Administrative expenses - technical account Group Company Staff costs (4,632) (4,920) (4,632) (4,920) Other staff related costs (797) (899) (797) (899) Auditors remuneration (refer Note 8) (155) (185) (155) (185) Legal and other professional fees (715) (921) (715) (921) Outsourcing fees (1,069) (907) (1,069) (907) IT related costs (1,129) (1,422) (1,129) (2,035) Other administrative expenses (2,192) (2,511) (2,345) (2,511) (10,689) (11,765) (10,842) (12,378) 6. Staff costs (a) Staff numbers Group Company Number Number Number Number Average number of employees (including directors) employed during the financial year Underwriting Claims Risk Finance IT Administration, Human Resources and Compliance Management (b) Staff costs Group Company Aggregate payroll costs of employees (including directors) employed during the financial year Wages and salaries 5,714 6,069 4,072 4,291 Social security costs Other pension costs ,439 6,866 4,632 4,920 The pension costs above represent the Group s contributions to defined contribution pension schemes. Pension costs of 11,819 were unpaid at the year end (2010: Nil). 62 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

66 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Directors emoluments Group and Company Aggregate emoluments Group contributions to money purchase pension schemes 26 Sums paid to third parties for directors services ,075 Group and Company Highest paid director Aggregate emoluments The highest paid director did not exercise share options or receive shares in respect of qualifying services under any long term incentive scheme (2010: none). No season ticket travel loans (2010: 1,904) were granted to any directors during the year (2010: one). The loan amount outstanding at year end was Nil (2010: 1,111). No retirement benefits (2010: Nil) accrued to any directors (2010: one) under the Group s defined contribution scheme. No guarantees (2010: Nil) on behalf of any directors (2010: none) were granted during the year. 8. Auditor s remuneration During the year, the Group obtained the following services from the Group s auditor as detailed below: Group Company Audit services (refer Note 5) Fees payable to the company s auditor for audit of the group financial statements (165) (172) (165) (172) Fee reversal of prior year s over-accrual (143) (172) (143) (172) Non-audit services (refer Note 5) Audit of the company s subsidiaries, pursuant to legislation (36) (39) Other services pursuant to legislation, including the audit of the regulatory return (12) (13) (12) (13) (48) (52) (12) (13) (191 ) (224 ) (155 ) (185 ) 63

67 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Investment income Group Company Income from debt securities and other fixed income securities 7,847 6,768 7,847 6,768 Income from deposits with ceding undertakings and other deposits Income from deposits with credit institutions and cash at bank and in hand Income from group undertakings 150 Income from participations in investment pools ,540 7,730 8,686 7, Other income and other charges (a) Other income Group Company Interest receivable on corporation tax repayments Fee income from group undertakings 3,161 2,920 Exchange gain on cash settlements 9 9 Exchange gain on revaluation of profit and loss account from average to closing rates and on internal transfers of balance sheet assets/liabilities between functional currencies 3,444 3, (b) Other charges Group Company Non-technical expenses (3,058 ) (3,200 ) Loss on tangible fixed assets disposals (1) (1) (1) Interest payable on corporation tax payments (26) (26) Exchange loss on cash settlements (369) (369) Exchange loss on revaluation of profit and loss (306) (306) account from average to closing rates and on internal transfers of balance sheet assets/liabilities between functional currencies (3,428) (3,533) (369) (333) 64 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

68 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Corporation tax (a) Tax (charge)/credit on profit on ordinary activities Group Company United Kingdom corporation tax at 26.5% (2010: 28%) Current tax on income for the year (2,780) (2,924) (2,780) (2,924) Adjustments in respect of previous financial years 145 (30) 145 (30) (2,635) (2,954) (2,635) (2,954) Foreign corporation tax Current tax on income for the year (46) (134) Adjustments in respect of previous financial years (11) (46) (145) Total current tax (refer Note 11(b)) (2,681 ) (3,099 ) (2,635 ) (2,954 ) UK deferred tax movements Origination and reversal of timing differences Adjustment in respect of previous financial years (14) 41 (14) 41 Impact of change in UK tax rate (29) (9) (29) (9) (28) 159 (28) 159 Foreign deferred tax movements Origination and reversal of timing differences (48) 34 (48) 34 Total deferred tax movements (refer Note 11(d)) (76 ) 193 (28 ) 159 Tax on profit on ordinary activities (2,757 ) (2,906 ) (2,663 ) (2,795 ) 65

