Exhibit 99.2

		CONTENTS TOKIO MILLENNIUM RE (UK) LIMITED Financial Statements Report For The Year Ended 31 December 2018

 

 

Contents
Report of Independent Auditors			2
Statements of Comprehensive Income			3 - 4
Statements of Financial Position: Assets			5
Statements of Financial Position: Liabilities			6
Statements of Changes in Equity			7
Statements of Cash flows			8
Statement of Accounting Policies			9 - 13
Notes to the Financial Statements			14 - 43

 

Page 1

Report of Independent Auditors

To the Board of Directors of Tokio Millennium Re (UK) Limited

We have audited the accompanying financial statements of Tokio Millennium Re (UK) Limited which comprise the statements of financial position as at 31 December 2018 and 2017, and the related statements of comprehensive income, changes in equity and cash flows for the years then ended, which as described in accounting policies section (a), have been prepared on the basis of accounting principles generally accepted in the United Kingdom.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in United Kingdom; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tokio Millennium Re (UK) Limited as of 31 December 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United Kingdom.

 

PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT T: +44 (0) 2075 835 000, F: +44 (0) 2072 127 500, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of

PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business.

Basis of Accounting

As discussed in statement of accounting policies section (a), the Company prepares its financial statements on the basis of accounting principles generally accepted in the United Kingdom, which differs from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP

 

PricewaterhouseCoopers LLP

London, United Kingdom

22 March 2019

		STATEMENTS OF COMPREHENSIVE INCOME TOKIO MILLENNIUM RE (UK) LIMITED

 

 

		Notes		2018 £000				2017 £000
EARNED PREMIUMS, NET OF REINSURANCE
Premiums written
Gross amount		2(a),2(b)			(8,216	)			(5,135	)
Reinsurers’ share					77				(284	)
					(8,139	)			(5,419	)
Change in the provision for unearned premiums
Gross amount		3			1,882				8,380
Reinsurers’ share		3			(291	)			(321	)
					1,591				8,059
Earned premiums, net of reinsurance		4			(6,548	)			2,640
CLAIMS INCURRED, NET OF REINSURANCE
Claims paid
Gross amount		5			(32,840	)			(54,782	)
Reinsurers’ share		5			293				866
					(32,547	)			(53,916	)
Change in the provision for claims
Gross amount		5,6(a)			42,713				58,871
Reinsurers’ share		5,6(a)			197				(4,355	)
					42,910				54,516
Claims incurred, net of reinsurance		5			10,363				600
Operating expenses, net of reinsurance
Gross amount		7			(1,946	)			2,618
Reinsurers’ share		7			(314	)			1,469
					(2,260	)			4,087
BALANCE ON THE TECHNICAL ACCOUNT FOR GENERAL BUSINESS		2(a)			1,555				7,327
INVESTMENT RETURN
Investment income		8			6,551				6,083
Realised loss on investments					(3,880	)			(3,130	)
Unrealised loss on investments					(671	)			(737	)
Investment expenses and charges					(343	)			(523	)
Total investment return					1,657				1,693
OTHER INCOME AND CHARGES
Other income		9(a)			5				205
Other charges		9(b)			(579	)			(1,156	)
					(574	)			(951	)
OPERATING PROFIT AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAX					2,638				8,069
Tax charge on profit on ordinary activities		10(a)			(492	)			(1,411	)
PROFIT FOR THE FINANCIAL YEAR					2,146				6,658

 

Page 3

		STATEMENTS OF COMPREHENSIVE INCOME TOKIO MILLENNIUM RE (UK) LIMITED

 

 

		Notes				2018 £000				2017 £000
PROFIT FOR THE FINANCIAL YEAR							2,146				6,658
OTHER COMPREHENSIVE INCOME
Gain on revaluation of group undertaking							—				608
TOTAL COMPREHENSIVE INCOME FOR THE YEAR							2,146				7,266

 

Page 4

		STATEMENTS OF FINANCIAL POSITION : ASSETS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

		Notes				2018 £000				2017 £000
INVESTMENTS
Other financial investments			11				364,851				375,128
Deposits with ceding undertakings			12				1,336				1,503
							366,187				376,631
REINSURERS’ SHARE OF TECHNICAL PROVISIONS
Provision for unearned premiums			3				31				317
Claims outstanding			6(a)				1,948				1,692
							1,979				2,009
DEBTORS
Debtors arising out of direct insurance operations			13				47				47
Debtors arising out of reinsurance operations			14				5,783				13,070
Other debtors including taxation and social security			15				11				1,297
							5,841				14,414
OTHER ASSETS
Tangible assets			16				—				37
Cash at bank and in hand							19,200				34,944
							19,200				34,981
PREPAYMENTS AND ACCRUED INCOME
Accrued interest							2,161				2,617
Deferred acquisition costs			17				48				554
Other prepayments and accrued income			18				113				260
							2,323				3,431
TOTAL ASSETS							395,529				431,466

