Orascom Inv Regulatory News (OIH)

RNS Number : 4217I

Omega Insurance Holdings Limited

11 March 2010

 

Omega Insurance Holdings Limited

Results for the 12 months to 31 December 2009

Omega Insurance Holdings Limited, the international insurance and reinsurance group, today announces its Full Year results for the 12 month period to 31 December 2009.

Highlights

 

·; Profit before tax up 67% at US$47.1 million (2008: US$28.2 million), US$50.7 million excluding non-recurring corporate expenses

·; Profit for the year of US$43.6 million (2008: US$22.2 million)

·; Gross premium income of US$265.8 million (2008: US$265.4 million)

o significant growth in new operating platforms in Bermuda and US

o offset by reductions in share of the Syndicate premium

·; Loss ratio of 49.3% (2008: 76.0%)

·; Combined ratio of 81.4% (2008: 101.4%)

·; Investment return of 2.8% (2008: 5.8%)

·; Earnings per share of 18.6 cents (2008: 15.1 cents)

·; Return on average equity of 9.8% (2008: 7.5%)

·; Final dividend of 6.5 cents per share, equating to a total dividend relating to the financial year of 12.5 cents per share (2008: 11.3 cents), being 70% of profit after tax

 

Richard Tolliday, Chief Executive Officer of Omega said:

 

"Omega delivered a strong performance in 2009, with a notable underwriting contribution and healthy margins on a historic basis, whilst maintaining our prudent approach to reinsurance buying and investment. We have continued to drive outstanding performances from our US and Bermuda platforms, while in the UK we have more than doubled our underwriting capacity in Lloyd's Syndicate 958 for the 2010 account. All of these developments put us in a very favourable position to move positively into 2010 and beyond."

 

Enquiries

Richard Tolliday, Chief Executive Officer, Omega +1 441 294 6610

 

Media Enquiries:

Byron Ousey/Michael Turner, Kreab Gavin Anderson +44 (0)20 7074 1800

 

Analyst Enquiries:

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

Lucia Langella-Rahn/Andy Jones, Kreab Gavin Anderson +44 (0)20 7074 1800

 

 

Key Performance Indicators

Indicator	2009	2008
Gross written premium	US$ 265.8m	US$ 265.4m
Basic earnings per share	18.6 US cents	15.1 US cents
Investment return	2.8%	5.8%
Group combined ratio	81.4%	101.4%
Dividend per share	12.5 US cents	11.3 US cents
Profit for the year	US$ 43.6m	US$ 22.2m
Net assets	US$ 496.0m	US$ 283.6m
Return on equity	9.8%	7.5%
Net assets per share	203.7 US cents	192.1 US cents

 

 

 

CEO's Review

The results of the Group for the year ended 31 December 2009 are set out in the Consolidated Income Statement on page 25.

Introduction

2009 was characterised by low levels of claims incidence and a benign US hurricane season coupled with a challenging investment environment. Industry capital levels have been restored following the catastrophe losses of 2008 and pricing in key reinsurance lines has come under pressure at the important 1 January renewals season. However margins still remain healthy on an historic basis and we expect overall rating pressure to be restrained by continued low investment yields. There will be others that outperform us in a year such as 2009 given our prudent approach to reinsurance buying and investment. However as conditions become more challenging we believe that the continued application of our disciplined underwriting approach will underpin Omega's profitable performance as has been the case through past market cycles.

For Omega, 2009 was a watershed year. The Group finalised its share placing of £124.0 million (US$178.6 million) net of expenses in January, moved to the Main Market of the London Stock Exchange and completed a capacity offer for Syndicate 958 in July. The Group has more than doubled its share of Syndicate 958 capacity, from 16.4% to 38.8% for the 2010 year of account onwards, with the capacity acquired at an attractive price. Further, Omega US has established itself in the US Excess and Surplus lines market, achieving gross premiums of US$36.2 million (2008: US$10.8 million) in the period. These developments are encouraging for the Group and put us in a very strong position to move forward positively into 2010 and beyond.

2009 Financial Performance

Profit before tax increased by 67.0% to US$47.1 million (2008: US$28.2 million), based on gross written premiums of US$265.8 million (2008: US$265.4 million). Our underwriting contribution is notable, achieving a loss ratio of 49.3% (2008: 76.0%). This is reflective not only of a benign claims environment during the year but also of the underlying strength of our underwriting.

The pre-tax result comprises a profit of US$36.5 million (2008: loss of US$3.0 million) from underwriting activities, a profit of US$15.9 million (2008: US$23.5 million) from managing agency activities and US$16.3 million (2008: US$21.8 million) from investment income with recurring corporate expenses of US$18.3 million (2008: US$18.0 million), non-recurring expenses of US$3.6 million (2008 US$ nil) and other income, net of finance costs and foreign exchange gains/losses, of US$0.3 million (2008: US$3.9 million).

Profit for the year was US$43.6 million (2008: US$22.2 million) and earnings per share were 18.6 US cents (2008: 15.1 US cents) equating to a return on equity of 9.8% (2008: 7.5%). The board is pleased to declare a final dividend of 6.5 US cents per share (2008: nil final, 1.0 US cents special interim). Along with the interim dividend of 6.0 US cents per share (2008: 10.3 US cents) that was declared and paid on 28 October 2009, this equates to a distribution of 70% of the Group's post tax profit for the period and a total dividend for the year of 12.5 US cents per share, an increase of 10.6% over the previous year (2008: 11.3 US cents). The size of the dividend demonstrates Omega's continued commitment to pay out the majority of profits to shareholders.

Net asset value per share increased by 6.3% to US$2.04 (2008: US$1.92) demonstrating the continued strength of the Group's balance sheet and capital position.

    Corporate Developments

Capacity Offer

2009 was a busy time for the Group. We completed our share placing in January 2009, raising £124 million (US$178.6 million), net of expenses, in order to take advantage of favourable underwriting conditions. This enabled the Group to acquire additional underwriting capacity on Syndicate 958. In July we successfully completed the acquisition of third party capacity on Syndicate 958, which together with further purchases in the Lloyd's Capacity Auctions in November, increased our share of capacity on Syndicate 958 to 38.8% from 16.4% for the 2010 year of account. Capacity was acquired at an average price of 40.6 pence per £ of capacity during the Capacity Offer and at a price of 35.6 pence per £ of 2010 capacity (equivalent to the 40p cash consideration offered in the July Capacity offer) in the November Auctions. We believe that this capacity was acquired at an attractive price. Earnings will begin to flow from our increased share in the Syndicate in 2010, with the full benefit being seen in the 2011 results.

Move up the Main Market of the London Stock Exchange

On 7 July the Group was admitted to the Official List of the London Stock Exchange, a move that had been announced in December 2008. The Board regards the move as an important next step in building the profile of the Group within the investment community and in its corporate development as an international insurance group. Omega appointed JP Morgan Cazenove as joint broker in March and a new Head of Investor Relations in January 2010.

Chief Underwriting Officer

On 4 September 2009, the Group announced that Daria Vanous was succeeding John Robinson as Active Underwriter of Syndicate 958 for the 2010 year of account, a change first announced in March, as part of Mr Robinson's succession plan. On 29 October 2009, Daria was also appointed Chief Underwriting Officer of the Group. Mr Robinson ceased to be a Director and Chief Underwriting Officer on the same date. Information on the reasons for Mr Robinson's leaving the Group are set out in the Company's Special General Meeting Circular to the shareholders dated 18 February 2010 ("SGM Circular").

Daria Vanous joined the Omega group in 2003 as an international property reinsurance underwriter, prior to which she was chief executive of Europa Re in Cologne. She joined Europa Re in 1999, having begun her career in reinsurance in Oslo working first with Storebrand and then Uni-Polaris and has in total more than 24 years' experience as an underwriter. Whilst with Omega, Daria has spent time working in the Lloyd's operation and in 2005 moved to Cologne to lead the successful Omega Europe operation.

Daria shares the cautious underwriting philosophy that the Group has had since its establishment.

Board Composition

In March 2010 Coleman Ross joined the Board as a Non-Executive Director and Chairman of the Audit Committee. His focus on corporate governance is already proving invaluable to the Group. Christopher Clarke was also appointed as the Group's first Senior Independent Director in November, having joined the Board in March 2005. In November, we commenced a formal search for a new Chairman to succeed Walter Fiederowicz, following agreement with the Board that he would step-down to focus on his other business commitments.

As announced on 7 and 23 December 2009, the Company has received communications on behalf of Invesco, our largest shareholder, calling for the Company to convene a Special General Meeting (the "SGM") to consider resolutions (the "Resolutions") to remove Walter Fiederowicz and Christopher Clarke as Directors and to appoint six additional directors, namely John Coldman, James Bryce, Robin Spencer-Arscott, Jonathan Betts, Ernest Morrison and David Cooper (the "Proposed Directors") with the result that the Proposed Directors would together control the Board.

On 5 January 2010, in an effort to achieve a consensual outcome to the communications sent on behalf of Invesco, the Board offered to appoint Mr Coldman as Chairman and James Bryce and Robin Spencer-Arscott as non-executive directors, and Walter Fiederowicz also agreed to step down as a non-executive Director. However, no response was received to this proposal from Invesco.

On 26 January 2010, the Board was asked on behalf of Invesco and certain other shareholders to appoint the Proposed Directors and to remove Walter Fiederowicz and Christopher Clarke. In addition, John Coldman requested that the remaining non-executive Directors agree to stand down when he asks them to do so and at the latest before the 2010 annual general meeting. The Board has been in dialogue with most major shareholders of the Company and, while the communications on behalf of Invesco did not constitute legally binding notices of requisition under Bermuda law, the Company acknowledged and wished to facilitate the right of all shareholders to have the opportunity to vote on the Resolutions for the appointment of the Proposed Directors by convening the SGM. Accordingly, on 29 January 2010, the Group announced its intention to convene an SGM and on 18 February 2010, a SGM Circular was posted to shareholders confirming the date of the SGM as 12 March 2010. The Company's intention in this is to ensure the implementation of any changes are resolved by shareholders at the SGM, which is the appropriate forum to effect the change of control of the Board.

Each of Walter Fiederowicz and Christopher Clarke has confirmed to the Company that he will step down as a Director if the Resolutions are passed in light of the Invesco Proposals calling for his removal. Accordingly, Messrs Fiederowicz and Clarke have a conflict of interest in making a recommendation to shareholders as to how they should vote at the SGM. The "Independent Directors" in this context means all of the Directors other than Messrs Fiederowicz and Clarke.

Each of the three other non-executive Directors of the Company, Clifford Palmer, Coleman Ross and Nicholas Warren, has informed the Company that he intends to step down as a Director if the Resolutions are passed.

The Independent Directors do not however believe that this change of control of the Board would be in the best interests of the Company and the shareholders as a whole for the reasons set out in the SGM Circular. These include the breach of several important principles of good corporate governance which would result from the constitution of the Board of Omega following the passing of the Resolutions and the implementation of the Invesco Proposals.

On 19 February 2010, A.M. Best placed the ratings of Omega, Omega Specialty and Omega US under review with negative implications due to uncertainty regarding Board composition, operational management and future strategy. Their decision to put the ratings under review was prompted by uncertainty about any future Board's actions and not by any concerns about trading or Omega's financial strength. Omega is a strong business with a strong track record and a robust statement of financial position ('balance sheet').

Underwriting

Group Underwriting Result
US$'m	2009	2008
Gross premiums written	265.8	265.4
Net premiums earned	195.5	215.7
Claims incurred, net of reinsurance	(96.3)	(163.9)
Net underwriting charges	(62.7)	(54.8)
Underwriting profit/(loss)	36.5	(3.0)

 

Given our focus on catastrophe and direct property lines, our claims experience has benefited from 2009 being a relatively benign loss year, free of significant catastrophe events. This is reflected in our loss ratio which improved by 26.7 points to 49.3% (2008: 76.0%). However, we have strengthened attritional claim reserves on prior underwriting years in the Syndicate. This has been restricted to certain classes, including longer tail classes. Given the position of the cycle and experience to date we have taken a more prudent view of likely claims and premiums development and have therefore increased our reserving margin over the actuarial best estimate, produced by our independent actuaries, for prior years to take account of this. This reserve increase has been offset largely by the reinsurance protection afforded to us by our aggregate whole account reinsurance protection although this has resulted in reduced profit commission on those contracts.

The recent 1 January 2010 renewals season indicated that rates have softened. US catastrophe business has seen reductions of between 5% and 10%, whereas larger nationwide business has remained flat. Non-US business has seen smaller reductions albeit from a smaller base. Premium rates across Omega's portfolio decreased marginally during 2009. Overall, however, Omega's account is still affording attractive margins. There are some signs that the remainder of the year may see a further weakening of market conditions. The Chief Underwriting Officer and the underwriting team will be applying the disciplined approach to underwriting for gross profit that has underpinned Omega's profitable performance through past market cycles. They will not hesitate to decline business should margins become unacceptable.

Risk Management

With the closure of the 2007 underwriting year of account, Omega Syndicate 958 continues its year track record of unbroken profitability, where we have consistently outperformed the wider Lloyd's market. Clearly, the experience and technical expertise of the underwriting team is seen as paramount in maintaining this track record. Moreover, we continue to develop and refine our approach to risk governance, in tandem with the regulators and our rating agency, A.M Best.

During 2009, we appointed a Chief Actuary and Head of Internal Audit together with additional actuarial and finance headcount. A new Head of Risk joins us in April 2010. We are also improving our risk and capital modelling capability, via the implementation of AIR Wordwide's catastrophe models and the ReMetrica dynamic financial analysis software, both of which are considered to be vital to evolving our enterprise risk management program.

We made significant progress in the latter part of 2009 with our internal model and risk reporting framework and will be working closely with Lloyd's and the FSA throughout 2010 to ensure the Group meets both its internal and external deadlines for Solvency II.

Capital and Financial Strength

The Group continues to demonstrate considerable balance sheet strength. Of the £124.0 million (US$178.6 million) share placing concluded in January 2009 approximately half was deployed to support the acquisition of 22.4% of capacity on Syndicate 958 and the associated increase in capital required, as prescribed by Lloyd's and A.M. Best. The majority of the remainder will be deployed to further support underwriting on the Omega Specialty and Omega US platforms.

As was communicated at the time of the placing, should the rating environment become less favourable or there is a major change to our business plan, we will not hesitate to give back to shareholders any surplus capital. At this stage we will maintain our dividend at approximately 70% of profit but the capital position of the Group, in the context of the overall market, will be kept under review.

Summary and Outlook

2009 has been a year of major accomplishments and testing challenges for Omega. The successful acquisition of a further 22.4% of the capacity of Syndicate 958 and the move to the Official List are tangible testaments to the delivery of stated goals. 2009 has produced a good underwriting result and the dividend is again declared at 70% of post-tax profit. Since its flotation in 2005, Omega has laid out a clear vision and strategy and delivered on every component of it. The Group is now optimally positioned with its operations in Bermuda, the U.S., London and Cologne to pursue the prudent development of its underwriting by adhering to the same principles and disciplines on which its enviable track record has been built.

Omega's successes are the result of the enthusiasm, dedication, skill and effort of its people. We would like to thank everyone in Omega for giving again their very best in a year that has provided a most testing backdrop. They have reason to be proud but we know they will not be complacent. They strive to serve Omega's clients with a consistency and constancy that earn respect and loyalty in a market where such qualities are often scarce.

The Company also owes a significant debt to Walter Fiederowicz who, as Chairman, skilfully steered the Group through its transition to a public company and along its path of growth and development to where it stands today. He has sought always to ensure that preservation of the fundamental strengths of Omega's approach to underwriting and risk was accorded the highest priority. Walter announced his intention in November to step down as Chairman in order to pursue his many other business interests.

