Allianz Cornhill Insurance plc Annual Report 2005

Allianz Cornhill Insurance plc Annual Report 2005

Allianz Cornhill Insurance plc Annual Report 2005

Allianz Cornhill Insurance plc Annual Report 2005 Allianz Cornhill Insurance plc Annual Report 2005

Allianz Cornhill Insurance plc Annual Report 2005

1 AT A GLANCE 2 MISSION 3 DIRECTORS AND OFFICERS/ MANAGEMENT BOARD 4 CHIEF EXECUTIVE’S REPORT 6 CORPORATE GOVERNANCE BUSINESS AND FINANCIAL REVIEW 8 Allianz Cornhill 12 Allianz Cornhill Personal 13 Allianz Global Risks 14 Allianz Cornhill Commercial 16 Allianz Cornhill Speciality 18 Investments REPORT AND ACCOUNTS 20 Report of the Directors’ 21 Statement of Directors’ Responsibilities 22 Independent Auditors Report 24 Financial Statements 30 Notes to the Financial Statements Group Organisation CONTENTS

Allianz Cornhill Insurance plc Annual Report 2005

2005 2004 £m £m General insurance contents premium revenue (Note 24) Gross Written Premiums 1,665.5 1,767.9 Net Written Premiums 1,312.6 1,372.8 Results Total Revenue 1,542.9 1,593.7 Total Claims and Expenses (1,336.5) (1,383.1) Profit before tax 206.4 210.6 Income tax expense (1.6) (51.2) Net profit for the year from continuing operations 204.8 159.4 Shareholders’ Funds 867.6 829.6 FINANCIAL HIGHLIGHTS Allianz Cornhill Commercial Allianz Cornhill Personal Allianz Cornhill Speciality £300m £500m £700m NET WRITTEN PREMIUMS 2005 1905-2005 1 AT A GLANCE £100m

Allianz Cornhill Insurance plc Annual Report 2005

2 MISSION Andrew Torrance, Chief Executive and Lord Walker, Chairman. Our mission is to be the most successful competitor in our chosen markets by delivering: • products and services that our clients recommend • a great company to work for • the best combination of profit and growth

Allianz Cornhill Insurance plc Annual Report 2005

3 DIRECTORS AND OFFICERS/MANAGEMENT BOARD DIRECTORS Lord Walker of Worcester (Chairman) D. A. Torrance (Chief Executive) C. B. Booth K-H. Lowe C. R. Reeves G. R. Stratford MANAGEMENT BOARD D. A. Torrance G. R. Stratford M. J. Churchlow J. M. Dye P. J. Gennoy N. Hall C. D. Hanks G. A. Jones D. J. Knowles D. G. Pennycuick SECRETARY C. J. Kiddle Morris AUDITORS Ernst & Young LLP, 1 More London Place, London SE1 2AF REGISTERED OFFICE 57 Ladymead, Guildford, Surrey GU1 1DB Registered No. 84638 Andrew Torrance Chief Executive, Age 52. Joined Allianz Cornhill Broker division as General Manager and appointed a Director in 1999. Appointed Chief Executive in 2003. Previously held senior and Board positions in consultancy and insurance.

Nick Hall General Manager, Personal Lines. Age 48. Joined Allianz Cornhill in January 2006. Previously held senior marketing and general management positions in financial services. Chris Hanks General Manager, Commercial Lines. Age 55. Joined Allianz Cornhill in 1999 as Commercial Underwriting and Marketing Executive following the Allianz takeover of AGF, where he held a number of senior positions. Appointed General Manager in 2003. Gareth Jones General Manager, Speciality. Age 51. Joined Allianz Cornhill Broker in 1997 as Marketing and Development Executive. Appointed General Manager in 2003. Previously held senior positions in management consultancy and the leisure industry.

Doug Pennycuick General Manager, Allianz Global Risks UK. Age 54. Joined Allianz in 1999 and held positions as Marketing Executive and Director, Underwriting AGR UK. Appointed General Manager in July 2005. Previously held senior management positions in insurance. George Stratford Finance Director, Age 54. Joined Allianz Cornhill in 1977 and held a number of senior positions in the Finance division before being appointed General Manager in 1996 and a Director in 2003. Mark Churchlow Director, Actuarial & Planning. Age 46. Joined Allianz Cornhill in 1989 and held a number of positions, including Appointed Actuary, in Life division before becoming Chief Actuary for the company in 1998. Jon Dye Director, Claims. Age 39. Joined Allianz Cornhill as Director, Claims in 2003. Previously held several senior Claims Management positions in insurance.

Philip Gennoy Director, HR. Age 47. Joined Allianz Cornhill in 1999. Previously held senior HR and Sales and Marketing positions in the oil and dairy industries. John Knowles Director, IT & Off-Shore Operations. Age 53. Joined Allianz Cornhill in 1999. Previously held senior and Board positions in IT and Business Operations in the UK and overseas.

Allianz Cornhill Insurance plc Annual Report 2005

4 CHIEF EXECUTIVE’S REPORT 2005 WAS ANOTHER YEAR OF SUBSTANTIAL ACHIEVEMENT FOR THE COMPANY. Profit before tax was a highly satisfactory £206m only slightly below the record profits recorded in 2004. The combined ratio was an excellent 94.9% compared to the record 94.0% last year. All trading divisions made strong contributions to the record profits and delivered results well in excess of their cost of capital. The performance by Allianz Cornhill Commercial was exceptional in difficult market conditions.

The excellent profits and strong investment markets enabled the Company to further strengthen its capital base with net assets at the end of the year of £867m some 4.6% higher than last year. The increase in the capital base was achieved after paying record dividends including the payment to the parent company of the net proceeds from the sale of the life business and after funding a £60m contribution towards the deficit in the Allianz Cornhill Management Services Limited pension fund. During the year the Company also celebrated its Centenary. A hundred years of trading in a very challenging market is a significant achievement and there are many insurers who have failed to reach this landmark. Our Centenary was marked by a series of parties for our employees around the country and at our offshore operation in India which now employs in excess of 400 people. The year concluded with a memorable dinner for our business partners, many of whom have a long association with Allianz Cornhill, at the London Hilton on Park Lane. For the third consecutive year excellent profits were achieved in another year of substantial achievement.

Allianz Cornhill Insurance plc Annual Report 2005

5 CHIEF EXECUTIVE’S REPORT The Company continues to pursue its strategy of only underwriting business where there is a realistic prospect of achieving a return in excess of the company’s cost of capital. This has resulted in a reduction in net written premiums in 2005 of 4.4% to £1,312.6m Central to our strategy is the continuing investment in the development of the technical, commercial and leadership skills of our employees. The Underwriting Academy is now well established and the Excellence in Claims initiative launched in 2004 is delivering encouraging results. The leadership skills initiative has been further enhanced and all managers are working hard to improve their skills in this important area. Encouraging progress has been made with a number of important IT developments with the new processing system for the Schemes business nearing completion. The reorganisation of our personal lines and claims divisions in recent years is resulting in returns which exceed our original expectations.

Together with other companies in the Allianz family the Company is participating in a number of Allianz Group wide projects. The objective is to leverage the skills and expertise in specific areas of competence of the different members of the group and deploy these more widely. A number of initiatives in motor and claims commenced implementation early in 2005 and are already delivering encouraging results. 2006 will benefit from further business opportunities and savings as a result of this work. The reorganisation and modernisation of the Allianz Cornhill Group structure has been completed which gives the group a firm base and additional flexibility in an increasingly complex regulatory environment.

These accounts have been prepared in accordance with International Accounting Standards. The Company has reported to its parent using IFRS for a number of years but the decision to adopt international standards for our published accounts has resulted in a number of presentational changes and additional disclosures. Another highlight of 2005 occurred in July when the progress the Company has made towards becoming the most successful competitor in our chosen markets was recognised at the British Insurance Awards when Allianz Cornhill won, for the second consecutive year, the premier award of General Insurer of the Year. To win the award in our centenary year was very pleasing. None of what was achieved in 2005 would have been possible without the highly skilled and committed contributions of our employees. My thanks to them for what was delivered to our customers and shareholders during the year, and also for their generosity in supporting both with time and financially the various charities and voluntary organisations with which the company is involved.

Looking ahead, we expect 2006 to be another challenging year in terms of the market conditions faced by most of our trading operations. Nevertheless, it is anticipated that meaningful benefits from the Allianz Group wide projects will start to be realised and that this will help sustain profitability in the face of continued underlying claims inflation. The company will also continue to benefit from the major and sustained investment made in developing the capabilities of its people. From this solid platform, I am confident that the company is well equipped to continue to move forward successfully. Andrew Torrance Chief Executive

6 CORPORATE GOVERNANCE The Company is not publicly quoted and consequently does not have to meet the requirements of the Combined Code or provide an Operating and Financial Review. However, the Company is conscious of its position as a substantial provider of financial services in Great Britain and is committed to high standards of corporate governance. The Board and its Committees The Board currently comprises a non-executive Chairman, three non executive directors, two of whom are representatives of the shareholder and two executive directors. The Board is responsible for organising and directing the affairs of the Company in the best interests of stakeholders. The Board’s responsibilities include strategy, internal control, the overall operation of the Company and meeting legal and regulatory requirements. The Board has established a Statement of Business Principles to provide guidance on the standards expected from all employees when conducting business on behalf of the Company. The Board has established a number of Committees and a system of internal control to ensure the efficient and effective operation of the business. The Board, its main committees and membership of those committees is shown in the table below: The Group is committed to high standards of corporate governance. Corporate Governance Board Management Audit Finance Risk Investment Reinsurance Board Committee Committee Committee Committee Panel Number of meetings held 5 13 3 2 5 4 2 Lord Walker of Worcester D A Torrance R Hagemann – resigned December 31 K-H Lowe C R Reeves G R Stratford M J Churchlow J M Dye P J Gennoy H J E Hanauer – resigned June 30 C D Hanks G A Jones D G Pennycuick – appointed July 1 R E Schäfer – resigned December 31 The shaded area indicates Board and Committee membership. Shown against each member is the number of meetings they attended during the year. C B Booth was appointed to the Board of Directors on January 1, 2006.

D A Torrance was a member of the Audit Committee but resigned from this position on December 31, 2005. 13 1 6 12 2 11 6 13 13 2 3 4 13 2 4 5 2 11 5 4 2 3 5 2 3 5 2 4 2 3 13 5 5 The Management Board is the principal Committee of the Board. Membership of the Management Board comprises the two executive directors together with the General Managers and Executives who run the trading and service divisions. The Management Board meets monthly to monitor business performance, compliance and risk management, discuss developing issues, monitor and develop strategy and to provide a forum for making important operational decisions.

The Audit Committee was established at the beginning of 2005 as a committee of the Board. It assumed responsibility for a number of activities previously undertaken by the Governance and Control Group. Membership of the Committee comprises two non executive directors one of whom acts as chairman. The other non executive directors have an open invitation to attend meetings if they so wish. The engagement partner from the external auditors, Ernst and Young LLP, the Head of Internal Audit, the Chief Executive and the Finance Director usually attend by invitation. The Committee monitors the integrity of the financial statements, financial controls and the system of internal control. Reports on these matters are provided to the committee by the external auditors and internal audit as appropriate.

7 CORPORATE GOVERNANCE The Finance Committee is a committee of the Board and is responsible for Investment strategy, approval of Mergers and Acquisitions and other non routine transactions, investments in derivatives and options together with monitoring investment income development. Membership of the Finance Committee comprises an executive director who acts as chairman, one other executive director and two non executive directors. The Chief Investment Officer and a representative from the Allianz Group Investment department usually attend by invitation. The Risk Committee is a sub committee of the Management Board and was established at the beginning of 2005 to assume responsibility for a number of activities previously undertaken by the Governance and Control Group. Membership of the Risk Committee comprises an executive director, the Chief Risk Officer, the Chief Accountant, the Company Secretary and Chief Legal Officer and the Director Actuarial and Planning. The Compliance and Money Laundering Officer, the Head of Internal Audit and a Representative of the Allianz Group Risk department usually attend by invitation. The Risk Committee is responsible for reviewing the effectiveness of risk policies, their impact and the development of risk based capital.

The Investment Committee is a sub committee of the Finance Committee. Membership comprises the two executive directors one of whom acts as chairman, the Director Actuarial and Planning, the Chief Investment Officer together with independent economic, fixed interest and property advisors. The fixed interest and equity investment managers usually attend by invitation. The role of the Investment Committee is to monitor portfolio performance and after taking into account anticipated economic trends recommend investment strategy to the Finance Committee. The Reinsurance Panel is a sub committee of the Management Board. Membership comprises the two executive directors one of whom acts as chairman, the Director Actuarial and Planning, the Chief Accountant, the Head of Reinsurance, the Director Commercial - Actuarial, the General Manager Commercial Lines and the General Manager Personal Lines. The Committee monitors the performance of the Group’s reinsurance programme, reinsurance security and determines future reinsurance purchasing policy after taking into account business requirements, risk appetite and developments in the reinsurance market.

As the Company is a wholly owned subsidiary of Allianz AG the Board does not consider it necessary to establish either a Nominations or a Remuneration Committee. A number of controls are in place to ensure that appropriate appointments are made and remuneration policies reflect the scale of the business and performance of its operations. All senior appointments have to be approved by the ultimate parent company. No senior or management appointment is made without the applicant undertaking a comprehensive assessment centre to determine the level of their management skills. The executive directors’ and general managers’ remuneration packages are approved by the ultimate parent company. The remuneration of the Management Board members comprises a combination of basic salary, appropriate benefits and a performance related bonus paid in a combination of cash and Allianz Group Equity Incentives. Details of the share based payments are disclosed in note 39. The performance related bonus is based upon a combination of Company profitability against target and personal performance against specific objectives, broadly the same arrangements that apply to all employees. Notice periods for members of the Management Board are consistent with other senior managers.

8 BUSINESS AND FINANCIAL REVIEW Background In Great Britain Allianz Cornhill Insurance plc is the principal insurance operation of Allianz AG and is one of the country’s leading general insurance companies. The Company is not required to prepare an Operating and Financial Review as recommended as best practice by the Accounting Standards Board. The Board is conscious of its position as a major financial services provider and includes in the following Business and Financial Review details of its performance and some of the key influences on its business in 2005 and the prospects for 2006. The Business and Financial Review does not purport to meet the requirements of an Operating and Financial Review.

Nature of business Allianz Cornhill Insurance plc is the 7th largest general insurer in the United Kingdom measured by 2004 Gross Written Premium. The Company offers a wide range of products and has a presence in most general insurance markets but concentrates its resources on markets and products which it believes will deliver the best return for shareholders The Company distributes its products almost entirely in Great Britain but has a limited amount of overseas business, mostly arising through insurance risks underwritten for large international corporate clients. The Company operates through a number of trading divisions each of which trades in a particular market segment distributing products which meet the needs of the customers in that segment. The Company also has a small number of regulated subsidiary companies which are included within the trading division operations and distribute a limited range of products through specialist brands. Further analysis of the 2005 results and the prospects for 2006 are set out in the individual trading division Business and Financial Reviews.

At the end of 2004 the Company sold the economic interest in its Life operations to the Britannic Group. During the year responsibility for investment management and policy administration was outsourced to members of the Britannic Group. Application was made to The Courts and a Part VII transfer under the Financial Services and Markets Act 2000 became effective on September 30, 2005 bringing to an end the Company’s 37 year interest in the United Kingdom Life Assurance market. The Company’s operations are regulated by the Financial Services Authority.

Business Strategy and Overview of 2005 Results The Company’s mission is “to be the most successful competitor in its chosen markets by delivering products and services that clients recommend, being a great place to work and delivering the best combination of profit and growth”. Consistent with its mission the Company in recent years has pursued a strategy of proactively managing the insurance cycle to maximise the return for shareholders and carefully managing its capital base. This strategy has been highly successful and for the past three years the Company profitability has been very satisfactory. The Company’s overall performance has been recognised by the insurance industry with Allianz Cornhill Insurance plc being awarded the coveted General Insurer of the Year Award for both 2004 and 2005.

