Annual Report 2008

11 Employee benefit expenses

The average number of persons employed by the Group, including individuals on fixed term contracts and directors, were:

	2008	2007
Underwriting divisions
Underwriting, claims and reinsurance	365	375
Administration and support	171	132
Central functions
Operations	70	64
Finance	78	75
Internal audit and compliance	11	9
	695	655
	2008	2007
By location
UK	665	638
Bermuda	23	16
Europe (excluding UK)	3	–
Singapore	3	1
US	1	–
	695	655

The aggregate payroll costs incurred by Group companies are analysed as follows:

	2008 £m	2007 £m
Wages and salaries	38.3	33.5
Employee incentive and related social security costs	21.5	31.4
Share options granted to directors and employees	2.1	1.1
Social security costs	5.3	4.1
Pension costs—defined contribution schemes (note 27)	3.7	3.8
Pension costs—defined benefit schemes (note 27)	(2.6)	1.2
	68.3	75.1

12 Finance costs

13 Profit before tax

Profit before tax is stated after charging / (crediting) the following amounts:

	2008 £m	2007 £m
Depreciation – owned assets	3.3	3.0
Operating lease charges	3.8	3.6
Foreign exchange gains	(18.9)	(8.0)

Fees paid to the Group’s auditors comprise the following amounts:

	2008 £	2007 £
Amounts charged to the income statement
Audit of the Company's annual accounts	83,555	77,097
Audit of subsidiary companies	423,095	414,592
Taxation advice	35,950	34,000
Incentive scheme audit	8,000	7,709
Systems testing	8,645	9,883
Pension and actuarial services	9,846	6,000
Other audit	–	7,050
	569,091	556,331

The Audit Committee Chairman is required to approve any non-audit work commissioned from the auditors where any single piece of work attracts a fee over £25,000.

14 Tax

	2008 £m	2007 £m
Current tax – current year
UK corporation tax	22.9	52.6
Foreign tax suffered	–	4.1
Double tax relief	–	(3.2)
	22.9	53.5
Current tax – prior year
UK corporation tax	(2.8)	–
	(2.8)	–
Deferred tax – current year
Movement in assets	4.6	5.5
Movement in liabilities	16.0	35.5
	20.6	41.0
Deferred tax – prior year
Movement in assets	–	0.2
Movement in liabilities	0.5	(0.8)
	0.5	(0.6)
Deferred tax – change in tax rate
Movement in assets	–	0.5
Movement in liabilities	–	(2.2)
	–	(1.7)
Taxes on income	41.2	92.2

In addition to the above, deferred tax of £2.3 million on taxable items taken through equity has been credited directly to equity (2007: £1.3 million debited).

Underwriting profits and losses are recognised in the technical account on an annual accounting basis, recognising the results in the period in which they are earned. UK corporation tax is charged in the period in which the underwriting profits are actually paid by the Syndicate to the corporate members.

Deferred tax is provided on the annually accounted underwriting result with reference to the forecast ultimate result of each of the years of account included in the annually accounted underwriting. Where the forecast ultimate result for a year of account is a taxable profit, deferred tax is provided in full on the movement on that year of account included in the period’s annually accounted underwriting result. Where the forecast ultimate result for a year of account is a loss, deferred tax is only provided for on the movement on that year of account included in the period’s annually accounted Syndicate underwriting result to the extent that forecasts show that the taxable loss will be utilised in the foreseeable future. Deferred tax has been provided on the annually accounted underwriting result for this accounting period of £218.8 million (2007: £288.5 million).

Deferred tax assets on loss provisions in respect of non-aligned syndicate participations (see note 18) are only provided for, to the extent that forecasts show that it is more likely than not that the ultimate taxable underwriting losses represented by these provisions will be utilised within the foreseeable future. Deferred tax has been provided in full on non-aligned syndicate loss participation provisions of £2.6 million (2007: £3.6 million).

Reconciliation of tax expense

The UK standard rate of corporation tax is 28.5% (2007: 30%), whereas the tax charged for the year ended 31 December 2008 as a percentage of profit before tax is 33.9% (2007: 20.7%). The reasons for this difference are explained below:

	2008 £m	2008 %	2007 £m	2007 %
Profit before tax	121.6		445.0
Taxation on profit on ordinary activities calculated at the standard rate of corporation tax in the UK	34.7	28.5	133.5	30.0
Non-deductible or non-taxable items	0.2	–	(2.3)	(0.5)
Tax rate differences on overseas subsidiaries	9.7	8.0	(32.2)	(7.2)
Over provision in respect of prior periods	(2.3)	(1.8)	(0.9)	(0.2)
Reduction in future UK tax rate	(1.1)	(0.8)	(6.8)	(1.6)
Irrecoverable overseas tax	–	–	0.9	0.2
Taxes on income	41.2	33.9	92.2	20.7

The Group’s tax provision for 2008 has been prepared on the basis that the Group’s Bermudian subsidiaries are non-UK resident for UK corporation tax purposes. The corporation tax rate for Bermudian companies is currently 0% (2007: 0%).