As noted above, Christopher Clarke was appointed Senior Independent Director in November. Thanks are due to him for tirelessly contributing enormous effort and significant time to carrying out that role involving intensive communications with shareholders through a difficult period.

The Board has faced many hard decisions in 2009 bringing to each a concern only for what was in the best interests of the Company and the entirety of the shareholder base. The decisions of the Board have been all the stronger for the vigorously independent approach with which each director has brought their own experience and knowledge to bear. It has eschewed what might have been easy options and has sought to carry out to the full its duties and responsibilities.

Omega faces the future with many good reasons to be confident.

 

Operating Review

Omega Syndicate 958

 

Overview

Omega Syndicate 958 was established in 1979 to commence underwriting for the 1980 year of account. It has achieved a remarkable record of 28 consecutive years of unbroken profit, making it one of the best performing syndicates in Lloyd's. It has a capacity of US$420 million for the 2010 year of account (2009: US$496 million) and during 2009 its Insurer Financial Strength Rating (IFSR) was reaffirmed by A.M. Best at A (Excellent).

The Group derives business from the Syndicate through a combination of its participation via the Omega Dedicated corporate member and through quota share reinsurances with Omega Specialty as detailed in the table below.

Syndicate 958 Capacity and profit forecasts

Year of account	2010	2009	2008	2007
Effective capacity	US$420m	US$496m	US$478m	US$441m
Omega retained share of capacity	38.8%	16.4%	16.4%	15.2%
Quota share reinsurance with Omega	20.0%	20.0%	20.0%	27.5%
Forecast profit as a % of stamp capacity	n/a	5-15%	0-5%	16.4%

 

From the 2010 year of account, Omega will participate in the gross underwriting of the Syndicate through the 20.0% quota share and 38.8% of the remaining 80.0% representing an approximate economic gross underwriting interest of 51.2% prior to Managing Agency profit commission. Some outwards reinsurance from the Syndicate does not inure for the benefit of the quota share. Where this is the case the Group buys its own reinsurances.

During 2009, Omega concluded a capacity offer with third-party members that, together with capacity acquired at the Lloyd's November Auctions, increased its share of Syndicate 958 from 16.4% to 38.8%.

Underwriting focus

The Syndicate has focused predominantly on short-tail, diversified property orientated insurance and reinsurance with a focus on small to medium sized insureds, with whom the Omega Group has built long-standing relationships. 

Major classes underwritten include:

·; Non-marine property insurance	·; Motor insurance and reinsurance
·; Property catastrophe treaty	·; Energy and marine insurance and reinsurance
·; Property per risk treaty reinsurance	·; Liability insurance and reinsurance
·; Professional indemnity insurance	·; Other lines including Satellite and Personal Accident

 

 

2009 developments

The table above shows that Syndicate 958 has closed the 2007 year of account with a return on capacity of 16.4% which falls within the published forecast range of 12.5% to 17.5%.

The forecast range for 2008 has been reduced to 0% to 5% (previous forecast range of 0% to 10%) in response to an active strengthening in respect of both claims expectations and reduced premiums. Confidence remains that the underwriting year will generate a profit, thereby preserving the Syndicate's unbroken profit track record.

The 2009 year has seen strong rate correction on energy business in response to the losses on Ike and Gustav and continuing strong margins on catastrophe reinsurance rates. This coupled with relatively benign catastrophe loss experience during 2009 and positive underlying attritional performance permits a profit forecast of 5% to 15%. This is a prudent estimate in that it reflects the relative infancy of the year; given that significant elements of the account are yet to run-off which could be affected should there be a catastrophe event in the first half of 2010. It is also made against the backdrop of a year that will see the effects beginning to emerge for many insurers of the international financial crisis and the worldwide recession.

For the 2010 year of account, the Syndicate chose to reduce capacity from US$496 million to US$420 million. We believe that rates will come under increasing pressure given the benign loss experience in 2009 therefore leading to business not being renewed or participations reduced.

Outlook

 

The Syndicate remains confident that there continue to be margins in the rates on its core lines of business for profitable return. There remains concern, however, that increasing industry capacity, in part resulting from the benign loss experience in 2009, will exert downward pressure on rates. This has been taken into account within the 2010 business plan but in line with the Syndicate's proven response to the underwriting cycle, should such circumstances deteriorate then action will be taken to safeguard profit margins.

Omega Europe

Omega Europe is a cover-holder company that was established in Cologne in 2003 to complement the development of Syndicate 958's European reinsurance account, particularly 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.

The Cologne team offers a single point of contact for clients and brokers for all reinsurance business enquires relating to underwriting, claims, documentation, wordings and accounting. 

All business sourced through Omega Europe is written by Syndicate 958.

Omega Specialty (Bermuda Reinsurance)

Underwriting focus

Omega Specialty underwrites third-party reinsurance business through the Bermuda reinsurance market and has a similar profile to its peers in the market, focusing primarily on property catastrophe treaty reinsurance (approximately 70% of premium income) in the United States (approximately 75% of premium income). Other classes underwritten include property per risk treaty reinsurance, non-marine property insurance and marine insurance and reinsurance. The type of reinsurance risks underwritten by Omega Specialty tends to be of a similar nature to that historically seen on Syndicate 958.

 

2009 developments

·; Rates started off well in Q1 on the tail of Hurricane Ike and the credit crunch but with the rapid restoration of balance sheets, post-capital raising, we saw rates begin to soften by the end of Q2. The market softened further as the lack of major hurricanes in Q3 coupled with improving economic conditions led to a recovery for the industry.

·; During 2009 premium income grew by 44% to US$63.0 million from US$43.9 million in 2008.

 

·; Relationships with brokers and cedants have continued to develop resulting in an increase in business.

·; The loss ratio is attractive due to the absence of catastrophe events during 2009 and positive run off of 2008 underwriting year reserves.

·; With the recent growth in the portfolio, 2009 was the right time for Omega Specialty to build on its infrastructure. Three new team members joined during the year - a head of finance, an assistant underwriter and an IT/business analyst - bringing the total headcount to 5 personnel. These new recruits are industry experienced and will further enhance the development of the Omega Specialty franchise.

Outlook

 

We expect to see a softening market given the lack of catastrophes during 2009. Rates are down 5% to 10% but from a strong base, with key January 1st renewals written at the same level as in 2009. Given this backdrop we aim to carefully manage the size of the portfolio to 2009 levels, but expect additional spread of cedants throughout the portfolio. Overall, margins remain attractive and Omega Specialty is well positioned and established for growth at the relevant stage of the market.

Legal Entity - Omega Specialty

 

Omega Specialty is a Bermudian reinsurance company. Its Insurer Financial Strength Rating (IFSR) of A- (Excellent) is currently under review by A.M. Best pending clarity over the future composition of the Group Board, management team and strategy following the SGM.

 

As well as the business written in the Bermuda reinsurance market described above, Omega Specialty also sources income subject to annual renewal via:

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

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

Omega US

Omega US Insurance, Inc. ("Omega US") is a wholly owned subsidiary of the Omega Group and is the Group's US underwriting platform. Based in Schaumburg, Illinois, Omega US is incorporated and licensed in the state of Delaware and underwrites property and casualty business on an excess & surplus lines basis throughout the US. Excess & surplus lines are specialist risks which fall outside the standard criteria used by US domestic insurers. To date Omega US has been granted eligibility to write business in 42 US jurisdictions, and continues to seek eligibility in the remaining US jurisdictions.

Omega US was capitalised at US$50 million from the proceeds of a share placing conducted by Omega Group in October 2006 and is rated A- (Excellent) by A.M. Best. As for Omega Specialty this rating is under review by A.M. Best pending clarity following the SGM.

 

Underwriting focus

The Company commenced underwriting in the first quarter of 2008 and is developing a portfolio of business similar in nature to the direct property account written by Syndicate 958. It targets small and medium-sized commercial business and seeks to underwrite in those geographic areas in the US where it avoids clashing with Syndicate 958's property catastrophe account. It is intended that Omega US complement Syndicate 958, by sourcing business through existing agents and distribution channels that would not ordinarily be offered to Syndicate 958.

2009 developments

During 2009, Omega US continued to make steady progress. Gross premiums grew to US$36.2 million (2008: US$10.8 million). Achievements during 2009 include:

·; Obtaining licences to write excess and surplus lines business in Minnesota and New Mexico;

·; Signing agreements with 3 new general agents. This brings the number of signed agreements with general agents to 34; and we expect to appoint more throughout 2010;

·; Continuing to build the operational infrastructure of the business including bringing the finance function in-house;

·; Recruiting a Chief Financial Officer together with additional underwriting and accounting personnel, bringing the total headcount to 11 full-time employees.

US Excess & Surplus Lines Market

The current state of the US Excess and Surplus Lines market continues to be challenging and property rates in certain areas have flattened. Where Omega US does not consider the terms available will allow a good opportunity for profit, it has not participated in such business. General Liability business is being impacted by the weak economy and while rates are holding, the underlying exposures (and thus premiums available) have reduced significantly. However, as the economy recovers, we believe there will be opportunities in general liability particularly but also in property.

Outlook

 

The outlook for 2010 remains positive, with Omega US looking to continue to develop and grow the business we have with existing agents as we did successfully throughout 2009. We expect to continue to appoint new agents if and when the correct opportunities present themselves and to add to management, underwriting and operational head-count as growth continues.

Underwriting

Overview of 2009 rating environment 

Following the hurricane losses of 2008 and the emergence of the global financial crisis, we opened the year with expectations of steady and prolonged rate hardening, especially in catastrophe-exposed classes of business, such as US property catastrophe reinsurance, energy and US property insurance.

In catastrophe classes, in particular the US, we did see prices strengthening in the first half of the year but this was not consistent across the portfolio. Prices began to flatten over the course of the second half of 2009 and then soften at the January 2010 renewals season. This was exacerbated by the absence of major catastrophe losses during the Atlantic hurricane season. Nonetheless US catastrophe rates are still very attractive and so far softening has remained relatively disciplined with 5% to 10% reductions on accounts that have had no loss activity.

Longer tail lines continue to see rate pressure. Given the challenging investment environment we still anticipate rates taking a more sensible course.

 

Classes of business

Omega underwrites the following major classes of business:

 

Class Description	Rating Outlook
Property catastrophe treaty reinsurance: a core account principally containing small lines on regional insurance companies across the US which provides a degree of inherent diversification. The focus is on regional and supporting nationwide and international catastrophe excess of loss.	Rating remains attractive but signs of overcapacity in the market could lead to further softening. International rating is under the most pressure.
Property per risk treaty reinsurance: focused on reinsuring individual risks on small to medium size insurance companies.	Pricing has fallen but margins remain healthy.
Non-marine property insurance: predominantly small-ticket commercial property business written on a surplus lines basis through managing general agents across the US.	The market has weakened but as this is small-ticket business written under binding authorities the competition is not as strong and therefore margins are still positive. Rating is still strong in catastrophe exposed areas. We are maintaining our selective approach to underwriting and continue to work closely with the managing general agents.
Energy & Marine insurance and reinsurance: predominantly an offshore energy account with some yacht business.	Energy rates are expected to weaken. Sufficient margin is still expected in 2010.
Liability insurance and reinsurance: mainly ''trip and fall'' and artisans liability written on a surplus lines basis under binding authorities as part of a packaged product with commercial property business and now US reinsurance is written on an excess of loss basis.	Rates remain flat at present but downward pressure is expected going forward.
Motor insurance and reinsurance: largely an ex USA motor reinsurance account written via Omega Europe.	The rating environment is flat however new capacity is entering the market.
Professional indemnity insurance: focused on small non-financial insureds across the US, with little sub-prime exposure. Distributed via a network of managing agents.	Rates in this class have been under pressure in recent years and market conditions continue to be challenging.

 

Approach to underwriting

Our approach to underwriting remains solid and consistent with our traditional knowledge and expertise. We envisage no change in overall underwriting strategy but don't rule out tactical variation in the weighting of classes in response to evolving market conditions.

We are reviewing our reinsurance programme with the introduction of catastrophe modelling to improve our data in line with reinsurers' expectations, thereby giving greater certainty to smooth volatility and reducing the potential basis risk from large loss events through purchasing catastrophe excess of loss protection rather than industry loss warranties.

The underwriting team is led by Daria Vanous who has over 24 years' underwriting experience in the reinsurance market. We are moving towards a more team orientated approach to underwriting, reinsurance purchasing, reserving and aggregate management, where we can leverage the breadth and depth of underwriting experience across the organisation.

Risk management

Omega's Risk Management Framework is described in detail on page 67 under note 37 Group's framework continues to focus on the following categories of risk at operating level.

Insurance: The risk of loss arising from the inherent uncertainties in the occurrence, amount and timing of insurance liabilities and premiums.	Credit: The risk of loss if a counterparty fails to perform its obligations or fails to perform them in a timely fashion.
Market: The risk arising from fluctuations in values of, or income from assets, in interest rates or in exchange rates.	Liquidity: The risk arising from insufficient financial resources being available to meet liabilities as they fall due.
Group: The risk arising from the potential effect of risk events of any nature arising in or from membership of a corporate group.	Operational: The risk resulting from inadequate or failed internal processes, people and systems or from external events, including regulatory control failures.

 

As an international insurance and reinsurance Group, Omega's core activity has been and remains that of managing underwriting risk. It is the underwriting risk (including underwriting, reserving and claims) that continues to be the single largest risk factor faced by the Group. The management of this risk by our experienced underwriting and claims teams is seen as paramount in maintaining the group's track record.

The Group's Risk Management Framework continues to evolve and develop, responding to commercial needs and the changing risk environment in which it operates. These changes include the move to the Main Market of the London Stock Exchange in July 2009 and progressing towards the implementation of Solvency II throughout Europe in 2012 and its equivalent standard in Bermuda. Following a review of the Group's governance structures in the fourth quarter 2009 we are establishing new risk focused committees within the organisation. These Risk Committees will have specific responsibility for overseeing the introduction of additional risk management procedures and practices that will be required as the Group continues its development.

In order to assist with the management of these changes the Group has recruited senior experienced hires in the roles of Chief Actuary and Head of Internal Audit; in addition a newly recruited Risk Manager joins the Group on 1 April 2010. These appointments demonstrate our commitment to establishing clearly defined functions of risk management, compliance, internal audit and actuarial as subscribed under the principles of Solvency II. Each of these new hires will have active roles to play as we continue to develop our in-house management capabilities in these areas in 2010 and beyond.

We have also added to our capital and risk modelling capability. Firstly, with the introduction of ReMetrica software that will provide the Group with a dynamic financial capital modelling platform. This will be utilised to assist in ensuring the efficient utilisation of capital within the group. Secondly throughout 2010 we are introducing AIR Worldwide's catastrophe modelling services. The AIR models will be used as an additional risk management tool and will not be used to change the fundamental approach we have to underwriting.

The introduction of the new senior hires and modelling capabilities, together with our existing underwriting expertise and risk management framework will ensure that the Group is well placed to:

·; enhance current risk management practices and procedures,

·; assist in identifying and mitigating emerging risks; and

·; deliver the required framework to obtain Solvency II (and its equivalence) model approval.

