Orascom Inv Regulatory News (OIH)

PRESS RELEASE

FOR IMMEDIATE RELEASE

Tuesday 8th March 2011

Omega Insurance Holdings Limited

Full Year results 2010

Omega Insurance Holdings Limited ("Omega" or "The Group") today announces its preliminary results for the year ended 31 December 2010.

Financial Performance

·; Loss for the year of US$42.8 million (2009: US$43.6 million profit)

·; Gross premium income of US$356.1 million (2009: US$265.8 million)

·; Loss ratio of 84.4% (2009: 49.3%)

·; Combined ratio of 114.4% (2009: 81.4%)

·; Investment return of 1.9 % (2009: 2.8%)

·; Earnings per share of (17.6) cents (2009: 18.6 cents)

·; Total dividend relating to the financial year of 6 US cents per share (2009: 12.5 US cents)

Operational Performance

·; Significant de-risking of the Group's business

·; 86% of the reported pre-tax loss was incurred on 2009 year of account and prior, before the current Board's appointment in March 2010.

·; Improving reinsurance programme

·; Further strengthening of the board and senior management positions

·; Significant investment in risk management, modelling, data quality, analysis and controls

·; Company well positioned for future growth, into new lines of business when the market improves

Richard Pexton, Chief Executive Officer of Omega Insurance Holdings Limited, commented:

"The 2010 loss is an obvious disappointment to us all. Changes made since March will leave the business less exposed to losses of this nature. Although the current rating environment is challenging, Omega has an excellent franchise and a steady book of solid underwriting businesses. With its platforms in the major markets and the strength of its distributor relationships, Omega is ready to grow when the time is right. This, combined with our experienced underwriting team, operational improvements and efficient structure, leave it well placed as a strong underwriting platform able to take full advantage of any improvement in market conditions."

Further information:

Media Enquiries:

David Haggie/Juliet Tilley, Haggie Financial +44 (0)20 7417 8989

Analyst Enquiries:

David Coles, Head of Investor Relations, Omega +44 (0)20 7767 3000

Chairman's Statement

Shareholders will be aware of the background to my appointment as Chairman, and Richard Pexton's as Chief Executive, and other board changes in late March last year so I won't go over matters which have already been well publicised.

To say that ours was a baptism of fire would be an understatement!

Within a week of our arrival, we had to issue a profits warning arising from Omega's loss on the Chilean earthquake. This along with other loss experience on the 2009 and prior years represents some 86% of our total reported pre-tax loss for the year.

Subsequent events proved equally challenging. I am naturally very disappointed that we are reporting a loss for the year of US$42.8 million. Richard Pexton expands on the component parts of the loss and the actions we have taken since arrival in his review of the business.

Omega's performance during 2010 has been materially affected by catastrophe and other single-loss events, after a benign year in 2009. It is estimated that 2010 could be the sixth worst year for the insurance industry in the last thirty, with total insured losses of approximately US$37 billion.

Since the Board change to which I previously referred, and notwithstanding the difficulties experienced thus far, we have made great progress on a number of fronts.

We have further strengthened the Board with the appointment of Geoffrey Johnson who joined in September last year as a non-Executive Director and Chairman of the Audit Committee. He has recently been elected by the Board as Senior Independent Director. Geoffrey enjoyed a long and successful career with PricewaterhouseCoopers and his experience and focus on governance will prove invaluable in the future development of the Group. As planned, Jonathan Betts stepped down in November. Penny James steps down from the Board later this month and I would like to welcome Katherine Letsinger who joins us on an interim basis. Katherine has a wealth of insurance experience having previously been Group Finance Director of Wellington Underwriting plc following other financial appointments in the industry. I would like to thank both Penny and Jonathan for their contribution to the Group during this transitional year. We expect to make a further non-executive appointment from the insurance industry during the course of 2011.

We have made further senior appointments in the London operation.

A large part of our activity during 2010 has been concentrated upon strengthening our operational infrastructure in areas such as risk modelling, underwriting systems, capital modelling, and generally improving our internal governance and controls. This progress will contribute to achieving our goal of first class risk management capabilities.

The last two years have been an unsettling time for those who work in Omega and I would like to thank them all for their dedication, professionalism and commitment to the task. In spite of the noise surrounding the Group, it has been very much 'business as usual' and I am grateful to all of them.

Given the circumstances and, taking into account the interim dividend of 6.0 cents per share already paid and the substantial increase in the loss for the year compared to previous estimates, the Board has decided, as matter of prudence, not to pay a final dividend for 2010. We will keep under review the capital position and trading results with a view to resuming dividends as soon as conditions allow. As a matter of policy, the Board remains committed to paying out a substantial proportion of the Group's annual profits as dividends.

The rating environment remains challenging and short-term profitability will be constrained as a result. However, despite the difficult operating environment, we are putting in place a firm foundation from which to grow.

Chief Executive Officer's Review

2010 Results

The Group is reporting a loss before tax for the year of US$42.9 million (2009: US$47.1 million profit). Clearly this is a disappointing result and one that must not be repeated. The performance was driven by the level of catastrophe and large single-risk loss events including the earthquakes in Chile and New Zealand, the explosion of the Deepwater Horizon oil rig, Australian floods and Aban Pearl submersible amongst others. This was exacerbated by rating reductions putting pressure on margins in other lines of business as the market softens, reflected in the increase in attritional loss ratios and some strengthening of reserves at the half year. The post tax loss for the year was US$42.8 million (2009: US$43.6 million profit) and earnings per share was (17.6) US cents (2009: 18.6 US cents).

Gross premiums written by the Group rose by 34.0% to US$356.1 million in 2010 (2009: US$265.8 million) reflecting our increased ownership of capacity on Syndicate 958, which has grown to 40.5% for the 2011 year of account (2010: 38.8% and 2009: 16.4%). Net earned premium grew by 26.5% to US$247.4 million (2009: US$195.5 million). While this step up has negatively affected the 2010 results due to the 2010 Year of Account losses to date, we still expect to see the benefit of the increase in future years.

Our underwriting performance in the year has been dominated by multiple catastrophes including the Chile and New Zealand Earthquakes, Australian hailstorms and the flooding in Queensland in December. This was on top of several large single-loss events, including the Deepwater Horizon incident in April 2010 and the sinking of the Aban Pearl submersible in May 2010. Together, these losses have cost the Group US$65.0 million net of reinsurance and reinstatement premiums and including foregone managing agency profit commission. The loss ratio rose to 84.4% in 2010 (2009: 49.3%) with natural catastrophes and major losses accounting for 22.2 percentage points. The attritional loss ratio also rose by 12.9 percentage points in comparison with 2009 to 62.2% (2009: 49.3%) demonstrating the deterioration in current pricing due to excess capacity coupled with an elevated incidence of smaller attritional losses in the US. Strengthening of prior year reserves equates to 2.4 percentage points.

