Annual Report 2007

1. Summary of significant accounting policies

The basis of preparation, basis of consolidation and significant accounting policies adopted in the preparation of Amlin plc’s (the Group's) financial statements are set out below.

Basis of preparation

These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the European Union (EU).

The financial statements comply with Article 4 of the EU IAS regulation. The financial statements have been prepared on the historical cost basis except for cash and cash equivalents, financial investments, loans and receivables, share options and pension assets and liabilities which are measured at their fair value.

The accounting policies adopted in preparing these financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2006.

Basis of consolidation

The financial statements consolidate the accounts of the Company and subsidiary undertakings, including the Group’s underwriting through participation on Lloyd’s syndicates. Subsidiaries are those entities in which the Group, directly or indirectly, has the power to govern the operating and financial policies in order to gain economic benefits and includes the Group’s Employee Benefit Trusts. The financial statements of subsidiaries are prepared for the same reporting year as the parent company. Consolidation adjustments are made to convert subsidiary accounts prepared under UK GAAP into IFRS so as to remove the effects of any different accounting policies that may exist. Subsidiaries are consolidated from the date that control is transferred to the Group and cease to be consolidated from the date that control is transferred out. All inter-company balances, profits and transactions are eliminated.

Details of material subsidiaries included within the consolidated financial statements can be found in note 40 to the parent company accounts.

Changes to International Financial Reporting Standards

In the current year, the Group has adopted IFRS 7, Financial Instruments: Disclosures and the related amendments to IAS 1, Presentation of Financial Statements, and IFRS 4, Accounting for Insurance Contracts which are effective for annual reporting periods beginning on or after 1 January 2007. The impact of the adoption of IFRS 7 and the changes to IAS 1 and IFRS 4 have been to expand the disclosures provided in the financial statements regarding the Group’s management of capital and financial instruments (see notes 2 and 3).

Three Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are effective for the current period. These are: IFRIC 8, which clarifies IFRS 2, Share-based Payments; IFRIC 9, Reassessment of Embedded Derivatives; and IFRIC 10, Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Group’s accounting policies.

At the date of authorisation of these financial statements a number of standards and interpretations had been published but were not yet effective. These include:

• IFRS 8, Operating Segments;
• IFRIC 11, IFRS 2: Group and Treasury Share Transactions;
• IFRIC 12, Service Concession Arrangements; and
• IFRIC 14, IAS 19: The Limit of Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

The directors anticipate that the adoption of these standards and interpretations will have no material impact on the financial statements except for additional disclosures.

In accordance with IFRS 4, the Group has applied existing accounting practices for insurance contracts, modified as appropriate, to comply with the IFRS framework and applicable standards.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates.

Insurance contract liabilities

The most significant estimate made in the financial statements relates to the insurance unpaid claim reserves and related loss adjustment expenses of the Group.

The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up. The change in claims costs for prior period insurance claims represents the claims development of earlier reported years incurred in the current accounting period. In 2007 there has been a net positive development of £109.0 million (2006: £68.9 million) for the Group, reflecting the favourable experience in the 2006 and prior reported years. Note 3 provides further detail of the method the Group applies in estimating insurance contract liabilities.

Financial investments

The methods and assumptions used by the Group in estimating the fair value of financial assets are described in note 3.

Deferred tax

The estimates of deferred tax assets and tax liabilities have been adjusted in the current period to reflect the reduction in the UK Corporate tax rate to 28% on 1 April 2008. (2006: 30%).

Staff incentive plans

The Group recognises a liability and expense for staff incentive plans based on a formula that takes into consideration the underwriting year profit after certain adjustments. Underwriting year profit is estimated based on current expectation of premiums and claims and will change as more information is known. Where estimates change related staff incentive plan liabilities may also change.

Foreign currency translation

The Group presents its accounts in sterling since it is subject to regulation in the United Kingdom and the net assets, liabilities and income of the Group are currently weighted towards sterling. US dollar revenue is significant but the sterling revenue stream is also currently material. All group entities are incorporated in the United Kingdom with the exception of Amlin Bermuda Holdings Ltd and Amlin Bermuda Ltd which are incorporated in Bermuda and Amlin Singapore Pte Limited which is incorporated in Singapore. All Group entities conduct business in a range of economic environments, primarily the United Kingdom, United States of America and Europe. Due to the regulatory environment and the fact that the Group trades through the Lloyd’s market, all Group companies incorporated in the United Kingdom have adopted sterling as their functional currency. The Group companies incorporated in Bermuda have adopted the US dollar as their functional currency. The Group company incorporated in Singapore has adopted the Singapore dollar as its functional currency.

