Annual Report 2008

3 Risk disclosures

3.1 Underwriting risk

The Group accepts underwriting risk in a range of classes of business through Lloyd’s Syndicate 2001 and Amlin Bermuda. The bias of the portfolio is towards short-tail property and accident risk but liability coverage is also underwritten.

In underwriting insurance or reinsurance policies the Group’s underwriters use their skill, knowledge and data on past claims experience to evaluate the likely claims cost and therefore the premium that should be sufficient (across a portfolio of risks) to cover claims costs, expenses and to produce an acceptable profit. However, due to the nature of insurance risk there is no guarantee that the premium charged will be sufficient to cover claims costs. This shortfall may originate either from insufficient premium being calculated and charged or may result from an unexpected, or unprecedented, high level of claims.

A number of controls are deployed to limit the amount of insurance exposure underwritten. Each year a business plan is prepared and agreed which is used to monitor the amount of premium income, and exposure, to be written in total and for each class of business. Progress against this plan is monitored during the year. The Group also operates under a line guide that determines the maximum liability per policy that can be written for each class and for each underwriter. These can be exceeded in exceptional circumstances but only with the approval of senior management. Apart from the UK motor liability, and some of the international comprehensive motor liability portfolio, which has unlimited liability, all policies have a per loss limit which caps the size of any individual claims. For larger sum insured risks reinsurance coverage may be purchased. The Group is also exposed to catastrophe losses which may impact many risks in a single event and again reinsurance is purchased to limit the impact of loss aggregation from such events. These reinsurance arrangements are described in the reinsurance arrangements section.

Insurance liabilities are written through individual risk acceptances, reinsurance treaties or through facilities whereby Amlin is bound by other underwriting entities. Facility arrangements delegate underwriting authority to other underwriters, or to agents acting as coverholders, that use their judgement to write risks on our behalf under clear authority levels.

The insurance liabilities underwritten by the Group are reviewed on an individual risk, or contract, basis and through review of portfolio performance. Claims arising are reserved upon notification. Each quarter the entire portfolio of business is subject to a reserving process whereby levels of paid and outstanding (advised but not paid) claims are reviewed. Potential future claims are assessed with a provision for incurred but not reported (IBNR) claims being made. This provision is subject to review by senior executives and an independent internal actuarial assessment is carried out by the in-house actuarial team to determine the adequacy of the provision. Whilst a detailed and disciplined exercise is carried out to provide for claims notified, it is possible that known claims could develop and exceed the reserves carried. Furthermore, there is increased uncertainty in establishing an accurate provision for IBNR claims and there is a possibility that claims may arise which in aggregate exceed the reserve provision established. This is partly mitigated by the reserving policy adopted by the Group which is to carry reserves with a margin in excess of the in-house actuarial best estimate.

The review of claims arising may result in underwriters adjusting pricing levels to cater for an unexpectedly higher trend of claims advices or payments. However, this may not be possible in a competitive market and underwriters may respond either by accepting business with lower expected profit margins or declining to renew policies and thus reducing income. Also, there is a portfolio of risk already underwritten which cannot be re-priced until renewal at the end of the policy period.

The Group is exposed to the impact of large catastrophe events such as windstorms, earthquakes or terrorist incidents. Exposure to such events is controlled and measured through loss modelling, but the accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. The Group’s broad risk appetite guidelines are set out here. It is possible that a catastrophe event exceeds the maximum expected event loss. This is particularly the case for the direct property proportion of the loss exposure where models are used to calculate a damage factor representing the amount of damage expected to exposed aggregate insured values. Errors, or incorrect assumptions, in the damage factor calculation can result in incurred catastrophe event claims higher, or lower, than predicted due to unforeseen circumstances or inadequacies in the models used. As explained below the Syndicate buys a reinsurance programme to protect against the impact of any individual or series of severe catastrophes. However, the price and availability of such cover is variable and the amount of loss retained by the Group may therefore also increase or reduce. The Group will alter its insurance and reinsurance exposures to take account of the change in reinsurance availability in order to remain within the risk appetite guidelines.

Sections A to E below describe the business and the risks of Amlin’s Syndicate 2001 five business units. During 2008, the Non-marine business was reorganised into Reinsurance and Property and Casualty business units. Together, Reinsurance, Property and Casually, Marine and Aviation constitute Amlin London. Amlin Bermuda is described in section F. Anglo French Underwriters is described in section G.

A. Reinsurance risks

B. Property and casualty risks

C. Marine risks

D. Aviation risks

E. Amlin UK risks

F. Amlin Bermuda risks

G. Anglo French Underwriters

 

The Syndicate purchases proportional reinsurance to supplement line size and to reduce exposure on individual risks, notably for aviation and large property risks. A part of the premium ceded under such facilities is placed with Amlin Bermuda and, for risks incepting during 2009, a separate proportional facility is placed for the excess of loss reinsurance portfolio through a Special Purpose Syndicate at Lloyd’s. Syndicate 2001 also purchases a number of excess of loss reinsurances to protect itself from severe frequency or size of losses. The structure of the programme and type of protection bought will vary from year to year depending on the availability and price of cover.

On large risks individual facultative reinsurance may be bought which protects against a loss to that specific risk.

Specific risk excess of loss reinsurance is purchased for each class of business. The amount of cover bought depends upon the line size written for each class. The deductibles or amounts borne prior to recovery vary from class to class as do the amounts of co-reinsurance or unplaced protection. Specific programmes are purchased to deal with large individual risk losses, such as fire or large energy losses, and these programmes may be combined at a higher level into a general programme for larger losses.

The combined claims to the Syndicate from several losses which aggregate in a single catastrophe event are protected by catastrophe cover. A separate excess of loss on excess of loss programme may be purchased to protect the excess of loss reinsurance portfolio against such losses. Since 2006, the amount of excess of loss reinsurance purchased is lower and only responds to losses in excess of $60 million.

There is no guarantee that reinsurance coverage will be available to meet all potential loss circumstances as, for very severe catastrophe losses, it is possible that the full extent of the cover bought is not sufficient. Any loss amount which exceeds the programme would be retained by the Group. It is also possible that a dispute could arise with a reinsurer which reduces the recovery made. The reinsurance programme is bought to cover the expected claims arising on the original portfolio. However, it is possible for there to be a mismatch, or a gap in cover, which would result in a higher than expected retained loss.

Many parts of the programme also have limited reinstatements and therefore the number of claims which may be recovered from second or subsequent major losses is limited. It is possible for the programme to be exhausted by a series of losses in one annual period and it may not be possible to purchase additional reinsurance at all or for an acceptable price. This would result in the Group bearing higher losses from further events occurring. It should also be noted that the renewal date of the reinsurance programmes does not necessarily correspond to that of the business written. Where business is not protected by risk attaching reinsurance (which provides coverage for the duration of all the policies written) this reinsurance protection could expire resulting in an increase in possible loss retained by the Syndicate if renewal of the programme is not achieved.

Amlin Bermuda is presently not protected by any reinsurance programme although the company may decide to purchase reinsurance in the future.

The Group has a defined event risk appetite which determines the maximum net loss that the Group intends to limit its exposure to major catastrophe event scenarios. Currently these are a maximum of £165 million for the Syndicate and $300 million for any one zone or $320 million for a multi-zonal loss for Amlin Bermuda.

