OMEGA SPECIALTY INSURANCE COMPANY LIMITED

Transcription

1 OMEGA SPECIALTY INSURANCE COMPANY LIMITED (incorporated in Bermuda, Registration no ) Reports and Financial Statements 31 December 2010

2 CONTENTS 2. DIRECTORS REPORT 8. STATEMENT OF DIRECTORS RESPONSIBILITIES INDEPENDENT AUDITORS REPORT PROFIT AND LOSS ACCOUNT BALANCE SHEET NOTES TO THE FINANCIAL STATEMENTS DIRECTORS AND ADVISERS DIRECTORS Richard Pexton James Bryce Robin Spencer Arscott Andrew Stapleton AUDITORS Ernst & Young Ltd. 3 Bermudiana Road Hamilton HM 11 Bermuda SECRETARY Melanie Saunders BANKERS HSBC Bank Bermuda Limited 6 Front Street Hamilton HM 11 Bermuda REGISTERED OFFICE 4 Par la Ville Road Hamilton HM 08 Bermuda 1

3 DIRECTORS REPORT The directors present their report on the affairs of the Company, together with the audited financial statements, of the Company for the year ended 31 December PRINCIPAL ACTIVITIES AND BUSINESS REVIEW The Company was incorporated under the laws of Bermuda on 26 January 2006 and was authorised as a Class 3 insurer. With effect from 1 January 2009, the Company re registered as a Class 3B insurer. The Company has been assigned a financial strength rating by AM Best of A (Excellent). The Company is a wholly owned subsidiary of Omega Insurance Holdings Limited (the ultimate parent company for the Omega group ), which is incorporated in Bermuda. The Omega group s key operating activities are as follows: the management of Lloyd s Syndicate 958 ( the Syndicate ) which underwrites insurance and reinsurance business on behalf of the members of the Syndicate across a range of classes of business but focussing on short tail lines; the ownership of Omega Dedicated Limited, which is a member of the Syndicate owning a 40.5% share of its capacity for the 2011 year of account (38.8% for the 2010 year of account and 16.4% for the 2009 year of account); the ownership of Omega US which has underwritten a growing excess and surplus lines business in the US since 2008; and the ownership of the Company through which the Group has underwritten a growing reinsurance book of business with other insurance companies globally. The Company s key activities are as follows: the underwriting of the growing reinsurance book referred to above. the quota share reinsurance of the Syndicate s gross whole account (20% for the 2010 and 2009 years of account); the quota share reinsurance of the majority of business underwritten by Omega Dedicated through the Syndicate; and the quota share reinsurance of 50% of the Omega US net whole account; and These quota share contracts have been renewed for the 2011 underwriting year. SYNDICATE 958 RESULTS As a result of these activities the Company derives a significant proportion of its income from the Syndicate and the results of the Syndicate are directly linked to the performance of the Company. With the closure of the 2008 underwriting year of account at 31 December 2010, the Syndicate continued into its 29 th year its track record of unbroken profitability, reflecting a 3.5% return on Syndicate capacity. The benefit of these profits, through the contracts above, was reflected in the Company s accounts across 2008, 2009 and

4 The 2009 year of account has been significantly affected by the Chilean earthquake in February 2010 and to a lesser extent, the Deepwater Horizon incident. As a result the Syndicate return on capacity has been forecast between 5% and 10%. The effects of the profitability of the 2009 year of account have been reflected by the Company across the 2009 and 2010 financial years in accordance with the earnings patterns of the underlying premium and the timing of the incidence of catastrophe losses experienced. This resulted in a strong profit being recognised in the 2009 calendar year and a loss being recognised on the 2009 year of account in The 2010 year of account was, during 2010, characterized by a deteriorating rating environment and resulting increased attritional loss ratios along with catastrophe events in New Zealand and Australia, coupled with a continued challenging investment environment. THIRD PARTY REINSURANCE BUSINESS The Company underwrites third party reinsurance business through the Bermuda reinsurance market. The thirdparty reinsurance portfolio is primarily focused on US and international property catastrophe treaty reinsurance. It also includes property risk excess treaty reinsurance, property insurance and marine and aviation reinsurance. The US catastrophe book has been predominantly made up of regional and multi regional business but there are opportunities with regards to some of the nationwide accounts where capacity pricing has been a little more positive. The results of the US catastrophe book have not been significantly impacted by US losses, notwithstanding the industry experience showing US$12 billion of market losses, as estimated by PCS (Property Claims Service). The international catastrophe market has experienced an extreme year of losses with the Chile and New Zealand earthquakes and Australian floods which have impacted significantly on the results of the Company through the retrocessional account on both a gross and net basis. Accordingly we have now significantly reduced this account. We have also reviewed the reinsurance program taking into account the level of recoveries on the 2010 catastrophe losses in order to improve efficiency and effectiveness. In 2010 the Company underwrote gross written premium of US$65.2 million (2009: US$ 63.0 million) through this source. The combined ratio increased to 129.9% from 49.3% in 2009 due to the increased incidence of international catastrophic events during the year. OMEGA US RESULTS Omega US is the Group s US underwriting platform and is based in Schaumberg, Illinois. Omega US was capitalised in late 2006 with US$50 million by way of a share placing by Omega Group and is currently rated A (Excellent) by A.M. Best. It is incorporated and licensed by the state of Delaware and underwrites property and casualty insurance on an excess and surplus lines basis throughout the United States. Excess and surplus lines is a segment of the US insurance market tailored to specialty risks that fall outside of the standard criteria used by US admitted insurers. To date Omega US has been granted eligibility to underwrite business in 42 US jurisdictions, and continues to seek eligibility in the remaining US jurisdictions. The business commenced underwriting in the first quarter of 2008 and is developing a portfolio of business similar in shape to the property insurance account written by Syndicate 958. It targets small to medium sized commercial businesses and seeks to underwrite in those geographic areas in the US where it avoids clashing with Syndicate 958 s property catastrophe account. Omega US complements Syndicate 958 by sourcing business through existing agents, together with distribution channels not ordinarily available to Syndicate 958. Gross written premium to the Company increased by 27.1% to US$23.0 million in 2010 (2009: US$18.1 million). Gross earned premium increased by 68.5 % to US$20.9 million (2009: US$12.4 million). With ongoing growth, the cost base will continue to become more efficient and loss variability will reduce, both of which have helped contribute to a lower combined ratio in 2010 a trend we see continuing in

