Leadenhall Capital stake enables Amlin to have a foot in both camps

Amlin, the London-headquartered non-life insurance and reinsurance business, appreciates the increased exposure to insurance-linked securities (ILS) that its larger stake in ILS investment manager Leadenhall Capital Partners LLP delivered, giving it a “foot in both camps.”

Chairman of Amlin Richard Davey said that the synergies between Amlin’s traditional insurance and reinsurance business and Leadenhall’s ILS and third-party reinsurance capital management continue to grow, helped by the larger share of ownership.

Amlin increased its ownership stake in ILS and reinsurance-linked investments manager Leadenhall, taking its shareholding from 40% to 75% in October 2014 as the re/insurer exercised an option to increase its interest in the ILS manager.

Davey explained; “This increases our exposure to the growth of ILS and is already increasing the synergies between LCP and our reinsurance business.”

The increased stake enables Amlin to generate a larger share of the income and fees that Leadenhall earns, securing it a key stake in one of the major ILS managers in the marketplace and giving it a greater profit from third-party reinsurance capital management, to go alongside its traditional business.

“There is no doubt that Amlin’s reinsurance franchise is benefiting from having a foot in both camps and I believe it was prescient of Amlin to have established LCP in 2008,” Davey continued.

Amlin, through its core reinsurance businesses, is impacted by the lower pricing and high levels of competition in the traditional reinsurance market, which cuts into profits on business written on its own balance-sheet.

CEO Charles Philipps explained how market conditions are affecting the firm; “Reinsurance capital is at an all-time high at $575 billion, an increase of 6% compared to year end 2013. On top of this, there is now significant capital markets capacity which is mainly directed at reinsurance. The inevitable consequence is increased competition and lower pricing. To date this has been most evident in reinsurance but it is spreading to other lines of business.”

Amlin remains a key partner for cedents though, Philipps explained, enabling it to maintain its position on reinsurance programmes and likely in some cases to benefit from its stature as a key market.

“Our position as a preferred partner to many reinsurance clients has meant that in 2014 we have been able to retain and grow our business in areas where technical pricing has remained adequate. While many insurers are retaining more risk, resulting in reduced demand, they are also directing more of their programmes towards strategic partners such as Amlin,” commented Philipps.

Amlin, like the majority of other insurance and reinsurance businesses, has been expanding or shifting focus into other areas of reinsurance, to allow it to avoid the highest levels of competition and pressure from the capital markets.

Philipps said; “Our reorganisation provides further scope to offer a wider range of products to clients for whom we have historically provided only catastrophe reinsurance. This increases our longer term growth potential. As well as providing greater balance within Amlin’s overall reinsurance portfolio, the different risk profile of non-catastrophe reinsurance makes it less vulnerable to direct competition from the capital markets, as demonstrated by the greater stability of rating in these areas of the market.”

Philipps noted the development and accelerated growth of the ILS space, taking an enlarged share of the reinsurance market from traditional players. He also noted ILS capital’s ongoing expansion into new lines of business and said that the investors behind this growth are expected to remain in the market.

“We believe that, having entered the market, most of these investors will be there for the long term, continuing to provide an alternative source of reinsurance capital even when interest rates rise,” Philipps said.

However, having an increased stake in a successful ILS investment manager enables Amlin to increasingly put third-party capital to work alongside its own, allowing it to realise the benefits of lower cost and more efficient ILS capacity.

Philipps explained how the relationship with, and larger stake in, Leadenhall Capital Partners helps Amlin; “Some of this capital is competing with Amlin and other traditional reinsurers. Yet we believe that the combination of Amlin’s recognised franchise and our ILS fund manager, Leadenhall Capital Partners (LCP), means we are better placed than many of our competitors to continue to succeed in the face of continued expansion of ILS capacity.”

Amlin reported that its catastrophe premiums written were largely stable in 2014, in fact slightly up, and it’s likely that the Leadenhall relationship is a key contributing factor to this success at a time when others have pulled back dramatically. However Philipps did note that despite this Amlin has reduced its risk appetite in catastrophe due to the lower pricing.