69 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Corporation tax (continued) (b) Factors affecting tax (charge)/credit for the year The tax assessed on the profit on ordinary activities for the year is different than that resulting in applying the standard rate of corporation tax in the UK of 26.5% (2010: 28 %). The differences are reconciled below: Group Company Profit on ordinary activities before tax 10,570 9,689 10,463 9,357 Profit on ordinary activities before tax multiplied by the standard rate of corporation tax in the United Kingdom at 26.5% (2010: 28%) (2,801) (2,713) (2,773) (2,620) Factors affecting charge: United Kingdom: Expenses not deductible for tax purposes (30) (167) (30) (167) Income not taxable for tax purposes 40 Capital allowances in excess of depreciation (49) (107) (49) (107) Prepaid/(accrued) expenses deductible in current/future year (5) 5 (5) 5 Movement in technical/doubtful debt provisions 37 (35) 37 (35) Adjustment to tax charge in respect of previous financial years 145 (30) 145 (30) 98 (334) 138 (334) Foreign: Expenses not deductible for tax purposes (3) (4) Capital allowances in excess of depreciation Prepaid/(accrued) expenses deductible in current/future year (1) (37) Higher tax rates on foreign earnings (22) (26) Exchange gain/(loss) not taxable for tax purpose 2 11 Adjustment to tax charge in respect of previous financial years (1) (11) 22 (52) Current tax charge for the year (refer Note 11(a)) (2,681 ) (3,099 ) (2,635 ) (2,954 ) 66 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

70 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Corporation tax (continued) (c) Components of current corporation tax debtors/(creditors) Group Company United Kingdom: Corporation tax in respect of current financial year (refer Note 17) (5) 1,805 (5) 1,805 Corporation tax in respect of prior financial years (refer Note 17) 1,950 1,950 Foreign: Corporation tax in respect of current financial year (refer Note 17) Corporation tax in respect of prior financial years (refer Note 17) ,027 1,829 1,945 1,805 67

71 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Corporation tax (continued) (d) Components of deferred tax assets/(liabilities) Group Company Current Non-current Total Current Non-current Total Tangible fixed assets depreciation less/(greater) than capital allowances: At beginning of year Movement during year - pure (2) (2) Movement during year - adjustment in respect of previous financial years (14) (14) (14) (14) Movement during year - UK tax rate change (19) (19) (19) (19) Exchange loss on retranslation of in-year movements from average to closing rates through profit and loss account (2) (2) At end of year Prepaid/accrued items: At beginning of year 90 (3) 87 Exchange loss on retranslation of brought forward balances from last to this year closing rates Movement during year - pure At end of year Provision for doubtful debt: At beginning of year Movement during year - pure (35) (35) (35) (35) Movement during year - UK tax rate change (10) (10) (10) (10) At end of year Total: At beginning of year Movement during year - pure (refer Note 11(a)) (33) (33) Movement during year - adjustment in respect of previous financial years (refer Note 11(a)) (14) (14) (14) (14) Movement during year - UK tax rate change (refer Note 11(a)) (29) (29) (29) (29) Exchange loss on retranslation of in-year movements from average to closing rates through profit and loss account (2) (2) At end of year Consisting of: Deferred tax assets Deferred tax liabilities (61) (61) At end of year There were no unprovided deferred tax assets/liabilities at year end (2010: Nil). 68 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

72 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Investments in group undertakings Company Historic cost At beginning of year 1,122 1,122 Additions during the year At end of year 1,122 1,122 Revaluation At beginning of year 1, Movements during year At end of year 1,043 1,028 Net book value At end of this year 2,165 2,150 At end of last year 2,150 1,900 Capital and Profit for year Group undertakings Principal activity Class of shares Percentage Country of reserves at 31 ended 31 held holding incorporation December 2011 December 2011 Tokio Marine Technologies LLC Software USD 000 USD 000 development and United States 3,366 9 consultancy Ordinary 100% of America (2010: 3,357) (2010: 284) 13. Other financial investments Group Group Company historical cost market value market value Debt securities and other fixed income securities Listed in London 76, ,908 75, ,049 75, ,049 Listed elsewhere 151, , , , , , , , , , , ,824 Participations in investment pools 38,068 33,755 38,068 33,755 38,068 33,755 38,068 33,755 38,068 33,755 38,068 33,755 Deposits with credit institutions 54,272 52,152 54,272 52,152 53,763 51,806 54,272 52,152 54,272 52,152 53,763 51, , , , , , ,385 69