The attractive returns made by the Company and its competitors in recent years have resulted in insurance rates falling in 2005. However strict underwriting discipline has been maintained to minimise the impact on Company profits. This strategy has resulted in Gross Written Premium in 2005 falling to £1,665.5m, 5.8% below last year but profit before tax was a very satisfactory £206.4m only slightly down on last year’s record level. Business and Financial Review Allianz Cornhill

9 BUSINESS AND FINANCIAL REVIEW The Company has identified a number of Key Performance Indicators against which to measure its progress. One of the most important of these is Economic Value Added. Economic Value Added is the profit after tax in excess of the cost of assigned capital. All Trading Divisions made a positive contribution to EVA in 2005. Looking ahead it is expected that the rating environment will remain challenging for personal and small to mid commercial business during 2006 but the impact of the hurricanes in the USA will result in a hardening of rates for the large corporate business underwritten by Allianz Global Risks.

Key Performance Indicators 2005 2004 2003 £m £m £m Gross Written Premium 1,665.5 1,767.9 1,742.6 Net Written Premium 1,312.6 1,372.8 1,351.3 Insurance Profit 156.1 161.6 111.1 Operating Profit 182.6 188.7 152.7 Profit Before Tax 206.4 210.6 155.1 Economic Value Added 90.1 91.0 64.3 Claims Ratio 65.2% 63.9% 68.1% Expense Ratio 29.7% 30.1% 28.8% Combined Ratio 94.9% 94.0% 96.9% Source - Management Accounts (General Business only) Risk Management The Board has agreed a Risk Appetite Statement and has developed risk policies which are consistent with the appetite for risk and the Company’s capital base. The main risks faced by the business have been identified and are kept under regular review together with the controls to mitigate those risks. The key controls to mitigate risk form an integral part of the system of internal control established by the Board. The main risks faced by the business are detailed in Note 35 - Risk management policies. A Risk Management department independent of normal business activities has been established to assist the Board and Management Board with the development of risk policies and the identification and monitoring of the key controls that mitigate risk. To ensure risk management is fully integrated into the business and effective control is maintained each key risk is owned by a member of the Management Board. The Company is a founding member of the Association of British Insurers’ initiative to establish a database of operational risk events. The key internal operational and financial controls are regularly tested by Internal Audit. A comprehensive programme of risk based reviews is conducted. Key issues from individual audit reports are summarised to form a regular assessment of the control climate across the business. Internal Audit maintains a close working relationship with the Allianz Group Internal Audit Department.

The Group’s ultimate parent company Allianz AG is listed on the New York Stock Exchange and consequently is required to comply with the requirements of the Sarbanes-Oxley Act 2002. Although Section 404, Management Assessment of Internal Controls, is not applicable for foreign registrants until 2006 significant work has been undertaken by the Company in 2004 and 2005 to ensure compliance. This includes external testing of the documentation and processes that guard against financial misstatement. A limited number of deficiencies have been identified which are currently being remediated but in all material respects the Company complied with the Allianz Group’s S404 requirements at the end of 2005.

10 BUSINESS AND FINANCIAL REVIEW Allianz AG the ultimate parent company has also introduced minimum risk standards which the Company must adopt. The Company complies with the group minimum standards in all material respects. The Company uses a number of risk based capital models and techniques to ensure that its capital base is consistent with its risk appetite and sufficient to meet its current and future business plans. These models are used for the FSA Individual Capital Assessment, rating agency discussions, internally for determining capital adequacy and allocation as well as for discussions with the ultimate parent company. Capital is allocated to each trading division based upon the underlying risks their business presents. Each division is required to make a minimum return on its allocated capital. The minimum returns on allocated capital are incorporated into divisional objectives and personal performance targets to ensure that the underlying business operations are run and managed in a manner consistent with the Board’s appetite for risk and with the capital available.

During 2005 work on the Individual Capital Assessment required by the FSA was finalised. The FSA have completed their review of this work and have issued their Individual Capital Guidance (ICG). The capital required by the ICG is broadly consistent with the Company’s own assessment of the capital required to operate the business without undue risk to policyholders or shareholders. The Company has little exposure to industrial disease claims arising from asbestos exposure. Historically the Company wrote a very limited portfolio of UK liability business but did write some London market marine and non marine business which is now in run off and is where most of the exposure arises. The Company believes it is fully reserved for these liabilities. Share Capital On July 1, 2005 Allianz (UK) Limited transferred its entire shareholding in the Company to Allianz Cornhill Holdings plc as part of a Group reorganisation. The share capital transferred comprised non voting ordinary shares, cumulative voting preference shares and non cumulative non voting preference shares. Other than the change of ownership there were no changes to the authorised or issued share capital during the year.

Group Reorganisation and Employees During the year the Company undertook a major internal reorganisation. As a first phase, effective from July 1, 2005, a services company was established to own the operational assets and employ the staff previously employed by Allianz Cornhill Insurance plc. A new holding company, Allianz Cornhill Holdings plc, a wholly owned subsidiary of Allianz (UK) Limited was established and effective from July 1, 2005 the ownership of the services company and Allianz Cornhill Insurance plc transferred to it. On January 1, 2006 the non insurance operations of Allianz Cornhill Insurance plc were transferred to specialist companies. The non insurance activities comprise mainly service contract policy administration and engineering inspection business. The services company, Allianz Cornhill Insurance plc and the companies that operate the non insurance businesses are fellow subsidiaries of Allianz Cornhill Holdings plc. The services company employs around 4000 employees that support the Company’s insurance operations. In addition the holding company has a subsidiary company in India which employ’s over 400 employees who provide IT and administration services to the Company’s insurance business. The number of people employed by Allianz Cornhill Information Services Limited (ACIS) in India is anticipated to increase modestly in 2006.

The Company continues to invest in the development of its employees and believes that it will deliver superior returns through investing in market leading technical, commercial and leadership skills. Technical employees continue to undergo development through either the Underwriting Academy or the Excellence in Claims initiative. All managers are enrolled in a leadership programme which has been further enhanced in 2005. Management training has also

11 BUSINESS AND FINANCIAL REVIEW Allianz Cornhill’s 2005 corporate charity campaign raised over £72,000 for Childline. been repositioned and improved to align more closely with business objectives. The Company’s Investors in People accreditation was reconfirmed during the year. The company achieved a score which puts it in the top quarter of companies that have been assessed under the new profile system. Corporate and Social Responsibility The Company is not engaged in business activities that have major adverse social and environmental impact. However the Company is committed to minimising the impact its business has on the environment and to promote social responsibility. During the year the Company has benefited from new thermally efficient heating boilers that were installed towards the end of 2004 at its main administration offices. Contracts have been signed with electricity suppliers to ensure that 30% of the power used at the main administration offices is generated from renewable sources. New printing presses have allowed alcohol free inks to be used and a trial of hybrid vehicles has commenced. In recognition of these and other initiatives the Company has recently been awarded first place in the large Company section of the 2005 Surrey Sustainable Business Awards.

In 2005 over £72,000 has been donated by the company and staff to Childline, the Company’s 2005 corporate charity. A further £60,000 was raised to support communities impacted by the Tsunami. Part of this money has been used to support the education of 50 orphans at a school close to the ACIS operation in Trivandrum, India. Employees from offices all over the country have supported their local communities through a variety of fund raising activities and have generously given their own time and practical support to many charities and local organisations.

12 BUSINESS AND FINANCIAL REVIEW provides personal lines products distributed through brokers, affinity partners and direct marketing Allianz Cornhill Personal Allianz Cornhill Personal underwrites mostly motor and household insurance products which are distributed by both brokers and through a number of direct channels including mail, TV, telesales and the internet. The personal lines market is highly competitive with historically volatile returns. The division does not seek to compete directly with the largest insurers in the personal lines market who have significant scale advantages. Instead the division concentrates on specific market and product niches where the prospects of delivering acceptable profits are much greater.

During the year the migration of part of the division’s administrative operations to ACIS, the offshore operations in India, continued. Around a third of policy administration services and limited telesales activities are now delivered from India. Personal Lines Broker Net written premiums fell by £45.4m to £193.7m with an insurance profit of £18.7m. The fall in premium reflects the competitive market conditions, the continued decline of intermediated personal lines business and the residual effects of the termination during 2004 of the Broker Direct private car business. The focus on underwriting for profit has continued and delivered very encouraging results. The impact of the insurance cycle means that 2006 will be another difficult year with further pressure on volumes but it is expected insurance rates will begin to harden during the latter part of the year and that the medium term prospects for both growth and profits are good. Cornhill Direct Net written premiums grew modestly to £72.8m reflecting efforts to increase the volume of business written through the direct channel whilst balancing this against the need to maintain the quality of the portfolio. The insurance result was disappointing with a loss of £3.7m. The loss arises from the adverse development of a number of prior year claims plus an unusually high number of large losses both in the motor and household accounts in the current year. The strategy implemented a few years ago to increase the proportion of household business in the portfolio continued and household business now comprises 43% of the account. A successful trial of an Accidental Death product was concluded during the year. Plans are well developed to offer this product more widely, particularly to key affinity partners in 2006. Direct volumes are expected to grow in 2006 as a result of expanded affinity marketing and an increased focus on the internet. Careful risk selection will be maintained and an anticipated resumption of normal major loss patterns will return the business to profit in 2006.

Cornhill Direct continues to focus on insurance for experienced drivers whilst growing its household business.

13 BUSINESS AND FINANCIAL REVIEW services the insurance needs of large corporate customers and their brokers Allianz Global Risks Allianz’s engagement in the America's Cup strengthens its position as a leading international financial services provider. Allianz Global Risks is a leading provider of insurance for large corporate clients. The competitive market conditions that first began to manifest themselves in 2004 continued for much of 2005. As a result of the hurricanes in the US Gulf Region in the autumn of 2005 there are early signs that the rate cuts which were a feature of the market in 2004 and 2005 are abating. AGR in the UK is part of the Allianz Global Risks network. Whilst it is managed as a separate division within the Company and generates much of its business from the UK, some of its business is derived from relationships owned elsewhere within the Allianz Group. After facultative and other reinsurance 90% of the retained account is reinsured to Allianz Global Risks Re in Munich.

Net written premiums for 2005 were £13.3m, a reduction over 2004 reflecting the difficult underwriting conditions. The net insurance profit for 2005 was an attractive £2.3m. The division had very little exposure to the autumn hurricanes in the USA. For a number of years AGR has concentrated a great deal of effort on better understanding the insurance needs of its clients as part of a client focus strategy, This strategy has resulted in a number of new business successes and the conversion of a number of follow lines into underwriting leads.

During 2006 the AGR business underwritten by the Company will be transferred to the UK branch of an Allianz Group company established to underwrite and manage the risks of global clients. The legal formalities will be concluded during the year but to facilitate the new arrangements the reinsurance placed by the company will be increased from 90% to 100% for risks attaching from January 1, 2006.

14 BUSINESS AND FINANCIAL REVIEW provides a comprehensive range of commercial and engineering inspection and insurance products distributed through the intermediated market Allianz Cornhill Commercial Allianz Cornhill Commercial comprises a commercial lines insurance business and a separate engineering insurance and inspection business. The commercial lines insurance business provides a full range of commercial insurance products to a range of clients from small businesses to large commercial organisations. The business is distributed through intermediaries. Through its commercial lines business Allianz Cornhill is one of the top five commercial lines insurers in the UK market. The engineering and inspection business distributes through intermediaries and is among the largest specialist engineering insurers in the UK. Commercial Lines Net written premiums at £620.8m were modestly ahead of last year but delivered an outstanding insurance profit of £87.3m with a combined ratio of 93.9%. New business was difficult to obtain throughout the year. In part, this was due to brokers focusing on compliance with the FSA conduct of business regulations, introduced in early 2005. The continued focus of maintaining profitability through the application of strict underwriting discipline and a determination not to write business at inadequate rates also contributed to static premium levels. Rating pressures remain and whilst a small increase in premium income is anticipated next year the underwriting environment is likely to remain challenging with some competitors still focused on writing for volume.

Previous years’ results have been positively influenced by an almost complete absence of major losses and weather events. Loss events in 2005 returned to the expected levels with the fourth quarter experiencing a number of major losses. During 2005 the investment in the branch infrastructure to improve our broker proposition continued with the opening of a new office in Cardiff and the move to new premises in the centre of Manchester. IT investment has continued to improve the commercial lines business processing systems with a number of important enhancements due to be delivered in 2006.

Allianz Cornhill officially opened its new Manchester office for Commercial, Claims and Engineering at Piccadilly Gardens in May 2005. ACC works to build profitable partnerships with brokers built on the technical, commercial and leadership skills of its people.

15 BUSINESS AND FINANCIAL REVIEW Engineering Allianz Cornhill Engineering (ACE) net written premiums fell by 12.9% to £119.6m. This reduction was due to a major affinity relationship changing its business model and moving from a gross to a net of commission premium basis. This change occurred part way through the year and will impact volumes in 2006 as well as 2005. Discounting this effect 2005 net written premiums grew by an underlying 5.6%. ACE delivered an outstanding insurance profit despite increased competition for both insurance and inspection business. The number of field engineers and their productivity increased due to good growth in volumes of inspection business. Trading conditions are becoming more difficult but as a market leader with unrivalled standards and levels of service ACE is well positioned to maintain its market leading position and profitability in 2006.

Over 2 million items each year are inspected by Allianz Cornhill Engineering's team of engineer surveyors.

16 BUSINESS AND FINANCIAL REVIEW provides a range of specialist products distributed by retailers, affinity groups and veterinary practices Allianz Cornhill Speciality Operating through its Schemes, Animal Health and Legal Expenses businesses, Allianz Cornhill Speciality has a strong presence in specialist insurance markets which, whilst competitive, offer consistent, attractive and less volatile returns. Schemes Allianz Cornhill Schemes is one of the leading providers of extended warranty, all risks, mobile phone and musical instrument insurance in the UK insurance market. It also provides payment protection insurance.

Net written premiums fell 5.8% to £113.1m but a good insurance profit of £10.5m was delivered. The fall in volumes, whilst disappointing was largely driven by external influences. Schemes has a number of important retail clients some of whom suffered from the well publicised downturn in the retail market resulting in lower sales of linked insurance products. A number of clients were involved in mergers, resulting in lower volumes. During 2005 Schemes has strengthened the depth and quality of its management team through a number of key marketing and operational appointments. The investment in the new team has already begun to be repaid and a number of important new business wins were achieved in 2005. These include Expansys, Inchcape and Littlewoods as well as new schemes for Argos and Dial a Phone. The full impact of these new business wins will not be reflected in business volumes until 2006 when good growth in net written premiums is expected.

Considerable investment has been made in the last few years to improve Schemes IT systems. A number of elements were implemented in 2005 and the improved processing and management information has contributed to the new business successes during the year. The system will be largely completed in 2006 which will enable business currently administered on the old processing system to be migrated to the new modern and more efficient platform. Allianz Cornhill Schemes’ mobile technology insurance provides specialist cover in this fast-growing market. Music Insure from Allianz Cornhill Musical Insurance offers comprehensive insurance on all musical instruments, accessories and equipment, as well as incorporating a cutting-edge security tagging system.

17 BUSINESS AND FINANCIAL REVIEW Animal Health Employing the widely recognised Petplan brand, Allianz Cornhill Animal Health is the leading provider of small animal and equine insurance. Products are distributed through the complete range of channels including vets, charities, affinities, retail, TV, direct and internet. Despite a difficult year for new business, largely as a result of the impact of the FSA conduct of business regulations particularly on the important veterinary and breeders channels, net written premium increased by 7.4% to £150.9m. Insurance profit was an excellent £12.4m. The impact of regulation on business volumes is expected to be less pronounced in 2006 as familiarity with the new regulatory environment improves. As a result premium growth is expected to return to double digits in 2006. One of the key challenges for Animal Health in 2006 is managing veterinary claims inflation, particularly as new government regulations which allow clients to obtain prescribed drugs from outlets other than their vets may increase consultation costs. Despite this and other challenges Animal Health expects to deliver attractive growth and profits in the medium term. Legal Expenses Allianz Cornhill Legal Protection is a leading specialist provider of a range of before the event and after the event insurance products for both personal and commercial clients.

Net written premiums at £27.5m were similar to last year with an insurance profit of £1.3m. Growth in 2006 will be modest, but returns in the short and medium term are expected to provide an acceptable return on capital. Allianz Cornhill continues to lead the market for animal insurance through its Petplan and Petplan Equine branded insurance plans.

