Amlin plc Final Results - 28.2.08

Amlin released its final results on 28 February. 

KEY POINTS

• Record return on equity of 37.8% (2006: 34.0%).
• Weighted average return on equity over past five years of 32.0% (2006: 27.9%).
• Profit before tax up 29.9% at £445.0 million (2006: £342.7 million).
• Strong underwriting contribution up 32.5 % to £355.0 million (2006: £267.9 million).
• Combined ratio at record 63% (2006: 72%).
  
• Investment return increased by 36.4% to £157.0 million (2006: £115.1million).
  
• Balance sheet and capital management
  
• Net assets increased 12.4% to £1,052.2 million (£936.4 million).
  
• Record run-off profits from reserves of £109.0 million (2006: £68.9 million).
  
• £120.4 million return of capital via issue of B shares.
  
• Dividends (paid and proposed) increased by 25.0% to 15.0 pence per share.
  
• Positive outlook
  
• Underpinned by net unearned premium reserve of £474.3 million (2006: £507.8 million).
  
• Underwriting margins remain good despite declining rates.
  
• Strong cash flow supports future growth in dividends.

Charles Philipps, Chief Executive, commented as follows:
"These results are exceptional and reflect a combination of strong pricing conditions, low catastrophe claims and good investment returns. Our average return on equity over the past five years shows that this is not a flash in the pan. However, underwriting returns have peaked in the short term. Our confidence in being able to continue to deliver more than acceptable returns for shareholders and our strong balance sheet supports a growing dividend going forward."
Outlook
Undoubtedly, rating conditions became more challenging in 2007 and into the start of 2008. Nevertheless, our Non-marine, Marine and Bermuda businesses continue to enjoy good market conditions with the potential to deliver acceptable returns to shareholders. However, we have reduced our risk appetite as margins have fallen.

In our other two areas of underwriting we believe that we are towards the trough of the cycle. The aviation market has been disappointing, with competitors seemingly happy to expand their underwriting with little prospect of an adequate return for the risk assumed. The UK commercial market has also been highly competitive with only limited signs to date of a return to more rational behaviour. However it is increasingly likely that these business areas will start to turn to provide a source of future growth.

While conditions may now be more difficult, this is when we would expect our outperformance against our peers to grow. Our team shares a well understood underwriting philosophy that focuses on profitability, we are well reserved and we are constantly striving to improve our risk management and management information to enable us to steer a steady course.

Rating indices in key classes
Rating levels across a number of major classes of business are shown in the table below.

Underwriting performance

With a low level of catastrophe incidence in the year, a good underwriting result is to be expected but the Group's overall combined ratio of 63% (2006: 72%) is exceptional.
Gross premium written remained relatively unchanged in original currency, with growth in well priced classes such as US catastrophe reinsurance offset by further volume reductions in classes that have continued to come under pressure, such as UK Commercial motor.

With 62% of gross premium written in US dollars, which weakened relative to sterling by 8% during the year, reported gross premium written of £1,044.7 million, is 6.2% less than in the prior year (2006: £1,113.8 million).

Overall, the renewal rate reduction across all business was 5% with a renewal retention ratio of 77%.  In 2006 we took the decision to operate with significantly less retrocessional reinsurance cover than we had in previous years on the basis that the price of cover had become uneconomic.

In 2007 the price of retrocessional cover became more reasonably priced and Syndicate 2001 purchased more cover, albeit not as much as had been in force during 2005.

However reinsurance expenditure as a proportion of gross premium written has increased only modestly from 9.0% to 10.2%. This is due to two factors. Firstly, Amlin Bermuda now represents a larger part of the Group and has so far operated without the purchase of any reinsurance.

Secondly, more reinsurance is bought for the Syndicate dollar account than for the sterling business. As the dollar weakens, this lowers the apparent reinsurance expenditure".