 

Examples of Omega's key trading risks and controls
Key Risk	Controls to mitigate risk
Underwriting risk: ·; Unexpected frequency of large individual risk losses ·; Unexpected frequency or severity of catastrophe losses ·; Increased frequency or severity of attritional losses ·; Adverse development in reported losses and IBNR	·; Maximum underwriting limits ·; Aggregate exposure monitoring ·; Ongoing monitoring of loss ratios ·; Purchase of appropriate reinsurance programmes
Credit risk: ·; Counterparties including reinsurers and intermediaries failing to meet with their obligations to meet obligations in full or in a timely fashion.	·; Evaluation of reinsurance providers ·; Monitoring of reinsurance asset outstanding recoverable ·; Monitoring of settlement due dates for inwards premiums
Market risk: ·; Underperformance of investment portfolio ·; Sensitivity to interest rate fluctuations	·; Investment guidelines and asset allocation ·; Benchmark returns ·; Monitoring of portfolio performance ·; Management of outsourced fund managers

 

 

Financial Review

Summary Income Statement
US$'m	2009	2008	Change %
Gross premiums written	265.8	265.4	0.2%
Net premiums written	199.3	224.6	-11.3%
Net premiums earned	195.5	215.7	-9.4%
Underwriting return	36.5	(3.0)	1316.7%
Investment return	16.3	21.8	-25.2%
Income from management of Lloyds' Syndicate	15.9	23.5	-32.3%
Group expenses (net of other income)
- Group expenses - non-recurring items	(3.6)	-	100.0%
- Group expenses - other	(18.3)	(18.0)	1.7%
Other income, foreign exchange (losses)/gains and finance costs	0.3	3.9	-92.3%
Profit before tax	47.1	28.2	67.0%
Profit for the year	43.6	22.2	96.4%
Net assets	496.0	283.6	74.9%
Net tangible assets	453.0	281.3	61.0%
Per share amounts (in US cents)
Earnings	18.6	15.1	23.2%
Dividends	12.5	11.3	10.6%
Net assets	203.7	192.1	6.0%
Group operating ratios
Claims ratio	49.3%	76.0%	-35.1%
Commission ratio	28.6%	21.7%	31.8%
Other underwriting expense ratio	3.5%	3.7%	-5.4%
Combined ratio	81.4%	101.4%	-19.7%
Investment return	2.8%	5.8%	-51.8%
Return on equity*	9.8%	7.5%	30.7%

*calculated on average equity for the period, including non-recurring items.

Summary Statement of Financial Position
US$'m	2009	2008
Intangible assets	43.0	2.3
Investments and cash	610.2	429.2
Insurance receivables	43.1	30.0
Reinsurance assets	88.9	98.1
Other assets	65.7	78.2
Total assets	850.9	637.8
Loss reserves	211.4	211.1
Unearned premiums	93.6	84.7
Other liabilities	49.9	58.4
Total liabilities	354.9	354.2
Net assets	496.0	283.6
Net assets per share	US $2.04	US $1.92
Net tangible assets per share	US $1.86	US $1.90
Number of shares (000's)	243,480	147,662

 

The Group profit for the year was US$43.6 million (2008: US$22.2 million), representing a return of equity of 9.8% including non-recurring expenses of US$3.6 million.

Premiums

Premium income for the period is flat at US$265.8 million (2008: US$265.4 million). On a segmented basis the movement is analysed as follows:

- Bermuda third party reinsurance grew by 44% to US$63.0 million (2008: US$43.9 million)

- Omega US grew by 235% to US$36.2 million (2008: US$10.8 million)

- The business generated by Syndicate 958 fell by 21% to US$166.7 million (2008: US$210.7 million)

Omega Specialty first underwrote in 2006 and since this point has been building its profile in Bermuda. We have been able to take advantage of the strong rating environment in US property catastrophe business to build the Bermuda third party reinsurance book which is approximately 70% property catastrophe treaty.

The additional state licenses obtained by Omega US in 2008 and 2009 ensured that it was in a strong position from which to achieve underwriting growth in 2009. As a result its gross premium income rose from US$10.8 million to US$36.2 million. Given the competitiveness of the surplus lines property and casualty market place where Omega US operates, it is projected that its rate of premium growth will slow for a spell while it is increasingly selective in its underwriting.

Premium income from the Group's share of Syndicate 958 fell by 21% to US$166.7 million. The Group's share of Syndicate 958 underwriting is driven by three factors:

- The underlying level of premium in the Syndicate in terms of US dollars

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

- The level of Group participation on Syndicate 958

The underlying Syndicate premium income 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 in such circumstances. In addition, Syndicate derived business fell due to changes in the quota share levels between the 2007 year of account (27.5%) and 2008 year of account (20.0%) as well as some reductions in pipeline premium estimates on the 2007 and 2008 years of account reflecting enhancements to the Group's premium estimation processes and a more prudent reserving position. The quota share has been renewed at the 20% level for the 2010 year of account.

For 2008 and 2009, the Group's participation on the Syndicate remained static at 16.4%. For 2010, the Group's premium growth will grow materially as the participation on the Syndicate increases from 16.4% to 38.8% as a result of the successful capacity offer.

Reinsurance

Reinsurance premiums for the period have increased from US$40.8 million in 2008 to US$66.5 million in 2009. The increase is a result of the Group moving to a more catastrophe focused portfolio in 2009 to take advantage of the strong rating environment in US property catastrophe. Reinsurance spend has increased to protect the Group's aggregate exposures.

Claims

	2009	2008
Gross Claims Ratio	43%	72%
Net Claims Ratio	49%	76%

 

In contrast to 2008, 2009 has been a benign year from a catastrophe claims perspective and the loss ratios for 2009 reflect this.

As well as the contribution from short-tail classes the loss ratio incorporates reserve strengthening in a number of areas. Specifically, as highlighted in the SGM Circular, the Group has strengthened reserves on longer tail classes such as motor, professional indemnity and liability. This reflects the Syndicate's belief that the softening of the cycle can lead to slower claims notifications. The recessionary pressures are having the effect of deteriorating attrition on both the professional indemnity and the liability accounts. Much of this strengthening occurs in the 2008 year of account. When this effect is combined with the loss ratio impact of Hurricane Ike on the year of account, our whole account reinsurance protections are triggered resulting in reinsurance recoveries, despite the clean nature of the 2009 underwriting year.

As noted, pipeline premium estimates on the 2007 and 2008 underwriting years have also been reduced reflecting a more prudent approach to those estimates. We would typically expect a reduction in premium estimates to result in reduced claims expectations however, the strengthening of claims reserves has offset the benefit of this effect. Much of this deterioration however is captured by the whole account reinsurance protections.

Where the Group is reflecting recoveries on whole account protections, there are reductions in profit commission receivable and increases in reinsurance premium payable reflecting the terms of those contracts.

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 reimburses the agency for the costs of 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 and is recognised in line with the underlying earnings of the Syndicate for each underwriting year.

Income from management of Lloyd's Syndicate	2009 US $'m		2008 US $'m
Profit Commission with US Dollars as the functional currency for Omega Underwriting Agents	11.5		10.9
Agency Fees	2.6		3.0
Management charges to the Syndicate	1.8		1.6
Sub-total	15.9		15.5
Additional profit commission in 2008 due to use of sterling as the functional currency for Omega Underwriting Agents	-		8.0
Total	15.9		23.5

 

In 2009, the Group revised the functional currency of the managing agency to US dollars from pounds sterling reflecting the dominant effect of US denominated transaction flows on the agencies results. Profit commission which was previously accrued by the Group in sterling (but derived from predominantly US dollar denominated underwriting) is now accrued in the underlying currencies in which Syndicate underwriting takes place.

 

This has the effect of reducing significantly the volatility in the Group's profit commission income which was previously affected by foreign exchange movements experienced by the Syndicate in calculating its Sterling results. Those foreign exchange movements were previously reversed in the Group balance sheet through equity on retranslation of the agency's results into the group reporting currency (US dollars).

 

Had this change been made at 1 January 2008, the profit commission for the full year 2008 would have been US$8.0 million lower.

 

That point aside, income from management of the Lloyd's Syndicate is broadly flat year on year with each year having a strong contribution from one underwriting year (2009 this year and 2007 in the comparative) with neither receiving a significant contribution from the weaker 2008 year of account.

Investment return

The cautious investment strategy that served to protect the investment portfolio during the extraordinary times of 2007 and 2008 was maintained throughout 2009 as many uncertainties remained in terms of the strength and sustainability of the nascent economic recovery, the ramifications of rapidly growing budget deficits and the impact of the eventual withdrawal of the unprecedented levels of government intervention and stimuli. This conservative investment strategy was applied consistently across both the directly owned investments that support the underwriting businesses and also our share of the Syndicate investments.

Asset allocation decisions are made by the Investment Committee which is responsible for setting the investment strategy, the guidelines and the appointment and monitoring of investment managers. During 2009, the Investment Committee made certain tactical decisions, starting with the reduction of cash and short term investments as central bank intervention had kept short term rates very low. These balances were reduced from 36.7% at the start of the year to 15.2% by the year end. In addition the Investment Committee decided tactically to raise the government guaranteed bond holdings from 3.9% to 11.6% and to increase the Investment Grade corporate bond holdings from 16.9% to 21.0%, although the managers were restricted from holding mortgage-backed and other asset-backed securities at that time.

The total cash and investments held within the Group increased by over 40% during 2009 to US$610.2 million (2008: US$429.2 million). This increase incorporates the net proceeds retained within the Group from our January 2009 capital raise and funds generated by our underwriting platforms.

 

 

Asset Allocation
	As at 31 December 2009					As at 31 December 2008
	Share of Syndicate funds	Corporate funds	Total funds				Total funds
	US$'m	US$'m	US$'m	%			US$'m	%
By asset type
Bonds	71.3	446.1	517.4	84.8%			271.5	63.3%
Money market	10.2	44.7	54.9	9.0%			65.1	15.1%
Cash and cash equivalents	7.9	30.0	37.9	6.2%			92.6	21.6%
	89.4	520.8	610.2	100.0%			429.2	100.0%
Bond types
Government bonds	27.0	310.6	337.6	65.3%			207.2	76.3%
Government agency	10.4	-	10.4	2.0%			7.8	2.9%
Government guaranteed	16.6	43.3	59.9	11.6%			10.5	3.9%
Municipal	0.8	-	0.8	0.1%			-	-
Corporate bonds	16.5	92.2	108.7	21.0%			46.0	16.9%
	71.3	446.1	517.4	100.0%			271.5	100.0%
			As at December 2009				As at 31 December 2008
			Total funds				Total funds
Credit rating of investment portfolio			US$'m	%			US$'m	%
AAA			465.1	76.2%			290.2	67.6%
AA			74.9	12.3%			110.2	25.7%
A			69.7	11.4%			28.8	6.7%
BBB & below			0.5	0.1%			-	-
			610.2	100.0%			429.2	100.0%

 

Performance

The Group's investments produced a total return of US$16.3 million (2.79% gain) compared to 2008: US$21.8 million (5.79% gain) in 2008. The return includes a gain of US$5.9 million (2008: US$1.7 million) from a derivative contract that protected the Group from foreign exchange movements on its capital raising. The investment return is reasonable when compared to the modest returns of the benchmark government bond 1-3 year index that returned 0.785% for the year.

The return was largely driven by the addition of corporate bonds and government guaranteed paper that experienced significant spread compression as demand for those asset classes was driven by the improved economic outlook and equity market performance.

Investment return
	Funds as at 31 December 2009	Average Investment return		Funds as at 31 December 2008	Average Investment return
	US$'m			US$'m
Share of syndicate funds	89.4	2.04%		93.4	5.32%
Corporate funds	12.2	0.14%		14.2	4.05%
Corporate funds supporting underwriting
Bermuda	448.9	1.82%		268.8	5.77%
US	59.7	1.52%		51.1	3.01%
Investment return excluding gains on forward contracts	610.2	1.69%		427.5	5.33%
Gains on foreign exchange forward contracts	n/a 1	1.10%		1.7 2	0.46%
Investment return including gains on forward contracts	610.2	2.79%		429.2	5.79%

 

1 All foreign exchange forward contracts had closed at 31 December 2009.

2 Fair values of forward contracts at 31 December 2008.

Investments by currency

Early in 2010, the Group established Sterling, Canadian and Euro investment portfolios as the holdings in these currencies reached a material level. The establishment of these portfolios allows the Group to more closely align the underlying investments with the Group's liability and liquidity profiles.

A member of Lloyd's is required to provide capital as security supporting their Lloyd's underwriting. This capital is known as Funds at Lloyd's (FAL). The amount of FAL required will vary depending on the quantum and perceived risk in the business being underwritten. During late 2009, the Group switched from providing the majority of its FAL requirements from collateralised Letters of Credit to US Treasury securities. During, 2010 the Group will look for suitable opportunities to diversify these assets away from purely US Treasuries.

 

Outlook and strategy

Omega expects the investment environment to remain challenging as interest rates are likely to be kept low for the foreseeable future. With short dated US government bond yields below the long term rate of inflation insurance portfolios risk negative real returns. Whilst two-year US bond yields trading below 1% leave little room for yields to fall should the US or other developed economies return to recession, exposure to intermediates and longer dated maturities remains vulnerable to any upward shifts in yield curves on signs of a stronger than expected recovery or inflation.

The dramatic corporate spread compression of 2009 is not expected to continue in 2010; moreover, concerns of Sovereign defaults, particularly in Europe, are likely to be a major theme in 2010. With corporate balance sheets generally strengthened over the past year or so, we would likely view any widening of credit spreads as an opportunity to marginally increase credit exposure where the enhanced yield from this asset class should provide some buffer against any rise in rates.

The Group remains risk adverse but recognises the opportunity afforded by its stronger capital base to adopt an investment strategy to target positive real returns in the prevailing very low interest rate environment. Omega therefore intends to marginally increase investment risk in 2010 by raising its allocation to non government bonds as opportunities arise.

Since October 2009 Omega has employed the services of a former experienced Chief Investment Officer to act in that capacity on an advisory basis. He has been working with Omega exploring strategies to broaden the asset allocation to enhance potential returns of the investment portfolios without significantly increasing the risk profile of the portfolios.

Commission

Commissions	2009	2008
	US$'m	US$'m
Net acquisition costs	55.8	46.7

 

Net acquisition costs have risen by 19% to US$55.8 million. Acquisition costs consist of commissions payable, expenses of underwriting new business less profit commission receivable on outward reinsurances.

As explained above, during the period the gross reserving on the 2008 Syndicate year of account has been strengthened. This has limited effect at the net level due to the whole account protections that are in place. However, profit commissions receivable on the whole account protections are reduced as a result of increased claims recoveries on these contracts. In 2009, those profit commissions represented a negative expense of US$1.9 million (2008: US$6.7 million). Another driver for the increased commissions is the higher proportion of business placed through Omega US which operates in a market with higher commissions.

Group Expenses

Group Expenses	2009	2008
	US$'m	US$'m
Other underwriting and corporate expenses:
Recurring staff costs	13.1	15.0
Recurring costs - other	12.0	11.0
Total Recurring costs	25.1	26.0
Non recurring expenses recognised in 2009	3.6	-
Total	28.7	26.0
These amounts have been allocated as follows:
Other underwriting operating expenses	6.8	8.0
Other corporate expenses - non-recurring	3.6	-
Other corporate expenses - other	18.3	18.0
Total	28.7	26.0
Non-recurring items above include the following:	2009	2008
	US$'m	US$'m
Costs associated with the Main Market Listing	2.4	-
Accrued payments in lieu of notice for John Robinson	0.6	-
Credit arising on share options due to the forfeiture of John Robinson's share options	(1.1)	-
Legal costs associated with the departure of John Robinson	0.9	-
Legal costs arising from shareholder demands for change to the Board	0.8	-
	3.6	-

 

In terms of other underwriting expenses, these have fallen from US$8.0 million to US$6.8 million. The Group's anticipated 2010 growth in business, having more than doubled our share of the Syndicate capacity, will be driven predominantly by underwriters already within the Group - so the headcount will remain unaffected though the Group's share of the Syndicate cost base will increase.

Corporate expenses include US$3.6 million of non-recurring items, being costs of completing the listing process, costs arising from shareholder demands for changes to the Board and costs relating to the departure of John Robinson. Listing costs consist of legal fees and advisory fees totalling US$2.4 million to achieve the move up to the Official List of the London Stock Exchange. The costs relating to John Robinson's departure include US$0.6 million for his salary for the remaining ten months of his twelve month notice period, a US$1.1 million reversal of costs previously borne through the income statement relating to share options now forfeited and legal costs of $0.9m. Finally, legal fees of US$0.8 million are included relating to shareholder demands for changes to the Board.