A deferred tax liability of £16.1 million (2007: £20.3 million) has been provided for on profits of the Group’s overseas subsidiaries expected to be distributed in the foreseeable future. A deferred tax liability has not been provided on the undistributed profits of the overseas subsidiaries of £134.4 million (2007: £169.5 million) because the distribution of these profits is not expected in the foreseeable future.

Deferred tax has been provided for at the tax rate in force when the temporary differences are expected to reverse. The tax rates used are 28.5% for temporary differences expected to reverse in 2008 and 28% for temporary differences expected to reverse in 2009 or later.

The Group is subject to US tax on US underwriting profits. No provision has been made in respect of such tax arising in 2008 (2007: £nil) as any net provision is likely to be immaterial and would be offset by brought forward US tax losses in the Group.

Deferred income tax

The deferred tax liability is attributable to temporary differences arising on the following:

	Provisions for losses £m	Other provisions £m	Pension provisions £m	Other timing differences £m	Total £m
At 1 January 2008	1.0	5.2	0.8	6.4	13.4
Movements in the year	–	(0.5)	1.0	(2.8)	(2.3)
At 31 December 2008	1.0	4.7	1.8	3.6	11.1

The deferred tax liability is attributable to temporary differences arising on the following:

	Underwriting results £m	Unrealised capital gains £m	Syndicate capacity £m	Overseas earnings £m	Other timing differences £m	Total £m
At 1 January 2008	102.9	0.1	4.5	20.3	0.3	128.1
Movements in the year	20.0	(0.1)	0.8	(4.2)	–	16.5
At 31 December 2008	122.9	–	5.3	16.1	0.3	144.6

Deferred tax assets have not been provided on US net operating losses of £26.5 million (2007: £30.2 million) carried forward due to uncertainty over their future use.

15 Net foreign exchange gains/(losses)

The Group recognised foreign net exchange gains of £18.9 million (2007: £8.0 million) in the income statement during the year.

The Group writes business in many currencies and although a large proportion of the Group’s balance sheet assets and liabilities are matched, minimising the effect of movements in foreign exchange rates on the Group’s result, it is not possible, or practical, to match exactly all assets and liabilities in currency. Accounting standards also require that certain classes of assets and liabilities be translated at different rates (see foreign currency translation accounting policy).

Included within the Group’s foreign exchange gain in the income statement is:

	2008 £m	2007 £m
Net gains/(losses) on underwriting transactions and translation of underwriting assets and liabilities at closing rates	17.4	(7.7)
Gain on translation of net non-monetary liabilities at historical average rates	58.1	14.7
Underwriting exchange gains	75.5	7.0
(Losses)/gains on long-term US dollar borrowings	(18.1)	0.8
Losses on Sterling capital assets held in Amlin Bermuda (note 3)	(41.3)	–
Net gains on non-underwriting transactions and translation of non-underwriting assets and liabilities at closing rates	2.8	0.2
Group company exchange (losses)/gains	(56.6)	1.0
	18.9	8.0

In addition, the following exchange movements have been charged directly to equity:

	2008 £m	2007 £m
Gain/(loss) on translation of overseas subsidiaries (note 3)
- Amlin Bermuda	256.5	(8.2)
- Anglo French Underwriters	(0.4)	–
	256.1	(8.2)
(Loss) on derivative instruments hedging investments in overseas operations (note 3)	(74.7)	–
Gains on translation of intangibles (note 21)	4.7	–
	186.1	(8.2)

Amlin Bermuda, which reports in US dollars, held Sterling assets of £182.1 million at 31 December 2008. These produced a foreign exchange loss of £41.3 million which is included within the Group’s foreign exchange gain. These investments, together with certain foreign exchange hedge contracts, were held in Sterling as part of the Group’s overall strategy to hedge up to 50% of its US dollar exposure in Amlin Bermuda Ltd (refer to note 3.2 for further details).

16 Cash and cash equivalents

Cash and cash equivalents represents cash at bank and in hand and short-term bank deposits which can be recalled within 24 hours.