These maximum losses are expected only to be incurred in extreme events – with an estimated occurrence probability of less than 1 in 50 years estimated for the natural peril or elemental losses. The Group also adopts risk appetite maximum net limits for a number of other non-elemental scenarios, including aviation collision and North Sea rig loss.

The risk appetite policy recognises that there may be circumstances in which the net event limit could be exceeded. Such circumstances include changes in rates of exchange, non renewal or delay in renewal of reinsurance protection, reinsurance security failure, or regulatory and legal requirements.

A detailed analysis of catastrophe exposures is carried out every quarter and measured against risk appetite. The following assumptions and procedures are used in the process:

• The data used reflects the information supplied to the Group by insureds and ceding companies. This may prove to be incomplete, inaccurate or could develop during the policy period;
•  The exposures are modelled using a mixture of stochastic models and underwriter input to arrive at ‘damage factors’ – these factors are then applied to the assumed aggregate exposure to produce gross loss estimates. The damage factors may prove to be inadequate;
• The reinsurance programme as purchased is applied – a provision for reinsurer counterparty failure is included but may prove to be inadequate; and
•  Reinstatement premium both payable and receivable are included.

There is no guarantee that the assumptions and techniques deployed in calculating these event loss estimate figures are accurate. Furthermore, there could also be an unmodelled loss which exceeds these figures. The likelihood of such a catastrophe is considered to be remote, but the most severe scenarios modelled are simulated events and these simulations could prove to be unreliable.

Insurance liabilities and reinsurance assets Calculation of incurred but not reported (IBNR) and claims development

Amlin adopts a rigorous process in the calculation of an adequate provision for insurance claim liabilities. The overriding aim is to establish reserves which are expected to be at least adequate and that there is consistency from year to year. Therefore, the level of reserves are set at a level above the actuarial ‘best estimate’ position. However, there is a risk that, due to unforeseen circumstances, the reserves carried are not sufficient to meet insurance claim liabilities reported in future years on policy periods which have expired.

The reserving process commences with the proper recording and reporting of claims information which consists of paid and notified or outstanding claims. For our London market business information is received through Xchanging (the London market bureau) and, in the case of Amlin UK business, service companies and Amlin Bermuda, directly from brokers and policyholders. Claims records are maintained for each class by the underwriting year to which the policy incepts. For notified, or outstanding claims, a case reserve is established based on the views of underwriting management and claims managers, using external legal or expert advice where appropriate. This reserve is expected to be sufficient to meet the claim payment when it is finally determined. For some classes of business, particularly liability business, settlement may be several years after the initial notification of the claim, as it may be subject to complexities or court action. For claims received from Xchanging, the market reserve is generally set by the lead underwriter, but there are circumstances on larger claims where Amlin will post higher reserves than those notified.

To establish a provision for IBNR claims, the underwriting and claims teams use their experience and knowledge of the class of business to estimate the potential future development of each class for every underwriting year. The development period varies by class, by method of acceptance and is also determined by the deductible of each policy written. For casualty business, the policy form will determine whether claims can be made on a claims made (as advised) or as a losses occurring (determined by date of loss) basis. This has a significant impact on the reporting period in which claims can be notified. In setting the IBNR provision estimates are made for the ultimate premium and ultimate gross claims value for each underwriting year. Allowance is then made for anticipated reinsurance recoveries to reach a net claim position. Reinsurance recoveries are calculated for outstanding and IBNR claims, sometimes through the use of historical recovery rates or statistical projections, and provisions are made as appropriate for bad debt or possible disputes. The component of ultimate IBNR provision estimates and reinsurance recoveries that relates to future events occurring to the existing portfolio is removed in order to reflect GAAP accounting practice. During the year the process for calculating future events was changed in order to improve the accuracy of the GAAP provisions. This increased profit by approximately £15 million.

To assist with the process of determining the reserves, triangulation statistics for each class are produced which show the historical development of premium, as well as paid and incurred losses, for each underwriting year, from inception to the date of review. Each class triangulation is also independently analysed by the internal actuarial team using actuarial software as appropriate. The aim of the actuarial exercise is to produce ‘best estimate’ ultimate premium and claims amounts which can be compared to the figures proposed by divisional management. Meetings are held in which executive management, actuarial staff and business management discuss claims issues and analyse the proposed and independently generated reserves to conclude the provision to be carried.

For Amlin Bermuda, which only commenced underwriting in 2005, historical statistics for the Syndicate’s relevant classes of business have been used as a guide for actuarial review.

The reserves established can be more or less than adequate to meet eventual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate case reserves for known large losses and catastrophes or from inadequate provision for IBNR. The impact on profit before tax of a +/- 1% variation in the total net claims reserves would be +/- £13.3 million (2007: £10.9 million).

Large loss case reserves are determined through careful analysis of the individual claim, often with the advice of legal advisers. Liability claims arising from events such as the 11 September 2001 terrorist attacks in the US are examples of cases where there continues to be some uncertainty over the eventual value of claims.

Property catastrophe claims, such as earthquake or hurricane losses, can take several months, or years, to develop as adjusters visit damaged property and agree claim valuations. Until all the claims are settled it requires an analysis of the area damaged, contracts exposed and the use of models to simulate the loss against the portfolio of exposure in order to arrive at an estimate of ultimate loss to the Group. There is uncertainty over the adequacy of information and modelling of major losses for a period of several months after a catastrophe loss. Account should also be taken of factors which may influence the size of claims such as increased inflation or a change in law.

The long tail liability classes, for which a large IBNR has to be established, represent the most difficult classes to reserve because claims are notified and settled several years after the expiry of the policy concerned. This is particularly the case for US liability written on a losses occurring basis.

The use of historical development data, adjusted for known changes to wordings or the claims environment, is fundamental to reserving these classes. It is used in conjunction with the advice of lawyers and third party claims adjusters on material single claims.

The allocation of IBNR to the reinsurance programme is an uncertain exercise as there is limited knowledge of the size or number of future claims advices. The assumption over future reinsurance recoveries may be incorrect and unforeseen disputes could arise which would reduce recoveries made.

To improve our risk management capability, and our assessment of capital requirements, Amlin has developed a stochastic model to analyse the potential performance of the underwriting businesses. The output from the model includes a distribution of outcomes from reserves for prior written liabilities, investment performance, and new business underwriting performance. The result is a combined view of the expected best estimate mean result and the range of possibilities around it.

The model requires the input of a large number of explicit parameters. Those inputs are based on many different sources of information including detailed historical data on premium and claims, forecast income and exposures, estimated rating levels and catastrophe loss data from proprietary models applied to Amlin’s portfolio. It enables projection of an estimated mean ultimate loss ratio and the distribution of results around it. The model explicitly recognises diversification credit, since class results are not all strongly correlated and thus individual classes are unlikely to all produce losses (or profits) in the same year. Due to the inherent uncertainty of predicting the key drivers of business performance, including in particular claims levels, any individual simulation of the model viewed in isolation cannot be relied upon as an accurate forecast. However, the output from many thousands of simulated results can provide a picture of the possible distribution of insurance business results. This output is useful in developing an understanding of the losses which may be borne by the business at varying levels of probability.

• There are a large number of uncertainties and difficulties in achieving accurate results from the model. Some of the key issues are:
• The model is based on a best estimate view of business volumes and rate expectations, which may not be borne out in practice;
• A significant change in the portfolio of business could result in the past not being a reliable guide to the future;
• Changing external environmental factors may not be assessed accurately;
• Model risk may be significant in such a complex and developing discipline;
• Key assumptions over levels of correlation between classes may over time prove to be incorrect; and
• Catastrophe model inputs, which estimate the severity and frequency of large catastrophes on the portfolio, may be incorrect.