Other recurring corporate expenses have increased by 1.7% to US$18.3 million. As anticipated in the prospectus and last year's report and accounts, there have been certain investments in resource to ensure the Company is able to meet the requirements of being a Main Market company. As a result there has been some increase in headcount. That strengthening of resource to reach the level of control required for a fully listed company has continued into Q1 2010, including the appointments of the Head of Internal Audit and the Head of Investor Relations as well as actuarial and finance hires.

The table below shows headcount for the entire organisation. The costs are borne by the shareholders and third party capital providers of the Syndicate.

Average number of employees employed by the group during the year
									2009			2008
									Number			Number
Underwriting activities									27			24
Management and administration									23			19
Claims									7			4
									57			47

 

Increases in staff employed in underwriting activities relate to strengthening of the underwriting teams including the recruitment of a new underwriter on the property catastrophe account.

Staff involved management, administration and claims activities increased as the Group recruited additional staff in order to deliver the level of control and reporting appropriate for a fully listed company and to allow the bring in house of some previously outsourced activities in the US.

 

 

Foreign Exchange

To the extent possible, the currencies of assets and liabilities are matched to minimize the effect of volatility on the Group's profit and shareholders' equity. Surplus assets are held in US dollars.

The net result on revaluation is an exchange loss of US$0.2 million, compared with a gain of US$3.9 million in 2008.

	31 December 2009	31 December 2008
US$: £ closing rate	1.61	1.44
US$:£ average rate	1.57	1.85
US$: Euro closing rate	1.42	1.40
US$:Euro average rate	1.40	1.47

 

Taxation

The Group's effective tax rate for the period is 7.3% (2008: 21.3%). In 2008, as underwriting profits were depleted by Hurricane Ike, a substantial proportion of profits were derived from the managing agency profit commission which is taxable at UK rates.

Capital and Dividends

The table below is designed to explain the key drivers of our capital position:

Estimated Capital Utilisation and commitments to date	As at 31 December 2009
	US$'m
Available capital
Total equity & reserves	496
	496
Minimum required capital for credit rating and regulatory purposes:
Supporting Omega Specialty underwriting	295
Supporting Omega US underwriting	45
Supporting Omega Dedicated underwriting	13
Total capital supporting underwriting at 31 December 2009	353
Committed capital
Capital utilised increasing Syndicate participation	39
Capital committed supporting increased Syndicate participation	32
Total capital supporting additional syndicate participation	71
Final dividend 2009	16
Capital in excess of minimums including funding for future growth of Omega US and Omega Specialty	56
Percentage of available capital	11%

 

The minimum level of capital held within the Group to support underwriting is determined by both regulatory and rating agency requirements. 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.

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 2010, Omega Dedicated, our Lloyd's Corporate Member, supports 38.8% 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 total commitment of Group capital supporting Syndicate 958 for 2010 has increased reflecting the increase in business Omega is writing on Syndicate 958 due to the acquisition of capacity during 2009.

For Omega Specialty the main driver of capital is the amount required to maintain an A- IFSR under A.M. Best's Capital Adequacy Ratio methodology - the 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- IFSR is uplifted to 175%.The scale of this uplift can fall after five years.

For Omega US, the key driver of capital at this stage in its development remains the NAIC risk-based capital formula which sets a minimum capital requirement of US$45 million.

The level of capital utilisation from the capacity offer is driven by our proposed business plan spend and impact on the BCAR in Omega Specialty. The market has not strengthened during 2009 as we had hoped at the time of the placing, and our planned premium income for 2010 is reducing. Our capital position will continue to be reviewed based on the latest market position.

However, we also have to be mindful of Solvency II, which could have a material impact on our required level of capital for all insurers, including Lloyd's Syndicates. Solvency II is an updated set of regulatory requirements for insurance firms that operate in the European Union to be implemented in 2012. The proposed Solvency II framework has three central pillars:

·; Pillar 1: consists of quantitative requirements related to required capital and financial resources

·; Pillar 2: sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers

·; Pillar 3: focuses on disclosure and transparency requirements

 

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 are working on the development of our internal capital model during 2010 to ensure appropriate capitalisation in the future.

The Group's dividend policy remains clear and unambiguous; to return a substantial part of its profit to shareholders in the form of dividends. In making the decision as to the affordability of such a dividend, the Board takes into account both its current and anticipated future requirements. To the extent possible, the excess we return to shareholders.

In relation to 2009 earnings, an interim dividend was paid in October of US 6.0 cents per share (2008 interim: US 10.3 cents) and we are paying a final dividend of US 6.5 cents (2008: nil final, US 1.0 cents special interim). These dividends combined represent a distribution of 70% of the Group's profit after tax.

Purchase of Syndicate capacity during the year

As noted above, the Group purchased an additional 22.4% of the capacity on Syndicate 958 taking its share to 38.8%. The increase in the Group's share takes effect from the 2010 year of account onwards. At the end of 2010, not all of the income from the 2010 year of account will have been recognised due to the requirement to defer premium in line with ongoing risk exposures. The full benefit of the increase in capacity will therefore not be felt until the 2011 financial year, although the 2010 results will benefit from a significant uplift in earned premium income.

The income the Group derives from its share in the Syndicate capacity is based on the Syndicate's net premium income after the Syndicate's cost of the 20% quota share reinsurance with Omega Specialty (itself a source of significant premium income to the Group). As a consequence the Group's approximate effective interest in the 2010 gross underwriting of the Syndicate is approximately 51.2% after taking into account elimination effects.

The Group receives managing agency profit commission and agency fees only from owners of Syndicate capacity outside the Group. With effect from the 2010 year of account, the share of the Syndicate capacity generating profit commission will fall from 83.6% to 61.2% in line with the increased Group owned share of capacity.

 

2009 Group Financial Statements

Consolidated Income Statement

Year ended 31 December 2009

		2009	2008
	Note	US$'000	US$'000
Income
Gross premiums written	2	265,811	265,402
Premiums ceded to reinsurers	2	(66,519)	(40,783)
Net premiums written		199,292	224,619
Change in gross provision for unearned premiums		(8,837)	(11,111)
Reinsurers' share of change in the provision for unearned premiums		5,004	2,171
Net earned premiums		195,459	215,679
Investment return	3	16,323	21,827
Income from management of Lloyd's Syndicate	4	15,885	23,518
Other income		506	181
Net revenue		228,173	261,205
Expenses
Insurance claims		(110,429)	(183,687)
Insurance claims recoverable from reinsurers		14,118	19,757
Net insurance claims	14	(96,311)	(163,930)
Net acquisition costs	5	(55,837)	(46,733)
Other underwriting operating expenses	6	(6,849)	(8,024)
Other corporate expenses
- Other corporate expenses - non-recurring items	6	(3,601)	-
- Other corporate expenses - other	6	(18,292)	(17,969)
Other corporate expenses - total	6	(21,893)	(17,969)
Foreign exchange (losses) / gains	9	(171)	3,908
Finance costs	10	(58)	(235)
Total expenses		(181,119)	(232,983)
Profit before tax		47,054	28,222
Income tax	11	(3,440)	(6,010)
Profit for the year		43,614	22,212
Earnings per share - basic	12	18.6 cents	15.1 cents
Earnings per share - diluted	12	17.8 cents	14.1 cents

 

 

Consolidated Statement of Comprehensive Income

Year ended 31 December 2009

		2009	2008
		US$'000	US$'000
Profit for the year		43,614	22,212
Currency translation differences		1,192	(12,775)
Total comprehensive income for the period		44,806	9,437

 

Consolidated Statement of Financial Position

As at 31 December 2009

 

		2009	2008
	Note	US$'000	US$'000
ASSETS
Cash and cash equivalents	15	37,919	92,554
Financial investments	16	572,276	336,634
Deferred acquisition costs	5	22,063	20,379
Reinsurance assets comprising:
- Reinsurers' share of unearned premium		21,444	16,440
- Reinsurers' share of claims		32,039	28,283
- Debtors arising from reinsurance operations		35,419	53,416
Insurance receivables	17	43,065	29,995
Prepayments and accrued income	18	14,088	29,065
Other debtors	19	25,388	25,065
Current income tax assets		1	-
Deferred tax assets	11	3,256	3,218
Property and equipment	20	942	463
Intangible assets	24	42,978	2,315
Total assets		850,878	637,827
EQUITY
Called up share capital	25	24,348	14,766
Share premium account		321,085	147,918
Contributed surplus		100,000	100,000
Foreign exchange reserve		(9,990)	(11,182)
Profit and loss account		60,521	32,091
Total equity and reserves		495,964	283,593
LIABILITIES
Insurance contract liabilities comprising:
- Provision for claims reported	27	127,810	130,296
- Provision for claims incurred but not reported	27	83,545	80,789
- Provision for unearned premium	27	93,554	84,716
Trade and other payables	28	49,060	54,681
Current income tax liabilities		-	3,000
Deferred tax liabilities	11	945	752
Total liabilities		354,914	354,234
Total liabilities and equity		850,878	637,827
Net assets per share		US $2.04	US $1.92
Net tangible assets per share		US $1.86	US $1.90

 

 

Consolidated Statement of Changes in Equity

Year ended 31 December 2009

 

	Share capital	Share premium account	Contributed Surplus	Own Shares	Foreign exchange reserve	Profit and loss account	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Balance at 1 January 2009	14,766	147,918	100,000	-	(11,182)	32,091	283,593
Profit for the year						43,614	43,614
Other comprehensive income					1,192		1,192
Total comprehensive income for the period	-	-	-	-	1,192	43,614	44,806
Issue of new share capital	9,582	182,364					191,946
Share based payments	-	-	-	-	-	902	902
Dividends	-	-	-	-	-	(16,086)	(16,086)
Cost of capital raise	-	(9,197)	-	-	-	-	(9,197)
Balance as at 31 December 2009	24,348	321,085	100,000	-	(9,990)	60,521	495,964

 

 

Year ended 31 December 2008

	Share capital	Share premium account	Contributed Surplus	Own Shares	Foreign exchange reserve	Profit and loss account	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Balance at 1 January 2008	14,758	147,694	100,000	(49)	1,593	44,606	308,602
Profit for the year	-	-	-	-	-	22,212	22,212
Other comprehensive income	-	-	-	-	(12,775)	-	(12,775)
Total comprehensive income for the period	-	-	-	-	(12,775)	22,212	9,437
Vesting of own shares	-	-	-	49	-	(49)	-
Issue of new share capital	8	224	-	-	-	-	232
Share based payments	-	-	-	-	-	4,072	4,072
Dividends	-	-	-	-	-	(39,265)	(39,265)
Tax relating to share options taken directly to equity	-	-	-	-	-	515	515
Balance as at 31 December 2008	14,766	147,918	100,000	-	(11,182)	32,091	283,593

 

 

Consolidated Cash Flow Statement

Year ended 31 December 2009

		2009	2008
	Note	US$'000	US$'000
Cash flow from operating activities
Cash generated from operations	31	(174,576)	73,438
Interest paid		(58)	(2,145)
Income tax paid		(6,480)	(7,086)
Net cash inflow from operating activities		(181,114)	64,207
Cash flow from investing activities
Purchase of intangible assets		(40,694)	(2,166)
Purchase of property and equipment		(701)	(169)
Net cash (outflow) from investing activities		(41,395)	(2,335)
Cash flow from financing activities
Equity dividends paid		(16,086)	(39,265)
Issue of share capital		191,946	232
Cost of share capital issued		(9,197)	-
Net cash outflow from financing activities		166,663	(39,033)
Net decrease) / increase in cash and cash equivalents		(55,846)	22,839
Cash and cash equivalents at the start of the period		92,554	82,063
Foreign exchange currency movements		1,211	(12,348)
Cash and cash equivalents at end of period	15	37,919	92,554

 

Notes to the Consolidated Financial Statements

 

1. GENERAL INFORMATION AND ACCOUNTING POLICIES

 

Omega Insurance Holdings Limited ("the Company") is domiciled in Bermuda. The address of the registered office is provided in the Company information page.

 

Details of the Omega Group's principal activities are included in the Financial Review.

 

 

Basis of Preparation

The consolidated accounts are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IFRS") 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 $'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 2009.

 

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 different accounting policies 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.

 

Inter-company transactions and balances between Group companies are eliminated.

 

 

Changes to accounting requirements applicable to these financial statements

 

The accounting policies adopted are consistent with those of the previous financial year except as noted.

 

IAS 1 Presentation of Financial Statements (Revised)

 

The International Accounting Standards Board (IASB) issued a revised version of IAS1, which became effective 1 January 2009.

 

The revised standard requires the separation of changes in equity during a period arising from transactions with the owners of the entity in their capacity as owners, from other types of changes in equity. In compliance with the standard, items of income and expense and components of other comprehensive income have been presented in two separate statements, the Consolidated Income Statement and the Consolidated Statement of Comprehensive income.

 

Non-owner changes in equity have been presented in the Consolidated Statement of Comprehensive Income. Changes in equity arising from transactions with owners and related current and deferred tax have been presented in the Consolidated Statement of Changes in Equity.

 

 

 

 

 

 

IFRS 8 Operating Segments

 

IFRS 8 Operating Segments replaces IAS 14 Segment Reporting and is mandatory for annual financial statements for periods beginning on or after 1 January 2009.

 

IFRS 8 requires operating segments to be identified on the basis of how components of an entity are managed and based on internal reports about the entity that are regularly reviewed by the chief operating decision maker, being the Group Board of Directors, in order to allocate resources to the segment and assess its performance.

 

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

 

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

 

·; Omega Specialty (other reinsurance) which is the non-Syndicate derived business written by Omega Specialty in Bermuda. This element of the Group's results was not previously disclosed as a separately reportable segment.

 

·; Omega US Insurance which is the contribution to the Group's results 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. Other expenses for this segment include group-wide foreign exchange losses and gains.

 

The segmental analysis in note 2 reflects this new basis of segmental reporting with restated prior period comparatives.

 

IFRS 7 Financial Instruments: Disclosures

 

The amendment to IFRS 7 requires an entity to provide quantitative and qualitative analysis of financial assets and liabilities recognised at fair value based on a three-level measurement hierarchy. Furthermore, for those instruments which have significant unobservable inputs (classified as Level 3), the amendment requires disclosures on the transfers into and out of Level 3, a reconciliation of the opening and closing balances, total gains and losses for the period split between those recognised in other comprehensive income, purchases, sales issues and settlements, and sensitivity analysis of reasonable possible changes and assumptions. In addition, disclosure is required of the movements between different levels of the fair value hierarchy and the reason for those movements. Finally, the standard amends the previous liquidity risk disclosures as required under IFRS 7 non-derivative and derivative financial liabilities.

 

Entities are required to apply this amendment for annual periods beginning on or after 1 January 2009, with no requirement to provide comparatives on transition. The Group disclosures required by this amendment are set out in note 16.

 

IFRS 2 Share based payment

 

An amendment to IFRS 2 Share-based payments on vesting conditions and cancellations was issued in January 2008 and becomes effective for financial years beginning on or after 1 January 2009. As a result of this amendment, the standard now restricts the definition of 'vesting condition' to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. The Group currently does not have share-based payment schemes with non-vesting conditions attached and, therefore, this amendment has not affected the Group's financial statements.

Changes to other standards

 

In addition to the changes described above, there are various standards, interpretations, amendments and revisions applicable for the year, but only those that are relevant to the Group have been disclosed.

