Annual Report 2007

3. Risk disclosures

3.1 Insurance risk

The Group accepts insurance risk in a range of classes of business through Lloyd’s Syndicate 2001’s four distinct underwriting businesses and Amlin Bermuda. The bias of the portfolio is towards short-tail property and accident risk but liability coverage is also underwritten.

In underwriting insurance or reinsurance policies the Group’s underwriters use their skill, knowledge and data on past claims experience to evaluate the likely claims cost and therefore the premium that should be sufficient (across a portfolio of risks) to cover claims costs, expenses and to produce an acceptable profit. However due to the nature of insurance risk there is no guarantee that the premium charged will be sufficient to cover claims costs. This shortfall may originate either from insufficient premium being calculated and charged or result from an unexpected, or unprecedented, high level of claims.

A number of controls are deployed to limit the amount of insurance exposure underwritten. Each year a business plan is prepared and agreed which is used to monitor the amount of premium income, and exposure, to be written in total and for each class of business. Progress against this plan is monitored during the year. The Group also operates under a line guide which determines the maximum liability per policy which can be written for each class and for each underwriter. These can be exceeded in exceptional circumstances but only with the approval of senior management. Apart from the UK, and some of the international, comprehensive motor liability portfolio, which has unlimited liability, all policies have a per loss limit which caps the size of any individual claims. For larger sum insured risks reinsurance coverage may bepurchased. The Group is also exposed to catastrophe losses which may impact many risks in a single event and again reinsurance is purchased to limit the impact of loss aggregation from such events. These reinsurance arrangements are described in the reinsurance arrangements section below.

Insurance liabilities are written through individual risk acceptances, reinsurance treaties or through facilities whereby Amlin is bound by other underwriting entities. Facility arrangements delegate underwriting authority to other underwriters, or to agents acting as coverholders, that use their judgement to write risks on our behalf under clear authority levels.

The insurance liabilities underwritten by the Group are reviewed on an individual risk, or contract, basis and through review of portfolio performance. All claims arising are reserved upon notification. Each quarter the entire portfolio of business is subject to a reserving process whereby levels of paid and outstanding (advised but not paid) claims are reviewed. Potential future claims are assessed with a provision for incurred but not reported (IBNR) claims being made. This provision is subject to review by senior executives and an independent internal actuarial assessment is carried out by the in-house actuarial team to determine the adequacy of the provision. Whilst a detailed and disciplined exercise is carried out to provide for claims notified, it is possible that known claims could develop and exceed the reserves carried. Furthermore there is increased uncertainty in establishing an accurate provision for IBNR claims and there is a possibility that claims may arise which in aggregate exceed the reserve provision established. This is partly mitigated by the reserving policy adopted by the Group which is to carry reserves with a margin in excess of the in-house actuarial best estimate.

The review of claims arising may result in underwriters adjusting pricing levels to cater for an unexpectedly higher trend of claims advices or payments. However, this may not be possible in a competitive market and underwriters may respond either by accepting business with lower expected profit margins or declining to renew policies and thus reducing income. Also, there is a portfolio of risk already underwritten which cannot be re-priced until renewal at the end of the policy period.

Sections A to D below describe the business and the risks of Amlin’s Syndicate operations. Amlin Bermuda is described in section E.

A. Non-marine risks

A.i Non-marine property risks

Non-marine property classes

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Catastrophe reinsurance (per programme)	158	50	4.0
Per risk property reinsurance (per programme)	43	20	1.7
Proportional reinsurance	24	5	0.7
Direct and facultative property	68	20	2.4
Binding authorities	20	2	0.3

Notes:

1. Limits are set in US dollars converted to sterling at a rate of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits.
2. Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.
3. Premium are stated net of acquisition costs.

Catastrophe reinsurance protects insurance companies against catastrophic losses, such as windstorm or earthquake, which may impact more than one risk written by the company. This portfolio is a key part of the insurance risk written by the Group. Programmes are placed on a layered or excess of loss basis. Territorial exposures, from a number of programmes, are much higher, but are carefully recorded and analysed through loss simulations or realistic disaster scenarios.

Per risk property reinsurance is also written on an excess of loss basis but covers loss or damage to a single risk within the reinsured’s portfolio. Proportional reinsurance covers a proportional share of a reinsureds portfolio of business subject to payment of commission and/or profit commission. Almost all proportional reinsurance written by the Group in this class is property business and risk exposure is limited to $7.5 million any one risk.

Direct and facultative property insurance is written for the full value of the risk, on a primary or excess of loss basis, through individual placements, or by way of delegated underwriting facilities given to coverholders ('binding authorities'). Binding authority arrangements delegate the day to day underwriting to underwriting agents working on our behalf. For these contracts, we are reliant on a coverholder exercising underwriting judgement on our behalf. Coverholders have to have local regulatory approval, be Lloyd’s registered and also approved by the Amlin Binding Authority Committee. For all binding authority facilities we receive a monthly or quarterly bordereau which is checked by our underwriting staff. We control the underwriting by setting clear authority levels for coverholders stipulated within the binding authority agreement, regularly monitoring performance and periodically carrying out underwriting visits and or commissioning third party audits. The coverholder is incentivised to produce an underwriting profit through the payments of profit commission. However, with the day to day underwriting not controlled by Amlin, there is a risk that coverholder underwriting or claim decisions are made which would not have been made by Amlin underwriters or claims staff. The maximum value insured under binding authorities is currently limited to $4 million at any one location.

Property cover is provided to large commercial enterprises with high value locations and/or many locations and also for small commercial property. The perils covered include fire, flood, wind and earthquake damage. Business interruption cover is also provided for loss of earnings sustained due to the perils and properties covered but may also be extended to connected enterprises. Terrorism cover is given on a limited basis particularly where required by local regulation, but nuclear and biochemical coverage is excluded in most territories.

The portfolio of property insurance and reinsurance business is written with the aim of achieving territorial diversification. However, a severe catastrophe to a major economic zone in Europe, Japan or the USA is likely to result in an overall loss to the property portfolio prior to reinsurance. The Group is exposed to the impact of large catastrophe events such as windstorms, earthquakes or terrorist incidents. Exposure to such events is controlled and measured through loss modelling but the accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. The Group’s broad risk appetite guidelines are set out here. It is possible that a catastrophe event exceeds the maximum expected event loss. This is particularly the case for the direct property proportion of the loss exposure where models are used to calculate a damage factor representing the amount of damage expected to exposed aggregate insured values. Errors or incorrect assumptions in the damage factor calculation can result in incurred catastrophe event claims higher or lower than predicted due to unforeseen circumstances or inadequacies in the models used. As explained below in the reinsurance arrangements section, the Syndicate buys a reinsurance programme to protect against the impact of, or series of, severe catastrophes. However, the price and availability of such cover is variable and the amount of loss retained by the Group may therefore also increase or reduce. The Group will alter its insurance and reinsurance exposures to take account of the change in reinsurance availability in order to remain within the risk appetite guidelines. However, there may be some period of delay before this can be achieved.

The property portfolio is also exposed to an above average frequency of individual fire, explosion or weather related claims. The premium charged for the coverage given may not be sufficient to cover all claims made in any year, particularly in a year in which there is an abnormal frequency of claims.

A.ii US casualty risk

The US casualty portfolio of business provides insurance and reinsurance cover to individuals or companies in order to indemnify against legal liability arising from their activities and actions or for incidents occurring on their property. The account is currently written to a maximum liability of $6 million on any one claim but average lines are $0.6 million on any one claim.

The portfolio is made up of specialist general casualty, professional indemnity, medical malpractice and errors and omissions cover. Small amounts of directors' and officers' liability and auto liability are also written. The class is mostly written on a claims notified basis (responding to all claims made during a defined period) except for small amounts of general liability business which may be written on a losses occurring basis (the policy responds to losses which occur during the period even if reported after the policy has expired).

Claims from this class emanate from professional error, negligence or an accident which causes injury, damage or financial loss. The account is vulnerable to a high frequency of claims but not individual large losses as the cost to Amlin of any individual claim is small. Claims frequency to the direct and reinsurance portfolio may be impacted by a generic claim type which impacts many individual policies such as poor housing design or bad medical practice. The size of individual claims is subject to decisions arising from the US court system which can be higher than anticipated. There is also the potential for US courts to impose a 'bad faith' judgement on insurers if it is deemed that the insurer has acted improperly in trying to avoid contractual obligations. Such awards can, in exceptional circumstances, be much higher than the value of the insurance claim.

