Amlin ‘bloodied…but unbowed’ but must sort Benelux business-analyst

Eamon Flanagan, Equity Analyst at Shore Capital in Liverpool, pointed out this week that Amlin has taken ‘quite a hammering’ from the stock market over the past month since it published a disappointing trading update on August 2.

The group’s shares have underperformed the FTSE All-Share by about 16% since the trading update which leaves the stock trading close to its historic lows, in 2009, of about 20%, something Mr Flanagan described as a ‘massive overreaction’.

“In our view part of this de-rating is justified, with the ongoing underperformance at ACI being particularly galling and the need to boost UK reserves disappointing. However, these ‘disappointments’ amount to just over £50m compared to the [roughly] £250m that has been wiped from the market capitalisation, on a relative basis…a massive overreaction, in our view,” read the statement from Shore.

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Amlin’s foray into the continental European market through the acquisition of the Fortis Corporate Insurance (FCI) business from the Dutch government in 2009 for €350m was welcomed with open arms by brokers and insurance managers in the Benelux.

Local insurance buyers and brokers were relieved to see the former local business insurance champion fall into safe hands after its parent group ran into credit crisis-related problems and the fit with Amlin’s already growing French business appeared sensible.

Amlin Corporate Insurance (ACI) wrote some €763m in premiums in 2008 of which 63% was derived from the Netherlands, 36% from Belgium and only 1% from France which was subsequently transferred to Amlin France, said Amlin CEO Charles Phillips at the time of the acquisition.

The ACI business managed a combined ratio of 96% in 2009 but it was recognised that the business needed to be cleaned out somewhat after a tricky period, especially in its marine business.

Amlin swiftly announced that it would commence a re-underwriting process, migrate ACI’s portfolio to its core underwriting system, adopt Amlin’s well-regarded risk management standards and a number of profit-focused initiatives and exploit cross-selling initiatives to help raise the margin of the business.

Part of the result of the portfolio pruning was to produce a 30% reduction in business underwritten at ACI in the first half of this year compared with last year, according to Shore Capital’s numbers.

But seemingly the re-underwriting did not come fast enough as ACI suffered a spate of large claims that reached €51m in the first half of this year against €21m in the first half of last year.

This combination, plus reduced reserve releases (almost half last year), helped deliver a 119% combined ratio so far this year against 100% for the first half of last year.

This was not the whole story of course as Amlin, along with all other international insurers and reinsurers, was hit hard by the global catastrophe losses in the first quarter in particular.

Amlin suffered total cat losses in the first half of this year of £314m against £127m for the same period last year. This included the New Zealand earthquake at a cost of $305m, the Japanese earthquake at a cost of $156m, US tornadoes at $41m and Australian floods at $39m.

The group combined ratio was therefore shoved up to 121% from 88% with the cat losses accounting for 34 percentage points against 15 percentage points for the same period last year. On top of this reserve releases were lower from each unit, not just ACI.

Mr Flanagan said that the stock market ‘remains focused on the negatives’ but he believes it is worth highlighting the positives for Amlin and reiterated his recommendation to buy the stock.

The analyst also pointed out strong premium growth when offset against the 30% reduction at ACI. The overall number was plus 2%, with 2% in Lloyd’s, 9% in the UK, 200% in France and 14% in Bermuda.

The first half 2011 premiums included £79m from the recently established Amlin Re Europe operation and at Lloyd’s, reinsurance accounted for 48% of the total enabling it and Amlin Bermuda to take advantage of an improving rating environment following the first half cats.

Mr Flanagan pointed out that property & casualty lines were ‘broadly stable’ in terms of rates and premiums, although rates in the property side are expected to harden as the year progresses.

“The other area of growth for Amlin within Lloyd’s was marine, reflecting the benefit of new underwriters and stronger rates,” stated the analyst.

To summarise Mr Flanagan said: “In essence, we can ‘live with’ the H1 2011 cat losses…given Amlin’s reinsurance focus, it is the ‘nature of the beast’.

“However, the key to management regaining the stock’s premium rating in the sector is ACI…the performance of this really needs sorting, something we believe that the team is focused on,” he said.