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Media Centre

Interim Management Statement for the period from 1 July 2011

17 November 2011

The environment for the period from 1 July has continued to be volatile with material further claims activity and difficult investment markets. Whilst this will impact on the current year's full year financial return, the outlook is improving, with rating levels in a number of important markets for Amlin continuing to strengthen or beginning to turn positively.

The level of catastrophe loss activity slowed in the third quarter of 2011 with no major single catastrophe events. However, the frequency of events remained high characterised by floods in Copenhagen, wildfires in Texas and Hurricane Irene across the Eastern seaboard of the United States. Advices were also received for the New Zealand ‘Sumner’ earthquake in June 2011. Additionally, as detailed below, estimated losses deteriorated on the February 2011 New Zealand earthquake and the March 2011 Japanese earthquake. Much of the claims activity, resulting from new and updated event advices, has been contained by retrocessional reinsurance with the net additional losses being approximately £25  million above catastrophe budgets for the second half of the year. More recently we have seen heavy flooding in Thailand but at this stage information is too limited to accurately provide guidance on exposures. Net claims from the Chilean and New Zealand ‘Darfield’ earthquakes in 2010, and the Australian floods in December 2010 and January 2011 remain materially unchanged from those previously disclosed.

Investment markets have also continued to be volatile, hitting equity markets, corporate bonds and the European government bond market.

As reported with our interim results, the rating environment for catastrophe reinsurance is markedly improved from the early part of the year and has been strong in the third quarter. We expect this to continue into 2012 with rate increases at 1 January taking US rates back to peak levels and greater balance in the international portfolios. We have continued to see accelerating improvement in our UK commercial lines business, particularly for UK commercial motor. US commercial rates have stabilised and are starting to show evidence of a firming market. Many other speciality lines continue to trade at acceptable levels. This provides Amlin with the ability to allocate capital towards these growth areas as  we continue to retract from poorly rated markets.

Amlin remains in a solid financial position, able to support continued growth as conditions improve. The underlying profitability of our core London Market and Bermuda platforms, improving profitability in Amlin UK and a continued focus on returning ACI to profitability, should enable the group to deliver strong performance in a more normal catastrophe year. Our underwriting philosophy is founded on making an underwriting profit without over reliance on investment returns. In a low interest rate environment, this should allow the businesses to prosper.

Underwriting environment

The Group’s gross written premium for the ten months ended 31 October 2011 was up 7.1% at £2,051.9 million (31 October 2010: £1,916.6 million). At constant rates of exchange, written premium increased by 8.6% (31 October 2010: £1,889.5 million).

The underlying increase in gross written premium of £64.0 million was attributable to new business in Amlin London, Amlin UK, Amlin France and Amlin Bermuda, offset by a reduction in income from ACI due to the non-renewal of poorly performing business, as part of our focus on returning the division to profitability. Amlin Re Europe, our new Continental European reinsurance platform, wrote £98.4 million of income.

The average renewal rate increase for the Group during the first ten months of 2011 was 0.9% (31 October 2010: decrease of 1.9%). However, the track of rate movements was impacted by catastrophe events in the period, with an average rate decrease of 1.0% in the first quarter countered by an average rate increase of 3.6% between 1 July and 31 October. The renewal retention ratio for the ten month period was 82.1%, reflecting the re-underwriting programme at ACI (31 October 2010: 84.7%).

These movements are analysed by division in the table below.

US catastrophe reinsurance rates have improved markedly since the significant catastrophe events of the first quarter and we expect the continued frequency of events, and the release of new modelling data from a major modelling agency, to lead to firmer pricing for both our US and international catastrophe accounts. While US catastrophe rates for the ten month period were up only 0.3%, since April they have experienced an average rate increase of 5.1% compared to reductions of 4.7% during the 1 January renewal season. Rates in the international account were up 6.9% in the first ten months, with significantly larger rate increases in loss affected territories, such as New Zealand and Japan. Prospective margins across our catastrophe reinsurance business are strong and our US book is trading at near peak levels. Given the profitable margins that exist, Amlin Bermuda increased its direct reinsurance account during the period by 17.1% to £305.4 million.

Property and Casualty rates have remained relatively stable, with an average rate increase of 0.2% in the ten month period. However, as with the reinsurance market, the property market has experienced significant claims activity over the past year and this is beginning to drive improved pricing. Rate increases since the half year have averaged 1.5% for Property and Casualty, with property classes up a notable 5.9% in the period. The outlook for 2012 is now improving for this business.

Rates within our London Marine business were up 2.0% to 31 October, with marine liability and energy classes achieving healthy rate increases of 7.5% and 6.0% respectively in the ten month period. Modest rate increases were evident for most other marine classes. 

The Aviation business continues to trade in difficult markets, with an average rate decrease of 0.4% in the ten month period.

The trading environment for Amlin UK has further improved since 1 July, with an average rate increase of 5.2% for the year to date. Increases to fleet motor rates now average 7.1% for the year. Overall, fleet and other motor income has increased by 8.8% to £103.2 million, with new business amounting to £28.2 million. Rates for liability classes remain mixed. Property rates increased by 6.3% in the ten month period, and recent strategic initiatives, including the purchase of JR Clare in January 2011, have added new business of £43.2 million into this improving environment. On 1 November, Amlin UK announced the addition of a team of five underwriters to its mid/high net worth household account, which is expected to generate approximately £12 million of income in its first year.

