Operating & Financial Review
Outlook for 2007
|
A continuing healthy rating environment in many areas
The table above illustrates the rating of a number of key classes for Amlin.
Over our portfolio as a whole, rates were flat in our January 2007 with a retention ratio of 83%. However, the divergence of fortunes by business area seen in 2006 continued into the New Year.
US catastrophe reinsurance remains very strong and rate rises have been achieved on 2007 renewals to date, although pricing levels are lower than those achieved in the pre-windstorm July 2006 renewals. With industry catastrophe models now factoring in the probability of increased frequency and severity of weather related losses, we expect US catastrophe business to remain stable, even though the decision by the State of Florida to materially increase the Florida Hurricane Catastrophe Fund (FHCF) will reduce demand for industry cover in that state and is likely to increase competition in other areas. International catastrophe rates remain reasonably priced although a number of less well diversified competitors are seeking greater access to this business and this may result in increased pressure on rates.
For US exposed direct property business, US based insurers who materially reduced their exposures or even exited the market in 2006 are re-entering and this is resulting in some of the large increases achieved in 2006 being given up to retain business. Nevertheless, it is still acceptably priced. However, in non catastrophe exposed zones, rates are coming under more pressure. In our marine account, energy risks in the Gulf of Mexico are reasonably firm and in other areas weakening modestly. Many other areas are currently stable.
Hull rates have recently come under more pressure and war and terrorism rates continue to decline. Even where rates are weakening, we remain confident of being able to deliver good margins.
Most airlines renew in the fourth quarter of the year, but currently there is no sign of a change in direction of rates as competitors chase market share based on historic profitability rather than taking account of exposures. Thankfully, other aviation classes are reasonably stable and these now represent 67% of our Aviation division’s planned premium for 2007.
Commercial motor and UK liability business remains under pressure and we will continue to decline business where we do not consider it adequately priced. We will view with interest the results of competitors whom we believe must be making underwriting losses. At some point we would expect their management to take correctiveaction, but we are not counting on it in 2007.
While margins may be eroded, it is important to remember the level of margins which have been possible in recent years for much of our attritional as well as our natural catastrophe exposed classes, as illustrated in the following chart.
The above incurred claims trends exclude classes with a high catastrophe exposure content, specifically all excess of loss and proportional reinsurance classes, direct property and energy insurance.
Premium growth in Bermuda
£274 million of premiums were written across the Group by the end of January 2007. Of this, £232 million was written by Syndicate 2001, 5% less than at the same stage in 2006 at constant exchange rates and the balance of £42 million was written by Amlin Bermuda, 57% more than in 2006. We are pleased that Amlin Bermuda was able to get access to a good balance of both US and non US business so that it continued to build the diversity of its account.
The current strength of sterling, if it persists for the year as a whole, will dampen premiums reported in sterling.
On 25 January, the Governor of Florida signed new legislation seeking to reduce the cost of homeowners’ insurance in the State. Essentially, the State is bearing hugely increased hurricane risk on behalf of its citizens which will result in less demand for reinsurance from the market. We estimate that this will reduce our reinsurance premiums for Florida risk by around US$40 million.
For the year as a whole we expect growth in premiums to come from Bermuda. Recognising our policy of purposely not seeking to grow income in lines where prices are softening, we have maintained our Lloyd’s capacity at its 2006 level of £1 billion.
Volatility
The Group remains subject to greater volatility of performance than prior to 2006, having purchased less retrocessional reinsurance. We have recently been offered and purchased cover at more attractive terms than were available in 2006 and will continue to explore options for reducing our increased volatility. We continue to believe that the relationship between risk and the reward of operating with less protection is a good one.
Growth in unearned premium reserve
With the growth in the business in 2006, we have a record net unearned premium reserve of £507.8 million as at 31 December 2006. A large share of this is reinsurance income, which was written at very strong rates and on which we earn premium on a straight line basis, the balance of which will be earned in the first half of this year.
Continually well reserved balance sheet
Amlin’s policy of reserving for claims above the actuarial best estimate of their likely development has resulted in material prior year run-off profits in recent years and assuming run-off which is no worse than normal expectations, our continued and consistent policy should deliver further run-off profits.
Investment outlook improving
We consider the outlook for our bond and liquid investments, which represent 69% of the Group’s current portfolios, to be better than in 2006. Base rates for US dollars and sterling are both 0.75% higher than at the start of 2006 and there is less risk of rises adversely affecting bond values. The outlook for equities remains sound although we do not expect to repeat the excellent 15% return achieved in 2006.
Top