18 BUSINESS AND FINANCIAL REVIEW are managed in a conservative manner to minimise investment risk to the core insurance operations Investments Investment strategy has continued to concentrate on minimising risk to the core insurance operations from which the investment cash flows are derived. Underwriting cash flows during the year were positive but below last year’s levels as a result of lower premium income as the insurance cycle takes its course. Assets backing technical reserves continue to be invested in cash and government securities, with limited and strictly controlled exposure to high quality corporate bonds. Yields from gilts and bonds fell further during 2005 and remain unattractive when compared to the return available from cash and short term deposits. The opportunity was taken to invest in gilts and bonds on the few occasions when yields rallied. High levels of cash and short term deposits continued to be held. The holdings are well diversified. The portfolio of bonds and cash gives a high degree of liquidity. The return from the fixed interest portfolio was 6.1% compared to a benchmark return of 6.0%.

Equities performed strongly in 2005, led by the oil and mining sectors. The opportunity was taken during the year to increase modestly the weighting of equities in a carefully controlled manner. The Company continues to protect its equity portfolio through FTSE 100 options which protect against the index falling below a certain level in return for surrendering performance above a given level. This is an effective and low cost protection. Other than the FTSE 100 options the Company holds no other options or derivatives. The performance from the equity portfolio in 2005 was 19.9% against a benchmark of 21.6%.

The Company owns a small high quality property portfolio. The Company’s main administrative offices and training centre comprise around 25% of the portfolio with the remaining investments being a diversified portfolio of office, retail and industrial properties. A small number of transactions were undertaken in 2005 but property investment opportunities with attractive yields have been difficult to locate. The performance of the property portfolio in 2005 was 14.9% against a benchmark of 18.8%. The underperformance largely being due to underweight positions in out of town retail parks and the City of London office market As the majority of the Company’s business is undertaken in the UK the major part of the Company’s investment portfolio is in sterling denominated assets. Small holdings of US dollars and Euros are maintained to match currency technical reserves arising from some of the risks underwritten by Allianz Global Risks and old run off portfolios. Investment income for the year was £118.1m compared with £104.0m in 2004. Realised gains amounted to £34.2m compared to £31.2m in 2004 of which £3.4m arises from property sales which are not expected to be repeated in 2006. In 2006 investment income is expected to fall as a result of falling short term interest rates, lower bond yields, reduced cash flow, lower levels of invested funds reflecting the large dividend payments and the contribution to reduce the deficit in the group defined benefit pension fund in 2005. The opportunity presented by the current high level of the equity market will allow higher levels of realised gains to be taken in 2006.

Allianz Cornhill Insurance plc Report and Accounts 2005

20 REPORT OF THE DIRECTORS’ The Directors submit their hundredth Annual Report together with the Accounts of the Group for the year ended December 31, 2005. PRINCIPAL ACTIVITY The Group transacts most classes of general insurance business. REVIEW OF THE YEAR AND FUTURE DEVELOPMENTS These are outlined in the Chief Executive’s Review and the Business and Financial Review beginning on page 4. The Group results are set out in the Financial Highlights on page 3 and in the Group Income Statement on page 26. The Group Balance Sheet is set out on page 24.

DIVIDEND The Directors are not recommending the payment of a final ordinary dividend. A first interim ordinary dividend of £75.2m was paid on February 17, 2005 and a second interim ordinary dividend of £116.0m was paid on December 30, 2005. Preferential dividends of £3.875m were paid to the holders of the 5% Non Cumulative preference Shares on April 30, 2005 and October 31, 2005 respectively. DIRECTORS The Directors who held office throughout the financial year are listed on page 3. Dr R Hagemann resigned as a Director with effect from December 31, 2005 and Mr C B Booth was appointed as a non executive director on January 1, 2006.

Mr C R Reeves attained the age of 70 on January 14, 2006 and in accordance with Section 293 of the Companies Act 1985 retires and offers himself for re-election. Special Notice pursuant to Section 293 has been given to the Company. The Director retiring by rotation at this year’s Annual General Meeting is Mr K H Lowe who will offer himself for re-election. Mr C B Booth having been appointed since the last Annual General Meeting retires and offers himself for re-appointment. Lord Walker after serving as a Director for 14 years, all of them as Chairman, will retire from the Board at the Annual General Meeting. The Board would like to record its thanks to Lord Walker for his highly valued contribution over a pivotal period in the development of the business which has seen Allianz Cornhill firmly establish itself as a leading insurer in Great Britain. It is proposed that Mr C B Booth will be appointed as Chairman to succeed Lord Walker.

FINANCIAL INSTRUMENTS The Group’s and Company’s policies in respect of financial instruments and risk management are detailed in note 35. CORPORATE GOVERNANCE A report on corporate governance appears on pages 6 to 7. CHARITABLE DONATIONS During the year donations to charities have been made amounting to £89,314 (2004 £153,498). No political donations were made. EMPLOYEES Throughout the Company, consultative procedures are in operation to enable management and staff to discuss matters of mutual interest. Efforts are made through consultative bodies, departmental channels, including team briefing, and the house magazine to keep staff well informed about the affairs of their Company. Under the procedural agreement with the recognised trade union, the Company holds regular meetings on topics raised by both parties; this is in addition to the normal negotiating processes. Participation in share schemes is available and encourages involvement in Allianz Group's performance. It has always been the policy of the Company to encourage the employment, training and advancement of disabled persons. The Company has been accredited as an Investor in People. SUPPLIERS It is the policy of the Company to make known to and agree the terms of payment with its suppliers when entering into transactions with them and to keep to those terms. At December 31, 2005 the Company had an average of 9 days (2004 5 days) outstanding to trade creditors calculated in accordance with the relevant statutory regulations. GOING CONCERN The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and that it is therefore, appropriate to adopt the going concern basis in preparing the Annual Report and Accounts. AUDITORS Ernst & Young LLP have expressed their willingness to continue in office as auditors and a resolution proposing their reappointment will be submitted at the Annual General Meeting. By Order of the Board C.J. Kiddle Morris Secretary March 13, 2006

21 STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The Directors are required to prepare financial statements for each financial year which present fairly the financial position of the Company and of the Group and the financial performance and cash flows of the Company and of the Group for that period. In preparing these financial statements, the Directors are required to: n select suitable accounting policies and then apply them consistently; n present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; n provide additional disclosures when compliance with the specific requirements in IFRS’s is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and n state that the Company has complied with IFRS’s, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the accounts comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

We have audited the group and parent company financial statements (the “financial statements”) of Allianz Cornhill Insurance plc for the year ended December 31, 2005 which comprise the Group Income Statement, the Group and Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statements of Change in Shareholders' Equity and the related notes 1 to 41. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union as set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act 1985.

We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises the Chief Executive’s Report, Corporate Goverance, Business and Financial Review and the Report of the Directors’ on pages 4 to 20. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

22 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ALLIANZ CORNHILL INSURANCE PLC

OPINION In our opinion: n the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at December 31, 2005 and of its profit for the year then ended; n the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at December 31, 2005; and n the financial statements have been properly prepared in accordance with the Companies Act 1985.

Ernst & Young LLP Registered Auditor London March 13, 2006 23 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ALLIANZ CORNHILL INSURANCE PLC

24 GROUP BALANCE SHEET AS AT DECEMBER 31, 2005 2005 2004 Notes £m £m ASSETS Intangible assets 4 9.2 22.0 Property and equipment 5 33.5 46.6 Investment properties 6 85.8 82.5 Deferred acquisition costs 7 184.3 169.3 Deferred tax 9(a) 53.2 14.8 Reinsurance assets 10 872.9 866.2 Prepayments and accrued income 11 28.6 24.5 Financial Assets: Derivative assets 12 0.1 0.3 Available for sale financial assets 13(a) 2,229.3 1,995.4 Loans 13(b) 72.1 72.5 Insurance receivables 14 561.6 538.8 Other receivables 15 60.8 49.7 Cash and cash equivalents 16 239.2 400.3 Total assets 4,430.6 4,282.9 EQUITY AND LIABILITIES EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Share capital 22 172.8 172.8 Share premium 5.2 5.2 Other reserves 132.7 100.6 Retained earnings 556.9 551.0 Total equity 867.6 829.6 LIABILITIES Insurance contract liabilities 17 3,142.0 3,048.2 Pension benefit obligation 19 - 38.4 Financial liabilities: Derivative liabilities 12 - 3.1 Other insurance financial liabilities 20 262.5 237.4 Tax payable 9(b) 81.7 37.7 Accruals and other payables 21 76.8 88.5 Total liabilities 3,563.0 3,453.3 Total liabilities and shareholders’ equity 4,430.6 4,282.9

25 PARENT COMPANY BALANCE SHEET AS AT DECEMBER 31, 2005 2005 2004 Notes £m £m ASSETS Intangible assets 4 6.3 19.1 Property and equipment 5 29.8 46.6 Investment in group undertakings 23 130.9 131.1 Deferred acquisition costs 7 196.4 179.8 Deferred tax 9(a) 64.4 18.1 Reinsurance assets 10 866.2 859.4 Prepayments and accrued income 11 26.7 23.2 Financial Assets: Derivative assets 12 0.1 0.3 Available for sale financial assets 13(a) 1,883.5 1,710.6 Loans 13(b) 72.1 72.5 Insurance receivables 14 499.4 491.3 Other receivables 15 246.5 221.3 Cash and cash equivalents 16 217.2 381.8 Total assets 4,239.5 4,155.1 EQUITY AND LIABILITIES EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Share capital 22 172.8 172.8 Share premium 5.2 5.2 Other reserves 97.6 83.7 Retained earnings 475.1 512.5 Total equity 750.7 774.2 LIABILITIES Insurance contract liabilities 17 3,093.4 2,978.8 Pension benefit obligation 19 - 38.4 Financial liabilities: Derivative liabilities 12 - 3.1 Other insurance financial liabilities 20 257.4 232.8 Tax payable 9(b) 61.0 20.7 Accruals and other payables 21 77.0 107.1 Total liabilities 3,488.8 3,380.9 Total liabilities and shareholders’ equity 4,239.5 4,155.1 These financial statements were approved by the Board of Directors on March 13, 2006 and signed on its behalf by:- D. A. Torrance Director

26 GROUP INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 Continuing operations Notes £m £m Gross earned premiums 24 1,660.4 1,771.0 Reinsurers’ share of gross earned premiums 24 (352.3) (405.6) Net insurance revenue 1,308.1 1,365.4 Reinsurance commission 77.3 90.8 Investment income 25 118.1 104.0 Net realised gains 26 34.2 31.2 Net fair value gains 27 5.2 2.3 Other revenue 234.8 228.3 Total revenue 1,542.9 1,593.7 Gross insurance claims paid (892.0) (897.6) Reinsurers’ share of gross insurance claims paid 130.2 141.8 Gross change in insurance liabilities (63.9) (129.3) Reinsurers’ share of gross change in insurance liabilities (8.3) 32.7 Net insurance claims (834.0) (852.4) Finance cost (0.4) (3.3) Commission (313.2) (355.3) Other operating and administrative expenses 28 (188.9) (172.1) Other expenses (502.5) (530.7) Total claims and expenses (1,336.5) (1,383.1) Profit before tax 206.4 210.6 Income tax expense 32 (1.6) (51.2) Net profit for the year from continuing operations 204.8 159.4 Discontinued operations Profit for the year from discontinued operations 31 - 9.3 Net profit for the year wholly attributable to the equity holders of the parent 204.8 168.7

27 GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 Notes £m £m Cash generated from operations Cash generated from operating activities 34 (79.4) 146.4 Interest received 111.5 103.8 Dividends received 10.6 9.1 Interest paid (0.2) (0.3) Income tax paid 9(b) (6.4) (25.1) Net cash inflow from operating activities 36.1 233.9 Cash flows from investing activities Purchase of property and equipment 5 (7.6) (13.8) Proceeds from sale of property and equipment 0.7 5.7 Purchase of investment properties 6 (9.3) (6.7) Proceeds from sale of investment properties 12.3 1.5 Intangible assets cost capitalised - (1.9) Increase in loans to related parties (0.4) (2.1) Net cash outflow from investing activities (4.3) (17.3) Cash flows from financing activities Dividends paid during the year 33 (198.9) (77.5) Net cash outflow from financing activities (198.9) (77.5) Net (decrease)/increase in cash and cash equivalents (167.1) 139.1 Cash and cash equivalents at the beginning of the year 16 400.3 268.5 Effects of exchange rate changes on cash and cash equivalents 6.0 (7.3) Cash and cash equivalents at the end of the year 16 239.2 400.3

28 PARENT COMPANY CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 Notes £m £m Cash generated from operations Cash generated from operating activities 34 (77.7) 141.4 Interest received 102.8 94.8 Dividends received 5.4 5.5 Interest paid (0.2) (0.3) Income tax received/(paid) 9(b) 1.0 (17.9) Net cash inflow from operating activities 31.3 223.5 Cash flows from investing activities Purchase of property and equipment 5 (4.0) (13.8) Proceeds from sale of property and equipment 0.7 5.7 Intangible assets cost capitalised - (1.9) Decrease/(increase) in loans to related parties 0.4 (2.1) Net cash outflow from investing activities (2.9) (12.1) Cash flows from financing activities Dividends paid during the year 33 (198.9) (77.5) Net cash outflow from financing activities (198.9) (77.5) Net (decrease)/increase in cash and cash equivalents (170.5) 133.9 Cash and cash equivalents at the beginning of the year 16 381.8 251.9 Effects of exchange rate changes on cash and cash equivalents 5.9 (4.0) Cash and cash equivalents at the end of the year 16 217.2 381.8

29 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005 Share Share Revaluation Retained Total capital premium reserve earnings Group Note £m £m £m £m £m Balance as at January 1, 2004 172.8 5.2 97.9 459.8 735.7 Fair value gains on available for sale financial assets - - 10.6 - 10.6 Fair value loss on property ( 0.5) - (0.5) Tax on fair value gains ( 7.4) - (7.4) Net profit for the year - 168.7 168.7 Total recognised income for the year - - 2.7 168.7 171.4 Dividends paid during the year ( 77.5) (77.5) Balance as at December 31, 2004 172.8 5.2 100.6 551.0 829.6 Fair value gains on available for sale financial assets - - 40.7 - 40.7 Fair value gains on property - - 1.8 - 1.8 Tax on fair value gains ( 10.4) - (10.4) Net profit for the year - 204.8 204.8 Total recognised income for the year - - 32.1 204.8 236.9 Dividends paid during the year 33 ( 198.9) (198.9) Balance as at December 31, 2005 172.8 5.2 132.7 556.9 867.6 Share Share Revaluation Retained Total capital premium reserve earnings Company Note £m £m £m £m £m Balance as at January 1, 2004 172.8 5.2 84.5 449.2 711.7 Fair value gains on available for sale financial assets - - 2.8 - 2.8 Fair value loss on property ( 0.5) - (0.5) Tax on fair value gains ( 3.1) - (3.1) Net profit for the year - 140.8 140.8 Total recognised income/(expense) for the year ( 0.8) 140.8 140.0 Dividends paid during the year ( 77.5) (77.5) Balance as at December 31, 2004 172.8 5.2 83.7 512.5 774.2 Fair value gains on available for sale financial assets - - 17.4 - 17.4 Fair value gains on property - - 1.7 - 1.7 Tax on fair value gains ( 5.2) - (5.2) Net profit for the year - 161.5 161.5 Total recognised income for the year - - 13.9 161.5 175.4 Dividends paid during the year 33 ( 198.9) (198.9) Balance as at December 31, 2005 172.8 5.2 97.6 475.1 750.7

1. ACCOUNTING POLICIES 1.1. Company and its operations Allianz Cornhill Insurance plc (“the Company”) is a public limited company registered in England and Wales, whose shares are not publicly quoted. The Company transacts most classes of general insurance business. Products offered include motor, household, commercial, business interruption and liability insurance. On December 15, 2004 the Company entered into a series of agreements with the Britannic Group to sell its remaining Life Business. Many of these agreements came into effect on December 31, 2004 when completion occurred. During 2005 the Company and members of the Britannic Group made a successful application to the Courts under Part VII of the Financial Services and Markets Act 2000 to transfer the Assets and Liabilities of the Life Business from the Company to appropriate members of the Britannic Group. The assets and liabilities of the Life Division have been derecognised in the comparatives following the derecognition criteria of IAS 39.