Where sterling is the functional currency, income and expenditure in US dollars, Euros and Canadian dollars is translated at average rates of exchange for the period. Transactions denominated in other foreign currencies are translated using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated into sterling at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at the average rate prevailing in the period in which the asset or liability first arose.

Exchange differences arising from the conversion of overseas operations are accounted for through reserves.

Where contracts to sell currency have been entered into prior to the year end, the contracted rates have been used. Differences arising on the translation of foreign currency amounts on such items are included in other operating expenses.

Insurance contracts premium

Gross premium written comprise premium on insurance contracts incepting during the financial year. The estimated premium income in respect of facility contracts is deemed to be written in full at the inception of the contract. Premium is disclosed before the deduction of brokerage and taxes or duties levied on them. Estimates are included for premium receivable after the period end but not yet notified, as well as adjustments made in the year to premium written in prior accounting periods.

Premium is earned over the policy contract period. The earned element is calculated separately for each contract on a 365ths basis. For premium written under facilities, such as under binding authorities, the earned element is calculated based on the estimated risk profile of the individual contracts involved.

The proportion of premium written, gross of commission payable, attributable to periods after the balance sheet date is deferred as a provision for unearned premium. The change in this provision is taken to the income statement in order that revenue is recognised over the period of the risk.

Acquisition costs comprise brokerage incurred on insurance contracts written during the financial year. They are incurred on the same basis as the earned proportions of the premium they relate to. Deferred acquisition costs are amortised over the period in which the related revenues are earned. Deferred acquisition costs are reviewed at the end of each reporting period and are written off where they are no longer considered to be recoverable.

Reinsurance premium ceded

Reinsurance premium ceded comprises the cost of reinsurance arrangements placed and is accounted for in the same accounting period as the related insurance contracts. The provision for reinsurers' share of unearned premium represents that part of reinsurance premium written which is estimated to be earned in following financial years.

Insurance contracts liabilities: claims

Claims paid are defined as those claims transactions settled up to the balance sheet date including the internal and external claims settlement expenses allocated to those transactions. The reinsurers' share represents recoveries received from reinsurance protections in the period plus recoveries receivable against claims paid that have not been received at the balance sheet date, net of any provision for bad debt.

Unpaid claims reserves are made for known or anticipated liabilities under insurance contracts which have not been settled up to the balance sheet date. Included within the provision is an allowance for the future costs of settling those claims. This is estimated based on past experience and current expectations of future cost levels.

Unpaid claims reserves are estimated on an undiscounted basis. Provisions are subject to a detailed quarterly review where forecast future cash flows and existing amounts provided are reviewed and reassessed. Any changes to the amounts held are adjusted through the income statement. Provisions are established above an actuarial best estimate so that there is a reasonable chance of release of reserves from one underwriting year to the next.

The unpaid claims reserves also include, where necessary, a reserve for unexpired risks where, at the balance sheet date, the estimated costs of future claims and related deferred acquisition costs are expected to exceed the unearned premium provision. In determining the need for an unexpired risk provision the underwriting divisions within the Syndicate have been regarded as groups of business that are managed together.

Although the unpaid claims reserves are considered to be reasonable, having regard to previous claims experience (including the use of certain statistically based projections) and case by case reviews of notified claims, on the basis of information available at the date of determining the provision, the ultimate liabilities will vary as a result of subsequent information and events. This uncertainty is discussed further in the risk disclosures in Note 3.

Net investment income

Dividends and any related tax credits are recognised as income on the date that the related listed investments are marked ex-dividend. Other investment income, interest receivable, expenses and interest payable are recognised on an accruals basis.