Perspective of Omega since my arrival

I joined Omega one year ago this week and have reviewed all areas of the business. I would summarise my thoughts as follows:

·; The corporate structure is excellent with platforms in each of the world's major markets: Lloyds, Syndicate 958, Bermuda and in the US, Chicago.

·; Notwithstanding the result, there is a solid core book of underwriting focused on regional and smaller ticket property and casualty insurance that has driven the Group and Syndicate's success over many years.

·; There is a team of experienced underwriters who understand how to navigate troughs in the insurance cycle.

·; The book was more volatile than I had expected, with the Group having expanded in more recent years into classes of business with greater catastrophe exposure and larger insureds, such as retrocessional reinsurance and marine energy.

·; Certain of the Group's reinsurance programmes were not strategic and, therefore, far less efficient and effective than I had expected, with some reinsurance accounts written 'net' and limited tools available to model how it operated in different stress scenarios. This is evidenced by the gross loss ratio of 68.3% and net loss ratio of 84.4%.

·; Operationally the business was 'behind the curve' playing catch up with the more sophisticated players in the industry in the areas of risk management, modelling, data quality and analysis, and control.

·; The reserves are sound. The short tail nature of Omega's book means it is not susceptible to significant historic reserving problems but being a young company there is currently only a small book of historic reserves and so profit is sensitive to movements in small loss ratios.

·; The investment portfolio is high quality, low risk, extremely liquid and consequently has a constrained return.

·; Omega US Chicago, continues to build a strong franchise with slower growth than originally expected due to current market conditions.

Actions

1. Underwriting

In light of the findings of my review, and the developing market conditions, we took the following actions to reduce the risk in the book of business:

·; We substantially cut our direct offshore energy business from September 2010 in order to reduce the overall volatility of the portfolio;

·; Since the second quarter of 2010 we have significantly scaled back and refocused the international retrocessional reinsurance account which was impacted by the Chilean, Australian and New Zealand catastrophes with gross written premium on this account reducing from US$16.4 million in 2010 (of which US$11.6 million was written by 1 April 2010) to US$4.2 million in 2011;

The effect of these is that a repeat of 2010's catastrophe and large energy events today would result in costs to the Group some 33% lower.

Further, we are currently changing the composition of our reinsurance programme to reduce basis risk, having undertaken a full external review of the reinsurance programme in the fourth quarter of 2010 which will lead to a programme with a better fit for Omega Specialty and potential cost savings.

2. Operations

The operational capability of the Group has been another key area of focus given its importance to both our underwriting capabilities and our ability to function effectively as a business. We have invested in new talent and additional infrastructure to help us manage the business more effectively and more efficiently. Resources have been added in operational and risk management functions and we have improved actuarial and financial controls.

In addition new systems for recording underwriting information and for modelling aggregations have been introduced during the year across all our platforms.

The effect of these changes will be a better risk managed business in the future with a consequential benefit of lower capital ratios than would otherwise be the case.

3. Investments

The investment environment in 2010 was driven by uncertainty as to whether there would be an economic recovery or a double dip recession, and central banks continued to add liquidity into the financial system, keeping interest rates low. Uncertainty increased mid-year coinciding with the distress in the peripheral European sovereign debt markets.

Omega continued its cautious approach and benefited from its high allocation to government bonds which rallied throughout the year, resulting in an investment return of 1.9% (2009: 1.7% excluding one-off hedging gains).

Due to the asymmetric exposure to interest rate movements we reviewed our investment strategy in the final quarter, broadening the asset classes and implementing a blended benchmark to include a higher proportion of corporate bonds and some securitised assets. Although we benefited throughout 2010 from a high allocation to government bonds, we have taken steps to reduce this position as we expect interest rates to rise over the following year. We expect to see the benefits of these changes through 2011. We will continue to cautiously seek opportunities to enhance our returns within the Groups' risk appetite parameters established by the Board. Further information about our investment performance and asset allocation can be found in the Financial Review.

4. Capital Management

The Board remains committed to its policy of returning to shareholders a substantial proportion of the Group's annual profits as dividends. Taking into account the interim dividend of 6.0 cents per share and the substantial increase in the loss for the year as compared to earlier estimates, the Board has decided as a matter of prudence not to pay a final dividend for 2010.

The Board will keep under review the capital position, potential changes in regulatory requirements, the results of our actions to reduce risk exposures in the business and trading results with a view to paying dividends when conditions allow.

Taking into account the need for capital to take advantage of business opportunities when the market improves, the Board remains committed to paying out as dividends a substantial proportion of the Group's annual profits.

To further support the business's flexibility to grow as the conditions improve, the negotiation of a revolving credit facility is near completion.

5. Governance

With the changes made during 2010, the Group now has strong Boards in both London and Bermuda with a wealth of financial and industry experience.

Dialogue with the regulators and rating agencies has been excellent, with open and transparent relations in place. AM Best reaffirmed Omega Specialty's and Omega US's A- (Excellent) rating after the half year results.

Outlook for 2011 and beyond

The trading environment for 2011 remains competitive and, with a benign Atlantic hurricane season during 2010, the industry's supply of capital has increased further. Rate reductions were evident at the important 1 January reinsurance renewals with excess capacity continuing to depress pricing. US catastrophe reinsurance rates were down by between 5-10%, whilst international catastrophe rates were down by between 3-10%, with loss affected areas experiencing firmer pricing.

The actions through 2010 and 2011 were to de-risk the business and protect value. The result is that we will have reduced aggregates, a reshaped and more robust reinsurance program and improved modelling capability all of which should help us deal with catastrophe events more effectively.

Our underwriting strategy for 2011 continues to stress discipline and patience. We have reduced our planned gross written premium for the year relative to 2010, and will continue to monitor the rating environment in each class of business we underwrite. We have pulled back from some classes where we believe that underwriting margins are inadequate.

There are still profitable opportunities to be had. However, with rating pressure continuing, notwithstanding the actions we are taking to dampen that effect, the result must be reduced profit expectations for 2011 if the current rating environment continues.

Although short term conditions are challenging, Omega has an excellent franchise and a steady book of solid underwriting businesses. With its platforms in all the key locations and the strength of its distributor relationships, Omega is ready to grow when the time is right. This combined with our experienced underwriting team, operational improvements and efficient structure will leave it well placed for the medium term.