 

Page 5

		STATEMENTS OF FINANCIAL POSITION : LIABILITIES TOKIO MILLENNIUM RE (UK) LIMITED

 

 

		Notes				2018 £000				2017 £000
CAPITAL AND RESERVES
Called up share capital			19				125,000				125,000
Profit and loss account							81,669				79,523
Total equity							206,669				204,523
TECHNICAL PROVISIONS
Provision for unearned premium			3				766				2,604
Claims outstanding			6	(a)			180,016				219,665
							180,782				222,269
PROVISIONS FOR OTHER RISKS AND CHARGES
Onerous lease			20				—				335
Provision for taxation			10	(d)			280				235
							280				570
CREDITORS
Creditors arising out of insurance operations							7				7
Creditors arising out of reinsurance operations							6,483				2,625
Other creditors including taxation and social security			21				670				404
							7,160				3,036
ACCRUALS AND DEFERRED INCOME
Reinsurers’ share of deferred acquisition costs			17				2				21
Other accruals and deferred income			22				636				1,047
							638				1,068
TOTAL EQUITY AND LIABILITIES							395,529				431,467

The consolidated financial statements on pages 4 to 44 were approved by the Board of Directors on 22 March 2019 and signed on its behalf by:

 

Mark Julian

Chief Executive Officer

 

Page 6

		STATEMENTS OF CHANGES IN EQUITY TOKIO MILLENNIUM RE (UK) LIMITED

 

 

		2018
		Share capital £000				Revaluation reserve £000				Profit and loss account £000				Total equity £000
At beginning of year			125,000				—				79,523				204,523
Profit after tax			—				—				2,146				2,146
At end of year			125,000				—				81,669				206,668
		2017
		Share capital £000				Revaluation reserve £000				Profit and loss account £000				Total equity £000
At beginning of year			125,000				1,561				70,696				197,257
Profit after tax			—				—				6,658				6,658
Revaluation gain on disposal of subsidiary			—				608				—				608
Disposal of subsidiary			—				(2,169	)			2,169				—
At end of year			125,000				—				79,523				204,523

 

Page 7

		STATEMENTS OF CASH FLOWS TOKIO MILLENNIUM RE (UK) LIMITED Year Ended 31 December 2018

 

 

		2018 £000				2017 £000
CASH FLOWS FROM OPERATING ACTIVITIES
Operating profit and profit on ordinary activities before tax			2,638				8,069
Adjustments for:
Depreciation of property and equipment			37				148
Amortisation of intangible assets			—				3
Investment income			(6,551	)			(6,083	)
Realised loss on investments			3,880				3,130
Unrealised loss on investments			671				737
Foreign exchange gains on cash and cash equivalents			(502	)			(419	)
Revaluation gain on disposal of subsidiary			—				(608	)
Other foreign exchange gains			(216	)			(62	)
Change in operational assets and liabilities
Debtors arising from operations			7,184				9,157
Deposits with ceding undertakings			167				566
Provision for unearned premiums			287				345
Claims outstanding from reinsurers			(256	)			4,414
Deferred acquisition costs			507				1,936
Claims outstanding			(39,649	)			(64,977	)
Creditors arising from operations			3,961				1,974
Provision for unearned premium			(1,838	)			(8,700	)
Reinsurers’ share of deferred acquisition costs			(19	)			(40	)
Other assets and liabilities			(2,352	)			(1,778	)
CASH USED IN OPERATING ACTIVITIES			(32,051	)			(52,188	)
Income taxes refunded/(paid)			1,628				(404	)
NET CASH USED IN OPERATING ACTIVITIES			(30,423	)			(52,592	)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment income received			7,000				5,566
Purchase of investments			(296,261	)			(489,391	)
Proceeds on sales and maturities of investments			319,362				474,178
Proceeds from sale of equity investment			—				3,291
Purchase of property and equipment			—				(21	)
Net cash (used in)/provided by investing activities			30,101				(6,377	)
Net decrease in cash and cash equivalents			(322	)			(58,969	)
Foreign exchange gains on cash and cash equivalents			502				419
Cash and cash equivalents at beginning of year			83,145				141,695
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR			83,325				83,145
Cash and cash equivalents consists of:
Cash at bank and in hand			19,200				34,944
Short term deposits (included in current asset investments)			64,125				48,201
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR			83,325				83,145

 

Page 8

		STATEMENT OF ACCOUNTING POLICIES TOKIO MILLENNIUM RE (UK) LIMITED

 

STATEMENT OF ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

(a)	Statement of compliance

The consolidated financial statements have been prepared in accordance with United Kingdom Accounting Standards, including Financial Reporting Standard 102, “The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland” (“FRS 102”), Financial Reporting Standard 103, “The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland for entities issuing insurance contracts” (“FRS 103”).