The result reproduced below represents the modelled loss sustained by the business from a single 1 in 200 bad year i.e. at the 0.5 percentile. This probability is the calculation benchmark required by the FSA and Lloyd’s. However, it does not represent the level of capital required for Amlin to support current and expected business levels, which should be considered over a longer period of modelling. Furthermore, Amlin is required to carry (higher) levels of capital which are sufficient in the eyes of rating agencies and clients.

Risk category after diversification

	2009 forecast £m
Underwriting (new business risk)	(476)
Reserving	(87)
Credit (reinsurance counterparty risk)	(32)
Investment (market risk)	42
Liquidity risk	(10)
Discounting credit	31
Diversified result	(532)

Notes:

• All figures are based on business plan forecasts which are currently under review for changes in the trading environment, interest rate outlook and movements in rates of exchange. It is likely that capital requirements will increase as a consequence.
• Excluding any additional capital provision for operational risk.
• No dividend or tax is considered.
• Currency risk is not modelled explicitly.
• Non-sterling amounts have been converted at Lloyd’s required rates, including for US Dollars $1.99 to £1.00.
• These figures are based on assumptions consistent with the work for the October 2008 ICA submission (for the 2009 Year of Account) and thus include the projected year end asset and liability position.
• Figures include an allowance for investment returns generated on assets backing the insurance liabilities (i.e. discounting). The discounting credit shown represents the release from the balance sheet by discounting the mean best estimate reserves.
• Investment income includes group corporate (surplus) assets. Investment risk after diversification remains positive since at around the 1 in 200 level total investment income (on both surplus and technical assets) exceeds the investment income implicitly assumed via discounting on the technical assets alone.
• No credit has been taken for carried reserve margins.

Risk disclosures

Premium development

The table below illustrates the development of the estimate of gross written premium and gross earned premium for Syndicate 2001 and Amlin Bermuda Ltd after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimate made. Non-sterling balances have been converted using 2008 closing exchange rates to aide comparability.

Group

Gross written premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	997.3	1,144.9	1,121.9	1,150.5	1,317.1	1,288.9	1,255.5
One year later	1,043.1	1,146.6	1,135.1	1,149.6	1,340.2	1,285.5
Two years later	1,011.3	1,152.2	1,145.5	1,160.9	1,333.2
Three years later	1,010.7	1,154.0	1,148.6	1,160.3
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3
Current ultimate gross written premium	1,012.3	1,154.0	1,140.5	1,160.3	1,333.2	1,312.5	1,290.2
Gross earned premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	493.8	609.4	568.4	593.3	712.3	712.4	693.4
One year later	984.3	1,090.6	1,076.8	1,097.4	1,284.2	1,234.7
Two years later	1,011.3	1,152.2	1,145.5	1,160.9	1,332.8
Three years later	1,010.8	1,154.0	1,148.6	1,160.3
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3

Syndicate 2001 total

Gross written premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	997.3	1,144.9	1,121.9	1,146.7	1,160.4	1,091.2	1,006.2
One year later	1,043.1	1,146.6	1,135.1	1,147.5	1,184.9	1,094.8
Two years later	1,011.3	1,152.2	1,145.5	1,159.0	1,177.7
Three years later	1,010.7	1,154.0	1,148.6	1,159.0
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3
Current ultimate gross written premium	1,012.3	1,154.0	1,140.5	1,159.0	1,177.7	1,121.8	1,040.9
Gross earned premium Underwriting year	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
At end of underwriting year	493.8	609.4	568.4	593.2	621.6	588.6	541.6
One year later	984.3	1,090.6	1,076.8	1,095.7	1,136.9	1,052.8
Two years later	1,011.3	1,152.2	1,145.5	1,159.0	1,177.7
Three years later	1,010.8	1,154.0	1,148.6	1,159.0
Four years later	1,012.7	1,154.2	1,140.5
Five years later	1,012.3	1,154.0
Six years later	1,012.3

Amlin Bermuda – Direct business

Gross written premium Underwriting year	2005 $m	2006 $m	2007 $m	2008 $m
At end of underwriting year	5.5	228.8	288.7	364.0
One year later	3.0	226.7	278.4
Two years later	2.8	227.1
Three years later	1.9
Current ultimate gross written premium	1.9	227.1	278.4	364.0
Gross earned premium Underwriting year	2005 $m	2006 $m	2007 $m	2008 $m
At end of underwriting year	0.1	132.4	180.7	221.6
One year later	2.5	215.1	265.6
Two years later	2.8	226.5
Three years later	1.9

Claims development

The tables below illustrate the development of the estimates of ultimate cumulative claims for Syndicate 2001 and Amlin Bermuda after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimates made. Non-sterling balances have been converted using 2008 exchange rates to aide comparability.

Non-marine

In 2008, the Non-marine division was reorganised into two business units: Reinsurance and Property and Casualty. The following claims development tables report these business units as Non-marine because this is how this information was reported internally for management purposes until the end of 2008.

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	640.3	643.6	674.2	718.0	668.0	595.9
Estimate of cumulative claims
At end of underwriting year	325.9	452.5	726.3	303.6	314.0	458.4
One year later	228.8	481.0	711.9	209.4	236.5
Two years later	215.7	471.1	707.3	200.5
Three years later	201.2	458.5	701.3
Four years later	196.8	452.3
Five years later	197.3
Cumulative payments	172.2	415.5	634.1	143.7	100.8	118.6
Estimated balance to pay	25.1	36.8	67.2	56.8	135.7	339.8
Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	269.6	338.3	389.9	245.7	244.6	296.5
One year later	192.3	315.9	370.2	170.7	189.8
Two years later	177.2	305.1	366.1	169.9
Three years later	162.9	290.2	353.7
Four years later	157.8	281.5
Five years later	157.4
Cumulative payments	146.8	249.9	282.5	133.4	90.2	84.0
Estimated balance to pay	10.6	31.6	71.2	36.5	99.6	212.5

Marine

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	198.0	199.5	219.5	246.7	234.5	221.8
Estimate of cumulative claims
At end of underwriting year	118.2	112.8	164.7	121.7	120.2	151.1
One year later	113.0	105.3	228.0	113.7	129.1
Two years later	85.5	86.8	212.1	105.4
Three years later	83.8	88.1	194.4
Four years later	85.3	86.9
Five years later	84.9
Cumulative payments	74.8	73.5	149.7	69.7	49.1	10.6
Estimated balance to pay	10.1	13.4	44.7	35.7	80.0	140.5
Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	102.2	105.6	108.1	95.0	88.6	92.7
One year later	93.1	91.1	124.3	88.3	96.5
Two years later	69.2	70.9	116.7	81.9
Three years later	67.6	73.1	110.1
Four years later	66.9	71.3
Five years later	67.0
Cumulative payments	63.6	57.5	90.8	58.5	44.6	44.6
Estimated balance to pay	3.4	13.8	19.3	23.4	51.9	48.1