Intangible assets

i. Syndicate capacity

The cost of Lloyd’s syndicate participations that have been purchased in the Lloyd’s capacity auctions is capitalised at cost. Syndicate capacity is considered to have an indefinite life and is not subject to an annual amortisation charge. The continuing value of the capacity is reviewed for impairment annually by reference to the expected future profit streams to be earned from Syndicate 2001, with any impairment in value being charged to the income statement.

ii. Goodwill

Goodwill arising on acquisitions prior to 1 January 1999 was written off to reserves. Goodwill recognised between 1 January 1999 and the date of transition to IFRS (1 January 2004) was capitalised and amortised on a straight line basis over its estimated useful life. Following the transition to IFRS this goodwill is stated at net book value at 1 January 2004. Goodwill that was recognised subsequent to 1 January 2004, representing the excess of the purchase consideration over fair value of net assets acquired, is capitalised. Goodwill is tested for impairment annually, or when events or changes in circumstance indicate that it might be impaired, by comparing the net present value of the future earnings stream from the acquired subsidiary, for the next five years against the carrying value of the goodwill and the carrying value of the related net assets.

iii. Other intangible assets

Other intangible assets comprise costs directly attributable to securing the intangible rights to customer contractual relationships. Costs are recognised as intangible assets where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. Other intangible assets are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over the useful economic life which is estimated to be 3 years.

Property and equipment

Property and equipment are stated at historical cost less accumulated depreciation and provision for impairment where appropriate. Depreciation is calculated on the straight line method to write down the cost of such assets to their residual values over their estimated useful lives as follows:

Leasehold land and buildings	over period of lease
Motor vehicles	33% per annum
Computer equipment	33% per annum
Furniture, fixtures and leasehold improvements	20% per annum

The carrying values of property and equipment are reviewed for impairment when events or changes in circumstance indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the income statement. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken to the income statement. Repairs and renewals are charged to the income statement when the expenditure is incurred.

Financial investments

The Group has classified its financial investments as “fair value through income” (FV) to the extent that they are not reported as cash and cash equivalents. This classification requires all fair value changes to be recognised immediately within the investment return line in the income statement. Investments are assigned this classification at the time of acquisition. Within the FV category, fixed maturity and equity securities are classified as 'trading' as the Group buys with the intention to resell. All other securities are classified as 'other than trading' within the FV category.

Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and are subsequently re-measured at fair value based on quoted bid prices. Changes in the fair value of investments are included in the income statement in the period in which they arise. The uncertainty around bond valuation is discussed further in note 3. In the Company’s accounts, other financial investments in Group undertakings are stated at cost and are reviewed for impairment annually or when events or changes in circumstances indicate the carrying value may be impaired.

Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into. Changes in the fair value of derivative instruments are recognised immediately in the income statement. Fair values for over the counter derivatives, are supplied by the relevant counterparty. The Group has opted not to seek hedge accounting for its derivative instruments in the year.

Loans and receivables

Loans and receivables are measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired. These are reversed when payment is received.

Borrowings

Borrowings are stated initially at the consideration received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between amortised cost and the redemption value is recognised in the income statement over the period of the borrowings. Transaction costs on borrowings are charged through the income statement over the period of the borrowings.

Borrowing costs

Borrowing costs comprise interest payable on loans and bank overdrafts and commissions charged for the utilisation of letters of credit. These costs are charged to the income statement as financing costs, as incurred. In addition fees paid for the arrangement of debt and letter of credit facilities are charged to borrowing costs over the life of the facility.

Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at fair value. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks and other short-term, highly liquid investments which are subject to insignificant risk of change in fair value.

Treasury shares

Treasury shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the treasury shares. Any consideration paid or received is recognised directly in equity.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards to the Group. All other leases are classified as operating leases.

Assets held under finance leases and hire purchase transactions are capitalised in the balance sheet and depreciated over their useful lives. The initial capital value is the lower of the fair value of the leased asset and the present value of the minimum lease payments. Payments under finance leases are apportioned between finance charges and the reduction of the lease obligation so as to achieve a consistent rate of interest on the remaining balance of the lease liability.

Rentals payable under operating leases are charged to income in the period in which they become payable in accordance with the terms of the lease.

Employee benefits

i. Pension obligations

The Group participates in a number of pension schemes, including one defined benefit scheme, defined contribution schemes and personal pension schemes.

The Lloyd’s Superannuation Fund scheme is a multi-employer scheme. There is insufficient information available to reliably identify the Group’s proportionate share of the defined benefit obligation, plan assets and post-employment costs associated with scheme. Therefore it is accounted for as a defined contribution scheme and not a defined benefit scheme. For this scheme, where contractual obligations have been agreed, the net present value of these payments is recognised as a liability on the balance sheet.

The JE Mumford (Underwriting Agencies) Limited defined benefit scheme was transferred into the Lloyd’s Superannuation Fund scheme in February 2007.