A.iii Other non-marine classes

The Group also writes other non-marine classes which contribute diversified exposure to the portfolio. The main classes with the maximum sum insured lines together with the geographical spread are shown in the tables following.

The accident and health class is written through medical expense schemes in the US and direct personal accident cover or personal accident reinsurance worldwide. Medical expense cover is subject to a high frequency of claim and significant medical cost inflation. Personal accident insurance and reinsurance could be impacted by a single or series of accidents to high value insured individuals or from a multiple death and injury event such as an air crash or natural catastrophe.

The division writes a portfolio of aviation and marine reinsurance business which protects insurers against losses to their direct portfolios of business. This is written on an excess of loss basis.

Other non-marine classes

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Accident & health	15	2	1.0
Credit insurance	10	15	15.0
Auto	28	4	0.2
Aviation reinsurance (per programme)	3	27	5.2
Marine reinsurance (per programme)	15	67	1.7
US Casualty	21	3	0.3
Special risks	13	20	4.0

Notes:

1. Limits are set in US dollars converted to sterling at a rate of £1=US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits.
2. Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.
3. Premium are stated net of acquisition costs.

Credit insurance is written for UK and Irish companies only and the coverage is provided to protect against insolvency of debtors in the normal course of trading. The principal risk is from a very large corporate collapse which may impact many of our assureds or a serious economic downturn which impacts many sectors and companies.

The auto class covers property damage only (fire, theft and collision) in the US and property damage and third party motor liability combined cover in other international territories. This class could be impacted by unexpected claim frequency, a multi vehicle event such as a severe flood, and also large bodily injury award claims emanating from an accident.

The special risks account includes small premium classes such as nuclear, contingency business and terrorism reinsurance which is written in all parts of the world. Because of the small premium and specialist nature of these classes they are generally written without reinsurance protection.

B. UK Commercial risks

B.i Non-US liability risks

Liability classes

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Employers' liability	15	27	10.0
Public/products liability	8	12	2.0
Professional indemnity	20	6	1.3
UK commercial package	10	27	1.0
Financial institutions fidelity and liability	4	6	0.9

The Group writes three classes of non-US liability. 89% of the business emanates from the UK with the balance mainly from Ireland and Canada.

Employers' liability (EL) – protecting employers against accident or injury to employees. This is written on a losses occurring basis (covering events that occurred in the policy period even if they are not notified until after expiry) for limits up to £27 million per employer.

Public liability (PL) – this coverage, often written in conjunction with employers' liability covers accident or injury occurring to clients, customers or another third party as a result of contact with the insured’s personnel, property or products. This is written on a losses occurring basis currently for limits up to £12 million per assured.

Professional indemnity – this covers liability which may arise from services provided by the assured, for example as a result of negligence or error, which may lead to financial or physical loss. This includes but is not limited to services from architects, engineers, surveyors, advertising firms, medical professionals and financial advisors and is written on a claims made basis (covering losses notified in the policy period).

UK commercial package policies combine one or more of the liability coverages mainly EL and PL with motor and/or property damage protection.

The Group also writes a small account of financial institutions policies covering fidelity, professional indemnity and directors' and officers' liability for companies providing financial services. The current maximum line is £6 million. Approximately 54% of the income is from Western Europe financial institutions with the balance spread broadly by territory. Coverage is given on a claims made basis.

The expected claims costs from these lines of business may be impacted by larger than anticipated damage awards to injured parties as well as due to an unforeseen increase in generic claims such as industrial disease or other health hazards. It is also possible that many claims could arise under many policies from a common cause such as financial advice or generic building defect. The financial institutions account could be affected by a major fraud or a series of related liability claims arising from banking, investment activity, stockbroking or other practices.

B.ii UK motor risks

The Group’s motor insurance risk written in the UK commercial division is 99% UK which covers fire, theft, collision and third party property and bodily injury liability. Under the requirements of UK law, third party liability coverage is unlimited, but matching reinsurance is purchased. The account is biased towards commercial clients such as coach operators, haulage companies, commercial vehicle fleets and company executive fleets. The syndicate leads two facilities for fleets involved in the transportation of hazardous waste. There is also a UK agriculture and a specialist private car account written.

Claims frequency has improved in recent years due to car and road safety measures but can fluctuate due to factors such as weather conditions. UK inflation is a key factor in determining the size of motor claims. Car values affect the size of theft claims and for physical damage claims size is linked to repair costs. Inflationary pressure on court awards within the UK and Irish legal systems impacts liability claim values. Government intervention such as liability award limit changes or expense recoveries for government bodies, including the National Health Service will also impact claim size. For the motor account severe bodily injury and catastrophe damage claims (e.g. UK flood) are limited through the purchase of a reinsurance programme, the highest layer of which is unlimited.

Motor insurance is a highly competitive area of insurance and pricing levels fluctuate. Whilst underwriters accept business subject to sufficient rates per vehicle, in a year where there is an unexpectedly high level of claims the total premium may not be sufficient to cover all the claims. There is also a risk that legal changes impact bodily injury payments and result in a requirement to increase reserves for outstanding claims.

C. Marine risks

The Group writes a broad account of marine risks with maximum lines set out below:

Marine classes

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Hull	12	10	1.0
Cargo	22	17	2.6
Energy	35	20	2.5
War and terrorism	18	17	7.3
Specie	7	34	6.3
Bloodstock	17	4	0.5
Yacht (hull and liability)	20	4	0.9
Liability	16	57	3.6

Notes:

1. Limits are set in US dollars converted at a rate of exchange of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits.
2. Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.
3. Premium are stated net of acquisition costs.

The hull and cargo account is worldwide, covering property damage to ships and loss, or damage to a large variety of cargo or goods in transit. The hull account can include machinery breakdown and the account written by Amlin is generally targeted towards smaller “brownwater” vessels and fishing boats. These accounts can be impacted by attritional claims of a small size as well as a single individual large claim. The cargo account in particular could also be involved in a major natural catastrophe loss.

The energy portfolio is mainly offshore rig and construction policies which may be impacted by large individual claims but is also exposed to severe catastrophe losses in the North Sea and Gulf of Mexico. The account includes control of well (to limit loss of oil and avoid pollution) and also some business interruption cover which indemnifies companies for loss of production.

War business includes aviation, marine and on land terrorism coverage and is exposed to single incidents or a series of losses arising from concerted action. A small amount of political risk, confiscation and contract frustration is written.

Specie business consists of the insurance against damage or theft to fine art, the contents of vaults and other high value goods including jewellers' block and cash in transit. The fine art may be shown at exhibitions which have very high aggregate values at risk. The class is therefore exposed to the potential for a frequency of small claims and also large individual losses. Some specie is written in catastrophe zones e.g. California.

The bloodstock account protects for death, illness or injury to horses mainly in the UK but business from the USA, Australia and South Africa is also written. This covers racing and eventing horses or breeding studs. The average value insured is below £1 million but there is the potential for an aggregate loss such as a stable fire which could cause multiple claims.

Yacht business covers property damage and third party injury for small leisure boats and craft. The bulk of the account is smaller value yachts in the UK and Europe and there is an expectation of a large number of small claims. Third party liability yacht claims arise from injury or damage caused by one of our policyholders. There is also the potential for a large catastrophe loss such as a UK windstorm where there are large aggregate sums insured in coastal regions such as southern England.

The marine liability portfolio is written to protect ship-owners, harbours, charterers and energy companies against damage or injury to third parties. This includes the potential for pollution claims. The account could suffer a large catastrophe incident from a collision causing death of crew and passengers or an oil or chemical spill which could require large clean up costs.

D. Aviation risks

The Group underwrites a direct and facultative reinsurance account domiciled in most parts of the world. The portfolio is made up of the following classes with maximum lines and split by territory.

The airline account is exposed to large claims arising from property damage, death or injury arising from aircraft accident. The domicile of the airline and passengers has a notable influence on the cost of claims as US court awards are generally higher.

The general aviation book covers smaller aircraft or cargo and covers owner or operators against loss or damage and third party injury.

The risk excess account is a book of general aviation reinsurance business written to protect a small number of insurers.

Aviation classes

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Airline (hull & liability)	15	84	19.3
General aviation (hull & liability)	5	57	15.4
Risk excess (hull & liability)	6	57	11.1
Airports liability	12	57	21.9
Products	8	50	14.7
Space (hull & liability)	5	46	7.7

Notes:

1. Limits are set in US dollars converted at a rate of £1 = US$1.5 and therefore currency rate of exchange changes may increase or reduce the sterling limits.
2. Maximum line size is after business written and ceded by specific proportional treaties to Amlin Bermuda Ltd.
3. Premium are stated net of acquisition costs.

