AMLIN PLC | ANNUAL REPORT 2004

NOTES / NOTES 1 - 11

1 Segmental information
The segmental analysis of the Group’s share of the underwriting activities is reported using the divisional structure of the Group as this is how performance is monitored by management. A description of the classes of business within each of the divisions is provided within the Operating
and Financial Review.

2004

	Non- marine Łm		Marine Łm		Aviation Łm		UK commercial Łm		Other technical Łm		Total Łm

Gross premium written	525.0		160.2		90.8		170.6		(1.0	)	945.6

Gross premium earned	472.7		142.6		82.7		158.9		(1.0	)	855.9
Gross claims incurred	(302.7	)	(79.0	)	(48.0	)	(117.0	)	4.5		(542.2	)
Reinsurance balance	8.9		(4.5	)	(9.1	)	15.0		(6.9	)	3.4
Gross operating expenses	(112.5	)	(44.0	)	(18.5	)	(37.6	)	(2.0	)	(214.6	)

Balance on the technical account excluding allocated investment return	66.4		15.1		7.1		19.3		(5.4	)	102.5
Investment return											50.6
Net non-technical expenses											(31.5	)

Profit before tax											121.6

Segmental net assets
Net assets not attributed to a business segment	125.1		16.3		4.0		30.5		(2.9	)	173.0
Net assets notionally allocated to a business segment	150.2		45.9		26.0		48.8		-		270.9

Net assets											443.9


2003	Non- marine Łm		Marine Łm		Aviation Łm		UK commercial Łm		Other technical Łm		Total Łm

Gross premiums written	499.3		160.4		90.2		187.5		-		937.4

Gross premiums earned	445.0		133.4		91.2		167.8		-		837.4
Gross claims incurred	(169.3	)	(65.3	)	(45.5	)	(131.8	)	(1.5	)	(413.4	)
Reinsurance balance	(82.0	)	(7.3	)	(17.3	)	14.2		-		(92.4	)
Gross operating expenses	(114.0	)	(41.7	)	(20.5	)	(38.1	)	2.1		(212.2	)

Balance on the technical account excluding allocated investment return	79.7		19.1		7.9		12.1		0.6		119.4
Investment return											32.0
Net non-technical expenses											(31.1	)

Profit before tax											120.3

Segmental net assets
Net assets attributable to a business segment	61.6		21.9		24.3		28.2		1.5		137.5
Net assets notionally allocated to a business segment	130.8		42.1		23.7		49.2		-		245.8

Net assets											383.3

Net assets notionally allocated to a business segment comprise of assets and liabilities which are managed collectively to support all group underwriting activities. They have been allocated using gross premiums written.
Gross premiums written analysed by location of risk									2004 Łm		2003 Łm

UK									282.3		277.5
USA									343.6		349.4
Europe (excl. UK)									91.6		87.1
Canada, Central and South America									65.0		62.8
Asia									65.5		62.6
Other locations									49.2		42.6
Worldwide									48.4		55.4

Total									945.6		937.4

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2 Investment return

									2004 Łm		2003 Łm

Income from investments									52.6		40.0
Losses on realisation of investments									(0.3	)	(3.4	)

									52.3		36.6

Unrealised (losses) gains on investments									0.2		(3.1	)

Investment management fees									(1.6	)	(1.1	)
Interest on loan stock and bank loans									(0.3	)	(0.4	)

									(1.9	)	(1.5	)

Total investment return									50.6		32.0

The longer term rate of return in respect of equity investments and fixed interest securities has been determined by having regard to the Group’s historical and expected returns and current portfolio strategy. The longer term rates of return assumed are:

									2004		2003

UK Equities									7.0%		7.0%
Fixed interest securities									4.5%		4.5%

These returns are applied to the average, over the year, of the investments attributable to the shareholders and insurance technical provisions of the aligned syndicate participations. The attributable shareholders’ funds are based on the Funds at Lloyd’s supporting the insurance business. The actual return on investments since 1 January 2000, compared with the aggregate longer term return over the same period, is set out below. All figures are gross of expenses.

