Risk disclosures: introduction

The Group is exposed to risks from several sources. These include insurance risk, market risk, liquidity risk, credit risk, operational risk and strategic risk. The primary risk to the Group is insurance risk.

The primary objective of the Group's ERM is to ensure that the capital resources held are matched to the risk profile of the Group and that the balance between risk and reward is considered as part of all key business decisions. The Group has formulated, and keeps under review, a risk appetite which is set by the Board of Directors. The Group's appetite for risk will vary marginally from time to time to reflect the potential risks and rewards that present themselves. However, protecting the Group's capital and providing investors with a superior risk-adjusted return over the long term are constants. The risk appetite of the Group is central to how the business is run and permeates into the risk appetites that the individual operating entity Boards of Directors have adopted. These risk appetites are expressed through detailed risk tolerances at both a Group and an operating entity level. Risk tolerances represent the maximum amount of capital, generally on a modeled basis, that the Group and its entities are prepared to expose to certain risks.

The Board of Directors is responsible for setting and monitoring the Group's risk appetite and tolerances, whereas the individual entity Boards of Directors are responsible for setting and monitoring entity level risk tolerances. All risk tolerances are subject to at least an annual review and consideration by the respective Boards of Directors. The LHL and individual entity Boards of Directors review actual risk levels versus tolerances, emerging risks and any risk learning events at least quarterly. In addition, on at least a monthly basis, management reviews the output from BLAST in order to assess modeled potential losses against risk tolerances and ensure that risk levels are managed in accordance with them.

Risk and Return Committee

The RRC seeks to optimise risk-adjusted return and facilitate the appropriate use of the Internal Model, including considering its effectiveness. It ensures that all key areas of risk are discussed according to a schedule that covers fortnightly, monthly, quarterly, semi-annual and annual reviews. The RRC meets fortnightly and is responsible for coordinating and overseeing ERM activities within the risk profile, appetites and tolerances set by the Group and individual entity Boards of Directors. The RRC includes the Group CEO and members from the finance, actuarial and underwriting functions and includes representation from Cathedral. The CRO attends the meetings and reports on the RRC's activities to the Group and individual entity Boards of Directors and the Risk Committee of Cathedral.

Chief Risk Officer

The primary role of the CRO is to facilitate the effective operation of ERM throughout the Group at all levels. The role includes but is not limited to the following responsibilities:

·  drive ERM culture, ownership and execution on three levels: Board, executive management, and operationally within the business;

·  facilitate the identification, assessment and evaluation of existing and emerging risks by management and the Board;

·  ensure that these risks are given due consideration and are embedded within management's and the Board's oversight and decision making process;

·  be consulted, and opine on, policy in areas such as, but not limited to, underwriting, claims, investments, operations and capital management; and

·  provide timely, accurate, reliable, factual, objective and accessible information and analysis to guide, coach and support decision making.

Responsibility for the management of individual risks has been assigned to, and may form part of the performance objectives of, the risk owners within the business. Risk owners ensure that these risks and controls are consistent with their day-to-day processes and the entries made in the Group risk registers, which are a direct input into BLAST. The CRO provides regular reports to the business outlining the status of the Group's ERM activities and strategy, as well as formal reports to the Boards of Directors of the Group and the individual operating entities in this regard including the Risk Committee of Cathedral. The CRO ultimately has the right to report directly to the Group and entity regulators if he feels that management is not appropriately addressing areas of concern.

 

Internal audit

Internal Audit plays a key role in the Group's ERM by providing an independent opinion regarding the accuracy and completeness of risks, in addition to verification of the effectiveness of controls and the consistency of their operation. Internal Audit's roles and responsibilities are clearly defined through the Internal Audit Charter. The Head of Internal Audit reports directly to the Group Audit Committee. The CRO receives a copy of each Internal Audit report and considers the findings and agreed actions in the context of the risk appetites and tolerances, plus the risk policies and risk management strategy of each area. The integration of Internal Audit and ERM into the business helps facilitate the Group's protection of its assets and reputation.

Economic capital model

The foundation of the Lancashire Companies and Kinesis' risk-based capital approach to decision making is its economic capital model, BLAST, which is based on the widely accepted economic capital modeling tool, ReMetrica. Management uses BLAST primarily for monitoring its insurance risks. However, BLAST is also used to monitor other risks including market, credit and operational risks.

BLAST produces data in the form of a stochastic distribution for all classes, including non-elemental classes. The distribution includes the mean outcome and the result at various return periods, including very remote events. BLAST calculates projected financial outcomes for each insurance class, as well as the overall portfolio including diversification credit. Diversification credit arises as individual risks are generally not strongly correlated and are unlikely to all produce profits or losses at the same time. BLAST also measures the Group's aggregate insurance exposures. It therefore helps senior management and the Board of Directors to determine the level of capital required to meet the combined risk from a wide range of categories. Assisted by BLAST, the Group seeks to achieve an improved risk-adjusted return over time.

BLAST is used in strategic underwriting decisions, as part of the Group's annual business planning process and to assist in portfolio optimisation, taking account of inwards business and all major reinsurance purchases. Management also utilises BLAST in assessing the impact of strategic decisions on individual classes of business that the Group writes, or is considering writing, as well as the overall resulting financial impact to the Group. BLAST output, covering all of the risk groups to which the Group is exposed, is reviewed, including the anticipated loss curves, combined ratios and risk-adjusted profitability, to determine profitability and risk tolerance headroom by class.

BLAST covers the risks for LICL, LUK and Kinesis but does not cover Cathedral's risk. Owing to the particular requirements of Lloyd's regulations, Cathedral has its own Internal Model which is vetted by Lloyd's as part of its own capital and solvency regulations. To formulate an overall Group view of risk, exposures from Cathedral are combined with LICL, LUK and Kinesis using Lancashire's proprietary internal models.

The six primary risk categories, insurance risk, market risk, liquidity risk, credit risk, operational risk and strategic risk, are discussed in detail on pages 102 to 126.

 

A. Insurance risk

The Group underwrites worldwide, predominantly short-tail, insurance and reinsurance contracts that transfer insurance risk, including risks exposed to both natural and man-made catastrophes. The Group's exposure in connection with insurance contracts is, in the event of insured losses, whether premiums will be sufficient to cover the loss payments and expenses. Insurance and reinsurance markets are cyclical and premium rates and terms and conditions vary by line of business depending on market conditions and the stage of the cycle. Market conditions are impacted by capacity and recent loss events, and broader economic cycle impacts amongst other factors. The Group's underwriters assess likely losses using their experience and knowledge of past loss experience, industry trends and current circumstances. This allows them to estimate the premiums sufficient to meet likely losses and expenses and desired levels of profitability consistent with the Group's risk-adjusted RoE targets.

The Group considers insurance risk at an individual contract level, at a sector level, a geographic level and at an aggregate portfolio level. This ensures careful risk selection, limits on concentration and appropriate portfolio diversification are accomplished. The four principle classes of business for the Group, excluding the Lloyd's segment, are Property, Energy, Marine and Aviation. These classes, plus the Group's Lloyd's segment, are deemed to be the Group's five operating segments. The level of insurance risk tolerance per peril is set by the respective Boards of Directors at both the LHL and entity level.

A number of controls are deployed to manage the amount of insurance exposure assumed:

·  the Group has a rolling three-year strategic plan that helps establish the over-riding business goals that the Board of Directors aims to achieve;

·  a detailed business plan is produced annually which includes expected premiums and combined ratios by class and considers risk-adjusted profitability, capital usage and requirements. The plan is approved by the Board of Directors and is monitored, reviewed and updated on an ongoing basis;

·  for Cathedral the Syndicate Budget Forecast and Business Plan are subject to review and approval by Lloyd's;

·  BLAST and SHARP are used to measure occurrence risks, aggregate risks and correlations between classes and other non-insurance risks, and the outputs and assumptions are reviewed periodically by the RRC;

·  each authorised class has a predetermined normal maximum line structure;

·  each underwriter has a clearly defined limit of underwriting authority;

·  the Group and individual operating entities have predetermined tolerances on probabilistic and deterministic losses of capital for certain single events;

·  risk levels versus tolerances are monitored on a regular basis;

·  a daily underwriting call is held for LICL and LUK to peer review insurance proposals, opportunities and emerging risks;

·  a daily post-binding review process with exception reporting to management based on underwriting authority operates at Cathedral;

·  sophisticated pricing and aggregation models are utilised in certain areas of the underwriting process, and are updated frequently;

·  BLAST and other modeling tools are deployed to model catastrophes and resultant losses to the portfolio and the Group; and

·  reinsurance may be purchased to mitigate both frequency and severity of losses on a treaty or facultative basis and to improve risk-adjusted RoE as modeled in BLAST.

Some of the Group's business provides coverage for natural catastrophes (e.g. hurricanes, earthquakes and floods) and is subject to potential seasonal variation. A proportion of the Group's business is exposed to large catastrophe losses in North America, Europe and Japan as a result of windstorms. The level of windstorm activity, and landfall thereof, during the North American, European and Japanese wind seasons may materially impact the Group's loss experience. The North American and Japanese wind seasons are typically June to November and the European wind season November to March. The Group also bears exposure to large losses arising from other non-seasonal natural catastrophes, such as earthquakes, tsunamis, droughts, floods and tornadoes, from risk losses throughout the year and from war, terrorism and political risk and other events. The Group's associate bears exposure to catastrophe losses and any significant loss event could potentially result in impairment in the value of the Group's investment in associates.

