“With our strong focus on profit and return on equity, and the proven experience of our team, we are confident, without being complacent, of being able to continue to deliver good returns relative to the industry.”

We anticipate another year of strong performance with a good return on equity in 2005. There are a number of positive factors influencing financial performance in this year.

Unearned premium reserve: the premium written in 2003 and 2004, which remained unearned at 31 December 2004, amounted to £501 million, up 16.6% over the equivalent figure at the end of 2003. This premium has been written at very good rates and, in classes other than airline insurance, a large part of the associated risk will expire at either the end of March or the end of June. Subject to unexpected levels of catastrophe experience between now and then, the unearned premium reserve is expected to contribute good margins to the 2005 result.


Consistent reserving strength: the 2004 result included a release from prior year reserves of £62.7 million for Syndicate 2001. We make every effort to ensure that we maintain a consistent prudency in our reserving and, therefore, we would expect there to be a further release of reserves which will benefit the 2005 result if we experience normal claims development on previously earned premium.

Solid rating achieved on £267 million of 2005 premium written: we have written £267 million of premium (net of brokerage) in the first two months, which is approximately 34% of our current plan for the year. Of the £231 million of this which was renewal income, the average rate reduction was only 3%. This table illustrates that rating levels in most classes have to date remained above or around 2002 levels.

Class 2000 2001 2002 2003 2004
Airline hull and liabilities 100 242 232 194 175
Marine hull 100 115 148 170 183
UK Employers’ liability 100 115 144 158 155
Energy 100 140 172 189 165
UK Professional indemnity 100 110 148 178 180
US property insurance 100 125 171 163 143
Non US catastrophe reinsurance 100 120 157 162 146
US catastrophe reinsurance 100 115 146 150 143
US casualty 100 125 170 211 230
War 100 250 288 244 220
UK Fleet motor 100 121 136 142 139
Risk XL 100 122 190 192 171

Note: This table is completed by our underwriters and covers their views of rate movement from year to year. These views are supported by actual recorded renewal rate movements on the underwriting system. Subjective judgement is used to account for subtle changes in exposure or terms and conditions. Claims inflation is not systematically taken into account in the calculation of these rate movements and therefore, particularly in relation to long tail business, some of the benefit of rate increases has been eroded.

Among the classes where pricing is now below 2002 levels, airline hull and liability insurance has little room for further decline before margins fall into questionable territory. Rating pressure in this class has been affected by the paucity of major losses over the past four years, with some in the industry suggesting that this is a new trend which is set to continue owing to increased safety measures, new equipment and a more cautious culture. However, we believe it is too early to form such conclusions.

International property reinsurance became more competitive at the major January renewal season as some companies sought to increase their spread of risk, although rates are still technically sound. For US property insurance, which came under pressure in 2004, rate reductions currently appear to be moderating a little which is a good sign of discipline in the market.

Encouragingly, we are still able to find areas to write new property business at attractive rates.

The renewal seasons for reinsurance risks affected in 2004 by windstorms in Japan and the United States are in April and July respectively and we would expect pricing in these areas to improve. We are also still seeing rate increases in a small number of classes such as marine hull and aviation products. Offshore energy rates, which were reducing in 2004, are showing signs of greater stability following the larger than originally anticipated industry losses from Hurricane Ivan.

All in all, 2005 has every prospect of being another good underwriting year.

Larger investment funds: the Group’s cash and investments amounted to £1.3 billion at 31 December 2004. We believe the investment outlook for this year to be reasonable.

Lower Lloyd’s costs: Our Central Fund contributions have fallen by £8.2 million for 2005.

The largest threats to our 2005 performance are abnormal loss activity and the sterling/dollar exchange rate, given that 52% of our gross premium in 2004 was US$ denominated.

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