Airport liability insurance covers airport operators, refuellers and air traffic controllers against losses arising from injury caused by their activities or occurring on their premises. Product liability covers manufacturers against accidents arising from faulty parts or equipment, or poor servicing of aircraft. Both airport and product liability coverage is written on a losses occurring basis meaning that claims advices can be made after the policy has expired. Space insurance covers property and liability during launch and the operation of satellites whilst in orbit for a limited period of normally one year.

The aviation account is subject to both small and large claims. Claims involving loss of life or serious injury to high earning passengers or third parties are subject to the ongoing inflation of court awards particularly in the US. Large accidents involving the potential death of 500 or so passengers are feasible and could potentially result in a gross claim to the division of more than $175 million before reinsurance if, for example, two large aircraft were to collide. Space losses are generally large single claim amounts caused by launch failure or operational failure in orbit.

E. Amlin Bermuda

Amlin Bermuda was formed in December 2005 to directly write a short tail portfolio of reinsurance business and to reinsure part of the Syndicate 2001 portfolio. The direct written portfolio consists of the following classes with maximum line sizes and split by territory.

	2007 Gross premium £m	Current maximum line size £m	2007 Average line size £m
Direct written business
Catastrophe reinsurance (per programme)	150.1	75.0	6.0
Proportional reinsurance	38.5	7.5	1.4
Per risk property reinsurance (per programme)	34.3	12.5	2.8
Special risks	10.5	15.0	6.6
Marine reinsurance	4.2	20.0	10.1
Aviation reinsurance	1.6	20.0	3.8
Accident & health	1.0	7.5	4.1
Casualty	0.3	5.0	2.1

Amlin Bermuda’s direct business has strong similarities to the reinsurance portfolio of the Non-marine division of Syndicate 2001. A large proportion of the business written emanates from London broker markets and is frequently seasoned business already underwritten by Syndicate 2001. Risk tolerance is provided by a whole account quota share of Syndicate 2001. This is further supplemented by a number of specific variable quota share treaties on short tail classes such as property and energy. These are utilised by Syndicate 2001 underwriters on an individual risk basis when deemed appropriate.

Property reinsurance is written through treaty arrangements on a proportional, individual risk excess of loss, or catastrophe excess of loss basis. The catastrophe reinsurance portfolio is the largest class of insurance risk written by Amlin Bermuda. Exposures to each programme are currently limited to $12.5 million per risk and $75 million any one catastrophe programme, with maximum event limits of $300 million any one zone and $350 million probable maximum loss for losses affecting more than one zone.

Catastrophe event exposures per territory are carefully recorded and analysed through loss simulations or realistic disaster scenarios. Amlin Bermuda is exposed to the impact of large catastrophe events such as windstorms, earthquakes or terrorist incidents. Exposure to such events is controlled and measured through loss modelling but the accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modelling. The Group’s broad risk appetite guidelines are set out here. It is possible that a catastrophe event exceeds the maximum expected event loss. This is particularly the case for the direct property proportion of the loss exposure, which Amlin Bermuda would receive through the whole account and specific variable quota shares, where models are used to calculate a damage factor representing the amount of damage expected to exposed aggregate insured values. Errors or incorrect assumptions in the damage factor calculation can result in an incurred catastrophe event higher than predicted due to unforeseen circumstances. A significant element of the Amlin Bermuda book is catastrophe reinsurance relating to US windstorm. However, a severe catastrophe to a major economic zone in Europe, Japan or the USA is likely to result in an overall loss to the property portfolio.

The accident and health class is written through medical expense schemes in the US and provides personal accident reinsurance worldwide. Personal accident reinsurance could be impacted by a single or series of accidents to high value insured individuals or from a multiple death and injury event such as an air crash or natural catastrophe.

The special risks account includes small premium classes mostly relating to terrorism reinsurance but also includes nuclear and contingency which is written in all parts of the world.

To date the Bermuda subsidiary has written risks without the protection of a reinsurance programme and therefore it has higher net retained exposures to individual risk losses than the Syndicate currently bears.

Reinsurance arrangements

The Syndicate purchases proportional reinsurance to supplement line size and to reduce exposure on individual risks. A part of the premium ceded under such facilities is placed with Amlin Bermuda and a separate proportional facility is placed for the US catastrophe excess of loss portfolio. The Syndicate also purchases a number of excess of loss reinsurances to protect itself from severe frequency or size of losses. The structure of the programme and type of protection bought will vary from year to year depending on the availability and price of cover.

On large risks individual facultative reinsurance may be bought which protects against a loss to a specific risk.

Specific risk excess of loss reinsurance is purchased for each class of business. The amount of cover bought depends upon the line size written for each class. For instance, unlimited cover is bought for our UK motor portfolio where unlimited third party cover is given on original policies. The deductibles or amounts borne prior to recovery vary from class to class as do the amounts of co-reinsurance or unplaced protection. Specific programmes are purchased to deal with large individual risk losses such as fire or large energy losses and these programmes may be combined at a higher level into a general programme for larger losses.

The combined claims to the Syndicate from several losses which aggregate in a single catastrophe event are protected by catastrophe cover. A separate excess of loss on excess of loss programme may be purchased to protect the excess of loss reinsurance portfolio against such losses. The Syndicate may also purchase multi-class umbrella protection which responds to a catastrophe loss which could exceed any of the specific programmes bought for aviation, property or excess of loss reinsurance losses. However, since 2006, the amount of excess of loss reinsurance purchased is lower and only responds to losses in excess of $50 million. Also very little multi-class umbrella protection has been purchased for 2008.

There is no guarantee that reinsurance coverage will be available to meet all potential loss circumstances as, for very severe catastrophe losses, it is possible that the full extent of the cover bought is not sufficient. Any loss amount which exceeds the programme would be retained by the Syndicate. It is also possible that a dispute could arise with a reinsurer which reduces the recovery made. The reinsurance programme is bought to cover the expected claims arising on the original portfolio. However it is possible for there to be a mismatch or a gap in cover which would result in a higher than expected retained loss.

Many parts of the programme also have limited reinstatements and therefore the number of claims which may be recovered from second or subsequent major losses is limited. It is possible for the programme to be exhausted by a series of losses in one annual period and it may not be possible to purchase additional reinsurance at an acceptable price. This would result in the Group bearing higher losses from further events occurring. It should also be noted that the renewal date of the reinsurance programmes does not necessarily correspond to that of the business written. Where business is not protected by risk attaching reinsurance (which provides coverage for the duration of the policies written) this reinsurance protection could expire resulting in an increase in possible loss retained by the Syndicate if renewal of the programme is not achieved.

Amlin Bermuda is presently not protected by any reinsurance programme although the company may decide to purchase reinsurance in the future.

Realistic Disaster Scenario (RDS) analysis

The Group has a defined event risk appetite which determines the maximum net loss that the Group intends to limit its exposure to major catastrophe event scenarios. Currently these are a maximum of £165 million for the Syndicate and $300 million any one zone or $350 million for a multi-zonal loss for Amlin Bermuda.

These maximum losses are expected only to be incurred in extreme events – with an estimated occurrence probability of less than 1 in 100 years estimated for the natural peril or elemental losses. The Group also adopts risk appetite maximum net limits for a number of other scenarios including aviation collision (£140 million) and North Sea rig loss (£100 million).

The risk appetite policy recognises that there may be circumstances in which the net event limit could be exceeded. Such circumstances include non renewal or delay in renewal of reinsurance protection, reinsurance security failure, or regulatory and legal requirements.

A detailed analysis of catastrophe exposures is carried out every quarter and measured against risk appetite. The following assumptions and procedures are used in the process:

• The data used reflects the information supplied to the Group by insureds and ceding companies. This may prove to be inaccurate or could develop during the policy period;
• The exposures are modelled using a mixture of stochastic models and underwriter input to arrive at 'damage factors' – these factors are then applied to the assumed aggregate exposure to produce gross loss estimates. The damage factors may prove to be inadequate;
• The reinsurance programme as purchased is applied – a provision for reinsurer counterparty failure is included but may prove to be inadequate;
• Reinstatement premium both payable and receivable are included.