									1 Jan 2000 to 31 Dec 2004 Łm		1 Jan 1999 to 31 Dec 2003 Łm

Actual return attributable to the technical account									155.9		119.4
Longer term return attributable to the technical account									185.1		140.2

Effect of short term fluctuations over the period									(29.2	)	(20.8	)


3 Prior periods’ claims provisions
Material over provisions for claims at the beginning of the year as compared with net payments and provisions at the end of the year in respect of prior periods’ claims reserves are as follows:

									2004 Łm		2003 Łm

Movement in reserves									49.7		24.5


4 Net operating expenses

									2004 Łm		2003 Łm

Acquisition costs									177.4		177.2
Changes in deferred acquisition costs									(19.0	)	(24.4	)
Administrative expenses									53.9		56.8
Syndicate exchange losses									2.3		2.6

									214.6		212.2


5 Other income

									2004 Łm		2003 Łm

Managing agent’s fee income									-		0.8
Managing agent’s profit commission									2.6		3.3
Other income									3.3		-

									5.9		4.1


6 Other charges

									2004 Łm		2003 Łm

Central, management and other expenses									12.2		6.6
Amortisation of purchased syndicate participations									3.5		3.1
Financing charges									4.4		6.6
Employee incentives									17.3		18.9

									37.4		35.2


7 Directors’ remuneration
The aggregate remuneration of the directors of the Company, including amounts received from subsidiaries, was:

									2004 Łm		2003 Łm

Emoluments of executive directors									3.0		2.3
Fees to non-executive directors									0.4		0.3

									3.4		2.6
Pension contributions									0.2		0.2

									3.6		2.8

Remuneration includes remuneration during the period of office only. Details of directors’ remuneration and pension benefits, including those of the highest paid director, are included in the Directors’ remuneration report.
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8 Employee information
The average number of persons employed by the Group, including individuals on fixed term contracts and directors, was:

									2004		2003

Underwriting divisions
Underwriting, claims, and reinsurance									346		340
Administration and support									124		126
Central functions
Operations									64		59
Finance									56		52
Internal audit and compliance									9		8

									599		585

The aggregate payroll costs in respect of these persons were:

									2004 Łm		2003 Łm

Wages and salaries									24.7		19.8
Employee incentives and related social security costs									17.3		18.9
Social security costs									3.9		2.7
Pension costs									9.9		12.3

									55.8		53.7

9 Pensions
The Group participates in a number of pension schemes, including defined benefit, defined contribution and personal pension schemes. The total charges for all schemes are shown in the table below, together with the Group’s share.
					Total charge				Group share
					2004 Łm		2003 Łm		2004 Łm		2003 Łm

Defined benefit schemes
Lloyd’s Superannuation Fund					8.1		10.2		6.8		7.5
The Angerstein Underwriting Ltd scheme					0.1		0.6		0.1		0.4