5 2010 was another challenging year for the US excess and surplus lines market, which incurred further rate reductions, increased appetite from the admitted market for non standard business; and the economic effects of the recession on our risk base. However, Omega US enjoyed steady growth with many of its general agents, and we expect this to continue in Further, poor investment yield ensures that emphasis remains firmly fixed on underwriting profit. Omega US continues to work on obtaining its remaining surplus lines licenses, which will also support additional growth going forward. POST BALANCE SHEET EVENTS AND OUTLOOK Subsequent to the year end the earthquake in Christchurch New Zealand in February 2011 has had a material effect on the 2010 year of account results, although this effect is not reflected in these accounts since its occurrence was after 31 December Whilst there is a significant degree of uncertainty around the ultimate costs of these claims to the industry and the Company, the Company s initial estimate of losses arising from this earthquake is $8.4m net of reinsurance recoveries and reinstatement premiums. During January 2011 significant flooding occurred in Queensland, Australia as a result of sustained heavy rainfall. This is expected to result in significant losses to the insurance market. The Group estimates that the event will result in net insurance claims to the Company of approximately $7.2m in 2011 although there is significant uncertainty as to the ultimate cost of such claims. On 12 March 2011, a major earthquake hit Japan. Whilst there is a significant degree of uncertainty around the ultimate costs of claims to the industry and the Company from this event, the Company s estimates that its losses arising from this earthquake and tsunami event are $22.8m net of reinsurance recoveries and reinstatement premiums. The Omega group will continue to manage Syndicate 958. As noted above, the Company s key reinsurance contracts with group companies and Syndicate 958 have been renewed for The Company s reinsurance of Omega Dedicated Limited will increase with the increase of that company s share of syndicate capacity from 38.8% for the 2010 year of account to 40.5% for the 2011 year of account. RESULTS, DIVIDENDS AND CAPITAL The results for the year ended 31 December 2010 are shown in the profit and loss account on pages thirteen and fourteen of the financial statements. The loss on ordinary activities for the year was US$27.7m (2009: profit of US$44.5m). Subsequent to year end the directors approved a return of contributed surplus of $9.0m to be paid in 2011 (2009: US$17.0m). Dividends paid during the year were US$31.610m (2009: US$4.5m). DIRECTORS The directors who held office during the year were as follows: Richard Pexton James Bryce Robin Spencer Arscott Andrew Stapleton Penny James (ceased to be a director 9 March 2011) Walter Fiederowicz (ceased to be a director 12 March 2010) Nick Warren (ceased to be a director 12 March 2010) Richard Tolliday (ceased to be a director 22 April 2010) AUDITORS 4

6 The Company will reappoint Ernst & Young Ltd. (Bermuda) as auditors of the Company. RISK MANAGEMENT The Omega group operates an integrated risk management framework across its global entities. Where possible and appropriate (taking into account possible conflicts of interest) risks are managed on a group wide basis with all key operating subsidiaries (including the Company) represented in relevant risk committees. The Group Risk Management Framework is described in detail in note highlights: We have continued to build our risk and control framework to address the material risks faced by the Group In 2010, in addition to upgrading the separate Compliance, Internal Audit and Actuarial functions, Omega s risk management processes were enhanced with the development of a dedicated risk management function for the Group. The risk management function is also responsible for developing the risk management framework across all locations The Group has subscribed to AIR catastrophe modelling capability to assist the management of main catastrophe exposures 2011 priorities: A key priority for 2011 will be to embed the procedures for risk assessment and reporting into the business processes throughout the Group. As required by Solvency II, progress has been made with regard to developing an Own Risk and Solvency Assessment (ORSA) for Omega Underwriting Agents Limited (in relation to Syndicate 958) which will be developed further in 2011, including the integration of a risk management framework within key areas of the business. This will be linked to the Bermuda requirement to prepare the Commercial Insurer s Solvency Self Assessment (CISSA) for the Group, which will cover all the subsidiaries in the Group. Group risk function During 2010 Omega established a Group Risk Management function with responsibilities for the risk and control framework across the Group and each of the operating entities. This function reports into the Group Board and Audit Committee, via the Chief Operating Officer, but also has local reporting lines to the entity boards and the OUAL Risk Committee. The Group Audit Committee has specific responsibilities for monitoring and approving the risk management process across the Group, as reflected in its Terms of Reference and Membership. OUAL also has a dedicated Risk Committee with oversight of the full risk management process for OUAL and Syndicate 958. Risk reporting is being developed, including risk dashboards, for the Group and subsidiary boards, and this will continue to be enhanced in The OIH board retains responsibility for the risk management throughout the Group, including determining risk appetite and setting risk policies; however the Board delegates to various committees for reviewing many aspects of the Three lines of defence. This approach to governance is demonstrated by the following model, with the main focus being to ensure that appropriate controls are embedded in the day to day management of the business, while also maintaining independent risk, compliance and internal audit functions to support the second and third lines of defence. 5

7 1 st line of defence Day to day risk management and control 2 nd line of defence Risk oversight, policy and methodologies OIH Board 3 rd line of defence Independent Assurance Delegates to Delegates to Delegates to (E.g.) Reserving Committee Activity is carried out b Senior Line of Business Underwriters Business Management (E.g.) Investment Committee Activity is carried out b Risk Management Function Compliance Function (E.g.) Audit Committee Activity is carried out b Internal Audit External Independent Actuary 6

