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PERFORMANCE
Investment performance
Funds under management grew by 26% (Group and 100%
Syndicate) during the year as a result of strong cash flow with
overall 2003 investment return contributing £32.0 million
to Group profit.
With the appointment of our new Chief Investment Officer and
Investment Advisory Panel, Amlin has benefited from good asset
allocation decisions and exceeded its asset class benchmark returns.
Investments are managed in two distinct pools, the first
consisting of our solvency funds and the second our technical
insurance funds. For each pool we outsource fund management
but retain asset allocation and review functions in-house.
Solvency funds
During 2003, with the strength of insurance markets and the
consequential high opportunity cost to capital depreciation
our solvency funds, which support Amlin’s underwriting, were
managed with a low appetite for risk. Using our model developed
in conjunction with WM Company, at a confidence level of 99%,
we set a maximum value at risk, equivalent to 8% of solvency
funds at 1 January 2003 of £223 million.
With US federal funds and UK base rates at lows of 1% and
3.5% respectively and with signs of economic recovery post the
Iraq war, 2003 was a year which looked as if it would be difficult
for bond returns and which could favour equities.
Against this background, we changed our strategic benchmark
in March 2003, from 50% long duration bonds and 50% cash
to 5% long duration bonds, 70% cash and short term deposits
and 25% equities.
The sale of the long bond portfolio in March and July, together
with the switch into equities and cash, proved beneficial as bond
returns generally fell short of the long term assumed rate of
return while equities exceeded it.
Taube Hodson Stonex Partners (THS) were appointed as equity
managers and in the second half of the year we invested
£50 million in a portfolio of global equities. They adopt a
pragmatic style rather than one which is wedded to value or
growth, as different approaches will prosper in different market
conditions. Over the period in which it was invested in 2003,
the equity portfolio exceeded the FTSE All World Index
benchmark return by 4.3%.
Technical insurance funds
Amlin’s technical insurance funds represent monies reserved
to pay claims and profits held in Lloyd’s premium trust funds
until they are released following closure of a year of account.
For these funds we adopt a policy of matching asset and liability
durations. The liability durations are actuarially calculated for
each of our trading currencies and strategic benchmarks are set
from these.
Given the low absolute level of bond yields and an expectation
of rising yields, tactical benchmarks shorter than the duration
of the liabilities were given to the fund managers in the early
part of 2003. All benchmarks, with the exception of US dollar
funds, were taken back to neutral during October, after bond
yields had risen. In addition cash was allowed to build up
periodically and was subsequently invested as markets weakened.
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