					8.2		10.8		6.9		7.9
Defined contribution schemes					1.7		1.5		1.6		1.2

					9.9		12.3		8.5		9.1

a) The Lloyd’s Superannuation Fund funded defined benefit scheme The scheme is operated as part of the Lloyd’s Superannuation Fund (the Fund). Historically the Fund has catered for a number of employers in the Lloyd’s market. As a consequence of the consolidation in the market, employers closing final salary schemes and some companies failing, there are now only around eight employers with active members in the Fund. A large proportion of the liability of the Fund relates to employers no longer participating in the Fund. The assets of the Fund are pooled and the current active employers are responsible collectively for the funding of the Fund as a whole. For the purposes of determining contributions to be paid, the Trustees have split the Fund into a number of notional sections. This is a notional split and has no legal force. Previously this notional split allowed for separate sections in respect of each employer’s active members and one combined section for non-employed members of all current and former employers. With effect from 31 December 2002, the Trustees altered this notional split so that, from that date, the active employers contributing to the Fund, including the Amlin Group, have individual notional sections comprising the notionally allocated assets in respect of their active employees, deferred pensioners and pensioners, and their corresponding liabilities. A separate notional fund is maintained for members whose former employers no longer contribute to the Fund (Orphan Scheme). Amlin is also liable for a proportion of the Orphan Scheme’s liabilities. Since this alteration Amlin can now more clearly identify its expected contribution requirement to the Fund. However, as the asset allocation is notional and at the discretion of the Trustees, it is not possible for Amlin to be certain of its overall surplus or deficit position at any time. For this reason, the scheme is classified as a multi-employer scheme for the purposes of Financial Reporting Standard No. 17 (FRS 17) – Retirement benefits. The total charge for this scheme for Syndicate 2001 and Amlin group companies is analysed in the table below, together with the Group’s share.
									Total charge
									2004 Łm		2003 Łm

Contributions relating to:
2001 valuation deficit – Amlin scheme									2.0		2.0
2004 valuation deficit – Amlin scheme									1.2		-
2002 valuation deficit – Orphan scheme									-		6.8
2004 valuation deficit – Orphan scheme									3.5		-
Ongoing funding									1.4		1.4

									8.1		10.2

Group share of total charge									6.8		7.5

The funding position of the Fund is assessed every three years by an independent qualified actuary. Contributions are made at the funding rates recommended by the actuary, which vary across different sections of the Fund reflecting the notional sections then adopted, and typically include adjustments to amortise any funding surplus or shortfall over a period. Amounts borne under the scheme are charged to Syndicate 2001 or other Group companies. However, actuarial amounts quoted below are for Syndicate 2001 as a whole, irrespective of capital provider, and other Group companies. The latest actuarial assessment of the scheme, at 31 March 2004, used the projected unit actuarial method and was based on the following assumptions:
									Long term annual rate
									Amlin section %		Orphans section %

Pre retirement
– Inflation									2.8		2.8
– Investment return									6.3		5.9
Post retirement
– Inflation									3.0		3.0
– Investment return									5.4		4.7
Increases to pensions in payment
– Limited price indexation									3.0		3.0
– Limited price indexation (minimum 3%)									3.2		3.2
– Discretionary increases									0.0		0.0
General pay escalation									4.5		4.5


Investment strategy
– Equities									50%		20%
– Bonds									50%		80%

The assessment showed that the assets relating to the Amlin section of the Fund were £107.2 million, being £6.2 million less than the amount required to fund members’ accrued liabilities on the assumptions adopted, resulting in a shortfall of 6%. To rectify this shortfall, Amlin has agreed with the Trustees that it will make six annual payments to the Fund of £1.2 million, with the first paid in December 2004 and subsequent payments falling due each 31 March, commencing on 31 March 2005. In addition, Amlin has agreed to pay contributions to the notional orphans’ section to rectify a share of the funding shortfall revealed in the actuarial valuation at 31 March 2004 of £17 million based on the assumptions described above. (The assets notionally allocated to this section of £181 million were 91% of the amount expected to be required to provide the benefits of this section.) The Group and Syndicate’s share of this shortfall is currently estimated to be £11.4 million and £12.8 million respectively. On 31 December 2004, a payment of £3.5 million was made in order to reduce this deficit. Three subsequent annual payments of £3.5 million are falling due each 31 March, commencing on 31 March 2005. Contributions will also be paid to provide for the cost of benefit accrual after the date of the valuation. The rate of contribution agreed with the Trustees is 30% paid by the employer plus 5% member contributions, in each case of pensionable earnings. These contributions will be backdated to take effect from 1 April 2004. In 2004, funding rates and charges to the profit and loss account were at 30.2% of pensionable salaries as recommended by the 2001 valuation, and totalled £1.4 million (2003: £1.4 million). b) The Angerstein Underwriting Ltd funded defined benefit scheme SSAP 24 disclosures The scheme consists of a closed funded defined benefit scheme for certain past employees of a subsidiary of the Company, Angerstein Underwriting Limited. Contributions to the scheme are determined by an independent qualified actuary, based upon triennial valuations, using the attained age actuarial method. A valuation at 1 July 2004 was carried out, and the market value of the scheme assets was £1.2 million representing 59% of the benefits accrued to the members. Group contributions made to this scheme in respect of the year ended 31 December 2004 were £0.1 million (2003: £0.1 million), and the agreed contribution rate for future years is an employer contribution of 31% plus 5% member contributions, in each case of pensionable salaries. An accrual of £0.5 million was made at 31 December 2003 and 31 December 2004 to rectify the deficit of £0.8 million at the end of 2004. A 2% per annum differential between investment returns and salary increases is assumed. FRS 17 disclosures – Angerstein Underwriting Ltd funded defined benefit scheme For the purposes of the FRS 17 disclosures, the 1 July 2004 valuation has been reviewed and updated to 31 December 2004. The disclosures are based upon the following annual financial assumptions:
									2004 %		2003 %