 

(b)	Basis of preparation

These consolidated financial statements are prepared on a going concern basis, under the historical cost convention, as modified by the recognition of certain assets and liabilities measured at fair value.

 

(c)	Going concern

Having assessed the principal risks, the directors considered it appropriate to adopt the going concern basis of accounting in preparing the consolidated financial statements.

 

(d)	Use of estimates and judgements

The preparation of the consolidated financial statements in conformity with FRS 102 requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

The most significant estimate made by management is in relation to claims outstanding. Estimates in relation to claims incurred are discussed in statement of accounting policy (i) - claims incurred and note 1 (c) - Underwriting Risk-reserve. Also refer to Note 6 (a) - Technical Provisions, claims outstanding.

 

(e)	Basis of accounting for underwriting activities

The results are determined on an annual basis whereby the incurred cost of claims, commissions and related expenses are charged against the earned proportion of premiums, net of reinsurance, as described below.

 

(f)	Written, earned and unearned premiums

Premiums written

Premiums written are recognised within the Statement of Comprehensive Income—Technical Account, with the gross and ceded amounts disclosed separately. Premiums written are stated gross of acquisition costs payable to intermediaries, but net of any premium levies or indirect taxes.

Premiums written relate to business incepted during the financial period, together with any differences between booked premiums and those previously accrued on contracts which incepted in prior financial periods.

 

Page 9

		STATEMENT OF ACCOUNTING POLICIES TOKIO MILLENNIUM RE (UK) LIMITED

 

STATEMENT OF ACCOUNTING POLICIES (continued)

 

 

Premium is initially recognised based on estimates of ultimate premiums. These estimates are judgemental and could result in misstatements of premium recorded in the financial statements. Adjustments to the amounts of premium are reflected in the consolidated financial statements for the period in which the adjustments are made. The methods used, and the estimates made, are reviewed regularly.

Earned premiums

Premiums written are earned on a time-apportionment basis to reflect the risk profile of each contract written.

Unearned premium reserves (“UPR”)

Premiums written not earned, are deferred within the Statement of Financial Position as unearned premium reserves (“UPR”). UPR are retranslated at closing rate and will be recognised as earned premiums in the Statement of Comprehensive Income - Technical Account in future financial periods’.

 

(g)	Claims incurred

Claims incurred are recognised within the Statement of Comprehensive Income - Technical Account, with the gross and ceded amounts disclosed separately. Claims incurred comprise:

 

•

Claims paid during the financial period;

 

•

Movements in claim provisions during the financial period;

 

•

Related internal and external claims handling costs attributable to the above; and

 

•

Where applicable, deductions for salvage and other recoveries.

Claims provisions and related reinsurance recoveries

Claims provisions within the Statement of Financial Position comprise the following:

 

•

Estimated costs of claims notified but not yet settled at the financial period end (“outstandings”);

 

•

Incurred but not reported claims at the financial period end (“IBNRs”);

 

•

Related internal and external claims handling costs attributable to the above; and

 

•

Salvage and subrogation deductions, plus other recoveries where applicable.

Claims provisions are estimated at each financial period end based on best available information. The Company takes all reasonable steps to ensure that it has appropriate information regarding its estimated claim exposures and these are set so that no adverse run-off deviation is envisaged. Given the uncertainties in establishing claims provisions, it is likely that the final liability will prove different from the original estimates established. Where such uncertainty is deemed considerable, a degree of caution is exercised in setting claims provisions.

Notified outstanding claims

In estimating outstanding claims within the Statement of Financial Position, the Company considers the claim circumstances as reported, including any information available from loss adjusters.

The Company’s gross outstanding claim estimates of large losses are based on best estimates of claims given the currently available information from: industry assessments of exposures; preliminary claims information obtained from policyholders, cedants and brokers to-date; and a review of in-force contracts. Actual gross losses from these events may vary materially from initial estimates due to the inherent uncertainties in making such determinations.

Incurred but not reported (“IBNR”) claims

The estimation of IBNR claims within the Statement of Financial Position is generally subject to a greater degree of uncertainty than the estimation of notified outstanding claims as less information is available. IBNR claims may often not be apparent to the insured until many years have passed following the event which trigger such claims. Business classes where the proportion of IBNR claims are high in relation to total claims provisions will typically display greater variations between initial estimates and the final outcomes because of greater difficulties estimating these. Business classes where claims are typically reported relatively quickly after the claim event tend to display lower levels of volatility.

In calculating IBNR claims, the Company applies the three reserving methods of a priori loss ratio, link ratio and Bornhuetter Ferguson. The Company then selects the most appropriate method based on information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data where appropriate.

These methods consider, among other things, premium rate changes, claims inflation and changes in terms and conditions that have been observed in the market.