There is no guarantee that the assumptions and techniques deployed in calculating these event loss estimate figures are accurate. Furthermore there could also be an unmodelled loss which exceeds these figures. The likelihood of such a catastrophe is considered to be remote but the most severe scenarios modelled are simulated events and these simulations could prove to be unreliable.

Insurance liabilities and reinsurance assets
Calculation of incurred but not reported (IBNR) and claims development

Amlin adopts a consistent process in the calculation of an adequate provision for insurance claim liabilities. The overriding aim is to establish reserves which are expected to be at least adequate and that there is consistency from year to year. Therefore the level of reserves are set at a level above the actuarial'best estimate' position. However, there is a risk that, due to unforeseen circumstances, the reserves carried are not sufficient to meet insurance claim liabilities reported in future years on policy periods which have expired.

Reserving process and methodology

The reserving process commences with the proper recording and reporting of claims information which consists of paid and notified or outstanding claims. For our London market business information is received through Xchanging (the London market bureau) and, in the case of our UK Commercial business, service companies and Amlin Bermuda, directly from brokers and policyholders. Claims records are maintained for each class by the underwriting year to which the policy incepts. For notified or outstanding claims a case reserve is established based on the views of underwriting management and claims managers, using external legal or expert advice where appropriate. This reserve is expected to be sufficient to meet the claim payment when it is finally determined. For some classes of business, particularly liability business, settlement may be several years after the initial notification of the claim, as it may be subject to complexities or court action. Underwriters and claims staff are responsible for setting case reserves for outstanding claims. For claims received from Xchanging, the market reserve is generally set by the lead underwriter but there are circumstances on larger claims where Amlin will post higher or lower case reserves than those notified.

To establish a provision for IBNR claims, the underwriting and claims teams use their experience and knowledge of the class of business to estimate the potential future development of each class for every underwriting year. The development period varies by class, by method of acceptance and is also determined by the deductible of each policy written. For casualty business the policy form will determine whether claims can be made on a claims made (as advised) or as a losses occurring (determined by date of loss) basis. This has a significant impact on the reporting period in which claims can be notified. In setting the IBNR provision estimates are made for the ultimate premium and ultimate gross claims value for each underwriting year. Allowance is then made for anticipated reinsurance recoveries to reach a net claim position. Reinsurance recoveries are calculated for outstanding and IBNR claims sometimes through the use of historical recovery rates and provisions are made as appropriate for bad debt or possible disputes. The component of ultimate IBNR provision estimates and reinsurance recoveries that relates to future events occurring to the existing portfolio is removed in order to reflect GAAP accounting practice.

To assist with the process of determining the reserves, triangulation statistics for each class are produced which show the historical development of premium, as well as paid and incurred losses, for each underwriting year, from inception to the date of review. Each class triangulation is also independently analysed by the internal actuarial team using actuarial software as appropriate. The aim of the actuarial exercise is to produce ' best estimate' ultimate premium and claims amounts which can be compared to the figures proposed by divisional management. Meetings are held in which executive management, actuarial staff and business management discuss claims issues and analyse the proposed and independently generated reserves to conclude the provision to be carried. These provisions are also reviewed annually by external actuaries who examine the work carried out and opine on the sufficiency of reserves.

For Amlin Bermuda, which only commenced underwriting in 2005, historical statistics for the Syndicate’s relevant classes of business have been used as a guide for actuarial review.

Reserving areas of uncertainty

The reserves established can be more or less than adequate to meet eventual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate case reserves for known large losses and catastrophes or from inadequate provision for IBNR. The impact on profit before tax of a +/–1% variation in the total net claims reserves would be +/–£10.9 million (2006: £11.0 million).

Large loss case reserves are determined through careful analysis of the individual claim, often with the advice of legal advisers. Liability claims arising from events such as the 11 September 2001 terrorist attacks in the US is an example of a case where there continues to be some uncertainty over the eventual value of claims.

Property catastrophe claims such as earthquake or hurricane losses can take several months, or years, to develop as adjusters visit damaged property and agree claim valuations. Until all the claims are settled it requires an analysis of the area damaged, contracts exposed and the use of models to simulate the loss against the portfolio of exposure in order to arrive at an estimate of ultimate loss to the Group. There is uncertainty over the adequacy of information and modelling of major losses for a period of several months after a catastrophe loss. Account should also be taken of factors which may influence the size of claims such as increased inflation or a change in law.

The long tail liability classes, for which a large IBNR has to be established, represent the most difficult classes to reserve because claims are notified and settled several years after the expiry of the policy concerned. This is particularly the case for US liability written on a losses occurring basis.

The use of historical development data, adjusted for known changes to wordings or the claims environment, is fundamental to reserving these classes. It is used in conjunction with the advice of lawyers and third party claims adjusters on material single claims.

The allocation of IBNR to the reinsurance programme is an uncertain exercise as there is limited knowledge of the size or number of future claims advices. The assumption over future reinsurance recoveries may be incorrect and unforeseen disputes could arise which would reduce recoveries made.

Dynamic financial analysis (DFA) modelling of risk

To improve our risk management capability, and our assessment of capital requirements, Amlin has developed a stochastic model to analyse the potential performance of the underwriting businesses. The output from the model includes a distribution of outcomes from reserves for prior written liabilities, investment performance, and new business underwriting performance. The result is a combined view of the expected best estimate mean result and the range of possibilities around it.

The model requires the input of a large number of explicit parameters. Those inputs are based on many different sources of information including detailed historical data on premium and claims, forecast income and exposures, estimated rating levels and catastrophe loss data from proprietary models applied to Amlin’s portfolio. It enables projection of an estimated mean ultimate loss ratio and the distribution of results around it. The model explicitly recognises diversification credit, since class results are not all strongly correlated and thus individual classes are unlikely to all produce losses (or profits) in the same year. Due to the inherent uncertainty of predicting the key drivers of business performance, including in particular claims levels, any individual simulation of the model viewed in isolation cannot be relied upon as an accurate forecast. However, the output from many thousands of simulated results can provide a picture of the possible distribution of insurance business results. This output is useful in developing an understanding of the losses which may be borne by the business at varying levels of probability. There are a large number of uncertainties and difficulties in achieving accurate results from the model. Some of the key issues are:

• The model is based on a best estimate view of business volumes and rate expectations which may not be borne out in practice;
• A significant change in the portfolio of business could result in the past not being a reliable guide to the future;
• Changing external environmental factors may not be assessed accurately;
• Model risk may be significant in such a complex and developing discipline;
• Key assumptions over levels of correlation between classes may over time prove to be incorrect;
• Catastrophe model inputs, which estimate the severity and frequency of large catastrophes on the portfolio, may be incorrect.

The result reproduced below represents the modelled loss sustained by the business from a single 1 in 200 bad year i.e. at the 0.5 percentile. This probability is the calculation benchmark required by the FSA and Lloyd's. However, it does not represent the level of capital required for Amlin to support current and expected business levels, which should be considered over a longer period of modelling. Furthermore, Amlin is required to carry (larger) levels of capital which are sufficient in the eyes of rating agencies and clients. This is modelling for a single year’s outcome only.

All figures are based on business plan forecast and assumptions consistent with the work for the October 2007 ICA submission (for the 2008 Year of Account) and thus include the previously projected year end asset and liability position.

Risk category after diversification

	2008 forecast £m
Underwriting (new business risk)	(459)
Reserving	(68)
Credit (reinsurance counterparty risk)	(15)
Investment (market risk)	74
Liquidity risk	(8)
Discounting credit	90
Diversified result	(386)

Notes:

• Figures include an allowance for investment returns generated on assets backing insurance liabilities (i.e. discounting). The discounting credit shown represents the release from the balance sheet by discounting the mean best estimate reserves.
• Investment income includes group corporate (surplus) assets. Investment risk after diversification remains positive since at around the 1 in 200 level total investment income (on both surplus and technical assets) exceeds the investment income implicitly assumed via discounting on the technical assets alone.
• Figures exclude:
  • any additional capital provision for operational risk
  • dividend or tax considerations
  • effects of currency risk
  • credit for carried reserve margins
• Non-sterling amounts have been converted at Lloyd’s required rates, including for US Dollars $1.92 to £1.0.

Premium development

The table below illustrates the development of the estimate of gross written premium and gross earned premium for Syndicate 2001 and Amlin Bermuda Ltd after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimate made. Non-sterling balances have been converted using 2007 closing exchange rates to aid comparability. All premium is gross of acquisition costs.

