Review
The business – Amlin London
Trading environment
The trading environment for our London business was mixed in 2008. Generally, downward pressure was evident across most of the portfolio in the first half of 2008. The average rate decline for Amlin London was 7.7% for the year (2007: 5.8%). However, as financial market distress spread to the insurance sector following the US government bail-out of AIG, and Hurricanes Gustav and Ike led to heavy losses for reinsurers, the downward trend in rating levelled off.
The margin potential in our reinsurance business remained good, particularly for US catastrophe business where rating was a little off all time highs. The reinsurance market had begun to trend downwards, with rate reductions in 2008 across the reinsurance portfolio of 9.0%, but discipline was evident. International catastrophe business was more disappointing with rate declines of 9.1% but off a lower base price than US catastrophe. More discipline was evident in peak zones, such as the UK, following the flood losses in 2007 and for European windstorm risk, and overall rating levels remained adequate. Consequently our retention ratio in this area remained high at 89%.
Rates for property and casualty classes experienced further decreases with rate reductions on our renewal portfolio of 9.9% (2007: 6.7%). The pattern was irregular through the year but large US property insurance
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business incurred average rate reductions of 7.2% and the US casualty market continued to soften by an average of 8.9%. However, the financial difficulties experienced by a number of major participants during the year, particularly AIG who are the largest US surplus lines insurer, put a halt to the slide.
Rates for marine classes as a whole were down 4.8% for 2008 (2007: 4.1%). In the first half, energy business experienced significant rate reductions as two loss free hurricane seasons in 2006 and 2007 encouraged competition from new entrants. But, losses from Hurricane Ike in September prompted a sharp turnaround. Elsewhere, war rates continued to weaken.
However the less volatile marine classes, such as cargo, hull and yacht, benefited from more stable rates. Whilst the marine market generally has proven difficult for a number of these classes in recent times, through selective underwriting, Amlin’s portfolio continues to deliver satisfactory returns.
Finally, our Aviation business continued to trade in a challenging market, with airport and product liability classes starting to come under rating pressure in the year. However, following the poor market performance of 2007 and 2008, when we estimate that the whole market was loss making, the airline renewals in December provided the first tangible evidence of an upturn in the cycle. Rates improved by only 4.3%, but we expect that the trend in rating in this area has now turned. Consequently, we added modest exposure to the airline portfolio.
2008 loss activity
Catastrophe loss activity in 2008 was significant. Munich Re estimates catastrophe insured losses at US$45 billion, substantially in excess of the benign years of 2006 and 2007, but also notably above the long term trend. There were 16 named Atlantic hurricanes or tropical storms in the year, of which 6 made landfall.
Hurricanes Gustav and Ike were by far the most significant. The table above sets out the other principal catastrophe losses in the period and Amlin’s loss estimates for each.
Hurricanes Gustav and Ike, as category 2 storms, caused insured damage in the Gulf of Mexico, the US coast and mainland. RMS, a leading loss modelling consultancy, estimates the market insured loss for Gustav and Ike at US$10 billion and US$21 billion respectively. At this level, Hurricane Ike is the third worst storm in history.
Despite only registering as a category 2 hurricane, Ike was particularly costly due to its unique characteristics. Rather than concentrating its energy near the centre Ike had two well defined areas of maximum winds. These winds, although only a modest 110–120 mph, extended out to 120 miles which was much larger than Hurricane Gustav a month earlier and also greater than Hurricane Katrina in 2005.
Ike caused damage to areas around Texas, Louisiana and Arkansas as it made landfall, but its residual energy then combined with a preexisting weather system over the Midwest. This resulted in strong winds covering an area from east of Illinois to New York and south to Kentucky and Tennessee. Modelling this loss proved difficult and modelling agencies increased their loss estimates as events unfolded.
Our underwriting team recognised early that initial estimates might prove insufficient and quickly raised our loss estimates above those modelled. We are confident that our initial reserves for Gustav and Ike announced on 19 November 2008 require only a modest adjustment.
Elsewhere, within the marine market there have been a number of significant risk losses during 2008. These losses include an oil refinery explosion during February in Texas, estimated to cost US$700 million and one of the largest armed robberies in history in Paris in December, costing an estimated US$53.5 million. Due to our limited lines and exposure monitoring Amlin’s costs for these losses are estimated at US$4.5 million and US$3.5 million respectively.
Incidents of piracy off the East African coast have made regular press during the year with more than 90 attacks on ships recorded this year alone. Insurers are having to meet their proportion of average costs of demands now reaching US$2 million on top of damage to vessels and cargo or injury to crew. The cost of these events to Amlin is less than US$0.3 million.
The aviation market also saw notable losses. The year started with the much publicised British Airways jet undershooting the runway at London Heathrow, Taca Airlines overshooting the runway in Honduras in May and the Spanair crash in Madrid in August. Total estimated losses for these three events amount to over US$350 million as part of overall airline losses of around US$1 billion during 2008.
Our estimated combined loss for these three events is US$6.9 million which reinforces our decision to limit airline exposure while rates were at low levels.
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