 

Page 10

		STATEMENT OF ACCOUNTING POLICIES TOKIO MILLENNIUM RE (UK) LIMITED

 

STATEMENT OF ACCOUNTING POLICIES (continued)

 

(h)	Claims incurred (continued)

 

The IBNR for each class of business is set to represent the best estimate of future claims with appropriate allowance for all risks faced. There is no longer a margin included in the IBNR. The IBNR in previous years has included a margin to take into account uncertainties in its estimation that arise from the fact that the claims experience is underdeveloped and that industry benchmark data is at times used in the reserving methodologies. The level of this margin has generally been decreasing each year as these uncertainties have reduced.

Assumed treaty contracts

These contracts currently comprise a mixed portfolio of Property, Liability, Accident/Health, Motor, Financial, Marine, Transport and Aggregate lines. The majority are short-to-medium tail in nature and there is generally not expected to be a significant delay between the occurrence of the claim and the claim being reported to the Company. Certain contracts have exposure to periodic payment orders and these are longer tail in nature where the claim payments are structured as annuities over an extended time horizon.

Direct contracts, assumed facultative contracts

These contracts comprise principally Property and Engineering lines. These are short-to-medium tail in nature and there is generally not expected to be a significant delay between the occurrence of the claim and the claim being reported to the Company.

Reinsurance recoveries

For ceded outstanding claims within the Statement of Financial Position, a separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provision.

For ceded IBNR claims within the Statement of Financial Position, these are assumed to be consistent with the historical pattern of recoveries, and adjusted to reflect changes in the Company’s reinsurance programme over time.

An assessment is also made of their recoverability having regard to market data on the financial strength of the underlying reinsurers and their associated default probabilities.

 

(i)	Unexpired risk provisions (“URP”)

Unexpired risk provisions (“URP”) are established within the Statement of Financial Position for any deficiencies arising when unearned premium reserves (“UPR”), net of associated deferred acquisition costs (“DAC”) are insufficient to meet expected claims and expenses after taking into account future investment return arising from investments supporting the URP and UPR. The expected claims are calculated based on information available at the Statement of Financial Position date.

Unexpired risk surpluses and deficits are offset where business classes are managed together and a provision is made if an aggregate deficit arises.

 

(j)	Acquisition costs

Acquisition costs

Acquisition costs within the Statement of Comprehensive Income-Technical Account represent both external commissions and internal expenses associated with acquiring insurance contracts written during the financial period. Acquisition costs are recognised in the financial period in which the related premiums are earned, with the gross and ceded amounts disclosed separately.

Deferred acquisition costs (“DAC”)

Acquisition costs are deferred over the period in which related premiums are earned and are recognised within the Statement of Financial Position as deferred acquisition costs (“DAC”). DAC are retranslated at closing rate and will be charged in future financial periods’ Statement of Comprehensive Income - Technical Account.

 

Page 11

		STATEMENT OF ACCOUNTING POLICIES TOKIO MILLENNIUM RE (UK) LIMITED

 

STATEMENT OF ACCOUNTING POLICIES (continued)

 

 

(k)	Financial instruments

The Company has chosen to adopt FRS 102 section 11 in respect of financial instruments.

Financial assets

Basic financial assets, including trade and other receivables, cash and bank balances, bonds and similar debt instruments are initially recognised at transaction price. Upon their initial recognition, debt instruments are designated by the entity as fair value through profit or loss, and are subsequently measured at fair value which is the current bid market price. Any changes in fair value are recognised in the Statement of Comprehensive Income - Non Technical Account.

Financial assets are derecognised when: (a) the contractual rights to the cash flows from the asset expire or are settled; or (b) substantially all the risks and rewards of the ownership of the asset are transferred to another party; or (c) control of the asset has been transferred to another party who has the practical ability to unilaterally sell the asset to an unrelated third party without imposing additional restrictions.

Financial liabilities

Basic financial liabilities, including trade and other payables are initially recognised at transaction price and are subsequently stated at amortised cost. Trade payables are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognised at the transaction price when recorded.

Offsetting

Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is an enforceable right to set off the recognised amounts, and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

 

(I)	Investment return

Investment return is recognised within the Statement of Comprehensive Income and comprises:

 

•

Investment income earned during the financial period;

 

•

Investment expenses, charges or interest incurred during the financial period;

 

•

Movements in unrealised market value gains/losses during the financial period; and

 

•

Realised investment gains/losses arising from the sales and maturities of investments during the financial period.

Investment income

Investment income comprises:

 

•

Interest on bank balances, which are accounted for on an accruals basis;

 

•

Coupons on bonds, which are accounted for on an accruals basis; and

 

•

Returns on money market funds, which are accounted for on an accruals basis.

Investment expenses, charges or interest

These are recognised on an accruals basis.

Movements in unrealised gains/(losses)

Unrealised gains/(losses) on investments arising during the financial period represent the difference between:

 

•

The market value of investments at the Statement of Financial Position date, and their acquired cost if purchased during the financial period; or

 

•

The market value of investments at the Statement of Financial Position date, and their market value at the last Statement of Financial Position date if purchased in previous financial periods.

