Operating & Financial Review

Underwriting performance

Underwriting made a very strong contribution to profit. Whilst good performance is to be expected when catastrophe incidence is very low, an overall combined ratio of 72% is excellent given the diverse nature of the Group’s portfolios.

Reserve releases were again material contributing £68.8 million (2005: £79.7 million) to profit. Our reserves are set at a level above an actuarial best estimate of possible outcomes. We believe that this is appropriate because of the inherently uncertain nature of insurance business. With this approach, if “normal” claims development is experienced, releases will be made from reserves over time. We monitor the level of estimated reserves for consistent strength and adjust expectations of future development if consistent new trends emerge. For example, in 2006 we have revised the reserving approach on the marine business to take account of improvements in claims settlement patterns in recent years.

During 2006 trading conditions for a number of classes of business underwritten have diverged. See Market overview for more details. Overall the annual renewal rate increase was 6.25%.

Gross written premium increased by 12.1% during 2006. Our new Bermudian operation was the major source of growth writing US$279.8 million of new premium for the Group (including additional lines written for Bermuda on per class reinsurance treaties) in its first full year of trading. The London operation’s gross written premium was largely unchanged with growth in property, energy and reinsurance classes balanced out by contraction in our UK commercial and in aviation classes.

Reinsurance expenditure as a proportion of gross written premium fell to 9% from 16.5%. This reflects reduced reinsurance expenditure in London and Amlin Bermuda writing without reinsurance protection. The former results largely from the decision to purchase less retrocessional reinsurance (see Underwriting – focused on risk and return for more detail) which saved approximately £42 million in the year.

As a consequence of the increase in gross written premium and the reduction in reinsurance, net premium written grew by 22% in the year.

Net earned premium was up by18.4% to £973.9 million (excluding the premiums associated with the reinsurance to close). The slower rate of growth in earned premium reflects the acceleration of the level of underwriting through 2006 as conditions in catastrophe exposed lines improved through to the middle of the year. Net unearned premiums now stand at a record £507.8 million.

© Copyright Amlin 2006