The registered office of the Company is 57 Ladymead, Guildford, Surrey, GU1 1DB, United Kingdom. The consolidated financial statements of Allianz Cornhill Insurance plc for the year ended December 31, 2005 were authorised for issue in accordance with a resolution of the directors on March 13, 2006. 1.2 Basis of preparation The consolidated and parent financial statements of Allianz Cornhill Insurance plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, Interpretations issued by its International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Union, those parts of the Companies Act 1985 applicable to companies reporting under IFRS and under the historical cost conversion model, as modified by the revaluation of investment properties, investment securities and derivative assets and liabilities. The financial statements are compiled on a going concern basis.

These financial statements do not include an income statement for the parent company as the Company has taken advantage of the exemption conferred by Section 230(4) of the Companies Act 1985. The following accounting standards and or amendments to existing standards are effective from the following dates and have not been adopted early. Management do not believe that the application of these standards or amendments to existing standards will have a financial impact on the financial statements other than requiring additional disclosures. IAS 1 – Amendment – Presentation of Financial Statements: Capital Disclosures – effective January 1, 2007 IAS 19 – Amendments to employee benefits – effective January 1, 2006 IAS 39 – Fair Value Option – effective January 1, 2006 IAS 39 – Amendments to IAS 39 – Transition and Initial Recognition of Financial Assets and Financial Liabilities (Day 1 profits) – effective January 1, 2006 IAS 39 – Cash Flow Hedge Accounting – effective January 1, 2006 IAS 39 – Amendment to IAS 39 and IFRS 4 – Financial Guarantee Contracts – effective January 1, 2006 IFRS 4 – Insurance Contracts (amendment to IAS 39 and IFRS 4 – Financial Guarantee Contracts) – effective January 1, 2006 IFRS 7 – Financial instruments: Disclosures – effective January 1, 2007 IFRIC 4 – Determining whether an arrangement contains a lease – effective January 1, 2006 IFRIC 9 – Reassessment of Embedded Derivatives – effective June 1, 2006 1.3. Summary of significant accounting policies Allianz Cornhill Insurance plc has identified the accounting policies that are most significant to its business operations and the understanding of its results. These accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to: insurance provisions, deferred acquisition costs, the ascertainment of fair values of financial assets and liabilities and the determination of impairment losses. In each case, the determination of these is fundamental to the financial results and position and requires management to make complex judgments based on information and financial data that may change in the future periods. Since these involve the use of assumptions and subjective judgments as to future events and are subject to change, the use of different assumptions or data could produce materially different results. 30 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 The significant accounting policies adopted in the preparation of the financial statements are set out in the following paragraphs, any differences or exemptions on first time adoption are set out in note 3. (a) Basis of consolidation The consolidated financial statements comprise the financial statements of Allianz Cornhill Insurance plc and its subsidiaries that are wholly owned and controlled by the Group. All the financial statements included are uniformly prepared in conformity with IFRS and adopting consistent accounting policies as at December 31, 2005. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date control is transferred out. All intra group balances and transactions have been eliminated. Shareholdings in subsidiary undertakings are reported in the parent company financial statements at cost. (b) Property and equipment Motor vehicles and computer equipment are depreciated on a straight line basis over two to four years, so as to reduce cost to the estimated realisable value at the time of disposal.

Owner occupied properties are carried at fair value as assessed by qualified external valuers. Fair value is the estimated amount for which a property can be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction. Gains arising from changes in fair values are recognised in the revaluation reserve in equity, unless this reverses a revaluation decrease previously recognised in the income statement. Losses arising from changes in fair value are recognised in the income statement, unless this reverses a revaluation increase previously recognised in the revaluation reserve.

(c) Investment properties Property held for long term rental yields and for capital appreciation is classified as investment property. Investment properties are initially measured at cost. Subsequently, at each balance sheet date such properties are carried at fair value as assessed by qualified external valuers. Fair value is the estimated amount for which a property can be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction. Investment properties are derecognised when either its use changes or it has been disposed off or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Gains or losses arising from changes in the fair values are recognised in the income statement in the period in which they arise.

If an item of property and equipment becomes an investment property because its use has changed, any difference arising between the net book value and the fair value of the item at the date of transfer is recognised as a fair value gain in equity and is subsequently treated under the normal policies for investment properties. (d) Intangible assets Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of acquisition.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstance indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represent the lowest level within the Group at which the goodwill is monitored for internal management purposes.

(d) Intangible assets (continued) Impairment is determined by assessing the recoverable amount of the cash generating unit (group of cash generating units), to which the goodwill relates. Where the recoverable amount of the cash generating unit (group of cash generating units) is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash generating unit (group of cash generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative value of the operation disposed of and the portion of the cash generating unit retained. Other intangible assets Costs associated with the development of software for internal use, are capitalised only if the software is technically feasible for sale or use on completion and the Group has both the intent and sufficient resources to complete the development. Additional costs are capitalised only if the asset can be reliably measured, will generate future economic benefits and there is an ability to use or sell the asset. The cost is amortised over the expected useful life of the intangible asset on a straight line basis. The useful life is between two and four years. The cost of externally generated software is amortised on a straight line basis over the expected useful life of the intangible asset. This has been set between two and four years.

The cost of acquiring renewal rights to books of business is amortised on a straight line basis over the expected life of the intangible asset. The Company reassessed the useful life of the renewal rights from 20 to 10 years during the year. (e) Deferred acquisition costs Commission and other acquisition costs incurred during the financial period that vary with and are related to securing new insurance contracts and or renewing existing insurance contracts, but which relates to subsequent financial periods, are deferred to the extent that they are recoverable out of future revenue margins. Deferred acquisition costs are capitalised and amortised on a straight line basis. All other acquisition costs are recognised as an expense when incurred.

An impairment review is performed at each reporting date and the carrying value is written down to the recoverable amount. (f) Income taxes Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement, except to the extent that income taxes relating to items recognised directly in equity are recognised in equity. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, together with adjustments to tax payable in respect of prior years. Deferred income tax is provided in full using the liability method on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the balance sheet date. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Deferred income tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred income tax asset to be utilised. Group tax losses are utilised when available. Consideration paid for group relief is accounted for in the financial statements as though the payment had been made to the relevant tax authorities.

32 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 1. ACCOUNTING POLICIES (CONTINUED)

33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 (g) Reinsurance assets The Company assumes and cedes reinsurance in the normal course of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Amounts due to reinsurers are estimated in a manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims reimbursed are presented on a gross basis. Reinsurance contracts that do not transfer significant insurance risk are accounted for directly through the balance sheet and are not included in reinsurance assets or liabilities. These are deposit assets or financial liabilities that are recognised based on the consideration paid or received less any explicit identified premiums or fees to be retained by the reinsured.

An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance assets are impaired only if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract and that this can be measured reliable. (h) Fair values of financial assets and liabilities Financial assets and liabilities are initially stated at fair value. Listed investments are stated at the bid market price at the close of business on the balance sheet date. Unlisted investments are stated at management’s estimate of amounts that could be realised under current market conditions assuming an orderly liquidation over a reasonable period of time. Subsequent remeasurement of the financial assets is in accordance with the financial assets accounting policy (j).

(i) Derivative financial instruments Derivative financial instruments are stated at fair value. The Group does not separate embedded derivatives that meet the definition of an insurance contract. All other derivatives are separated from the host contract and derivative financial instruments that do not qualify for hedge accounting, are initially recognised at fair value on the date the financial derivative contract is entered into and are subsequently remeasured at fair value by mark to market. Changes in the fair value are recognised immediately in the income statement. Fair values are obtained from quoted prices prevailing in active markets.

(j) Financial assets The Group classifies its investments as either available for sale financial assets, or loans and receivables. All purchases of financial assets are recognised on the trade date i.e. the date the Group commits to purchase the asset. All sales of financial assets are recognised on the settlement date i.e. the date the asset is delivered to the counterparty. All investments are initially recognised at fair value plus, in the case of available for sale assets and loans and other receivables, the transaction costs that are directly attributable to the acquisition of the investment. A financial asset shall be derecognised when the contractual right to receive cash flows expire or when the asset is transferred. Available for sale financial assets, after initial recognition, are measured at fair value. Unrealised gains and losses are reported as a separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in equity is transferred to the income statement.

(j) Financial assets (continued) Loans and receivables Loans and receivables are financial assets with fixed or determinable payments. Loans and receivables are initially recognised at fair value and subsequently measured at amortised cost, using the effective interest method. Impairments The carrying value of all financial assets is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The identification of impairment and the determination of recoverable amounts is an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. In order to determine whether negative revaluations on investment securities correctly represent impairment, all investment securities for which the market value has either fallen significantly below cost price or been below cost price for a considerable period of time, are individually reviewed. A distinction is made between negative revaluations due to general market fluctuations and due to issuer specific developments. The impairment review focuses on issuer specific developments regarding financial condition and future prospects, taking into account the intent and ability to hold the securities under the Group’s long term investment strategy.

For available for sale financial assets, a significant prolonged decline in the fair value indicates an impairment. For available for sale financial assets the impairment loss is the difference between its current fair value and its original cost. (k) Insurance receivables Insurance receivables are recognised in a manner consistent with the premium income recognition as detailed in the revenue recognition accounting policy (q). The carrying value is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the income statement.

(l) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short term deposits with an original maturity of three months or less at the date of placement, free of any encumbrances. (m) Product classification Insurance contracts are defined as those containing significant insurance risk at the inception of the contract, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant. The significance of insurance risk is dependant on both the probability of an insured event and the magnitude of its potential effect.

(n) Insurance contracts liabilities Insurance contracts liabilities Insurance contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Significant delays can be experienced in the notification and settlement of certain type of general insurance claims, particularly in respect of liability business, environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 1. ACCOUNTING POLICIES (CONTINUED)

35 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 (n) Insurance contracts liabilities (continued) Provision for unearned premiums The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as unearned premium. The change in the provision for unearned premium is taken to the income statement in the order that revenue is recognised over the period of risk. Liability adequacy test At each balance sheet date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition cost assets. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses, as well as investment income from assets backing such liabilities, are used. Any inadequacy is immediately charged to the income statement by establishing an unexpired risk provision.

(o) Provision for other liabilities A provision is recognised when the Group has a present legal or constructive obligation, as a result of past event, which it is probable, will result in a outflow of resources and when a reliable estimate of the amount of the obligation can be made. If the effect is material, the provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects a current market assessment for the time value of money and, where appropriate, the risks specific to the liability.

The Group recognise the provision for onerous contracts when the expected benefits to be derived from contracts are less than the unavoidable costs of meeting the obligations under the contracts. (p) Pension benefit obligation As part of a group reorganisation during 2005, which included the transfer of its employees to a services company, pension benefits are now provided by that fellow group company. Prior to the reorganisation, the Group provided both defined benefit and defined contribution pension schemes for its employees. The cost of providing benefits under the defined benefit pension scheme, which required contributions to be made to a separately administered fund, was determined by using the projected unit credit method. The valuation of the obligation is performed at each reporting year end by a qualified actuary.

The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all the employees for benefits in respect of employee service in the current and prior periods. Prior to the reorganisation, the Group applied the corridor method whereby actuarial gains and losses were recognised as income or expenses when the cumulative unrecognised actuarial gains or losses of the plan exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets. These gains or losses are recognised over the expected average remaining working lives of the employees participating in the plan.

(q) Revenue recognition Premium income Premiums written are recognised on policy inception and earned on a pro rata basis or for risks where a pro rata basis is inappropriate a basis consistent with the risk profile over the term of the related policy coverage. Estimates of premiums written as at the balance sheet date but not yet processed, are assessed based on estimates from underwriting or past experience and are included in premiums earned.

(q) Revenue recognition (continued) Investment income Interest income is recognised in the income statement as it accrues, taking into account the effective yield of the asset or an applicable floating rate. Interest income includes the amortisation of any discount or premium. Investment income also includes dividends, which are included on the date the shares become quoted ex dividend. Rental income from investment property is recognised in the income statement on a straight line basis over the term of the lease.

Realised gains and losses recorded in the income statement Realised gains and losses on the sale of property and equipment and of available for sale financial assets are calculated as the difference between net sales proceeds and the original or amortised cost. Realised gains and losses are recognised in the income statement when the sale transaction occurred. Unrealised gains and losses recorded in the income statement Unrealised gains and losses relating to investment properties and derivative financial instruments are recognised immediately in the income statement.

(r) Claims Claims incurred include all claim losses occurring during the year, whether reported or not, including the related handling costs and reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function.

(s) Finance cost Interest payable is recorded in the period in which it is incurred. (t) Foreign currency translation The Group’s presentation and functional currency is Sterling . Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at year end are retranslated at the functional currency rate of exchange ruling at the balance sheet date. Non monetary items that are measured in terms of historical cost are translated using the exchange rate as at the date of initial transaction. Non monetary items measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. All foreign exchange differences are taken to the income statement, unless required to be taken to equity.

(u) Off setting of financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to off set the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. (v) Current, non current disclosure For each asset and liability line item, amounts expected to be recovered or settled within twelve months after the balance sheet date, will be classified as current at the balance sheet date and the remaining balance as non current. 36 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 1. ACCOUNTING POLICIES (CONTINUED)

37 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 2. USE OF ESTIMATES, ASSUMPTIONS AND JUDGEMENTS The Group makes estimates, assumptions and judgements that affect the reported amounts of assets and liabilities. Estimates, assumptions and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Claims liability arising from insurance contracts Estimates have to be made both for the expected ultimate cost of claims reported at the balance sheet date and for the expected ultimate cost of claims incurred but not yet reported (IBNR) at the balance sheet date. It can take a significant period of time before the ultimate claims cost can be established with certainty and for some type of policies, IBNR claims form the majority of the balance sheet claims provision. The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends. Further details of the claims estimation process are described in note 18. At each reporting date, prior year claims estimates are reassessed for adequacy and changes are made to the provision. Claims provisions are not discounted for the time value of money except for claims being settled by periodic payments. The carrying value at balance sheet date for these general insurance contracts is £3,142.0m (2004: £3,048.2m). (b) Impairment of financial assets Fair values are based on quoted market prices for the specific instrument, comparisons with other highly similar financial instruments, or the use of valuation models. Establishing valuations where there are no quoted market prices inherently involves the use of judgement and applying judgement in establishing reserves against indicated valuations for aged positions, deteriorating economic conditions (including country specific risks), concentrations in specific industries, types of instruments or currencies, market liquidity, model risk itself and other factors. (c) Surplus or deficit on defined benefit pension scheme Any surplus or deficit on the scheme is calculated based on the fair value of the assets and liabilities in the scheme. Fair values of the scheme assets are based on quoted market prices for the specific instrument, comparisons with other highly similar financial instruments, or the use of valuation models. The cost of providing benefits under the plan is determined by using the projected unit credit method. The valuation of the obligation is performed at each reporting year end by a qualified actuary. The pension benefit obligation is accounted for in the manner detailed in accounting policy (p).

3. FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (a) Statement of compliance Allianz Cornhill Insurance plc has adopted International Financial Reporting Standards (IFRS) for these financial statements for the year ended December 31, 2005 and has also restated its comparative amounts for the year ended December 31, 2004 for all standards effective as at December 31, 2005. The date of transition to IFRS is therefore, January 1, 2004. The Group has elected to apply the exemption from IFRS 1: First time adoption, in respect of not applying IFRS 4 to previous periods.

The Group has applied IFRS 5: Non current assets held for sale and discontinued operations, from the date of transition. This is the first financial report prepared based on IFRS. Reconciliation of IFRS equity and net profit for the year ended December 31, 2004 as reported earlier and under IFRS is detailed below. (b) The following courses of action have been taken under IFRS 1, upon adoption of IFRS Goodwill and impairment The Group has elected not to apply the provisions of IFRS 3: Business Combinations retrospectively to past combinations that occurred prior to January 1, 2004.

Goodwill arising on acquisition is no longer amortised, rather, it is subject to an annual impairment test, or sooner when there is an indication that it may be impaired. Post retirement benefits - Defined benefit scheme The Group has elected to apply the corridor approach for all cumulative actuarial gains and losses for the period prior to the transfer of its pension obligations to another group company. Estimates The Group’s estimates earlier made under UK GAAP have been made consistent with IFRS at the date of transition after adjustments to reflect any difference in accounting policies.

