We have continued to build upon our core strengths and made progress towards our Vision of becoming the leading insurance business in the London Market. In 2002, the underwriting profitability of which we were confident twelve months ago has started to be recognised in our reported results. Amlin is now in a strong position to deliver high returns on equity in the current year and next. We remain optimistic beyond this, although profitability will be affected by the competitive environment in our specialist lines of business. We have continued to build upon our core strengths and make progress towards our Vision of becoming the leading insurance business in the London Market. Strategically, we successfully completed the acquisition of third party capacity, and I am confident that over the next two years we will be able to demonstrate clearly the operational and financial logic of that acquisition. With £862 million of dedicated Lloyd’s capacity for 2003, we are the largest independent business in the Lloyd’s market. However, our goal to become the leading insurance business in the London Market is not based on size – our building blocks are centred on bottom line profitability and growth in net asset value per share. To achieve sustainable superior performance in these areas we are focused on becoming the most astute leader of risks, on ‘being the place to go’ as a first choice for leading risks, on reading and adjusting our business to the insurance cycle and on optimising our financial strategy. Underwriting performance Gross premiums written were up 22% over 2002 as we sought to maximise our recovery from the financial consequences of 11 September 2001 and capitalising on the significantly improved underwriting markets which followed. This growth was achieved through a combination of increased rates on renewal business, attracting good new business and increased ownership of Syndicate 2001’s capacity. With our stronger position in the London Market we have seen an increased showing of good new business and this has enabled our underwriters to maintain a satisfactory level of selectivity aimed at maintaining and building upon our high quality book of business. In line with our policy of capacity optimisation, we increased our income weighting mostly in energy insurance, large commercial property insurance and property reinsurance; areas that witnessed major improvements in terms and conditions. We also maintained major positions in airline and commercial motor insurance, which had previously reached levels where good returns were being generated. Our focus on gross underwriting meant that we were again able to place an effective reinsurance programme with good security at an acceptable cost. Reinsurance spend, excluding our qualifying quota share reinsurance, as a percentage of premium written in the 2002 underwriting year was 14% compared with 17% in 2001. There was a low level of major losses during 2002 which is evidenced by Syndicate 2001’s 2002 underwriting year gross incurred loss ratio at 31 December 2002 of 19.3%, its lowest level for nine years. The European floods in August were our largest single loss event for which we estimate our net losses at £8.6 million. The marine market suffered a number of major incidents during the year, including the loss of the tanker Prestige and the sinking of the cargo vessel Tricolor. However, our involvement in these events was small. Performance in each of our divisions continued to improve so that, notwithstanding the strengthening of reserves for prior years’ US casualty business, which added 5% to our combined ratio, at the 100% managed syndicate level our combined ratio improved by 5% to 95%.This is analysed by division in the Financial Review. Group financial performance The strong underwriting performance, before investment return, contributed £32.0 million to the consolidated result, compared with a loss of £8.9 million in 2001, after stripping out the effect of the 11 September losses on that year. Investments contributed a healthy £41.5 million to the consolidated profit for the year, compared with £5.1 million in 2001. Good investment returns were achieved from a defensive stance with our bond portfolios exceeding our long term anticipated return by 2%. This positive return has also been aided by the growth in our technical funds with strong cash flow and action taken to reduce the terms of trade and to tighten credit controls. Earnings per share of 14.1p were enhanced by our capital strategy of gearing the balance sheet in hard market conditions. Our return on equity was 20.1%. Net assets per share increased by 19.6% to 81.1p, and net tangible asset value per share increased by 8.3% to 65.4p as £46.0 million was spent acquiring the outstanding third party capacity on Syndicate 2001. We expect the pay back from this to be rapid. Business strategy We have continued to focus on the six key operational objectives set out in last year’s annual report: building our intellectual capital; capacity optimisation; gross underwriting discipline; strengthening our client service capability; maintaining strong risk management techniques; and driving for operational efficiency. The foundation for driving each of these objectives rests with the quality and