8 Key risk faced and managed As an international insurance and reinsurance Group, Omega is in the business of managing insurance risk transferred to the Group by insureds and reinsureds, and this is therefore the main area of risk in the Group. Additionally the Group holds significant assets on behalf of both policyholders and shareholders which present investment related risks. These are the risks we take commercially, but there are also external risks such as legislation and economic uncertainty, and internal risks associated with the delivery and execution of the Group s strategy, including credit, operational and strategic risks. Omega s strategy for managing the insurance and investment risks includes: Measuring and reporting on insurance risks with input from underwriting, actuarial and claims staff; Buying investments which fit with our risk appetite and using experienced asset managers; Allocating capital according to the expected risk/return on business to be written; Use of reinsurance to mitigate insurance exposures; Accepting insurance and reinsurance risk in line with the agreed risk appetite and holding capital to cover the risks; Identifying emerging risks and any actions necessary in response to them. The Group s strategy for managing other business and operational risks includes: Measuring and reporting on all categories of risk with input from risk and control owners; Accepting risk in line with the agreed risk appetite and holding capital to cover the risks; Developing and supporting a strong control environment to mitigate and avoid risks that could impact on the Group s business objectives. The following table contains some key sections of the Omega Risk Universe, demonstrating the approach taken to mitigate risks in these areas. Our mitigation controls are being enhanced in 2011 through ongoing review and change governance structures and introduction of management analysis tools including catastrophe models, forecasting software and continuing to build our in house capital model. 7

9 Risk Category Insurance The risk of loss arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. Credit The risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion. Risk Subcategory Underwriting Claims Reserving Reinsurance Investment Key Example Risks Unexpected frequency or severity of catastrophe losses Losses occur through mismanagement of claims Adverse development in reported losses and IBNR Counterparties to Group reinsurance programme are not able to fulfil obligations to the Group Losses on the investment portfolio due to default of bond issuers or financial institutions Key Controls to Mitigate Continuing use of Realistic Disaster Scenarios to assess risk exposures. Our future analysis will be enhanced with the introduction of third party proprietary catastrophe models. All large claims are acted upon in a timely manner and subject to regular review. In house actuarial function develop the best estimate for the reserves. Reports on rating downgrades are reviewed and acted upon accordingly. Setting counterparty limits and minimum ratings. Investment Guidelines are in place with limits on counterparties, based on credit ratings and sector exposure. Market The risk arising from fluctuations in the value of assets, interest rates or exchange rates. Investments Inflation / interest rate Risk of devaluing of investment portfolio due to movements in financial markets Risk of movement in value of assets due to volatility of interest rates Monitoring of Value at Risk and Tail Value at Risk against approved limits. Stress and scenario testing to ensure the effect of an interest rate shock is within tolerance. Operational The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Liquidity The risk that sufficient financial resources are not maintained to meet liabilities as they fall due. Group / Strategic The potential impact of risk events of any nature arising in group entities or through OIH s management of the Group. Outsourcing Cash flow / liquidity Rating agencies Failure of major outsourcing arrangement. Liquidity issues resulting from a catastrophe event Loss of business due to rating downgrade Managing the duration of the investment portfolio. Contracts in place with providers providing satisfactory cancellation / termination conditions and service level agreements. Annual evaluation of materiality for all outsource partners and on site visits to those considered material. The liquidity of the investment portfolio is monitored against agreed risk appetites and reported to the Investment Committee quarterly. The capital model is used to ensure sufficient capital is held to maintain the current ratings, in addition to a strong working relationship with the rating agency. 8

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11 STATEMENT OF DIRECTORS RESPONSIBILITIES Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Standards. The financial statements are required to give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that period. In preparing those financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 10

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13 PROFIT AND LOSS ACCOUNT GENERAL BUSINESS TECHNICAL ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2010 Notes 2010 US$ US$ 000 Gross premiums written 3 310, ,488 Outward reinsurance premiums (81,376) (63,514) Net premiums written 229, ,974 Change in provision for unearned premiums Gross amount (14,998) (2,270) Reinsurers share (1,033) 4,933 Net earned premiums 213, ,637 Allocated investment return transferred from the non technical account 6 10,050 9,243 Total technical income 223, ,880 Claims incurred, net of reinsurance Claims paid Gross amount (111,704) (108,735) Reinsurers share 11,548 10,649 (100,156) (98,086) Change in provision for claims Gross amount (92,042) 12,127 Reinsurers share 7,454 1,662 4 (84,588) 13,789 (184,744) (84,297) Net operating expenses 3,4&5 (63,319) (55,525) Total technical charges (248,063) (139,822) Balance on technical account general business (24,874) 46,058 All the amounts above are in respect of continuing operations. 12

14 PROFIT AND LOSS ACCOUNT NON TECHNICAL ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2010 Notes 2010 US$ US$ 000 NON TECHNICAL ACCOUNT Balance on the technical account general business (24,874) 46,058 Investment return 6 10,050 9,243 Allocated investment return transferred to the general business technical account 6 (10,050) (9,243) Other charges (2,852) (1,541) (Loss) / Profit on ordinary activities (wholly attributable to the equity shareholder) (27,726) 44,518 There were no recognised gains or losses in the financial year other than those reported in the profit and loss account. There were no differences between the amounts reported in the profit and loss account and their historical cost equivalent. 13

15 BALANCE SHEET AS AT 31 DECEMBER 2010 Notes 2010 US$ US$ 000 Assets Investments Financial investments 9 423, ,293 Reinsurers share of technical provisions Provision for unearned premiums 19,422 20,455 Claims recoverable 35,338 28, ,760 48,753 Debtors Debtors arising out of reinsurance operations 150, ,340 Other , ,360 Other assets Cash at bank and in hand Furniture and equipment , ,707 26,795 17,707 Prepayments and accrued income Deferred acquisition costs 21,941 18,220 Other prepayments and accrued income 2,293 2,793 24,234 21,013 Total assets 680, ,125 14