17 Financial investments

	At valuation 2008 £m	At valuation 2007 £m	At cost 2008 £m	At cost 2007 £m
Financial assets held for trading at fair value through income
Shares and other variable yield securities	190.7	232.1	310.4	230.4
Debt and other fixed income securities	1,805.3	1,563.0	1,811.5	1,541.9
Property	83.5	75.4	94.9	72.7
Other financial assets at fair value through income
Participation in investment pools	789.0	748.0	789.0	748.0
Deposits with credit institutions	29.0	19.2	29.0	19.2
Derivative instruments	(40.0)	(1.4)	14.7	–
Other	2.0	2.6	2.0	2.6
Available for sale financial assets
Unlisted equities	8.6	–	8.6	–
	2,868.1	2,638.9	3,060.1	2,614.8
In Group owned companies	1,291.2	1,061.0	1,436.0	1,051.1
In Syndicate 2001	1,573.1	1,573.6	1,620.3	1,559.4
In non-aligned syndicates participations (see note 18)	3.8	4.3	3.8	4.3
	2,868.1	2,638.9	3,060.1	2,614.8
Listed investments included in Group: owned total are as follows:
Shares and other variable yield securities	190.7	232.1	310.4	230.4
Debt and other fixed income securities	1,739.8	1,506.5	1,746.0	1,485.6
	1,930.5	1,738.6	2,056.4	1,716.0

Included within debt and other fixed income securities are overseas deposits amounting to £71.1 million (2007: £60.2 million). Overseas deposits represent balances held with overseas regulators to permit underwriting in certain territories. The assets are managed by Lloyd’s on a pooled basis and are predominantly invested in debt and other fixed income securities.

Unlisted equity investments are the Group’s investments of 19.9% of the shares in Miles Smith plc and TL Dallas Group Limited acquired for £4.6 million and £4.0 million on 22 July 2008 and 13 August 2008 respectively. No provision has been made for the impairment of these investments as at 31 December 2008.

	2008 £m	2007 £m
At 1 January	2,638.9	2,367.7
Exchange gains/(losses)	547.5	(2.5)
Net (sales)/purchases	(155.4)	232.1
Realised gains on disposals	22.3	20.0
Unrealised investment (losses)/gains	(110.5)	21.6
Losses on derivative hedging instruments realised and unrealised	(74.7)	–
At 31 December	2,868.1	2,638.9

18 Insurance contracts and reinsurance assets

	Claims reserves £m	Unearned premiums reservess £m	Other insurances assets and liabilitiess £m	Totals £m
Insurance liabilities
At 1 January 2007	1,417.5	545.5	68.6	2,031.6
Movement in the year	(70.9)	(42.4)	(35.7)	(149.0)
Exchange adjustments	3.6	(1.3)	1.1	3.4
At 31 December 2007	1,350.2	501.8	34.0	1,886.0
Movement in the year	43.9	7.8	39.8	91.5
Exchange adjustments	298.7	39.8	11.1	349.6
At 31 December 2008	1,692.8	549.4	84.9	2,327.1
Reinsurance assets
At 1 January 2007	357.0	37.7	300.6	695.3
Movement in the year	(89.4)	(10.2)	21.3	(78.3)
Exchange adjustments	2.6	–	(2.7)	(0.1)
At 31 December 2007	270.2	27.5	319.2	616.9
Movement in the year	22.3	3.5	(60.2)	(34.4)
Exchange adjustment	68.3	–	66.1	134.4
At 31 December 2008	360.8	31.0	325.1	716.9

Further information on the calculation of claims reserves and the risks associated with them is provided in the risk disclosures in note 3. Claims reserves are further analysed between notified outstanding claims and incurred but not reported claims below:

	2008 £m	2007 £m
Notified outstanding claims	1,040.9	800.3
Claims incurred but not reported	651.9	549.9
Insurance contracts claims reserve	1,692.8	1,350.2

It is estimated, using historical settlement trends, that £781.8 million (2007: £568.4 million) of the claims reserves, as at 31 December 2008, will settle in the next twelve months.

	2008 £m	2007 £m
Reinsurers’ share of insurance liabilities	744.0	638.5
Less provision for impairment of receivables from reinsurers	(27.1)	(21.6)
Reinsurance assets	716.9	616.9

Other insurance liabilities are comprised principally of premium payable for reinsurance, including reinstatement premium. Other insurance assets are comprised principally of amounts recoverable from reinsurers in respect of paid claims and premium receivable on inward reinsurance business, including reinstatement premium.

The Group assesses its reinsurance assets for impairment on a quarterly basis by reviewing counterparty payment history and credit grades provided by rating agencies. The credit ratings of the Group’s reinsurance assets are shown in note 3.2. As at 31 December 2008 reinsurance assets at a nominal value of £13.4 million (2007: £13.3 million) were greater than 3 months past due and provided for the value of £9.4 million (2007: £8.7 million). The Group holds collateral of £0.2 million (2007: £0.3 million) in relation to these assets.

The ageing analysis of reinsurance assets past due but not impaired is as follows:

	2008 £m	2007 £m
3 to 6 months	1.2	1.4
6 to 9 months	1.2	1.3
Greater than 9 months	1.6	1.9
	4.0	4.6

The Group recognised a total impairment loss of £5.5 million (2007: £4.3 million gain) on reinsurance assets and insurance receivables.