Aviation

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	115.3	113.5	101.2	100.4	77.2	70.4
Estimate of cumulative claims
At end of underwriting year	67.0	69.0	62.0	63.3	59.8	50.7
One year later	49.8	55.2	60.7	70.8	62.7
Two years later	41.0	50.0	50.2	62.5
Three years later	41.1	45.7	50.2
Four years later	37.0	41.8
Five years later	37.3
Cumulative payments	25.7	28.7	25.4	23.0	18.7	3.3
Estimated balance to pay	11.6	13.1	24.8	39.5	44.0	47.4
Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	50.7	56.2	50.8	43.8	43.3	36.3
One year later	39.3	47.2	44.6	42.5	42.1
Two years later	32.3	42.9	36.9	37.7
Three years later	32.1	39.3	34.9
Four years later	28.7	36.1
Five years later	29.0
Cumulative payments	21.7	25.5	18.7	17.6	14.4	3.1
Estimated balance to pay	7.3	10.6	16.2	20.1	27.7	33.2

Amlin UK

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	209.1	191.3	170.8	148.8	142.2	152.9
Estimate of cumulative claims
At end of underwriting year	146.6	127.5	116.3	103.9	102.4	119.1
One year later	131.3	113.5	112.2	108.0	103.8
Two years later	103.6	105.9	104.3	103.2
Three years later	97.7	92.8	90.8
Four years later	97.9	88.3
Five years later	88.5
Cumulative payments	66.7	60.3	48.9	38.4	28.7	9.4
Estimated balance to pay	21.8	28.0	41.9	64.8	75.1	109.7
Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	127.3	112.0	105.2	86.6	86.8	93.9
One year later	111.1	103.1	101.6	90.3	84.3
Two years later	93.4	94.6	98.4	87.6
Three years later	89.1	89.1	89.3
Four years later	89.2	84.9
Five years later	81.4
Cumulative payments	66.7	57.7	48.9	38.4	28.7	9.4
Estimated balance to pay	14.7	27.2	40.4	49.2	55.6	84.5

Syndicate 2001 total

Gross basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Current ultimate gross written premium	1,162.7	1,147.9	1,165.7	1,213.9	1,121.9	1,041.0
Estimate of cumulative claims
At end of underwriting year	657.7	761.8	1,069.4	592.5	596.4	779.3
One year later	522.9	755.0	1,112.8	501.9	532.1
Two years later	445.8	713.8	1,073.9	471.6
Three years later	423.8	685.1	1,036.7
Four years later	417.0	669.3
Five years later	408.0
Cumulative payments	339.4	578.0	858.1	274.9	197.3	141.8
Estimated balance to pay	68.6	91.3	178.6	196.7	334.8	637.4
Net basis Underwriting year	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m
Estimate of cumulative claims
At end of underwriting year	549.8	612.1	654.0	471.1	463.3	519.5
One year later	435.8	557.3	640.7	391.8	412.7
Two years later	372.1	513.5	618.1	377.1
Three years later	351.7	491.7	588.0
Four years later	342.6	473.8
Five years later	334.8
Cumulative payments	298.8	390.6	440.9	247.9	177.9	141.1
Estimated balance to pay	36.0	83.2	147.1	129.2	234.8	378.4

Amlin Bermuda – Direct business

Claims gross basis Underwriting year			2005 $m	2006 $m	2007 $m	2008 $m
Estimate of cumulative claims
At end of underwriting year			–	67.9	114.4	254.7
One year later			1.2	39.3	87.3
Two years later			0.6	46.4
Three years later			0.5
Cumulative payments			0.4	25.9	20.3	81.7
Estimated balance to pay			0.1	20.5	67.0	173.0

3.2 Financial investment risk disclosures

Market risk

Risk management

The following section describes Amlin’s investment risk management from a quantitative and qualitative perspective. The Group has two main categories of assets which have to be invested in accordance with robust regulations. The asset categories are as follows:

• Underwriting assets. These are the premiums received and held to meet future insurance claims.
• Capital assets. These are the capital required by the regulators to support the underwriting business plus working capital and surplus funds. Apart from the outstanding borrowings, these assets do not have specific current liabilities attached to them.

Investment governance

Amlin manages its investments in accordance with investment frameworks that are set by the Boards of Amlin plc and its subsidiaries. These frameworks determine investment policy and the management of investment risk. They are reviewed on a regular basis to ensure that the Boards’ fiduciary and regulatory responsibilities are being met. The Boards delegate responsibility for the management of the investments to the Investment Management Executive.

The Investment Management Executive comprises the Chief Executive, Group Finance Director and Chief Investment Officer. They meet at least monthly to determine investment tactics, to ensure that asset allocation is appropriate for current market conditions and is in accordance with the investment frameworks. The Investment Management Executive appoints and monitors the external investment managers and the custodians that are responsible for the safekeeping of the assets.

The Investment Advisory Panel, which consists of external investment professionals as well as members of the Investment Management Executive, meets quarterly. The Panel monitors and critiques investment strategy and tactics. In addition, Group Compliance and external lawyers provide advice on investment regulations.

Risk tolerance

The investment process is formulated from the risk tolerance which is determined by reference to factors such as the underwriting cycle and the requirements of the capital providers. In a hard underwriting market capital preservation is paramount in order to support the insurance business and, therefore, the risk tolerance for the capital assets will be low. Conversely, the risk tolerance for the underwriting assets under these circumstances will be relatively high due to the strong cash flows. In a soft underwriting market the opposite applies. However, the investment risk tolerance will never be set to such a level to undermine the Group’s credit ratings.

Strategic benchmarks

Strategic benchmarks are set for the neutral asset allocation taking account of the risk tolerance.

For the London operations, the expected timescale for future cash flows in each currency is calculated by our Group Actuarial team. These durations form the basis for the strategic benchmarks for the underwriting assets against which the assets are invested. Due to the short tail nature of the Bermudian operations the underwriting assets are currently held in AAA rated stable net asset value money market funds.

The strategic benchmarks for capital assets, for both London and Bermuda are set by using a Value at Risk (VaR¹) model, to determine the optimum asset allocation for the current risk tolerance and to ensure that appropriate solvency levels are maintained.

Tactical ranges around these strategic benchmarks provide sufficient flexibility to ensure that an appropriate risk/reward balance is maintained in changing investment markets.

Investment management

Specialist external investment managers are used to manage each asset class on a segregated, pooled or commingled basis². For regulatory reasons, the Corporation of Lloyd’s manages overseas regulatory deposits in commingled funds. Otherwise, manager selection is based on a range of criteria that leads to the expectation that the managers will add value to the funds over the medium to long-term. Investment guidelines are set for each manager to ensure that they comply with the investment frameworks. The managers have discretion to manage the funds on a day-to-day basis within these guidelines. The managers are monitored on an ongoing basis.

The managers as at 31 December 2008 were as follows:

Manager	Asset class
Segregated funds
Aberdeen Asset Management	US dollar bonds
AEGON Asset Management	Sterling bonds
ING Real Estate	Global property manager of managers
Insight Investment Management	Sterling and Euro bonds
THS Partners	Global equities
Wellington Management International Ltd	US and Canadian dollar bonds
Western Asset Management	US dollar bonds
Leadenhall Capital Partners	Insurance linked securities
Pooled vehicles
Barclays Global Investors	Sterling, Euro and US dollar Money Market Funds
Goldman Sachs Asset Management	Sterling, Euro and US dollar Money Market Funds and LIBOR plus Fund
HSBC Asset Management	US dollar Money Market Funds
Insight Investment Management	Sterling Money Market Fund
JP Morgan Asset Management	US dollar Money Market Funds
PIMCO	Sterling and US dollar bonds
Western Asset Management	US dollar Money Market Fund
Commingled funds
Corporation of Lloyd’s Treasury Services	US dollar, Canadian dollar, Australian dollar, South African and Japanese bonds
Union Bank of Switzerland	Canadian and US dollar liquid funds

Click here to see the funds under management with each manager:

Asset allocation

The analysis in this section covers the investments for which Amlin has direct responsibility together with £71.1 million (2007: £60.2 million) of overseas regulatory deposits managed by the Corporation of Lloyd’s on Amlin’s behalf in commingled funds.

