Summary of significant accounting policies
The basis of preparation, consolidation principles and significant accounting policies adopted in the preparation of Amlin plc's (the Group's) financial statements are set out below.

Basis of preparation and consolidation principles
These consolidated financial statements are the first published financial statements of the Group prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union (EU) and that are applicable for accounting periods commencing after 1 January 2005. The financial statements comply with Article 4 of the EU IAS regulations.

The balance sheet of the parent company has also been prepared in accordance with IFRS. In accordance with the exemption permitted under Section 230 of the Companies Act, the income statement of the parent company is not presented as part of these accounts. The profit after tax for the year of the parent company was £66.1 million (2004: £5.3 million loss).

The financial statements consolidate the accounts of the Company, its subsidiary undertakings, and the Group's underwriting through participation on Lloyd's syndicates.

The financial statements have been prepared on the historical cost basis except for financial investments, share options and pension assets and liabilities which are measured at their fair value.

Consolidated financial statements of the Group until 31 December 2004 had been prepared in accordance with UK GAAP. UK GAAP differs in certain respects from IFRS. In preparing these consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2004 have been restated to reflect these adjustments.

The reconciliations between the Group's consolidated UK GAAP and IFRS balance sheets as at 1 January 2004 (date of transition to IFRS) and at 31 December 2004 (date of last UK GAAP financial statements) and the reconciliation of profit for 2004 as required by IFRS1, First time adoption of International Financial Reporting Standards, are provided in note 34 to these financial statements, together with an explanation of the differences between UK GAAP and IFRS that affect Amlin plc.

In transitioning to IFRS the Group has adopted in full the requirements of IFRS4, Insurance contracts and IAS32 and IAS39 on financial instruments as at 1 January 2004. Accordingly the Group has not taken advantage of the exemptions available in IFRS1 which permits these standards to be only applied to accounting periods beginning after 1 January 2005.

At the date of authorisation of these financial statements IFRS7, Financial instruments: disclosures and an amendment to IAS19, Employee benefits issued in December 2004 were in issue but not effective and have not been applied in these financial statements. The directors anticipate that the adoption of IFRS7 in future periods will have no material impact on the financial statements except for additional disclosures on financial instruments. The amendment to IAS19 could reduce profit after tax and net assets by £8.0 million. However, this cannot be quantified with certainty until all changes in respect of the pension schemes, as discussed in note 26, are agreed.

In accordance with the standard for insurance contracts (IFRS4), the Group has applied existing accounting practises for insurance contracts, modified, as appropriate, to comply with the IFRS framework and applicable standards.

Use of estimates
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management's best knowledge of current events and actions, actual outcomes may ultimately differ from those estimates.

Foreign currency translation
The Group presents its accounts in sterling since it is subject to regulation in the United Kingdom and the net assets of the Group are currently weighted towards sterling. US dollar revenue is significant but the sterling revenue stream is also currently material. All group entities are incorporated in the United Kingdom with the exception of Amlin Bermuda Holdings Limited and Amlin Bermuda Limited which are incorporated in Bermuda. All group entities conduct business in a range of economic environments, primarily the United Kingdom, United States of America and Europe. Due to the regulatory environment and the fact that the Group trades through the Lloyd's market, all group companies incorporated in the United Kingdom have adopted sterling as their functional currency. The group companies incorporated in Bermuda have adopted the US dollar as their functional currency.

Income and expenditure in US dollars, Euros and Canadian dollars is translated at average rates of exchange for the period. Transactions denominated in other foreign currencies are translated using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated into sterling at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at the average rate prevailing in the period in which the asset or liability first arose.

Exchange differences arising from the conversion of overseas operations are accounted for through reserves.

Where contracts to sell currency for sterling have been entered into prior to the year end, the contracted rates have been used. Differences arising on the translation of foreign currency amounts on such items are included in other operating expenses.