Realised gains/(losses)

These represent the difference between the net sales proceeds and acquired cost. Any unrealised gains/(losses) previously recognised will be reclassified as realised gains/(losses) upon the sale or maturity of investments.

 

(m)	Other income

Fee income arises from:

 

•

Income receivable by the Company from group undertakings for risk consultancy services; and

 

•

Income receivable by the Company from its sublease on an office premise.

 

Page 12

		STATEMENT OF ACCOUNTING POLICIES TOKIO MILLENNIUM RE (UK) LIMITED

 

STATEMENT OF ACCOUNTING POLICIES (continued)

 

(n)	Foreign currency translations and settlements

The Company’s reporting and functional currency is GBP.

The Company operates in the three transactional currencies of GBP/EUR/USD. All non-GBP/EUR/USD transactions are translated into GBP/EUR/USD at the actual rates prevailing on the respective dates of the transactions. At each period end:

 

•

Foreign currency monetary items, including the Statement of Comprehensive Income, are translated at closing rates. Individual line items in the Statement of Comprehensive Income are translated at the average rate, with the retranslation into closing rates taken to exchange gains and losses.

 

•

Foreign currency non-monetary items measured at historical cost are translated using the exchange rate prevailing at the date of the transaction.

 

•

Foreign currency non-monetary items measured at fair value are translated using the exchange rate prevailing at the date fair value was determined.

All foreign exchange gains and losses are recognised in the Statement of Comprehensive—Non Technical Account. These arise from:

 

•

Settlements of non-GBP/EUR/USD foreign currency transactions.

 

•

Retranslations of monetary items at period end exchange rates.

 

•

Differences on non-monetary items between theoretical period end exchange rate values, and the established historic or fair values recognised at various exchange rates.

 

(o)	Operating leases

Operating lease rentals are charged to the Statement of Comprehensive Income-Non Technical Account evenly over the period of the lease.

 

(p)	Current and deferred taxation

Current tax

Current tax is recognised in the Statement of Comprehensive Income-Non Technical Account and reflects:

 

•

Estimated tax charges/credits associated with the current financial period’s taxable profits/losses; and

 

•

Changes in previously estimated tax charges/credits associated with previous financial periods’ taxable profits/losses.

Deferred tax

Deferred tax assets/liabilities within the Statement of Financial Position arise from differences in timing between the recognition of taxable profits/losses in the consolidated financial statements, versus their recognition in the tax computation.

Provision is made for all material timing differences, including revaluations of investment gains/losses recognised within the Statement of Comprehensive Income—Non Technical Account. Deferred tax is measured using tax rates and laws that have been enacted or substantively enacted by the period end and that are expected to apply to the reversal of the timing difference. This provision is not discounted.

Deferred tax assets are recognised to the extent that it is regarded more likely than not that these will be recovered.

 

(q)	Pension costs

The Company only operates a defined contribution pension scheme—a plan under which the Company pays fixed contributions into a separate entity. Once the contributions have been paid, the Company has no further payment obligations. Contributions to the scheme are charged to the Statement of Comprehensive Income—Technical Account and represent the amounts payable during the current financial period. Contributions are accumulated and invested by an independent scheme manager across a portfolio of assets which are held separately from the Company’s assets.

 

(r)	Tangible assets

Tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes the original purchase price, costs directly attributable to bringing the asset to its working condition for its intended use, dismantling and restoration costs and borrowing costs capitalised. The costs of tangible assets are capitalised on the Statement of Financial Position within the following categories, and depreciated on a straight line basis over the estimated useful lives stipulated below:

 

•

Leasehold improvements              3 to 10 years

 

•

Furniture/fixtures/fittings             2 years

 

•

Computer hardware                      2 years

 

•

Office equipment                          2 years

The assets’ residual values and useful lives are reviewed, and adjusted, if appropriate, at the end of each reporting period. The effect of any change is accounted for prospectively.

 

(s)	Distributions to equity shareholders

Dividends and other distributions to Company’s shareholders are recognised as a liability in the financial statements in the period in which the dividends and other distributions are approved by the Company’s shareholders. These amounts are recognised in the Statement of Changes in Equity.

 

(t)	Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts, when applicable, are shown within borrowings in current liabilities.

 

Page 13

		NOTES TO THE FINANCIAL STATEMENTS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

1.	RISK MANAGEMENT

The Company, through its risk management function and the Risk Committee, seeks to identify all material risks inherent in its business including emerging risks, understand the manifestations of each risk, then assess, control, mitigate and manage these risks appropriately.

The objectives of the Company’s risk management function are to ensure that:

 

•

all material risks are proactively identified;

 

•

the probability and impact of each risk are quantified on a pre-mitigation and post-mitigation basis;

 

•

the potential to cause losses or generate profits is understood and assessed;

 

•

appropriate action is taken to manage the assumption of each risk based on that assessment and the Company’s stated risk appetite;

 

•

an appropriate level of capital is held to cover financial and non-financial risks from all sources; and

 

•

following a severe catastrophic event(s), appropriate capital action can be executed to remain solvent and meet its obligations under reinsurance contracts.