The total value of investments in the following tables is reconciled to note 17 financial investments as follows:

	2008 £m	2007 £m
Financial investments per note 17	2,868.1	2,638.9
Assets shown separately in the notes to the accounts:
Accrued income	16.1	16.0
Net unsettled payables for investments sold	(15.9)	(1.3)
Assets not analysed in the investment risk tables that follow:
Liquid investments	(10.7)	(2.5)
Unlisted equities	(8.6)	–
Spread syndicates	(3.8)	(4.3)
Derivative hedging instruments	40.0	1.4
Total investments in asset allocation tables	2,885.2	2,648.2

The asset allocation of the Group’s investments at 31 December 2008 is set out below

	31 December 2008			31 December 2007
	Underwriting assets £m	Capital £m	Total £m	Underwriting assets £m	Capital £m	Total £m
Global equities	–	190.8	190.8	–	232.1	232.1
Bonds
Government securities	550.7	331.7	882.4	585.6	252.1	837.7
Government index—linked securities	11.7	–	11.7	3.0	–	3.0
Government agencies / guaranteed	163.5	8.7	172.2	108.5	13.5	122.0
Supranational	33.7	–	33.7	44.5	2.1	46.6
Asset backed securities—Home Equity	3.5	18.4	21.9	5.4	23.9	29.3
Asset backed securities—Autos	36.7	60.1	96.8	12.5	31.6	44.1
Asset backed securities—Cards	4.5	–	4.5	5.8	–	5.8
Asset backed securities—Other	5.3	7.5	12.8	1.5	–	1.5
Mortgage backed securities—Prime	65.9	40.7	106.6	38.7	61.6	100.3
Mortgage backed securities—Alt A	2.8	2.6	5.4	1.0	6.0	7.0
Mortgage backed securities—Subprime	–	0.8	0.8	–	–	–
Corporate bonds—Basic Resources/Materials	1.6	–	1.6	1.2	–	1.2
Corporate bonds—Consumer Goods	1.4	0.8	2.2	0.2	0.8	1.0
Corporate bonds—Consumer Services	16.5	14.0	30.5	5.3	11.0	16.3
Corporate bonds—Financials	114.6	23.8	138.4	135.0	20.2	155.2
Corporate bonds—Healthcare	1.2	–	1.2	1.6	–	1.6
Corporate bonds—Industrials	6.7	10.4	17.1	2.7	2.4	5.1
Corporate bonds—Oil & Gas	4.1	4.4	8.5	4.3	5.1	9.4
Corporate bonds—	0.5	6.9	7.4	–	–	–
Corporate bonds—Telecoms	5.1	7.1	12.2	6.8	6.5	13.3
Corporate bonds—Utilities	2.0	–	2.0	1.5	1.6	3.1
Pooled vehicles	100.5	127.7	228.2	53.3	121.4	174.7
Insurance linked securities	–	22.9	22.9	–	–	–
	1,132.5	688.5	1,821.0	1,018.4	559.8	1,578.2
Property	–	83.5	83.5	–	75.4	75.4
Other liquid investments
Liquidity funds and other liquid investments	262.9	527.0	789.9	461.4	301.0	762.4
	1,395.4	1489.8	2,885.2	1,479.8	1,168.3	2,648.1

Government agencies / guaranteed bonds at 31 December 2008 include £81.3 million of corporate bonds and £49.1 million of mortgage backed securities.

76.8% of the pooled vehicles held at 31 December 2008 are bond funds of which 35.5% were government / agency bonds. The remaining 23.2% was held in cash.

	31 December 2008			31 December 2007
	Underwriting assets %	Capital %	Total %	Underwriting assets %	Capital %	Total %
Global equities	–	12.8	6.6	–	19.9	8.8
Bonds
Government securities	39.5	22.3	30.6	39.6	21.5	31.6
Government index—linked securities	0.8	–	0.4	0.2	–	0.1
Government agencies / guaranteed	11.7	0.6	6.0	7.3	1.2	4.6
Supranational	2.5	–	1.2	3.0	0.2	1.8
Asset backed securities—Home Equity	0.3	1.2	0.8	0.4	2.1	1.1
Asset backed securities—Autos	2.6	4.0	3.3	0.8	2.7	1.7
Asset backed securities—Cards	0.3	–	0.1	0.4	–	0.2
Asset backed securities—Other	0.4	0.5	0.4	0.1	–	0.1
Mortgage backed securities—Prime	4.7	2.7	3.7	2.6	5.3	3.8
Mortgage backed securities—Alt A	0.2	0.2	0.2	0.1	0.5	0.3
Mortgage backed securities—Subprime	–	0.1	–	–	–	–
Corporate bonds—Basic Resources/Materials	0.1	–	–	0.1	–	–
Corporate bonds—Consumer Goods	0.1	0.1	0.1	–	0.1	–
Corporate bonds—Consumer Services	1.2	0.9	1.1	0.4	0.9	0.6
Corporate bonds—Financials	8.2	1.6	4.8	9.1	1.7	5.9
Corporate bonds—Healthcare	0.1	–	–	0.1	–	0.1
Corporate bonds—Industrials	0.5	0.7	0.6	0.2	0.2	0.2
Corporate bonds—Oil & Gas	0.3	0.3	0.3	0.3	0.4	0.3
Corporate bonds—Technology	–	0.5	0.3	–	–	–
Corporate bonds—Telecoms	0.4	0.5	0.4	0.5	0.6	0.5
Corporate bonds—Utilities	0.1	–	0.1	0.1	0.1	0.1
Pooled vehicles	7.2	8.6	7.9	3.6	10.3	6.6
Insurance linked securities	–	1.5	0.8	–	–	–
	81.2	46.3	63.1	68.9	47.8	59.6
Property	–	5.6	2.9	–	6.5	2.8
Other liquid investments
Liquidity funds and other liquid investments	18.8	35.3	27.4	31.1	25.8	28.8
	100.0	100.0	100.0	100.0	100.0	100.0

At 31 December 2008 the industry and geographical splits were as follows:

 

Global equities
Industry	Total %		Region	Total %
Oil & Gas	12.5		United Kingdom	12.0
Basic Materials	5.0		USA and Canada	17.1
Industrials	9.5		Europe (ex UK)	46.7
Consumer Goods and Services	29.1		Far East	22.9
Health Care	5.5		Emerging markets	1.3
Telecommunications	15.2
Utilities	4.0
Financials	16.7
Technology	2.5
	100.0			100.0
Corporate bonds
Industry	Total %		Region	Total %
Oil & Gas	2.7		United Kingdom	17.7
Basic Materials	0.5		USA and Canada	65.6
Industrials	5.3		Europe (ex UK)	14.9
Consumer Goods and Services	10.2		Far East	1.3
Health Care	0.4		Emerging markets	0.5
Telecommunications	3.8
Utilities	0.6
Financials	74.2
Technology	2.3
	100.0			100.0

Note: The tables by industry and location include £81.3 million of corporate bonds with government guarantees.