Underwriting Review

2010 Underwriting Return and Loss ratio by Underwriting Segment

Underwriting performance in 2010

Group gross premiums written rose by 34.0% to US$356.1 million in 2010 (2009: US$265.8 million) and net earned premiums rose by 26.5% to US$247.4 million (2009: US$195.5 million), reflecting our increased ownership of capacity on Syndicate 958, which was 38.8% for the 2010 year of account (2009: 16.4%). The net loss ratio rose to 84.4% (2009: 49.3%) with natural catastrophes and major losses accounting for 22.2 percentage points. The attritional loss ratio - which excludes catastrophe and major losses - rose to 62.2% (2009: 49.3%) due to an increased incidence of smaller losses and increased pressure on margins due to rating reductions.

The table below shows how catastrophes and major losses have affected our 2010 results.

Catastrophe net losses to Omega in 2010 US$'m

2010 was beset by losses affecting the international accounts. We remain comfortable that our original estimates for the Chilean earthquake loss are prudent and claims are developing in line with expectations.

It remains very early to make definitive estimates of the cost of the New Zealand earthquake and the Australian floods in 2010. Our New Zealand loss estimates reflect the latest data available from the New Zealand Earthquake Commission. Our exposures to the Australian floods are limited but we have raised what we believe to be prudent provisions of US$4.5m.

There is minimal data on which to base estimates of the 2011 losses for either the recent New Zealand earthquake or Australian floods in January and considerable uncertainty as to how the totality of the losses will be attributed to specific events and years of account. Whilst both market losses would appear to be more substantial than the 2010 events, exposures on our retrocessional accounts had been reduced. Based on the very limited data available we would expect our losses on the 2011 events to be at similar or potentially lower levels to those on the 2010 Australian and New Zealand events taking into account the larger magnitude of the 2011 losses to the industry.

Reserve additions have been modest at US$6.0m. Strengthening on the Syndicate's motor and liability classes reflecting a more conservative view of the development tail has been offset in part by releases on older years of account in the Syndicate; in particular in relation to catastrophe events in the 2005 and prior years of account.

Underwriting approach

Our approach to underwriting remains centred on experience and selectivity. We maintain the flexibility to respond rapidly when the market changes. We seek to expand the portfolio in a hard market and reduce as the market softens. Short tail property insurance and reinsurance has traditionally been the mainstay of the Group, and such business will continue to be the dominant part of our account. We will continue to expand our existing liability accounts, mainly through the issuance of small commercial "package" policies in the USA and specialist non-US treaty liability business.

In 2010, Syndicate 958 ceased writing direct offshore energy business and reduced its aggregates on the property treaty reinsurance account. For 2011, we have also reduced our exposure to retrocessional reinsurance business which drove many of our losses on the international account in 2010.

During 2010, we also introduced catastrophe modelling via AIR's proprietary model. This is widening our outwards reinsurance purchasing ability by enabling us to provide industry standard data to potential reinsurers. Additionally, the output gives us an opportunity to compare our own data with industry standard benchmarks and refine our own assumptions and procedures. The outputs have also been integral to an overall review of our reinsurance program with a view to improving its effectiveness and efficiency.

Omega Underwriting Platforms

We organise our business around four main underwriting platforms, in each of our major centres of London, Bermuda, Chicago and Cologne, as detailed below.

London (Lloyd's Syndicate 958): Commenced underwriting in the Lloyd's of London insurance market for the 1980 year of account. Underwrites a diversified multi line insurance and reinsurance portfolio, with premium capacity of US$420 million for 2011 of which 40.5% is provided by Omega; Omega also has a 20.0% gross quota share of the Syndicate and therefore has an effective 52.4% share in the Syndicate's gross results.

Bermuda (Omega Specialty): Established in 2006. A Class 3B reinsurance company. Underwrites a portfolio of non-group related, mainly property reinsurance, together with intra-group quota share reinsurances of Syndicate 958, Omega US and our Lloyd's corporate member, Omega Dedicated.

Chicago (Omega US): Established in Schaumberg, Illinois in 2007 under license from the state of Delaware. Underwrites property and casualty insurance on an excess and surplus lines basis. Has eligibility to underwrite in 42 jurisdictions throughout the United States via a network of general agents.

Cologne (Omega Europe): Established in 2003 as a cover holder, underwriting on behalf of Syndicate 958. Underwrites UK, European and other proportional and non-proportional reinsurance business.

Gross written premium by IFRS operating segments (US$ m):

Classes of Business

Omega underwrites the following classes of business:

Property catastrophe treaty reinsurance: containing both US and worldwide treaty business. The US treaty portfolio has a predominantly regional and multi regional focus but also contains some nationwide accounts. Whilst our main focus remains on clients with more localised portfolios, we will take advantage of opportunities presented by a hardening of the market for larger capacity programmes. The international catastrophe excess of loss portfolio is focused on better regulated and more financially secure regions such as the UK, Northern Europe and Japan. We also look to take advantage of opportunities to write better priced business in areas of lower accumulation hazard such as South Africa and India.

Property per risk treaty reinsurance: focused on reinsuring individual risks on small and medium size insurance companies but again maintaining the ability to write larger accounts when opportunities are presented.

Non-marine property insurance: predominantly small-ticket commercial property business written on a surplus lines basis through general agents across the United States; more property insurance is now being written as part of a "package policy", combined with general liability coverage and occasionally other ancillary coverage. This strategy helps avoid some of the price pressure on mono-line property cover.

Marine insurance and reinsurance: a modest account of yacht hull business with a small amount of brown water hull business plus a small book of non-Gulf of Mexico windstorm energy excess of loss and general marine excess of loss business. Between 2007 and 2010 the Syndicate underwrote a direct energy book of business both Onshore and Offshore. A decision has been taken not to write direct energy business in 2011.

Liability insurance and reinsurance: mainly artisans' liability written on a surplus lines basis, under binding authorities, and general liability as part of packaged products with commercial property business. Also contains some liability excess of loss. These are specialised accounts where we expect to see growth potential.

Motor insurance and reinsurance: focused on motor excess of loss and motor insurance in the UK and Europe. The account is written in Cologne by Omega Europe.

Professional indemnity insurance: professional indemnity account focused on small, non-financial insureds in the US, Canada and Europe. The business is largely written via binding authorities on a claims made basis.

Other: contains space, kidnap and ransom and personal accident. Space business is written through three specialist consortia.

Lloyd's Syndicate 958 (London)

Omega's Syndicate 958 operates at Lloyd's and comprises the Group's main platform for sourcing insurance and reinsurance business. It has premium capacity of US$420 million (2010: US$420 million) for the 2011 year of account, and its Insurer Financial Strength Rating (IFSR) was reaffirmed at A (Excellent) by A.M. Best in September 2010.