 

The Group's exposures to certain peak zone elemental losses, as a percentage of tangible capital, including long-term debt, are shown below. Net loss estimates are before income tax and net of reinstatement premiums and outwards reinsurance. The exposure to catastrophe losses that would result in an impairment in the investment in associates is included in the figures below.

		100 year return period estimated net loss		250 year return period estimated net loss
As at 31 December 2014		$m	% of tangible capital	$m	% of tangible capital
Zones	Perils
Gulf of Mexico1	Hurricane	254.2	16.6	377.2	24.7
Non-Gulf of Mexico - U.S.	Hurricane	254.0	16.6	455.8	29.8
California	Earthquake	154.8	10.1	247.5	16.2
Pan-European	Windstorm	133.2	8.7	205.0	13.4
Japan	Earthquake	116.0	7.6	184.8	12.1
Japan	Typhoon	61.2	4.0	94.6	6.2
Pacific North West	Earthquake	39.5	2.6	123.3	8.1

(1) Landing hurricane from Florida to Texas.

 

		100 year return period estimated net loss		250 year return period estimated net loss
As at 31 December 2013		$m	% of tangible capital	$m	% of tangible capital
Zones	Perils
Gulf of Mexico1	Hurricane	307.6	19.0	440.2	27.3
Non-Gulf of Mexico - U.S.	Hurricane	227.8	14.1	451.4	28.0
California	Earthquake	130.6	8.1	239.0	14.8
Pan-European	Windstorm	210.7	13.0	319.3	19.8
Japan	Earthquake	154.8	9.6	266.9	16.5
Japan	Typhoon	132.9	8.2	249.0	15.4
Pacific North West	Earthquake	49.4	3.1	176.4	10.9

(1) Landing hurricane from Florida to Texas.

There can be no guarantee that the modeled assumptions and techniques deployed in calculating these figures are accurate. There could also be an unmodeled loss which exceeds these figures. In addition, any modeled loss scenario could cause a larger loss to capital than the modeled expectation.

Details of annual gross premiums written by geographic area of risks insured are provided below:

	2014		2013
	$m	%	$m	%
Worldwide offshore	287.4	31.7	253.3	37.3
Europe	221.7	24.4	38.4	5.6
U.S. and Canada	172.5	19.0	101.5	14.9
Far East	59.6	6.6	39.9	5.9
Middle East	42.7	4.7	16.7	2.5
Worldwide, including the U.S. and Canada1	23.2	2.6	151.0	22.2
Worldwide, excluding the U.S. and Canada2	9.5	1.0	19.4	2.9
Rest of world	91.0	10.0	59.5	8.7
Total	907.6	100.0	679.7	100.0

(1) Worldwide, including the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.

(2) Worldwide, excluding the U.S. and Canada, comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area, but that specifically exclude the U.S. and Canada.

 

Details of annual gross premiums written by business segment are provided below:

	2014		2013
	$m	%	$m	%
Lloyd's	284.3	31.3	24.5	3.6
Property	263.0	28.9	333.4	49.0
Energy	239.4	26.4	209.9	30.9
Marine	67.7	7.5	63.0	9.3
Aviation	53.2	5.9	48.9	7.2
Total	907.6	100.0	679.7	100.0

Further details of the gross premiums written and the risks associated with each of these five principal business segments are described on the following pages.

i. Lloyd's

Gross premiums written, for the year:

	2014 $m	2013 $m
Property reinsurance	104.3	3.4
Property direct and facultative	80.7	13.0
Marine cargo	37.5	5.0
Aviation and satellite	27.6	2.6
Energy	25.9	-
Contingency	4.8	0.5
Terrorism	3.5	-
Total	284.3	24.5

Property reinsurance predominantly includes property catastrophe excess of loss, per risk excess of loss and property retrocession lines of business. Property catastrophe excess of loss and per risk excess of loss provide protection for elemental and non-elemental risks and are written on an excess of loss treaty basis within the U.S. and internationally. The U.S. property catastrophe excess of loss book is particularly focused on regional clients. Property retrocession is written on an excess of loss basis through treaty arrangements. It provides coverage for elemental risks when sold on a catastrophe basis and both elemental and non-elemental risks when sold on a per risk retrocession basis. Protection is generally given on a regional basis and may cover specific property risks or all catastrophe perils. It is also generally written on an UNL basis, meaning loss payments are linked to the ceding company's own loss.

Property direct and facultative is a worldwide book of largely commercial property business, written both in the open market and under delegated authorities. The account spans small individual locations to Fortune 500 accounts but with a bias towards small to medium sized risks. Policies are generally provided both for non-elemental and elemental perils, although not all risks include both elemental and non-elemental coverage. Coverage is generally written on a full value, primary or excess of loss basis, although the very largest accounts are currently seldom written at the primary level.

Marine cargo is an international account and is written either on a direct basis or by way of reinsurance. It covers the (re)insurance of commodities or goods in transit. Typically, transit cover is provided on an all-risks basis for marine perils for the full value of the goods concerned, although higher value or capacity business may be written on a layered basis. Static cover is also provided for losses to cargo, from both elemental and non-elemental causes, whilst static at points along its route. In addition, the cargo account can include specie and fine art, vault risks, artwork on exhibition and marine war business relating to cargo in transit.

Aviation and satellite includes aviation reinsurance, aviation war, general aviation and aviation satellite lines of business. Aviation reinsurance provides excess of loss catastrophe cover to the insurers of the world's major airlines and aircraft and aircraft manufacturers. This includes cover for the aircraft themselves as well as losses arising from passenger and third party liability claims against airlines and/or manufacturers. Aviation war covers loss or damage to aviation assets from war, terrorism and similar causes. General aviation covers fixed wing and rotor wing aircraft typically with 50 passenger seats or less and covers both commercial and private clients. A significant part of the aviation satellite account is written through Satec, a specialist underwriting agency, to which underwriting authority is delegated. Satellite insurance is purchased by launch operators, satellite manufacturers and satellite operators to protect against launch or deployment failure or subsequent failure in orbit. Policies are typically written for launch plus one year in orbit. Thereafter orbit cover is normally provided on an annual basis.

 

Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis. Worldwide offshore energy policies are typically package policies which may include physical damage, well control, business interruption and third-party liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are therefore mostly written on a subscription basis, meaning that coverage is placed with multiple underwriters. Construction energy contracts generally cover all risks of platforms, FPSO and drilling units under construction at yard and offshore, during towing and installation. Onshore construction contracts are generally not written.

Contingency focuses on the sports, leisure and entertainment industries, with a significant emphasis on the music industry. It provides coverage for non-appearance and event cancellation. Generally business is written on a full value basis.

Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks, but typically excluding nuclear, chemical and biological coverage in most territories. Cover is generally provided to medium to large commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on aggregate exposure within a 'blast zone' radius. The term of these contracts may be multi-year reflecting the term of the underlying exposures. Reinsurance may be purchased on a facultative or treaty basis.

ii. Property

Gross premiums written, for the year:

	2014 $m	2013 $m
Property catastrophe excess of loss	124.2	97.5
Terrorism	55.2	67.8
Property political risk	44.4	66.4
Property retrocession	18.1	80.8
Property direct and facultative	1.0	10.0
Other property	20.1	10.9
Total	263.0	333.4

Property catastrophe excess of loss covers elemental risks and is written on an excess of loss treaty basis. The property catastrophe excess of loss portfolio is written within the U.S. and also internationally. Cover is offered for specific perils and regions or countries.

Terrorism business can be written either ground-up or for primary or excess layers, with cover provided for U.S. and worldwide property risks, but typically excluding nuclear, chemical and biological coverage in most territories. Cover is generally provided to medium to large commercial and industrial enterprises. Policies are typically written for scheduled locations and exposure is controlled by setting limits on aggregate exposure within a 'blast zone' radius. The term of these contracts is often multi-year reflecting the term of the underlying exposures. Some national pools are also written, which may include nuclear, chemical and biological coverage and may have an element of life coverage.

Property political risk cover is written either ground-up or on an excess of loss basis. Coverage that the Group provides in the political risk book is split between confiscation perils coverage and sovereign/quasi-sovereign obligor coverage. Confiscation perils coverage protects against CEND (Confiscation, Expropriation, Nationalisation, and Deprivation) and may be extended to include other perils. Sovereign/quasi-sovereign obligors coverage protects against the non-payment or non-honouring of an obligation by a sovereign or quasi-sovereign entity. Cover is provided to medium to large commercial and industrial clients as well as bank and commodity trading clients. The term of these contracts is often multi-year reflecting the term of the underlying exposures. The Group does not provide cover against purely private obligor credit risk.

Property retrocession is written on an excess of loss basis through treaty arrangements and covers elemental risks. Cover may be on a worldwide or regional basis and may cover specific risks or all catastrophe perils. Coverage may be given on a UNL basis, meaning that loss payments are linked directly to the ceding company's own loss, or on an ILW basis, meaning that loss payments are linked to the overall industry insured loss as measured by independent third-party loss index providers.

A small number of property direct and facultative risks continue to be written with modest lines mostly to support client relationships in other classes of business. Cover is generally provided to medium to large commercial and industrial enterprises with high-value locations for non-elemental perils, including fire and explosion, and elemental (natural catastrophe) perils which can include flood, windstorm, earthquake, brush fire, tsunami and tornado.