73 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Deposits with ceding undertakings Group and Company Deposits with cedants Debtors arising out of direct insurance operations Group and Company Amounts falling due within one year Amounts due from intermediaries - non-group undertakings 1,506 3,666 1,506 3, Debtors arising out of reinsurance operations Group and Company Amounts falling due within one year Amounts due from non-group undertakings 25,605 35,246 Amounts due from group undertakings 13,096 13,469 38,701 48, Other debtors including taxation and social security Group Company Amounts falling due within one year Value added tax recoverable UK corporation tax receivable (refer Note 11(c)) 1,945 1,805 1,945 1,805 Foreign corporation tax receivable (refer Note 11(c)) Employee tax recoverable Other debtors Amounts due from group undertakings ,250 2,298 2,050 1, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

74 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Tangible assets Group 2011 Furniture/ Computer fixtures/fittings hardware and and office Leasehold software equipment improvements Total Book cost At beginning of year 3, ,281 Exchange gain/(loss) on retranslation of brought forward balances from last to this year closing rates 5 5 Additions during year Disposals during year (120) (19) (139) At end of year 3, ,706 Accumulated depreciation At beginning of year 2, ,188 Exchange loss on retranslation of brought forward balances from last to this year closing rates 4 4 Charge during year Exchange gain/loss on retranslation of in-year movements from average to closing rates through profit and loss account 4 4 Eliminated on disposals during year (119) (18) (137) At end of year 2, ,685 Net book value At end of this year ,021 At end of last year ,093 The Group s depreciation charge for the year ended 31 December 2010 was 950,

75 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Tangible assets (continued) Company 2011 Furniture/ Computer fixtures/fittings hardware and and office Leasehold software equipment improvements Total Book cost At beginning of year 1, ,998 Additions during year Disposals during year (113) (16) (129) At end of year 2, ,205 Accumulated depreciation At beginning of year 1, ,106 Charge during year Eliminated on disposals during year (113) (16) (129) At end of year 1, ,482 Net book value At end of this year At end of last year The Company s depreciation charge for the year ended 31 December 2010 was 693, Other prepayments and accrued income Group Company Prepaid rent Prepaid other expenses Share capital Group and Company Allotted, called up and fully paid 125,000,000 ordinary shares of 1 each 125, ,000 Authorised 250,000,000 ordinary shares of 1 each 250, , TOKIO MILLENNIUM RE ANNUAL REPORT 2011

76 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Reconciliation of movements in total shareholder s funds Group 2011 Total Share Profit and shareholder s capital loss account funds At beginning of year 125,000 62, ,635 Exchange gain on retranslation of brought forward balances from last to this year closing rates Profit 7,813 7,813 Exchange gain arising on consolidation 2 2 Dividends paid (8,175) (8,175) At end of year 125,000 62, ,614 Group 2010 Total Share Profit and shareholder s capital loss account funds At beginning of year 125,000 54, ,460 Exchange gain on retranslation of brought forward balances from last to this year closing rates 1,363 1,363 Profit 6,783 6,783 Exchange loss arising on consolidation At end of year 125,000 62, ,635 During the year, an interim dividend of 8,174,994 (2010: Nil) was paid, amounting to 6.54p (2010: Nil) per ordinary share. No final dividends are proposed (2010: Nil). 73

77 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Technical provisions (a) Claims outstanding Group and Company 2011 Claims incurred Unallocated loss Outstanding claims but not reported adjustment Total claims reserves reserves expense reserves outstanding Gross At beginning of year 63,982 81,638 2, ,645 Exchange loss/(gain) on retranslation of brought forward balances from last to this year closing rates (355) (74) (6) (435) Increase/(decrease) during year (refer Note 3) (2,744) (2,067) (66) (4,877) Exchange loss/(gain) on retranslation of in-year movement from average to closing rates through profit and loss account At end of year 60,930 79,599 1, ,484 Reinsurers share At beginning of year Increase/(decrease) during year (refer Note 3) At end of year (b) Movements in prior accident years provision for claims outstanding The following favourable/(adverse) changes were experienced during the year: Group and Company 2011 Non-catastrophe Catastrophe Total losses losses losses Continuing Operations Assumed treaty business Proportional reinsurance 3,992 (221) 3,771 Non-proportional reinsurance 2,239 1,644 3,883 6,231 1,423 7,654 Discontinued Operations Direct and assumed facultative business Fire and other damage to property 7,851 7,851 Credit and suretyship 7,851 7,851 14,082 1,423 15, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