Lloyd's of London is the world's leading specialty insurance market, with more than 80 syndicates and gross written premiums of nearly £22 billion in 2009. It is a major market for the placement of specialist risks in classes such as property, casualty, marine, aviation and reinsurance. Lloyd's offers a number of benefits to its underwriting members including a worldwide network of licenses, a strong and efficient capital structure, well developed distribution through dedicated Lloyd's brokers and a reputable brand. Risks are placed in Lloyd's via subscription placement whereby several syndicates take a share of an insurance contract rather than one carrier taking 100%. This facilitates the spreading of large and complex risks across a number of carriers and hence reduces the counterparty risk of clients.

The Group derives business from Syndicate 958 through its participation via our Lloyd's corporate member, Omega Dedicated - together with quota share reinsurance with Omega Specialty. For the 2011 year of account the Group will participate in the gross underwriting of Syndicate 958 through a 20% quota share reinsurance contract and 40.5% ownership of the remaining 80%, representing an economic interest in gross underwriting of 52.4%. We also benefit from managing agency fee income and profit commission earned on third-party member profits.

Syndicate 958 commenced underwriting in Lloyd's for the 1980 year of account and has a track record of unbroken profitability over all years of closed account the past 29 years. The focus of the portfolio has been predominately on short tail, diversified property orientated insurance and reinsurance with a core of small to medium-sized insureds and reinsureds, with many of whom the Syndicate has long-standing relationships. Business is also sourced via its service company, Omega Europe which was established in Cologne in 2003 to complement the development of Syndicate 958's European reinsurance account, primarily motor reinsurance. It offers clients access to all of Syndicate 958's services and is able to facilitate the placement and servicing of reinsurance business with the Syndicate.

In 2010 Omega's participation on Syndicate 958, together with quota share reinsurance accounted for gross premiums written of US$244.9 million (2009: US$166.7 million) and net earned premium of US$169.7 million (2009: US$140.1 million). The Group's derived participation in Syndicate 958 generated a combined ratio of 112.7% (2009: 84.3%) and an underwriting loss of US$(21.4) million (2009: US$22.0 million profit). This loss was primarily due to the increased incidence of natural catastrophe and large loss events compared with 2009.

The 2008 year of account has closed with a return on capacity of 3.5 % which falls within the published forecast range of 0%-5%. The forecast range for 2009 is 5%-10% (previously 5-15%) and for 2010 is (2.5)%-7.5 %.

For the 2011 year of account, the Syndicate has maintained its capacity at US$420 million. However we have reduced our planned gross premium income due softening rates, expecting to utilise 79.4% of its capacity.

Syndicate 958 forecast profit by year of account

Omega Specialty (Bermuda Reinsurance)

Omega Specialty is our Bermudian class 3B reinsurance company that has an Insurer Financial Strength Rating (IFSR) of A- (Excellent) by A.M. Best. It was established in 2006 and started underwriting in 2007. It underwrites third-party business originated in the Bermudian reinsurance market. It also sources income via several intra-group quota share reinsurance contracts as follows:

·; Quota share reinsurance of 20% of Syndicate 958's gross whole account;

·; Quota share reinsurance of 50% of Omega US net whole account;

·; Reinsurance of Omega Dedicated through which Omega Specialty assumes the risk of the majority of the share of Syndicate 958's capacity owned by the Group.

Omega Specialty's third-party reinsurance portfolio is primarily focused on US and international property catastrophe treaty reinsurance. It also underwrites 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 OSIL 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 Omega Specialty underwrote gross written premium of US$65.2 million (2009: US$ 63.0 million). The combined ratio increased to 129.9% from 49.3% in 2009 due to the increased incidence of international catastrophic events during the year. In January, the US catastrophe margins were more acceptable than the international catastrophe margins but we believe a deterioration of rates will continue throughout 2011 in the absence of a major loss in the US, Europe or Japan. Business will therefore be flat or fall marginally until conditions improve.

Omega US (Chicago)

Omega US is the Group's US underwriting platform and is based in Schaumberg, Illinois. The company 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 increased by 27.1% to US$46.0 million in 2010 (2009: US$36.2 million). Gross earned premium increased by 69.6% to US$41.9 million (2009: US$24.7 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 2011.

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 2011. 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.

Outlook for 2011

The market landscape remains highly competitive with high levels of industry capital and a softening rating environment - a trend further encouraged by the lack of US Eastern Seaboard land-falling hurricanes during 2010. Many classes are now seeing a real profitability squeeze. Pricing at the important 1 January reinsurance renewals was broadly down, with average rate reductions on US catastrophe business of between 5-10%.

Rates on international catastrophe business fell by 3-12%, despite the losses incurred by the Chile and New Zealand earthquakes. European reinsurance rates were generally flat with the UK down. In comparison the risk excess of account stood up reasonably well as it continued to be priced based upon loss experience and changes in exposure.

Rates on the direct property account are expected to rise in some loss affected zones such as New Zealand and Australia. The UK is generally flat with some small increases seen on commercial property, whilst the US remains competitive which has led to the withdrawal of some carriers.

Market pricing for some longer-tail classes remains under pressure and signs of a market correction are not yet evident with several new entrants trying to gain market share. In response we will continue to exercise underwriting discipline in these areas and wait for adequate margin to return. Elsewhere, motor reinsurance rates are steady and have been affected by the general rate rises experienced in the UK motor insurance market during 2010.

Catastrophes aside, the underlying profitability track continues to be downwards. However, Omega will continue to shrink in areas where profitability is most challenged and continue to manage the book to navigate the bottom of the cycle, as it has in the past.

Financial Review

(1) Net earned premium less net insurance claims, net acquisition costs and other underwriting operating expenses

(2) Calculated on average equity for the period, including non-recurring items.

Premiums

Gross premium income written by the Group for the period has increased by 34.0% to US$356.1 million (2009: US$265.8 million) due to the growth in Group owned capacity on Syndicate 958, following our capacity purchase in 2009, coupled with growth in the US business. On a segmented basis the movement was as follows:

·; Bermuda third party reinsurance was steady at US$65.2 million (2009: US$63.0 million)

·; Omega US grew by 27.1% to US$46.0 million (2009: US$36.2 million)

·; The business derived from by Syndicate 958 grew by 46.9% to US$244.9 million (2008: US$166.7 million)

Premiums written by Omega Specialty in Bermuda have remained steady in the face of increasing competition in the Bermuda reinsurance market and resulting pricing pressure in some areas.

Omega US continues to grow steadily and selectively with its gross premium written increasing from US$36.2 million in 2009 to US$46.0 million in 2010. However, given the competitiveness of the surplus lines property and casualty market place where Omega US operates, it is envisaged that premiums will be steady in 2011.