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17 NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PREPARATION The financial statements have been prepared in accordance with UK Generally Accepted Accounting Principles ( UK GAAP ) and with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers (the ABI SORP ) in December 2005 as amended in Under Financial Reporting Standard No. 1 (Revised), the Company is exempt from the requirement to prepare a cash flow statement, on the grounds that it is a wholly owned subsidiary of Omega Insurance Holdings Limited. The Company has also taken advantage of the exemption under Financial Reporting Standard No. 8 and has not disclosed related party transactions with entities that form part of the Omega Insurance Holdings Limited ( OIH ) Group. 2. ACCOUNTING POLICIES Premiums Written premiums comprise the total premiums receivable for the whole year of cover under contracts incepting during the financial year, together with adjustments arising in the financial year to premiums in respect of business written in previous financial years. All premiums are shown gross of commission payable to intermediaries and are exclusive of taxes and duties levied thereon. Estimates are made for pipeline premiums representing amounts due but not yet notified. Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards business being reinsured. Unearned Premiums Provision Written and ceded premiums are recognised as earned income over the period of the policy on a time apportionment basis, having regard, where appropriate, to the incidence of the risk. Claims Claims incurred comprise the estimated cost of all claims occurring during the year, whether reported or not, including related direct and indirect claims handling costs and adjustments to claims outstanding from previous periods. The provision for claims outstanding is made on an individual case basis and is based on the estimated ultimate cost of all claims notified but not settled by the balance sheet date, together with the provision for related claims handling costs. The provision also includes the estimated cost of claims incurred but not reported at the balance sheet date based on statistical methods. The estimation process includes the use of statistical projections based on previous claims history, reviews of notified losses, and the use of security ratings to help assess the financial ability of reinsurers to pay the reinsurance recoveries anticipated of them. The provision for claims outstanding is based on information available at the balance sheet date. Significant delays are experienced in notification and settlement of certain claims and accordingly the ultimate cost of such claims cannot be known with certainty at the balance sheet date. Subsequent information and events may result in the ultimate liability being less than, or greater than, the amount provided. Any differences between provisions and subsequent settlements are dealt with in the technical account general business of later periods. 16

18 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) Deferred Acquisition Costs Acquisition costs, comprising commission and other costs related to the acquisition of insurance contracts are deferred to the extent that they are attributable to premiums unearned at the balance sheet date. Unexpired Risks Provision is made where the cost of claims and expenses arising after the end of the financial year from contracts concluded before that date is expected to exceed the provision for unearned premiums, net of deferred acquisition costs, and premiums receivable, charges and interest and related investment return. Investments Investments are stated at their current values at the end of the year. Listed investments are included in the balance sheet at market value. Cash at bank and in hand Cash at bank and in hand is comprised of cash at bank which includes short term deposits repayable on demand with any qualifying financial institution, less overdrafts from any qualifying institution repayable on demand. Cash in hand is comprised of the Company s petty cash funds. Furniture and Equipment Furniture and equipment is stated at cost less accumulated depreciation and impairment in value. Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows: Fixtures and fittings over 5 years An item of furniture and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. A gain or loss arising on de recognition of the asset is calculated as the difference between the net disposal proceeds and the carrying amount of the item. Any such gain or loss is recognized directly in the income statement. Investment Return Investment return comprises all investment income, realised investment gains and losses and movements in unrealised gains and losses, net of investment expenses. Realised gains and losses on investments carried at market value, are calculated as the difference between sale proceeds and purchase price based on the average cost method. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their valuation at the previous balance sheet date or purchase price if acquired during the year together with the reversal of previously recognised unrealised gains and losses in respect of investment disposals in the current year. Investment return is included initially within the non technical account. An allocation to the technical account is made to reflect the investment return on the Company s share of Syndicate investments and funds supporting the underwriting participation. 17

19 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) Foreign Currencies Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates of the transactions or a suitable average rate. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Exchange differences arising on retranslation are included in the income statement within the non technical account as recommended by the ABI SORP. Non monetary assets, being assets without a corresponding cash flow such as unearned premium reserves and deferred acquisition costs, are translated in the balance sheet at the exchange rate prevailing at the date of the original transaction. 3. SEGMENTAL INFORMATION TECHNICAL ACCOUNT Year ended 31 December 2010 Gross Gross Gross Gross premiums premium claims operating Reinsurance written earned incurred expense Balance Net US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Non marine property insurance 69,541 62,223 (34,385) (19,806) (6,396) 1,636 Property catastrophe treaty reinsurance 100, ,517 (70,953) (13,919) (52,995) (36,350) Property per risk treaty reinsurance 17,939 18,716 (7,208) (3,804) (2,200) 5,504 Professional indemnity insurance 11,330 9,877 (7,746) (3,272) 83 (1,058) Motor insurance and reinsurance 22,608 22,786 (15,222) (5,185) 665 3,044 Marine insurance and reinsurance 40,582 37,077 (36,652) (7,220) (4,682) (11,478) Liability insurance and reinsurance 32,819 29,529 (23,675) (8,725) 4,221 1,350 Other 15,350 13,823 (7,905) (1,388) (2,102) 2, , ,548 (203,746) (63,319) (63,407) (34,924) Year ended 31 December 2009 Non marine property insurance 46,932 50,830 (26,688) (16,742) (5,842) 1,558 Property catastrophe treaty reinsurance 93,827 91,850 (17,813) (16,303) (38,271) 19,463 Property per risk treaty reinsurance 17,673 16,178 (8,550) (3,219) 248 4,657 Professional indemnity insurance 8,778 9,587 (6,072) (3,188) 1,023 1,350 Motor insurance and reinsurance 11,198 11,673 (9,918) (2,053) (788) (1,086) Marine insurance and reinsurance 21,065 22,749 (7,006) (5,323) (951) 9,469 Liability insurance and reinsurance 24,692 23,419 (15,979) (7,318) (896) (774) Other 13,323 8,932 (4,582) (1,379) (793) 2, , ,218 (96,608) (55,525) (46,270) 36,815 18