commitment of our team. We maintained low turnover among our underwriters, selectively hiring to support targeted growth areas and to strengthen succession planning. We now have 46 divisional and class underwriters, with an average of 12 years of industry experience. We also made key appointments in operations management, to help ensure that our support functions maximise efficiency and are capable of handling our growth, and in contract wordings, an area of increasing importance as we strengthen our leadership position in the market. We will continue to invest in building Amlin’s skill base so that we are capable of sustaining the superior performance we are determined to deliver. The Amlin Academy, in its second full year, is demonstrating its leadership in training and development in our market and provided some 1,465 days of training and development for Amlin personnel. Having completed the acquisition of 100% of Syndicate 2001’s capacity in 2002 we have again, successfully, augmented the growth of the business into a strong insurance market. Dedicated underwriting capacity for 2003 is up 49% on 2002 and, looking forward, we have significantly increased flexibility for the ongoing management of the business. Capacity optimisation requires us to manage our income and exposures over the cycle, both in total and by class of business. In the current year we will review and hone our strategies for managing the soft cycle when it arrives. We continue to explore means of improving our client service capability, in particular through the use of systems and technology. Marinsure.com, which we launched in late 2001, has now signed up 16 leading insurance brokers and, with rates increasing in its targeted niche, it is rewarding to see the product attracting increasing volumes of business. Moreover, based on its operational attractions for insurance brokers, we have been asked by a leading broker to broaden the product to another niche class. We believe there now exists a real opportunity to increase the efficiency of London Market processes and we are actively supporting a number of initiatives with this aim. Financial and investment strategy Insurance underwriting and the support skills of policy wordings and claims management are Amlin’s core competencies. Combining these competencies with sound financial and investment strategies are critical to optimising shareholder returns. As our business has grown, so both our corporate and technical assets have increased in scale. We have created an Investment Advisory Panel, which includes leading professionals drawn from other institutions with expertise in global economics, equity and bond management. We continue to outsource the management of our assets, and our Investment Advisory Panel will help ensure we optimise our asset allocations in line with our underwriting and financial strategies. Withdrawal from exposure to equity investments in September 2001 has proved beneficial. At some point, respective valuations of bonds and equities will support a shift back towards equity investments. With our focus on maximising underwriting returns from the current strong insurance market, we favour a policy of gradually increasing the equity content of our corporate portfolio. Equity exposure will remain modest and we are mindful of the current uncertainties associated with war and global economic conditions. In the hard insurance markets into which we have grown, we have increased financial leverage to support our growth in capacity. We believe that, in current market conditions, the benefit of a leveraged return outweighs its risk. Outlook for underwriting conditions We expect good underwriting conditions to remain with us for some time. In some areas rates continue to rise, while in others there are signs of renewal rates coming under pressure. This is to be expected having experienced dramatic rate increases over the past two years. Overall, trading conditions in 2002 were their strongest for many years. Those classes of business where rates appear to have peaked include property reinsurance, large commercial property insurance and airline insurance. These are areas which were most impacted by the events of 11 September 2001 and in which we achieved some of the most significant rate increases in late 2001 and 2002. For example, renewal rates for large commercial property risks increased by an average of 75% in 2002 having increased by some 25% in 2001. Per risk property reinsurance renewal rates increased by 62% in 2002 on top of an average increase of 24% in 2001. We anticipate a modest softening of rates in these areas as the year develops but we expect good levels of return to continue to be achievable. In other areas rate increases continue to be achieved, especially where there have been poor loss experiences such as in space and UK liability business where we are now increasing our capacity allocation. Our large UK commercial motor business continues to achieve rate increases in excess of claims inflation, thereby sustaining its margin potential. It is inevitable that rates in all areas will peak at some point. Market dynamics, however, could result in good underwriting returns being achievable for some time. While 2002 was an excellent underwriting year, the