At 31 December 2007 the industry and geographical splits were as follows:

 

Global equities
Industry	Total %		Region	Total %
Oil & Gas	9.3		United Kingdom	18.1
Basic Materials	3.9		USA and Canada	19.0
Industrials	5.9		Europe (ex UK)	37.2
Consumer Goods and Services	24.8		Far East	21.5
Health Care	3.4		Emerging markets	4.2
Telecommunications	14.9
Utilities	6.6
Financials	29.0
Technology	2.2
	100.0			100.0
Corporate bonds
Industry	Total %		Region	Total %
Oil & Gas	3.5		United Kingdom	18.9
Basic Materials	0.5		USA and Canada	61.3
Industrials	1.9		Europe (ex UK)	17.7
Consumer Goods and Services	6.5		Far East	1.3
Health Care	0.6		Emerging markets	0.8
Telecommunications	5.0		Other	–
Utilities	1.2
Financials	80.8
Technology	2.3
	100.0			100.0

Note: The tables by industry and location include £81.3 million of corporate bonds with government guarantees.

Valuation risk

Amlin’s earnings are directly affected by changes in the valuations of the investments held in the portfolios. These valuations vary according to the movements in the underlying markets. Factors affecting markets include changes in the economic and political environment, risk appetites, liquidity, interest rates and exchange rates. These factors have an impact on Amlin’s investments and are taken into consideration when setting strategic benchmarks and tactical asset allocation. The price of holdings can also vary due to specific risks, such as the corporate strategy and companies’ balance sheet structure, which may impact the value of individual equity and corporate bond holdings. This is mitigated by holding diversified portfolios, as specified in the investment guidelines given to the fund managers. These limit the exposure to any one company, which also mitigates credit risk. In addition, the equity mandate limits the exposure to any one geographic region or industrial sector and the bond mandates limit the overall exposure to non-government holdings.

Group assets are marked to market at bid price. Prices are supplied by the custodians whose pricing processes are covered by their published annual audits. In accordance with their pricing policy, prices are sourced from two market recognised pricing vendor sources including: FT Interactive, Bloomberg and Reuters. These pricing sources use closing trades, or where more appropriate in illiquid markets, pricing models. Theses prices are reconciled to the fund managers’ records to check for reasonableness. Marked to market valuations for over the counter derivatives are supplied by the custodian and checked to the relevant counterparty and Bloomberg. Property investments are based on the most recent price available, which in some instances may be a quarter in arrears. Where a property transaction has taken place the transaction price is used if it is the most recent price available.

Low market liquidity provides challenges to assessing fair value. To establish a fair price for Amlin’s assets where there is no quoted price on an active market the master custodian, State Street, uses their European Fair Valuation (FV) solution, which has two vendor sources: FT Interactive Data and Investment Technology Group. The process is fully automated through their Vendor web platform, NAVigator. The regression methodology is based on a Multifactor Ordinary Least Squares Regression model (FT Interactive Data); each regression uses an exponentially weighted historic sample of the most recent 250 trading days of data when available. Criteria such as corresponding Global Depositary Receipts / American Depository Receipts, foreign exchange rates, global and sector indices and related futures contracts are used by the FV vendors in order to determine the FV points applied to the actual closing price.

As an additional check, where available, prices as at 31 December 2008 have been verified by Amlin using available quoted prices on Bloomberg to verify that the prices used are a good estimation for fair value. A month to month price check was completed to ensure any stale prices, defined as prices which are one month old or more are identified and investigated. As at 31 December 2008 no stale prices were identified.

Interest rate risk

Investors’ expectations for interest rates will impact bond yields³. The value of Amlin’s bond holdings is therefore subject to fluctuation as bond yields rise and fall. If yields fall the capital value will rise, and visa versa. The sensitivity of the price of a bond is indicated by its duration⁴. The greater the duration of a security, the greater its price volatility. Typically, the longer the maturity of a bond the greater its duration. The maturity bands of the Group’s bond holdings at year end are shown below.

	31 December 2008			31 December 2007
	Underwriting assets £m	Capital £m	Total £m	Underwriting assets £m	Capital £m	Total £m
Less than 1 year	32.9	49.9	82.8	95.8	76.8	172.6
1–2 years	144.2	181.3	325.5	58.8	72.8	131.6
2–3 years	145.2	178.4	323.6	153.3	102.8	256.1
3–4 years	232.0	60.2	292.2	242.5	49.0	291.5
4–5 years	189.4	15.7	205.1	219.2	30.5	249.7
Over 5 years	288.3	75.3	363.6	195.6	106.4	302.0
	1,032.0	560.8	1,592.8	965.2	438.3	1,403.5

Note: The table above excludes pooled investments of £295.4 million (2007: £174.7 million).

The duration of underwriting assets for Syndicate 2001 is set with reference to the duration of the underlying liabilities. It should be noted that the liabilities are not currently discounted and therefore their value is not impacted by interest rate movements. Due to the inherently short tail nature of the Bermudian reinsurance exposures, these underwriting assets are all held in money market funds. For Syndicate 2001 underwriting assets, cash is raised, or the duration of the portfolio reduced, if it is believed that yields may rise, and therefore capital values fall.

The duration of the bond and cash portfolios at year end was as follows:

	31 December 2008		31 December 2007
Underwriting assets	Assets Years	Liabilities Years	Assets Years	Liabilities Years
Syndicate 2001
Sterling	2.5	3.2	2.3	3.2
US Dollars	3.4	3.1	2.8	3.0
Euro	4.0	4.6	3.3	3.2
Canadian Dollars	3.0	4.0	2.7	3.3

Note: The table above excludes pooled vehicles.

The asset durations above are calculated by the custodian. Some differences occur between custodian durations and those of fund managers due to the use of different prepayment assumptions. As an additional check, where available, durations as at 31 December 2008 have been verified by Amlin using Bloomberg data. In all instances the duration differences are within the ranges permitted by the investment guidelines.

Sensitivity analysis

An indication of the potential sensitivity of the value of the bond and cash funds to changes in yield is shown below:

	Syndicate 2001				Capital	Bermuda		Net (reduction) increase in
Shift in yield (basis points)	Sterling %	US$ %	CAN$ %	Euro %	Sterling %	Underwriting %	Capital %	value £m
100	(2.6)	(3.1)	(2.4)	(4.6)	(0.6)	(0.1)	(0.8)	(49)
75	(2.0)	(2.3)	(1.8)	(3.4)	(0.5)	(0.1)	(0.6)	(37)
50	(1.3)	(1.6)	(1.2)	(2.3)	(0.3)	(0.1)	(0.4)	(25)
25	(0.7)	(0.8)	(0.6)	(1.1)	(0.1)	(0.0)	(0.2)	(12)
–25	0.7	0.8	0.6	1.1	0.1	0.0	0.2	12
–50	1.3	1.6	1.2	2.3	0.2	0.1	0.4	25
–75	2.0	2.6	1.9	3.4	0.3	0.1	0.6	38
–100	2.7	3.3	2.5	4.6	0.4	0.1	0.8	50

Underwriting assets are held in the base currencies of sterling, euros, US dollars and Canadian dollars, which represent the majority of the Group’s liabilities by currency. This limits the underwriting foreign exchange rate risk. However, foreign exchange exposure does arise when business is written in non-base currencies. These transactions are converted into sterling or US dollars (depending if the business is written out of London or Bermuda) at the prevailing spot rate once the premium is received. Consequently, there is exposure to currency movements between the exposure being written and the premium being converted. Payments in non-base currencies are converted back into the underlying currency at the time a claim is to be settled, therefore, Amlin is exposed to exchange rate risk between the claim being made and the settlement being paid.