20 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3. SEGMENTAL INFORMATION (CONTINUED) TECHNICAL PROVISIONS Year ended 31 December 2010 Gross reserves Reinsurance Net US$ 000 US$ 000 US$ 000 Non marine property insurance 63,964 4,245 59,719 Property catastrophe treaty reinsurance 85,009 22,243 62,766 Property per risk treaty reinsurance 20,812 1,381 19,431 Professional indemnity insurance 19,375 2,664 16,711 Motor insurance and reinsurance 30,786 3,204 27,582 Marine insurance and reinsurance 63,417 12,562 50,855 Liability insurance and reinsurance 55,176 5,924 49,252 Other 40,493 2,537 37, ,031 54, ,271 Year ended 31 December 2009 Non marine property insurance 57,098 4,010 53,088 Property catastrophe treaty reinsurance 42,933 18,830 24,103 Property per risk treaty reinsurance 22, ,419 Professional indemnity insurance 18,959 2,471 16,488 Motor insurance and reinsurance 24, ,320 Marine insurance and reinsurance 57,720 19,929 37,791 Liability insurance and reinsurance 37,955 1,312 36,643 Other 12, , ,887 48, ,134 The geographical analysis of premiums by destination is as follows: US$ 000 US$ 000 UK 42,530 28,900 Other EU countries 20,460 8,167 US 196, ,478 Other 50,600 18, , ,488 19

21 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 4. MOVEMENT IN CLAIMS OUTSTANDING The movement in the net provision for claims includes a release of approximately US$6.3m in respect of claims outstanding on the 2009 year of account from the previous year end. This movement includes the effects of gross and net reserve reserves on third party reinsurance business underwritten by the Company as well as strengthening of gross reserves on business derived from Syndicate 958 which was largely offset by increased recoveries on whole account reinsurance protections. The increase in these whole account reinsurance protections resulted in the absence of reinsurance profit commission and reinsurance premium rebates that would otherwise have been recognised in NET OPERATING EXPENSES TECHNICAL ACCOUNT US$ 000 US$ 000 Brokerage and other business acquisition expenses 57,828 51,056 Syndicate operating expenses 4, Corporate Members personal expenses 2, Reinsurers commissions and profit participations (1,883) 3,253 63,319 55, INVESTMENT RETURN US$ 000 US$ 000 Investment return 11,580 12,221 Realized investment gains and losses 875 (317) Unrealized investment gains and losses (2,066) (2,306) Investment expenses and charges (339) (355) 10,050 9,243 All of the investment return has been allocated to the technical account to recognise the activity of the Company. 7. STAFF COSTS US$ 000 US$ 000 Wages, salaries and profit related pay 2,248 1,811 Housing benefits Other and pension costs There were 5 full time employees at 31 December ,597 2,113 20

22 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. Staff costs (continued) US$ 000 US$ 000 Directors remuneration in the year Wages, salaries and profit related pay Housing benefits Other and pension costs The above relates to three of the five directors of the Company. One of the Company's five directors is employed on a full time basis by the Company, another is paid a fee for chairing the Company and another is a member of the board. The other directors of the Company are also directors of Omega Insurance Holdings Limited and are remunerated under Omega Insurance Holdings Limited. Full details of the remuneration of the directors who are also directors of Omega Insurance Holdings Limited are disclosed in that company's accounts. 8. AUDITORS REMUNERATION US$ 000 US$ 000 Audit of the financial statements and statutory return Auditors remuneration is included in the profit and loss account under Other charges. 9. FINANCIAL INVESTMENTS AND CASH Historical Cost Market Value Historical Cost Market Value US$ 000 US$ 000 US$ 000 US$ 000 Debt securities and other fixed income securities 413, , , ,895 Money market funds 13,225 13,225 41,398 41,398 Cash at bank and in hand 26,737 26,737 17,707 17, , , , ,000 Determination of fair value hierarchy Level 1 Level 2 Total Fair Value at 31 December 2010 US$ 000 US$ 000 US$ 000 Debt securities and other fixed income securities 314,243 96, ,723 Money market funds 13,225 13,225 Cash at bank and in hand 26,737 26, ,205 96, ,685 21

23 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 9. FINANCIAL INVESTMENTS AND CASH (CONTINUED) Included in the Level 1 category are financial assets that are measured in whole or in part by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker or industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm's length basis. Included in Level 2 are financial assets and liabilities measured using a valuation technique based on assumptions that are supported by prices from observable and current market transactions for which pricing is obtained via pricing services but where prices have not been determined in an active market, financial assets with fair values based on broker quotes, with fair values obtained via fund managers and assets that are valued using the Company's own models whereby the majority of assumptions are market observable. At 31 December 2010, the Company did not hold any Level 3 financial instruments, being those for which the fair value is determined in whole or in part using a valuation technique based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor based on available market data. The Company s cash represents accounts held with HSBC Bank Bermuda Limited, the Bank of New York Mellon, Barclays Bank Plc and petty cash. 10. PROPERTY AND EQUIPMENT Cost Depreciation Net Book Value US$ 000 US$ 000 US$ 000 Balance as at 31 December 2009 Additions Balance as at 31 December SHARE CAPITAL US$000 US$000 Authorised 120,000 ordinary shares of US$1 each Allotted, called up and fully paid 120,000 ordinary shares of US$1 each

24 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 12. RECONCILIATION OF MOVEMENTS IN SHAREHOLDER S FUNDS Year ended 31 December 2010 Share capital Contributed surplus Share options reserve Retained earnings Total US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balance as at 31 December , , ,715 Loss for the year (27,726) (27,726) Dividends paid (31,610) (31,610) Share options reserve Balance as at 31 December , (20,493) 294,483 Year ended 31 December 2009 Share capital Contributed surplus Share options reserve Retained earnings Total US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balance as at 31 December , (1,175) 184,622 Profit for the year 44,518 44,518 Dividends paid (4,500) (4,500) Contributed surplus 129, ,000 Share options reserve Balance as at 31 December , , ,715 On 4 February 2009, the Company received a capital contribution from the parent of $129,000,000. The amount has been recognised as a contributed surplus in the balance sheet of the Company. On 5 March 2010, the Company declared and paid a dividend of $17,000,000 for the 2010 financial year. On 27 August 2010, the Company declared and paid a dividend of $14,610, OTHER CREDITORS US$ 000 US$ 000 Due to parent