Amlin is utilising its stake in Leadenhall wisely it seems, leveraging third-party capital to help to differentiate its offering from its competitors. At the same time the relationship works both ways, with Amlin helping Leadenhall to access reinsurance transactions that may otherwise not have been available to it.

“Synergies between Amlin and LCP have enabled us to expand our reinsurance client offering in a way which differentiates Amlin from most of our competitors. At the same time Amlin provides LCP with access to transactions that are not available to other ILS providers. This has enhanced their business proposition and ability to attract new investments,” Philipps explained.

Leadenhall has been steadily growing its third-party assets under management as well, although at a slower rate in 2014 as is typical of most ILS managers, being cautious about taking on too much capital which might be more difficult to deploy at attractive rates.

By the 31st December 2014 Leadenhall Capital Partner’s assets under management reached $1.88 billion, up from $1.592 billion at the end of 2013.

Given the expanded stake in the ILS manager, Amlin’s preliminary results now contain a little more information on activities at Leadenhall Capital Partners. Since Amlin established control in the partnership in October up to the end of December 2014 Amlin said that Leadenhall has earned $2.4m in management and performance fees.

Amlin also revealed that Leadenhall has investments in both of its outstanding catastrophe bonds up to the end of 2014, with $5.5m invested in Tramline Re Ltd. (Series 2011-1) (now matured) and $1m invested in the bonds issued by Tramline Re II Ltd, so either Tramline Re II Ltd. (Series 2013-1) or Tramline Re II Ltd. (Series 2014-1).

Amlin also revealed some of the profits made from fronting transactions that the firm has entered into with ILS fronting and transformation specialist reinsurance vehicle Horseshoe Re Limited. Both Amlin’s Lloyd’s Syndicate 2001 and Amlin AG the Zurich reinsurance entity have participated in fronting arrangements which have been effected to enable Leadenhall funds to invest in specific private contracts.

The report released today explains:

Syndicate 2001 and Amlin AG (through its branches in Zurich and Bermuda) participate in fronting arrangements whereby they write inwards reinsurance contracts which are 100% reinsured by Horseshoe Re Limited on behalf of its segregated accounts. Funds managed by LCP have invested within these segregated accounts. During the year Syndicate 2001 and Amlin AG wrote £25.1 million (2013: £15.1 million) of gross premium and received £1.7 million (2013: £0.6 million) of commission through this arrangement. At 31 December 2014, £10.2 million (2013: £5.5 million) was net receivable from Horseshoe Re, of which £4.8 million (2013: £0.2 million) was reinsurance receivables on paid and outstanding claims, £13.0 million (2013: £6.0 million) was reinsurers’ share of insurance liabilities and £7.6 million (2013: £0.7 million) was reinsurance payables.

These privately transacted reinsurance and ILS deals show another way that both Amlin and Leadenhall benefit from the relationship. As transactions that Leadenhall looks to participate in and collateralise will sometimes require a fronting agreement with a rated reinsurance vehicle. Amlin is perfectly placed to assist in those cases as a fronting provider.

Amlin AG also holds a stake in funds managed by Leadenhall Capital Partners, demonstrating Amlin’s aligned interest with third-party investors in the funds. These investments totaled $63.7m at the end of December 2014, up slightly from $62.2m at the end of 2013.

Amlin continues to place a considerable focus on the synergies that it derives from the controlling stake and relationship with Leadenhall Capital Partners. As ILS continues to grow Leadenhall will provide a valuable source of efficient capital for Amlin to leverage alongside its own.

By leveraging that source of third-party reinsurance capital intelligently Amlin can use ILS capital to help it maintain a leading position in reinsurance markets most affected by competition, while Amlin’s strong position in re/insurance can help Leadenhall to access business it otherwise could not. A foot in both camps sounds like the best of both worlds for both parties in this relationship.