Premium income from the Group's share of Syndicate 958 rose by 46.9% to US$244.9 million. The Group's share of Syndicate 958 underwriting is driven by three factors:

·; The underlying level of premium in the Syndicate in US dollar terms

·; The scale of the quota share between Syndicate 958 and Omega Specialty

·; The level of Group participation on Syndicate 958

The underlying Syndicate premium written in US dollar terms fell marginally as rating in some lines came under pressure and the Syndicate drew back on its volumes as it historically has done in such circumstances. The quota share has remained at 20% for 2009 and 2010 years of account and has been renewed at the same level for the 2011 year of account.

For 2010, the Group's participation on the Syndicate increased from 16.4% to 38.8%, as a result of the capacity purchase in 2009. This has increased to 40.5% for the 2011 year of account, as a result of capacity acquired by the Group during the Lloyd's capacity auctions in September 2010.

Reinsurance

Reinsurance premiums for the period have increased from US$66.5 million in 2009 to US$87.7 million in 2010. The increase is a result of the Group's increased share of Syndicate capacity and the Group increasing its catastrophe reinsurance protection in order to protect the Group's aggregate exposures.

Claims

The Group's claims experience in 2010 has been severely impacted by the significant catastrophe losses experienced by the market together with a worsening of attritional loss ratios arising from rate softening. This compares to 2009 which was a much more benign year in terms of catastrophes and when rates were stronger albeit beginning to soften in the second half.

The Group's claims reserves are dominated by its share of Syndicate 958's reserves deriving from the Omega Specialty's quota share of the Syndicate since 2006 and the Group's share of Syndicate capacity. As a result of these arrangements the Group share of the Syndicate reserves is much more heavily weighted to the more recent years of account and the Group does not benefit as significantly from releases of older underwriting years which have taken place in the Syndicate.

As explained in the Chief Executive's Review, the Group has experienced approximately US$55.0m of catastrophe claims in the year and foregone approximately US$10.0m of agency profit commission as a result. We believe that the Group has reserved for these catastrophes on a prudent basis reflecting the significant uncertainty around their ultimate cost to the Group.

Attritional claims are driven by two factors: rate conditions and claims inflation. Whilst we have seen some claims inflation as is typical in a recessionary economy, a key driver of our result has been the insurance market conditions driven by excess capital in the market. As a result of these rate conditions our net attritional loss ratios on our Syndicate derived business have increased by approximately 6.0% for the 2010 financial year compared to 2009.

At the same time, as highlighted in our half year results announcement we took the decision in these market conditions and following a detailed actuarial review to strengthen our claims reserves of certain lines of business including liability, professional indemnity and motor. In the second half of the year these reserves have held up well without the need for further strengthening. At the same time, with reducing uncertainty the Syndicate has released some reserves on catastrophe claims on older years of account. Looking at the year as a whole the Group has strengthened prior year reserves by US$6.0m.

The net loss ratio is heavily influenced by the level of reinsurance spend in the group and the related level of recoveries. In 2010, the focus of the reinsurance program was on protecting the Group from catastrophe exposures in the US, the Gulf of Mexico, Europe and Japan. The highly unusual level of catastrophe activity in other zones meant that our reinsurance recoveries were limited and our net loss ratio was correspondingly worsened. As noted in the Chief Executive's review the Group's reinsurance program has been the subject of significant scrutiny by the Board and will be enhanced in 2011 supported by the Group's increasing modelling capabilities.

Income from management of Lloyd's Syndicate 958

Omega Underwriting Agents receives income from the management of Syndicate 958 by way of a managing agent's fee and a profit commission. The agency fee is paid to the agency for the management of a year of account. The year of account is normally closed at the end of the third year with work on that year of account continuing into the first quarter of the fourth year. The agency fee, calculated as 0.75% of capacity is therefore recognised over the three open years of account and a small proportion in the fourth year reflecting the costs of closing of the year of account and associated reporting.

Profit commission is payable to the Agency by the Syndicate upon closure of a profitable underwriting year, in effect three years after each underwriting year has commenced. It is calculated as 20% of the Syndicate's profit attributable to non-Group Names and is recognised in line with the underlying earnings of the Syndicate for each underwriting year.

Income from the management of the Lloyd's Syndicate has decreased from US$15.9 million in 2009 to US$1.3 million. Profit commission was materially impacted by the increased level of catastrophe and major losses which affected the Syndicate's profitability on both 2009 and 2010 years of account, together with the rise in attritional losses impacting 2010.

Fees that our managing agency earns from third-party members on Syndicate 958 have fallen, from US$2.6 million in 2009 to US$2.2 million in 2010, due to the increase in the Group's ownership of capacity in the 2010 year of account compared with the 2009 year of account.

Investment return

Market environment in 2010

Fixed income markets in 2010 were driven by uncertainty over whether there would be a double dip recession and concerns over the Eurozone sovereign debt crisis. Allied to this central banks continued to add liquidity, with differing degrees of success, in order to stimulate economic growth but often this merely added further volatility to the markets. Bond yields continued to fall throughout the year. 2 year treasury yields fell from 1.10% to a low of 0.35% before rising at the end the year back towards mid- year levels of 0.6% in response to stronger economic data and an increase in risk appetite. The belief that rates would need to remain low to avoid the dangers of slipping back into recession, fuelled a rally in the equity markets during the second half of the year.

Omega benefited throughout the year from its high allocation to government bonds although it has recently made the decision to reduce the government bond holdings in favour of more spread products which we believe to better suited to the current market outlook.

Changes to investment strategy

Asset allocation decisions are made by the Investment Committee and during the year a new investment committee was formed, supported by an experienced investment professional. The new committee reviewed the appropriateness of the investment strategy and process and at the November Investment committee meeting initiated some key improvements to take place in 2011.

The decision was made to manage the assets using a blended benchmark approach, rather than to a government bond index. The asset allocation to date has been more conservative than typically found in similar insurance companies and it was decided that, when opportunities arose, we would modestly increase the allocation to Agency, Agency MBS and corporate bonds and reduce the exposure to government bonds. The Group has successfully kept its cash holdings, where returns have been low, to minimum levels without affecting the liquidity of the portfolio.

Omega pays particular attention to managing and controlling investment risk and limits have been set by the Board that ensure that the risks taken are in-line with the Group's low risk appetite. The Group uses an outsourced CIO service to monitor investment risks and to advise the Investment committee on asset allocation.

The overall duration of the portfolio is 1.30 years which is marginally shorter than last year reflecting our continuing defensive stance as we expect to see interest rates rise in 2011.

Performance

The Group's investments produced a total return of US$12.4m (1.94%) compared to 2009: US$16.3m (2.79%). The investment return for 2010 compares favourably to last year where the return, before gains on foreign exchange forward contracts, was 1.90%, up from 1.69% last year.

The return was largely driven by US government bond yields falling throughout the year from a high of 1.15% in 2 year treasuries to 0.6% at the end of the year. Omega had an average of 70% of its assets in government bonds throughout the year and these assets benefited from the fall in yields.

