Review

Financial management

Currency management

The Group reports in sterling but manages a sterling business in the UK and a US dollar business in Bermuda. For the UK operations, we sell trading currency profits into sterling as they crystallise to mitigate the impact of fluctuating exchange rates.

Amlin Bermuda manages its US dollar trading position and holds its balance sheet mainly in US dollars reflecting its global underwriting profile. At a Group level, we implement a policy to hedge up to 50% of the net dollar exposure of the Group to Amlin Bermuda.

The significant strengthening of the US dollar against sterling has been a positive for the Group’s financial position. With much of our trading carried out in US dollars the rate change has been beneficial to our expected sterling profitability.

In the year to 31 December 2008, the dollar strengthening produced foreign exchange gains, before hedging, of £256.5 million on the dollar capital investment in Amlin Bermuda. The hedges deployed reduce this gain. The Group’s hedges are effected through the use of derivative contracts and partially through sterling investments held by Amlin Bermuda.

With effect from 7 March 2008, the Group applied the hedge accounting rules of IAS 39 Financial Instruments: Recognition and Measurement such that all fair value gains and losses on derivatives were taken through the Consolidated Statement of Changes in Equity to match the underlying movement in the valuation of the net investment in Amlin Bermuda. At 31 December 2008 a loss of £74.7 million had been taken to reserves in respect of these hedges.

For Amlin Bermuda, which reports in US dollars, sterling corporate assets of £182.1 million were held at 31 December 2008. These produced a foreign exchange loss of £41.3 million in the year.

Despite being part of the hedging strategy against the overall Group foreign exchange exposure, this loss has to be recorded in Amlin Bermuda’s income statement which is consolidated into the Group income statement. An offsetting foreign exchange gain is recognised in the Statement of Changes in Equity.

The income statement also reflects other foreign exchange gains, including gains on the foreign exchange translation of net non-monetary liabilities, which offset the loss on Amlin Bermuda’s sterling assets.

Foreign exchange on Amlin Bermuda
 
Reserves
£m		 Income
Statement
£m		  
Total
£m
Foreign exchange gain
on US$ investment in
Amlin Bermuda		  
 
256.5		  
 
–		  
 
256.5
Foreign exchange
gains/losses on FX
options used to hedge
US$ investment in
Amlin Bermuda
   – Income Statement
   – Balance Sheet		  
 
 
 
 
–
(74.7)		  
 
 
 
 
0.4
–		  
 
 
 
 
0.4
(74.7)
Foreign exchange loss
on sterling corporate assets
held as hedge in
Amlin Bermuda		  
 
 
–		  
 
 
(41.3)		  
 
 
(41.3)
181.8 (40.9) 140.9