Investment performance
The investment contribution of £90.9 million, up 76% on the previous year, was a strong performance. This reflected improved returns across most asset classes and increased assets available for investment. Cash and investments increased in the year by £794 million reflecting:
| Investment performance |
| |
2004
£m |
2005
£m |
 |
| Global equities |
9.1 |
26.9 |
|
| Cash and equivalents |
9.2 |
2.4 |
|
| Bonds |
33.8 |
61.6 |
|
| Investment return |
52.1 |
90.9 |
|
| Investment balance at 1 January |
1,081.3 |
1,350.1 |
|
| Investment balance at 31 December |
1,350.1 |
2,143.8 |
|
|
- Further increase in Amlin's share of Syndicate 2001. From 1 January 2006 Amlin owns 100% of Syndicate assets having closed the 2003 underwriting year as at 31 December 2005;
- Strong organic cash flow as the Syndicate continued to trade profitably; and
- Debt and equity capital raised of £458 million to support the investment of US$1 billion in Amlin Bermuda and the expansion of Syndicate 2001.
For an overview of Amlin's approach to investment management click here
Return on short dated sterling bonds was 5.3% (2004: 5.0%) compared to a total return on dollar assets of 1.6% (2004: 2.1%). This reflects the trend of the interest rate cycles in the UK compared to the US. UK interest rates peaked at 4.75% followed by a first rate cut of 0.25% in August as the UK economy slowed. In comparison, US interest rates were raised by 0.25% eight times in 2005 as the US economy performed strongly and interest rates were moved back to a more neutral position.
The level of equity investment has steadily grown during recent years and this asset class produced another excellent return of 26.6% in 2005 (2004: 14.4%). Cash remained the asset of choice to balance the volatility of the equity portfolio for the Group's capital and this generated a return of 4.8% (2004: 4.7%).
Expenses
The expense ratio has decreased by 7%. Of the reduction, 4.9% results from an exchange gain on the conversion of assets at the balance sheet date compared to a loss in the comparative period. A further 2% is attributable to increased premium written on a relatively stable cost base.
After exchange gains have been removed, operating expense increased by £15.7 million, or 17%, in the year.
This includes an increase in performance based employee incentives to £24.2 million, from £17.2 million. We have accrued a further £8.8 million under the capital builder plan, with the total accrued now amounting to £18.8 million.
Taxes
The Group tax charge for 2005 is £45.3 million (2004: £37.9 million), which gives an effective tax rate
of 24.8% (2004: 29.4%). This compares to a standard corporation tax rate of 30%. The lower 2005 tax charge is partly due to the utilisation of capital gains tax losses incurred in previous years against investment capital gains, realised and unrealised, on the equities held by the Group.
The potential deferred tax asset from these previous capital losses was not recognised until it was utilised. During the year, £11 million of the losses were used with £12.7 million remaining unprovided at
31 December 2005.
In addition, the effective rate was lowered by offsetting US dollar trading losses against previous US
tax provisions.
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