Capital market pressure on reinsurance rates both helps and hinders Amlin

Amlin plc, the insurance and reinsurance group engaged in non-life underwriting in the Lloyd’s market, Bermuda and Europe, has recognised the impact that third-party reinsurance capital and the capital markets are having in a statement published this morning. For Amlin the impact of third-party capital on reinsurance rates is both a help and a hindrance as it both underwrites reinsurance and utilises reinsurance capacity sources itself.

In the interim management statement it published earlier today, Amlin said that after seeing catastrophe reinsurance rates improve at the January renewals, with average renewal rate increases of 3.3% on U.S. lines and stable international cat reinsurance renewals, it is now noticing the impact of third-party capital.

Amlin’s statement said; “Increased competition from capital market entrants and the absence of major loss activity in the period is now generating downward pressure on catastrophe rates.”

So this is one effect that Amlin sees from the capital markets increasing convergence with the reinsurance sector, increased competition and pressure on rates, meaning that its own reinsurance operations may have their performance hindered. As a large insurance and reinsurance group Amlin can turn its focus to primary insurance business and here it has seen some attractive rate increases in recent months, according to the statement.

The negative effect that the reinsurance division of Amlin may see is however partially offset by its own ability to capitalise on the pressure that reinsurance rates are coming under as third-party capital becomes more accepting of risk for lower levels of return.

Amlin has been able to capitalise on lower retrocessional reinsurance rates, enabling it to both lower the premium cost of its own reinsurance as well as reduce its retention levels across its retro purchases.

The statement said; “With the benefit of a strong performance in 2012 and an influx of capital into the retrocession market through 2012 putting downward pressure on rates, we have been able to renew our retrocession programme at lower premium and with significantly lower retentions for 2013. This is expected to further benefit already strong reinsurance margins.”

So it’s by no means all bad, and while there has been a lot of discussion about the pressure on reinsurance rates, groups like Amlin can also take advantage of this to lock in reinsurance coverage of their own. Amlin has issued catastrophe bonds in the past, with the Tramline Re Ltd. (Series 2011-1) deal and we would imagine that it might look to the capital markets again now that pricing is so attractive. Amlin pays a 16.75% risk premium on Tramline Re, it would be interesting to see how much cheaper that might be if re-issued today.

Of course Amlin has another way to profit from the increased focus on third-party capital and the growing convergence between reinsurance and capital markets as it holds a stake in ILS investment manager Leadenhall Capital Partners. Leadenhall grew its assets under management to over $1 billion this year, meaning that Amlin’s shareholding in the Leadenhall ILS funds will have reduced but it is well positioned to capitalise on the growth of the ILS and collateralized reinsurance sector.

According to Amlin’s 2012 results announcement the firm had $116.5m invested in Leadenhall’s two funds, an investment which offered a return of 6.0% in 2012. However Amlin have an investment in Leadenhall Capital Partners LLP which gives them a share of profit and loss, meaning that as Leadenhall grows assets under management Amlin benefit from a source of capital efficient revenue.

Amlin’s CEO Charles Philipps said earlier this year that the firm intends to explore how it can utilise its existing interests to leverage third-party capital, suggesting that Amlin intends to utilise the growth of the ILS and third-party capital as an opportunity rather than see it as any sort of threat.

Charles Philipps commented; “Amlin has made a positive start to 2013 with improvement in performance across all key areas of the business. We continue to benefit from the diversity of our portfolio, which gives Amlin exposure to favourable market conditions across a range of insurance and reinsurance classes. The Group is well capitalised and in a strong position to exploit further opportunities for profitable growth.”