The oversight of the Company’s risk management function falls within the remit of the Risk Committee, a subcommittee of the Executive Committee which reports to the Board of Directors. The Risk Committee is charged with setting the orientation of the Company’s business. It pays particular attention to business strategy, capital allocation, risk control framework and ensures these are implemented.

The Company is exposed to risks from several sources. These fall into the broad categories of: underwriting risk (comprising premium, catastrophe and reserve); financial risk (comprising interest rate, foreign exchange, credit and liquidity); operational risk; and strategic risk.

Underwriting risk

Underwriting risk consists of premium risk, catastrophe risk and reserve risk.

Underwriting risk arise either from the acceptance of risks that do not comply with the Company’s underwriting guidelines and corporate strategy, or from the acceptance of risks that result in losses and expenses greater than it had anticipated at the time of underwriting.

As a reinsurance Company, TMRUK is in the business of taking underwriting risk and therefore has a high appetite for underwriting risk. The Company’s risk limits are defined in the Company’s risk appetite and risk tolerance limits for all underwriting risks.

The Company has underwriting guidelines in place that clearly define each underwriter’s authority, permitted territorial scope, risks to be written, risks to be avoided, acceptance limits, maximum policy period, maximum net retention, and outward reinsurance.

As part of the Company’s risk control strategy and governance, all contracts must be reviewed and approved by the Executive Committee, a sub-committee of the Audit Committee, before these can be bound.

The Company employs experienced catastrophe analysts and modellers, as well as experienced and credentialed actuaries, to perform pricing analyses ensuring each risk is adequately priced.

Financial risk

Financial risk refers to the risk of financial loss due to a change in the value of the Company’s assets, or a change of market risk factors that affect the value of such assets. The Company has identified the following as its main sources of financial risks: interest rate risk, foreign exchange risk, credit risk and liquidity risk.

Operational risk

Operational risk refers to the risk of financial or other loss, or potential damage to the Company’s reputation resulting from inadequate or failed internal processes, people and systems, or from external events.

Strategic risk

Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions, or inability to act in response to business opportunities, or to adapt to changes in its operating environment.

 

Page 14

		NOTES TO THE FINANCIAL STATEMENTS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

1.	RISK MANAGEMENT (continued)

 

 

(a)	Underwriting risk - premium

Premium risk is the risk that the premium to be earned over the next 12 month period from the in-force, new or renewal reinsurance contracts is insufficient to cover the claim costs, claim adjustment expenses as well as the acquisition costs to be incurred by those contracts over the same period.

Gross written premium of £(8,216) thousand (2017: £(5,135)) thousand relates to revisions in premium estimates primarily on Property and Marine.

Details of gross premiums written by geographical area of risk insured are set out below.

 

		2018								2017
		Gross written premiums £000				%				Gross written premiums £000				%
Geographic area of risk insured
Worldwide			(4,257	)			53	%			(2,987	)			58	%
Asia and Australia			(2,170	)			27	%			(2,312	)			45	%
Africa and Middle East			(685	)			8	%			(254	)			5	%
North, Central and South America			(736	)			9	%			(114	)			2	%
United Kingdom			(435	)			4	%			(13	)			1	%
Europe			67				1	%			545				(11	)%
			(8,216	)			100	%			(5,135	)			100	%

Details of gross premiums written by line of business are provided below.

 

		2018								2017
		Gross written premiums £000				%				Gross written premiums £000				%
Line of business
Property			(4,048	)			49	%			(3,466	)			67	%
Financial Lines			(101	)			1	%			(3,075	)			61	%
Transport			(583	)			7	%			(354	)			7	%
Marine			(2,017	)			25	%			(305	)			6	%
Accident and Health			(39	)			0	%			(25	)			0	%
Aggregate Cover			(92	)			1	%			9				(0	)%
Motor			(305	)			4	%			388				(8	)%
Liability			(1,031	)			13	%			1,693				(33	)%
			(8,216	)			100	%			(5,135	)			100	%

 

(b)	Underwriting risk - catastrophe

Catastrophe risk is the risk that the premium to be earned over the next 12 month period from the catastrophe exposed reinsurance contracts (in-force, new or renewal) is insufficient to cover potential claim costs, claim adjustment expenses as well as the acquisition costs associated with those contracts that may originate from extreme or exceptional catastrophic events over the same period, such as but not limited to hurricanes, earthquakes, windstorms, landslides, and terrorist attacks.

Catastrophe risk is classified as a separate and distinct class of underwriting risk mainly due to its low frequency and high severity characteristics, its potential to affect numerous contracts simultaneously, and inflict significant erosion of the Company’s capital.