25 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. GUARANTEES AND CONTINGENT LIABILITIES Letters of credit The Company has Letter of Credit (LOC) facilities of US$64,540,000 (2009: US$65,420,000) to support its underwriting requirements. These facilities have been utilised as follows and are backed by restricted cash holdings US$ 000 US$ 000 Letters of Credit with US cedants 11,102 10,900 The Company has deposited LOCs totalling US$ 11,102,000 (2009: US$ 10,900,000) with various US cedants. Should the Company fail to meet its obligations under contracts with these US cedants they would be able to draw down on these LOCs. The LOCs on these facilities are all secured by a charge over certain of the Company s cash deposits held with Barclays. Restricted assets Various cash and investment balances held by the Company are not available to the Company due to collateral and trust arrangements specifically US$ 64,728,703 (2009: US$ 63,900,000) funds at Lloyds supporting Syndicate underwriting and US$ 12,036,817 (2009: US$ 2,022,011) in restricted investments supporting underwriting by Omega US. 15. TAXATION Bermuda The Company has received an undertaking from the Bermuda government exempting it from all local income, withholding and capital gains taxes until 28 March, At the present time, no such taxes are levied in Bermuda. United States The Company does not consider itself to be engaged in trade or business in the United States and, accordingly, does not expect to be subject to United States taxation. 16. EXCHANGE RATES The exchange rates used in translating foreign currency amounts in the preparation of these accounts are: Average rate US$ Year Average end Rate rate US$ US$ Year end rate US$ 1 Sterling is equivalent to Euro 1 is equivalent to Can $1 is equivalent to

26 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 17. RELATED PARTY TRANSACTIONS Nicholas Warren, one of the Directors of the Company until his departure from the Board on 12 March 2010, was employed as a Senior Vice President with International Advisory Services Ltd. This company provides general accounting, administration and information technology services to the Group. This company also provided rented office space to the Company until 18 September US$431,000 was charged to the Company in respect of these services during 2010 (2009: US$604,000). 18. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS The Company is incorporated in Bermuda and is registered as an insurer under the Insurance Act 1978 and related Regulations ( the Act ). Under the Act, the Company is required to prepare Statutory Financial Statements and to file a Statutory Financial Return with the Bermuda Monetary Authority. The Act also requires the Company to meet certain minimum capital and surplus requirements. To satisfy these requirements, the Company was required to maintain a minimum level of statutory capital and surplus of US$37,254,928 at 31 December 2010 (2009: US$26,396,197). The Company s statutory capital and surplus was US$272,516,519 (2009: US$335,331,684) of which US$120,000 (2009: US$120,000) is fully paid up share capital. In this regard, distributions from contributed surplus are limited to the extent that the above requirements are met. As at 31 December 2010, retained earnings and contributed surplus amounting to US$79,207,099 (2009: US$44,376,082) were not available for distribution. The Company is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of the amount of its relevant liabilities. Relevant assets include cash at bank and in hand, financial investments, accrued interest receivable, debtors arising out of insurance operations and funds withheld. Certain categories of assets do not qualify as relevant assets under the statute. The relevant liabilities are total technical provisions and total other liabilities. At 31 December 2010, the Company was required to maintain relevant assets of at least US$248,493,094 (2009: US$173,298,737). At that date, relevant assets were US$603,765,322 (2009: US$566,376,528) and the minimum liquidity ratio was, therefore, met. The Statutory capital and surplus as reported under the Act is different from shareholder s equity as determined in conformity with generally accepted accounting principles ( GAAP ) due to Deferred acquisition costs of US$21,941,434 (2009: US$18,220,070) that are capitalised under GAAP but expensed under the Act and prepaid expenses of US$26,994 (2009: US$163,153). In addition to the above statutory requirements, the Company was subject to the new Bermuda Solvency Capital Requirement ( BSCR ) during At 31 December 2010, the capital the Company was required to hold an Enhanced Capital Requirement of US$139,954,150 and a Target Capital Level of US$167,944,980. This capital requirement varies with changes in the level and type of business underwritten by the Company along with other financial measures of risk to which the Company is exposed. 25

27 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 19. POST BALANCE SHEET EVENTS During the first quarter of 2011, three large loss events occurred affecting the Group: In January, significant flooding occurred in Queensland, Australia as a result of sustained heavy rainfall. This is expected to result in significant losses to the insurance market. On 22 February, an earthquake hit Christchurch, New Zealand causing widespread damage and multiple fatalities. The earthquake was centered 10 kilometers south east of Christchurch. On 12 March, an earthquake hit Japan eastern coast triggering an extremely destructive tsunami that struck shortly after the quake. The Group is monitoring its potential underwriting exposures to these large losses; however there is significant uncertainty as to the ultimate cost of such claims. On April 27, 2011, the Company approved a return of contributed surplus to the shareholder of US$9,000, ULTIMATE PARENT COMPANY The ultimate holding company of the Company is Omega Insurance Holdings Limited, registered number Copies of the accounts for that company may be obtained from the registered office, Crown House, 4 Par la Ville Road, Hamilton, Bermuda. 26

