Risk Disclosures

c. Credit risk

Credit risk is the risk that the Group becomes exposed to loss if a counterparty fails to perform its contractual obligations, including failure to perform them in a timely manner. Credit risk could therefore have an impact upon the Group’s ability to meet its claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. Amlin is exposed to credit risk in its investment portfolio and with its premium and reinsurance debtors.

As well as actual failure of a counterparty to perform its contractual obligations, the price of corporate bond holdings will be affected by investors’ perception of a borrower’s ability to perform these duties in a timely manner. Credit risk within the investment funds is managed through the credit research carried out by the investment managers. The investment guidelines are designed to mitigate credit risk by ensuring diversification of the holdings. For each portfolio there are limits to the exposure to single issuers and to the total amount that can be held in each credit quality rating category, as determined by reference to credit rating agencies.

The credit risk in respect of reinsurance debtors is primarily managed by review and approval of reinsurance security, by the Group’s Reinsurance Security Committee, prior to the purchase of the reinsurance contract. Guidelines are set, and monitored, that restrict the purchase of reinsurance security based on Standard & Poor’s ratings and the Group’s own ratings for each reinsurer. Provisions are made against the amounts due from certain reinsurers, depending on the age of the debt and the current rating assigned to the reinsurer. The impact on profit before tax of 1% variation in the total reinsurance debtors would be £4.2 million.

The table below shows the breakdown at 31 December 2006 of the exposure of the bond portfolio and reinsurance debtors by credit quality. The table also shows the total value of premium debtors, representing amounts due from policy holders. The quality of these debtors is not graded, but based on historical experience there is limited default risk relating to these amounts. The reinsurance debtors represent the amounts due at 31 December 2006 as well as amounts expected to be recovered on unpaid outstanding claims (including IBNR) in respect of earned and unearned risks. Reinsurance debtors are stated net of provisions for bad and doubtful debts.

31 December 2006
Bonds
£m
% Premium
debtors
£m
% Reinsurance
debtors
£m
%
AAA 1,305.9 81 21.1 5
AA 88.2 5 157.9 38
A 160.6 10 217.6 52
BBB 58.0 4 3.4 1
Other 388.2 100 17.9 4
1,612.7 100 388.2 100 417.9 100
31 December 2005
Bonds
£m
% Premium
debtors
£m
% Reinsurance
debtors
£m
%
AAA 870.5 76 75.3 12
AA 134.8 12 101.4 15
A 120.1 11 450.6 70
BBB 16.7 1 5.0 1
Other 404.3 100 12.9 2
1,142.1 100 404.3 100 645.2 100