|
|
|
|
|
 |
OPERATING AND FINANCIAL REVIEW / THE COMPANY / DELIVERING VALUE /
 |
RICHARD HEXTALL FINANCE DIRECTOR
“Flexible and efficient capital management has been an
important feature of our financial strategy and it is a key
ingredient to managing our cross cycle returns.”
|
|
|
|
| FINANCIAL LEVERAGE |
|
At its simplest we believe that debt capital
should be a significant part of capital employed
when underwriting margins are strong but
leverage should reduce when underwriting
margins are weak.
This strategy should ensure that we optimise
return on equity whilst having due regard to
the associated financial risk.
The extent of financial leverage, return on
capital and return on equity for the last three
financial years are analysed on the following
chart. Financial leverage has been adjusted
to remove the “bridging finance” that we have
employed to manage our capital within the
Lloyd’s rules.
This illustrates that the financial strategy has
significantly enhanced earnings over recent years.
The debt that has been deployed by Amlin over
this period has been in the form of letters of
credit (LOCs). Under the Lloyd’s capital
framework LOCs are an accepted form of
capital. However, another important feature
of the Lloyd’s framework is that only a limited
proportion of profits recognised on our annual
accounting basis to date have been allowable
for capital purposes. This is inconsistent with
insurance companies where reported profit is
Tier 1 capital.
Our response to this has been to deploy the
recognised but inadmissible profit into our
allowable capital base by securing LOCs
against these assets and using them as
solvency capital with Lloyd’s – essentially
“bridging finance”.
The level of LOCs deployed as “bridging finance”
and as “real” debt over the last three years is
illustrated below.
Looking to the future, we believe that we have
now reached the point in the cycle where
underwriting margins will reduce over the next
few years. However our ‘real’ debt has already
been extinguished. In the short term we will
look to increase our financial leverage but not
to the peak levels it reached in recent years.
|
|
| INSURANCE LEVERAGE |
|
Cash flow in the business has been very strong
as illustrated in the following chart.
Amlin benefits from insurance leverage which
affects its potential investment returns. Cash
and investments, including the Company’s
share of syndicate assets, now represent a
3.0 times multiple of shareholders’ equity.
This has increased significantly over recent
years with the growth of Syndicate 2001 and
our increased ownership of the syndicate. At
30 June 2004, when the multiple was 2.8,
it was one of the highest among Lloyd’s
listed companies, and we would expect that
it continues to be at 31 December 2004.
|
|
|
|
|
|
|
  |
|
|
|
|