Pension contributions to schemes that are accounted for as defined contribution plans are charged to the income statement when due.

ii. Equity compensation plans

The Group operates a number of executive and employee share schemes. Options issued after 7 November 2002 are accounted for using the fair value method where the cost for providing equity compensation is based on the fair value of the share option or award at the date of the grant. The fair value is calculated using an option pricing model and the corresponding expense is recognised in the income statement over the vesting period. The accrual for this charge is recognised in equity shareholders'funds. When the options are exercised, the proceeds received net of any transaction costs are credited to share capital for the par value and the surplus to share premium.

iii. Other benefits

Other employee incentive schemes and long-term service awards, including sabbatical leave, are recognised when they accrue to employees. A provision is made for the estimated liability for long-service leave as a result of services rendered by employees up to the balance sheet date.

Other income

Information fee income is recognised on an earned basis.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years or that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered, or to the extent that it has been utilised.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax is provided for on the profits of overseas subsidiaries where it is reasonably foreseeable that distribution of the profit back to the UK will take place.

2. Capital

The capital structure of the Group consists of equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in notes 22 and 24, and subordinated debt as disclosed in note 26. For business planning purposes account is also taken of the Group’s uncalled debt facilities.

The Amlin corporate members which support Syndicate 2001 are required to hold regulatory capital in compliance with the rules issued by the UK’s Financial Services Authority (FSA). In addition, being Lloyd’s operations, they are also subject to Lloyd’s capital requirements. Under FSA rules, the corporate members must hold capital in excess of the higher of two amounts. The first is the Pillar 1 requirement, as prescribed by EU directives, calculated by applying fixed percentages to premiums and claims. The second, Pillar 2, is an Individual Capital Assessment (ICA) calculated internally by the firm. The ICA is defined as the level of capital that is required to contain the probability of insolvency to no greater than 0.5%. The ICA calculation considers all ultimate losses incurred over a one year business planning horizon, and any prior year reserve movements.

The ICA calculation basis is generally considered to be broadly equivalent to a BBB insurance financial strength rating. For the purposes of setting Lloyd’s capital requirements, Lloyd’s currently uplifts all ICAs by 35% to bring the capital to a level to support a higher financial strength rating. The final capital requirement is then subject to a minimum of 40% of the syndicate’s agreed regulatory premium capacity limit.

The Syndicate also benefits from mutualised capital within the Lloyd’s Central Fund, for which a variable annual levy, which is 0.5% of syndicate gross premium for 2008, is payable.

The ICA is reviewed annually by Lloyd’s and periodically by the FSA. The FSA expect management to apply their rules continuously. If a firm breaches its Pillar 1 capital it must cease trading; if Pillar 2 capital is breached steps must be urgently taken to restore capital to the required level. Due to the nature of the Lloyd’s capital setting process, Funds at Lloyd’s requirements are formally assessed and funded twice yearly at discrete periods and must be met for the Syndicate to continue underwriting.

At 31 December 2007 the level of capital held by the Amlin corporate members was more than £150 million in excess of the Pillar 1 requirement and more than £75 million in excess of the Pillar 2 requirement.

The Group does not seek to retain any assets in excess of the Lloyd’s capital requirement within the Lloyd’s framework, and any surplus is paid to the corporate entities in the Amlin group.

For Amlin Bermuda, minimum capital requirements are dictated by the rules laid down by the Bermuda Monetary Authority (BMA). Amlin Bermuda is classified as a Class IV insurer for which the minimum solvency margin is the greater of $100m, 50% of net premiums written in the current financial year (subject to a 25% cap on reinsurance expenditure) and 15% of claims reserves. In the case of Amlin Bermuda at 31 December 2007, the premium test is currently the largest of the three criteria at $232.8 million, although the entity is in the early years of operation. In addition, as a Class IV insurer, Amlin Bermuda is required to maintain a minimum liquidity ratio such that the value of “relevant assets” is not less than 75% of its “relevant liabilities”. Amlin Bermuda met this requirement at 31 December 2007. For wider commercial reasons we believe that it is necessary to hold at least $1 billion of capital for Amlin Bermuda, which is currently far in excess of the required minimum.

The method by which the Group actively manages its capital base is described in Review section under Financial Management.

In addition to regulatory capital requirements we believe we should retain a level of capital within the Group which allows it to grow exposures materially in the aftermath of a major insurance disaster. The capital held by Syndicate 2001 and Amlin Bermuda, is driven by the business mix, nature and objectives of each entity and its context within the wider Amlin Group.

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