 

The Group is exposed to large natural catastrophe losses, such as windstorm and earthquake loss, primarily from assuming property catastrophe excess of loss and property retrocession portfolio risks. Exposure to such events is controlled and measured by setting limits on aggregate exposures in certain classes per geographic zone and through loss modeling. The accuracy of the latter exposure analysis is limited by the quality of data and the effectiveness of the modeling. It is possible that a catastrophic event significantly exceeds the expected modeled event loss. The Group's appetite and exposure guidelines for large losses are set out on pages 102 and 103.

Reinsurance may be purchased to mitigate exposures to large natural catastrophe losses in the U.S., Canada and worldwide with certain exclusions. Reinsurance may also be purchased to reduce the Group's worldwide exposure to large risk losses. Reinsurance is typically purchased on an excess of loss basis, however ILWs or quota share arrangements may be entered into.

iii. Energy

Gross premiums written, for the year:

	2014 $m	2013 $m
Worldwide offshore energy	149.9	149.2
Gulf of Mexico offshore energy	69.9	34.4
Energy liabilities	8.5	8.8
Construction energy	6.5	12.9
Other energy	4.6	4.6
Total	239.4	209.9

Energy risks are written mostly on a direct basis and may be ground-up or for primary or excess layers on either a first loss or full value basis. Worldwide offshore energy policies are typically package policies which may include physical damage, business interruption and third-party liability sections. Coverage can include fire and explosion and elemental risks. Individual assets covered can be high-value and are therefore mostly written on a subscription basis, meaning that coverage is placed with multiple underwriters.

Gulf of Mexico offshore energy programmes cover elemental and non-elemental risks. Most policies have sub-limits on coverage for elemental losses. These programmes are exposed to Gulf of Mexico windstorms. Exposure to such events is controlled and measured through loss modeling. The accuracy of this exposure analysis is limited by the quality of data and the effectiveness of the modeling. It is possible that a catastrophic event significantly exceeds the expected modeled event loss. The Group's appetite and exposure guidelines to large losses are set out on pages 102 and 103.

The Group also writes energy liability business on a stand-alone basis. Unlike the liability contained within the energy packages that Lancashire writes, stand-alone energy liability is written on an excess of loss basis only. Coverage is worldwide and provides coverage for all kinds of damages and loss to third parties. Coverage is generally restricted to offshore assets.

Construction energy contracts generally cover all risks of platform and drilling units under construction at yards and offshore, during towing and installation. Onshore construction contracts are generally not written.

Reinsurance protection may be purchased to protect a portion of loss from elemental and non-elemental energy claims, and from the accumulation of smaller, attritional losses. Reinsurance is typically purchased on an excess of loss basis but, from time to time, quota share arrangements may be entered into. Reinsurance may be purchased on a facultative or treaty basis.

 

iv. Marine

Gross premiums written, for the year:

	2014 $m	2013 $m
Marine hull and total loss	29.6	24.8
Marine P&I clubs	12.8	10.7
Marine builders risk	12.2	10.3
Marine hull war	10.3	15.0
Other marine	2.8	2.2
Total	67.7	63.0

With the exception of the marine P&I clubs, where excess layers are written, most policies are written on a ground-up basis. Marine hull and total loss is generally written on a direct basis and covers marine risks on a worldwide basis, primarily for physical damage. Marine P&I clubs is mostly the reinsurance of the International Group of Protection and Indemnity Clubs and covers marine liabilities. Marine builders risk covers the building of ocean going vessels in specialised yards worldwide and their testing and commissioning. Marine hull war is mostly direct insurance of loss of vessels from war, piracy or terrorist attack, with a very limited amount of facultative reinsurance.

The largest expected exposure in the marine class is from physical loss rather than from elemental loss events, although there is exposure to elemental perils and to the costs for removal of wreck.

Reinsurance may be purchased to reduce the Group's exposure to both large risk losses and an accumulation of smaller, attritional losses. Reinsurance is typically purchased on a treaty excess of loss basis.

v. Aviation

Gross premiums written, for the year:

	2014 $m	2013 $m
AV52	25.9	26.5
Aviation satellite	24.8	16.8
Other aviation	2.5	5.6
Total	53.2	48.9

AV52 is written on a risk attaching excess of loss basis and provides coverage for third-party liability, excluding own passenger liability, resulting from acts of war or hijack of aircraft. Cover excludes countries whose governments provide a backstop coverage, but does, since 2014, include some U.S. commercial airlines.

Aviation satellite cover is written on a full value, primary or excess of loss basis and can provide cover for satellite launch, satellite in-orbit or both satellite launch and in-orbit. Coverage for in-orbit can be provided on an annual or multi-year basis and both launch and in-orbit can cover loss of earnings as well as physical damage.

Reinsurance may be purchased to mitigate exposures to an AV52 event loss. Reinsurance is typically purchased on a treaty excess of loss basis.

 

Reinsurance

The Group, in the normal course of business and in accordance with its risk management practices, seeks to reduce certain types of loss that may arise from events that could cause unfavourable underwriting results, and to improve the modeled risk-adjusted RoE by entering into reinsurance arrangements. Reinsurance does not relieve the Group of its obligations to policyholders. Under the Group's reinsurance security policy, reinsurers are assessed and approved as appropriate security based on their financial strength ratings, amongst other factors. The RRC has defined limits by reinsurer by rating. The RRC considers reinsurers that are not rated or do not fall within the predefined rating categories on a case-by-case basis, and would usually require collateral to be posted to support such obligations. There are specific guidelines for these collateralised contracts. The RRC monitors the creditworthiness of its reinsurers on an ongoing basis and formally reviews the Group's reinsurance arrangements at least quarterly.

Reinsurance protection is typically purchased on an excess of loss basis, however it may also include ILW covers or quota share arrangements. The mix of reinsurance cover is dependent on the specific loss mitigation requirements, market conditions and available capacity. Reinsurance may also be purchased to optimise the risk-adjusted return of the underwriting portfolio. The structure varies between types of peril and sub-class. The Group regularly reviews its catastrophe exposures and may purchase reinsurance in order to reduce the Group's net exposure to a large natural catastrophe loss and/or to reduce net exposures to other large losses. The Group can purchase both facultative and treaty reinsurance. There is no guarantee that reinsurance coverage will be available to meet all potential loss circumstances, as it is possible that the cover purchased is not sufficient to transfer the totality of the Group's exposure. Any loss amount which exceeds the programme would be retained by the Group. Some parts of the reinsurance programme have limited reinstatements, therefore the number of claims which may be recovered from second or subsequent losses in those particular circumstances is limited.

Insurance liabilities

For most insurance and reinsurance companies, the most significant judgement made by management is the estimation of loss and loss adjustment expense reserves. The estimation of the ultimate liability arising from claims made under insurance and reinsurance contracts is a critical estimate for the Group particularly given the nature of the business written.

Under generally accepted accounting principles, loss reserves are not permitted until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the provision of a contingency reserve to account for expected future losses or for the emergence of new types of latent claims. Claims arising from future events can be expected to require the establishment of substantial reserves from time to time. All reserves are reported on an undiscounted basis.

Loss and loss adjustment expense reserves are maintained to cover the Group's estimated liability for both reported and unreported claims. Reserving methodologies that calculate a point estimate for the ultimate losses are utilised, and then a range is developed around these point estimates. The point estimate represents management's best estimate of ultimate loss and loss adjustment expenses. The Group's internal actuaries review the reserving assumptions and methodologies on a quarterly basis with loss estimates being subject to a semi-annual corroborative review by independent actuaries, using U.S. generally accepted actuarial principles. This independent review is presented to the Group's Audit Committee. The Group has also established Reserve Committees at the operating entity level, which have responsibility for the review of large claims and IBNR levels, their development and any changes in reserving methodology and assumptions.

The extent of reliance on management's judgement in the reserving process differs as to whether the business is insurance or reinsurance, whether it is short-tail or long-tail and whether the business is written on an excess of loss or on a pro-rata basis. Over a typical annual period, the Group expects to write the large majority of programmes on a direct excess of loss basis. The Group does not currently write a significant amount of long-tail business.

Insurance versus reinsurance

Loss reserve calculations for direct insurance business are not precise in that they deal with the inherent uncertainty of assumptions regarding future reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in the legal environment and other factors, such as inflation. These estimates and judgements are based on numerous factors and may be revised as additional experience or other data becomes available or reviewed as new or improved methodologies are developed or as current laws or regulations change.

Furthermore, as a broker market reinsurer, management must rely on loss information, reported to brokers by other insurers and their loss adjusters, who must estimate their own losses at the policy level, often based on incomplete and changing information. The information management receives varies by cedant and may include paid losses, estimated case reserves and an estimated provision for IBNR reserves. Additionally, reserving practices and the quality of data reporting may vary among ceding companies which adds further uncertainty to the estimation of the ultimate losses.

 

Short-tail versus long-tail

In general, claims relating to short-tail risks, such as the majority of risks underwritten by the Group, are reported more promptly than those relating to long-tail risks, including the majority of casualty risks. However, the timeliness of reporting can be affected by such factors as the nature of the event causing the loss, the location of the loss, and whether the losses are from policies in force with insureds, primary insurers, reinsurers or vendor binding authorities.

Excess of loss versus proportional

For excess of loss contracts, which make up the majority of the Group's business, management are aided by the fact that each policy has a defined limit of liability arising from one event. Once that limit has been reached, there is no further exposure to additional losses from that policy for the same event. For proportional business, an initial estimated loss and loss expense ratio is generally used. This is based upon information provided by the insured or ceding company and/or their broker and management's historical experience of that treaty, if any, and the estimate is adjusted as actual experience becomes known.