28 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 21. RISK MANAGEMENT The Group manages and monitors its key risks through the Board committee structure, with specific committees being given the responsibility for monitoring and managing specific risks. It uses and continues to develop a risk and control register as the central tool in this process to enable the Board to assess the relative scale and importance of the risks inherent in the business. Alongside the management controls in place, this process is intended to protect the shareholder from excessive volatility in earnings and/or deterioration in its capital position. The Risk Management Framework and monitoring thereof is the responsibility of the Board. The Board s view of the key risk areas facing the Group is demonstrated in the risk universe, shown in full below: A. Insurance risk B. Credit risk C. Liquidity risk D. Market risk E. Operational risk F. Group risk A. Insurance risk Insurance risk is the risk that the claims payable on an insurance or reinsurance book of policies outweigh the premiums charged. Such a risk could crystallise as a result of under pricing premiums, a major claim event, such as a hurricane, or a general (or attritional ) value of claims that exceeds expectations. This is the single largest risk category faced by the Group. Losses resulting from major catastrophes or multiple events can have a material impact on earnings. The expert management of insurance risk remains core to our business proposition. In underwriting reinsurance and insurance policies the underwriters use skill, experience and knowledge of how the claims have developed in the past to understand the appropriate level of premium required on a policy. Omega s business is predominantly low premium short tail business in areas which it has been familiar with for many years. Omega has been working with many of the managing general agents and brokers for a number of years, and therefore the majority of our business lines are mature. As a result the underwriters and claims team have a good understanding of how claims develop. There are a number of key controls which limit the amount of insurance risk taken. Specifically a business plan is prepared and agreed and progress against this is monitored. As part of this business planning process, limits on the amount of business each underwriter may write in his or her respective class are set and can only be exceeded with the sanction of senior management. The business planning process will be part of the Group s ongoing governance and procedures review. Some insurances are written through binder agreements where the Group is bound by other agents. The Group maintains long term relationships with most agents, giving confidence as to the quality of underwriting and nature of the business. There are clear authority limits in place and the business is monitored by Omega. Realistic Disaster Scenarios ( RDS ) The nature of the Omega book means it is diversified in a variety of ways to help balance the exposure. Peak exposures are monitored by the review of Realistic Disaster Scenarios which seek to estimate the effect of certain loss events, such as windstorms and earthquakes. These are designated storm paths/loss events set by Lloyd s and they are supplemented where appropriate by scenarios that the Group believe may be more applicable to the specific Omega portfolio. For each scenario, the risk exposures in the relevant zone are identified and then Probable Maximum Loss factors (PML s) are applied to determine the probable maximum loss for that scenario. These probable maximum losses are expected only to be incurred in extreme events as determined by Lloyd s guidelines. 27

29 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The relevant entity boards review and monitor these PML s to ensure they are consistent with the Group s risk tolerance and strategy. The monitoring process will be enhanced now that the Group has subscribed to the use of third party proprietary catastrophe modelling software. The Omega Group s portfolio has an inherent balance created by a diversity of both geographic exposure and business class. The exact balance is adjusted dependent on rate strength in a particular niche or field at any one time, considered against our maximum exposures. The composition of the portfolio is described in the Directors Report. Reinsurance process Omega s reinsurance programme combines both policies to limit exposure to specific risks and events with some whole account covers aiming at protecting shareholder capital in the event of a combination of major loss events. Over time the pricing and quality of terms available on retrocessional reinsurance cover varies. Omega s underwriters assess the availability of quality reinsurance each year and adjust their business volume and type according to their overall net exposure to losses. The exact nature of the programme is influenced by the availability, price and quality of reinsurance coverage in the market place. The Group will only place reinsurance with counterparties it believes have the financial strength to stand by their contracts in stress scenarios and where it is believed the terms of the contract offer real benefit. Omega Specialty benefits from participation on elements of Syndicate 958 s reinsurance programme and a tailored programme of its own. Within the Syndicate, the reinsurance programme consists of: Direct and facultative cover to limit exposure to an individual or group of risks. Excess of loss cover to protect the whole account should there be a series of loss events that drive total claims above a certain limit for the portfolio. Industry Loss Warranties which offer protection from a major event that affects a series of different kinds of risks. The introduction of catastrophe modelling will help inform reinsurance decision making in 2011 and beyond. Reserving risk Reserving risk is the risk that the cost of claims incurred will ultimately differ materially from the amounts assumed in estimating the provision for claims reported and the provision for claims incurred but not reported, and the reinsurers share of these amounts, ( claims reserves or reserves ) to be included in the Group balance sheet. As an insurance underwriter, the Group s provisions for claims form the most significant component of the Group s liabilities and small proportional changes in the estimation of these liabilities can have a significant effect on the profit reported by the Group. Given the sensitivity of the claims reserves to small changes in assumptions and inherent uncertainties, the reserves established at any point in time are an area of considerable judgement and the ultimate cost of the related claims may differ from current estimates. The key sources of this uncertainty in relation to the Group s claims reserves are: Catastrophe losses, for example the Chilean earthquake in 2010, which are inherently difficult to evaluate particularly since it can take months or years for the related individual claims to be notified or evaluated by loss adjusters. 28

30 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Large individual claims which can result in complex litigation, which may make it difficult to estimate the total claim or share of total claim apportioned to the Syndicate or the Group. Longer tail liability classes where the development of claims is slow and therefore notifications and data upon which reliable projection may be based is limited. Omega has limited exposure to long term liability classes. To ensure the appropriate level of claims reserve is held by the Syndicate, case reserves are reviewed by claims managers and the relevant underwriter to ensure an appropriate provision is made for claims notified. For older years these case reserves represent the majority of the claims provisions due to the short tail nature of the Omega book. Then on a portfolio basis, future claims payments for the Syndicate are projected by the Group s in house actuarial team based on the historic claims development pattern for each class of business. This process is used to determine the amount of provision required for claims that have been incurred but not yet reported ( IBNR ) and to assess the appropriate total value of provision for claims. In more recent underwriting years IBNR comprises a much greater proportion of the overall reserves and hence those years are subject to a greater degree of uncertainty. Given the similarity of the OSIL and Syndicate books of business, Syndicate loss ratios are currently used to derive the Omega Specialty reserves with adjustment for local variations. For Omega US the Group projects based on the company s own loss ratio experience and relevant US benchmarks to estimate the required reserves. In addition, Towers Watson, a firm of independent actuaries, is engaged by the Group to complete an independent reserving exercise for the Syndicate, Omega Specialty and Omega US, based on actuarial techniques that involve projecting the level of future claims payments based on historic data and market benchmarks. The results of both processes are compared and reviewed by the Syndicate Reserving Committee in relation to Syndicate reserves, and the Group Reserving Committee, and Group Audit Committee, in relation to the Group s claims reserves. B. Credit risk Credit risk represents the risk of loss arising from default of counterparties. The following are the key areas where the Group is exposed to credit risk: the risk of counterparties to the Group s reinsurance programme not being able to fulfil their obligations to the Group (reinsurance credit risk); the risk of monies held by brokers and other intermediaries on behalf of the Group being lost through insolvency (broker and intermediary credit risk); and the risk of the Group making losses on its investment or cash holdings through default of bond issuers or financial institutions (investment and cash credit risk). Broker and Intermediary credit risk The Group continues to deal primarily with brokers and intermediaries with whom it has longstanding relationships. The Group monitors its exposure to individual brokers and intermediaries on an ongoing basis to identify potential concentrations of risk. Investment and cash credit risk The Syndicate operates within the investment guidelines set out by the Syndicate Investment Committee and the rest of the Group companies operate within the investment guidelines laid out by the Group Investment Committee. These guidelines stipulate the permissible types of investments, Value at Risk (VaR) limits, maximum 29

