Amlin romps ahead

With the economic outlook remaining uncertain, it's just as well that the insurance industry's fortunes are largely driven by other factors. Chiefly, what determines insurers' fortunes is whether or not premium rates are rising, and that's a function of natural disasters. That's because disasters necessitate big payouts, depleting insurers' reserves. These have to be re-built, hence the collective need to raise premiums. Since the claims arising from 2008's hurricane season - which cost the insurance industry $24bn (£14.6bn), according to reinsurer Swiss Re - insurers have been pushing up their premium rates in order to do this. That process has been accelerated by the losses that many insurers have suffered in the value of their investment portfolios because of 2008-09's global financial crisis. Certainly, these factors hit profits; but, longer term, rising premium rates are good news for all insurers - especially Amlin.

That hopeful picture was confirmed with Amlin's trading update for the first nine months of 2009. Amlin reported that premiums to renew insurance contracts had, on average, risen by 4.4 per cent in the first 10 months of the year. There was an especially robust performance from the group's US property book, where premium rates rose 6.6 per cent, while Amlin's marine book pushed through a 5.6 per cent increase in premiums. The company's UK motor business isn't doing badly, either. Amlin UK managed a 5.7 per cent increase in rates in the year to end-October, while rates rose 5.3 per cent for fleet motor insurance - and that book delivered an impressive 10.5 per cent rate rise in October alone. Amlin's ability to take advantage of the market backdrop was boosted in July after it spent €350 (£318m) buying the insurance arm of the damaged Belgian financial conglomerate, Fortis. That move increased its exposure to corporate property and reinsurance lines, which are performing decently.

Rising premiums are certainly delivering impressive underwriting profits. In the first half of 2009, Amlin's combined ratio (of claims to premiums) stood at an impressive 73 per cent, and analysts at broker Numis Securities expect that to improve to 71 per cent for the full year. That may rank Amlin as the most profitable major underwriter in the Lloyd’s insurance market; with rivals, such as Brit, Beazley or Chaucer, all forecast to generate much lower levels of underwriting profits than Amlin. Moreover, Amlin owns all of its managed syndicate capacity, which means that its underwriting profits will only benefit its shareholders, not Lloyd's Names.

The company's investment portfolio looks in good shape, too. With the trading update, management said that the group's investment return had reached 5.3 per cent in the 10 months to end-October. That's not bad at all given todays ultra-low interest rates, and much healthier than the returns being generated at many of its rivals. Hardy Underwriting's third-quarter return, for instance, stood at just 1.5 per cent, while Chaucer's investment return for the first nine months of 2009 reached 3.6 per cent. True, with 3 per cent of its investments in property and 2 per cent in equities, then Amlin's appetite for investment risk is a shade greater than most Lloyd's underwriters. Still, 80 per cent of its funds are invested in bonds and 15 per cent is in cash, so the company isn't exactly playing fast and lose with its capital.

Still, there are some uncertainties ahead. Strangely, that reflects the absence of big disasters of late and an especially benign hurricane season so far in 2009. That's good news for profits in the short-term, but it could start to put the brakes on future profitability should insurers begin to use their capital to subsidise lower premiums in order to chase new business. Indeed, the sector's upswing is starting to look patchy - Amlin's book of US casualty business, for example, saw its rates fall by 1.7 per cent in the first 10 months of 2009.