Time lags

There is a time lag inherent in reporting from the original claimant to the primary insurer or binding authority holder to the broker and then to the reinsurer. Also, the combination of low claims frequency and high severity makes the available data more volatile and less useful for predicting ultimate losses. In the case of proportional contracts, reliance is placed on an analysis of a contract's historical experience, industry information, and the professional judgement of underwriters in estimating reserves for these contracts. In addition, if available, reliance is placed partially on ultimate loss ratio forecasts as reported by insureds or cedants, which are normally subject to a quarterly or six-month lag.

Uncertainty

As a result of the time lag described above, an estimation must be made of IBNR reserves, which consist of a provision for additional development in excess of the case reserves reported by insureds or ceding companies, as well as a provision for claims which have occurred but which have not yet been reported by insureds or ceding companies. Due to the degree of reliance that is necessarily placed on insureds or ceding companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business that the Group underwrites, and the varying reserving practices among ceding companies, reserve estimates are highly dependent on management judgement and are therefore uncertain. During the loss settlement period, which may be years in duration, additional facts regarding individual claims and trends often will become known, and current laws and case law may change as well as regulatory directives, with a consequent impact on reserving. The claims count on the types of insurance and reinsurance that the Group writes, which are low frequency and high severity in nature, is generally low.

For certain catastrophic events there are greater uncertainties underlying the assumptions and associated estimated reserves for losses and loss adjustment expenses. Complexity resulting from problems such as policy coverage issues, multiple events affecting one geographic area and the resulting impact on claims adjusting (including the allocation of claims to the specific event and the effect of demand surge on the cost of building materials and labour) by, and communications from, insureds or ceding companies, can cause delays to the timing with which the Group is notified of changes to loss estimates.

As at 31 December 2014, management's estimates for IBNR represented 31.6 per cent of total net loss reserves (31 December 2013 - 31.8 per cent). The majority of the estimate relates to potential claims on non-elemental risks where timing delays in insured or cedant reporting may mean losses could have occurred which the Group was not made aware of by the balance sheet date.

 

B. Market risk

The Group is at risk of loss due to movements in market factors. The main risks include:

i.	Insurance risk;
ii.	Investment risk;
iii.	Debt risk; and
iv.	Currency risk.

These risks, and the management thereof, are described below.

i. Insurance risk

The Group is exposed to insurance market risk from several sources, including the following:

·  the advent or continuation of a soft market, which may result in a stabilisation or decline in premium rates and/or terms and conditions for certain lines, or across all lines;

·  the actions and reactions of key competitors, which may directly result in volatility in premium volumes and rates, fee levels and other input costs;

·  market events which may cause a limit in the availability of cover, including unusual inflation in rates, causing political intervention or national remedies;

·  failure to maintain broker, binding authority and client relationships, leading to a limited or substandard choice of risks inconsistent with the Group's risk appetite; and

·  changes in regulation including capital, governance or licensing requirements.

The most important method to mitigate insurance market risk is to maintain strict underwriting standards. The Group manages insurance market risk in numerous ways, including the following:

·  reviews and amends underwriting plans and outlook as necessary;

·  reduces exposure to market sectors where conditions have reached unattractive levels;

·  purchases appropriate, cost-effective reinsurance cover to mitigate exposures;

·  closely monitors changes in rates and terms and conditions;

·  ensures through continuous capital management that it does not allow surplus capital to drive underwriting appetite;

·  holds a daily underwriting meeting for LICL and LUK to discuss, inter alia, market conditions and opportunities;

·  reviews all new and renewal business post-underwriting for Cathedral;

·  regularly reviews output from BLAST to assess up-to-date profitability of classes and sectors;

·  holds a quarterly Underwriting and Underwriting Risk Committee meeting to review underwriting strategy;

·  holds a fortnightly RRC meeting to monitor estimated exposures to peak zone elemental losses and RDS; and

·  holds regular documented meetings with regulators.

Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest bearing.

 

ii. Investment risk

Movements in investments resulting from changes in interest and inflation rates and currency exchange rates, amongst other factors, may lead to an adverse impact on the value of the Group's investment portfolio. Investment guidelines are established by the Investment Committee of the Board of Directors to manage this risk. Investment guidelines set parameters within which the Group's external investment managers must operate. Important parameters include guidelines on permissible assets, duration ranges, credit quality, currency, maturity, sectors, geographical, sovereign and issuer exposures. Compliance with guidelines is monitored on a monthly basis. Any adjustments to the investment guidelines are approved by the IRRC and the Board of Directors.

The Group's fixed income portfolios are managed by four external investment managers. The Group also has a diversified portfolio of multi-strategy low volatility hedge funds, and a small equity portfolio. The performance of the managers is monitored on an ongoing basis.

Within the Group guidelines is a subset of guidelines for the portion of funds required to meet near-term obligations and cash flow needs following an extreme event. The subset of guidelines adds a further degree of requirements, including fewer allowable asset classes, higher credit quality, shorter duration and higher liquidity. The primary objectives for this portion of assets are capital preservation and providing liquidity to meet insurance and other near-term obligations. In addition to cash managed internally, funds held in the investment portfolio to cover this potential liability are designated as the 'core' portfolio and the portfolio duration is matched to the duration of the insurance liabilities, within an agreed range. The core portfolio is invested in fixed income securities, fixed income funds and cash and cash equivalents. The core portfolio may, at times, contain assets significantly in excess of those required to meet insurance liabilities or other defined funding needs.

Assets in excess of those required to be held in the core portfolio are typically held in the 'core plus' or the 'surplus' portfolios. The core plus portfolio is invested in fixed income securities and cash and cash equivalents. The surplus portfolio is invested in fixed income securities, principal protected equity linked notes, derivative instruments, cash and cash equivalents, equity securities and hedge funds. The assets in the core plus and surplus portfolios are not matched to specific insurance liabilities. In general, the duration of the surplus portfolio is slightly longer than the core or core plus portfolio, while maintaining a focus on high quality assets.

The Group reviews the composition, duration and asset allocation of its investment portfolio on a regular basis in order to respond to changes in interest rates and other market conditions. If certain asset classes are anticipated to produce a higher return within management's risk tolerance, an adjustment in asset allocation may be made. Conversely, if the risk profile is expected to move outside of tolerance levels, adjustments may be made to reduce the risks in the portfolio.

The investment portfolio is currently structured to perform better in a risk-on environment in order to mitigate the impact of a potential rise in interest rates. The Group endeavours to limit losses in risk-on, risk-off, and interest rate hike scenarios. The Group models various periods of significant stress in order to better understand the investment portfolio's risks and exposures. The scenarios represent what could, and most likely will occur (albeit not in the exact form of the scenarios, which are based on historic periods of volatility). The Group also monitors the portfolio impact of more severe disaster scenarios consisting of extreme shocks.

The IRRC meets at least quarterly to ensure that the Group's strategic and tactical investment actions are consistent with investment risk preferences, appetite, risk and return objectives and tolerances. The IRRC also helps further develop the risk tolerances to be incorporated into the ERM framework.

 

The investment mix of the fixed income portfolios is as follows:

	Core		Core plus		Surplus		Total
As at 31 December 2014	$m	%	$m	%	$m	%	$m	%
-   Short-term investments	0.1	-	30.3	1.7	-	-	30.4	1.7
-   Fixed income funds	15.4	0.8	-	-	-	-	15.4	0.8
-   U.S. treasuries	145.3	8.0	129.0	7.1	88.7	4.9	363.0	20.0
-   Other government bonds	49.5	2.7	1.7	0.1	32.8	1.8	84.0	4.6
-   U.S. municipal bonds	0.9	-	0.3	-	27.7	1.5	28.9	1.5
-   U.S. government agency debt	1.4	0.1	-	-	16.1	0.9	17.5	1.0
-   Asset backed securities	89.1	4.9	28.8	1.6	66.2	3.6	184.1	10.1
-   U.S. government agency mortgage backed securities	40.6	2.2	41.9	2.3	85.5	4.7	168.0	9.2
-   Non-agency mortgage backed securities	9.5	0.5	4.0	0.2	7.3	0.4	20.8	1.1
-   Agency commercial mortgage backed securities	-	-	0.3	-	2.1	0.1	2.4	0.1
-   Non-agency commercial mortgage backed securities	4.6	0.3	14.3	0.8	20.7	1.1	39.6	2.2
-   Bank loans	-	-	-	-	127.9	7.0	127.9	7.0
-   Corporate bonds	307.9	17.0	153.5	8.5	243.7	13.5	705.1	39.0
Total fixed income securities - AFS	664.3	36.5	404.1	22.3	718.7	39.5	1,787.1	98.3
Fixed income securities - at FVTPL	-	-	-	-	31.2	1.7	31.2	1.7
Total fixed income securities	664.3	36.5	404.1	22.3	749.9	41.2	1,818.3	100.0

 

