Review

Tony Holt Group Underwriting Director

• Gross premium reduced 6.2% to £1,044.7 million.
• Overall renewal rate reduction of 5%, but 77% of existing business retained.
• Limited catastrophe loss activity experienced.
• Non-marine, Marine and Amlin Bermuda business remained well priced.
• Aviation and UK Commercial divisions continue to trade in difficult markets.

• Gross premium written of £1,044.7 million: 7% below plan
• Record combined ratio of 63%: 3% ahead of plan
• Average rate reduction of 5%: within 2.5% of plan

Trading environment in 2007

With levels of capital increasing to historic highs in all our markets, 2007 witnessed a softening of the pricing cycle across most classes, although rating levels remained favourable for many areas of our portfolio. Rates were coming off previous years’ peaks but healthy margins were available, particularly in our Non-marine, Marine and Bermudian businesses which represented 79% of gross premium income in 2007. The more uniform trends across the insurance market were in contrast to 2006, when the pricing cycle was divergent with a strong rating environment for catastrophe exposed North American property and energy insurance and reinsurance but weakening prospects in a number of other classes of business. In 2007, our Aviation and UK Commercial businesses continued to trade in difficult markets.

In the first part of 2007, US catastrophe rates strengthened, towards the peaks reached in the middle of 2006. With few major catastrophes and surplus capital across the industry building, rates began to decline in the middle of the year. However, market discipline was evident. A good example of this was the reaction to the decision by the State of Florida to increase the State supported catastrophe fund. The increase in cover from the fund was less than originally stated, primary insurers purchased more cover and pricing remained firm, recognising the continued hurricane threat faced.

Pricing levels were more disappointing for international catastrophe reinsurance, risk excess of loss and direct and facultative property business. The US casualty market has softened steadily since 2005 as new entrants are attracted by the profits made in recent years. Our portfolio remains specialist and very selective.

Prices for marine classes remained generally healthy. Off shore energy witnessed rate reductions through the year, but continued to offer good margin potential. However, classes such as hull, cargo and yacht were more stable. War experienced more difficult pricing conditions, with limited loss activity and new capacity coming to market as a result.

Our UK Commercial business continued to experience challenging rating conditions across all classes through 2007. Competition is expected to continue into 2008, though there has been some sign that pricing pressure will begin to reduce in the motor, liability and property classes.

US Capital & Surplus 1995 to 2006
UK Capital & Surplus 1995 to 2006
Bermuda Capital & Surplus 1995 to 2006
Cumulative rate movement for 2007 US catastrophe renewals

New competitors continued to enter the aviation market in 2007, adding further pressure to rates as they looked to acquire market share. This was particularly notable within the airline market, where despite the lack of a major airline disaster in the year, total claims, estimated at US$1.5 billion, were in excess of global airline premium of between US$1.3 billion and US$1.5 billion.

2007 industry loss activity

Catastrophe loss experience in 2007 was benign. According to Swiss Re Sigma, total worldwide catastrophe insured losses have been estimated at US$28 billion, an increase on 2006 but far lower than 2004 or 2005 and below the long term trend. There were fifteen named Atlantic hurricanes in the year but only six landfall events, of which only one struck the US coast at hurricane force. Of these Felix and Dean were noteworthy as category 5 storms which caused significant damage and disruption to Caribbean and Central American countries. However, neither were major insurance losses.

The largest US catastrophe loss in 2007 was the California bush fires in October for which the estimated total insured loss is US$1.0 billion. For Amlin, the loss is expected to be below US$26 million emanating mainly from catastrophe reinsurance programmes.

Elsewhere, there were severe storms in Europe, notably windstorm Kyrill in February which affected the Low Countries, Northern France and Germany causing US$5.9 billion of insured loss and the UK floods in June and July which caused an estimated US$4.7 billion of insured loss. Amlin’s net claims for these events were a modest £14.2 million. The other major natural catastrophe loss was a large flood in Newcastle, Australia which has an estimated market loss of US$1.0 billion and which cost Amlin £4.2 million, again mostly from catastrophe reinsurance programmes.

For marine classes there were a number of small to medium sized losses to the energy, hull and specie markets. The hull losses, Bourbon Dolphin of US$75 million and MSC Napoli of US$60 million were not significant for Amlin but the loss of the world’s largest dredger, WD Fairway (with an insured value of US$160 million), generated an estimated gross claim of £5.3 million for our account. An oil spillage in San Francisco bay, in November, when the container vessel Cosco Busan collided with the Golden Gate Bridge, and the loss of the Hebei Spirit tanker following a collision with a barge in December off the coast of South Korea, were stark reminders of the potential for a large pollution event.

It is widely anticipated that the sub-prime crisis and resulting credit squeeze will result in significant claims for the professional indemnity and directors’ and officers’ insurance markets. Some estimates of total claims amount to over US$9 billion, although it is very early to estimate claims arising from a set of problems which are still developing. Amlin’s involvement is expected to be negligible. Our US casualty account contains little commercial company directors’ and officers’ insurance. Since 2001 we have avoided professional indemnity and directors’ and officers’ cover for US domiciled as well as the world’s top 40 banks.

Insured catastrophe losses 1970-2007 (US$ billion)

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© Copyright Amlin 2007