Group

Gross written premium	2001	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m	£m
At end of underwriting year	668.4	794.5	945.3	926.7	939.2	1,145.1	1,114.2
One year later	629.1	835.3	946.3	935.3	941.0	1,167.6
Two years later	645.3	812.0	950.4	943.0	947.6
Three years later	651.0	811.7	951.8	945.4
Four years later	652.7	813.1	951.9
Five years later	655.3	812.8
Six years later	655.4
Current ultimate gross written premium	655.4	812.9	951.9	945.4	953.3	1,178.2	1,136.9

Gross earned premium	2001	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m	£m
At end of underwriting year	333.2	411.0	505.8	471.6	484.8	624.5	620.8
One year later	594.3	811.7	900.5	889.2	899.1	1,122.3
Two years later	645.3	812.0	950.4	943.0	947.6
Three years later	651.0	811.6	951.8	945.4
Four years later	652.7	813.1	951.9
Five years later	655.3	812.8
Six years later	655.4

Syndicate 2001 Total

Gross written premium	2001	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m	£m
At end of underwriting year	668.4	794.5	945.3	926.7	936.1	937.3	880.1
One year later	629.1	835.3	946.3	935.3	939.2	959.2
Two years later	645.3	812.0	950.4	943.0	945.9
Three years later	651.0	811.7	951.8	945.4
Four years later	652.7	813.1	951.9
Five years later	655.3	812.8
Six years later	655.4
Current ultimate gross written premium	655.4	812.9	951.9	945.4	951.6	969.8	902.8

Gross earned premium	2001	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m	£m
At end of underwriting year	333.2	411.0	505.8	471.6	484.8	503.5	474.1
One year later	594.3	811.7	900.5	889.2	897.6	921.0
Two years later	645.3	812.0	950.4	943.0	945.9
Three years later	651.0	811.6	951.8	945.4
Four years later	652.7	813.1	951.9
Five years later	655.3	812.8
Six years later	655.4

Amlin Bermuda Ltd Total

Gross written premium	2005	2006	2007
Underwriting year	$m	$m	$m
At the end of underwriting year	6.1	413.6	465.8
One year later	3.6	414.7
Two years later	3.4
Currernt ultimate gross written premium	3.4	414.7	465.8

Gross earned premium	2005	2006	2007
Underwriting year	$m	$m	$m
At the end of underwriting year	–	240.8	292.0
One year later	3.0	400.5
Two years later	3.4

Claims development

The table below illustrates the development of the estimate of cumulative claims for Syndicate 2001 after the end of the underwriting year, illustrating how amounts estimated have changed from the first estimate made. Non-sterling balances have been converted using 2007 exchange rates to aide comparability.

Non-marine

Gross basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Current ultimate gross written premium	409.7	509.4	504.3	529.1	567.9	522.6
Estimate of cumulative claims
At end of underwriting year	231.1	257.2	355.3	553.3	237.6	246.3
One year later	157.9	178.0	373.2	541.0	163.9
Two years later	136.1	167.0	364.6	536.8
Three years later	132.9	155.8	354.6
Four years later	132.2	152.5
Five years later	128.5
Cumulative payments	114.7	128.8	312.4	453.1	79.2	14.9
Estimated balance to pay	13.8	23.7	42.2	83.7	84.7	231.4

Net basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Estimate of cumulative claims
At end of underwriting year	192.5	212.7	365.5	299.9	191.2	191.2
One year later	143.6	149.4	246.1	287.8	132.4
Two years later	125.0	136.9	237.2	283.5
Three years later	121.8	126.1	225.6
Four years later	121.0	122.3
Five years later	117.3
Cumulative payments	111.8	109.1	187.9	199.9	73.3	13.7
Estimated balance to pay	5.5	13.2	37.7	83.6	59.1	177.5

Marine

Gross basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Current ultimate gross written premium	124.2	165.4	163.8	177.7	199.3	186.8
Estimate of cumulative claims
At end of underwriting year	74.3	97.7	92.8	129.3	97.9	97.0
One year later	74.3	93.1	85.3	177.0	92.0
Two years later	63.4	70.9	70.8	164.2
Three years later	61.9	69.7	71.8
Four years later	60.1	71.6
Five years later	58.5
Cumulative payments	52.0	60.7	57.4	97.4	38.6	8.9
Estimated balance to pay	6.5	10.9	14.4	66.8	53.4	88.1

Net basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Estimate of cumulative claims
At end of underwriting year	66.6	84.5	87.2	87.5	77.2	72.5
One year later	63.6	77.0	74.8	99.6	72.2
Two years later	52.3	57.6	59.1	93.2
Three years later	51.2	56.4	60.7
Four years later	49.7	56.1
Five years later	48.1
Cumulative payments	45.9	51.8	46.0	58.0	35.4	8.3
Estimated balance to pay	2.2	4.3	14.7	35.2	36.8	64.2

Aviation

Gross basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Current ultimate gross written premium	91.8	82.1	86.5	76.5	75.9	58.4
Estimate of cumulative claims
At end of underwriting year	66.7	50.6	51.7	47.0 4	7.6	45.4
One year later	45.5	37.7	42.2	45.7	57.8
Two years later	46.2	30.8	38.0	38.1
Three years later	42.8	30.8	34.8
Four years later	42.5	27.7
Five years later	38.8
Cumulative payments	30.3	17.9	20.2	11.9	10.2	3.4
Estimated balance to pay	8.5	9.8	14.6	26.2	42.6	42.0

Net basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Estimate of cumulative claims
At end of underwriting year	44.1	38.3	42.1	38.6	33.0	32.9
One year later	35.4	29.8	36.1	33.6	31.8
Two years later	34.7	24.3	32.6	28.0
Three years later	31.7	24.0	29.9
Four years later	30.9	21.5
Five years later	28.7
Cumulative payments	25.6	15.1	18.0	8.8	8.5	2.9
Estimated balance to pay	3.1	6.4	11.9	19.2	23.3	30.0

UK Commercial

Gross basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Current ultimate gross written premium	187.0	195.0	190.8	167.6	146.2	135.0
Estimate of cumulative claims
At end of underwriting year	136.0	144.2	125.6	114.3	101.6	100.0
One year later	122.7	129.1	111.4	110.5	105.5
Two years later	110.4	102.0	104.1	102.4
Three years later	106.4	96.4	91.3
Four years later	100.2	96.5
Five years later	95.9
Cumulative payments	73.3	59.3	50.3	39.4	26.2	8.2
Estimated balance to pay	22.6	37.2	41.0	63.0	79.3	91.8

Net basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Estimate of cumulative claims
At end of underwriting year	112.2	125.2	110.1	103.6	84.7	84.8
One year later	104.7	109.2	101.4	100.2	88.3
Two years later	92.8	91.9	93.1	96.6
Three years later	87.1	87.9	87.7
Four years later	82.7	87.9
Five years later	77.1
Cumulative payments	69.5	59.3	48.2	39.3	26.2	8.2
Estimated balance to pay	7.6	28.6	39.5	57.3	62.1	76.6

Syndicate 2001 Total

Gross basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Current ultimate gross written premium	812.8	951.9	947.5	957.6	969.8	902.8
Estimate of cumulative claims
At end of underwriting year	508.0	549.6	625.3	844.0	484.7	488.7
One year later	400.4	437.9	612.2	874.4	414.2
Two years later	356.1	370.7	577.3	841.5
Three years later	344.0	352.8	552.5
Four years later	334.9	348.2
Five years later	321.7
Cumulative payments	270.1	266.6	440.2	601.7	154.2	35.4
Estimated balance to pay	51.6	81.6	112.3	239.8	260.0	453.3

Net basis	2002	2003	2004	2005	2006	2007
Underwriting year	£m	£m	£m	£m	£m	£m
Estimate of cumulative claims
At end of underwriting year	415.4	460.8	505.0	529.6	386.1	381.5
One year later	247.2	365.4	458.4	521.2	324.7
Two years later	304.8	310.7	422.0	501.3
Three years later	291.7	294.4	403.9
Four years later	284.2	287.8
Five years later	271.2
Cumulative payments	252.7	235.3	300.1	306.1	143.5	33.2
Estimated balance to pay	18.5	52.5	103.8	195.2	181.2	348.3

Amlin Bermuda Ltd Total

Claims gross basis	2005	2006	2007
Underwriting year	$m	$m	$m
Estimate of cumulative claims
At end of underwriting year	–	86.2	94.5
One year later	1.2	64.3
Two years later	0.6
Cumulative payments	0.3	42.8	11.7
Estimated balance to pay	0.3	21.5	82.8

3.2 Financial investment risk disclosures

Market risk

Risk management

The following section describes Amlin’s investment risk management from a quantitative and qualitative perspective.

