Operating & Financial Review

Strategy

I am very pleased with the progress made across the Group towards our Vision of becoming “the global reference point for quality” and our strategy for building shareholder value.

Focus on quality and profitability of underwriting

The decision to adjust our catastrophe exposures and operate with significantly less retrocessional reinsurance in 2006 was not taken lightly and followed much analysis and consideration of the options and their impact on both potential volatility of performance and bottom line profitability. It is a tribute to our underwriting leadership that they were able to plan and achieve a change in approach to management of catastrophe exposed business. Peak exposures were reduced and an acceptable relationship achieved between the probable maximum loss to a very large event and return prospects. As well as being an excellent example of the focus on underwriting profitability in action, strategically this demonstrated an ability to reduce reliance on reinsurance which would not have been possible but for our well diversified business.

For more details please see Underwriting – focused on risk and return.

The strength of our underwriting team has again been maintained with turnover of our senior underwriters at only 4.35% in 2006. The initial team at Amlin Bermuda has been expanded through recruitment although we failed to secure more senior underwriting expertise for it in 2006. This will be required to achieve our growth plans and we expect to announce progress on this shortly.

The War team in our Marine division was also expanded to help growth in this class which has high margin potential. With every year that passes our underwriting teams, especially with their stability, have more experience providing strong prospects for continuing to generate superior performance.

For more details please see People – retaining, motivating and building skills.

Long term growth potential

While cyclical pricing pressure will most likely result in Amlin not pushing hard for organic top line growth in the short term, it is nevertheless important for us to continue to build our capability to attract and handle long term growth.

The share of business from reinsurance increased to 38.6% in 2006 and, at the right time, we will seek to balance this with more non-catastrophe business.

In 2006, as well as laying a good foundation in Bermuda, we made excellent progress in a number of initiatives aimed at improving Amlin’s attractiveness to brokers and clients, at helping the Lloyd’s market tackle process change, and developing the technology and infrastructure to be able to trade electronically. We are now in a position to receive risk placement data electronically, and to process claims using electronic files which will increase efficiency for both brokers and Amlin and will improve client service. This will help to strengthen our long term competitive position.

For more details please see Infrastructure – enhancing capability and delivery.

Our underwriting expertise, financial strength and focus on improving client service has become more consistently recognised with Amlin scoring highest among Lloyd’s managing agents and fifth among London market insurers overall for brand recognition in a survey of London market placing brokers in 2006. We need to sustain this into the next cyclical upturn to encourage maximum business flow.

For more details please see Clients – meeting their expectations.

With three London market brokers being acquired by US brokers in the last two years, and with an increasing requirement for transparency by clients and regulators which is forcing change in the way some brokers plan to trade, it is important that we expand our brand recognition internationally and this will take some effort.

Our marketing and distribution service companies for specialist lines such as yachts, bloodstock and credit insurance generated £44.8 million of premium in 2006, up 6.9% on 2005. While a relatively small component of our business, we have invested in new systems, which are now operating for our marine units, which will make volume growth easier to handle.

ROE focused capital management

The successful issue of £230 million of 15 year subordinated debt in April 2006 further increased our financial strength as well as providing greater scope for balance sheet management over the coming years, if, as we expect, we will have capital surplus to our requirements. It provides Amlin with more flexibility to return equity to shareholders while maintaining sufficient regulatory capital to withstand major catastrophes and to be able to respond quickly to event driven cyclical strengthening.

For more details please see Balance sheet management – enhancing returns.

The special dividend announced with our results is a clear demonstration of our intention to manage our balance sheet to enhance shareholder returns and value.

People

We motivate employees to excel in building and maintaining high standards through a clearly articulated Vision to which business objectives are linked, meaningful financial incentives based on performance, and the promotion of a culture which seeks to improve continually what we do so that we can continue to build shareholder value.

We are grateful to our employees for their hard work and what they have achieved. It was pleasing to see the first Capital Builder Incentive payments rewarding our underwriters well for some excellent performance over the period 2001 to 2005. We have made our first awards under the new Capital Builder incentive which was approved by shareholders in May 2006. It aims to reward underwriters for achieving returns over a five year period which are in excess of targets set by class of business.

More widely, the introduction of the Share Incentive Plan allows us to increase the alignment between all staff and shareholder interests and it will hopefully broaden from the current level of 17%, the number of employee shareholders.

Retention levels, especially in key areas, remain high and we continue to invest in building skills. The development of claims competencies was an excellent piece of work in 2006 which will provide a sound template for other technical areas in 2007. I was also particularly pleased with the completion of work on our core values which are now being rolled out. They are designed to motivate key attributes which will help sustain our success.

For more details please see Initiatives for 2007.

We completed our second MORI survey of staff in 2006 which indicated high levels of staff satisfaction and a strong understanding of our goals.

For more details please see People – building high performance.

Governance

To align our risk management with future best practice we have separated our compliance and internal audit functions and merged compliance with our business monitoring unit, refocusing it as Risk Assessment and Monitoring, headed by a Chief Risk Officer. This is intended to provide greater focus to the measurement and reporting of all categories of risk across the Group. This will help us address any challenges resulting from the introduction of the Solvency II regulatory standards and should, over time, enhance our risk measurement so that we can better use our resources.

© Copyright Amlin 2006