(1) All foreign exchange forward contracts had closed at 31 December in each year.

Outlook for 2011

Interest rates are more likely to rise than fall in 2011 as economies continue to recover and signs of inflation emerge. Investment grade credit, bonds that trade at a spread over government bonds, provide some cushion as rates rise in the form of higher running yields and this asset class is likely to remain attractive to investors. Omega has increased its allocation to corporate bonds in its benchmark and the managers will selectively diversify the portfolio as opportunities arise.

Risks to the general improving economic scenario are that the austerity measures, accompanied by higher taxes, cost push inflation and higher oil prices could stall economic growth and tip the US or Europe back into recession. High unemployment and the continuing housing crisis in the US significantly reduces the risk of inflation taking hold and for this reason Omega will continue to keep an allocation to government bonds, whilst modestly broadening its asset allocation into other fixed income classes.

Commission

Net acquisition costs predominantly consist of commissions paid to brokers on gross premiums ($61.9m) together with small elements of profit commission and overrider payable to the Syndicate under the quota share between Syndicate 958 and Omega Specialty. Net acquisition costs are recognised in line with the earning profile of the underlying premium. The key driver of these costs is therefore gross premium earned.

Net acquisition costs as a percentage of gross premiums earned have fallen in the year as a result of some non-renewed business in Omega Specialty with a high commission ratio and a credit arising on profit commission payable by Omega Specialty to Syndicate 958 due to loss experience in the year. Partially offsetting this has been an increase in business written by Omega US which has a higher commission ratio than other parts of the business.

The absolute increase in net acquisition costs payable has been driven by the increase in the Group's share of Syndicate capacity in 2010.

Group Expenses

Total costs have increased during the year as a result of the increase in the Group's share of Syndicate capacity. The Group's share of Syndicate expenses is included within Other underwriting expenses. The increase in the Group's share of the Syndicate for the 2010 Year of Account accounts for US$4.6m of the increase in other underwriting expenses in 2010.

In addition to this the Group's expense base has increased in line with the Group's investment in operational infrastructure by recruitment of staff in operational, risk management, actuarial, finance and IT functions. This has been partially offset by reductions in the level of bonuses accrued in line with the Group results for the year. The table below shows the average number of individuals employed by the Group during the year. Some of the costs associated with these employees are borne by third party capital providers of Syndicate 958.

Foreign Exchange

To the extent possible, the currencies of assets and liabilities are matched to minimise the effect of volatility on the Group's profit and shareholders' equity. Surplus assets are held in US dollars. The majority of the Group companies have US dollars as their functional currency which served to reduce accounting exposures.

Group has recognised a foreign exchange gain of US$2.1 million, compared with a loss of US$0.2 million in 2009. This gain has arisen on non-dollar assets and liabilities held by Group companies.

Taxation

The Group's effective tax rate for the period is 0.3% (2009: 7.3%). As the Group is domiciled in Bermuda underwriting results largely fall to the Bermuda insurance company and are not subject to tax. The pre-tax loss experienced in 2010 has not therefore generated a significant tax credit. In 2011 we would expect the Group's effective tax rate to return to a similar level to 2009.

During 2010 the Group took advantage of a short term tax advantage available to UK corporate members, which provides a significant tax timing benefit. This has resulted in a significant current tax credit ($9.5m) in 2010 which is offset by an increased deferred tax liability.

Capital and Dividends

The table below summarises the Group's capital position:

The Group determines the level of capital it requires considering regulatory and rating agency requirements as well as its own view. Our regulators, including the FSA, Lloyd's, the Bermuda Monetary Authority (BMA), the Delaware Department of Insurance and the National Association of Insurance Commissioners (NAIC) each set minimum solvency requirements locally for our individual businesses. A.M. Best sets additional capital requirements in order to maintain an A- insurer financial strength rating ("IFSR") for each of Syndicate 958, Omega Specialty and Omega US. A margin above these minimums is held to protect against short term fluctuations.

The vast majority of the Group's capital is held in Omega Specialty. Omega Specialty has regulatory capital levels to maintain, however the main driver of capital is the amount required to maintain an A- ("Excellent") IFSR under A.M. Best's Capital Adequacy Ratio methodology - the Best Capital Adequacy Ratio ("BCAR"). The BCAR contains a quantitative evaluation that risk weights premiums, assets and reserves to determine a required level of capital. This number is then compared to available economic capital after being stress tested for events such as above-normal catastrophes, a decline in equity markets and a rise in interest rates. Other factors such as operating performance, market profile and enterprise risk management practices also impact the final BCAR. Additionally, for a start-up company with less than 5 years of track record the required level of capital for an A- ("Excellent") IFSR is uplifted to 175%. We expect the 175% uplift to fall during 2011, but for prudence have not assumed this effect when determining our required capital at year end.

For Syndicate 958, Omega Underwriting Agents Limited is required to submit an Individual Capital Assessment (ICA) to Lloyd's. The ICA, sets the level of capital required in the business that is equivalent to a BBB insurance financial strength rating. The ICA is then uplifted to support Lloyd's higher financial strength rating of A+ (Excellent). For 2011, Omega Dedicated, our Lloyd's Corporate Member, supports 40.5% of Syndicate 958 with the remaining share of the Syndicate supported by third party capital. Of this Group support, 15.0% is retained by Omega Dedicated, with 85.0% being provided by Omega Specialty via a reinsurance arrangement with Omega Dedicated. In addition to the above, Omega Specialty participates in a 20.0% whole account quota share with Syndicate 958. The 15% retained by Omega Dedicated requires capital to support it in terms of depositing Funds at Lloyd's. The funds at Lloyd's required capital ratio for Omega Dedicated is approximately 45% of capacity for the 2011 year of account. The element quota shared to Omega Specialty is supported by Funds at Lloyd's supported by Omega Specialty. This requirement of Omega Specialty is taken into account when calculating but the regulatory requirements and BCAR for Omega Specialty and therefore there is no additional capital requirement.

Omega US is also rated by AM Best A-(Excellent). However, the key driver of capital at this stage in its development is the NAIC risk-based capital formula which sets a minimum statutory capital requirement (excluding Deferred Acquisition Costs) of US$45 million.

With the introduction of Solvency II there are a number of changes to the regulatory environment. Lloyd's is at the forefront of the implementation of Solvency II

Initial estimates suggest that the industry capital loads will increase based on the standard formula approach to the Solvency Capital Requirement adopted by Solvency II. Parameterisation and detailed guidance are still in development. However the regime does give the option for an insurer to create its own internal model to calculate required capital. This model should be externally validated and core to running the business. It should also demonstrate a more appropriate level of capital. Like other industry players we have been working on the development of our own internal capital model during 2010 to ensure appropriate capitalisation in the future.