Insurance contracts premiums
Gross written premiums comprise premiums on insurance contracts incepting during the financial year. The estimated premium income in respect of facility contracts is deemed to be written in full at the inception of the contract. Premiums are disclosed before the deduction of brokerage and taxes or duties levied on them. Estimates are included for premiums receivable after the period end but not yet notified, as well as adjustments made in the year to premiums written in prior accounting periods.

Premiums are earned over the policy contract period. Where the incidence of risk is the same throughout the contract, the earned element is calculated separately for each contract on a 365ths basis. Where the incidence of risk varies during the contract, the earned element is calculated based on the estimated risk profile of the individual contracts involved.

The proportion of written premiums, gross of commission payable, attributable to periods after the balance sheet date is deferred as a provision for unearned premiums. The change in this provision is taken to the income statement in order that revenue is recognised over the period of the risk.

Acquisition costs comprise brokerage incurred on insurance contracts written during the financial year. They are incurred on the same basis as the earned proportions of the premiums they relate to. Deferred acquisition costs are amortised over the period in which the related revenues are earned.

Reinsurance premiums ceded
Reinsurance premiums ceded comprise the cost of reinsurance arrangements placed and are accounted for in the same accounting period as the related insurance contracts. The provision for reinsurers' share of unearned premiums represents that part of reinsurance premiums written which is estimated to be earned in following financial years.

Insurance contracts liabilities: claims
Claims paid are defined as those claims transactions settled up to the balance sheet date including the internal and external claims settlement expenses allocated to those transactions. The reinsurers' share represents recoveries received from reinsurance protections in the period plus recoveries receivable against claims paid that have not been received at the balance sheet date, net of any provision for bad debt.

Claims reserves are estimated on an undiscounted basis. Provisions are subject to a detailed quarterly review where forecast future cash flows and existing amounts provided are reviewed and reassessed. Any changes to the amounts held are adjusted through the income statement. Provisions are established above an actuarial best estimate and so that there is a reasonable chance of release from one underwriting year to the next.

Claims reserves are made for known or anticipated liabilities under insurance contracts which have not been settled up to the balance sheet date. Included within the provision is an allowance for the future costs of handling those claims. This is estimated based on past experience and current expectations of future cost levels.

The claims provision also includes, where necessary, a reserve for unexpired risks where, at the balance sheet date, the estimated costs of future claims and related deferred acquisition costs are expected to exceed the unearned premium provision. In determining the need for an unexpired risk provision the underwriting divisions within the Group have been regarded as groups of business that are managed together.

Although the claims reserves is considered to be reasonable, having regard to previous claims experience (including the use of certain statistically based projections) and case by case reviews of notified losses, on the basis of information available at the date of determining the provision, the ultimate liabilities will vary as a result of subsequent information and events. This uncertainty is discussed further in the risk disclosures.

Net investment income
Dividends and any related tax credits are recognised as income on the date the related listed investments are marked ex-dividend. Other investment income, interest receivable, expenses and interest payable are recognised on an accruals basis.

Intangible assets
i. Syndicate capacity
The cost of syndicate participations which have been purchased in the Lloyd's capacity auctions is capitalised at cost. Syndicate capacity is considered to have an indefinite life and is not subject to an annual amortisation charge. The continuing value of the capacity is reviewed for impairment annually by reference to the expected future profit streams to be earned from Syndicate 2001, with any impairment in value being charged to the income statement.

ii. Goodwill
Goodwill arising on acquisitions prior to 1 January 1999 was written off to reserves. Goodwill recognised between 1 January 1999 and the date of transition to IFRS (1 January 2004) was capitalised and amortised on a straight line basis over its estimated useful life. Following the transition to IFRS this goodwill is stated at net book value at 1 January 2004. Goodwill that was recognised subsequent to 1 January 2004, representing the excess of the purchase consideration over fair value of net assets acquired, is capitalised. Goodwill is tested for impairment annually or when events or changes in circumstance indicate that it might be impaired by comparing the net present value of the future earnings stream from the acquired subsidiary, for the next five years, against the carrying value of goodwill.

Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation and provision for impairment where appropriate. Depreciation is calculated on the straight line method to write down the cost of such assets to their residual values over their estimated useful lives as follows:

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstance indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the income statement.

Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken to the income statement. Repairs and renewals are charged to the income statement when the expenditure is incurred.

Financial investments
The Group has classified its financial investments as "fair value through income" (FV) to the extent that they are not reported as cash and cash equivalents. This classification has been determined by management based on the decision at the time of acquisition. Within the FV category, fixed maturity and equity securities are classified as trading as the Group buys with the intention to resell. All other securities are classified as other than trading within the FV category.

Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and subsequently re-measured at fair value based on quoted bid prices. Changes in the fair value of investments are included in the income statement in the period in which they arise.

In the Company's accounts, other financial investments in Group undertakings are stated at cost and are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired.

Loans and receivables
Loans and receivables are initially measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired.

Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method. Any difference between the amortised cost and the redemption value is recognised in the income statement over the period of the borrowings.

Borrowing costs
Borrowing costs comprise interest payable on loans and bank overdrafts and commissions charged for the utilisation of letters of credit. These costs are charged to the income statement as financing costs, as incurred. In addition fees paid for the arrangement of debt and letter of credit facilities are charged as borrowing costs over the life of the facility.

Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at fair value. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks and other short-term, highly liquid investments which are subject to insignificant
risk of change in fair value.

Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards to the Group. All other leases are classified as operating leases.

Assets held under finance leases and hire purchase transactions are capitalised in the balance sheet and depreciated over their useful lives. The initial capital value is the lower of the fair value of the leased asset and the present value of the minimum lease payments. Payments under finance leases are apportioned between finance charges and the reduction of the lease obligation so as to achieve a consistent rate of interest on the remaining balance of the lease liability.

Rentals payable under operating leases are charged to income in the period in which they become payable in accordance with the terms of the lease.

Employee benefits
i. Pension obligations
The Group participates in a number of pension schemes, including two defined benefit schemes, defined contribution schemes and personal pension schemes.

One of the defined benefit schemes is a multi-employer scheme. However, there is insufficient information available to the Company to account for this as a defined benefit scheme, as explained in note 26, and therefore in accordance with IAS 19 it is accounted for as a defined contribution scheme.

The liability in respect of the other defined benefit scheme is calculated as the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the attained age actuarial method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using interest rates of government securities which have terms to maturity approximating the terms of the related liability. The resulting pension scheme surplus or deficit appears as an asset or liability in the consolidated balance sheet. Actuarial gains and losses arising from revaluations are recognised in full in the income statement, as they arise.

Pension contributions to schemes that are accounted for as defined contribution plans are charged to the profit and loss account when due. After payment of the contributions for the defined contribution scheme, the Group has no further payment obligations under these schemes.

ii. Equity compensation plans
The Group operates a number of executive and employee share schemes. Options issued after 7 November 2002 are accounted for using the fair value method where the cost for providing equity compensation is based on the fair value of the share option or award at the date of the grant. The fair value is calculated using an option pricing model and the corresponding expense is recognised in the income statement over the vesting period. The accrual for this charge is recognised in equity shareholders' funds. When the options are exercised, the proceeds received net of any transaction costs are credited to share capital for the par value and the surplus to share premium.

iii. Other benefits
Other employee incentive schemes and long-term service awards, including sabbatical leave, are recognised when they accrue to employees. A provision is made for the estimated liability for long-service leave as a result of services rendered by employees up to the balance sheet date.

Other income and charges
Agency fees are recognised on an accrual basis. Profit commission receivable is accrued in direct relation to underwriting income earned and is subject to the normal terms of the managing agent.

Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years or that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered, or to the extent that it has been utilised.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Deferred tax assets and liabilities have not been discounted.