The Company has made a series of strategic moves to diversify, spread and dilute its catastrophic exposures as well as optimise its underwriting portfolio through geographical diversification and by spreading risks across multiple lines of businesses.

 

Page 15

		NOTES TO THE FINANCIAL STATEMENTS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

1.	RISK MANAGEMENT (continued)

 

 

(c)	Underwriting risk - reserve

Reserve risk is the risk that the best (point) estimate of unpaid loss and loss adjustment expense reserves (collectively “claims reserves”) are inadequate to cover all future payments for the settlement of claims from all prior accident years occurring at or before the valuation date.

Reserve risk is distinct from premium risk and is related to premium exposures that have already been earned, as well as claims outstanding.

A summary of changes in claims reserves is presented in Note 6. This comprises outstanding claims reserves, claims incurred but not reported reserves, unallocated loss adjustment reserves and any reinsurers’ share thereof. There was no change to the Company’s reserving methodology during the year.

To manage reserving risk, the Company’s actuarial team uses a range of recognised actuarial techniques to project gross premiums written to ultimate, monitor claims development patterns, and stress test ultimate insurance liabilities. An independent firm of actuaries also performs an annual reprojection of the ultimate insurance liabilities.

A full analysis of claims reserves is performed on a quarterly basis. The analysis is reviewed by and discussed with underwriters, actuaries, claims, finance and senior management prior to submission to the Reserve Committee, a sub-committee of the Executive Committee. The Reserve Committee’s remit is to review the sufficiency of the estimated claims reserves and to critically assess the claims reserving practices of the Company.

The claims reserves established can be more or less than adequate to meet individual claims arising. The level of uncertainty varies significantly from class to class but can arise from inadequate reserves for known large losses and catastrophes, or from inadequate provision for unknown losses. The Company believes that the claims reserves established are adequate, however a 1% improvement/deterioration in the total estimated losses would have an impact on profit before tax of £1,800 thousand gain/loss (2017: £2,197 thousand).

Concentrations of claims reserves by line of business are provided below.

 

		2018								2017
Gross claims reserves		Claims reserves £000				%				Claims reserves £000				%
Line of business
Motor			97,201				53	%			64,106				42	%
Liability			36,053				20	%			39,693				26	%
Property			19,113				11	%			22,213				15	%
Financial Lines			17,156				10	%			14,644				10	%
Marine			7,002				4	%			7,672				5	%
Transport			2,195				1	%			2,484				2	%
Aggregate Cover			810				1	%			1,015				2	%
Accident and Health			486				0	%			377				0	%
			180,016				100	%			152,204				100	%

Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. Following the announcement by the Ministry of Justice on 27 February 2017 to decrease the Ogden rate from 2.75% to -0.75%, balance sheet reserves were calculated using a rate of -0.75%. On 20 March 2018, the Government announced that it will introduce the Civil Liability Bill (the Bill), which includes provisions to amend the discount rate. In December 2018 the Bill became an Act of Parliament, meaning that a new Ogden discount rate will be set by the Lord Chancellor in 2019. Based upon this, there is certainty that there will be a change in the Ogden rate in 2019, but uncertainty remains around the amount and timing of the final rate. At December 2018, the claim reserves have been calculated using a discount rate of 0.00% (2017: - 0.75%) resulting in a release of £10.9 million, though the rate to be announced by the Lord Chancellor later this year may result in a different discount rate.

 

Page 16

		NOTES TO THE FINANCIAL STATEMENTS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

1.	RISK MANAGEMENT (continued)

 

(c)	Underwriting risk - reserve (continued)

 

The table below summarises the development of gross ultimate cumulative claim estimates at the end of each financial year, illustrating how amounts estimated have changed from the first estimate made.

 

2018		Underwriting years
Gross ultimate liability estimates		2005				2006				2007				2008				2009				2010
at end of financial years		£000				£000				£000				£000				£000				£000
End of financial year 1			17,474				11,230				19,639				43,205				29,520				44,369
End of financial year 2			25,287				27,944				54,944				58,392				53,457				61,896
End of financial year 3			22,947				40,886				54,431				61,402				52,591				53,030
End of financial year 4			24,896				35,449				53,777				64,093				50,098				50,859
End of financial year 5			23,325				35,595				60,522				69,561				51,286				50,525
End of financial year 6			22,505				31,542				64,342				68,261				50,873				50,385
End of financial year 7			22,317				32,675				65,825				65,796				50,763				50,046
End of financial year 8			22,497				32,163				61,899				63,182				52,632				47,510
End of financial year 9			22,674				30,774				60,106				64,609				51,597				47,401
End of financial year 10			22,584				30,556				60,519				65,011				52,577
End of financial year 11			22,534				30,501				59,525				64,992
End of financial year 12			22,158				30,398				59,591
End of financial year 13			22,537				30,813
End of financial year 14			22,443
Ultimate liability			22,443				30,813				59,591				64,992				52,577				47,401
Paid to-date			(22,056	)			(29,837	)			(57,552	)			(61,721	)			(47,592	)			(44,749	)
Unpaid liability (excluding ULAE)			387				976				2,039				3,271				4,985				2,652
ULAE liability			8				18				38				60				92				49
Unpaid liability (including
ULAE) at 31 December 2018			395				994				2,077				3,331				5,077				2,701