In Continental Europe, market conditions for ACI remain competitive with limited evidence of improved rating conditions. We have taken further steps to improve the underwriting performance of ACI’s marine business, including the non-renewal of approximately €96 million of marine business in the ten month period, where pricing was considered inadequate or where historic claims ratios were unacceptable. Performance within the marine and property books has been below expectation but ACI’s liability and fleet accounts continue to perform satisfactorily in competitive trading conditions.

Amlin Re Europe, our Continental European reinsurance business established in October 2010, has been extremely well received and has made an excellent start in its first year of trading. In the ten month period to 31 October, the business wrote €113.2 million of gross written premium, ahead of business plan. As previously stated, with the initial costs of start up being incurred ahead of development of earned premium, we do not expect the business to make a material contribution to the Group in 2011, however, we are confident of its long term prospects.

The Group remains both well capitalised and positioned to support growth if the market continues to strengthen.

Claims and reserves

The ten months to 31 October represents a period of heavy catastrophe activity, with 2011 already the most costly year on record for economic losses.

The largest catastrophe losses in the period since 1 July were Hurricane Irene in August, with an insured loss estimate ranging from $3.4 billion to $6.8 billion*  and the current Thai floods, with current insured loss estimates of up to $10 billion. Amlin’s exposure to Hurricane Irene is contained within attritional loss expectations. Given the nature and timing of the Thai floods it is too early to provide details of Amlin’s estimated losses.

Other major catastrophe losses to the Group in the period were the New Zealand ‘Sumner’ earthquake which occurred in June and the Danish floods in July. Taken together, the Group’s net claims estimates for these events totals less than £25 million, with losses limited by the availability of retrocessional reinsurance cover.

Amlin’s net exposure to the New Zealand ‘Christchurch’ earthquake in February has increased to $338 million, up from our estimate of $305 million at the half year. The estimate reflects an uplift in client loss estimates, with Amlin’s exposure to the New Zealand Earthquake Commission now a total loss.

Our estimated net claims resulting from the Japanese earthquake in March have increased to $206 million, from $156 million reported in our interim results. Again, the estimate reflects an increase in client loss estimates, with an additional load to cater for possible further deterioration.

For both these events, whilst claims for Amlin London have been well contained by recoveries from its retrocessional reinsurance programme, Amlin Bermuda has not benefited to the same extent from recoveries under its programme.

Amlin’s net loss estimate for the US tornado in Joplin, Missouri that occurred in May has improved to $17 million (30 June 2011: $27 million), as deterioration in the gross loss estimate has triggered material recoveries from the aggregate reinsurance programme for Amlin London.

Net claims from the Chilean and New Zealand ‘Darfield’ earthquakes in 2010, and the Australian floods in December 2010 and January 2011 remain materially unchanged from those previously disclosed.

Outside of catastrophe claims, we have held a prudent reserving position for our property, fleet and private motor accounts within Amlin UK. As previously disclosed, reserves were strengthened at the half year in light of loss experience and slower development on the 2009 underwriting year. The third quarter has generated small releases from our property account, with no further material adverse occurrence to our fleet and private motor portfolios.

For ACI, we have had no new large claims above €5.0 million in the third quarter but attritional losses remain above an acceptable level for this business. A continued, but modest improvement has been seen in claims performance.

In the quarter to 30 September 2011, following the normal quarterly review of claims reserves, £34.4 million was released from reserves, bringing cumulative releases for the nine months to 30 September 2011 to £71.2 million (30 September 2010: £81.4 million).

Investment returns

The Group's year to date investment return as at 31 October was 0.4%, with average funds under management of £4.3 billion. During this period bonds returned 1.5%, Libor plus -0.5%, cash and cash equivalents 0.6%, equities -4.0% and property 6.8%.

The political and financial turmoil over the past few months had a negative impact on risk assets, causing equities to decline and credit spreads to widen, both of which had a negative impact on the marked to market value of our investments. Because of the heightened volatility and extreme difficulties facing Europe, we reduced our equity exposure by 25% during the third quarter. 

The asset allocation (based on allocations to sub-advisors) at 31 October 2011 was 49% bonds, 24% Libor+, 19% cash and cash equivalents, 5% equities and 3% property. As at 31 October 2011, we had 0.7% exposure to the sovereign debt of Italy and Spain, and zero exposure to peripheral European countries.

Other developments

On 29 September, the Board announced the appointment of Sir Alan Collins, KCVO, CMG, as an independent non-executive Director of Amlin plc, taking effect from 14 November 2011. Sir Alan, who is aged 63, has had a distinguished career in HM Diplomatic Service; principal posts have included Ambassador to the Philippines; High Commissioner to Singapore; and for the last four years until July 2011, Director General Trade & Investment USA and Consul General New York. These roles required considerable commercial involvement to promote and protect British business interests in, and gave him considerable exposure to, the Financial Services Industry including the insurance sector. He holds a degree in International Relations from LSE. He was most recently Managing Director, Olympic Legacy for United Kingdom Trade and Investment.

Charles Philipps, Amlin’s Chief Executive, commented “While this year’s performance has been impacted by an exceptionally high level and frequency of catastrophe events, the overall outlook for underwriting returns is improving and we remain a strong business which is more than capable of delivering excellent returns for shareholders.”

*AIR Worldwide: 15 September 2011.

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