	Core		Core plus		Surplus		Total
As at 31 December 2013	$m	%	$m	%	$m	%	$m	%
-   Short-term investments	145.4	7.3	75.8	3.8	9.8	0.5	231.0	11.6
-   Fixed income funds	26.3	1.3	-	-	-	-	26.3	1.3
-   U.S. treasuries	98.7	4.9	53.1	2.7	65.5	3.3	217.3	10.9
-   Other government bonds	45.5	2.3	13.6	0.7	48.8	2.4	107.9	5.4
-   U.S. municipal bonds	2.3	0.1	3.4	0.2	15.7	0.8	21.4	1.1
-   U.S. government agency debt	11.0	0.5	3.5	0.2	83.7	4.2	98.2	4.9
-   Asset backed securities	66.6	3.3	30.6	1.5	54.2	2.7	151.4	7.5
-   U.S. government agency mortgage backed securities	39.3	2.0	71.3	3.6	141.4	7.0	252.0	12.6
-   Non-agency mortgage backed securities	3.8	0.2	1.8	0.1	3.2	0.2	8.8	0.5
-   Agency commercial mortgage backed securities	1.6	0.1	0.9	-	1.7	0.1	4.2	0.2
-   Non-agency commercial mortgage backed securities	7.1	0.4	11.8	0.6	19.0	0.9	37.9	1.9
-   Bank loans	-	-	-	-	107.8	5.4	107.8	5.4
-   Corporate bonds	271.7	13.6	173.4	8.7	256.8	12.9	701.9	35.2
Total fixed income securities - AFS	719.3	36.0	439.2	22.1	807.6	40.4	1,966.1	98.5
Fixed income securities - at FVTPL	-	-	-	-	29.6	1.5	29.6	1.5
Total fixed income securities	719.3	36.0	439.2	22.1	837.2	41.9	1,995.7	100.0

 

Corporate bonds, fixed income securities at FVTPL, bank loans and other government bonds by country are as follows:

As at 31 December 2014	Financials $m	Other  industries  $m	Total corporate bonds and bank loans $m	Other government  bonds $m	Total corporate  bonds, bank loans and other government bonds $m
United States	141.5	382.5	524.0	-	524.0
United Kingdom	49.8	37.4	87.2	0.4	87.6
Canada	29.7	19.7	49.4	24.6	74.0
Australia	34.1	7.5	41.6	9.8	51.4
France	10.3	14.6	24.9	8.4	33.3
Netherlands	13.2	11.4	24.6	6.4	31.0
Germany	2.8	15.8	18.6	9.8	28.4
Norway	15.5	0.8	16.3	5.0	21.3
Japan	10.2	7.7	17.9	-	17.9
Switzerland	15.6	0.7	16.3	-	16.3
Sweden	13.9	-	13.9	0.2	14.1
Luxembourg	-	7.2	7.2	-	7.2
Mexico	-	3.0	3.0	3.6	6.6
Hong Kong	-	4.9	4.9	-	4.9
United Arab Emirates	-	0.2	0.2	3.5	3.7
Other	4.6	9.6	14.2	12.3	26.5
Total	341.2	523.0	864.2	84.0	948.2

 

As at 31 December 2013	Financials $m	Other  industries  $m	Total corporate bonds and bank loans $m	Other government  bonds $m	Total corporate  bonds, bank loans and other government bonds $m
United States	121.3	331.4	452.7	-	452.7
Canada	53.8	16.0	69.8	26.1	95.9
United Kingdom	41.3	52.2	93.5	0.4	93.9
Australia	22.9	9.7	32.6	10.0	42.6
France	7.4	24.4	31.8	6.6	38.4
Germany	3.8	13.3	17.1	15.3	32.4
Norway	29.0	0.8	29.8	2.0	31.8
Netherlands	14.1	10.9	25.0	5.8	30.8
Sweden	19.8	-	19.8	1.3	21.1
Switzerland	11.7	4.2	15.9	-	15.9
Belgium	-	7.4	7.4	-	7.4
Supranationals	7.2	-	7.2	-	7.2
Japan	2.6	2.6	5.2	-	5.2
Emerging market corporates	4.8	11.3	16.1	-	16.1
Emerging market sovereign	-	-	-	9.9	9.9
Emerging market agency	-	-	-	26.9	26.9
Other	4.0	11.4	15.4	3.6	19.0
Total	343.7	495.6	839.3	107.9	947.2

 

The sector allocation of the corporate bonds, fixed income securities at FVTPL and bank loans is as follows:

	2014		2013
As at 31 December	$m	%	$m	%
Industrial	487.3	56.5	452.8	53.9
Financial	338.3	39.1	336.5	40.1
Utility	35.7	4.1	42.8	5.1
Supranationals	2.9	0.3	7.2	0.9
Total	864.2	100.0	839.3	100.0

The Group's net asset value is directly impacted by movements in the value of investments held. Values can be impacted by movements in interest rates, credit ratings, exchange rates and economic environment and outlook.

The Group's investment portfolio is mainly comprised of fixed income securities and cash and cash equivalents. The fixed income funds are overseas deposits held by Syndicate 2010 and Syndicate 3010 in trust for the benefit of the policyholders in those overseas jurisdictions. They consist of high quality, short duration fixed income securities. The Group also has a small equity portfolio. The estimated fair value of the Group's fixed income portfolio is generally inversely correlated to movements in market interest rates. If market interest rates fall, the fair value of the Group's fixed income securities would tend to rise and vice versa.

The sensitivity of the price of fixed income securities, and certain derivatives, to movements in interest rates is indicated by their duration. The greater a security's duration, the greater its price volatility to movements in interest rates. The sensitivity of the Group's fixed income and derivative investment portfolio to interest rate movements is detailed below, assuming linear movements in interest rates:

	2014		2013
As at 31 December	$m	%	$m	%
Immediate shift in yield (basis points)
100	(30.6)	(1.7)	(23.3)	(1.2)
75	(22.9)	(1.3)	(18.3)	(0.9)
50	(15.3)	(0.8)	(12.7)	(0.6)
25	(7.6)	(0.4)	(6.6)	(0.3)
(25)	7.6	0.4	6.8	0.3
(50)	15.1	0.8	14.0	0.7
(75)	22.7	1.2	21.3	1.1
(100)	30.2	1.7	28.9	1.4

The Group mitigates interest rate risk on the investment portfolio by establishing and monitoring duration ranges in its investment guidelines. The Group may manage duration through the use of interest rate futures and swaptions from time to time. The duration of the core portfolio is matched to the modeled duration of the insurance reserves, within a permitted range. The permitted duration range for the core plus portfolio is between zero and four years and the surplus portfolio is between one and five years.

The durations of the externally managed portfolios are as follows:

As at 31 December	2014 years	2013 years
Core portfolio	1.7	1.2
Core plus portfolio	1.9	1.2
Surplus portfolio	1.8	1.9
Overall portfolio (including duration overlay)	1.5	1.1

The overall duration for fixed income, managed cash and cash equivalents and certain derivatives is 1.5 years (2013 - 1.0 year).

In addition to duration management, the Group uses VaR on a monthly basis to measure potential losses in the estimated fair values of its cash and invested assets and to understand and monitor risk. The VaR calculation is performed using variance/covariance risk modeling to capture the cash flows and embedded optionality of the portfolio. Securities are valued individually using market standard pricing models. These security valuations serve as the input to many risk analytics, including full valuation risk analyses, as well as parametric methods that rely on option adjusted risk sensitivities to approximate the risk and return profiles of the portfolio.

 

The principal VaR measure that is produced is an annual VaR at the 99th percentile confidence level. The annual VaR, at the 99th percentile confidence level, measures the minimum amount the assets should be expected to lose over a one year time horizon, under normal conditions, 1 per cent of the time.

The Group's annual VaR calculations are as follows:

	2014		2013
As at 31 December	$m	% of shareholder's equity	$m	% of shareholder's equity
99th percentile confidence level	38.1	2.8	32.6	2.2

Derivative financial instruments

The Group's investment guidelines permit the investment managers to utilise exchange-traded futures and options contracts, and OTC instruments including interest rate swaps, credit default swaps, interest rate swaptions and forward foreign currency contracts. Derivatives are used for yield enhancement, duration management, interest rate and foreign currency exposure management or to obtain an exposure to a particular financial market. These positions are monitored regularly. The Group may also use internally managed derivatives to mitigate interest rate risk and foreign currency exposures. The Group principally has exposure to derivatives related to the following types of risks: foreign currency risk, interest rate risk and credit risk.

The Group currently invests in the following derivative financial instruments:

a.  Futures;
b.  Options;
c.  Forward foreign currency contracts;
d.  Swaps; and
e.  Swaptions;

The net gains or losses on the Group's derivative financial instruments recognised in the consolidated statement of comprehensive income are as follows:

As at 31 December 2014	Net other investment loss  $m	Net realised losses $m	Net foreign exchange losses $m	Financing costs $m
Treasury futures	-	(6.0)	-	-
Forward foreign currency contracts	-	-	(0.7)	-
Interest rate swaps - investments	(0.1)	(0.1)	-	-
Interest rate swaps - debt	-	-	-	(7.4)
Swaptions	(2.2)	(2.1)	-	-
Total	(2.3)	(8.2)	(0.7)	(7.4)

 

As at 31 December 2013	Net other investment income $m	Net realised gains (losses) $m	Net foreign exchange gains $m	Financing gain $m
Eurodollar futures	-	0.3	-	-
Treasury futures	-	4.8	-	-
Forward foreign currency contracts	-	-	12.0	-
Interest rate swaps - investments	(0.1)	(0.3)	-	-
Interest rate swaps - debt	-	-	-	5.2
Credit default swaps	(0.3)	0.2	-	-
Swaptions	2.2	-	-	-
Total	1.8	5.0	12.0	5.2

 

The estimated fair values of the Group's derivative instruments are as follows:

		2014				2013
As at 31 December	Other investments $m	Other receivables $m	Other payables $m	Interest rate swaps  $m	Other investments $m	Other receivables  $m	Interest rate swaps $m
Forward foreign currency contracts	0.7	3.8	(1.8)	-	-	0.1	-
Interest rate swaps - investments	-	-	-	-	(0.1)	-	-
Interest rate swaps - debt	-	-	-	(4.9)	-	-	(0.2)
Swaptions	-	-	-	-	4.9	-	-
Credit default swaps	-	-	-	-	(0.1)	-	-
Total	0.7	3.8	(1.8)	(4.9)	4.7	0.1	(0.2)

A. Futures

The Group's investment guidelines permit the use of futures which provide the Group with participation in market movements, determined by the underlying instrument on which the futures contract is based, without holding the instrument itself or the individual securities. This approach allows the Group more efficient and less costly access to the exposure than would be available by the exclusive use of individual fixed income and money market securities. Exchange-traded futures contracts may also be used as substitutes for ownership of the physical securities.