Inflation									2.9		2.8
Increase in salaries									4.9		4.8
Increase in pensions in payment									2.8		2.7
Increase in pensions in deferment									2.9		2.8
Discount rate for scheme liabilities									5.3		5.4
Return on equities									6.5		6.8

Under these assumptions the valuation of the scheme at 31 December would have been:
									2004 Łm		2003 Łm

Assets
Equities									1.3		1.1
Liabilities
Present value of scheme liabilities									(2.8	)	(2.3	)

Scheme deficit									(1.5	)	(1.2	)

Scheme deficit attributable to the Group									(1.5	)	(1.2	)
Related deferred tax asset									0.5		0.4

Net scheme deficit									(1.0	)	(0.8	)

The members of the scheme are, or were, employed for the benefit of Syndicate 2001 or its predecessors. Due to the varying ownership of capacity for the years of account to which the contributions are charged, the following amounts which would have been recognised in the performance statements for the year ended 31 December 2004 under FRS 17, are shown on the assumption that any charges would be taken to the 2004 year of account, when Amlin owns all of the capacity and therefore would receive all charges (Amlin’s share of the 2003 year of account was 86.18%).
									2004 Łm		2003 Łm

Operating profit
Current service cost									0.1		0.1


Other finance income
Expected return on pension scheme assets									0.1		0.1
Interest on pension scheme liabilities									(0.1	)	(0.1	)

Net return									-		-


									2004 Łm		2003 Łm

Statement of total recognised gains and losses (STRGL)
Actual return less expected return on assets									0.1		0.1
Experience gains on liabilities									0.1		0.1
Changes in assumptions									(0.4	)	(0.3	)

Actuarial loss recognised in STRGL									(0.2	)	(0.1	)


Movement in deficit during the year
Deficit in scheme at 1 January									(1.2	)	(1.0	)
Current service cost									(0.1	)	(0.1	)
Contributions made									0.1		0.1
Other finance costs									(0.1	)	(0.1	)
Actuarial loss									(0.2	)	(0.1	)

Deficit in scheme at 31 December									(1.5	)	(1.2	)


