Operating & Financial Review

Outstanding financial performance

  • A combined ratio of 72%.
  • A record profit before tax of £342.7 million (2005: £186.7 million).
  • A return on equity of 34%.
  • Cross cycle return on equity exceeds 15% for the fifth consecutive year.
  • The weighted average return on equity since 2001 now stands at 22.7% in excess of our estimated cost of equity of 8.5%.

 
Underwriting performance – 100% Syndicate & Amlin Bermuda

Underwriting contributed £267.9 million to profit before tax in the year (2005: £137.1 million). The increase of 95.4% was driven by our decisions to grow our reinsurance account, in London and with our newoperation in Bermuda, and to reduce our purchaseof retrocessional reinsurance due to the lack of cost effective cover. Consequently with catastropheclaims experience in 2006 at low levels, a stark contrast to 2005 when the insurance industry experienced record losses, the underwriting contribution has grown significantly.

Included within the underwriting contribution are prior period claim reserve releases of £68.8 million (2005: £79.7 million). We have continued to maintain consistent levels of reserving strength for the liabilities assessed at 31 December 2006 compared with previous years.

The underwriting figures also include exchange losseswhich arise through translation of non monetary assets and liabilities at historic exchange rates compared to all monetary items at closing rates. The impact of this in the year is to reduce profit by £27.9 million (2005: increase profit by £26.2 million). In order to aid comparison the combinedratios for the business have been given before and after these exchange differences.

Investments produced a return of £115.1 million (2005: £90.9 million). The average return for Group assets was down to 4.8% (2005: 5.4%) as the equity portfolio made good but lower returns than in 2005 and the bond portfolio generated poor absolute returns as interest rate expectations rosein the UK and United States. However average investment balances increased by £0.8 billion to £2.3 billion, leading to an overall increase in returns.

Prior period adjustment

The comparative results have been adjusted to take account of a change to the accounting treatment of multi-employer pension schemes under International Accounting Standards. The change is modest and is set out in the accounting policies.