All futures contracts are held on a non-leveraged basis. An initial margin is provided, which is a deposit of cash and/or securities in an amount equal to a prescribed percentage of the contract value. The fair value of futures contracts is estimated daily and the margin is adjusted accordingly with unrealised gains and/or losses settled daily in cash and/or securities. A realised gain or loss is recognised when the contract is closed.

Futures contracts expose the Group to market risk to the extent that adverse changes occur in the estimated fair values of the underlying securities. Exchange-traded futures are, however, subject to a number of safeguards to ensure that obligations are met. These include the use of clearing houses (thus reducing counterparty credit risk), the posting of margins and the daily settlement of unrealised gains and losses. The amount of credit risk is therefore considered low. The investment guidelines restrict the maximum notional futures position as a percentage of the investment portfolio's estimated fair value.

As at 31 December, the Group had the following exposure to treasury futures:

	2014			2013
As at 31 December	Notional long $m	Notional short $m	Net notional long (short) $m	Notional long $m	Notional  short  $m	Net notional long (short) $m
Treasury futures	89.1	169.9	(80.8)	80.5	86.2	(5.7)
Total	89.1	169.9	(80.8)	80.5	86.2	(5.7)

A Eurodollar futures contract is an exposure to 3 month LIBOR, based on a commitment to a $1.0 million deposit. The estimated fair value is based on expectations of 3 month LIBOR, is determined using exchange-traded prices and was negligible as at 31 December 2014 and 2013. The contracts currently held by the Group will expire in 2015.

The sensitivity of the Group's Eurodollar futures position to interest rate movements is not material as at 31 December 2014 and 2013.

B. Options

The Group's investment guidelines permit the use of exchange-traded options on U.S. treasury futures and Eurodollar futures, which are used to manage exposure to interest rate risk and also to hedge duration. Exchange-traded options are held on a similar basis to futures and are subject to similar safeguards. Options are contractual arrangements that give the purchaser the right, but not the obligation, to either buy or sell an instrument at a specific set price at a predetermined future date. The Group may enter into option contracts that are secured by holdings in the underlying securities or by other means which permit immediate satisfaction of the Group's obligations. The notional amount of options is not material as at 31 December 2014 and 2013.

The investment guidelines also restrict the maximum notional options exposure as a percentage of the investment portfolio's estimated fair value.

 

C. Forward foreign currency contracts

A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date, at a defined rate. The Group may utilise forward foreign currency contracts to gain exposure to a certain currency or market rate or manage the impact of fluctuations in foreign currencies on the value of its foreign currency denominated investments, debt and/or insurance related currency exposures.

Forward contracts expose the Group to credit, market and liquidity risks. Credit risk arises from the potential inability of counterparties to perform under the terms of the contract. The Group is exposed to market risk to the extent that adverse changes occur in the exchange rate of the underlying foreign currency. Liquidity risk represents the possibility that the Group may not be able to rapidly adjust the size of its forward positions at a reasonable price in times of high volatility and financial stress. These risks are mitigated by requiring a minimum counterparty credit quality, restricting the maximum notional exposure as a percentage of the investment portfolio's estimated fair value and restricting exposures to foreign currencies, individually and in aggregate, as a percentage of the investment portfolio's estimated fair value.

The notional amount of a derivative contract is the underlying quantity upon which payment obligations are calculated. A long position is equivalent to buying the underlying currency whereas a short position is equivalent to having sold the underlying currency.

The Group has the following open forward foreign currency contracts:

	2014			2013
As at 31 December	Notional long $m	Notional short $m	Net notional long (short) $m	Notional long $m	Notional  short  $m	Net notional long (short) $m
Canadian Dollar	0.4	20.7	(20.3)	0.5	-	0.5
Australian Dollar	10.0	26.3	(16.3)	10.5	28.5	(18.0)
British Pound	-	8.1	(8.1)	-	9.4	(9.4)
Brazilian Real	-	-	-	3.9	6.6	(2.7)
Chinese Renminbi	-	-	-	0.3	0.3	-
Malaysian Ringgit	3.7	-	3.7	3.9	-	3.9
Euro	43.2	26.4	16.8	52.6	24.5	28.1
Japanese Yen	5.1	5.1	-	-	-	-
Other(1)	-	-	-	0.3	0.3	-
Total	62.4	86.6	(24.2)	72.0	69.6	2.4

(1) Individual currencies included in 'other' have a notional payable and receivable of less than $2.0 million for 2013.

D. Swaps

The Group's investment guidelines permit the use of interest rate swaps and credit default swaps which are primarily traded OTC. Swaps are recorded at estimated fair value at the end of each period with unrealised gains and losses recorded in the consolidated statement of comprehensive income.

Interest rate swaps are used to manage interest rate exposure, portfolio duration or capitalise on anticipated changes in interest rate volatility without investing directly in the underlying securities. Interest rate swap agreements entail the exchange of commitments to pay or receive interest, such as an exchange of floating rate payments for fixed rate payments, with respect to a notional amount of principal. These agreements involve elements of credit and market risk. Such risks include the possibility that there may not be a liquid market, that the counterparty may default on its obligation to perform, or that there may be unfavourable movements in interest rates. These risks are mitigated through defining a minimum counterparty credit quality and a maximum notional exposure to interest rate swaps as a percentage of the investment portfolio's estimated fair value. The notional amount of interest rate swaps held in the investment portfolio is not material as at 31 December 2014 and 2013. The notional amount of interest rate swaps held internally for the purposes of hedging the interest rate exposure on the Group's subordinated loan notes as at 31 December 2014 is $252.3 million (31 December 2013 - $259.8 million)

The Group uses credit default swaps as a way to add or reduce credit risk to an individual issuer, or a basket of issuers, without investing directly in their securities. As at 31 December 2014, the maximum amount of loss the Group could incur on its open credit default swaps was the notional value of $nil (31 December 2013 - $4.1 million).

 

E. Swaptions

The Group uses swaptions, options on interest rate swaps, to manage interest rate risk exposure and portfolio and yield curve duration. The Group, as the purchaser of a swaption, is subject to the credit risk of the counterparty but is only subject to market risk to the extent of the premium paid. As a swaption writer, the Group is not subject to credit risk but is subject to market risk, due to its obligation to make payments under the terms of the contract. These risks are mitigated through maximum allowable notional exposures as a percentage of the investment portfolio's estimated fair value. The estimated fair value of these instruments is $nil as at 31 December 2014 (31 December 2013 - $4.9 million).

iii. Debt risk

The Group has issued long-term debt as described in note 22. The LHL issued subordinated loan notes due in 2035 bear interest at a floating rate that is reset on a quarterly basis, plus a fixed margin of 3.70 per cent. The Group is subject to interest rate risk on the coupon payments of these subordinated loan notes. The Group has mitigated the interest rate risk by entering into interest rate swap contracts as follows:

	Maturity date	Interest hedged
Subordinated loan notes $97.0 million	15 December 2035	100%
Subordinated loan notes €24.0 million	15 June 2035	100%

The interest rate swaps expire on 15 December 2020, therefore the Group currently has no interest rate risk on the LHL issued subordinated loan notes due in 2035.

The senior unsecured notes maturing 1 October 2022 bear interest at a fixed rate of 5.70 per cent and therefore the Group is not exposed to interest rate risk on this long-term debt.

On the acquisition of Cathedral, the Group assumed subordinated loan notes as described in note 22. The Group is subject to interest rate risk on the coupon payment of this long-term debt. An increase of 100 basis points on the EURIBOR and LIBOR three month deposit rates would result in an increase in the interest expense on long term debt for the Group of approximately $0.8 million on an annual basis.

iv. Currency risk

The Group underwrites from two locations, Bermuda and London, although risks are assumed on a worldwide basis. Risks assumed are predominantly denominated in U.S. dollars.

The Group is exposed to currency risk to the extent its assets are denominated in different currencies to its liabilities. The Group is also exposed to non-retranslation risk on non-monetary assets such as unearned premiums and deferred acquisition costs. Exchange gains and losses can impact income.

The Group hedges non-U.S. dollar liabilities primarily with non-U.S. dollar assets, but may also use derivatives to mitigate foreign currency exposures. The Group's main foreign currency exposure relates to its insurance obligations, cash holdings, investments, premiums receivable, dividends payable and the euro denominated subordinated loan notes long-term debt liabilities discussed in note 22. These positions may not be hedged depending on the currency outlook. See page 117 for a listing of the Group's open forward foreign currency contracts.