							2004		2003		2002

History of experience gains and losses
Difference between the expected and actual return on scheme assets
Amount (Ł million)							0.1		0.1		(0.6	)
Percentage of scheme assets							8%		12%		(88%	)
Experience gains on scheme assets
Amount (Ł million)							0.1		0.1		0.1
Percentage of scheme assets							5%		3%		3%
Total amount recognised in the STRGL
Amount (Ł million)							(0.2	)	(0.1	)	(0.7	)
Percentage of scheme assets							(7%	)	(5%	)	(43%	)

c) The defined contribution scheme Between 1998 and 31 August 2004, all new employees were invited to join the Amlin Group Money Purchase Scheme (AGMPS), which was part of the Lloyd’s Superannuation Fund. Contributions made by the Group varied by age, seniority and the level of contribution that employees voluntarily made to the scheme. Employer contributions ranged from 4% to 21% and were fully expensed to the profit and loss account when due and payable. With effect from 1 September 2004, the scheme was replaced with a new stakeholder scheme (see (d) below). Contributions to the old scheme ceased with effect from 31 August 2004 and the Lloyd’s Superannuation Fund decided to wind up the scheme and secure pension rights via a transfer to Section 32A policies with Merrill Lynch Investment Management, which was the investment manager for the AGMPS. All staff members of the scheme have been given the option to retain benefits with Merrill Lynch or alternatively transfer their fund value to another approved arrangement, which includes the Amlin Retirement Investment Scheme (ARIS). d) The stakeholder defined contribution scheme With effect from 1 September 2004 ARIS replaced the AGMPS. The ARIS is a stakeholder arrangement, which provides staff with greater choice and flexibility on contributions and investments, improved security of benefits, better information and administrative support, and improved portability. The employer contributions paid by Amlin have not changed as a result of these new arrangements, nor has the level of lump sum life assurance benefits. Winterthur Life has been chosen as the stakeholder provider, following a rigorous selection process and review of the stakeholder market. The total contributions for the year ended 31 December 2004 to the AGMPS and ARIS schemes are shown in the table in 'Note 9'. e) Other arrangements Other pension arrangements include an occupational money purchase scheme which provides Death In Service protection for all employees. Regular contributions, expressed as a percentage of employees’ earnings, are paid into this scheme and are allocated to accounts in the names of the individual members, which are independent of the Group’s finances. The contributions are charged against profits in the period in which they are payable. There were no outstanding contributions at 31 December 2004 (2003: Łnil). Back to top 10 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging:
									2004 Łm		2003 Łm

Depreciation
- Owned assets									2.5		4.0
- Leased assets									-		0.1
Operating lease charges									2.3		1.9
Amortisation of intangible assets									3.5		3.1
Auditors’ remuneration
- Group audit fees									0.3		0.3
- Other services									0.2		0.1

Company audit fees amounted to Ł38,850 (2003: Ł42,000). Group audit fees include Ł145,611 (2003: Ł131,819) representing the Group’s share of fees paid in relation to the audit of the managed syndicates. Other services comprise taxation advice totalling Ł43,990 (2003: Ł38,905), internal audit and controls advice Ł39,625 (2003: Ł16,000), systems testing Ł28,000 (2003: Ł14,250), liquidation fees Ł12,100 (2003: Łnil), service company FSA authorisation Ł21,143 (2003: Łnil) and other fees of Ł880 (2003: Ł945). A further Ł26,000 was paid to the auditors for their work relating to the debt issue in November 2004 which has been added to the liability on the balance sheet. The Audit Committee Chairman is required to approve any non-audit work commissioned from the auditors where any single piece of work attracts a fee over Ł25,000. 11 Tax on profit on ordinary activities a) Analysis of tax charge for the year
									2004 Łm		2003 Łm

Current taxation
UK corporation tax at 30% (2003: 30%)									-		-
Adjustments in respect of prior periods									(0.3	)	0.3

Corporation tax									(0.3	)	0.3
Overseas taxation recoverable									(4.6	)	(10.0	)
Irrecoverable overseas taxation									5.0		11.4

Total current tax (see note 11(b))									0.1		1.7

Deferred taxation
Origination and reversal of timing differences									35.5		35.2
Adjustments in respect of prior periods									-		0.1

