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OPERATING AND FINANCIAL REVIEW / FINANCIAL PERFORMANCE / OUTLOOK
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| 2006 AND BEYOND |
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We believe that the non-life insurance industry
will remain cyclical, but we are seeing some
signs of greater discipline. It is too early to
assess whether this will last as the industry’s
capital and surplus builds, but there are some
dynamics which should help to sustain
reasonable margins. These include:
- A stated determination by Lloyd’s to manage
underwriting activities over the insurance
cycle so as to avoid the poor performance
experienced in the troughs of past cycles;
- Security ratings which remain below the
desired level for many companies. With rating
agencies increasingly focused on financial
return as a measure of long term company
health, we would expect those companies to
exercise greater discipline;
- Companies are still reporting prior year
reserving deficiencies and this is expected
to continue. Reserving inadequacy in the US
property/casualty industry was recently
estimated by Fitch to be between $43.5
billion and $61.5 billion at the end of 2003.
Some of this has been recognised in 2004.
However, insurance losses arising from the
massive corporate failures such as Enron
and other financial scandals have not,
we believe, yet been fully recognised by
the industry; and
- The industry is showing signs of managing its
capital base in recognition of cyclical
pressures. For example, among the
Bermudian insurers, whose capital and
surplus has grown significantly over the past
three years, there have been over $1.5 billion
of share buy-backs announced since the
beginning of 2004.
For Amlin, the 2006 result will be influenced
by 2005 underwriting in the same way that
2004 is influencing 2005. With our strong
focus on profit and return on equity, and the
proven experience of our team, we are
confident, without being complacent, of being
able to continue to deliver good returns relative
to the industry.
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| SEVEN REASONS WHY AMLIN SHOULD TRADE
BETTER THROUGH THE NEXT DOWN-CYCLE
THAN IN THE PERIOD 1997 TO 2000 |
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- Amlin’s senior underwriters traded
reasonably well through the trough of the
last cycle. However, when we reorganised
our business in 2000 we focused our
ongoing operations around the most
successful of these underwriters.
- The senior underwriters also have more
experience of trading in poor conditions
than they did last time around.
- Amlin’s focus on gross profit is well
understood and adhered to. Previously,
there were several philosophies and some
underwriters had grown their portfolios into
a softening market – something to be
avoided.
- Amlin has withdrawn from a number of
business areas, such as private motor, which
had poor results in the last soft market.
- The reorganisation in 2000 allowed Amlin
to restructure its reinsurance programme so
that it became more cost effective. This
resulted in savings equivalent to 5.0% of
premium in 2001. This saving was half of
the worst loss for Syndicate 2001 in the
period 1997 to 2000.
- Amlin’s investment return potential is much
greater than in the last trough of the cycle.
- The quality, timeliness and availability
of management information has been
significantly improved. This, combined with
sharpened monitoring capability, should
enable Amlin to manage the business better
and to spot any problem areas earlier.
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