 

The Group's assets and liabilities, categorised by currency at their translated carrying amount are as follows:

Assets	U.S. $ $m	Sterling $m	Euro $m	Japanese Yen $m	Other $m	Total $m
Cash and cash equivalents	173.4	42.8	27.2	28.6	31.5	303.5
Accrued interest receivable	7.7	-	-	-	-	7.7
Investments	1,885.7	18.8	41.2	-	41.2	1,986.9
Reinsurance assets	119.8	15.3	3.9	-	3.4	142.4
Deferred acquisition costs	81.8	4.8	10.9	0.6	6.5	104.6
Other receivables	10.8	25.1	-	-	0.7	36.6
Inwards premiums receivable from insureds and cedants	263.5	15.9	27.6	0.2	9.0	316.2
Corporation tax receivable	-	4.3	-	-	-	4.3
Investment in associates	52.7	-	-	-	-	52.7
Property, plant and equipment	0.3	8.8	-	-	-	9.1
Intangible assets	153.8	-	-	-	-	153.8
Total assets as at 31 December 2014	2,749.5	135.8	110.8	29.4	92.3	3,117.8

 

Liabilities	U.S. $ $m	Sterling $m	Euro $m	Japanese Yen $m	Other $m	Total $m
Losses and loss adjustment expenses	550.1	51.9	65.6	43.3	41.7	752.6
Unearned premiums	379.6	20.2	48.4	4.8	26.1	479.1
Insurance contracts - other payables	34.8	1.4	2.2	0.3	2.1	40.8
Amounts payable to reinsurers	30.0	2.4	1.0	-	0.8	34.2
Deferred acquisition costs ceded	0.1	-	-	-	-	0.1
Other payables	46.5	36.8	0.1	-	0.1	83.5
Deferred tax liability	17.4	21.3	-	-	-	38.7
Interest rate swap	1.6	-	3.3	-	-	4.9
Long-term debt	284.4	-	42.2	-	-	326.6
Total liabilities as at 31 December 2014	1,344.5	134.0	162.8	48.4	70.8	1,760.5

 

Assets	U.S. $ $m	Sterling $m	Euro  $m	Japanese Yen $m	Other $m	Total $m
Cash and cash equivalents	227.6	63.8	44.9	39.4	27.3	403.0
Accrued interest receivable	8.7	0.1	0.1	-	-	8.9
Investments	1,897.6	39.8	45.9	-	32.7	2,016.0
Reinsurance assets	170.3	34.6	2.3	0.3	1.2	208.7
Deferred acquisition costs	57.4	2.2	7.1	0.8	6.3	73.8
Other receivables	8.7	10.0	-	-	-	18.7
Inwards premiums receivable from insureds and cedants	232.1	18.0	26.7	0.6	11.0	288.4
Corporation tax receivable	-	5.6	-	-	-	5.6
Investment in associates	64.7	-	-	-	-	64.7
Property, plant and equipment	1.0	1.8	-	-	-	2.8
Intangible assets	177.2	-	-	-	-	177.2
Total assets as at 31 December 2013	2,845.3	175.9	127.0	41.1	78.5	3,267.8

 

Liabilities	U.S. $ $m	Sterling $m	Euro $m	Japanese Yen $m	Other $m	Total $m
Losses and loss adjustment expenses	569.9	74.1	91.1	77.7	40.6	853.4
Unearned premiums	348.4	22.8	35.3	7.4	28.2	442.1
Insurance contracts - other payables	24.2	0.1	2.6	-	2.0	28.9
Amounts payable to reinsurers	25.3	5.2	0.3	-	0.1	30.9
Deferred acquisition costs ceded	0.1	-	-	0.1	-	0.2
Other payables	47.7	32.9	0.1	-	-	80.7
Deferred tax liability	19.4	17.2	-	-	2.1	38.7
Interest rate swap	(1.4)	-	1.6	-	-	0.2
Long-term debt	284.4	-	47.9	-	-	332.3
Total liabilities as at 31 December 2013	1,318.0	152.3	178.9	85.2	73.0	1,807.4

The impact on net income of a proportional foreign exchange movement of 10.0 per cent up and 10.0 per cent down against the U.S. dollar at the year end spot rates would be an increase or decrease of $3.8 million (2013 - $2.3 million).

The 31 December 2014 losses and loss adjustment expenses include the equivalent of $21.0 million (2013 - $57.2 million) of Japanese Yen denominated insurance liabilities that are contained within the Group's outwards reinsurance programme which limits the Group's net liability to $30.0 million. The Group has therefore not hedged the foreign currency exposure in relation to these losses.

The Group uses forward foreign currency contracts for the purposes of managing currency exposures. See page 117 for details of the Group's open forward foreign currency contracts.

 

C. Liquidity risk

Liquidity risk is the risk that cash may not be available to pay obligations when they are due without incurring an unreasonable cost. The Group's main exposures to liquidity risk are with respect to its insurance and investment activities. The Group is exposed if proceeds from financial assets are not sufficient to fund obligations arising from its insurance contracts. The Group can be exposed to daily calls on its available investment assets, principally to settle insurance claims.

Exposures in relation to insurance activities are as follows:

·  large catastrophic events, or multiple medium-sized events in quick succession, resulting in a requirement to pay a large value of claims within a relatively short time frame;

·  failure of insureds or cedants to meet their contractual obligations with respect to the payment of premiums in a timely manner; and

·  failure of reinsurers to meet their contractual obligations with respect to the payment of claims in a timely manner.

Exposures in relation to investment activities are as follows:

·  adverse market movements and/or a duration mismatch to obligations, resulting in investments being disposed of at a significant realised loss; and

·  an inability to liquidate investments due to market conditions.

The maturity dates of the Group's fixed income portfolio are as follows:

As at 31 December 2014	Core $m	Core plus $m	Surplus $m	Total $m
Less than one year	103.7	58.9	43.6	206.2
Between one and two years	168.1	117.1	42.4	327.6
Between two and three years	200.0	80.6	75.5	356.1
Between three and four years	20.9	19.6	65.3	105.8
Between four and five years	21.9	29.1	97.5	148.5
Over five years	5.9	9.5	243.8	259.2
Asset backed and mortgage backed securities	143.8	89.3	181.8	414.9
Total fixed income securities	664.3	404.1	749.9	1,818.3

 

As at 31 December 2013	Core  $m	Core plus $m	Surplus  $m	Total $m
Less than one year	265.9	153.2	56.7	475.8
Between one and two years	162.2	68.7	101.5	332.4
Between two and three years	123.4	30.2	57.6	211.2
Between three and four years	30.7	34.3	153.5	218.5
Between four and five years	15.1	23.2	54.3	92.6
Over five years	3.6	13.2	194.1	210.9
Asset backed and mortgage backed securities	118.4	116.4	219.5	454.3
Total fixed income securities	719.3	439.2	837.2	1,995.7

 

The maturity profile of the financial liabilities of the Group is as follows:

	Years until liability becomes due - undiscounted values
As at 31 December 2014	Balance sheet $m	Less than one $m	One to three $m	Three to five $m	Over five $m	Total $m
Losses and loss adjustment expenses	752.6	299.0	270.0	102.2	81.4	752.6
Insurance contracts - other payables	40.8	30.5	9.6	0.7	-	40.8
Amounts payable to reinsurers	34.2	34.2	-	-	-	34.2
Other payables	83.5	83.5	-	-	-	83.5
Interest rate swap	4.9	2.5	2.2	0.4	(0.2)	4.9
Long-term debt	326.6	13.2	35.3	38.0	546.6	633.1
Total	1,242.6	462.9	317.1	141.3	627.8	1,549.1

 

	Years until liability becomes due - undiscounted values
As at 31 December 2013	Balance sheet $m	Less than one $m	One to three $m	Three to five $m	Over five $m	Total $m
Losses and loss adjustment expenses	853.4	381.2	312.4	96.7	63.1	853.4
Insurance contracts - other payables	28.9	26.6	1.5	0.8	-	28.9
Amounts payable to reinsurers	30.9	30.9	-	-	-	30.9
Other payables	80.7	80.7	-	-	-	80.7
Interest rate swap	0.2	2.5	3.5	(1.2)	(4.6)	0.2
Long-term debt	332.3	13.3	34.0	41.8	629.7	718.8
Total	1,326.4	535.2	351.4	138.1	688.2	1,712.9

Actual maturities of the above may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. The prepayment options for the Group's long-term debt are discussed in note 22. While the estimation of the ultimate liability for losses and loss adjustment expenses is complex and incorporates a significant amount of judgement, the timing of payment of losses and loss adjustment expenses is also uncertain and cannot be predicted as simply as for other financial liabilities. Actuarial and statistical techniques, past experience and management's judgement have been used to determine a likely settlement pattern.

The Group manages its liquidity risks via its investment strategy to hold high quality, highly liquid securities, sufficient to meet its insurance liabilities and other near-term liquidity requirements. The creation of the core portfolio with its subset of guidelines aims to ensure funds are readily available to meet potential insurance liabilities in an extreme event plus other near-term liquidity requirements. In addition, the Group has established asset allocation and maturity parameters within the investment guidelines such that the majority of the investments are in high quality assets which could be converted into cash promptly and at minimal expense. The Group monitors market changes and outlooks and reallocates assets as deemed necessary.

 

D. Credit risk

Credit risk is the risk that a counterparty may fail to pay, or repay, a debt or obligation. The Group is exposed to credit risk on its fixed income investment portfolio and derivative instruments, its inwards premiums receivable from insureds and cedants, and on any amounts recoverable from reinsurers.

