Credit risk
Credit risk is the risk that a counterparty may fail to pay, or repay, a debt or loan. Amlin is exposed to credit risk on its investment bond portfolio and its premium and reinsurance debtors.
The credit risk in respect of the bond portfolio is managed by the external fund 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 Standard and Poor's and Moody's ratings. Compliance with these guidelines is regularly monitored.
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 and 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. The impact on profit before tax of 1% variation in the total reinsurance debtors would be £6.5 million.
The table below shows the breakdown at 31 December 2005 of the bond portfolio and reinsurance debtors by credit quality. The Group's money market UCITs are all AAA rated and are not included in the table. 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 histrorical experience there is limited default risk relating to these amounts. The reinsurance debtors represent the amounts due at 31 December 2005 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.
|
Bonds
£m |
Premium
debtors
£m |
Reinsurance
debtors
£m |
|
AAA |
870.5 |
- |
75.3 |
AA |
134.8 |
- |
101.4 |
A |
120.1 |
- |
450.6 |
BBB |
16.7 |
- |
5.0 |
Other |
- |
404.3 |
12.9 |
|
|
1,142.1 |
404.3 |
645.2 |
|
|