The Group has two main categories of assets both of which have to be invested in accordance with the regulations applicable to where the underwriting business is being written. The asset categories are as follows.

Underwriting assets

These are the premium received and held to meet future insurance claims.

Capital assets

These are the capital required by the regulators to support the underwriting business plus working capital or surplus funds. Apart from the outstanding borrowings, these assets do not have specific current liabilities attached to them.

Investment governance

Amlin manages its investments in accordance with investment frameworks that are set by the Boards of Amlin plc and its subsidiaries. These frameworks determine investment policy and the management of investment risk. They are reviewed on a regular basis to ensure that the Boards' fiduciary and regulatory responsibilities are being met. The Boards delegate responsibility for the management of the investments to the Investment Management Executive.

The Investment Management Executive comprises the Chief Executive, Finance Director, Underwriting Director and Chief Investment Officer. They meet monthly to determine investment tactics, to ensure that asset allocation is appropriate for current market conditions and is in accordance with the investment frameworks. The Investment Management Executive appoints and monitors the external investment managers and the custodians that are responsible for the safekeeping of the assets.

The Investment Advisory Panel, which consists of external investment professionals as well as members of the Investment Management Executive, meets quarterly. The Panel monitors and critiques investment strategy and tactics. In addition Group Compliance provides advice on investment regulations.

Risk tolerance

The investment process is formulated from the risk tolerance, which is determined by the underwriting cycle and the requirements of the capital providers. In a hard underwriting market capital preservation is paramount in order to support the insurance business and, therefore, the risk tolerance for the capital assets will be low.

Conversely, the risk tolerance for the underwriting assets under these circumstances will be relatively high due to the strong cash flows. In a soft underwriting market the opposite applies.

Strategic benchmarks

Strategic benchmarks are set for the neutral asset allocation taking account of the risk tolerance.

For the London operations the expected timescale for future cashflows in each currency is calculated by our Group Actuarial team. These durations form the basis for the strategic benchmarks for the underwriting assets against which the assets are invested. Due to the short tail nature of the Bermudian operations the underwriting assets are currently held in AAA rated stable net asset value money market funds.

The strategic benchmarks for capital assets, for both London and Bermuda are set by using a Value at Risk (VaR¹) model, to determine the optimum asset allocation for the current risk tolerance and to ensure that appropriate solvency levels are maintained.

Tactical ranges around these strategic benchmarks provide sufficient flexibility to ensure that an appropriate risk/reward balance is maintained in changing investment markets.

Investment management

Specialist external investment managers are used to manage each asset class on a segregated, pooled or commingled basis². For regulatory reasons, the Corporation of Lloyd’s manages overseas regulatory deposits in commingled funds. Otherwise manager selection is based on a range of criteria that leads to the expectation that the managers will add value to the funds over the medium to long-term. Investment guidelines are set for each manager to ensure that they comply with the investment frameworks. The managers have discretion to manage the funds on a day-to-day basis within these guidelines. The managers are monitored on an ongoing basis and are reviewed periodically using Watson Wyatt Worldwide.

The managers as at 31 December 2007 were as follows:

Manager	Asset class
Segregated funds
Aberdeen Asset Management	US dollar bonds
AEGON Asset Management	Sterling bonds
ING Real Estate	Global property manager of managers
Insight Investment Management	Sterling bonds
Morley Fund Management	Global property manager of managers
Robeco Investment Management	US and Canadian dollar bonds
THS Partners	Global equities
Western Asset Management	US dollar and Euro bonds
Pooled vehicles
Barclays Global Investors	Sterling, Euro and US dollar Money Market Funds
Goldman Sachs Asset Management	Sterling, Euro and US dollar Money Market Funds and LIBOR plus Fund
HSBC Asset Management	US dollar Money Market Funds
Insight Investment Management	Sterling Money Market Fund
JP Morgan Asset Management	US dollar Money Market Funds
PIMCO	Sterling and US dollar bonds
Western Asset Management	US dollar Money Market Fund
Commingled funds	US dollar, Canadian dollar, Australian dollar,
Corporation of Lloyd’s Treasury Services	South African and Japanese bonds
Union Bank of Switzerland	Canadian and US dollar liquid funds

¹VaR is a statistical measure, which calculates the possible loss over a year, in normal market conditions. As VaR estimates are based on historical market data this should not be viewed as an absolute gauge of the level of risk to the investments.

²Segregated funds are managed separately for Amlin. Pooled funds are collective investment vehicles in which Amlin and other investors purchase units. Commingled funds combine the assets of several clients.

The funds under management with each manager:

Asset allocation

The asset allocation at the year end is set out below. The analysis in this section covers the investments for which Amlin has direct responsibility together with £60 million (2006: £55 million) of overseas regulatory deposits managed by the Corporation of Lloyd’s on Amlin’s behalf in commingled funds.

The assets in the table include £14.7 million (2006: £16.7 million) which relates to accrued income and net unsettled payables for investments which are shown separately in the notes to the accounts. The table does not include £5.5 million (2006: £9.2 million) which relates to spread syndicate exposure (note 17), derivative positions outstanding at year end and other liquid investments.

	31 December 2007			31 December 2006
	Underwriting assets £m	Capital £m	Total £m	Underwriting assets £m	Capital £m	Total £m
Global equities	–	232.1	232.1	–	248.3	248.3
Bonds
Government securities	585.6	252.1	837.7	643.8	239.1	882.9
Government index-linked securities	3.0	–	3.0	44.2	–	44.2
Government agencies	76.4	8.0	84.4	7.2	–	7.2
Supranational	44.5	2.1	46.6	0.7	16.1	16.8
Asset backed securities	25.2	55.5	80.7	81.7	59.2	140.9
Mortgage backed securities	18.0	67.6	85.6	131.4	77.2	208.6
Corporate bonds	212.4	53.1	265.5	208.1	103.9	312.0
Pooled Vehicles	53.3	121.4	174.7	50.1	25.7	75.8
	1,018.4	559.8	1,578.2	1,167.2	521.2	1,688.4
Property 3	–	75.4	75.4	43.1	–	43.1
Other liquid investments
Cash with fund manager	3.4	8.3	11.7	1.6	14.9	16.5
Money market funds	458.0	292.7	750.7	168.7	228.4	397.1
	461.4	301.0	762.4	170.3	243.3	413.6
	1,479.8	1,168.3	2,648.1	1,380.6	1,012.8	2,393.4

	31 December 2007			31 December 2006
	Underwriting assets %	Capital %	Total %	Underwriting assets %	Capital %	Total %
Global equities	–	19.9	8.8	–	24.5	10.4
Bonds
Government securities	39.6	21.5	31.6	46.6	23.6	36.9
Government index-linked securities	0.2	–	0.1	3.2	–	1.8
Government agencies	5.2	0.7	3.2	0.5	–	0.3
Supranational	3.0	0.2	1.8	0.1	1.6	0.7
Asset backed securities	1.7	4.8	3.0	5.9	5.8	5.9
Mortgage backed securities	1.2	5.8	3.2	9.5	7.6	8.7
Corporate bonds	14.4	4.5	10.1	15.0	10.3	13.0
Pooled Vehicles	3.6	10.3	6.6	3.6	2.5	3.2
	68.9	47.8	59.6	84.4	51.4	70.5
Property	–	6.5	2.8	3.1	–	1.8
Other liquid investments
Cash with fund manager	0.2	0.7	0.4	0.3	1.5	0.7
Money market funds	30.9	25.1	28.4	12.2	22.6	16.6
	31.1	25.8	28.8	12.5	24.1	17.3
	100.0	100.0	100.0	100.0	100.0	100.0

³The property valuations are based on the data available when the accounts were prepared. There were no material changes in value between the valuation in the table and the actual year end valuation.