Insurance contracts The Group has elected to disclose only five years of claims experience data in its loss development triangle tables as permitted in the first financial year in which it adopts IFRS 4. The disclosure will be extended for an additional year in each succeeding year until the 10 years of information requirement has been satisfied. (c) Reconciliation of equity reported under UK GAAP to the equity under IFRS The table below discloses the effect of adopting IFRS on equity that has previously been reported under UK GAAP, for the year ended December 31, 2004 and at the date of transition.

Group January 1, 2004 December 31, 2004 Notes £m £m Equity as reported under UK GAAP 743.5 839.4 De-recognition of dividends declared and approved by the shareholders subsequent to year end f(1) 1.9 1.9 De-recognition of goodwill f(2) (1.7) (1.5) Recognition of cumulative unrecognised actuarial losses on post retirement benefits f(3) (35.2) (38.4) Transfer of the equalisation reserve to equity f(4) 16.8 26.6 Revaluation of available for sale investments to bid price f(5) (1.2) (1.2) Deferred tax discounting disallowance f(6) 5.6 (1.0) Deferred tax impact of all first time adoption adjustments f(6) 6.0 3.8 Equity as reported under IFRS 735.7 829.6 38 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

39 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 Company January 1, 2004 December 31, 2004 Notes £m £m Equity as reported under UK GAAP 718.2 782.1 De-recognition of dividends declared and approved by the shareholders subsequent to year end f(1) 1.9 1.9 Recognition of cumulative unrecognised actuarial losses on post retirement benefits f(3) (35.2) (38.4) Transfer of the equalisation reserve to equity f(4) 15.9 25.7 Revaluation of afs investments to bid price f(5) (0.9) (0.7) Deferred tax discounting disallowance f(6) 5.6 (0.4) Deferred tax impact of all first time adoption adjustments f(6) 6.2 4.0 Equity as reported under IFRS 711.7 774.2 (d) Reconciliation of the income statement reported under UK GAAP to the income statement under IFRS The table below discloses the effect of adopting IFRS on the income statement that has previously been reported under UK GAAP, for the year ended December 31, 2004.

December 31, 2004 Notes £m Net profit for the year attributable to shareholders as reported under UK GAAP 95.9 Total dividends charged in the year f(1) 77.5 Reversal of goodwill amortisation f(2) 0.2 Recognition of impairment of afs investments f(8) (9.4) Additional realised gains on sale of afs investments due to impairments f(8) 13.3 Recognition of cumulative unrecognised actuarial losses on post retirement benefits f(3) (3.2) Financial assets available for sale fair value adjustment now recorded in the statement of changes in equity f(7) (14.7) Reversal of the equalisation reserve adjustment f(4) 9.8 Reversal of fair value adjustment on owner occupied properties now recorded in the statement of changes in equity f(7) 0.7 Current tax on unrealised gains on bonds now recorded in the statement of changes in equity f(6) 0.7 Deferred tax discounting disallowance f(6) (6.7) Deferred tax impact of the above adjustments f(6) 4.6 Net profit for the year attributable to shareholders as reported under IFRS 168.7 (e) Cash flow statement The re-classification of cash and cash equivalents from investments has resulted in a change to the 2004 increase in cash flow reported, from £153.9m reported under UK GAAP to £139.0m reported under IFRS. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP.

(f) Adjustments between UK GAAP and IFRS The basis of material adjustments between UK GAAP and IFRS are as follows. (1) Dividends De-recognition of dividends declared and approved by shareholders subsequent to year end Under UK GAAP for 2004 and prior, shareholders’ dividends are accrued in the year to which they relate regardless of when these are declared and approved by the directors. From January 1, 2004, under IAS 10: Events after the balance sheet date, shareholders’ dividends are accrued when declared and approved by the directors. This has resulted in the de-recognition of accrued dividends on preference shares.

(1) Dividends (continued) Total dividends charged in the year Under UK GAAP, total dividends charged in the year are recorded within the income statement but under IFRS they should be recorded within the statement of changes in equity. (2) De-recognition of goodwill Goodwill can no longer be amortised upon adoption of IFRS. The balance has been re-stated and brought into line with the value under the parent company accounting policies. (3) Full recognition of cumulative unrecognised actuarial losses on post retirement benefits Under UK GAAP, the Group accounted for pensions in accordance with SSAP 24 and complied with the phased transitional disclosure requirements of FRS 17. Under IAS 19: Employee benefits, the pension obligation calculated by using the projected unit credit method is matched against the fair value of the plan assets. The Group has applied the IAS 19 corridor method fully retrospectively in recognising the actuarial gains or losses on first time adoption. (4) Equalisation provision Under the UK law, an equalisation provision is required (even though there is no actual liability at the balance sheet date) for a general insurer, to eliminate or reduce the volatility in incurred claims arising from exceptional levels of claims. Under IFRS, no equalisation provision is recorded as a liability as there is no present obligation for the losses. (5) Valuation of available for sale investments Under UK GAAP, investments had been valued at mid-market price. Under IFRS, these have been valued at the bid- market price.

(6) Deferred tax Under UK GAAP, deferred tax balances were discounted. Discounting is not allowed under IFRS. Under UK GAAP; income taxes, deferred tax assets or liabilities are provided under the liability method for all timing differences that are expected to reverse in the foreseeable future. Under IAS 12; full provision is made for deferred tax assets and liabilities arising from temporary differences between the recognition of gains and losses in the financial statements and their recognition in the income tax return. Deferred tax assets are recognised for unused tax losses and tax credits to the extent that it is probable that future profits will be utilised against the unused tax losses and tax credits. (7) Fair value adjustments Under UK GAAP, financial assets available for sale and owner occupied properties are measured at fair value at each reporting date with changes in the fair value recorded within the income statement. Under IAS 39: Financial instruments, subsequent fair value adjustments are recorded within the statement of changes in equity. Any tax relating to these adjustments is also recorded within the statement of changes in equity. (8) Impairments For available for sale financial assets, a significant or prolonged decline in the fair value indicates an impairment. The impairment loss is the difference between its current fair value and its original cost. Impairment loss is transferred from equity to the income statement. Realised gains on impaired investments subsequently sold are higher than the gains recorded under UK GAAP.

40 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 3. FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS [IFRS] (CONTINUED)

41 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 4. INTANGIBLE ASSETS Other intangible Goodwill assets Total Group £m £m £m Cost At January 1, 2004 5.8 47.1 52.9 Cost capitalised during the year - 1.9 1.9 At December 31, 2004 5.8 49.0 54.8 Transfer to follow Allianz group company - (26.9) (26.9) At December 31, 2005 5.8 22.1 27.9 Accumulated amortisation and impairment At January 1, 2004 2.9 26.5 29.4 Amortisation charge for the year - 3.4 3.4 At December 31, 2004 2.9 29.9 32.8 Transfer to follow Allianz group company - (24.0) (24.0) Amortisation charge for the year - 9.9 9.9 At December 31, 2005 2.9 15.8 18.7 Carrying amount At December 31, 2004 2.9 19.1 22.0 At December 31, 2005 2.9 6.3 9.2 Amortisation charges have been charged in other operating and administrative expenses. Other intangible assets Total Company £m £m Cost At January 1, 2004 47.1 47.1 Cost capitalised during the year 1.9 1.9 At December 31, 2004 49.0 49.0 Transfer to follow Allianz group company (26.9) (26.9) At December 31, 2005 22.1 22.1 Accumulated amortisation and impairment At January 1, 2004 26.5 26.5 Amortisation charge for the year 3.4 3.4 At December 31, 2004 29.9 29.9 Transfer to follow Allianz group company (24.0) (24.0) Amortisation charge for the year 9.9 9.9 At December 31, 2005 15.8 15.8 Carrying amount At December 31, 2004 19.1 19.1 At December 31, 2005 6.3 6.3 Amortisation charges have been charged in other operating and administrative expenses.

42 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 5. PROPERTY AND EQUIPMENT Property Equipment Motor Total vehicles Group £m £m £m £m Cost or valuation At January 1, 2004 29.4 24.9 12.6 66.9 Additions 3.3 5.8 4.7 13.8 Disposals (4.1) (1.2) (3.7) (9.0) Net fair value losses (0.5 ( 0.5) At December 31, 2004 28.1 29.5 13.6 71.2 Additions 3.6 1.7 2.3 7.6 Transfer to follow Allianz group company - (31.2) (15.9) (47.1) Net fair value gains 1.8 - - 1.8 At December 31, 2005 33.5 - - 33.5 Accumulated depreciation At January 1, 2004 - 13.6 4.3 17.9 Depreciation charge for the year - 7.6 2.5 10.1 Disposals - (1.1) (2.3) (3.4) At December 31, 2004 - 20.1 4.5 24.6 Depreciation charge for the year - 1.9 1.3 3.2 Transfer to follow Allianz group company - (22.0) (5.8) (27.8) At December 31, 2005 - Carrying amount At December 31, 2004 28.1 9.4 9.1 46.6 At December 31, 2005 33.5 - - 33.5 Property Equipment Motor Total vehicles Company £m £m £m £m Cost or valuation At January 1, 2004 29.4 24.9 12.6 66.9 Additions 3.3 5.8 4.7 13.8 Disposals (4.1) (1.2) (3.7) (9.0) Net fair value (losses) (0.5 ( 0.5) At December 31, 2004 28.1 29.5 13.6 71.2 Additions - 1.7 2.3 4.0 Transfer to follow Allianz group company - (31.2) (15.9) (47.1) Net fair value gains 1.7 - - 1.7 At December 31, 2005 29.8 - - 29.8 Accumulated depreciation At January 1, 2004 - 13.6 4.3 17.9 Depreciation charge for the year - 7.6 2.5 10.1 Disposals - (1.1) (2.3) (3.4) At December 31, 2004 - 20.1 4.5 24.6 Depreciation charge for the year 1.9 1.3 3.2 Transfer to follow Allianz group company (22.0) (5.8) (27.8) At December 31, 2005 - Carrying amount At December 31, 2004 28.1 9.4 9.1 46.6 At December 31, 2005 29.8 - - 29.8

43 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 Property is stated at fair value. On December 31 2005, the properties were independently valued in accordance with the Royal Institute of Chartered Surveyors’ guidelines on the basis of open market value of such properties (amounts for which the properties could be exchanged between knowledgeable willing parties in an arm’s length transaction at the valuation date). 6. INVESTMENT PROPERTIES 2005 2004 Group £m £m At January 1 82.5 72.0 Additions 9.3 6.7 Disposals (8.9) (0.4) Net fair value gains 2.9 4.2 At December 31 85.8 82.5 Investment properties are stated at fair values. On December 31 2005, the properties were independently valued in accordance with the Royal Institute of Chartered Surveyors’ guidelines on the basis of open market value of such properties (amounts for which the properties could be exchanged between knowledgeable willing parties in an arm’s length transaction at the valuation date).

The rental income arising from investment properties during the year amounted to £4.9m (2004: £4.7m), which is included in investment income. Direct operating expenses (charged against investment income) arising in respect of such properties during the year amounted to £0.7m (2004: £0.3m). 7. DEFERRED ACQUISITION COSTS Group Company Group Company 2005 2005 2004 2004 £m £m £m £m At January 1 169.3 179.8 158.6 164.7 Costs deferred during the year 181.3 191.2 146.7 159.5 Amortisation charge for the year (166.3) (174.6) (136.0) (144.4) At December 31 184.3 196.4 169.3 179.8 Acquisition costs comprise the commission and management expenses of acquiring insurance policies written during the year.

Acquisition costs which relate to a subsequent financial year are deferred to the extent that they are attributable to premiums unearned at the balance sheet date.

8. LEASES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m The total of future minimum lease payments under non-cancellable operating leases are set out below: Not later than one year 10.1 9.4 11.2 10.5 Later than one year and not later than five years 38.5 36.0 41.4 38.7 Later than five years 45.4 43.7 60.5 58.0 94.0 89.1 113.1 107.2 Operating lease rentals for the year were £9.6m (2004 £8.5m). Group Company Group Company 2005 2005 2004 2004 £m £m £m £m The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date 3.8 3.8 11.9 11.9 Sublease payments for the Company and the Group for the year were £1.4m (2004 £1.5m). The Group owns its major operational properties. The leases described above relate to other smaller properties located throughout Great Britain. There are no individually significant lease arrangements or purchase options attached to these properties.

44 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

45 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 9. TAX ASSETS AND LIABILITIES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Deferred tax asset 53.2 64.4 14.8 18.1 Total tax asset 53.2 64.4 14.8 18.1 Tax payable 81.7 61.0 37.7 20.7 Total tax liability 81.7 61.0 37.7 20.7 Group Company Group Company 2005 2005 2004 2004 (a) Deferred tax asset £m £m £m £m At January 1 14.8 18.1 66.9 67.8 Claims equalisation reserve (3.7) (3.6) (3.0) (2.9) Provisions and other temporary differences (3.0) (3.0) (1.3) (1.3) Pension benefit obligation (11.5) (11.5) 0.9 0.9 Disclaimed technical reserves 69.5 69.5 (40.5) (40.5) Unrealised gains on investment securities (10.5) (5.0) (7.8) (5.1) Revaluation of property and equipment (2.4) (0.1) (0.4) (0.8) At December 31 53.2 64.4 14.8 18.1 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m At January 1 14.8 18.1 66.9 67.8 Amounts credited/(charged) to the income statement 45.9 48.7 (45.4) (47.1) Amounts charged to equity (7.5) (2.4) (6.7) (2.6) At December 31 53.2 64.4 14.8 18.1 The receivable is all non current. Group Company Group Company 2005 2005 2004 2004 (b) Tax payable £m £m £m £m At January 1 37.7 20.7 56.3 39.6 Amounts charged/(credited) to the income statement 47.5 36.5 5.8 (1.7) Amounts charged to equity 2.9 2.8 0.7 0.7 Tax payments (made)/received during the year (6.4) 1.0 (25.1) (17.9) At December 31 81.7 61.0 37.7 20.7 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Current tax payable 36.3 32.3 7.5 4.7 Non current tax payable 45.4 28.7 30.2 16.0

10. REINSURANCE ASSETS Group Company Group Company 2005 2005 2004 2004 Note £m £m £m £m Reinsurers share of Insurance contract liabilities 17 872.9 866.2 866.2 859.4 Total reinsurance assets 872.9 866.2 866.2 859.4 For the current and non-current split, refer to note 17. 11. PREPAYMENTS AND ACCRUED INCOME Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Prepayments: Rental prepayments 0.2 - 0.2 - Other prepayments - - 2.3 2.2 Total prepayments 0.2 - 2.5 2.2 Accrued income: Dividends 0.7 0.7 1.0 0.7 Interest 27.7 26.0 21.0 20.3 Total accrued income 28.4 26.7 22.0 21.0 Total prepayments and accrued income 28.6 26.7 24.5 23.2 The carrying amount for accrued income disclosed above reasonably approximates to its fair value at year end and is expected to be realised within a year from the balance sheet date.

12. DERIVATIVE FINANCIAL INSTRUMENTS The Group purchases exchange traded index options for the purpose of equity portfolio and risk capital protection. The fair values of derivative financial instruments at December 31, are as follows: 2005 2005 2004 2004 Fair value Fair value Fair value Fair value asset liabilities asset liabilities Group and Company £m £m £m £m Derivative financial instruments 0.1 - 0.3 3.1 Total derivative financial instruments 0.1 - 0.3 3.1 All derivative financial instruments are current. 46 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

47 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 13. FINANCIAL ASSETS The financial asset investments are summarised by measurement categories as follows: Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Available for sale financial assets 2,229.3 1,883.5 1,995.4 1,710.6 Loans and receivables 72.1 72.1 72.5 72.5 Total financial assets 2,301.4 1,955.6 2,067.9 1,783.1 Group Company Group Company 2005 2005 2004 2004 (a) Available for sale financial assets £m £m £m £m At fair value Equity securities Listed 373.8 149.8 302.4 157.7 Unlisted 14.2 13.8 11.6 11.6 Total equity securities at fair value 388.0 163.6 314.0 169.3 Debt securities Listed 1,425.7 1,304.3 1,274.7 1,134.6 Total debt securities at fair value 1,425.7 1,304.3 1,274.7 1,134.6 Deposits with credit institutions 415.6 415.6 406.7 406.7 Total available for sale financial assets at fair value 2,229.3 1,883.5 1,995.4 1,710.6 At cost Equity securities Listed 232.4 54.5 189.8 68.2 Unlisted 7.0 6.6 6.6 6.6 Total equity securities at cost 239.4 61.1 196.4 74.8 Debt securities Listed 1,398.7 1,279.0 1,257.7 1,118.8 Total debt securities at amortised cost 1,398.7 1,279.0 1,257.7 1,118.8 Deposits with credit institutions 415.6 415.6 406.7 406.7 Total available for sale financial assets at cost 2,053.7 1,755.7 1,860.8 1,600.3 Group Company Group Company 2005 2005 2004 2004 (b) Loans £m £m £m £m Loans to related parties 70.0 70.0 70.0 70.0 Other loans 2.1 2.1 2.5 2.5 Total loans 72.1 72.1 72.5 72.5 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Current loans 71.0 71.0 0.9 0.9 Non current loans 1.1 1.1 71.6 71.6 The carrying amounts disclosed above reasonably approximate fair values at year end.