The BMA is aiming to achieve recognition that its regime is "equivalent" to Solvency II regime.

To this end, Omega Specialty produces the Bermuda Solvency Capital Requirement "BSCR" for the first time in 2011 which will then form the regulatory minimum capital requirement and submits its internal model on a dry run basis in Q2 2011. Whilst there is uncertainty over the resulting capital requirements, it is not the Board's expectation that these will exceed the capital levels required to maintain the Group's A-(Excellent) A M Best rating.

In the context of a loss making period, the Board considered that an interim dividend of 6.0c should be paid out of capital, reflecting the Board's commitment to returning excess capital to shareholders.

At the full year, in light of the final balance sheet position, the Board again considered whether there should be any further return of capital. In this review the Board considered:

·; The volatility of the business and the status of actions being taken to address this;

·; The uncertainties associated with losses early in the year from the Australian floods and New Zealand earthquake;

·; The greater transparency offered by the catastrophe modelling now in place;

·; The potential impact of Solvency II on capital requirements;

·; The expectation that AM Best will reduce the capital requirement for Omega Specialty given it has reached its fifth year of trading;

·; The sufficiency of the current capital base to support the planned business.

The Board considered that, although they are confident that the capital requirement will reduce as a result of reaching 5 years trading and the steps taken to reduce volatility, given the uncertainties at this stage there should be no further return of capital or dividend.

The Board remains committed to paying a substantial proportion of the Group's annual profits to shareholders. It will also review the capital position again at the 2011 interim stage.

Finally, the Group is near finalisation of a revolving credit facility to offer flexibility and enable the Group to take advantage of future business opportunities.

2010 Group Financial Statements

Consolidated Income Statement

Year ended 31 December 2010

Consolidated Statement of Comprehensive Income

Year ended 31 December 2010

Consolidated Statement of Financial Position

As at 31 December 2010

Consolidated Statement of Changes in Equity

Year ended 31 December 2010

Year ended 31 December 2009

Consolidated Cash Flow Statement

Year ended 31 December 2010

Notes to the Consolidated Financial Statements

1. GENERAL INFORMATION AND ACCOUNTING POLICIES

Omega Insurance Holdings Limited ("the Company") is a limited liability company incorporated and domiciled in Bermuda, whose shares are publicly traded on the London Stock Exchange.

Basis of Preparation

The consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), both as adopted for use by the European Union ("EU"), and applied in accordance with the provisions of the Bermuda Companies Act 1981.

Consolidated financial statement values are presented in US dollars rounded to the nearest US$'000 unless otherwise stated.

Basis of Consolidation

The consolidated Financial Statements incorporate the accounts of Omega Insurance Holdings Limited and all its subsidiary undertakings ("the Group") drawn up to 31 December 2010.

The Financial Statements of subsidiaries are prepared for the same reporting year as the parent company. Consolidation adjustments are made to convert subsidiary Financial Statements prepared under local GAAP into IFRS so as to remove any accounting policy differences that may exist.

The Group's share of the transactions, assets and liabilities relating to its Syndicate participation is included in the consolidated Financial Statements.

Intra-group transactions and balances between Group companies are eliminated.

Changes to accounting requirements applicable to these Financial Statements

New and amended standards and interpretations

The accounting policies adopted are consistent with those of the previous financial year, except for the following IFRS amendments and IFRIC interpretations effective as of 1 January 2010:

·; IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)

·; IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results.

·; IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as for the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests.

·; These new requirements have had no effect on the Omega Group.

·; IFRS 8 Operating Segments (amended): the amendment clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. It is effective for annual periods beginning on or after 1 January 2010 and applied retrospectively. The Group's segment assets and liabilities are not used by the chief operating decision maker hence are not reported in the Financial Statements.

Standards issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group's Financial Statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective.

·; IAS 24 Related Party Disclosures (Amendment)

The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarifies the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The Group does not expect any impact on its financial position.

·; IFRS 9 Financial Instruments: Classification and Measurement

IFRS 9 as issued reflects the first phase of the Boards work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the Board will address classification and measurement of financial liabilities, hedge accounting and derecognition. The completion of this project is expected in 2011. The adoption of IFRS 9 will have an effect on the classification and measurement of the Group's financial assets. However, the Group determined that the effect shall be quantified in conjunction with the other phases when issued to present a comprehensive picture.

·; Improvements to IFRSs

The IASB issued improvements to IFRSs, which consists of amendments to its IFRS's. The amendments have not been adopted by the Group as they become effective for annual periods beginning on or after either 1 July 2010 or 1 January 2011. The amendments listed below are considered to have an impact on the Group:

·; IFRS 3 Business Combinations

·; IFRS 7 Financial Instruments: Disclosures

·; IAS 1 Presentation of Financial Statements

·; IAS 27 Consolidated and Separate Financial Statements

The Group expects no impact from the adoption of the amendments to its financial position.

Significant accounting judgements, estimates and assumptions

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods.

Judgements

The key accounting judgements applied by management in these Financial Statements relate to accounting estimates. The judgements applied in significant accounting estimates are set out below.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. These related primarily to valuation of insurance liabilities, investments and intangible assets.

Foreign currency translation

The Group's results and financial position are presented in US dollars which is also the parent company's functional currency. Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

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. Non-monetary assets and liabilities, being those 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.

The results and financial position of Group entities which have a different functional currency are translated into the Group's presentational currency as follows:

·; assets and liabilities are translated at the closing rate at the balance sheet date

·; income and expenses are translated at average exchange rates

All resulting exchange differences are recognised in the statement of comprehensive income.

Insurance contracts

a) Premiums

Written premiums comprise premiums on contracts incepted during the financial year as well as adjustments made in the year to premiums written in prior accounting periods. Estimates are made for pipeline premiums, representing amounts due but not yet notified.

For delegated authority business estimates of how much business will attach to a facility are based on experience and information provided by the broker. Estimates are updated on a regular basis. It is assumed that risks attaching to the master facility incept evenly across the period of the facility and therefore only that proportion of risks that have incepted to the master facility by the balance sheet date are reported within written premium in these Financial Statements.

All premiums are shown gross of commission payable to intermediaries and are exclusive of taxes and duties levied thereon.

Written premiums are earned over the period of the policy on a time apportionment or more appropriate basis, having regard to the exposure of the risk.

b) Reinsurance premium ceded

Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards business being reinsured.

c) Unearned premiums

The provision for unearned premiums represents the proportion of gross written premium which is estimated to relate to exposures in subsequent financial periods. The change in the unearned premium provision is taken to income so that revenue is recognised in accordance with the period of risk.

d) 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. Deferred acquisition costs are amortised over the period in which the related revenue is earned.

