Annual Report 2007

Profit before tax

The Group recorded a profit before tax of £121.6 million and a return on equity of 7.8% (2007: £445.0 million and 37.8%). The lower result is due to losses incurred from Hurricanes Gustav and Ike of US$302.3 million, which contrasts with a lack of major natural catastrophe events in 2007 and a lower investment return of 0.6%, down from 6.6% in the previous year.

Our long term performance has been excellent with a weighted average return on equity since 2004 of 25.5%. This compares well to our cross cycle target of 15% and our estimated cost of capital over that period of approximately 10%.

Underwriting contributed £222.2 million (2007: £355.0 million) to the pre tax result. Syndicate 2001 and Amlin Bermuda contributed £176.0 million (2007: £238.8 million) and £46.2 million (2007: £116.2 million) respectively. The fall in contributions reflect the impact of Hurricanes Gustav and Ike of US$140.3 million and US$162.0 million for the Syndicate and Bermuda respectively.

The underwriting contribution includes run off profits from reserves of £114.7 million (2007: £109.0 million). We have continued to maintain consistent levels of reserving strength for liabilities assessed at 31 December 2008, with reserves set at a level above an actuarial best estimate of possible outcomes. With this approach, if ‘normal’ claims development is experienced, releases will be made from reserves over time. At the year end, the level of surplus above the actuarial best estimate remained in excess of £200 million.(2007: in excess of £200 million)

Investment return was £18.0 million (2007: £157.0 million). This is a significant reduction in contribution reflecting difficult markets in 2008 for all investment classes with the exception of government bonds and cash. Our investment allocation has been more cautious over the last year and high levels of cash and government bond holdings more than offset the lower returns on equities and non government bonds and cash. We avoided material losses from the major defaults in equity and bond markets in the year.

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Another feature of the results is the impact of foreign exchange. 2008 was a volatile year for exchange rates and sterling, our Group reporting currency, weakened materially against the US dollar and the euro. This has had a number of effects:

• Margins on overseas income have generally increased.
• A gain of £75.5 million is recorded in the income statement principally relating to foreign exchange translation of net non-monetary liabilities.
• A loss of £41.3 million is also recorded in the income statement for sterling corporate assets of £182.1 million that were held by Amlin Bermuda. These holdings were part of the hedging strategy for the Group’s new investment in Bermuda. However, as Amlin Bermuda reports in US dollars, an exchange loss is recorded in their financial statements and this is recognised in the Group income statement. An offsetting foreign exchange gain is recognised in the Statement of Changes in Equity.
• Other losses of £15.3 million include the impact of revaluing the Group’s US dollar subordinated debt.

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