31 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) duration, counterparties, minimum acceptable ratings and counterparty exposure limits. Counterparty limits are applied both in terms of maximum concentrations with specific organisations and in terms of minimum credit rating criteria for the portfolio. Adherence to these guidelines and monitoring of overall investment performance is the responsibility of each company within the Group and is reviewed by the respective Investment committees. Reinsurance credit risk Reinsurance credit risk is mitigated by ensuring that only appropriate and suitably capitalised and rated reinsurance carriers are allowed to form part of the Syndicate s, Omega Specialty s and Omega US s reinsurance programme. The Group has an excellent track record in terms of recoverability of reinsurance balances. There are processes in place within the Group to monitor the reinsurance programmes to ensure this continues and have specific criteria to prevent reinsurance contracts being placed with carriers with inadequate financial strength. The Group considers reinsurance ratings, notified disputes and collection experience in determining whether reinsurance assets are impaired. Note 20 shows the amounts recoverable from reinsurers that were impaired and amounts recoverable on claims paid at the year end that were past due but not impaired. C. Liquidity risk Liquidity risk represents the risk that there is insufficient cash available to meet liabilities when they become due. The Group Investment Committee monitors the Group s exposure to liquidity risk by reviewing future expected cash flows, and by aligning the asset duration with liability duration. The Group s investment portfolios are high quality fixed income bonds and therefore the Group should not experience impairment of these assets if it was required to make sales of such assets quickly, for example to pay claims arising from a catastrophic loss event. The amounts and maturities in respect of insurance liabilities are based on management s best estimate based on past experience. However, the nature of insurance is that the funding requirements cannot be predicted with absolute certainty. Therefore the Group maintains surplus realisable investment assets to meet such short term liquidity requirements as may arise. D. Market risk Market risk arises where the value of assets and liabilities changes as a result of movements in interest rates and market prices. It is the responsibility of the Group Investment Committee to monitor and oversee the management of market risk to the Group. Market price risk The Group adopts a conservative approach to its investment portfolio as it believes that the business should be focused on insurance risk and returns. As a result the Group s investments guidelines do not allow investments in equities or speculative currency positions. Holdings are predominantly comprised of cash deposits, cash money market funds with major banks and good quality fixed income investments, including treasuries, government agency debt and high quality corporate debt. Interest rate risk Interest rate risk is the risk of the Group making losses as a result of interest rate fluctuations and is managed by the Group through the management of the duration of the Group s investments and in particular by keeping the durations of such assets relatively short. The short tail mature of the Group s liabilities means that the Group sets target duration on each of its portfolios under three years. This serves to limit the Group s exposure to movements in interest rates. 30

32 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Foreign exchange risk As an international Group, Omega has assets, liabilities and cash flows in a number of currencies. To minimise volatility in earnings as a result of movements in exchange rates the Group seeks to hold assets in currencies broadly matching the expected cash flows. As the Group predominantly transacts US centric business, the functional currency of the key operating companies within the Group is US dollars, minimising the risk of volatility due to balance sheet translation. Where a known cash flow is expected in a mismatched currency it may be hedged with a forward contract. E. Operational risk Operational risk is the risk of loss due to breakdown of systems and controls processes within the Group. The Group monitors operational risk through risk register processes. Specific responsibility for monitoring operational risk has been allocated through the Group s governance structure, with nominated boards / committees in each operating company and at Group. Continuing significant risks identified by the Group remain: The need for continuing development and embedding of the Group risk management framework to meet with the changing risk environment in which the Group is now operating, in particular Solvency II requirements in the UK and Solvency II equivalence requirements in Bermuda. The implementation and development of the new underwriting and financial I.T. systems within the Group. The Group continues with its policy to outsource certain non core underwriting activities such as investment management and book keeping in certain areas. Given the extent and importance of these outsourced relationships they remain subject to close review. As the Group develops it continues to give consideration to the bringing in house certain of those services that are currently outsourced. Any such changes will need to be managed carefully. F. Group risk The Omega Group has grown rapidly in recent years, having evolved from a pure Lloyd s Group based organisation, supported by third party capital, to an international insurance and reinsurance business with underwriting platforms in Lloyd s, Cologne, Bermuda and Chicago, listed on the London Stock Exchange. Despite this growth, the organisation has sought to maintain the underwriting philosophy and risk management approach that has underpinned the success of the Lloyd s syndicate. The Group s model thereby seeks to minimise the risk that any one underwriting platform could jeopardise the financial or reputational position of the Group overall. The Group has a multi location strategy with offices in London, Bermuda, the US and Germany. The German office in Cologne writes business into Syndicate 958 through a delegated authority agreement. Audits of the Cologne office are undertaken when deemed necessary to cover risks and controls around their underwriting process. The Group sets policies which the subsidiary companies then adopt and implement as appropriate to their operations. The adherence of subsidiary companies with Group policies is monitored though quarterly reporting to the Group Board and Audit & Risk Committee. 31