Claims

a) Insurance claims

Claims incurred comprise the estimated cost of all claims occurring during the period, whether reported or not, including related direct and indirect claims handling costs and adjustments to outstanding claims provisions from previous periods.

b) Insurance contract liabilities

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 ("IBNR") at the balance sheet date based on statistical methods.

These methods generally involve projecting from past experience of the development of claims over time to form a view of the likely ultimate claims to be experienced for more recent underwriting, having regard to variations in the business accepted and the underlying terms and conditions. For the most recent years, where a high degree of uncertainty arises from projections, estimates may be based on assessments of the business accepted and underwriting conditions. The Group does not discount its liabilities for unpaid claims. Where applicable, deductions are made for salvage and other recoveries.

The reinsurers' share of provisions for claims is based on the amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the year and the current security rating of the reinsurance companies involved.

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 income statement of later periods.

c) Liability adequacy test

Provision is made where the expected cost of claims and expenses arising after the end of the financial period from contracts concluded before that date exceeds the provision for unearned premiums, net of deferred acquisition costs, premiums receivable and related investment return.

Investments

a) Financial assets at fair value through the income statement

The Group has classified its financial investments as "fair value through income" to the extent that they are not reported as cash and cash equivalents. This classification has been determined by management based on the decision at the time of acquisition and reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. The fair values of quoted financial investments are based on current bid prices. Unlisted investments for which a market exists are stated at the average price at which they are traded on the balance sheet date or the last trading day before that date. Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and subsequently re-measured at fair value based on quoted bid prices. Investments are derecognised when they have been sold. Changes in the fair value of investments are included in the income statement in the period in which they arise.

b) Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are based on observable market conditions. Changes in the fair value are recognised immediately in the income statement.

c) Investment return

Investment return comprises all investment income, realised investment gains and losses and movements in unrealised gains and losses.

Realised gains and losses on investments are calculated as the difference between sale proceeds and purchase price. 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 investments disposed of in the current year.

The Group's investment strategy is based on an objective of maximising the Group's investment return whilst preserving the Group's capital. The investment return is measured based on the income received and the fluctuations in the market value of investments. Designation of the Group's investments at fair value through the profit and loss is therefore consistent with the Group's investment strategy.

Income from management of Lloyd's Syndicate

Income from management of Lloyd's Syndicate comprises; agency fees, management fees and profit commission charged by the Group to third party members of Syndicate 958.

Agency fees relating to a year of account are recognised by the Group over four years, with the majority recognised in the first year, in line with the services provided. Management fees relate to expenses incurred by the Group which are recharged to the Syndicate and are recognised in the same period as the related expense.

Profit commission is receivable on closure of the relevant Lloyd's year of account, normally after three years. It is recognised by the Group as earned on an annual basis to match the related underwriting profits. Profit commissions due after more than one year are held at fair value which is the discounted present value of the nominal amount expected to be received.

Other expenses

Other underwriting operating expenses are recognised on an accruals basis. These comprise expenses directly attributable to the Group's underwriting operations. They include the Group's share of Syndicate operating expenses and the costs of membership of Lloyd's. Also included are operating expenses in Bermuda and in the US which are attributable to underwriting operations.

Other corporate expenses are recognised on an accruals basis. They comprise other group operating expenses not attributable to underwriting.

Employee benefits

a) Pension

The Group provides defined contribution pension schemes for the benefit of employees. Contributions are charged to the income statement in the same period as the related service is provided.

b) Share based payments

The Group operates a number of executive and employee share schemes. In accordance with IFRS 2 the fair value of equity-settled share-based payments to employees is determined at the date of grant and is expensed on a straight-line basis over the vesting period based on the Group's estimate of shares or options that will eventually vest. In the case of options granted, fair value is measured by a binomial model the material inputs of which are: share price at date of the grant; expected dividend yield; expected volatility; risk free interest rate and employee turnover.

When the options are exercised, the proceeds received, net of transaction costs, are credited directly to equity. When employees forfeit share options on departure from the Group, amounts previously charged to the income statements in relation to the forfeited options are credited to the income statement.

Income taxes

The tax expense represents the sum of the current tax and deferred tax.

a) Current income tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because items of income and expense are taxed in different periods, and it excludes items that are never taxed or deducted. The Group's liability for current tax is calculated using tax rates applicable as at the balance sheet date.

Current income tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the current tax is also dealt with in equity.

b) Deferred income tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding amounts used in the computation of taxable profit, and is accounted for using the balance sheet method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered, or to the extent that it has been utilised.

Deferred tax is calculated at the tax rates based on the enacted or substantially enacted tax laws expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation and any 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

Computer hardware - over 3 years

An item of property and equipment is derecognised 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 recognised directly in the income statement.

Intangible assets

a) Software development

Computer software development costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets, and are amortised using the straight line method over their useful lives, not exceeding a period of three years. Amortisation commences when the asset is available for use.

Computer software development costs are subject to an annual impairment review. The amount of any impairment is recognised directly in the income statement.

b) Syndicate participation

Syndicate capacity purchased is recognised at cost. It is considered to have an indefinite useful economic life and is therefore not amortised.

Syndicate capacity is reviewed at each balance sheet date for impairment by reference to the future expected profit streams of Syndicate 958 and the amount of any impairment is recognised directly in the income statement.

Insurance receivables

Insurance receivables are recognised and carried at the recoverable amount. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount is greater than the recoverable amount, with the impairment adjustment recorded in the income statement.

Provisions

A provision is recognised when it is probable that a present legal or constructive obligation, as a result of a past event, will result in an outflow of resources and when a reliable estimate of the amount of the obligation can be made.

Leases

Rentals payable under operating leases are taken to the profit and loss account on a straight line basis over the lease term.

Trade and other payables

Trade and other payables are recognised on an accruals basis, based on amounts owed at the balance sheet date.

Operating segments

The Group's operating segments have been identified as follows:

·; Group reinsurance of, and participation on, Syndicate 958.

·; Omega Specialty (other reinsurance) which is the non-Syndicate and non-US derived business written by Omega Specialty in Bermuda.

·; Omega US Insurance which is the contribution to the Group from Omega US ignoring the effects of intra-group reinsurance.

·; Omega Underwriting Agents - which show the results for managing the non-Omega share of Syndicate 958 and includes profit commission and agency fees received for managing the Syndicate.

·; Other group activities - which show the results of transactions that do not relate to any of the segments above, being primarily those of the Group's ultimate and intermediate holding companies.

2. SEGMENTAL INFORMATION

(i) Income statement by segment

Year ended 31 December 2010

2. SEGMENTAL INFORMATION (continued)

(i) Income statement by segment

Year ended 31 December 2009