Further foreign exchange risk arises until non-sterling profits or losses are converted into sterling. For Amlin’s UK operations, it is policy to mitigate foreign exchange risk by systematically converting non-sterling profits into sterling. Given the inherent volatility in some business classes, a cautious approach is adopted on the speed and level of sales, but we seek to extinguish all currency risk on earned profit during the second year after the commencement of each underwriting year. This approach avoids the inherent dangers of ‘lumpier’ sales. It is not the intention to take speculative currency positions in order to make currency gains.

The Group’s monetary assets and liabilities by currency are presented in the table below.

	31 December 2008				31 December 2007
Currency risk	Sterling	US$	CAN$	Euro	Sterling	US$	CAN$	Euro
Cash and cash equivalents	14.9	2.2	1.2	(3.0)	8.4	3.0	–	2.1
Financial investments at fair value through income	1,065.1	2,384.5	110.0	111.7	1,224.9	2,471.0	110.4	157.9
Reinsurance assets	91.2	798.0	28.2	34.0	137.5	788.3	27.9	56.5
Loans and receivables	44.2	449.2	21.5	28.7	28.7	319.0	21.9	26.7
Current income tax assets	6.9	9.0	0.3	–	4.0	–	–	–
Deferred tax assets	10.1	–	–	–	13.4	–	–	–
Property and equipment	9.1	–	–	–	5.8	–	–	–
Intangibles	76.3	–	–	39.0	–	–	–	–
Investment in jointly owned entity	1.5	–	–	–	–	–	–	–
Total monetary assets	1,320.3	3,641.9	161.2	210.4	1,422.7	3,581.3	160.2	243.2
Insurance contracts	439.5	1,711.0	84.9	117.1	456.5	1,552.2	74.3	149.5
Trade and other payables	56.8	83.6	–	7.1	177.4	51.9	–	4.9
Curent income tax liabilities	2.4	6.6	–	–	25.7	–	–	–
Borrowings	233.3	99.5	–	–	227.6	99.4	–	–
Retirement benefit obligations	4.0	–	–	–	2.8	–	–	–
Deferred tax liabilties	144.6	–	–	–	128.1	–	–	–
Total monetary liabilities	880.6	1,900.7	84.9	124.2	1,018.1	1,703.5	74.3	154.4
Net monetary assets	419.3	1,742.3	76.3	86.2	404.6	1,877.8	85.9	88.8

As at the end of December 2008 the investment managers held some forward foreign exchange contracts in their portfolios to hedge non-base currency investments. These were transacted with banks with a short term rating of at least A1 and are marked to market in investment valuations.

The Group is subject to foreign exchange risk as a result of the translation of the Group companies that have a functional currency different from the presentation currency of the Group which is sterling. In particular, as Amlin reports its financial statements in sterling, it is subject to foreign exchange risk due to the impact of changes in the sterling/US dollar exchange rate on the converted sterling value of Bermuda’s dollar net assets. At 31 December 2008 these amounted to $1,389.5 million (2007: $1,478.6 million). Foreign exchange gains and losses on investments in overseas subsidiaries are taken directly to reserves in accordance with IAS21, The Effects of Changes in Foreign Exchange Rates. The profit taken to reserves for the year ended 31 December 2008 was £256.5 million (2007: £8.2 million loss). This reflects the movement in the dollar rate from 1.99 at the start of the year to 1.46 at the balance sheet date.

In order to mitigate the impact of these currency fluctuations, the Group adopts a policy of hedging up to 50% of the net dollar exposure resulting from Amlin Bermuda’s capital assets. With effect from 7 March 2008, hedges in the form of options were accounted for as hedges of net investment in overseas subsidiaries in line with the hedge accounting rules of IAS 39 ‘Financial Instruments: Recognition and Measurement’ such that all realised and unrealised fair value gains and losses on the hedging instruments are taken to reserves to match the underlying movement in the valuation of the net investment in Amlin Bermuda. At the year end hedges were in place for $460 million. These were in the form of long sterling calls/US dollar puts funded by short sterling puts/ US dollar calls. The net valuation of these trades was £54.7 million loss (2007: £2.5 million loss) as at the year end. The accumulated realised and unrealised losses from hedging options recognised in reserves was £74.7 million (2007: nil) as at the year end. A gain of £0.4 million was taken to the income statement for the period to 6 March 2008.

In addition to the hedges in the form of options, Amlin Bermuda held £182.1 million of its operating assets in sterling at 31 December 2008. These produced a foreign exchange loss of £41.3 million during the year which is recognised in the Group’s income statement.

If the USD/GBP exchange rate were to deteriorate/(improve) by 10%, the movement in the net underwriting assets and liabilities and borrowings of the Group, excluding overseas subsidiaries, would result in a £21.4 million foreign exchange gain/£17.5 million loss in the Group income statement at 31 December 2008.

In relation to translation of overseas subsidiaries, the same exchange rate improvement would result in a £86.1 million decrease in exchange gains through consolidated reserves. This decrease would be offset by a valuation gain of £27.2 million on the hedges in place and a £13.1 million gain through the income statement on Amlin Bermuda’s Sterling operating assets. The same exchange rate deterioration would result in an additional £106.1 million exchange gain through consolidated reserves. This gain would be offset by a valuation loss of £34.0 million on the hedges in place and a £16.0 million loss through the income statement on Amlin Bermuda’s Sterling operating assets.

In November 2008, the Group purchased Financière Europe Assurances SAS (FEA) a Lloyd’s approved general insurance coverholder in France (note 35). The purchase resulted in intangible assets of B45.2 million, which are required to be revalued to sterling at each reporting date. Amlin is, therefore, subject to foreign exchange risk due to the impact of changes in the sterling/euro exchange rate. At year end, the net exchange gain on revaluing these assets was £4.7 million which is taken to consolidated reserves.

Liquidity risk

It is important to ensure that claims are paid as they fall due. Levels of cash are therefore managed on a daily basis. Buffers of liquid assets are also held in excess of the immediate requirements to reduce the risk of being forced sellers of any of our assets, which may result in prices below fair value being realised, especially in periods of below normal investment market liquidity. The impact of the credit crunch intensified during 2008. As a result, global economic forecasts were reduced and institutions were forced to deleverage. In many cases, investors were forced to sell their highest quality assets in order to shore up their balance sheets, as these were the only assets with any material value and liquidity. This pushed prices down so that many non-government bonds finished the year with spreads over government bonds that represented substantial liquidity premiums in excess of their credit risk premiums.