78 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Technical provisions (continued) (c) Equalisation provision Group and Company At beginning of year 14,437 Increase during year 1,313 At end of year 15,750 The increase in the equalisation provision during the year has had the effect of reducing the balance on the consolidated profit and loss technical account for general business and the profit before taxation for the year by 1,312,697 (2010: 3,106,394). 23. Provision for unearned premiums Group and Company Gross At beginning of year 73,794 Exchange loss/(gain) on retranslation of brought forward balances from last to this year closing rates 51 Increase/(decrease) during year (refer Note 2) (19,712) Exchange loss/(gain) on retranslation of in-year movement from average to closing rates through profit and loss account (319) At end of year 53,814 Reinsurers share At beginning of year 11 Decrease during year (refer Note 2) (11) At end of year 75

79 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Deferred acquisition costs Group and Company 2011 Total Deferred Deferred deferred acquisition profit acquisition costs commissions costs Gross and Net At beginning of year 16,552 1,177 17,729 Exchange (loss)/gain on retranslation of brought forward balances from last to this year closing rates Increase/(decrease) during year (refer Note 4) (3,854) (419) (4,273) Exchange (loss)/gain on retranslation of in-year movement from average to closing rates through profit and loss account (54) 1 (53) At end of year 12, ,421 There are no reinsurers share for the above (2010: Nil). 25. Other creditors including taxation and social security Group Company Amounts falling due within one year Insurance premium tax payable Value added tax payable Other creditors - non-group undertakings Other creditors - group undertakings Other accruals and deferred income Group Company Accrued professional fees Accrued outsourcing fees Accrued rent Accrued other expenses 1,479 1,869 1,328 1,615 2,061 3,029 1,817 2, TOKIO MILLENNIUM RE ANNUAL REPORT 2011

80 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Guarantees, financial commitments and contingent liabilities (a) Guarantees A credit facility with the Bank of Tokyo-Mitsubishi has been extended for USD 18,374,600 at the end of the financial year (2010: USD 21,855,608) pursuant to the issuance of several letters of credit to policyholders/cedants in the United States of America and Canada. A credit facility with Mizuho Trust and Banking has been extended for USD 20,757,568 at the end of the financial year (2010: USD 18,812,342) pursuant to the issuance of several letters of credit to policyholders/cedants in the United States of America. A bank balance that is held in trust with National Westminster Bank plc for 9,913 at the end of the financial year (2010: 9,913) has been assigned to the Group s insurance premium tax representative in France. (b) Capital commitments Capital commitments, contracted but for which no provision has been made at the end of the financial year, were Nil (2010: Nil). (c) Annual commitments Annual commitments in respect of non-cancellable operating leases are as follows: Group Company Land and Land and Land and Land and buildings buildings buildings buildings Operating leases which expire: Within one year Between one and five years After five years Discontinued operations (a) Discontinued underwriting portfolio of contracts incepting prior to 1 January 2011 Discontinued operations within the profit and loss account reflect transactions that emanate from the direct/facultative property and engineering portfolio of contracts (refer Note 1(a)) which incepted prior to 1 January No termination provisions are required for these discontinued operations. (b) Transfer out of renewal rights attaching to discontinued underwriting portfolio The renewal rights attaching to the discontinued underwriting portfolio were transferred out to a fellow subsidiary, Tokio Marine Kiln Syndicate 1880 (United Kingdom), on 1 January 2011 for nil consideration. 77