 

Future changes to accounting requirements

 

At the date of authorisation of these financial statements, the following standards and interpretations, applicable to the Group, which have not been applied in these financial statements were in issue but are not yet effective. These include:

 

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

 

The revised standards were issued in January 2008 and are effective prospectively for financial years beginning on or after 1 July 2009. IFRS 3 introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. IAS 27 requires that a change in the ownership interest of a subsidiary (without loss of control) to be accounted for as an equity transaction. Therefore, such a transaction 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 the loss of control of a subsidiary. Other consequential amendments were made to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28 Investment in Associates and IAS 31 Interests in Joint Ventures.

 

This will only impact future acquisitions and disposals by the Group of its interest in subsidiaries.

 

Future changes to other standards

 

In addition to the future changes described above, there are various other changes to accounting standards, interpretations, amendments and revisions that have been issued but not yet effective. These changes are not expected to have an effect on the Group when they become effective.

 

 

Estimates and assumptions

 

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

 

 

Foreign currency translation

 

The Group's results and financial position are presented in US dollars. 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.

 

As explained in note 4, from 1 January 2009, the Group has revised the functional currency used for Omega Underwriting Agents Limited to US dollars. In accordance with IAS 21, this change has been applied prospectively from that date and prior period comparatives have not been restated.

 

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, net of investment expenses, charges and interest.

 

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.

 

 

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 from its participation on the Syndicate, 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 the expense 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. They are stated net of contributions from quota share reinsurers.

 

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 direct 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 the Group has a present legal or constructive obligation, as a result of a past event, which is probable 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.

 

2. Segmental Information

 

As explained in Note 1, the Group has applied IFRS 8 Reporting Segments for the 2009 financial year and restated prior year comparatives accordingly.

 

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

1. Group reinsurance of, and participation on, Syndicate 958.

2. Omega Specialty (other reinsurance) which is the non-Syndicate derived business written by Omega Specialty in Bermuda.

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

4. 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.

5. 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.

 

(i) Income statement by segment

Year ended 31 December 2009

 

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance	Omega Underwriting Agents	Other group activities	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Gross premiums written	166,651	62,987	36,173	-	-	265,811
Gross premiums earned	175,035	57,274	24,665	-	-	256,974
Premiums ceded to reinsurers	(34,902)	(23,267)	(3,346)	-	-	(61,515)
Net earned premium	140,133	34,007	21,319	-	-	195,459
Investment return	6,526	2,466	1,416	-	5,915	16,323
Income from management of Lloyd's Syndicate	-	-	-	15,885	-	15,885
Other income	-	-	-	506	-	506
Net revenue	146,659	36,473	22,735	16,391	5,915	228,173
Expenses
Insurance claims	(85,133)	(7,119)	(18,177)	-	-	(110,429)
Insurance claims recoverable from reinsurers	11,269	-	2,849	-	-	14,118
Net insurance claims	(73,864)	(7,119)	(15,328)	-	-	(96,311)
Net acquisition costs	(41,074)	(8,134)	(6,629)	-	-	(55,837)
Other underwriting operating expenses	(3,240)	(1,527)	(2,082)	-	-	(6,849)
Other corporate expenses	(11,464)	(2,374)	(2,692)	(1,726)	(3,637)	(21,893)
Foreign exchange gains / (losses)	-	-	-	-	(171)	(171)
Finance costs	-	-	-	-	(58)	(58)
Total expenses	(129,642)	(19,154)	(26,731)	(1,726)	(3,866)	(181,119)
Profit before tax	17,017	17,319	(3,996)	14,665	2,049	47,054
Claims ratio	52.7%	20.9%	71.9%			49.3%
Commission ratio	29.3%	23.9%	31.1%			28.6%
Other underwriting expense ratio	2.3%	4.5%	9.8%			3.5%
Corporate expense ratio	8.2%	7.0%	12.6%			11.2%
Combined ratio	84.3%	49.3%	112.8%			81.4%

(i) Income statement by segment (continued)

Year ended 31 December 2009

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance			Total
	US$'000	US$'000	US$'000			US$'000
Gross written premium class analysis
Non-marine property insurance	34,789	4,357	20,079			59,225
Property catastrophe treaty reinsurance	50,336	46,453	-			96,789
Property per risk treaty reinsurance	13,141	5,318	-			18,459
Professional indemnity insurance	9,312	-	-			9,312
Motor insurance and reinsurance	11,915	-	34			11,949
Marine insurance and reinsurance	21,962	645	-			22,607
Liability insurance and reinsurance	17,628	-	16,060			33,688
Other	7,568	6,214	-			13,782
Gross premiums written	166,651	62,987	36,173			265,811

 

 

(i) Income statement by segment (continued)

Year ended 31 December 2008

 

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance	Omega Underwriting Agents	Other group activities	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Gross premiums written	210,656	43,940	10,806	-	-	265,402
Gross premiums earned	214,285	36,430	3,576	-	-	254,291
Premiums ceded to reinsurers	(31,121)	(6,560)	(931)	-	-	(38,612)
Net earned premium	183,164	29,870	2,645	-	-	215,679
Investment return	16,110	1,706	1,809	141	2,061	21,827
Income from management of Lloyd's Syndicate	-	-	-	23,518	-	23,518
Other income	-	-	-	23	158	181
Net revenue	199,274	31,576	4,454	23,682	2,219	261,205
Expenses
Insurance claims	(161,220)	(19,068)	(3,399)	-	-	(183,687)
Insurance claims recoverable from reinsurers	19,498	-	259	-	-	19,757
Net insurance claims	(141,722)	(19,068)	(3,140)	-	-	(163,930)
Net acquisition costs	(40,731)	(5,100)	(902)	-	-	(46,733)
Other underwriting operating expenses	(3,497)	(2,432)	(2,095)	-	-	(8,024)
Other corporate expenses	(7,712)	(608)	(1,988)	(1,495)	(6,166)	(17,969)
Foreign exchange gains / (losses)	-	-	-	-	3,908	3,908
Finance costs	-	-	-	-	(235)	(235)
Total expenses	(193,662)	(27,208)	(8,125)	(1,495)	(2,493)	(232,983)
Profit before tax	5,612	4,368	(3,671)	22,187	(274)	28,222
Claims ratio	77.4%	63.8%	118.7%			76.0%
Commission ratio	22.2%	17.1%	34.1%			21.7%
Other underwriting expense ratio	1.9%	8.1%	79.2%			3.7%
Corporate expense ratio	4.2%	2.0%	75.2%			8.3%
Combined ratio	101.5%	89.0%	232.0%			101.4%

 

 

 

 

(i) Income statement by segment (continued)

Year ended 31 December 2008

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance			Total
	US$'000	US$'000	US$'000			US$'000
Gross written premium class analysis
Non-marine property insurance	58,250	13,676	5,186			77,112
Property catastrophe treaty reinsurance	39,986	28,941	-			68,927
Property per risk treaty reinsurance	13,909	713	-			14,622
Professional indemnity insurance	12,578	-	-			12,578
Motor insurance and reinsurance	12,559	-	57			12,616
Marine insurance and reinsurance	47,124	-	-			47,124
Liability insurance and reinsurance	19,003	-	5,563			24,566
Other	7,247	610	-			7,857
Gross premiums written	210,656	43,940	10,806			265,402

 

 

 

(ii) Statement of financial position by segment

Year ended 31 December 2009

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance	Omega Underwriting Agents	Other group activities	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Insurance and reinsurance assets	102,141	25,988	25,901	-	-	154,030
Financial investments and cash and cash equivalents	391,384	99,581	99,247	1,258	18,725	610,195
Other assets	50,971	2,944	4,053	26,636	2,049	86,653
Total assets	544,496	128,513	129,201	27,894	20,774	850,878
Insurance contract liabilities	272,037	-	32,872	-	-	304,909
Other liabilities	31,653	7,749	3,844	5,580	1,179	50,005
Total liabilities	303,690	7,749	36,716	5,580	1,179	354,914
Capital expenditure	1,054	78	214	676	36	2,058

 

 

(ii) Statement of financial position by segment (continued)

Year ended 31 December 2008

 

	Group participation on and reinsurance of Syndicate 958	Omega Specialty (other reinsurance)	Omega US Insurance	Omega Underwriting Agents	Other group activities	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Insurance and reinsurance assets	119,238	23,676	5,599	-	-	148,513
Financial investments and cash and cash equivalents	334,788	24,437	56,404	1,408	12,151	429,188
Other assets	13,301	506	736	30,468	15,115	60,126
Total assets	467,327	48,619	62,739	31,876	27,266	637,827
Insurance contract liabilities	257,075	29,185	9,541	-	-	295,801
Other liabilities	36,751	793	779	2,089	18,021	58,433
Total liabilities	293,826	29,978	10,320	2,089	18,021	354,234
Capital expenditure	1,666	93	533	43	-	2,335

 

 

(iii) Geographic information

Year ended 31 December 2009

 

		US	UK	Other EU	Other	Total
		US$'000	US$'000	US$'000	US$'000	US$'000
Gross written premium		207,124	30,764	8,654	19,269	265,811
Total assets		826,376	9,603	7,966	6,933	850,878
Capital expenditure		214	1,688	41	115	2,058

 

 

Year ended 31 December 2008

 

		US	UK	Other EU	Other	Total
		US$'000	US$'000	US$'000	US$'000	US$'000
Gross written premium		177,955	27,889	18,763	40,795	265,402
Total assets		545,467	70,800	16,742	4,818	637,827
Capital expenditure		626	1,685	24	-	2,335

 

 

 

3. INVESTMENT RETURN

 

								2009		2008
								US$'000		US$'000
Financial investments at fair value through income - interest income								12,861		12,730
Cash and cash equivalents - interest income								87		2,593
Net realised (losses) / gains on investments								(198)		1,938
Net unrealised (losses) / gains on investments								(2,854)		2,863
Derivative fair value gains								6,427		1,703
								16,323		21,827

 

Derivative fair value gains for the period include a gain of US$5,911,000 made on derivatives held to hedge the dollar value of sterling denominated proceeds from the Group's capital raise (£124m net of expenses) in January 2009. These derivatives were entered into in December 2008 (when the value of the 2009 capital raise became known) and were held at their market value at 31 December 2008 resulting in a derivative gain of US$1,703,000 in 2008.

 

Foreign exchange losses relating to the movement in the US dollar value of the proceeds from the Group capital raise in January 2009 from the date the related shares were issued and the date on which the proceeds are disclosed in note 9.

 

The remaining derivative fair value gains in the period of US$516,000 relate to gains on foreign exchange forward contracts entered into by Syndicate 958 which were settled during 2009.

 

 

4. INCOME FROM MANAGEMENT OF LLOYD'S SYNDICATE

 

									2009		2008
									US$'000		US$'000
Profit commission									11,514		18,861
Management fees									2,599		3,025
Management charges to syndicate									1,772		1,632
									15,885		23,518

 

In 2009, the Group revised the functional currency of the managing agency to US dollars from pounds sterling reflecting the dominant effect of US denominated transaction flows on the agencies results. Profit commission which was previously accrued by the Group in sterling (but derived from predominantly US dollar denominated underwriting) is now accrued in the underlying currencies in which Syndicate underwriting takes place.

 

This has the effect of reducing significantly the volatility in the Group's profit commission income which was previously been affected by foreign exchange movements experienced by the Syndicate in calculating its Sterling results. Those foreign exchange movements were previously reversed in the Group balance sheet through equity on retranslation of the agency's results into the group reporting currency (US dollars).

 

Had this change been made at 1 January 2008, the profit commission for the full year 2008 would have been US$8.0 million lower.

 

 

 

5. ACQUISITION COSTS

 

									2009		2008
									US$'000		US$'000
Net expenses in relation to the acquisition of business									57,521		49,527
Movement of deferred acquisition costs									(1,684)		(2,794)
									55,837		46,733

 

 

6. OTHER UNDERWRITING AND CORPORATE EXPENSES

 

										2009			2008
						Note				US$'000			US$'000
Staff costs						8				13,088			14,961
Operating lease charges										735			540
Audit fees						7				791			758
Depreciation						20				226			170
Non-recurring expenses recognised										3,601			-
General corporate expenses										10,301			9,564
										28,742			25,993
These amounts have been allocated as follows:
Other underwriting operating expenses									6,849				8,024
Other corporate expenses - non-recurring									3,601				-
Other corporate expenses - other									18,292				17,969
									28,742				25,993

 

 

Non-recurring items included above are the following:	2009		2008
	US$'000		US$'000
Costs associated with the Main Market listing	2,410		-
Accrued payments in lieu of notice for John Robinson	603		-
Credit arising on share options due to the forfeiture of John Robinson's share options	(1,100)		-
Legal costs associated with the departure of John Robinson	848		-
Legal costs arising from shareholder demands for change to the Board	840		-
	3,601		-

 

 

7. AUDITORS FEES

 

							Note		2009		2008
									US$'000		US$'000
Fees payable to the Group auditor for the audit of group accounts
- Statutory audit									456		342
Fees payable to the Group auditor for other services
- Local statutory audit of subsidiaries									335		416
							6		791		758

 

In addition to the above, amounts of US$310,777 (2008: US$370,000) were paid to the Group auditor for the audit of Syndicate 958.

 

Fees payable to the Group auditor for non-audit related services provided during the year totalled US$718,895 for services in relation to the Main Market Listing. This cost is included within non-recurring items in note 6. Fees payable to the Group's auditors for non-audit services provided during 2008 totalling US$86,000 comprised $30,000 for actuarial consulting and US$56,000 for assurance services in relation to the 'Placing Circular' issued on 9 December 2008.

 

 

8. STAFF COSTS

 

Staff costs including directors' remuneration
							2009				2008
			Note				US$'000				US$'000
Wages, salaries and profit related pay							9,964				9,244
Share options granted to directors and employees			26				902				4,072
Social security costs							1,050				924
Other pension costs							675				721
Total staff costs			6				12,591				14,961

 

Included within wages and salaries is an amount of US$602,861 in relation to John Robinson's remaining notice period which began on 29 October 2009 and ceases on 28 October 2010. This is included as a non-recurring item in note 6.

 

The charge for share options granted to Directors and employees in 2009 was reduced by a credit of US$1,099,521 in relation to the forfeiture of share options by John Robinson, who ceased to be the Group Underwriting Officer on 29 October 2009. This is included as a non-recurring item in note 6.

 

Average number of employees employed by the group during the year
									2009			2008
									Number			Number
Underwriting activities									27			24
Management and administration									23			19
Claims									7			4
									57			47

 

 

 

 

9. FOREIGN EXCHANGE

 

									2009		2008
									US$'000		US$'000
Foreign exchange (losses) / gains									(171)		3,908

 

Foreign exchange losses include a loss of US$1,942,000 relating to the movement in the US dollar value of the proceeds from the Group capital raise in January 2009 from the date the related shares were issued to the date on which the proceeds were received. This foreign exchange loss was offset by a related gain in the fair value of derivatives as disclosed in note 3.

 

 

10. FINANCE COSTS

 

								2009		2008
								US$'000		US$'000
Servicing of finance								-		194
Other interest								58		41
								58		235

 

Servicing of finance costs represent amounts payable to third parties participating in the corporate member. There was a full and final settlement of outstanding liabilities to third parties during 2008

 

 

11. INCOME TAX

 

Tax expense
									2009			2008
									US$'000			US$'000
Current tax:
Income tax on profits taxable under UK jurisdiction									3,458			7,145
Profits taxed under other jurisdictions									28			103
Adjustments in respect of prior periods									(228)			(410)
Total current tax									3,258			6,838
Deferred tax (credit)/charge:
Origination and reversal of temporary differences									182			(856)
Other adjustments in respect of prior years									-			28
Total deferred tax									182			(828)
Total tax expense									3,440			6,010

 

In addition to the above, deferred tax in relation to share options of US$Nil (2008: US$515,000) has been credited directly to the Profit and Loss account within Equity.

