Transcript Slide 1
The Art of Risk Management during the Global Credit
Crisis from a Direct Insurer’s Perspective
10th September 2009
Amlin - Background
A leading independent insurer operating in the Lloyd’s, UK, continental European and
Bermudian markets with combined gross premiums of over £1,043 million in 2008
Specialist in insurance and reinsurance for commercial enterprises writing a diverse
portfolio of property, marine, aviation, liability and motor classes
Listed on the London Stock Exchange since 1993 and one of the largest pure non-life
insurance stocks in London with a market capitalisation of £1.7 billion
Acquired Fortis Corporate Insurance in July 2009 with a portfolio of marine, property,
liability and motor risks in the Netherlands, Belgium and France and combined gross
premiums of €763 million in 2008
Strong balance sheet with approx. £600m of available capital in excess of regulatory
requirements. Ratings are shown below.
Agency
Syndicate 2001
Amlin Bermuda
ACI
AM Best
A+ (Superior)
A (Excellent)
Not rated
Moody’s
A1 (Stable)
A2 (Stable)
Not rated
Fitch
Not rated
Not rated
A- (Positive)
S&P
4 (Stable)
A (Stable)
A- (Stable)
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2008 business mix by operating division
Amlin (including ACI) wrote £1.7bn of gross premiums in
2008, of which approximately 65% was direct business.
Aviation
Airline
General aviation
Airports liabilities
Products
Space
%
30
25
23
12
11
P&C
Property
US casualty
Auto
Accident & health
%
53
14
14
13
Trade credit
Amlin UK
Motor
Employer’s liability
Professional indemnity
Products liability
Commercial package
Financial institutions
8%
3%
9%
36%
12%
6
%
46
18
16
9
8
3
12%
20%
ACI
Marine
Fire
Liability
Fleet
Captives
Engineering
%
49
16
15
8
7
5
Reinsurance
Catastrophe
Property
Proportional
Marine
Special risks
%
59
19
12
6
4
Amlin Bermuda
Catastrophe
Proportional
Property
Special Risks
Marine
Other
%
60
20
16
3
1
1
Marine
Energy
Cargo
Yacht
War & terrorism
Bloodstock
Liability
Hull
Specie
%
20
16
15
13
11
11
9
5
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Trends in risk management & insurance buying
Recent years have seen a paradigm shift in companies’ attitudes towards
and understanding of risk management: it is now a matter discussed at board
level and taken extremely seriously by senior management
Companies now have a broader view of their risk universe, and a knowledge
that these risks can be addressed in a wide range of ways and with a number
of instruments, of which insurance is just one
Insurance remains the key means of balance sheet protection, and the
strains of the current economic environment have weakened balance sheets
and increased demand for insurance
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Trends in risk management & insurance buying
Insurance buyers are increasingly sophisticated, and recent economic events
have only served to heighten awareness of counterparty risk, with two main
effects noted:
– the so-called ‘flight to quality’ – preferential selection of the more robustly
capitalised insurers
– syndication of risk – the subscription market allows buyers to spread and therefore
dilute counterparty risk
The credit crisis has enhanced the value of insurance broking expertise:
– helping to match the structure of a programme to their client’s financial situation
– providing expert advice on insurer security
– ability to spread risk across insurers
Amidst all this economic ‘noise’ it is still important to remember that natural
catastrophes can happen at any time (even during a recession), as
Windstorm Klaus and the L’Aquila earthquake have recently shown
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Why the insurance industry is well positioned relative to
other financials
Comparatively low ratio of invested assets to equity
Depository institutions
10:1
Investment banks
25:1
Special investment vehicles
35:1
Life insurers
Property/casualty (re)insurers
8:1 – 10:1
2.5:1
Source: Dowling & Partners
Risk generally taken on the liability side, not asset side
Largest liability (loss reserves) have no covenants = no “run on the bank”
Matching of assets to liabilities = ability to hold to maturity
Economic distress less a negative on operating results
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State of European direct insurance business
Pricing remained weak in Q109 but improved a little in Q209 and is expected
to continue to do so in 2010 (according to Europe’s largest 4 primary insurers
AXA, Allianz, Zurich and Generali): there is broad consensus that we have
reached the bottom of the pricing trough
Levels of capital in 2009 appear to be repairing – some evidence of increased
share repurchase activity
Suggests that pricing upturn likely to be a response to slim or negative
underwriting margins rather than a shortage of capital. Evidence that some
markets have already turned:
– Aviation
– UK motor fleet
Reliance on investment returns no longer feasible with an increased emphasis
now on gross underwriting return
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Increased focus on underwriting profit
As investment returns have declined since the mid 1980s so the importance of
delivering positive gross underwriting returns has increased. The chart below shows
the decline in investment income for Dowling & Partners’ universe of P&C insurers:
INDUSTRY NET INVESTMENT INCOME
250%
29%
31%
242%
27%
26%
28%
25%
196%
208%
202%
206%
26%
26%
25%
24%
23%
243%
239%
231%
235%
229%
218%
14%
300%
200%
150%
100%
50%
9%
10%
13%
12%
15%
17%
94%
15%
121%
20%
24%
25%
148%
140%
128%
162%
30%
Net Reserves/Beginning Surplus
244%
25%
231%
27%
232%
26%
228%
25%
216%
25%
222%
21%
206%
20%
206%
18%
191%
19%
187%
17%
159%
16%
142%
13%
118%
12%
109%
12%
107%
12%
117%
13%
136%
14%
148%
11%
133%
13%
128%
12%
120%
11%
109%
11%
106%
NII/Beginning Surplus & Ending Reserves/Surplus
35%
NII/Beginning Surplus
5%
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007A
2008E
0%
Source: Dowling & Partners
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The credit crisis and its impact on underwriting
performance
Reduced asset values and economic activity lowers sums insured, thus
diluting the top-line effect of rate increases
Increased claims activity
– economic hardship claims (fraud, arson etc.)