At 31 December 2007 the industry and geographical splits of global equities and bond portfolios were as follows:

Global equities	2007	2006		2007	2006
Industry	%	%	Region (based on domicile of issuer)	%	%
Oil & Gas	9.3	9.0	United Kingdom	18.1	23.2
Basic Materials	3.9	1.8	USA and Canada	19.0	19.8
Industrials	5.9	13.3	Europe (ex UK)	37.2	34.9
Consumer Goods and Services	24.8	23.6	Far East	21.5	21.6
Health Care	3.4	5.3	Emerging markets	4.2	0.5
Telecommunications	14.9	11.4
Utilities	6.6	4.7
Financials	29.0	29.9
Technology	2.2	1.0
	100	100		100	100

Bonds	2007	2006		2007	2006
Industry	%	%	Region (based on domicile of issuer)	%	%
Oil & Gas	3.5	3.8	United Kingdom	18.9	29.5
Basic Materials	0.5	0.1	USA and Canada	61.3	61.4
Industrials	1.9	12.8	Europe (ex UK)	17.7	7.5
Consumer Goods and Services	6.5	5.4	Far East	1.3	0.9
Health Care	0.6	0.1	Emerging markets	0.8	0.6
Telecommunications	5.0	4.5	Other	0.0	0.1
Utilities	1.2	6.3
Financials	80.8	67.0
	100	100		100	100

Note: The two tables by industry and region exclude pooled investments.

Valuation risk

Amlin’s earnings are directly affected by changes in the valuations of the investments held in the portfolios. These valuations vary according to the movements in the underlying markets. Factors affecting markets include changes in the economic and political environment, risk appetites, liquidity, interest rates and exchange rates. These factors have an impact on Amlin’s investments and are taken into consideration when setting strategic benchmarks and tactical asset allocation. The price of holdings can also vary due to specific risks, such as the corporate strategy and companies' balance sheet structure, which may impact the value of individual equity and corporate bond holdings. This is mitigated by holding diversified portfolios, as specified in the investment guidelines given to the Fund Managers. These limit the exposure to any one company, which also mitigates credit risk. In addition the equity mandate limits the exposure to any one geographic region or industrial sector and the bond mandates limit the overall exposure to non-government holdings.

Amlin Group’s assets are marked to market at bid price. Prices are supplied by the custodians, whose pricing processes are covered by their published annual audits. In accordance with their pricing policy, prices are sourced from two market recognised pricing vendor sources including: FT Interactive, Bloomberg and Reuters. These pricing sources use closing trades, or where more appropriate in illiquid markets, pricing models. These prices are reconciled to the fund managers' records to check for reasonableness. Prices for over the counter derivatives, are supplied by Bloomberg and checked to the relevant counterparty. Property investments are based on the most recent price available, which in some instances may be a quarter in arrears. Where a property transaction has taken place the transaction price is used if it is the most recent price available.

Low market liquidity during the second half of 2007 meant that assessing fair value was more difficult than usual. As an additional check, the majority of prices as at 31 December 2007 have been verified by Amlin against publicly available quoted prices to verify that the prices used are a good estimation for fair value.

In 2007 Amlin entered into a number of equity index options to limit the volatility of the equity exposure. Put options were bought limiting the downside risk of exposures to the FTSE 100, S&P 500, DAX and CAC indices to no more than five percentage points from the market levels at the dates of the trades. These transactions incurred no premiums as call options were simultaneously sold, which meant that the upside of market movements was capped to a few percentage points. At the end of the year these hedges covered 25% of the Group’s equity exposure until the end of March 2008. The valuation of these transactions at the 31 December 2007 was £0.2 million.

If global equity markets fell by 10% the pre-tax impact on the overall assets and profit as at 31 December 2007, pre-tax, would be a decline of £15.9 million (2006: £24.8 million). As explained above, the downside risk is mitigated by the hedges that were in place. These expire at the end of March. Without the hedges the downside risk would be £23.2 million.

Interest rate risk

Investors' expectations for interest rates will impact bond yields⁴. The value of Amlin’s bond holdings is therefore subject to fluctuation as bond yields rise and fall. If yields fall the capital value will rise, and visa versa. The sensitivity of the price of a bond is indicated by its duration⁵. The greater the duration of a security, the greater its price volatility. Typically the longer the maturity of a bond the greater its duration. The maturity bands of the Group’s bond holdings at year end are shown below:

	31 December 2007			31 December 2006
	Underwriting assets £m	Capital £m	Total £m	Underwriting assets £m	Capital £m	Total £m
Less than 1 year	95.8	76.8	172.6	106.7	153.8	260.5
1-2 years	58.8	72.8	131.6	105.2	34.4	139.6
2-3 years	153.3	102.8	256.1	106.2	47.6	153.8
3-4 years	242.5	49.0	291.5	153.7	22.0	175.7
4-5 years	219.2	30.5	249.7	388.2	105.3	493.5
Over 5 years	195.6	106.4	302.0	257.0	132.5	389.5
	965.2	438.3	1,403.5	1,117.0	495.6	1,612.6

Note: The table above excludes £174.7 million (2006: £75.8 million) of pooled investments.

⁴The yield is the rate of return paid if a security is held to maturity. The calculation is based on the coupon rate, length of time to maturity and the market price. It assumes coupon interest paid over the life of the security is reinvested at the same rate.

⁵The duration is the weighted average maturity of the security’s cash flows, where the present values of the cash flows serve as the weights.

The duration of underwriting assets for Syndicate 2001 is set with reference to the duration of the underlying liabilities. It should be noted that the liabilities are not currently discounted and therefore their value is not impacted by interest rate movements. Due to the inherently short tail nature of the Bermudian reinsurance exposures, the underwriting assets are currently all held in money market funds. For the London underwriting assets, cash is raised, or the duration of the portfolio reduced, if it is believed that yields may rise, and therefore capital values fall.

The duration of the bond and cash portfolios for the London underwriting assets at year end was as follows:

	31 December 2007		31 December 2006
	Assets Years	Liabilities Years	Assets Years	Liabilities Years
Sterling	2.3	3.2	2.4	2.5
US Dollars	2.8	3.0	3.0	3.1
Euro	3.3	3.2	3.3	3.0
Canadian Dollars	2.7	3.3	3.0	3.2

The asset durations are based on Bloomberg prepayment data. In the few instances where this is not available, investment managers have provided independent proof of prepayment data used to calculate duration. Some differences occur between custodian durations and those of fund managers due to the use of different prepayment assumptions. The material differences are for the European portfolio, where the manager’s duration is 11% shorter than the custodian and the US portfolios where the fund managers' duration is 9% below that of the custodian. In all instances the duration differences are within the tactical ranges permitted by the investment guidelines.

Sensitivity analysis

An indication of the potential sensitivity of the value of the bond and cash funds to changes in yield is shown below:

Shift in yield (basis points)	Sterling %	Syndicate		Euro %	Capital Sterling %	Bermuda		Net (reduction) increase in value £m
		US$ %	CAN$ %			Underwriting %	Capital %
100	(2.5)	(2.6)	(2.3)	(3.0)	(0.6)	(0.1)	(1.0)	(42)
75	(1.9)	(1.9)	(1.8)	(2.2)	(0.5)	(0.1)	(0.7)	(32)
50	(1.2)	(1.3)	(1.2)	(1.5)	(0.3)	–	(0.5)	(21)
25	(0.6)	(0.6)	(0.6)	(0.7)	(0.1)	–	(0.2)	(10)
-25	0.6	0.7	0.6	0.7	0.1	–	0.2	10
-50	1.2	1.3	1.2	1.5	0.3	–	0.4	20
-75	1.9	1.9	1.8	2.2	0.4	0.1	0.6	31
-100	2.5	2.6	2.3	3.0	0.6	0.1	0.8	41

Unpaid claims reserves are estimated on an undiscounted basis and therefore, are not subject to interest rate fluctuations.

Foreign exchange risk

Underwriting assets are held in the base currencies of sterling, euros, US dollars and Canadian dollars, which represent the majority of the Group’s liabilities by currency. This limits the underwriting foreign exchange rate risk. However, foreign exchange exposure does arise when business is written in non-base currencies. These transactions are converted into sterling or US dollars (depending if the business is written out of London or Bermuda) at the prevailing spot rate once the premium is received. Consequently there is exposure to currency movements between the exposure being written and the premium being converted. Payments in non-base currencies are converted back into the underlying currency at the time a claim is to be settled; therefore Amlin is exposed to exchange rate risk between the claim being made and the settlement being paid.

Further foreign exchange risk arises until non-sterling profits or losses are converted into sterling. For Amlin’s UK operations it is policy to mitigate foreign exchange risk by systematically converting non-sterling profits into sterling. Given the inherent volatility in some business classes a cautious approach is adopted on the speed and level of sales, but we seek to extinguish all currency risk on earned profit during the second year after the commencement of each underwriting year. The intention is to time the currency transactions in order to optimise the conversion rates. This approach avoids the inherent dangers of 'lumpier' sales. It is not the intention to take speculative currency positions in order to make currency gains. A summary of the sales for 2007 is shown in the table below.