 

 

Reconciliation of tax expense
		2009			2008
		US$'000			US$'000
Profit before tax		47,054			28,222
Tax at the standard rate of domestic tax applicable to profits in the country concerned		2,600			5,206
Add back effect of:
Expenses not deductible for tax purposes		27			88
Additional taxable income		-			380
Permanent differences related to share based payments		1,041			718
Adjustment in respect of prior period		(228)			(382)
Total tax charge for the period		3,440			6,010

 

The Group's effective tax rate reflects the fact that a proportion of the Group's profits were taxable within the UK. The standard rate of corporation tax in the UK is 28.0% (2008: 28.5%).

 

As the parent company and Omega Specialty are Bermudian companies and are non-UK resident, their profits are not subject to UK corporation tax. The corporation tax for Bermudian companies is 0% (2008: 0%).

 

Deferred tax
Deferred tax is attributable to temporary differences arising on the following:
						Underwriting profits				Share options				Other						Total
						US$'000				US$'000				US$'000						US$'000
Deferred tax liability/(asset) at 1 January 2009						752				(1,306)				(1,912)						(2,466)
Movements in year						43				1,278				(1,167)						154
Foreign exchange translation differences						(27)				28				-						1
Deferred tax liability/(asset) at 31 December 2009						768				-				(3,079)						(2,311)

 

The deferred tax liability on underwriting profits represents tax on the technical result in Omega Dedicated which is taxed in the year following the syndicate year of account closing.

 

Other deferred tax assets are primarily in relation to losses incurred in Omega US. These losses will more likely than not be utilised against future profits of Omega US.

 

 

 

 

12. EARNINGS PER SHARE

 

Earnings per share are based on the profit for the year and the weighted average number of shares in issue during the period. For the diluted earnings per share the weighted average number of shares in issue is adjusted to reflect the dilutive effect of the future exercise of share options.

 

									2009		2008
Profit for the year in US$'000									43,614		22,212
Weighted average number of shares in issue									234,836,792		147,494,888
Dilutive average number of shares in issue									245,420,666		157,423,375
Earnings per share:
Basic (US cents)									18.6		15.1
Diluted (US cents)									17.8		14.1

 

 

13. DIVIDENDS

 

Amounts recognised as distributions to equity shareholders in the period:

 

								2009		2008
								US$'000		US$'000
2007 second dividend of US 16.3 cents per common share								-		24,056
2008 interim dividend of US 10.3 cents per common share								-		15,209
2009 special interim dividend of US 1.0 cents per common share								1,478		-
2009 second interim dividend of US 6.0 cents per common share								14,608		-
								16,086		39,265

 

On 10 March 2010, the directors have resolved to pay a dividend of US 6.5 cents per common share, amounting to US$15,826,000.

 

 

14. NET INSURANCE CLAIMS

 

								2009		2008
						Note		US$'000		US$'000
Claims paid						27		116,398		88,494
Reinsurers' share of claims paid						27		(11,861)		(7,690)
Net claims paid								104,537		80,804
Movement in insurance liabilities								(5,969)		95,193
Reinsurers' share of movement in insurance liabilities								(2,257)		(12,067)
Net movement in insurance liabilities								(8,226)		83,126
Net insurance claims								96,311		163,930

 

 

Claims development

 

The group's underwriting business is predominately managed on an underwriting year of account basis and a good indicator of the reliability of the Group's reserving estimation process is the extent to which estimates for each historic year of account have developed each year.

 

The following claims development table includes the Group claims experience from participation on Syndicate 958, reinsurance of Syndicate 958, and other underwriting by Omega Specialty and Omega US on an underwriting year of account basis. All years reported are translated at the exchange rate ruling on 31 December 2009. The Group's participation on the old closed years of Syndicate 958 is based on the share of the most recent closed year into which the old years of account were reinsured.

 

Gross claims development	Year of account
Ultimate claims at year end:	2003	2004	2005	2006	2007	2008	2009
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Year 1	20,571	44,781	85,958	56,525	106,939	157,687	125,914
Year 2	17,056	56,200	96,278	55,589	133,063	169,853	-
Year 3	16,750	54,481	96,869	54,720	133,357	-	-
Year 4	16,127	54,370	97,893	55,279	-	-	-
Year 5	15,593	54,631	96,277	-	-	-	-
Year 6	15,600	54,628	-	-	-	-	-
Year 7	15,649	-	-	-	-	-	-
31 December 2009	15,649	54,628	96,277	55,279	133,357	169,853	125,914
Claims paid	(14,719)	(50,549)	(85,007)	(40,319)	(85,210)	(98,115)	(14,241)
Unearned element of gross claims	-	-	-	-	-	(2,550)	(51,804)
Outstanding and IBNR claims	930	4,079	11,270	14,960	48,147	69,188	59,869
Provision for claims reported and claims incurred but not reported on 2002 and prior underwriting years								2,912
Total provision for claims reported and claims incurred but not reported								211,355

 

 

Net claims development	Year of account
Ultimate claims at year end:	2003	2004	2005	2006	2007	2008	2009
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Year 1	19,440	27,098	35,281	45,190	89,871	142,114	112,199
Year 2	16,207	33,520	34,966	47,341	113,769	132,958	-
Year 3	15,936	30,633	36,890	49,593	114,209	-	-
Year 4	15,256	30,384	36,899	50,465	-	-	-
Year 5	14,698	30,693	35,117	-	-	-	-
Year 6	14,678	30,621	-	-	-	-	-
Year 7	14,720	-	-	-	-	-	-
31 December 2009	14,720	30,621	35,117	50,465	114,209	132,958	112,199
Claims paid	(13,820)	(26,889)	(24,782)	(36,441)	(73,655)	(80,066)	(12,690)
Unearned element of gross claims	-	-	-	-	-	(1,943)	(42,557)
Outstanding and IBNR claims	900	3,732	10,335	14,024	40,554	50,949	56,952
Provision for claims reported and claims incurred but not reported on 2002 and prior underwriting years								1,870
Total provision for claims reported and claims incurred but not reported								179,316

 

To illustrate the degree of sensitivity of the result to changes in the assumptions used in estimating the provisions for claims, the table below shows the approximate affect on profit before tax and shareholders' equity of a 5% movement in the net ultimate loss ratio (which is a key assumption in the estimation process), assuming all other variables remain the same.

 

Sensitivity of Profit and Equity to changes in net ultimate loss ratios
						2009				2009		2008		2008
						Effect on Profit before tax				Effect on Equity*		Effect on Profit before tax		Effect on Equity*
						US$'000				US$'000		US$'000		US$'000
Increase in net ultimate loss ratio of 5%								(9,773)		(9,478)		(10,784)		(10,665)
Decrease in net ultimate loss ratio of 5%								9,773		9,478		10,784		10,665

 

* Effect on equity reflects adjustments for tax where applicable

 

 

15. CASH AND CASH EQUIVALENTS

 

									2009		2008
									US$'000		US$'000
Cash at bank and in hand									18,801		36,592
Short term bank deposits									19,118		55,962
									37,919		92,554

 

Included in cash and cash equivalents are amounts totalling US$18,791,000 (2008: US$60,233,000) not available for use by the Group which are held within the Lloyd's Syndicate, as Funds at Lloyd's or to collateralise insurance balances with Syndicate 958. Of these, US$10,900,000 (2008: US$43,500,000) is held to support Letters of Credit as detailed in note 35.

 

 

16. FINANCIAL INVESTMENTS

 

The Group's financial investments are summarised by categories as follows:

 

									2009		2008
									US$'000		US$'000
Financial investments at fair value through income
Debt securities and other fixed income securities									517,432		271,500
Money market deposits									47,496		57,418
Funds held in overseas deposits									7,348		6,013
Derivative financial investments									-		1,703
									572,276		336,634

 

The Group entered into foreign exchange forward and options contracts in December 2008 in order to manage the currency risk on the £124m placing proceeds (net of expenses), which were received in February 2009. At 31 December 2008 the fair value of these contracts was an asset of US$1,703,000. These contracts crystallized in February 2009 generating a further gain of US$5,911,000 as set out in note 3.

 

 

(a) Group financial investments include investments held by Group companies and the Group's share of Syndicate investments:
			2009												2008
			US$'000												US$'000
Group investments			490,804												257,633
Syndicate investments			81,472												79,001
			572,276												336,634

 

Syndicate investments are held in trust funds and are not available to the Group until distribution of profits to members on a year of account basis.

 

Of the amounts included in Group investments US$96,594,000 (2008: US$33,793,000) are not available for use by the Group as they are held to collateralise insurance balances with Syndicate 958, held as Funds at Lloyd's and Regulatory Deposits. These assets comprise the following:

 

			2009		2008
			US$'000		US$'000
Investments pledged to guarantee obligations to the Syndicate under a quota share of the 2007 year of account			16,100		27,000
Restricted investments supporting underwriting by Omega US			8,794		6,793
Group funds at Lloyds supporting Syndicate underwriting			71,700		-
			96,594		33,793

 

 

 

 

(b) Determination of fair value hierarchy
										Level 1		Level 2	Total fair value at 31 December 2009
										US$'000		US$'000	US$'000
Financial investments at fair value through income
Debt securities and other fixed income securities										337,583		179,849	517,432
Funds held in overseas deposits										2,579		4,769	7,348
Money market deposits										47,496		-	47,496
										387,658		184,618	572,276

 

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 Group's own models whereby the majority of assumptions are market observable.

 

Non market observable inputs mean that fair values are 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 are they based on available market data.

 

Level 3 financial instruments

 

At 31 December 2009, the Group 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.

 

 

 

17. INSURANCE RECEIVABLES

 

								US$'000		US$'000
Debtors arising from inwards insurance operations								43,065		29,995

 

 

The carrying amounts disclosed above represent approximate fair values at the year end.

 

 

 

18. PREPAYMENTS AND ACCRUED INCOME

 

								2009		2008
								US$'000		US$'000
Prepayments								787		9,610
Accrued investment income								3,170		6,452
Profit commission								10,131		13,003
								14,088		29,065

 

Profit commission of US$10,131,000 (2008: US$13,003,000) included above is due after one year. It relates to amounts earned on open years of account which will not be received until the syndicate year of account closes.

 

The carrying amounts disclosed above represent approximate fair values at year end.

 

 

 

19. OTHER DEBTORS

 

 

									2009		2008
									US$'000		US$'000
Due from Syndicate members									1,206		984
Syndicate debtors									8,655		6,454
Profit commission on closed years of account									14,502		17,223
Other debtors									1,025		404
									25,388		25,065

 

The carrying amounts disclosed above represent approximate fair values at year end.

 

 

20. PROPERTY AND EQUIPMENT

 

					Computer equipment		Office furniture		Total
					US$'000		US$'000		US$'000
Cost
At 1 January 2008					600		251		851
Currency valuations					(84)		(18)		(102)
Additions					80		89		169
At 31 December 2008					596		322		918
Currency valuations					28		8		36
Additions					156		545		701
At 31 December 2009					780		875		1,655
Depreciation
At 1 January 2008					283		89		372
Currency valuations					(73)		(14)		(87)
Charge for period					134		36		170
At 31 December 2008					344		111		455
Currency valuations					25		7		32
Charge for period					146		80		226
At 31 December 2009					515		198		713
Net Book Value
At 1 January 2008					317		162		479
At 31 December 2008					252		211		463
At 31 December 2009					265		677		942

 

In August 2009, the Omega office in London moved premises. Part of this move involved a furnishing of the new floor, including fixtures, fitting and computer hardware. A portion of the fit-out costs associated with the move have been capitalised in line with Group policy.

 

 

 

21. CREDIT QUALITY OF GROUP FINANCIAL ASSETS

 

 

31 December 2009			AAA	AA	A	BBB	Unrated	Total
		Note	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Cash and cash equivalents			-	32,996	4,923	-	-	37,919
Financial investments			465,122	41,946	64,738	470	-	572,276
Reinsurance assets		a	-	-	64,072	-	3,386	67,458
Insurance receivables		b	-	-	-	-	43,065	43,065
Other debtors			-	-	-	-	25,388	25,388
		c	465,122	74,942	133,733	470	71,839	746,106
31 December 2008			AAA	AA	A	BBB	Unrated	Total
		Note	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Cash and cash equivalents			-	90,687	1,867	-	-	92,554
Financial investments			290,247	19,486	26,901	-	-	336,634
Reinsurance assets		a	-	-	69,952	141	11,606	81,699
Insurance receivables		b	-	-	-	-	29,995	29,995
Other debtors			-	-	-	-	25,065	25,065
		c	290,247	110,173	98,720	141	66,666	565,947

 

Notes

 

a) Amounts recoverable from reinsurers on claims outstanding and debtors arising from reinsurance operations (excluding reinsurer's share of unearned premium.

b) Debtors arising out of direct insurance operations which are due from customers and intermediaries that do not tend to be rated.

c) The carrying value of financial instruments, other than those carried at fair value, are a reasonable approximation of their fair values.

 

The following table shows the amounts recoverable from reinsurers on claims paid at year end that were past due but not impaired

 

							31 December 2009		31 December 2008
							US$'000		US$'000
0 - 3 months past due							246		187
3 - 6 months past due							78		55
6 - 12 months past due							1		2
More than 12 months past due							83		100
Total past due							408		344

 

 

As at 31 December 2009 there were US$106,000 (2008: US$200,000) of reinsurance assets that were impaired.

 

 

 

 

 

22. LIQUIDITY OF MONETARY ASSETS AND LIABILITIES

 

The table below analyses monetary assets and liabilities of the Group by the contractual maturity or expected settlement date.

 

Please refer to note 36(d) in relation to the risk management of these items.

 

31 December 2009
		Statement of Financial Position		Up to 1 year		1 to 3 years				3 to 5 years				Over 5 years			Total
		US$'000		US$'000		US$'000				US$'000				US$'000			US$'000
Assets
Cash and cash equivalents		37,919		37,919		-				-				-			37,919
Financial investments		572,276		169,319		400,939				1,632				386			572,276
Reinsurance assets		67,458		34,003		33,455				-				-			67,458
Insurance receivables		43,065		43,065		-				-				-			43,065
Other debtors		25,388		25,388		-				-				-			25,388
		746,106		309,694		434,394				1,632				386			746,106
Liabilities
Insurance contracts		211,355		110,634		100,721				-				-			211,355
Trade and other payables		44,662		44,662		-				-				-			44,662
		256,017		155,296		100,721				-				-			256,017

 

 

31 December 2008
		Statement of Financial Position		Up to 1 year		1 to 3 years		3 to 5 years		Over 5 years				Total
		US$'000		US$'000		US$'000		US$'000		US$'000				US$'000
Assets
Cash and cash equivalents		92,554		92,554		-		-		-				92,554
Financial investments		336,634		125,452		192,259		18,585		338				336,634
Reinsurance assets		81,699		70,789		7,978		2,360		572				81,699
Insurance receivables		29,995		29,995		-		-		-				29,995
Other debtors		25,065		25,065		-		-		-				25,065
		565,947		343,855		200,237		20,945		910				565,947
Liabilities
Insurance contracts		211,085		128,042		60,721		17,442		4,880				211,085
Trade and other payables		38,903		38,903		-		-		-				38,903
		249,988		166,945		60,721		17,442		4,880				249,988

 

 

 

23. INTEREST RATE SENSITIVITY

 

The following table shows the effect of movements in interest rates on the Group's profit before tax and equity due to fluctuations in the value of the Group's financial investments:

 

					2009		2009		2008		2008
Movement in Rate					Effect on Profit before tax		Effect on Equity*		Effect on Profit before tax		Effect on Equity*
(Basis Points)					US$'000		US$'000		US$'000		US$'000
+ 50					(4,206)		(3,785)		(1,615)		(1,504)
+ 100					(8,306)		(7,475)		(3,205)		(2,985)
+ 150					(12,538)		(11,284)		(4,770)		(4,443)

 

* Effect on equity reflects adjustments for tax where applicable

 

 

24. INTANGIBLE ASSETS

						Syndicate Participating Rights		Capitalised Software Development Costs		Total
						US$'000		US$'000		US$'000
Cost
At 1 January 2008						149		-		149
Addition - underwriting software						-		2,166		2,166
At 31 December 2008						149		2,166		2,315
Addition - capacity purchased in Syndicate 958						39,337		-		39,337
Addition - software						-		1,357		1,357
At 31 December 2009						39,486		3,523		43,009
Amortisation
At 1 January 2008						-		-		-
Charge for period						-		-		-
At 31 December 2008						-		-		-
Charge for period						-		31		31
At 31 December 2009						-		31		31
Net Book Value
At 1 January 2008						149		-		149
At 31 December 2008						149		2,166		2,315
At 31 December 2009						39,486		3,492		42,978

 

Purchased Syndicate capacity entitles the Group to participate in the underwriting activities of Syndicate 958. It is considered to have an infinite useful economic life.