Credit risk on the fixed income portfolio is mitigated through the Group's policy to invest in instruments of high credit quality issuers and to limit the amounts of credit exposure with respect to particular ratings categories and any one issuer. Securities rated below an S&P or equivalent rating of BBB-/Baa3 may comprise no more than 10.0 per cent of shareholders' equity. In addition, no one issuer, with the exception of U.S. government and agency securities, other G10 government guaranteed securities (excluding Italy) and Australian sovereign debt should exceed 5.0 per cent of shareholders' equity. The Group is therefore not exposed to any significant credit concentration risk on its investment portfolio, except for fixed income securities issued by the U.S. government and government agencies and other highly rated governments.

Credit risk on exchange-traded derivative instruments is mitigated by the use of clearing houses to reduce counterparty credit risk, require the posting of margins and settle unrealised gains and losses daily. Credit risk on OTC derivatives is mitigated by monitoring the creditworthiness of the counterparties and by requiring collateral to be posted for positions which have accrued gains by amounts exceeding predetermined thresholds.

Credit risk on inwards premiums receivable from insureds and cedants is managed by conducting business with reputable broking organisations, with whom the Group has established relationships, and by rigorous cash collection procedures. The Group also has a broker approval process in place. Binding authorities are subject to standard market controls including credit control. Credit risk from reinsurance recoverables is primarily managed by the review and approval of reinsurer security by the RRC, as discussed on page 102.

The table below presents an analysis of the Group's major exposures to counterparty credit risk, based on their rating. The table includes amounts due from policyholders and unsettled investment trades. The quality of these receivables is not graded but, based on management's historical experience, there is limited default risk associated with these amounts.

As at 31 December 2014	Other investments  $m	Cash and fixed income securities $m	Inwards  premiums receivable and other receivables $m	Reinsurance recoveries $m
AAA	-	385.9	-	-
AA+, AA, AA-	-	765.8	-	-
A+, A, A-	0.7	642.4	85.0	103.0
BBB+, BBB, BBB-	-	193.1	-	0.1
Other1	-	134.6	273.1	9.3
Total	0.7	2,121.8	358.1	112.4

(1) Reinsurance recoveries classified as "other" include $4.2 million of reserves that are fully collateralised.

 

As at 31 December 2013	Other investments  $m	Cash and fixed income securities $m	Inwards premiums  receivable and other receivables $m	Reinsurance  recoveries  $m
AAA	-	568.8	-	-
AA+, AA, AA-	-	865.9	-	-
A+, A, A-	4.9	665.8	97.0	148.1
BBB+, BBB, BBB-	(0.2)	186.8	-	0.3
Other1	-	111.4	220.9	34.6
Total	4.7	2,398.7	317.9	183.0

(1) Reinsurance recoveries classified as "other" include $33.2 million of reserves that are fully collateralised; $26.8 million of these are with ARL.

The two counterparties to the Group's long-term debt interest rate swaps are currently rated A+ and A- by S&P respectively.

 

The following table shows inwards premiums receivable that are past due but not impaired:

	2014 $m	2013 $m
Less than 90 days past due	23.6	13.5
Between 91 and 180 days past due	6.7	2.2
Over 180 days past due	3.2	3.6
Total	33.5	19.3

Provisions of $1.2 million (2013 - $0.2 million) have been made for impaired or irrecoverable balances and $1.0 million (2013 - $0.3 million) was released from the consolidated statement of comprehensive income in respect of bad debts. No provisions have been made against balances recoverable from reinsurers.

E. Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems. The Group and its subsidiaries have identified and evaluated their key operational risks and these are incorporated in the risk registers and modeled directly within BLAST. The Group has also established, and monitors compliance with, internal operational risk tolerances. The RRC reviews operational risk on at least an annual basis and operational risk is covered in the CRO's quarterly report to the LHL and Entity Boards and the Cathedral Risk Committee reporting.

In order to manage operational risks, the Group has implemented a robust governance framework. Policies and procedures are documented and identify the key risks and controls within processes. The Group's Internal Audit function provides independent feedback with regard to the accuracy and completeness of key risks and controls, and independently verifies the effective operation of these through substantive testing. All higher risk areas are subject to an annual audit while compliance with tax operating guidelines is audited quarterly. Frequency of audits for all other areas varies from quarterly at the most frequent to a minimum of once every three years, on a rotational basis.

F. Strategic risk

The Group has identified several strategic risks. These include:

·  the risks that either the poor execution of the business plan or an inappropriate business plan in itself results in a strategy that fails to adequately reflect the trading environment, resulting in an inability to optimise performance, including reputational risk;

·  the risks of the failure to maintain adequate capital, accessing capital at an inflated cost or the inability to access capital. This includes unanticipated changes in vendor, regulatory and/or rating agency models that could result in an increase in capital requirements or a change in the type of capital required; and

·  the risks of succession planning, staff retention and key man risks as strategic risks.

The Group has maintained elevated risk scores in the risk register relating to the integration of Cathedral into the Group's financial and actuarial reporting, but these will be reviewed in 2015.

i. Business plan risks

The Group addresses the risks associated with the planning and execution of the business plan through a combination of the following:

·  an iterative annual forward-looking business planning process with cross departmental involvement, including the Cathedral team;

·  evaluation of and approval of the annual business plan by the Board of Directors;

·  regular monitoring of actual versus planned results;

·  periodic review and re-forecasting as market conditions change; and

·  feedback to senior management via the daily UMCC and fortnightly RRC meetings.

 

ii. Capital management risk

The total capital of the Group is as follows:

As at 31 December	2014 $m	2013 $m
Shareholders' equity	1,356.8	1,459.7
Long-term debt	326.6	332.3
Total capital	1,683.4	1,792.0
Intangible assets	(153.8)	(177.2)
Total tangible capital	1,529.6	1,614.8

Risks associated with the effectiveness of the Group's capital management, are mitigated as follows:

·  regular monitoring of current and prospective regulatory and rating agency capital requirements;

·  regular discussion with the Cathedral management team regarding Lloyd's capital requirements;

·  oversight of capital requirements by the Board of Directors;

·  ability to purchase sufficient, cost effective reinsurance;

·  maintaining contact with vendors, regulators and rating agencies in order to stay abreast of upcoming developments; and

·  participation in industry groups such as the International Underwriters Association, the Association of Bermuda Insurers and Reinsurers and the Lloyd's Market Association.

The Group reviews the level and composition of capital on an ongoing basis with a view to:

·  maintaining sufficient capital for underwriting opportunities and to meet obligations to policyholders;

·  maximising the risk-adjusted return to shareholders within predetermined risk tolerances;

·  maintaining adequate financial strength ratings; and

·  meeting internal and regulatory capital requirements.

Capital is increased or returned as appropriate. The retention of earnings generated leads to an increase in capital. Capital raising can include debt or equity and returns of capital may be made through dividends, share repurchases, a redemption of debt or any combination thereof. Other capital management tools and products available to the Group may also be utilised. All capital actions require approval by the Board of Directors.

Internal methods have been developed to review the profitability of classes of business and their estimated capital requirements plus the capital requirements of the combination of a wide range of other risk categories. These approaches are used by management in decision making. The operating entities also conduct capital requirement assessments under internal measures and local regulatory requirements. Refer to note 30 for a discussion of the regulatory capital requirements of the Group's operating entities.

The Group's aim is to provide its shareholders with an RoE of 13.0 per cent in excess of a risk-free rate over the insurance cycle. The return is generated within a broad framework of risk parameters. The return is measured by management in terms of the IRR of the increase in FCBVS in the period adjusted for dividends accrued. This aim is a long-term goal, acknowledging that management expects both higher and lower results in the shorter term. The cyclicality and volatility of the insurance market is expected to be the largest driver of this pattern. Management monitors these peaks and troughs - adjusting the Group's portfolio to make the most effective use of available capital and seeking to maximise the risk-adjusted return.

 

IRR achieved is as follows:

	Annual return %	Compound annual return %	Inception to date return  %
31 December 20051	(3.2)	n/a	(3.2)
31 December 2006	17.8	14.0	14.0
31 December 2007	31.4	22.4	50.3
31 December 2008	7.8	17.9	63.7
31 December 2009	26.5	19.8	105.8
31 December 2010	23.3	20.3	152.4
31 December 2011	13.4	19.5	191.2
31 December 2012	16.7	19.2	242.7
31 December 2013	18.9	19.2	308.0
31 December 2014	13.9	18.9	375.3

(1) The returns shown are for the period from the date of incorporation, 12 October 2005, to 31 December 2005.

IRR achieved in excess of the three-month treasury yield is as follows:

	Annual return %	Compound annual return %	Inception to date return %
31 December 20051	(3.4)	n/a	(3.4)
31 December 2006	13.0	9.2	9.2
31 December 2007	26.9	17.8	40.8
31 December 2008	6.4	14.3	52.7
31 December 2009	26.4	17.1	94.6
31 December 2010	23.2	18.2	141.1
31 December 2011	13.3	17.7	179.9
31 December 2012	16.6	17.7	231.3
31 December 2013	18.9	17.9	296.6
31 December 2014	13.9	17.7	363.8

(1) The returns shown are for the period from the date of incorporation, 12 October 2005, to 31 December 2005.

iii. Retention risks

Risks associated with succession planning, staff retention and key man risks are mitigated through a combination of resource planning processes and controls, including:

·  the identification of key personnel with appropriate succession plans;

·  identification of key team profit generators and function holders with targeted retention packages;

·  documented recruitment procedures, position descriptions and employment contracts; and

·  resource monitoring and the provision of appropriate compensation, including equity based compensation which vests over a defined time horizon, and training schemes.