Review
Financial management
Understanding the level of capital
The foundation for determining our capital requirement is our required regulatory capital. Amlin uses a Dynamic Financial Analysis (DFA) to model its capital. The model predicts a range of possible financial outcomes for each area of our business, incorporating underwriting and investments, and for the business as a whole, by running thousands of simulations through a stochastic model, which is derived from historic and expected variability in claims. We operate separate DFA models for Syndicate 2001, Amlin Bermuda and the Group. In 2008, we have developed our DFA modelling capability by enhancing our control over catastrophe modelling and improving the overall granularity of analysis, to allow analysis of the annual aggregate expected catastrophe loss rather than just single event potential.
For the Syndicate, Amlin is required to submit an Individual Capital Assessment (ICA) to Lloyd’s.
The ICA sets out the level of capital required in the business to contain the risk of insolvency to no greater than a probability of 0.5%. This is equivalent to a BBB insurance financial strength rating level. Lloyd’s reviews the submissions for all syndicates in the market with the intent of bringing all ICAs to an equivalent level. At that point the ICA figure is uplifted by 35% to support a higher financial strength rating.
For Syndicate 2001, our uplifted ICA for 2009 is 47% of the expected premium income, after deduction of brokerage. This ratio has increased by 5% on the modelled ratio since 2008, an expected movement as profit margins decreased as rates fell.
Our ICA is currently under review to take account of the current trading environment and changes to expected investment returns and exchange rates. We expect this to lead to an increase in capital at Lloyd’s.
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Our Bermudian underwriting business has grown in the year and it now has net assets of nearly US$1.4 billion. We continue to believe that US$1 billion is the minimum amount of capital required to trade with our preferred client base, an amount that is in excess of the local regulatory capital requirement of US$274.5 million.
In addition to these regulatory capital requirements, we believe that we should retain a level of capital within the Group to allow material growth in the aftermath of a major insurance disaster, but also to respond to other opportunities to enhance long term growth, for example through acquisition.
The events of 2008 illustrate the need for prudence in capital management. The insurance industry has had to face losses from both hurricanes and financial markets in the year. We believe that the market will improve as a consequence, as explained in the Outlook section. Amlin’s strong capital position will allow us to expand our core underwriting business in 2009, review business opportunities for further expansion and take steps to increase risk in our investment portfolio at an appropriate time.
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