Review
Chief Executive’s statement
Unprecedented financial markets
As a leading reinsurer, catastrophe events are a regular feature of our business. However, the prevailing extreme economic circumstances are as difficult to predict as they are rare, affecting returns on our assets, foreign exchange fluctuations which affect our insurance exposures and the availability of capacity in our markets. They have also resulted in significant financial stress for a number of our competitors, most notably AIG. They create heightened risk as well as opportunity.
Government action and lower interest rates have made returns from government bonds negligible and with uncertainty over the duration and depth of the current recession equity markets remain very volatile. The widening of spreads for credit risk offer potential value but, as an insurer, it is necessary to maintain sufficient liquidity. Therefore, investment allocation decisions are not as clear as hitherto and our focus on this, with the help of our Investment Advisory Panel, will be important to steering a course through this period.
The 27% and 37% deterioration of sterling relative to the US dollar and the Japanese yen respectively over the last six months increases our exposure to major US and Japanese catastrophe loss when expressed in sterling. The creation of a new sidecar syndicate which is underwriting a 15% quota share of our excess of loss accounts has helped address this. The weakness of sterling will also increase reported profits from overseas business.
An estimated US$50 billion to US$70 billion has been wiped off insurers’ balance sheets in 2008 as a result of asset impairments due to the current economic crisis. This reduces available capacity and should increase the resolve of competitors to charge rates for coverage which are commensurate with the risk, helping to improve potential profitability.
The fallout from the financial troubles experienced by AIG has not been as pronounced as initially thought as US government support has enabled them to remain competitive, with enhanced security. AIG's troubles have acted as a reminder to many of the benefits of a subscription market where risk is shared between participants. The London market is the world's largest and best known subscription market and, after AIG, Lloyd's is the largest surplus lines market. As a major player in both, Amlin is exceptionally well placed to benefit from opportunities which arise.
Amlin is well placed, with its strong capital position and superior Financial Strength Ratings referred to above, to benefit from the dislocation caused by the current instability in financial markets.
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