The Group funds its insurance liabilities with a portfolio of cash and debt securities exposed to market risk and foreign exchange risk. The following table indicates the contractual timing of cash flows arising from assets and liabilities for management of insurance contracts as of 31 December 2008:

As at 31 December 2008	No stated	Contractual cash flows (undiscounted)				Carrying
Financial assets	Maturity	0–1 yr	1–3 yrs	3–5 yrs	>5 yrs	amount
Shares and other variable yield securities	274.3	–	–	–	–	274.3
Debt and other fixed income securities	228.1	82.9	649.2	497.3	363.5	1,821.0
Cash and money market funds	789.9	–	–	–	–	789.9
Total	1,292.3	82.9	649.2	497.3	363.5	2,885.2

	No stated	Contractual cash flows (undiscounted)				Carrying
Insurance liabilities	Maturity	0–1 yr	1–3 yrs	3–5 yrs	>5 yrs	amount
Insurance contracts	–	781.8	521.7	218.9	170.4	1,692.8
Less assets arising from reinsurance contracts held	–	(145.3)	(120.8)	(45.3)	(49.4)	(360.8)
Total	–	636.5	400.9	173.6	121.0	1,332.0
Difference in contractual cash flows	1,292.3	(553.6)	248.3	323.7	242.5	1,553.2

As at 31 December 2008	No stated	Contractual cash flows (undiscounted)				Carrying
Financial assets	Maturity	0–1 yr	1–3 yrs	3–5 yrs	>5 yrs	amount
Shares and other variable yield securities	307.5	–	–	–	–	307.5
Debt and other fixed income securities	174.7	172.6	387.7	541.2	302.0	1,578.2
Cash and money market funds	762.4	–	–	–	–	762.4
Total	1,244.6	172.6	387.7	541.2	302.0	2,648.1

	No stated	Contractual cash flows (undiscounted)				Carrying
Insurance liabilities	Maturity	0–1 yr	1–3 yrs	3–5 yrs	>5 yrs	amount
Insurance contracts	–	568.4	415.3	181.6	184.9	1,350.2
Less assets arising from reinsurance contracts held	–	(100.8)	(82.8)	(39.1)	(47.5)	(270.2)
Total	–	467.6	332.5	142.5	137.4	1,080.0
Difference in contractual cash flows	1,244.6	(295.0)	55.2	398.7	164.6	1,568.1

Liquidity in the event of a major disaster is tested regularly using internal cash flow forecasts and realistic disaster scenarios. In addition pre-arranged revolving credit facilities are available from bank facilities (note 26). As discussed above, if a major insurance event occurs the investment strategy is reviewed to ensure that sufficient liquidity is also available in the capital assets.

Credit risk

Credit risk is the risk that the Group becomes exposed to loss if a counterparty fails to perform its contractual obligations, including failure to perform them in a timely manner. Credit risk could therefore have an impact upon the Group’s ability to meet its claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. Amlin is exposed to credit risk in its investment portfolio and with its premium and reinsurance debtors.

As well as actual failure of a counterparty to perform its contractual obligations, the price of corporate bond holdings will be affected by investors’ perception of a borrower’s ability to perform these duties in a timely manner. Credit risk within the investment funds is managed through the credit research carried out by the investment managers. The investment guidelines are designed to mitigate credit risk by ensuring diversification of the holdings. For each portfolio there are limits to the exposure to single issuers and to the total amount that can be held in each credit quality rating category, as determined by reference to credit rating agencies.

£59.0 million bonds held at 31 December 2008 were subject to downgrades during the year. Amlin had £4.3 million direct exposure in bonds with companies that went into liquidation during the year, based on the last price available before the liquidation date. The majority of these holdings were subsequently sold giving a net loss, of £4.1 million. At the year end Amlin’s exposure to impaired securities was de minimis.

The table below shows the breakdown at 31 December 2008 of the exposure of the bond portfolio and reinsurance debtors by credit quality⁵. The table also shows the total value of premium debtors, representing amounts due from policy holders. The quality of these debtors is not graded, but based on historical experience there is limited default risk relating to these amounts. The reinsurance debtors represent the amounts due at 31 December 2008 as well as amounts expected to be recovered on unpaid outstanding claims (including IBNR) in respect of earned and unearned risks. Reinsurance debtors are stated net of provisions for bad and doubtful debts.

Credit risk in respect of premium debt is overseen by the Group’s Broker Committee. The key controls include broker approval, annual financial review and internal rating of brokers and regular monitoring of premium settlement performance. The credit risk in respect of reinsurance debtors is primarily managed by review and approval of reinsurance security by the Group’s Reinsurance Security Committee, prior to the purchase of the reinsurance contract. Guidelines are set, and monitored, that restrict the purchase of reinsurance security based on the Group’s own ratings for each reinsurer and Standard & Poor’s ratings. The Group holds collateral from certain reinsurers including those that are non-rated. Provisions are made against the amounts due from certain reinsurers, depending on the age of the debt and the current rating assigned to the reinsurer. The impact on profit before tax of a 1% variation in the total reinsurance debtors would be £3.9 million (2007: £3.7 million).

31 December 2008	Debt securities £m	%	Money Market funds and cash £m	%	Insurance and reinsurance premium debtors £m	%	Reinsurance debtors £m	%
AAA5	1,406.4	77.2	779.3	100.0	–	–	8.3	2.1
AA	225.4	12.4	–	–	–	–	162.0	41.6
A	99.3	5.4	–	–	–	–	201.8	51.9
BBB	70.4	3.9	–	–	–	–	2.3	0.6
Other	19.5	1.1	–	–	467.3	100.0	14.5	3.8
	1,821.0	100.0	779.3	100.0	467.3	100.0	388.9	100.0

31 December 2008	Debt securities £m	%	Money Market funds and cash £m	%	Insurance and reinsurance premium debtors £m	%	Reinsurance debtors £m	%
AAA	1,387.9	87.9	750.6	100.0	–	–	11.8	3.2
AA	87.2	5.5	–	–	–	–	141.2	37.9
A	57.9	3.7	–	–	–	–	206.4	55.3
BBB	45.2	2.9	–	–	–	–	1.1	0.3
Other	–	–	–	–	364.9	100.0	12.3	3.3
	1,578.2	100.0	750.6	100.0	364.9	100.0	372.8	100.0

The table below shows the credit rating of the Group’s asset and mortgage backed debt securities and corporate bonds.

31 December 2008 Non-government bonds	Total £m	AAA	AA	A	BBB	Other
Corporate—Financials	138.4	29.9%	21.1%	48.0%	6.0%	–
Corporate—Other	82.7	16.2%	3.6%	32.8%	47.4%	–
Mortgage backed securities	161.9	95.7%	0.2%	1.6%	2.0%	0.5%
Asset backed securities	136.0	79.3%	6.8%	1.4%	12.4%	0.1%
Insurance linked securities	22.9	–	–	7.9%	10.8%	81.3%

The table excludes £81.3 million of corporate bonds with explicit government guarantees.
The table includes £49.1 million of government agency mortgage backed securities.

31 December 2007 Non-government bonds	Total £m	AAA	AA	A	BBB
Corporate—Financials	214.5	49.3%	24.0%	21.2%	5.5%
Corporate—Other	51.0	8.8%	10.6%	15.2%	65.4%
Mortgage backed securities	149.5	100.0%
Asset backed securities	80.7	97.6%	2.4%

¹ VaR is a statistical measure, which calculates the possible loss over a year, in normal market conditions. As VaR estimates are based on historical market data this should not be viewed as an absolute gauge of the level of risk to the investments.

² Segregated funds are managed separately for Amlin. Pooled funds are collective investment vehicles in which Amlin and other investors purchase units. Commingled funds combine the assets of several clients.

³ The yield is the rate of return paid if a security is held to maturity. The calculation is based on the coupon rate, length of time to maturity and the market price. It assumes coupon interest paid over the life of the security is reinvested at the same rate.

⁴ The duration is the weighted average maturity of the security’s cash flows, where the present values of the cash flows serve as the weights.

⁵ Credit ratings on debt securities are State Street composite ratings based on Standard & Poor’s, Moody’s and Fitch, depending on which agency / agencies rate each bond.

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