non-life insurance industry has failed to emerge stronger. Many companies suffered from the resurgence of legacy claims issues, most notably an acceleration in asbestos claims settlements and adverse claims development in US casualty classes on business underwritten between 1997 and 2000. Additionally, the significant fall in equity values has impaired the balance sheets of those insurers with meaningful equity portfolios. The result is that the security ratings of many companies have been downgraded and net industry capital has declined for the third successive year. In this environment, companies with exposures to legacy claims need to maintain acceptable underwriting returns to stand still, especially as investment returns are unlikely to compensate for poor underwriting. Companies, such as the recently incorporated Bermudians, who do not have these exposures have some ability to be more competitive but, on the whole, we anticipate that such capacity will be more disciplined in drawing a line at an acceptable underwriting margin. Amlin’s exposure to legacy claims issues is limited, our market position has grown in significance, and we are increasingly seen as a market of choice by brokers and clients. With this we are excellently placed to benefit from the current trading environment. However, we will reduce our exposures if and when underwriting margins become questionable. Risk to future underwriting profitability We continuously evaluate the threats to our future underwriting profitability to minimise or even eliminate their potential impact on the Group. With current industry dynamics we have been mainly focused on the following three threats: reinsurance security and debtors; adequacy of US casualty reserving; and risks arising from the 11 September 2001 terrorist attacks. As shown in the Financial Review, our reinsurance receivables continue to comprise high quality security, for the most part, and where security has been downgraded over the past year, we have been active in collecting due debts. We consistently attempt to identify adverse claims trends early to help ensure that our reserves reflect potential claims development. US casualty claims for risks underwritten in the years 1997 to 2000 witnessed unprecedented development during 2002 and we have adjusted reserves accordingly. Having materially reduced our exposure to US casualty business in late 2000, the impact of potential future claims development reduces as the years become more mature. We have maintained an extremely close watch on claims issues arising from the 11 September 2001 terrorist events. Our estimate of the ultimate loss has stabilised and we are beginning to experience claims settlements within the reserves we have set. There remains uncertainty as to whether the destruction of the World Trade Center itself is judged to be one or two insured occurrences. We believe the attacks were one occurrence and have legal guidance that supports this view. In the event that the losses were judged to be two occurrences and two total losses to the layers we underwrite, we estimate that the adverse financial impact could be up to around £22 million for Amlin. Given our legal advice, and the high excess layer that we insured, we believe this outcome to be unlikely. Outlook Underwriting conditions remain strong, even though those classes which experienced significant increases after 11 September 2001 are showing signs of having peaked. Amlin’s growth into the hard market and financial leverage, together with the manner in which we earn profitable premium, should provide strong earnings momentum over the next several years. In the longer term, we believe that the high quality of our underwriting skill base and our focus on managing the insurance cycle will help Amlin to deliver sustained, superior returns. CHARLES PHILIPPS CHIEF EXECUTIVE FEBRUARY 2002 Completion of its 2 for 7 rights issue at 77p per share raising £43.2 million of capital after expenses. APRIL 2002 25 senior underwriters invited to join the Capital Builder Plan, the Group’s long term incentive plan for underwriters. This plan aligns shareholder and underwriter interests by rewarding above target 5 year returns by class of business over 5 underwriting years of account. JUNE 2002 Amlin announced plans to raise a further £80 million through a placing and open offer of shares at 81p per share. AUGUST 2002 Heavy rain and subsequent floods devastated areas of Central Europe. Total insured losses are estimated at $2.5 billion, of which Amlin’s share is estimated at £8.6 million. AUGUST 2002 Amlin launched recommended offer for remaining 28% of Syndicate 2001 capacity. The offer was successfully completed in November 2002. SEPTEMBER 2002 Lloyd’s EGM approved the proposals of the Chairman’s Strategy Group. Tighter management of bottom quartile businesses expected to strengthen Lloyd’s brand. SEPTEMBER 2002 Amlin entered FTSE 250 index. Amlin announced return to profit for six months ended 30 June 2002. NOVEMBER 2002 Debt and letter of credit facilities increased to £151 million to help support growth in owned capacity to £862 million for 2003. JANUARY 2003 Divisional underwriter of Amlin Aviation, Rod Dampier, appointed Chairman of Lloyd’s Aviation Underwriters’ Association.