48 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 14. INSURANCE RECEIVABLES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Due from policyholders 189.3 128.5 186.7 140.6 Due from reinsurers 77.9 76.6 70.3 69.4 Due from agents, brokers and intermediaries 294.4 294.3 281.8 281.3 Total insurance receivables 561.6 499.4 538.8 491.3 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Current insurance receivables 479.3 417.6 465.1 418.0 Non current insurance receivables 82.3 81.8 73.7 73.3 The carrying amounts disclosed above reasonably approximate fair values at year end. 15. OTHER RECEIVABLES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Amounts due from related parties 24.4 212.2 4.4 178.1 Other 36.4 34.3 45.3 43.2 Total other receivables 60.8 246.5 49.7 221.3 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Current other receivables 45.1 230.8 33.8 205.4 Non current other receivables 15.7 15.7 15.9 15.9 The carrying amounts disclosed above reasonably approximate fair values at year end. 16. CASH AND CASH EQUIVALENTS Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Cash at bank 29.6 26.4 41.9 38.5 Short-term deposits (including demand and time deposits) 209.6 190.8 358.4 343.3 Total 239.2 217.2 400.3 381.8 All deposits are subject to an average variable interest rate of 4.5% (2004 4.8%) and have an average maturity of 26 days (2004 36 days). The carrying amounts disclosed above reasonably approximate fair values at year end.

49 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 17. INSURANCE CONTRACTS LIABILITIES 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Group £m £m £m £m £m £m Provisions for claims reported by policyholders 1,542.4 (377.2) 1,165.2 1,470.0 (377.7) 1,092.3 Provisions for claims incurred but not reported 553.3 (192.8) 360.5 537.5 (186.7) 350.8 Total claims reported and IBNR 2,095.7 (570.0) 1,525.7 2,007.5 (564.4) 1,443.1 Provision for unearned premiums 1,046.3 (302.9) 743.4 1,040.7 (301.8) 738.9 Total general insurance contracts liabilities 3,142.0 (872.9) 2,269.1 3,048.2 (866.2) 2,182.0 Current general insurance contracts liabilities 1,415.6 (371.5) 1,044.1 1,370.6 (365.2) 1,005.4 Non current general insurance contracts liabilities 1,726.4 (501.4) 1,225.0 1,677.6 (501.0) 1,176.6 The provision for claims reported by policyholders and claims incurred but not yet reported may be analysed as follows: 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Group £m £m £m £m £m £m At January 1 2,007.5 (564.4) 1,443.1 1,903.2 (548.3) 1,354.9 Foreign exchange adjustment 24.2 (13.9) 10.3 (25.0) 16.6 (8.4) 2,031.7 (578.3) 1,453.4 1,878.2 (531.7) 1,346.5 Claims incurred in the current accident year 1,175.6 (173.9) 1,001.7 1,167.9 (225.8) 942.1 Movement on claims incurred in prior accident years (219.6) 52.0 (167.6) (141.0) 51.3 (89.7) Claims paid during the year (892.0) 130.2 (761.8) (897.6) 141.8 (755.8) At December 31 2,095.7 (570.0) 1,525.7 2,007.5 (564.4) 1,443.1 The provision for unearned premiums may be analysed as follows: 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Group Notes £m £m £m £m £m £m At January 1 1,040.7 (301.8) 738.9 1,045.2 (313.5) 731.7 Foreign exchange adjustment 0.5 (0.5) - (1.4) 1.2 (0.2) 1,041.2 (302.3) 738.9 1,043.8 (312.3) 731.5 Premiums written in the year 24 1,665.5 (352.9) 1,312.6 1,767.9 (395.1) 1,372.8 Premiums earned during the year 24 (1,660.4) 352.3 (1,308.1) (1,771.0) 405.6 (1,365.4) At December 31 1,046.3 (302.9) 743.4 1,040.7 (301.8) 738.9

50 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 17. INSURANCE CONTRACTS LIABILITIES (CONTINUED) 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Company £m £m £m £m £m £m Provisions for claims reported by policyholders 1,504.0 (373.0) 1,131.0 1,421.2 (373.8) 1,047.4 Provisions for claims incurred but not reported 546.8 (190.3) 356.5 523.7 (183.8) 339.9 Total claims reported and IBNR 2,050.8 (563.3) 1,487.5 1,944.9 (557.6) 1,387.3 Provision for unearned premiums 1,042.6 (302.9) 739.7 1,033.9 (301.8) 732.1 Total general insurance contracts liabilities 3,093.4 (866.2) 2,227.2 2,978.8 (859.4) 2,119.4 Current general insurance contracts liabilities 1,396.0 (369.9) 1,026.1 1,343.2 (364.5) 978.7 Non current general insurance contracts liabilities 1,697.4 (496.3) 1,201.1 1,635.6 (494.9) 1,140.7 The provision for claims reported by policyholders and claims incurred but not yet reported may be analysed as follows: 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Company £m £m £m £m £m £m At January 1 1,944.9 (557.6) 1,387.3 1,835.4 (540.6) 1,294.8 Foreign exchange adjustment 23.9 (13.6) 10.3 (24.7) 16.2 (8.5) 1,968.8 (571.2) 1,397.6 1,810.7 (524.4) 1,286.3 Claims incurred in the current accident year 1,164.3 (170.8) 993.5 1,126.2 (213.7) 912.5 Movement on claims incurred in prior accident years (214.9) 51.1 (163.8) (127.0) 39.0 (88.0) Claims paid during the year (867.4) 127.6 (739.8) (865.0) 141.5 (723.5) At December 31 2,050.8 (563.3) 1,487.5 1,944.9 (557.6) 1,387.3 The provision for unearned premiums may be analysed as follows: 2005 2004 Insurance Reinsurers’ Insurance Reinsurers’ contracts share of contracts share of liabilities liabilities Net liabilities liabilities Net Company £m £m £m £m £m £m At January 1 1,033.9 (301.8) 732.1 1,022.2 (313.5) 708.7 Foreign exchange adjustment 0.5 (0.5) - (1.4) 1.2 (0.2) 1,034.4 (302.3) 732.1 1,020.8 (312.3) 708.5 Premiums written in the year 1,657.9 (352.6) 1,305.3 1,746.0 (394.5) 1,351.5 Premiums earned during the year (1,649.7) 352.0 (1,297.7) (1,732.9) 405.0 (1,327.9) At December 31 1,042.6 (302.9) 739.7 1,033.9 (301.8) 732.1

51 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 18. INSURANCE CONTRACTS LIABILITIES AND REINSURANCE ASSETS – TERMS, ASSUMPTIONS AND SENSITIVITIES The major classes of general insurance written by Allianz Cornhill include motor, household, commercial, business interruption and liability. Risks under these policies usually cover a 12 month duration. The Group also writes several more specialist lines of business such as pet insurance, creditor business, extended warranties and mobile phone all risks. Risk durations under these policies can vary from 1 month up to 5 years.

Claims provisions (comprising provisions for claims reported by policyholders and claims incurred but not yet reported) are established to cover the ultimate costs of settling the liabilities in respect of claims that have occurred and are estimated based on known facts at the balance sheet date. These provisions are revised quarterly as part of a regular ongoing process as claims experience develops, certain claims are settled and further claims are reported. Outstanding claims provisions are not discounted for the time value of money, apart from those associated with the settlement of (usually) high value personal injury claims by way of periodical payments established under the Courts Act 2003. As at the end of 2005 there were only 3 of these claims with total reserves of £5.6m gross and £0.9m net of reinsurance. The corresponding undiscounted amounts are £9.5m gross and £0.9m net. These 3 claims are all made against policies written by the Company.

The provision for claims reported by policyholders is generally determined on a case by case basis except for certain business where there is sufficient data available to enable the provision to be calculated by the application of statistical techniques. Where applicable, prudent estimates are made for salvage and subrogation recoveries. The provision for claims incurred but not reported (IBNR) is estimated by the application of a variety of actuarial and statistical projection techniques, the two most common being the chain ladder and Bornheutter-Ferguson methods. Claims provisions are analysed separately by line of business, and further, bodily injury provisions are generally analysed separately from damage provisions.

Chain ladder methods may be applied to premiums, paid claims or incurred claims (ie paid claims plus individual reported case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected development factors are then applied to cumulative data for each year that is not yet fully developed to produce an estimated ultimate amount for each year. Chain ladder techniques are most appropriate for mature classes of business that have a relatively stable development pattern. They are less suitable in cases where an insurer does not have a developed history for the particular class of business.

The Bornheutter-Ferguson method uses a combination of a benchmark or market based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience based estimate as time passes. This technique has been used in situations in which developed claims experience was not available for the projection, and especially for the most recent accident years. The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In addition, the choice involves a consideration of a number of other business factors, including historical rating changes, inflation, claims handling issues, business mix and market information. Ultimately reserving methods allow for a combination of mathematical techniques and judgement based upon experience and knowledge of the business.

There can be considerable uncertainty associated with the future outcome of the outstanding claims. Variability can come from a number of sources, including but not limited to: n More IBNR claims being reported than expected n Current notified claims costing more to settle in future than expected due to higher inflation than expected, adverse legal rulings or adverse impact from future government legislation n Claims handling costs being higher than expected.

52 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 18. INSURANCE CONTRACTS LIABILITIES AND REINSURANCE ASSETS – TERMS, ASSUMPTIONS AND SENSITIVITIES (CONTINUED) It is therefore prudent to hold reserves in excess of the mean of the distribution of possible outcomes, usually referred to as the best estimate. The reserves currently held are intended to give a high degree of confidence that there will be no adverse run-off impact on the results of subsequent financial periods.

The risk analysis work carried out as part of the Group’s submission of the Individual Capital Assessment to the FSA in 2005 included an assessment of the possible variability of the outcome of the cost of settling outstanding claims. This was carried out using various actuarial and statistical techniques, and was based upon the Group’s historical claims experience, using past volatility as a guide to the future and considering the interaction of the various classes of business. Based on the analysis undertaken during 2005, and scaling the results appropriately to reflect the provisions held at the end of the year, we estimate that at a 90th percentile level of assurance, best estimate provisions could deteriorate by around £78m net of reinsurance. The overall impact on shareholders funds, after allowing for tax would be £55m, assuming that the level of prudence then held in the reserves was unchanged. It is certainly possible that reserves could deteriorate by more than this, particularly if future experience differed markedly from the past (for example if a currently unknown form of latent disease were discovered that the portfolio had been exposed to). Loss development triangle Reproduced below are tables that show the development of claims over a period of time on both a gross and net of reinsurance basis. The tables show the cumulative incurred claims, including both notified and IBNR claims, for each successive accident year at each balance sheet date, together with cumulative claims as at the current balance sheet date. In the loss development triangles, the cumulative claims estimates and payments for each accident year are translated into pounds sterling at the exchange rates that applied at the end of each accident year. Accident Year Group 2001 2002 2003 2004 2005 Total Gross of reinsurance Note £m £m £m £m £m £m Accident year 1,186.2 1,152.6 1,065.9 1,167.9 1,175.6 One year later 1,133.6 1,040.3 943.4 1,035.7 Two years later 1,098.0 1,011.1 896.9 Three years later 1,051.2 995.0 Four years later 1,047.4 Current estimate of cumulative claims 1,047.4 995.0 896.9 1,035.7 1,175.6 5,150.6 Cumulative payments to date (916.8) (842.5) (645.3) (611.8) (410.3) (3,426.7) Reserve in respect of prior years - 371.8 Total gross liability as per the balance sheet 17 130.6 152.5 251.6 423.9 765.3 2,095.7 Accident Year Group 2001 2002 2003 2004 2005 Total Net of reinsurance Note £m £m £m £m £m £m Accident year 789.7 812.4 892.0 942.1 1,001.7 One year later 769.1 756.2 791.1 834.6 Two years later 775.1 753.6 753.0 Three years later 756.5 739.4 Four years later 766.1 Current estimate of cumulative claims 766.1 739.4 753.0 834.6 1,001.7 4,094.8 Cumulative payments to date (655.8) (645.0) (575.2) (542.9) (386.1) (2,805.0) Reserve in respect of prior years - 235.9 Total net liability as per the balance sheet 17 110.3 94.4 177.8 291.7 615.6 1,525.7

53 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 Accident Year Company 2001 2002 2003 2004 2005 Total Gross of reinsurance Note £m £m £m £m £m £m Accident year 1,122.0 1,093.4 1,019.7 1,126.2 1,164.3 One year later 1,069.3 982.5 899.4 997.9 Two years later 1,035.7 955.1 856.1 Three years later 990.4 940.4 Four years later 983.9 Current estimate of cumulative claims 983.9 940.4 856.1 997.9 1,164.3 4,942.6 Cumulative payments to date (863.5) (793.8) (610.8) (582.4) (404.2) (3,254.7) Reserve in respect of prior years - 362.9 Total gross liability as per the balance sheet 17 120.4 146.6 245.3 415.5 760.1 2,050.8 Accident Year Company 2001 2002 2003 2004 2005 Total Net of reinsurance Note £m £m £m £m £m £m Accident year 725.5 759.8 855.7 912.5 993.5 One year later 705.5 704.9 756.9 808.9 Two years later 713.8 704.1 722.0 Three years later 696.7 691.5 Four years later 704.9 Current estimate of cumulative claims 704.9 691.5 722.0 808.9 993.5 3,920.8 Cumulative payments to date (602.5) (602.9) (550.6) (525.7) (383.1) (2,664.8) Reserve in respect of prior years - 231.5 Total net liability as per the balance sheet 17 102.4 88.6 171.4 283.2 610.4 1,487.5 Whilst the information in the tables provides a historical perspective on the adequacy of the unpaid claims estimates established in previous years, readers of these financial statements are cautioned against extrapolating redundancies or deficiencies of the past on current unpaid loss balances. The Group believes that the estimate of total claims outstanding as at the end of 2005 is adequate. However, due to the inherent uncertainties in the provisioning process, it can not be assured that such balances will ultimately prove to be sufficient.