 

Of the total capitalised software development costs, US$3,404,476 relates to the cost of development of a new underwriting system. At the year-end no amortisation had been charged for the underwriting system, as it is not yet available for use. The capitalised software development costs have been reviewed for impairment at 31 December 2009 and, based on their expected value in use, are considered not to be impaired.

 

During 2009, the Group purchased additional stamp capacity representing 22.4% of all outstanding capacity of Syndicate 958. This increased the Group's share of the Syndicate capacity to 38.8% with effect from the 2010 Year of Account at a cost of US$39,337,262 including transaction costs of US$2,248,219.

 

The Group's share of Syndicate capacity is considered to have an indefinite life. The asset is considered not be impaired as its recoverable amount, being its value in use, exceeds its book value. The value in use has been estimated by reference to the expected future profits to the Group deriving from ownership of this asset over a five year period. The key assumptions used in this profit forecast are based on the profitability of the Syndicate in recent years. No growth in Syndicate activity has been assumed in the forecast and projected profits have been discounted at a rate of 10%.

 

 

 

 

25. SHARE CAPITAL

 

						2009		2009		2008		2008
						Number		US$		Number		US$
Authorised:
Common shares of US$0.10 each				10,000,000,000			1,000,000,000		10,000,000,000		1,000,000,000
Allotted and fully paid
Common shares of US$0.10 each					243,479,862			24,347,986		147,662,417		14,766,242

 

 

Movement in year relevant to equity shareholders in Omega Group
								Number			Par Value
											US$
Common shares of US$0.10
Shares in issue at 1 January 2008								147,581,010			14,758,101
Issue of new shares								81,407			8,141
Shares in issue at 31 December 2008								147,662,417			14,766,242
Issue of new shares								95,817,445			9,581,744
Shares in issue at 31 December 2009								243,479,862			24,347,986

 

On 30 January 2009, the Company issued an additional 92,857,142 common shares of US$0.10 each at a price of £1.40 per share resulting in additional issued share capital of $9,285,714 and additional share premium of $168,938,000.

 

On 2 July 2009, the Company issued an additional 1,786,540 common shares of $0.10 each at a price of £1.29 per share resulting in additional issued share capital of US$178,654 and additional share premium of US$3,619,618.

 

The remaining issue of 1,173,763 shares relates to the exercise of 1,048,843 share options and the issue of 124,920 shares to Non-executive Directors during the year. These transactions resulted in additional share capital of US$117,377 and share premium of US$608,726.

 

 

26. SHARE INCENTIVE PLANS

 

During the year ended 31 December 2009, the Group operated two Share Incentive Plans, under which share options have been granted to employees as described below. There are no cash settlement alternatives.

 

Date Granted

Exercise price

Exercisable period

Vesting conditions

Long term incentive plan

Option B

06-Apr-05

115p

6 April 2007 to 5 April 2015

Total Shareholder Return

Option C

08-Apr-05

115.5p

8 April 2007 to 7 April 2015

Total Shareholder Return

Option D

21-Jan-06

0p

5 December 2008 to 20 January 2016

Two independent performance conditions

Option G

19-Apr-07

0p

19 April 2010 to 18 April 2017

Two independent performance conditions

Option H

01-Jun-07

0p

1 June 2010 to 31 May 2017

Two independent performance conditions

Option I

25-Jun-07

0p

25 June 2010 to 24 June 2017

Two independent performance conditions

Option J

25-Jun-07

0p

25 June 2010 to 24 June 2017

Two independent performance conditions

Option K

25-Oct-07

0p

25 October 2010 to 24 October 2017

Two independent performance conditions

Option L

23-May-08

0p

23 May 2011 to 22 May 2018

Two independent performance conditions

Executive Plan

Option E

07-Apr-05

116.5p

7 April 2008 to 6 April 2015

None

Option F

08-Apr-05

115.5p

8 April 2008 to 7 April 2015

None

 

Option B "market value option" is exercisable in 3 equal tranches on 6 April 2007, 6 April 2008, and 6 April 2009.

Option C "market value option" is exercisable in 3 equal tranches on 8 April 2007, 8 April 2008, and 8 April 2009.

Option D "performance related nil cost option" is exercisable as follows: one half on 5 December 2008 expiring on 20 January 2016, one third on 5 December 2009 expiring on 20 January 2016, and one sixth on 5 December 2010 expiring on 20 January 2016.

Option E and Option F are "HMRC tax favoured market value options", exercisable as follows: two thirds on the third anniversary of grant and one third on the fourth anniversary of grant.

Option G "performance related nil cost option" is exercisable as follows: one half on 19 April 2010 expiring on 18 April 2017, one third on 19 April 2011 expiring on 18 April 2017, and one sixth on 19 April 2012 expiring on 18 April 2017.

Option H "performance related nil cost option" is exercisable as follows: one half on 1 June 2010 expiring on 31 May 2017, one third on 1 June 2011 expiring on 31 May 2017, and one sixth on 1 June 2012 expiring on 31 May 2017.

Option I and Option J are "performance related nil cost options" exercisable as follows: in five equal tranches on 25 June 2010, 25 June 2011, 25 June 2012, 25 June 2013 and 25 June 2014.

Option K "performance related nil cost options" is exercisable in five equal tranches on 25 October 2010, 25 October 2011, 25 October 2012, 25 October 2013 and 25 October 2014.

Option L "performance related nil cost options" is exercisable in five equal tranches on 23 May 2011, 23 May 2012, 23 May 2013, 23 May 2014 and 23 May 2015.

 

Total number of shares under options:

 

			Options outstanding at 1 January 2009			Granted	Lapsed / Forfeited		Exercised		Options outstanding at 31 December 2009
Long term incentive plan
Option B					1,348,248	-	-		(229,084)				1,119,164
Option C					9,833	-	-		-				9,833
Option D					3,563,013	-	(1,270,833)		(763,013)				1,529,167
Option G					250,000	-	(64,739)		(10,261)	1			175,000
Option H					500,000	-	-		-				500,000
Option I					5,450,000	-	(2,600,000)		-				2,850,000
Option J					2,315,000	-	(141,506)		(8,494)	1			2,165,000
Option K					500,000	-	-		-				500,000
Option L					100,000	-	-		-				100,000
Executive Plan
Option E					76,266	-	-		(24,764)				51,502
Option F					302,467	-	(25,974)		(13,227)				263,266

 

1. Options G and J should only be exercisable from 2010, however, an accelerated exercise occurred due to an employee leaving on good terms.

 

Options B and C are subject to the TSR Performance condition - for the options to vest, average annual total shareholders returns (TSR) over the relevant performance period must be at least equal to the greater of: a) the percentage change in the Retail Prices Index (RPI) over the relevant performance period plus 5 per cent; and b) 10 per cent. The relevant performance period is the time between the date at which the options were granted and date from which they are first exercisable as shown above. Performance conditions for Options B and C have been deemed to have been satisfied.

 

The performance conditions for Options E and F were deemed to have been satisfied at the time of the Company's domicile to Bermuda.

 

Options D, G, H, I, J, K and L are subject to two independent performance conditions. The first performance condition attaches to 75% of the options granted and relates to the average compound annual percentage growth in the Group's TSR over the particular performance period. The second performance condition attaches to 25% of the options granted and relates to the Group's TSR relative to the constituents of a comparator group identified by the Group over the particular performance period. In 2009, 1,133,333 of Options D (2008: Nil), exercisable on 5 December 2009 were lapsed due to the second performance condition not being met.

 

The weighted average share price at the date of exercise for shares exercised during the period was 136.2p (2008:162.9p). The options outstanding at 31 December 2009 had a range of exercise price of 0p to 116.5p, a weighted average exercise price of 18p (2008: 14.0p), and a weighted average remaining contractual life of 6.92 years (2008: 7.88 years).

 

 

Fair value of options

 

Inputs to the valuation model

 

The fair values of equity settled awards granted under the Long Term Incentive Plan and Executive Plan have been calculated using a variation of the Binomial option pricing model that takes into account the specific features of these two Share Incentive Plans. The following principal assumptions were used in the valuation.

 

			2008 options		2007 options		2006 options		2005 options
Share price on date of grant			145.2p		158.5p - 163.3p		127.5p		115.0p - 116.5p
Expected dividend yield			5.50%		3.0%		2.5%		0.5% - 2.5%
Expected volatility			30%		25%		25%		10% - 25%
Risk-free interest rate			4.95%		4.79% - 5.50%		4.10%		4.20% - 4.25%
Employer turnover			0%		0% - 15%		5% - 7%		0.5% - 5.0%

 

 

There have been no grants during 2009. In prior years, volatility has been based on the following:

(i) the annualised volatility of the Group's shares since its floatation on the AIM market, which was calculated at 5.3% in 2005, 12.6% in 2006 and 14.8% and 16.2% at different points in time in 2007.

(ii) the volatility of comparable listed companies in the insurance sector, based on historical share price information from the London Business School for a ten year period dating back to 1995. These average volatility figures ranged from 25% to 50% over a 3, 5, 7 and 10 year period.

(iii) the Group's shareholder base which, being primarily made up of institutional investors, has resulted in a low level of transactions in the Group's shares and the likelihood of the investor base changing over time resulting in an increased volume of transactions in the Group's shares and a consequent increase in volatility, which is usual for AIM listed securities.

 

Based on the above information, figures of between 10% and 30% have been used for volatility over the course of the lives of the options, reflecting the increase in the volatility of the Group's share prices from its current low level.

 

Based on the above assumptions, and after allowing for the effects of the TSR performance criteria by performing Monte Carlo simulations, the fair values of the options granted are estimated to be:

 

								Weighted average fair value
Option B/C:	2005 Long Term Incentive Plan 'market value' options									13.91p
Option E/F:	2005 Executive Plan 'market value' options									14.32p
Option D:	2006 Long Term Incentive Plan options									50.73p
Option G:	2007 Long Term Incentive Plan 'Nil cost' options									79.51p
Option H:	2007 Long Term Incentive Plan 'Nil cost' options									80.87p
Option I/J/K:	2007 Long Term Incentive Plan 'Nil cost' options									77.06p
Option L:	2008 Long Term Incentive Plan 'Nil cost' options									54.87p

 

Expense arising from share-based payments

 

Based on the above fair values and the Group's expectations of employee turnover, the expense arising from share options granted to employees was US$901,803 for the period ended 31 December 2009 (2008: US$4,072,000). There were no other share-based payment transactions.

 

As a result of his departure from the Group on 29 October 2009 and his not being specified as a 'Good Leaver' John Robinson forfeited 2,600,000 of 'I Options' and 125,000 'D Options'. This resulted in a reduction in the Group's share option expense of US$1,099,521.

 

 

 

27. INSURANCE CONTRACT ASSETS AND LIABILITIES

 

					2009					2008
				Insurance liabilities		Reinsurance assets	Net	Insurance liabilities		Reinsurance assets	Net
				US$'000		US$'000	US$'000	US$'000		US$'000	US$'000
Provision for claims reported				127,810		(15,762)	112,048	130,296		(24,691)	105,605
Provision for claims incurred but not reported				83,545		(16,277)	67,268	80,789		(3,592)	77,197
				211,355		(32,039)	179,316	211,085		(28,283)	182,802
Provision for unearned premium				93,554		(21,444)	72,110	84,716		(16,440)	68,276
				304,909		(53,483)	251,426	295,801		(44,723)	251,078

 

 

 

The provision for claims reported and claims incurred but not yet reported (IBNR) may be analysed as follows:

 

			2009					2008
			Insurance liabilities	Reinsurance assets	Net	Insurance liabilities		Reinsurance assets	Net
			US$'000	US$'000	US$'000	US$'000		US$'000	US$'000
At 1 January			211,085	(28,283)	182,802	119,395		(15,874)	103,521
Change in Syndicate participation			-	-	-	8,302		(1,541)	6,761
Movements on claims incurred			110,429	(14,118)	96,311	183,687		(19,757)	163,930
Claims paid during the year			(116,398)	11,861	(104,537)	(88,494)		7,690	(80,804)
Foreign exchange adjustments			6,239	(1,499)	4,740	(11,805)		1,199	(10,606)
At 31 December			211,355	(32,039)	179,316	211,085		(28,283)	182,802

 

 

The provision for unearned premium may be analysed as follows:

 

						2009					2008
				Insurance liabilities			Reinsurance assets	Net	Insurance liabilities			Reinsurance assets	Net
				US$'000			US$'000	US$'000	US$'000			US$'000	US$'000
At 1 January				84,716			(16,440)	68,276	73,605			(14,269)	59,336
Premiums written in the year				265,811			(66,519)	199,292	265,402			(40,783)	224,619
Premiums earned in the year				(256,973)			61,515	(195,458)	(254,291)			38,612	(215,679)
At 31 December				93,554			(21,444)	72,110	84,716			(16,440)	68,276

 

 

 

28. TRADE AND OTHER PAYABLES

 

							2009		2008
							US$'000		US$'000
Arising out of direct insurance operations							15,076		11,613
Arising out of reinsurance operations							16,097		17,476
Syndicate creditors							7,527		4,537
Other creditors							1,818		5,277
Accruals and deferred income							8,542		15,778
							49,060		54,681

 

The carrying amounts disclosed above represent approximate fair values at year end. All of the above are considered due within one year.

 

 

29. COMMITMENTS

 

At 31 December 2009, the future minimum lease payments under non-cancellable operating leases are set out below:

 

								2009				2008
								US$'000				US$'000
Total future minimum lease payments:
Within one year								298				299
Between one and five years								1,628				268
								1,926				567

 

Of the commitments due under operating leases approximately 60% (2008: 56%) will be reimbursed by the Syndicate under the Group's management.

 

 

30. EFFECTS OF FOREIGN EXCHANGE

 

The exchange rates used in translating foreign currency amounts in the preparation of these accounts are:

 

 

				2009				2008
				Average rate		Year end rate		Average rate		Year end rate
				US$		US$		US$		US$
£1 sterling is equivalent to				1.57		1.61		1.85		1.44
Euro 1 is equivalent to				1.40		1.42		1.47		1.40
Can $1 is equivalent to				0.88		0.95		0.94		0.81

 

 

The table below illustrates the exposure to foreign exchange risk, summarising the carrying value of total assets and liabilities by currency:

 

As at 31 December 2009
			US $		UK £		Can $		Euro		Total
			US$'000		US$'000		US$'000		US$'000		US$'000
Assets			826,376		9,603		6,933		7,966		850,878
Liabilities			(344,634)		(4,029)		(2,909)		(3,342)		(354,914)
Net assets			481,742		5,574		4,024		4,624		495,964

 

 

As at 31 December 2008
		US $		UK £		Can $		Euro		Total
		US$'000		US$'000		US$'000		US$'000		US$'000
Assets		545,467		70,800		4,818		16,742		637,827
Liabilities		(267,605)		(53,271)		(6,810)		(26,548)		(354,234)
Net assets		277,862		17,529		(1,992)		(9,806)		283,593

 

 

The table below shows the effect on profit and equity of a change in the exchange rates of Sterling, Canadian dollar and the Euro to the US dollar, assuming all other variables remain the same.

