Performance

Investment performance

The contribution to profit for the year from investments increased by 36.4% to £157.0 million (2006: £115.1 million). The return on average cash and investment balances of £2.4 billion was 6.6% (2006: £2.3 billion, 4.8%). The increase in assets under management was due to strong organic cash flows and profitable trading.

The investment environment in 2007 has been volatile as the potential economic cost of defaults from sub-prime borrowers in the United States and the weak US housing market, led to a liquidity crisis in the financial system. The diverse portfolio structure of the Group’s assets helped to weather the storm through 2007. The global equity portfolio produced a return of 10.2% – our managers invested defensively and were not over exposed to the US market.

In August the investment risk appetite was reduced as explained here.

The underlying performance of bond assets was markedly divergent with strong performance from the government portfolios, as investors factored in likely interest rate cuts in the anticipation that central banks would respond proactively to economic slowdown.

However, credit exposure, either through corporate bonds or structured bond portfolios such as mortgage backed securities, fared badly.

The underperformance of our bond investment managers against their government benchmarks amounted to £19.8 million. This illustrates the impact of credit market dynamics on our portfolio.

Expenses

Total expenses, including underwriting, nonunderwriting and finance costs, decreased to £332.9 million from £345.9 million in the prior year. This decrease is a result of a favourable swing in non monetary foreign exchange adjustments offset by an increase in staff incentive payments.

Business acquisition costs of £196.0 million, representing 18% of gross earned premium, were consistent with the prior year (2006: £195.4 million, 18%). These include an element of the foreign exchange translation of non-monetary assets and liabilities and other foreign exchange movements, which in total increased 2007 expenses by £5.1 million (2006: 0.4 million).

Non-underwriting costs (excluding finance costs) increased by £31.5 million to £49.8 million. Within this, total staff costs increased from £25.0 million to £42.3 million. Staff incentive plans accounted for £31.4 million of these costs (2006: £18.6 million).

Taxation

The effective rate of tax for the period is 20.7% (2006: 21.9%). The reduction is mainly attributable to the fall in the rate of UK corporation tax.

The effective rate is below the UK rate of corporation tax primarily due to Amlin Bermuda. We believe that Amlin Bermuda is exempt from the Controlled Foreign Corporation tax provisions of the UK tax regime. Accordingly, the Group will pay tax to the UK tax authorities only when distributions are made back to its UK holding companies. We have again provided for tax on possible future distribution through deferred tax of 9% of Amlin Bermuda’s profit.

The standard rate of UK corporation tax is due to fall from 30% to 28% from 1 April 2008, which affects the deferred tax provision in two ways. Firstly, an adjustment was required to those elements of the deferred tax provision at 1 January 2007 which were expected to reverse after 31 December 2007. This adjustment generated a credit to the deferred tax charge of £1.7 million. Secondly, temporary differences arising in 2007 will affect the 2007 corporation tax charge at a rate of 30%, but will generate deferred tax at a rate of 28% or 28.5% (the effective corporation tax rate for 2008). This has generated a credit to the tax charge of £5.1 million.

Dividends

The Board proposes a final ordinary dividend of 10.0 pence per share. Taken together with the interim dividend of 5.0 pence per share and the return of capital under the B share scheme approved at the EGM in December 2007 of 22.4 pence per share, this gives total payments to shareholders for 2007 of 37.4 pence per share in issue at the time (equivalent to 34.4 pence per share following the consolidation of December 2007).

© Copyright Amlin 2007