54 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 19. PENSION BENEFIT OBLIGATION As part of the group reorganisation which took place during 2005, the Principal Employer to the Fund was changed from Allianz Cornhill Insurance plc to Allianz Cornhill Management Services Limited. This change was effective from September 1, 2005 and the Fund was transferred at that date. The defined benefit scheme is closed to new entrants. The amounts recognised in the income statement are as follows: 2005 2004 Group and Company £m £m Current service cost 9.7 11.4 Past service cost - (1.0) Interest cost on benefit obligation 17.2 21.6 Recognition of unfunded benefit promise and post-retirement medical arrangements 2.4 - Expected return on plan assets (16.5) (19.6) Net actuarial losses recognised during the year 3.2 4.5 (Gains)/losses on curtailments and settlements (0.2) 2.7 Total defined benefit pensions costs 15.8 19.6 The actual return on plan assets amounted to £40.0m (2004: £29.6m). The amounts recognised in the balance sheet at year end are as follows: 2005 2004 Group and Company £m £m Present value of pension benefit obligation - 432.6 Fair value of plan assets - (289.0) Net pension benefit obligation - 143.6 Unrecognised actuarial losses - (105.2) Total pension benefit obligation - 38.4 The movement in the net pension benefit obligation recognised in the balance sheet is as follows: 2005 2004 £m £m At January 1 38.4 35.2 Total pension cost charge in the income statement 15.8 19.6 Contributions paid (10.0) (16.4) Transfer to fellow Allianz group company (44.2) - At December 31 - 38.4 The distribution of the plan assets at year end is as follows: 2005 2004 £m £m Equities - 206.1 Bonds - 63.5 Property - 14.6 Other - 4.8 Total plan assets - 289.0 The pension benefit obligation is an entirely non-current liability The principal actuarial assumptions used in determining pension benefit obligation for the plan are as follows: 2005 2004 Rate of increase in salaries - 4.4% Rate of increase in pensions in payment - 2.7% Rate of increase in deferred pensions - 2.9% Discount rate - 5.3% Expected return on plan assets - 7.4%

20. OTHER INSURANCE FINANCIAL LIABILITIES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Arising out of direct insurance operations Third parties 131.4 127.8 114.3 111.0 131.4 127.8 114.3 111.0 Deposits received from reinsurers Third parties 2.7 2.7 2.6 2.6 2.7 2.7 2.6 2.6 Arising out of reinsurance operations Amounts due to related operations 65.4 63.9 64.1 62.9 Third parties 63.0 63.0 56.4 56.3 128.4 126.9 120.5 119.2 Total other insurance financial liabilities 262.5 257.4 237.4 232.8 Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Current 259.8 254.7 234.8 230.2 Non-current 2.7 2.7 2.6 2.6 21. ACCRUALS AND OTHER PAYABLES Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Amounts due to related parties 14.8 24.2 1.5 27.5 Trade payables - - 1.6 1.6 Accrued expenses 10.3 8.0 19.5 16.8 Social security and other taxes 23.5 20.8 28.7 26.1 Other 28.2 24.0 37.2 35.1 Total accruals and other payables 76.8 77.0 88.5 107.1 The estimated fair values of the amounts payable are the amounts repayable on demand and are the amounts as recorded at year end.

22. SHARE CAPITAL Authorised Issued 2005 £ 2004 £ 2005 £ 2004 £ Ordinary non-voting shares of £1 each fully paid 19,999,000 19,999,000 17,757,609 17,757,609 5% cumulative preference voting of £1 each fully paid 1,000 1,000 1,000 1,000 5% non cumulative preference of £1 each fully paid 180,000,000 180,000,000 155,000,000 155,000,000 200,000,000 200,000,000 172,758,609 172,758,609 The 5% non cumulative preference shares are non-voting shares and carry a non cumulative dividend of 5% per annum payable on April 30 and October 31 each year. On a winding up of the Company, the nominal value of the non cumulative preference shares has priority over the repayment of any other shares in the Company. The 5% cumulative preference shares are voting shares and carry a cumulative dividend of 5% per annum payable in December each year. On a winding up of the Company, repayment of the nominal value of the cumulative preference shares and any arrears of dividend has priority over the repayment of the ordinary shares. 55 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

56 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 23. INVESTMENT IN GROUP UNDERTAKINGS The principal subsidiary undertakings of Allianz Cornhill Insurance plc at December 31, 2005 are shown below. Group undertakings Country of incorporation Primary business operation % Held British Reserve Insurance Company Limited England General Insurance 100 DBI Insurance Company Limited England Pet Insurance 100 Three Pillars Business Solutions Limited England Insurance Administration 100 Pet Plan Limited England Pet Insurance Administration 100 Trafalgar Insurance Public Limited Company England General Insurance 100 All of the Group’s shareholdings in these subsidiaries are held directly by Allianz Cornhill Insurance plc. With effect from January 1, 2006 the shareholdings in Three Pillars Business Solutions Limited was transferred to Allianz Cornhill Holdings plc.

For transactions with and balances from and to related parties, refer to note 41. 24. NET INSURANCE REVENUE 2005 2004 Note £m £m (a) Gross earned premiums Direct insurance 1,581.5 1,687.2 Assumed reinsurance 84.0 80.7 Total general insurance contracts premium revenue 17 1,665.5 1,767.9 Gross change in unearned premium provision 17 (5.1) 3.1 Total gross earned premiums 1,660.4 1,771.0 (b) Reinsurers’ share of gross earned premiums Direct insurance (276.6) (320.5) Assumed reinsurance (76.3) (74.6) Total reinsurers’ share of general insurance contracts premium revenue 17 (352.9) (395.1) Reinsurers’ share of change in unearned premium provision 17 0.6 (10.5) Total reinsurers’ share of gross earned premiums on insurance contracts (352.3) (405.6) Total net insurance revenue 1,308.1 1,365.4 The Group did not assume or cede any reinsurance policies during the year resulting in a profit or loss on inception.

57 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 25. INVESTMENT INCOME 2005 2004 £m £m Available for sale financial assets Interest income 95.4 83.3 Dividend income 10.4 9.4 Impairment of available for sale financial assets (5.6) (9.4) Cash and cash equivalents interest income 13.7 16.3 Rental income from investment properties 4.2 4.4 Total investment income 118.1 104.0 26. NET REALISED GAINS RECORDED IN THE INCOME STATEMENT 2005 2004 £m £m Property and equipment Realised gains - 0.2 Investment properties Realised gains 3.6 0.9 Realised losses (0.2) - Total investment properties 3.4 0.9 Available for sale financial assets Realised gains Equity securities 32.5 27.1 Debt securities 3.9 5.9 Realised losses Equity securities (1.3) (0.1) Debt securities (0.1) (2.5) Total available for sale financial assets 35.0 30.4 Derivative assets and liabilities Realised gains 2.6 2.5 Realised losses (6.8) (2.8) Total derivative assets and liabilities (4.2) (0.3) Total net realised gains recorded in the income statement 34.2 31.2 27. NET FAIR VALUE GAINS RECORDED IN THE INCOME STATEMENT 2005 2004 Note £m £m Gain on investment properties 6 2.9 4.2 Net gain/(loss) on derivative financial instruments 2.3 (1.9) Total net fair value gains recorded in the income statement 5.2 2.3

58 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 28. OTHER OPERATING AND ADMINISTRATIVE EXPENSES 2005 2004 Note £m £m Acquisition costs 93.4 88.7 Movement in deferred acquisition costs 7 (15.0) (10.7) Administration expenses 110.5 94.1 Total other operating and administrative expenses 188.9 172.1 29. EMPLOYEE RELATED COSTS 2005 2004 Note £m £m Wages and salaries 63.8 133.0 Social security costs 7.2 13.7 Pension costs 19 15.8 19.6 Total employee related costs 86.8 166.3 2005 2004 The average monthly number of employees including executive directors during the year was: Management 210 396 Underwriting and claims 1,558 3,184 Finance and administration 462 827 2,230 4,407 As part of the group reorganisation which took place during 2005, all members of staff were transferred to Allianz Cornhill Management Services Limited, a fellow group undertaking. This transfer took place with effect from July 1, 2005. 30. AUDITORS’ REMUNERATION In respect of the Group for the year ended December 31, 2005 audit fees amounted to £0.8m (2004 £0.8m) of which £0.8m (2004 £0.8m) was attributable to the Company’s auditors. Audit and non audit fees attributable to the UK firm of Ernst & Young LLP totalled £0.8m (2004 £0.8m) and £0.5m (2004 £0.5m) respectively. 31. SALE OF LIFE BUSINESS On December 15, 2004 the Company entered into a series of agreements with the Britannic Group to sell its remaining Life Business. Many of these agreements came into effect on December 31, 2004 when completion occurred. During 2005 the Company and members of the Britannic Group made a successful application to the Courts under Part VII of the Financial Services and Markets Act 2000 to transfer the assets and liabilities of the Life Business from the Company to appropriate members of the Britannic Group. The assets and liabilities of the Life Business have been derecognised in the comparatives following the derecognition criteria of IAS 39.

An application was made to the Financial Services Authority requesting the removal of the Company’s licence to write life business towards the end of 2005. Confirmation of this variation in permission was subsequently received, effective from December 19, 2005. The financial effect of the discontinued operation is shown below: 2005 2004 £m £m Total revenue - 257.6 Total claims and expenses - (248.3) Profit before tax - 9.3 Income tax expense - - Net profit for the year - 9.3

32. INCOME TAX EXPENSE 2005 2004 (a) Current year tax charge £m £m Current tax: United Kingdom corporation tax charge @ 30% (2004 30%) 29.8 8.3 Prior year adjustment (1) 17.7 (2.5) Total current tax 47.5 5.8 Deferred tax: Origination / (reversal) of temporary differences (45.9) 45.4 Total deferred tax (45.9) 45.4 Total income tax expense 1.6 51.2 The effective tax rate drops from 24.3% in 2004 to 0.8% in 2005. This is due to the utilisation of tax losses claimed from fellow Allianz group undertakings.

2005 2004 (b) Tax charged to equity £m £m Current tax 2.9 0.7 Deferred tax 7.5 6.7 Total tax charge to equity 10.4 7.4 2005 2004 (c) Reconciliation of tax charge £m £m Profit before tax from continuing and discontinued operations 206.4 219.9 Tax at 30% 61.9 66.0 Franked investment income (3.1) (2.7) Disallowable expenses 1.6 0.7 Differences arising from movement in unrealised gains and losses on properties (0.9) (2.0) Adjustment to tax charge in respect of prior years (1) (46.8) (2.5) Write down of deferred tax assets 18.6 1.7 Recognition of previously unrecognised tax credit (29.7) (10.0) Total tax charge for the year 1.6 51.2 2005 2004 (d) Tax paid for cash flow purposes £m £m Current tax payable at January 1 37.7 56.3 Amounts charged to the income statement 1.6 51.2 Amounts charged to equity 10.4 7.4 Movement in the deferred tax liability in the income statement 45.9 (45.4) Movement in the deferred tax liability in equity (7.5) (6.7) Tax paid during the year (6.4) (25.1) Current tax payable at December 31 81.7 37.7 (1) A major proportion of the adjustment to prior year tax relates to additional group relief from Allianz group undertakings.

59 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

60 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 33. DIVIDENDS 2005 2004 £m £m Dividends on ordinary shares: Interim dividends paid of 1,076.4400p per share (2004 392.7894p) 191.2 69.8 Dividends on preference shares: Paid 5% non cumulative preference shares 7.7 7.7 198.9 77.5 34. CASH GENERATED FROM OPERATING ACTIVITIES 2005 2004 Group Notes £m £m Net profit before tax from continuing and discontinued operations 206.4 219.9 Investment income 25 (118.1) (104.0) Rental income from investment properties 4.2 4.4 Finance cost 0.4 3.4 Non cash items Amortisation of intangible assets 4 9.9 3.4 Transfer of intangible assets to fellow group undertaking 2.9 - Transfer of property and equipment to fellow group undertaking 18.6 - Amortisation of deferred acquisition costs 7 166.3 136.0 Net acquisition costs deferred during the year 7 (181.3) (146.7) Depreciation on property and equipment 5 3.2 10.1 Net realised gain from sale of property and equipment 26 - (0.2) Net realised gain from sale of investment property 26 (3.4) (0.9) Net realised gain from sale of available for sale financial assets 26 (35.0) (30.4) Net realised loss from sale of derivative assets and liabilities 26 4.2 0.3 Purchase of available for sale financial assets (1,770.0) (1,286.0) Proceeds from sale of available for sale financial assets 1,600.6 1,142.2 Purchase of derivative assets (0.8) (7.3) Proceeds from sale of derivative assets - 0.1 Purchase of derivative liabilities 4.2 7.2 Proceeds from sale of derivative liabilities (0.3) (0.2) Net fair value gain on investment properties 27 (2.9) (4.2) Net fair value (gain)/loss on trading derivatives 27 (2.3) 1.9 Changes in working capital Decrease/(increase) in reinsurance assets 17 7.7 (22.2) Increase in prepayments 11 (4.1) (1.7) (Increase)/decrease in insurance receivables 14 (22.8) 18.6 Increase in other receivables 15 (11.1) (3.1) Increase in insurance contracts liabilities 17 69.1 126.2 Increase/(decrease) in other insurance financial liabilities 20 25.1 (13.5) (Decrease)/increase in pension benefit obligation 19 (38.4) 3.2 (Decrease)/increase in accruals and other payables 21 (11.7) 89.9 Cash generated from operations (79.4) 146.4 The Group classifies the cash flows for the acquisition and disposal of financial assets as operating cash flows, as the purchases are funded from the cash flows associated with the origination of insurance and investment contracts, net of the cash flows for payments of benefits and claims incurred for insurance and investment contracts, which are respectively treated under operating activities.

61 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 Company Notes £m £m Net profit before tax from continuing and discontinued operations 149.2 186.2 Investment income (107.3) (95.8) Finance cost 0.4 3.3 Non cash items Amortisation of intangible assets 4 9.9 3.4 Transfer of intangible assets to fellow group undertaking 2.9 - Transfer of property and equipment to fellow group undertaking 18.6 - Amortisation of deferred acquisition costs 7 174.6 144.4 Net acquisition costs deferred during the year 7 (191.2) (159.5) Depreciation on property and equipment 5 3.2 10.1 Net realised gain from sale of property and equipment - (0.2) Net realised gain from sale of available for sale financial assets (16.4) (22.6) Net realised loss from sale of derivative assets and liabilities 4.2 0.3 Purchase of available for sale financial assets (1,576.5) (1,192.0) Proceeds from sale of available for sale financial assets 1,432.7 1,076.8 Purchase of derivative assets (0.8) (7.3) Proceeds from sale of derivative assets - 0.1 Purchase of derivative liabilities 4.2 7.2 Proceeds from sale of derivative liabilities (0.3) (0.2) Net fair value (gain)/loss on trading derivatives (2.3) 1.9 Changes in working capital Decrease/(increase) in reinsurance assets 17 7.7 (22.7) Increase in prepayments 11 (3.5) (1.6) (Increase)/decrease in insurance receivables 14 (8.1) 7.1 Increase in other receivables 15 (25.2) (18.0) Increase in insurance contracts liabilities 17 90.2 147.3 Increase/(decrease) in other insurance financial liabilities 20 24.6 (13.3) (Decrease)/increase in pension benefit obligation 19 (38.4) 3.2 (Decrease)/increase in accruals and other payables 21 (30.1) 83.3 Cash generated from operations (77.7) 141.4 Included in the cash generated from operations shown above are net cash outflows from operating activities of the discontinued Life business of £nil (2004 £0.3m) for both the Group and the Company. There were no cashflows from either investing or financing activities in 2005 or 2004.

62 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 35. RISK MANAGEMENT POLICIES Following the sale of the Group’s economic interest in its Life business and the completion on September 30, 2005, of the Part VII transfer under the Financial Services and Markets Act 2000 the Group only transacts general insurance business. Accordingly this note is confined to an analysis of the general insurance risks managed by the Group and Company (Group). The Group’s general insurance business is wholly written in Great Britain and the majority of risk exposure is confined to the United Kingdom.

Insurance The risk under an insurance contract is the risk that an insured event will occur including the adequacy of the price charged for the risk and uncertainty as to the amount and time of any resulting claim. The principal risk that the Group faces under such contracts is that the actual claims will exceed the carrying value of insurance liabilities. This is influenced by the frequency of claims, severity of claims, weather events and other factors dependant upon the type of the insurance contract. By the nature of an insurance contract insurance risk is random and unpredictable therefore the actual claims costs may exceed the estimated insurance liabilities.

Risk exposure is improved by diversification across a large portfolio of similar insurance contracts, as a more diversified portfolio is less likely to be affected by specific events. Exposure is also improved by careful selection and implementation of underwriting strategies, strict claim review policies to assess all new and on going claims, as well as the careful investigation of possible fraudulent claims. The price charged for an insurance contract is determined using actuarial techniques which take into account past experience, anticipated loss ratios, claims frequency, expected claims inflation, reinsurance costs and other relevant influences such as the Group’s required return on capital. For some products, such as personal lines motor, the market is highly competitive and the rate determined by the application of actuarial techniques will not necessarily be obtainable. In these circumstances the Group seeks to minimise the impact of uneconomic rates by strictly controlling the amount of business it writes in these segments and by seeking profitable niches within the segment. The Group has and will withdraw from segments of the market which do not offer the prospect of an acceptable return on capital over the medium term.