81 NOTES TO THE FINANCIAL STATEMENTS Tokio Millennium Re (UK) Limited Year ended 31 December Discontinued operations (continued) (c) Analysis of discontinued operations within the profit and loss account Group Group Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total Earned premiums, net of reinsurance 82,290 20, ,600 90,093 34, ,432 Claims incurred, net of reinsurance (44,341) (13,357) (57,698) (47,766) (20,557) (68,323) Net operating expenses (33,733) (3,259) (36,992) (36,489) (11,773) (48,262) Change in the equalisation provision (1,206) (107) (1,313) (2,338) (768) (3,106) Balance on the technical account for general business 3,010 3,587 6,597 3,500 1,241 4,741 Investment income 8,540 8,540 7,730 7,730 Realised gain/(loss) on investments (2,985) (2,985) 1,906 1,906 Unrealised loss on investments (1,147) (1,147) (3,813) (3,813) Investment expenses and charges (451) (451) (387) (387) Other income (refer Note 10a) 3,444 3,444 3,045 3,045 Other charges (refer Note 10b) (3,428) (3,428) (3,533) (3,533) Total Group operating profit 6,983 3,587 10,570 8,448 1,241 9,689 Group Group Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total Earned premiums, net of reinsurance 82,290 20, ,600 90,093 34, ,432 Claims incurred, net of reinsurance (44,341) (13,357) (57,698) (47,766) (20,557) (68,323) Net operating expenses (33,886) (3,259) (37,145) (36,643) (12,232) (48,875) Change in the equalisation provision (1,206) (107) (1,313) (2,338) (768) (3,106) Balance on the technical account for general business 2,857 3,587 6,444 3, ,128 Investment income 8,686 8,686 7,727 7,727 Realised gain/(loss) on investments (2,985) (2,985) 1,906 1,906 Unrealised loss on investments (1,147) (1,147) (3,813) (3,813) Investment expenses and charges (449) (449) (383) (383) Other income (refer Note 10a) Other charges (refer Note 10b) (369) (369) (333) (333) Total Company operating profit 6,876 3,587 10,463 8, , Immediate and ultimate parent undertakings Tokio Marine & Nichido Fire Insurance Co. Ltd. (Japan) is the immediate parent. This company s registered office is located at 2-1 Marunouchi 1-chome, Chiyoda-ku, Tokyo , Japan. Tokio Marine Holdings Inc. (Japan) is the ultimate controlling party and parent undertaking of the largest group of undertakings to consolidate these financial statements for the current year end. This company s registered office is located at Tokyo Kaijo Nichido Building Shinkan 13F, Marunouchi, Chiyoda-ku, Tokyo , Japan. Copies of both companies financial statements are available from the addresses provided above. 78 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

82 CORPORATE INFORMATION 79

83 CORPORATE INFORMATION BERMUDA TOKIO MILLENNIUM RE LTD. Directors Shin-ichiro Okada Fumiaki Namekawa Kazuya Kojima Tatsuhiko Hoshina Edwin Jordan Parent Company Tokio Marine & Nichido Fire Insurance Co., Ltd. 2-1, Marunouchi 1-Chome Chiyoda-ku Tokyo Japan Auditors KPMG Crown House 4 Par-La-Ville Road Hamilton HM 08 Bermuda Bermuda Lawyers Conyers Dill & Pearman Clarendon House 2 Church Street Hamilton HM 11 Bermuda 80 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

84 LONDON TOKIO MILLENNIUM RE (UK) LIMITED Executive Director Takayuki Sumi Non-Executive Directors Clemens von Bechtolsheim David Finch Tatsuhiko Hoshina Nobuyuki Kashimura Kazuya Kojima Registered Office 10th Floor 2 Minster Court Mincing Lane London EC3R 7BB United Kingdom Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 7 More London Riverside London SE1 2RT United Kingdom Banker National Westminster Bank plc Fenchurch Street Branch 116 Fenchurch Street London EC3M 5AN United Kingdom 81

85 TOKIO OFFICES BERMUDA UNITED KINGDOM SWITZERLAND AUSTRALIA Tokio Millennium Re Ltd. STREET ADDRESS: Tokio Millennium House 3 Waterloo Lane Pembroke HM 08 Bermuda MAILING ADDRESS: P.O. Box HM 1296 Hamilton HM FX Tokio Millennium Re (UK) Ltd. 2 Minster Court London EC3R 7BB United Kingdom T. +44 (0) F. +44 (0) E. enquiries@ tokiomillenniumuk.com Tokio Millennium Re Ltd. Hamilton (Bermuda), Zürich Branch Claridenstrasse Zurich Switzerland T F Tokio Millennium Re Ltd. Australian Branch Australia Square, Level George Street Sydney, NSW 2000 Australia T Bermuda T F E. info@tokiomillennium.com PARENT COMPANY Tokio Marine & Nichido Fire Insurance Co., Ltd. 2-1, Marunouchi 1-Chome Chiyoda-ku Tokyo Japan 82 TOKIO MILLENNIUM RE ANNUAL REPORT 2011

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