– anecdotal evidence that increased redundancies and work stress are driving up
Workers’ comp/employer liability claims
– with increased incentives for companies and individuals to improve stretched
cashflows claims now being made more urgently
Some evidence of an increase in D&O and E&O claims but little reported by
the large European insurers as yet
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Responses of Direct Insurers
De-risking of investment portfolios
A more risk-based approach to underwriting
Less acceptance of poor performance
Rate increases where needed / demand for gross underwriting profit
Improvement in service
Counterparty risk analysis
Opportunities for growth where space is created by large corporations’
difficulties
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Solvency II and regulatory background
Solvency II is the new solvency regime for all EU insurers and reinsurers,
due to come into effect in 2012
Solvency II is based on three pillars:
1. Quantitative capital requirements and rules for investments
2. Supervisory review and internal evaluation of risks and controls
3. Disclosure relating to risk and performance
The essence of the Solvency II requirements is pillar 2. which will enforce a
direct and more visible relationship between capital and levels of risk and
return
The aim is to achieve a consistency of approach across the EU leading to
sustainability of insurers’ financial security
Political engagement with the financial services industry is likely to lead to
further regulation
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Amlin’s risk management emphasis
Underwriting risk
–
–
–
–
–
Diverse and balanced portfolio
Control over catastrophe exposures
Pricing discipline
Long tail class reserving
Product line size and use of reinsurance
Investment / market risk
– Risk controls on asset allocation to preserve balance sheet for underwriting
Credit risk
– Reinsurance security
Investment in models for assessment of risk
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Amlin’s strong balance sheet and stable team
Net tangible assets up 12.5% to
£1.11 billion in 2008 (2007:
£0.98 billion)
Net Asset Growth
1,200
1,106
1,000
983
Investments and cash up 8.7%
to £2.9bn in 2008 (2007:
£2.7bn)
£m
800
870
719
600
400
383
200
0
2004
Experienced and stable
underwriting team: voluntary
turnover of 4.2% in 2008; senior
underwriters have 22 years
average industry experience
2005
2006
2007
2008
Voluntary Turnover
18.0%
16.0%
14.0%
12.0%
10.0%
Senior underw riters
8.0%
Overall
6.0%
4.0%
2.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
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Amlin & ACI
The acquisition of ACI provides an excellent fit with our declared strategy:
Expansion of the non-catastrophe portfolio
Gives Amlin a strong platform in the continental European market, where opportunities to acquire a
significant foothold and dominant market share are rare
Provides access to a new customer base with diversified distribution
Creates opportunities for organic growth as well as a platform for further acquisitions if
opportunities arise
Business mix is predominantly in lines where Amlin has established underwriting expertise and
resource
Strong local management team with established track record
Transaction expected to be ROE accretive in 2009 and will contribute to Amlin’s cross cycle target
ROE of at least 15%1
1
This statement does not constitute a profit forecast and should not be interpreted to mean that the earnings per share in
the first full financial year following the Acquisition, or in any subsequent period, would necessarily match or be greater
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than those for the relevant preceding financial year
Amlin’s proposition to buyers
A specialist insurer for commercial clients and brokers
Emphasis on excellence of service
Consistent approach to underwriting and pricing
Strong balance sheets
Strong risk management capability to ensure financial stability
Long-term client relationships based on sustainable model of fair
pricing for reliable coverage
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