 

2018		Underwriting years
Gross ultimate liability estimates		2011				2012				2013				2014				2015				Total
at end of financial years		£000				£000				£000				£000				£000				£000
End of financial year 1			35,481				35,314				40,679				58,555				76,746
End of financial year 2			52,632				53,808				80,172				109,511				132,391
End of financial year 3			45,713				51,991				86,084				120,341				129,323
End of financial year 4			43,929				52,238				96,091				122,936				131,572
End of financial year 5			43,911				65,248				96,227				119,993
End of financial year 6			44,158				60,954				90,958
End of financial year 7			43,478				60,789
End of financial year 8			41,889
End of financial year 9
End of financial year 10
End of financial year 11
End of financial year 12
End of financial year 13
End of financial year 14
Ultimate liability			41,889				60,789				90,958				119,993				131,572				723,018
Paid to-date			(41,452	)			(45,796	)			(58,055	)			(65,610	)			(71,433	)			(545,853	)
Unpaid liability (excluding ULAE)			437				14,993				32,903				54,383				60,139				177,165
ULAE liability			8				221				487				875				995				2,851
Unpaid liability (including ULAE)
at 31 December 2018			445				15,214				33,390				55,258				61,134				180,016

 

Page 17

		NOTES TO THE FINANCIAL STATEMENTS TOKIO MILLENNIUM RE (UK) LIMITED

 

 

1.	RISK MANAGEMENT (continued)

 

(c)	Underwriting risk - reserve (continued)

 

The table below summarises the development of net ultimate cumulative claim estimates at the end of each financial year, illustrating how amounts estimated have changed from the first estimate made.

2018		Underwriting years
Net ultimate liability estimates		2005				2006				2007				2008				2009				2010
at end of financial years		£000				£000				£000				£000				£000				£000
End of financial year 1			12,511				11,230				19,639				43,205				29,520				44,369
End of financial year 2			20,603				27,944				54,944				58,392				53,457				61,896
End of financial year 3			19,815				40,886				54,431				61,402				52,591				53,030
End of financial year 4			19,079				35,449				53,777				64,093				50,098				50,859
End of financial year 5			18,866				35,595				60,522				69,561				51,286				50,525
End of financial year 6			18,046				31,542				64,342				68,261				50,873				50,385
End of financial year 7			17,858				32,675				65,825				65,796				50,763				50,046
End of financial year 8			18,038				32,163				61,899				63,182				52,632				47,510
End of financial year 9			18,215				30,774				60,106				64,609				51,597				47,401
End of financial year 10			18,125				30,556				60,519				65,011				52,577
End of financial year 11			18,075				30,501				59,525				64,992
End of financial year 12			17,699				30,398				59,591
End of financial year 13			18,078				30,813
End of financial year 14			17,983
Ultimate liability			17,983				30,813				59,591				64,992				52,577				47,401
Paid to-date			(17,596	)			(29,837	)			(57,552	)			(61,721	)			(47,592	)			(44,749	)
Unpaid liability (excluding ULAE)			387				976				2,039				3,271				4,985				2,652
ULAE liability			8				18				38				60				92				49
Unpaid liability (including ULAE)
at 31 December 2018			395				994				2,077				3,331				5,077				2,701

 

2018		Underwriting years
Net ultimate liability estimates		2011				2012				2013				2014				2015				Total
at end of financial years		£000				£000				£000				£000				£000				£000
End of financial year 1			35,122				26,435				39,427				57,534				76,746
End of financial year 2			52,632				44,156				78,742				105,555				132,391
End of financial year 3			45,713				41,548				84,763				117,865				129,323
End of financial year 4			43,929				42,996				94,522				119,024				131,572
End of financial year 5			43,911				55,444				96,227				116,080
End of financial year 6			44,158				51,887				90,958
End of financial year 7			43,478				51,178
End of financial year 8			41,889
End of financial year 9
End of financial year 10
End of financial year 11
End of financial year 12
End of financial year 13
End of financial year 14
Ultimate liability			41,889				51,178				90,958				116,080				131,572				705,034
Paid to-date			(41,452	)			(38,049	)			(58,055	)			(61,779	)			(71,435	)			(529,817	)
Unpaid liability (excluding ULAE)			437				13,129				32,903				54,301				60,137				175,217
ULAE liability			8				221				487				875				995				2,851
Unpaid liability (including ULAE)
at 31 December 2018			445				13,350				33,390				55,176				61,132				178,068

 

Page 18