Total deferred taxation (see note 24)									35.5		35.3

Taxation on profit on ordinary activities									35.6		37.0

b) Factors affecting current period tax charge The UK standard rate of corporation tax is 30% (2003: 30%), whereas the current tax assessed for the year ended 31 December 2004 as a percentage of profit before tax is 0.1% (2003: 1.4%). The reasons for this difference are explained below:
					2004 Łm		2004 %		2003 Łm		2003 %

Profit on ordinary activities before taxation					121.6				120.3

Current taxation on profit on ordinary activities calculated at the standard rate of corporation tax in the UK					36.4		30.0%		36.1		30.0%
Expenses not deductible for tax purposes					(0.1	)	(0.1%	)	0.4		0.3%
Unprovided timing differences					-		-		(1.3	)	(1.1%	)
Depreciation in excess of capital allowances					(0.2	)	(0.2%	)	0.3		0.3%
Difference between the technical result for accounting purposes and the technical result for taxation purposes					(31.0	)	(25.5%	)	(41.7	)	(34.7%	)
Deferred tax on loss provisions					0.3		0.2%		0.5		0.4%
Other timing differences					(5.4	)	(4.4%	)	5.7		4.7%
Adjustments in respect of prior periods					(0.3	)	(0.2%	)	0.3		0.3%

UK corporation tax for the year					(0.3	)	(0.2%	)	0.3		0.2%
Net overseas taxation suffered					0.4		0.3%		1.4		1.2%

Current taxation charge for the year (See note 11(a))					0.1		0.1%		1.7		1.4%

c) Factors which may affect future tax charges Underwriting profits or losses are recognised in the technical account on an annual accounting basis, recognising the results in the period in which they are earned. Corporation tax is charged in the period in which the underwriting profits are actually paid by the syndicate to the corporate names. Payment of the underwriting profit normally occurs in the fourth year after the commencement of a year of account. Deferred tax is provided on the annually accounted technical result with reference to the forecast ultimate result of each of the years of account included in the annually accounted technical result. Where the forecast ultimate result for a year of account is a taxable profit, deferred tax is provided in full on the movement on that year of account included in this period’s annually accounted technical result. Where the forecast ultimate result for a year of account is a loss, deferred tax is only provided for on the movement on that year of account included in this period’s annually accounted technical result to the extent that forecasts show that the taxable loss will be utilised in the foreseeable future. Deferred tax has been provided on the annually accounted technical result for this accounting period of Ł108 million (2003: Ł110.3 million). Deferred tax assets on non-aligned technical loss provisions are only provided for to the extent that forecasts show that it is more likely than not that the ultimate taxable underwriting losses represented by these provisions will be utilised within the foreseeable future. Deferred tax has been provided in full on non-aligned loss provisions of Ł4.2 million (2003: Ł3.0 million). The Inland Revenue has introduced final regulations to give effect to the General Insurance Reserves provisions contained in the Finance Act 2000. The Group’s Lloyd’s corporate members fall within the remit of these regulations by virtue of their greater than 4% participation on aligned and non-aligned syndicates. The corporation tax charge for this period contains an estimated adjustment in respect of a notional taxable charge as calculated under these regulations of Ł0.4 million (2003: Ł0.7 million). A deferred tax asset of Ł2.1 million (2003: Ł1.1 million) has been taken on existing capital losses to match against deferred tax provisions of Ł2.1 million (2003: Ł1.1 million) on unrealised capital gains arising within the Group during this accounting period. Deferred tax has not been provided on capital losses of Ł35.9 million (2003: Ł43.6 million). The Group expects to continue to suffer depreciation in excess of capital allowances in future periods albeit at a diminishing rate. The Group has suffered US tax on its share of syndicate US underwriting profits. This US tax is recoverable against UK tax on the taxable syndicate profits for the appropriate years of account. Some US tax suffered will be irrecoverable due to the difference between UK and US tax rates and the difference between the timing of US and UK syndicate profits for tax purposes. During the period Ł0.4 million of US tax has been written off (2003: Ł1.4 million).