	US dollar		Euro		Canadian dollar
	Total £m	Average rate	Total £m	Average rate	Total £m	Average rate
31 December 2007	532	2.00	29	1.47	16	2.48

In order to reduce the foreign exchange risk at the Group level, during 2007 $200m of Amlin Bermuda’s surplus underwriting assets have been converted into sterling at an average exchange rate of 1.9870.

Currency risk

As at the end of December 2007 the investment managers held some forward foreign exchange contracts in their portfolios to hedge non-base currency investments. These are transacted with highly rated banks and are marked to market in investment valuations.

The Group is subject to foreign exchange risk as a result of the translation of the group companies that have a functional currency different from the presentation currency of the Group which is sterling. As Amlin reports its financial statements in sterling it is subject to foreign exchange risk due to the impact of changes in the sterling/US dollar exchange rate on the converted sterling value of Bermuda’s dollar net assets. In order to mitigate the impact of these currency fluctuations, during 2007 the Group has implemented a policy of hedging up to 50% of the net dollar exposure resulting from Amlin Bermuda’s capital assets. As the transactions are not currently “hedge accounted”, realised and unrealised gains and losses are recorded in the profit and loss account of the period in which they occur. At the year end hedges were in place for $400 million. These were in the form of long sterling calls/US dollar puts funded by short sterling puts/US dollar calls. The net valuation of these trades was a £2.5 million loss as at the year end.

If the USD/GBP exchange rate were to deteriorate/(improve) by 10%, the movement in the net underwriting assets and liabilities and borrowings of the Group, excluding overseas subsidiaries, would result in a £31.8 million foreign exchange loss/(gain) in the Group income statement at 31 December 2007.

In relation to translation of overseas subsidiaries, the same exchange rate deterioration would result in a £68 million additional exchange loss through consolidated reserves. This loss would be offset by a valuation gain of £10.6 million on the hedges in place. The same exchange rate improvement would result in a £68 million exchange gain through consolidated reserves. This gain would be offset by a valuation loss of £20.4 million on the hedges in place.

Liquidity risk

It is important to ensure that claims are paid as they fall due. Levels of cash are therefore managed on a daily basis. Buffers of liquid assets are also held in excess of the immediate requirements to avoid us having to be forced sellers of any of our assets, which may result in prices below fair value being realised, especially in periods of below normal investment market activity. The policy of limiting the extent of duration divergence between the underwriting assets and the liabilities helps to reduce the risk of a cash flow mismatch.

The Group funds its insurance liabilities with a portfolio of equity and debt securities exposed to market risk. The following table indicates the contractual timing of cash flows arising from assets and liabilities for management of insurance contracts:

		Contractual cash flows (undiscounted)
As at 31 December 2007 Financial assets	No stated Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	Carrying amount
Shares and other variable yield securities	307.5	–	–	–	–	307.5
Debt and other fixed income securities	174.7	172.6	387.7	541.2	302.0	1,578.2
Cash and liquid funds	762.4	–	–	–	–	762.4
Total	1,244.6	172.6	387.7	541.2	302.0	2,648.1

		Expected cash flows (undiscounted)
Insurance liabilities	No stated Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	Carrying amount
Insurance contracts – short term	–	568.4	415.3	181.6	184.9	1,350.2
Less assets arising from reinsurance contracts held – short term contracts	–	(100.8)	(82.8)	(39.1)	(47.5)	(270.2)
Total	–	467.6	332.5	142.5	137.4	1,080.0
Difference in contractual cash flows	1,244.6	(295.0)	55.2	398.7	164.6	1,568.1

		Contractual cash flows (undiscounted)
As at 31 December 2006 Financial assets	No stated Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	Carrying amount
Shares and other variable yield securities	291.4	–	–	–	–	291.4
Debt and other fixed income securities	75.7	260.5	293.4	669.2	389.6	1,688.4
Cash and liquid funds	413.6	–	–	–	–	413.6
Total	780.7	260.5	293.4	669.2	389.6	2,393.4

		Expected cash flows (undiscounted)
Insurance liabilities	No stated Maturity	0-1 yr	1-3 yrs	3-5 yrs	>5 yrs	Carrying amount
Insurance contracts	–	658.2	452.1	181.1	126.1	1,417.5
Less assets arising from reinsurance contracts held	–	(177.7)	(116.9)	(37.7)	(24.7)	(357.0)
Total	–	480.5	335.2	143.4	101.4	1,060.5
Difference in contractual cash flows	780.7	(220.0)	(41.8)	525.8	288.2	1,332.9

The assets in the above table include £18.0 million (2006: £16.7 million) accrued income which is shown separately in the notes to the accounts. The table above does not include the derivative positions that Amlin plc had outstanding at the year end.

Liquidity in the event of a major disaster is tested regularly using internal cash flow forecasts and realistic disaster scenarios. In addition, the London underwriting asset investment guidelines require at least 25% of the funds to be held in government bonds and/or cash equivalents, which are highly liquid. This figure is 100% for Bermuda. In addition pre-arranged revolving credit facilities are available from bank facilities. As discussed above, the capital assets are not matched to liabilities. However, if a major insurance event occurs the investment strategy is reviewed to ensure that sufficient liquidity is also available in the capital assets.

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.

The table below shows the breakdown at 31 December 2007 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 2007 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.

Exposure of the bond portfolio and reinsurance debtors by credit quality

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. Additionally there are limits on the overall level of non-government bonds that the fund managers can hold in the bond portfolios.

During 2007, markets became increasingly concerned about the ability of sub-prime borrowers, that is borrowers with a poor credit history, to meet their repayment commitments, particularly in the US. The impact of this spread to concerns about the ability of insurers, who have provided guarantees that enhance the credit of the issuer, to meet those guarantees. The consequence was a widening of the yield spread of these bonds over the yield of comparable sovereign debt.

At the year end within the asset and mortgage backed holdings there was £24.0 million direct exposure to sub-prime home equity loans debt, of which £22.0 million AAA rated and £2.0 million AA rated. In addition there was £3.6 million indirect exposure to sub-prime in the bond pooled vehicles. £34.7 million of the bond portfolio was guaranteed by insurers, so called monolines, was £34.7 million. At 31 December 2007 all these bonds were AAA rated. The managers have stress tested each bond and conservatively believe in the event of failure by the guarantors that 96% of the bonds will remain investment grade.

There was an additional £1.1 million sub-prime mortgage debt that was all AAA rated, as well as £28.2 million short duration asset backed auto loans which were classified as sub-prime.

					Total
		% of total assets			direct	Total
MBS & ABS	AAA	AA	Indirect	Total	£m	£m
MBS incl agencies	5.6%	0.2%	2.4%	8.2%	154.3	217.3
ABS
ABS other	1.9%	0.1%	0.1%	2.0%	51.4	53.8
ABS Home Equity	1.0%	0.1%	0.1%	1.2%	29.3	33.2
Total	8.5%	0.4%	2.6%	11.4%	235.0	304.3

Alt-A	AAA	AA	Indirect	Total	Total direct £m	Total £m
Collateralised mortgage obligation	0.4%	0.0%		0.4%	9.9	9.9
Home equity loan	0.1%	0.0%		0.1%	2.3	2.3
Auto	0.0%	0.0%		0.0%	–	–
Indirect			0.2%	0.2%		6.4
Total	0.5%	0.0%	0.2%	0.7%	12.2	18.6
Sub-prime
Collateralised mortgage obligation	0.0%	0.0%		0.0%	1.1	1.1
Home equity loan	0.8%	0.1%		0.9%	24.0	24.0
Auto	1.1%	0.0%		1.1%	28.2	28.2
Indirect			0.1%	0.1%		3.6
Total	1.9%	0.1%	0.1%	2.1%	53.3	56.9

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. As of 31 December 2007 reinsurance assets at a nominal value of £13.3 million (2006: £13.2 million) were greater than 3 months overdue and provided for to the value of £8.7 million (2006: £10.3 million). The Group holds collateral of £0.3 million in relation to these assets.

The Group recognised a total impairment gain in respect of the recovery during the year of £4.3 million (2006: £2.3 million) on reinsurance assets and insurance receivables.

The impact on profit before tax of 1% variation in the total reinsurance debtors would be £3.7 million (2006: £4.2 million).

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