 

			2009	2009		2008	2008
			Effect on Profit before tax	Effect on Equity*		Effect on Profit before tax	Effect on Equity*
			US$'000	US$'000		US$'000	US$'000
10% increase against US dollar			(1,500)	1,422		(2,277)	772
10% decrease against US dollar			1,500	(1,422)		2,277	(772)

 

* Effect on equity reflects adjustments for tax when applicable and items reflected directly in the foreign exchange reserve.

 

 

 

31. CASH GENERATED FROM OPERATIONS

 

							2009		2008
							US$'000		US$'000
Profit before taxation							47,054		28,222
Adjustments:
- Depreciation of tangible assets							226		170
- Amortisation of intangible assets							31		-
- Realised and un-realised losses / (gains)							(3,375)		(6,504)
- Charge in relation to financing							58		235
- Foreign exchange adjustments							171		(3,908)
- Charge in relation to share option awards							902		4,072
Changes in operating assets and liabilities
- (Increase) in financial investments							(232,267)		(56,266)
- (Increase) in deferred acquisition costs							(1,684)		(2,794)
- Decrease in reinsurance assets							9,237		19,075
- (Increase) in insurance receivables							(13,070)		(11,442)
- Decrease / (Increase) in prepayments and accrued income							14,977		(3,985)
- (Increase) in other debtors							(323)		(8,375)
- Increase in insurance liabilities							9,108		102,801
- (Decrease) Increase in trader and other payables							(5,621)		12,137
							(174,576)		73,438

 

 

32. EVENTS AFTER THE BALANCE SHEET DATE

 

As referred to on page 4, following communications on behalf of Invesco calling for the Company to convene a general meeting to remove Walter Fiederowicz and Christopher Clarke as Directors and to appoint six additional Proposed Directors, the Company has convened a Special General Meeting to be held on 12 March 2010 at which the following Ordinary resolutions will be proposed:

(i) that John Coldman be appointed an additional Class II director

(ii) that James Bryce be appointed an additional Class I director

(iii) that Robin Spencer-Arscott be appointed an additional Class II director

(iv) that Jonathan Betts be appointed an additional Class III director

(v) that Ernest Morrison be appointed an additional Class I director

(vi) that David Cooper be appointed an additional Class III director

 

Each of Walter Fiederowicz and Christopher Clarke has confirmed to the Company that he will step down as a Director if the resolutions are passed in light of the Invesco Proposals calling for his removal. Each of the other three other non-executive Directors of the Company, Clifford Palmer, Nicholas Warren and Coleman Ross, has informed the Company that he intends to step down if the Resolutions are passed.

 

On 19 February 2010, A.M. Best placed the credit rating of the Group Companies on 'under review with negative implications' due to uncertainty regarding Omega's Board composition, operational management and future strategy.

 

 

 

33. RELATED PARTY TRANSACTIONS

 

Key management compensation
	2009			2008
	US$'000			US$'000
Salaries and other short term employee benefits	3,401			3,915
Share-based payments	1,126			2,635
Credit arising on share options due to the forfeiture of John Robinson's share options	(1,100)			-
Post employment benefits - Company contributions paid to money purchase pension scheme	298			259
	3,725			6,809

 

The aggregate gain made by directors on exercise of options during 2009 was US$749,531 (2008: US$651,888).

 

For the purposes of International Accounting Standard 24 "Related party disclosures", key managers are defined as the Board of Directors.

 

Walter Fiederowicz, the non-executive Chairman, participated as a Name on Syndicate 958 between 1996 and 2009. He sold his share of the Syndicate capacity to the Group for consideration of US$273,587 on 2 July 2009.

 

Nicholas Warren, one of the Non-executive Directors of the Company, is 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 Group until 18 September 2009. US$604,237 was charged to the Group in respect of these services during 2009 (2008: US$591,523).

 

Directors' interests in the shares of the Company are set out in the Remuneration Report.

 

 

34. CONSOLIDATED ENTITIES

 

 

The following entities are consolidated within these financial statements

 

Subsidiary undertakings at 31 December 2009	Country of incorporation		Proportion and voting rights of shares held		Nature of business
Omega Specialty Insurance Company Limited		Bermuda	100%		Insurance company
Omega US Insurance, Inc. *		USA	100%		Insurance company
Omega US Holdings, Inc.		USA	100%		Intermediate holding company
Omega Underwriting Holdings Limited		UK	100%		Intermediate holding company
Omega Underwriting Agents Limited *		UK	100%		Lloyd's managing agent
Omega Dedicated Limited *		UK	100%		Lloyd's corporate partner
Omega Administration Services Limited *		UK	100%		Service company to other members of Omega Group
Omega Europe GmbH *		Germany	100%		European underwriting agent
Omega Europe Holdings Limited *		UK	100%		Dormant company
Omega Underwriting Investments Limited *		UK	100%		Dormant company
Omega Dedicated (No 2) Limited *		UK	100%		Lloyd's corporate member - ceased underwriting

 

All holdings are of ordinary shares

 

* Owned by a subsidiary undertaking of the Company

 

35. GUARANTEES AND CONTINGENT LIABILITIES

 

Letter of credit

 

Omega Specialty has Letter of Credit (LOC) facilities of US$65,420,000 (2008: US$46,680,000) to support its underwriting requirements.

 

These facilities have been utilised as follows and, as set out in note 15, are backed by restricted cash holdings.

 

	2009		2008
	US$'000		US$'000
LOC supporting funds at Lloyds 1	-		12,000
OSIL LOC with Syndicate 958 2	-		18,000
OSIL LOC with US cedents 3	10,900		13,500
	10,900		43,500

 

1. Omega Specialty has deposited LOCs totalling US$ Nil (2008: US$12,000,000) with Lloyd's. In the event that Omega Dedicated failed to meet its obligations under policies of insurance or reinsurance written on its behalf, Lloyd's could draw down on these LOCs.

 

2. Omega Specialty has a LOC of US$ Nil as at 31 December 2009 (2008: US$18,000,000) lodged with Syndicate 958 to support its reinsurance of the Syndicate's 2007 year of account.

 

3. Omega Specialty has deposited LOCs totalling US$10,900,000 (2008: US$13,500,000) with various US cedants. Should Omega Specialty 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 Omega Specialty's cash deposits as set out in note 15.

 

Restricted assets

 

As set out in note 15 and 16, various cash and investment balances held by the Group are not available to the Group due to collateral and trust arrangements.

 

 

36. 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 as follows:

a) Insurance risk

b) Reserving risk

c) Credit risk

d) Liquidity risk

e) Market risk

f) Foreign exchange risk

g) Operational 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.

 

The expert management of insurance risk is core to our business proposition. In underwriting its reinsurance and insurance policies the underwriters use skill and 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.

 

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.

 

The relevant entity boards review and monitor these PML's to ensure they are consistent with the Group's risk tolerance and strategy.

 

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 at the end of 2009 can be best outlined as follows:

 

Non-marine Property Insurance (22% of gross premiums written in (2008: 29%)):

The account remains core to Omega and is comprised of predominantly low value, commercial risks. It is written through a series of managing agents with whom we have long standing relationships. The regionalised nature of these agents adds to the inherent diversification within the book. The majority of Omega US falls into this category, as well as a significant and longstanding book in the Syndicate.

 

Property Catastrophe Treaty Reinsurance (36% of gross premiums written in 2009 (2008: 26%)):

The focus of this account in which Omega is an established underwriter is the reinsurance of smaller to medium sized insurance companies. Whilst it is a catastrophe account, the nature and geographical spread of the insureds provides natural diversification within the account.

 

Property per Risk Treaty Reinsurance (7% of gross premiums written in 2009 (2008: 5%)):

This account is written with a methodology and approach consistent with that employed on the Property Catastrophe Treaty Reinsurance account, with a similar bias towards the US and reinsuring smaller to medium sized insurers.

 

Professional Indemnity Insurance (4% of gross premiums written in 2009 (2008: 5%)):

This account is focused predominantly on small assureds in the US.

 

Motor Insurance and Reinsurance (4% of gross premiums written in 2009 (2008: 5%)):

The majority of the insurance element of the account is vehicle physical damage cover in the US and the reinsurance element is comprised of reinsurances of European and UK motor insurers, covering both physical damage and liability.

 

Marine Insurance and Reinsurance (9% of gross premiums written in 2009 (2008: 18%)):

For underwriting years before 2007 the account is comprised principally of reinsurances of the direct marine accounts of insurers, on both an excess loss basis and proportional basis. In 2007 the account was further diversified by the addition of the new energy insurance account covering both on and offshore energy exposures.

 

Liability Insurance and Reinsurance (13% of gross premiums written in 2009 (2008: 9%)):

Most of the liability insurance underwritten by Omega is the restricted coverage given in conjunction with the writing of commercial property insurances. The reinsurances are of European and UK general liability insurers on a risk excess basis.

 

Other (5% of gross premiums written in 2009 (2008:3%)):

Classes categorised as "other" include Omega's underwriting, on either an insurance or reinsurance basis, of satellites, aviation, war, fine art, personal accident and kidnap and ransom. Omega underwrites these classes on an opportunistic basis and therefore expands and contracts the individual lines of business according to the market conditions.

 

Reinsurance Process

Omega has developed a tailored reinsurance programme. This combines both policies to limit exposure to specific risks and events with some whole account covers to protect 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 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.

 

Omega US purchases reinsurances externally, including whole account protection. This is in addition to a quota share with Omega Specialty.

 

 

b) 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 of the profit reported by the Group.

 

To illustrate the degree of sensitivity of the result to changes in the assumptions used in estimating the provisions for claims, note 14 shows the approximate affect on profit before tax and shareholders' equity of a 5% movement in the gross ultimate loss ratio (which is a key assumption in the estimation process), assuming all other variables remain the same.

 

Given the sensitivity of the claims reserves to small changes in assumptions and inherent uncertainties the reserves established at any point in time is an area of considerable judgement and the ultimate cost of the related claims will differ from current estimates.

 

The key sources of this uncertainty in relation to the Group's claims reserves are:

 

·; Catastrophe losses, for example Hurricane Ike 2008, 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.

 

·; Large individual claims which can result in complex litigation which may make it difficult to estimate the total claim or share of 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 achieved by the Syndicate, case reserves are determined on a case by case basis by the relevant underwriter and are reviewed by claims managers to ensure an appropriate provision is made for each claim 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 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 Group and Syndicate books of business, and the recent introduction of direct underwriting at these companies, Syndicate loss ratios are currently used to derive the Omega Specialty and Omega US reserves with adjustment for local variations.

 

In addition, Milliman, 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 Finance Committee, in relation to Syndicate reserves, and the Group Audit Committee in relation to the Group's claims reserves.

 

Note 14 shows the development of the Group's claims reserves over the past six years, thereby demonstrating how accurate prior period estimates have proved to be to date.

 

 

c) 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).

 

Note 21 provides information regarding these risks to the Group by classifying the Group's assets according to the credit ratings of counterparties. These amounts represent the maximum credit risk exposure to the Group.

 

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. To date no significant losses have been made by the Group as a result of this risk.

 

Investment and cash credit risk. All of the Group companies operate within the investment guidelines laid out by the Investment Committee of Omega Insurance Holdings. These guidelines stipulate the permissible types of investments, maximum 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 Group's investment committee. During the year under review the Group has invested principally in short-term bank deposits and AAA rated mutual funds with high quality financial institutions or fixed income bonds rated A or above.

 

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 and Omega Specialty's reinsurance programme. The Group has an excellent track record in terms of reinsurance recoveries. The Underwriting Committees and operational Boards within the Group monitor closely 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 21 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.

 

 

d) 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 as such an early realisation due to a major claim event should not trigger material impairment of value.

 

Note 22 analyses monetary assets and liabilities of the Group by the contractual maturity or expected settlement date.

 

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.

 

The Group also maintains facilities to provide additional flexibility to meet these short term needs should they arise.

 

 

e) Market risk

Market risk arises where the value of assets and liabilities changes as a result of movements in foreign exchange rates, 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 limited to 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 of between 1.5 and 2 years. This serves to limit the Group's exposure to movements in interest rates.

 

Note 23 shows the effect on profit and equity of the revaluation of the assets on the balance sheet at the year end, as a result of basis point movements in interest rates. The sensitivities assume all other variables remain the same.

 

 

f) 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 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.

 

The Group Investment Committee is responsible for the management and monitoring of foreign exchange risk.

 

The table in note 30 illustrates the exposure to foreign exchange risk, summarising the carrying value of total assets and liabilities by currency as well as the effects on profit and equity of a change in the exchange rates of Sterling, Canadian dollar and the Euro to the US dollar, assuming all other variables remain the same.

 

 

g) 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. It is also establishing specific risk committees within the Group to oversee all key risks including those covered by the category of operational risk.

Continuing significant risks identified by the Group include;

1. The need for further development and embedding of the group risk management framework to meet with the changing risk environment in which the Group is now operating. These changes include the move to the Main Market of the London Stock Exchange in 2009 and the move towards Solvency II (and its Bermudian equivalent) model approval.

2. The implementation of new underwriting and financial I.T. systems within the Group. We continue to work with experienced external consultants and suppliers to ensure that our required implementation strategy for new systems is appropriate.

3. The Group continues with its policy to outsource certain non-core underwriting activities such as investment management. Given the extent and importance of these outsourced relationships they remain subject to close review. As the Group continues to develop it will give consideration to the bringing in-house certain of those services that are currently outsourced.

 

37. Capital Management

The total amount of capital of the Group excluding intangible assets is US$452,986,000 (2008: US$281,278,000).

 

The Group adopts an active approach towards capital management, seeking to return excess capital to shareholders as demonstrated by the pay-out of a large proportion of its profits in dividends.

 

In determining the required amount of capital the Board consider:

·; Regulatory solvency requirements in Omega Specialty

 

·; Regulatory solvency requirements in Omega US

 

·; The capital required to support Omega Dedicated's corporate membership of Syndicate 958

 

·; The level of capital required to support our credit ratings in each rated entity.

 

The relevant boards monitor the solvency position against regulatory and credit rating requirements.

 

Although both Omega US and Omega Specialty have specific funding and capital requirements, these are less demanding than the capital levels required to support the credit ratings. In practice meeting asset strength requirements to support the credit ratings means regulatory requirements are also met.

 

The solvency levels are therefore monitored and reported to the respective bodies, but the main focus of management's attention is the understanding of the affect of business plans and decisions on the 'BCAR', A.M. Best's capital ratio which is one of the key determinants in rating decisions. The BCAR effectively is a ratio of required capital to actual capital, where required capital is determined by applying standardised capital loadings for each type of risk. The actual capital is calculated in stress circumstances where the rated entity must demonstrate it has adequate capital even after a major catastrophe loss.

 

Management review both the affect of business plans on the BCAR and any management decisions, adjusting the reinsurance programme or gross premium levels as appropriate.

 

For the Syndicate an 'individual capital assessment' is carried out each year, using stochastic modelling techniques and the management team's judgement as to the financial effect of risks. The model derives the amount of capital required to ensure the Syndicate has positive net assets over the coming year to a 99.5% confidence level. This is reviewed and used by Lloyd's to determine the required capital ratio for each member supporting the Syndicate's capacity. For the Syndicate's 2009 year of account, Omega Dedicated's capital ratio figure is 40%. In 2009, Omega Dedicated represents 16.4% of the Syndicate's overall capacity.

 

All externally imposed capital requirements have been complied with during the year.