Operating & Financial Review

Outlook

The adjustment to our catastrophe exposures and the growth in the balance sheet resulting from our exceptionally strong 2006 financial result places us in a more robust position.

With record net unearned premium of £507.8 million, and margin potential in many classes still healthy, we expect to generate a further good return on equity in 2007. For more detail see page 40.

For more details please see Outlook for 2007.

There are signs that the growth in industry capital and a search by some reinsurers to increase diversity are placing downward pressure on rates. We are hopeful, however, that industry discipline will be applied to maintain margins which reflect the risk assumed rather than growing market share senselessly. As we have demonstrated before, we will reduce exposures and are prepared to forego premium income when margins become unacceptable. If this happens we will look to retain good margin business where we can and will actively manage the balance sheet with a focus on shareholder returns.

Charles Philipps
Chief Executive

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