From 1994 to 1999 the Group participated on a number of Lloyd’s syndicates other than those managed by the Group. From 2000 the Group ceased to underwrite directly on non-aligned syndicates. However, a number of syndicates remain “open” and Amlin’s final liabilities are still to be finalised. Provisions are made for potential future insurance claims. Included within the claims provisions in the table above are provisions in respect of “non-aligned syndicate participations” of £2.6 million (2007: £3.9 million). Syndicates that remain open at 31 December 2008 are set out in the table below.

		Syndicate capacity
Managing agent	Non-aligned syndicate	1999 £m	1998 £m	1997 £m
Non-marine
Jago Managing Agency Ltd	205	2.25	–	–
A E Grant (Underwriting Agencies) Ltd	991	2.93	2.35	–
Duncanson & Holt Syndicate Management Ltd	1101	–	2.50	2.50
Total Non-marine		5.18	4.85	2.50
Aviation
Duncanson & Holt Syndicate Management Ltd	957	–	3.00	3.00
Total capacity
Capacity remaining open at 31 December 2007 and 2008		5.18	7.85	5.50

19 Loans and receivables, including insurance receivables

	2008 £m	2007 £m
Receivables arising from insurance contracts	192.0	77.0
Less provision for impairment of receivables from contract holders and agents	(0.5)	(2.1)
Deferred acquisition costs	114.0	108.2
Insurance receivables	305.5	183.1
Other debtors	16.2	11.4
Prepayments and other accrued income	52.5	25.4
Other loans and receivables	68.7	36.8
	374.2	219.9

	2008 £m	2007 £m
Current portion	365.2	210.0
Non-current portion	9.0	9.9
	374.2	219.9

The reconciliation of opening and closing deferred acquisition costs is as follows:

	2008 £m	2007 £m
At 1 January	108.2	118.3
Exchange gains/(losses)	7.0	(0.2)
Movements in the year	(1.2)	(9.9)
At 31 December	114.0	108.2

The Group assesses its insurance receivables for impairment on a quarterly basis by reviewing counterparty payment history. As of 31 December 2008 insurance receivables at a nominal value of £3.6 million (2007: £3.2 million) were greater than 3 months overdue and provided for on the basis of credit rating to the value of £0.5 million (2007: £2.1 million).

The ageing analysis of insurance receivables overdue, before impairment provision, is as follows:

	2008 £m	2007 £m
3 to 6 months	1.0	1.2
6 to 9 months	1.4	1.0
Greater than 9 months	1.2	1.0
	3.6	3.2

20 Property and equipment

	Leasehold land and buildings £m	Freehold land and buildings £m	Motor vehicles £m	Computer equipment £m	Fixtures, fittings and leasehold improvements £m	Total £m
Cost
At 1 January 2008	1.9	–	0.1	20.9	6.4	29.3
Additions	–	4.1	0.1	2.6	0.3	7.1
Acquisitions through business combination (note 35)	–	–	0.1	0.2	0.1	0.4
Disposal	(1.9)	–	(0.1)	(0.1)	–	(2.1)
At 31 December 2008	–	4.1	0.2	23.6	6.8	34.7
Accumulated depreciation
At 1 January 2008	0.2	–	0.1	17.3	5.9	23.5
Charge for the year	–	0.2	0.1	2.7	0.3	3.3
Disposal	(0.2)	–	(0.1)	(0.2)	–	(0.5)
At 31 December 2008	–	0.2	0.1	19.8	6.2	26.3
Net book value
At 31 December 2008	–	3.9	0.1	3.8	0.6	8.4
At 1 January 2008	1.7	–	–	3.6	0.5	5.8

		Leasehold land and buildings £m	Motor vehicles £m	Computer equipment £m	Fixtures, fittings and leasehold improvements £m	Total £m
Cost
At 1 January 2007		1.9	0.3	18.4	6.2	26.8
Additions		–	–	2.5	0.3	2.8
Disposal		–	(0.2)	–	(0.1)	(0.3)
At 31 December 2007		1.9	0.1	20.9	6.4	29.3
Accumulated depreciation
At 1 January 2007		0.1	0.2	14.6	5.7	20.6
Charge for the year		0.1	–	2.7	0.2	3.0
Disposal		–	(0.1)	–	–	(0.1)
At 31 December 2007		0.2	0.1	17.3	5.9	23.5
Net book value
At 31 December 2007		1.7	–	3.6	0.5	5.8
At 1 January 2007		1.8	0.1	3.8	0.5	6.2

There were no assets held under finance lease and hire purchase contracts at 31 December 2008 (2007: £nil).

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