The Group limits its exposure to insured events by imposing maximum claim limits on many types of insurance contracts. In addition the Group uses both proportional and non proportional reinsurance protection to limit its maximum exposure to individual loss events and to catastrophic events such as weather related claims. Maximum exposure is limited to £5m (2004 £2m) in respect of casualty losses arising mostly from motor and liability insurance and £4m (2004 £4m) in respect of property and business interruption claims after the erosion of a £8m (2004 £8m) aggregate deductible. The Group uses its risk data to populate proprietary models to determine the maximum reinsurance protection it should purchase to protect its capital base from major catastrophe losses. The exposure to a single catastrophe event is £30m (2004 £12.5m) and £10m (2004 £5m) in respect of a second event in the same year. Based upon the modelling work undertaken, the Group buys reinsurance protection up to a maximum reinsurance claim of £350m (2004 £270m). In order to protect its risk capital from extreme events the group also purchases catastrophe reinsurance for loss events in excess of £438m (2004 £660m) up to a limit of £651m (2004 £200m). The purpose of these underwriting and reinsurance strategies is to limit exposure to a series of unconnected events and catastrophes to a pre-determined maximum amount based on the Group’s risk appetite as decided by the Board. As detailed below under Financial Credit risk reinsurance placement is limited to a small number of highly regarded reinsurers in order to ensure as far as possible that reinsurance claims are met in full. Members of the Allianz AG Group of companies are the Group’s largest reinsurers.

The Group principally issues the following types of general insurance contract, motor, household, property and business interruption, liability and speciality pecuniary. The following table sets out the concentration of insurance risk by contract:

63 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 Reinsurers’ Gross Share Net Claims Liabilities 2005 £m £m £m Motor 687.6 (49.0) 638.6 Household 41.5 - 41.5 Property and business interruption 346.0 (147.7) 198.3 Liability 540.7 (159.0) 381.7 Speciality pecuniary 61.5 (12.0) 49.5 Other 418.4 (202.3) 216.1 Total 2,095.7 (570.0) 1,525.7 Reinsurers’ Gross Share Net Claims Liabilities 2004 £m £m £m Motor 660.5 (42.0) 618.5 Household 40.7 (0.1) 40.6 Property and business interruption 327.8 (147.7) 180.1 Liability 534.1 (143.6) 390.5 Speciality pecuniary 77.4 (24.6) 52.8 Other 367.0 (206.4) 160.6 Total 2,007.5 (564.4) 1,443.1 Note 18 sets out the development of the estimate of ultimate claims cost for claims notified in a given year. This gives an indication of the accuracy of the Group’s estimation techniques for claims payments. Financial The Group is exposed to financial risk through its financial assets, reinsurance assets, insurance receivables and cash and cash equivalents held primarily to meet obligations under insurance contract liabilities. The key financial risk is the proceeds from the realisation of assets are insufficient to meet the obligations under its insurance contracts. The most important aspects of financial risks compromise equity market risk, interest rate risk and credit risk. (a) Equity Market Risk As stated in accounting policy (h), the book cost of the portfolio is the bid market price. Equity market risk is the risk that the market price of the available for sale financial assets will fall in value as a result of adverse stock market movements. To manage this risk the Group limits its exposure to stock markets to a modest proportion of its total investment portfolio. Stocks held are limited to United Kingdom equities with the maximum investment in any one stock being controlled by the application of strict investment controls. These controls limit the maximum exposure to any one stock or sector of the FTSE 100 index in order to minimise risk.

The Group purchases FTSE 100 options in order to limit its exposure to a widespread fall in the stock market. At December 31, 2005 the Group was protected against a fall in the FTSE 100 index below 4,025 (2004 3,625) (b) Interest Rate A substantial part of the Group’s financial assets are invested in available for sale fixed interest securities. Interest rate risk is the risk that interest rates will change adversely affecting the market value of the fixed interest portfolio and consequently the value of the assets that the Group has available to meet insurance contract liabilities. None of the Group’s general insurance contracts include benefits which involve contractual interest payments. Each 25 basis points movement in interest rates is estimated to impact net assets by £10m.

Interest rate risk is managed by matching the duration of the fixed interest and cash and cash equivalents portfolios against the average duration of the insurance contract liabilities. At December 31, 2005 the average duration of the fixed interest and cash and cash equivalent portfolios was 2.8 years (2004 2.3 years) compared with the duration of the insurance contract liabilities which is estimated to be 2.3 years (2004 2.4 years).

64 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 35. RISK MANAGEMENT POLICIES (CONTINUED) (c) Credit Credit Risk is the risk that a counterparty will be unable to pay amounts due to the Group in full when they fall due. Key areas where the Group is exposed to credit risk are: n Counterparty risk in respect of Debt Securities, cash and cash equivalents n Reinsurer’s share of insurance liabilities n Amounts due from reinsurers in respect of claims already paid n Amounts due from insurance intermediaries and policyholders The Group manages credit risk by limiting the amount of exposure to each counterparty through a comprehensive series of limits which have been determined after taking into account publicly available credit ratings and such other information considered relevant. These limits restrict, dependant upon credit rating, the amount of financial assets exposed to each counterparty or where the counterparty is a member of a group the exposure to the group. The broad strategy is to limit the credit risk to tolerable levels whilst at the same time taking limited and controlled advantage of the additional returns which are available for additional risk. The largest counterparty risk at December 31, 2005 was £225.4m (2004 £197.5m).

Reinsurance is used to manage insurance risk. Reinsurance does not discharge the Group’s liability as primary reinsurer. If a reinsurer fails to pay a claim for any reason the Group remains liable for the payment to the policyholder. In view of the potential long term exposure from insurance risks reinsurance security is limited to a small number of highly regarded reinsurers that offer the best long term security. Reinsurance is only placed with companies that meet the Group’s strict security criteria. Some reinsurance is placed with the captive reinsurance companies of the Group’s major clients. Where there is a significant or potentially significant exposure to an individual captive additional measures which ensure the captives funds are diversified and prioritised for the payment of the insured liabilities are in place. The following table provides information regarding the credit risk exposure of the Group at December 31, by classifying assets according to the credit ratings of counterparties.

AAA AA A BBB BB Captive Not Rated Total 2005 £m £m £m £m £m £m £m £m Reinsurance assets 7.0 462.4 143.4 11.1 1.8 158.4 88.8 872.9 Derivative assets 0.1 - 0.1 Available for sale financial assets 1,299.5 295.5 473.3 39.3 5.7 - 116.0 2,229.3 Loans - 70.0 - 2.1 72.1 Insurance receivables (1) 0.2 105.7 17.4 21.2 3.8 22.5 390.8 561.6 Cash and cash equivalents 54.3 96.1 88.3 - 0.5 239.2 Total £m 1,361.1 1,029.7 722.4 71.6 11.3 180.9 598.2 3,975.2 Percent 34.2 25.9 18.2 1.8 0.3 4.6 15.0 100.0 AAA AA A BBB BB Captive Not Rated Total 2004 £m £m £m £m £m £m £m £m Reinsurance assets 10.3 429.4 148.9 14.4 3.9 183.2 76.1 866.2 Derivative assets 0.3 - 0.3 Available for sale financial assets 1,280.9 290.8 288.2 18.8 4.3 - 112.4 1,995.4 Loans - 70.0 - 2.5 72.5 Insurance receivables (1) 13.4 96.5 19.2 24.3 2.1 7.5 375.8 538.8 Cash and cash equivalents 169.9 122.9 106.7 - 0.8 400.3 Total £m 1,474.8 1,009.6 563.0 57.5 10.3 190.7 567.6 3,873.5 Percent 38.1 26.1 14.5 1.5 0.3 4.9 14.6 100.0 1. Included in the not rated balance is £189.3m (2004 £186.7m) due from policyholders under premium instalment plans. Much of the remaining not rated balance relates to debts from intermediaries, most of whom are regional and provincial brokers who despite being regulated by the Financial Services Authority are not rated.

Liquidity Liquidity risk is the risk that cash might not be available to pay obligations when they fall due at a reasonable cost. The Group is exposed to daily calls on its available cash resources mainly from claims arising on insurance contracts. The investment strategy is to maintain sufficient levels of cash and cash equivalents to meet all foreseeable immediate demand. The market value of the Group’s financial assets at December 31, 2005 amounted to £2,301.5m (2004 £2,068.2m) plus cash and cash equivalents of £239.2m (2004 £400.3m). All of the financial assets are held as available for sale and along with cash and cash equivalents are readily realisable. As a result the Group’s exposure to potential liquidity risk is extremely low and in the various risk capital models used by the Group no capital is allocated to this risk. Currency Currency risk is the risk that fluctuations in exchange rates may lead to a material change in the value of currency denominated assets or liabilities. Currency risk is small as the majority of the Group’s insurance contracts and insurance risks are either concluded or situated in the United Kingdom.

The Group has a policy of broadly matching its currency liabilities with assets denominated in the same currency in order to minimise currency risk. Rebalancing of net currency exposure is undertaken at the end of every quarter to reflect changes in either asset or liability values. At December 31, the largest currency exposures were: 2005 2004 £m £m US Dollars Assets 116.5 99.5 Liabilities 124.0 115.1 Euro Assets 39.7 34.9 Liabilities 38.5 40.9 36. ULTIMATE PARENT UNDERTAKING The immediate parent undertaking is Allianz Cornhill Holdings plc, a company registered in England and Wales. The ultimate parent undertaking, Allianz Aktiengesellschaft, is incorporated in Germany and is the parent of the largest group of undertakings for which group accounts are drawn up and of which the Company is a member. Copies of the Group accounts are available on request from Allianz Aktiengesellschaft, Königinstrasse 28, 80802, München, Germany.

37. CONTINGENCIES AND COMMITMENTS Legal proceedings and regulations The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings (including litigation) will have material effect on its results and financial position. 65 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005

66 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 38. SHARE BASED PAYMENTS Members of the Management Board and other Executives participate in the Allianz Group Equity Incentive scheme. The scheme comprises Stock Appreciation Rights (SAR) and Restricted Stock Units (RSU). SAR’s constitute the right to receive the difference, in cash, between the price of an Allianz share at the time of grant and the price at the time of exercise subject to certain conditions having been met. SAR’s are subject to a vesting period of two years and can only be exercised between the third year and seventh year from the date of grant. No value attaches to SAR’s until the vesting period has expired, the value of the Allianz share price has increased by a minimum of 20% compared with the price at the date of grant and has outperformed the Dow Jones Europe Stoxx Price Index (600) once on five consecutive trading days. The maximum value of an SAR is restricted to 150% of the price at time of grant.

RSU’s constitutes the right to receive the value of an Allianz share equivalent to the stock market price at the time of exercise. RSU’s are subject to a vesting period of five years and Allianz Group exercises them uniformly for all participants. The fair value of the SARs (based on standard valuation models – Black- Scholes or Binomial Method) and RSUs (equal to the market price of one Allianz share less expected future dividends) is expensed over the respective vesting periods. The fair value is remeasured at each reporting period. The amount expensed through the Income Statement was £3.5m (2004 £1.1m). The liability recorded in the financial statements in respect of the SAR’s and RSU’s as at December 31, 2005 was £5.2m (2004 £1.7m).

SAR’s and RSU’s are allocated annually. The number of SAR’s and RSU’s allocated to an individual are based upon a combination of Allianz Group performance against Plan, Company performance against Plan and individual performance against predefined targets, the same rules that apply throughout the Allianz Group. During 2005 51,309 SAR’s and 26,117 RSU’s were allocated to members of the Company. SAR plan awards granted, forfeited and exercised as of December 31, 2005 Grant Date Vesting period Reference price SARs granted SARs forfeited SARs exercised years € April 1999 2 264.23 13,326 624 0 April 2000 2 332.10 7,165 0 0 April 2001 2 322.14 12,231 0 0 April 2002 2 239.80 14,818 0 0 May 2003 2 65.91 54,522 0 5,872 May 2004 2 83.47 46,088 0 0 May 2005 2 92.87 51,309 0 0 RSU plan awards granted, forfeited and exercised as of December 31, 2005 Grant Date Vesting period RSUs granted RSUs forfeited RSUs exercised years May 2003 5 22,899 0 0 May 2004 5 22,173 0 0 May 2005 5 26,117 0 0

67 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 39. DIRECTORS’ EMOLUMENTS 2005 2004 £ £ Emoluments 810,954 739,460 The amounts in respect of the highest paid Director are as follows: Emoluments 473,030 440,906 Two Directors are accruing retirement benefits under a defined benefit scheme. The highest paid Director’s accrued pension at December 31, 2005 was £34,263 (2004 £26,667). Two Directors waived their rights to receive emoluments. 40. DIRECTORS’ INTERESTS Directors’ interests in the ordinary non-voting shares of Allianz Cornhill Insurance plc as shown by the register kept in accordance with Section 325 of the Companies Act 1985, together with details of their options to purchase shares under Share Option Schemes and shares which have been allotted under the Profit-Sharing Share Scheme are set out below: Beneficially Profit-Sharing Executive Share Owned Share Scheme Option Scheme 1.1.05 31.12.05 1.1.05 31.12.05 1.1.05 31.12.05 Mr G.R. Stratford 718 777 59 – 900 – Mr D.A. Torrance – 76 76 – During the year one Director exercised a share option over non-voting ordinary shares in Allianz Cornhill Insurance plc.

68 GROUP ORGANISATION 41. RELATED PARTY TRANSACTIONS (a) Transactions with and balances from or to related parties The Group enters into transactions with fellow group undertakings and key management personnel in the normal course of business. Details of significant transactions carried out during the year with related parties are as follows: Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Sale of Insurance contracts to other related parties 36.1 36.1 34.7 34.7 Purchase of Dividends paid to the parent 194.9 194.9 76.0 76.0 Reinsurance contracts from other related parties 183.9 183.9 183.8 183.7 Group tax relief from other related parties 47.5 44.5 7.5 4.6 Pension benefit obligation transferred to other related party 44.2 44.2 – – Reinsurance contracts are made at normal arm length’s transaction basis. Year end balances arising from transactions carried out with related parties are as follows: Group Company Group Company 2005 2005 2004 2004 £m £m £m £m Due from related parties At as January 1 21.3 194.1 42.7 204.6 Other related parties 16.0 31.0 (21.4) (10.5) As at December 31 37.3 225.1 21.3 194.1 Due to related parties As at January 1 99.3 119.7 126.1 153.5 Other related parties 53.0 37.3 (26.8) (33.8) As at December 31 152.3 157.0 99.3 119.7 Loan to related parties As at January 1 70.0 70.0 70.0 70.0 As at December 31 70.0 70.0 70.0 70.0 The loan to related parties carries 5.9% (2004 5.9%) interest annually. No provision for doubtful debts was made at year end.

(b) Compensation of key management personnel Key management personnel of the Group includes all executive and non executive directors, and other members of the management board. The summary of compensation of key management personnel for the year is as follows: 2005 2004 £m £m Salaries and other short term employee benefits 2.4 2.2 Post employment pension benefits 0.3 0.2 Share based payments 1.9 0.6 Total compensation of key management personnel 4.6 3.0 (c) Investment in subsidiaries No restrictions are placed on subsidiaries to transfer funds to the parent company in the form of cash dividends. No guarantees or collaterals were provided to subsidiaries. The Group is not liable for any contingent liabilities arising on the side of the subsidiaries and will not settle any liabilities on behalf of them.

UNITED KINGDOM Head Office 57 Ladymead, Guildford, Surrey GU1 1DB Allianz Cornhill Commercial 57 Ladymead, Guildford, Surrey GU1 1DB Allianz Cornhill Engineering Haslemere Road, Liphook, GU30 7UN Allianz Cornhill Personal 2530 The Quadrant, Aztec West, Almondsbury, Bristol BS32 4AW Allianz Global Risks 27 Leadenhall Street, London EC3A 1AA Allianz Cornhill Speciality Allianz Cornhill Animal Health Great West House (GW2), Great West Road, Brentford, Middlesex TW8 9DX Allianz Cornhill Schemes Allianz Cornhill House, 6 Vale Avenue, Tunbridge Wells, Kent TN1 1EH Allianz Cornhill Legal Protection Redwood House, Brotherswood Court, Great Park Road, Bradley Stoke, Bristol BS32 4QW OVERSEAS India Allianz Cornhill Information Services Private Limited Trivandrum

Allianz Cornhill Insurance plc Annual Report 2005 Allianz Cornhill Insurance plc Annual Report 2005

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