Fitch Ratings has upgraded Amlin Europe N.V.’s (AE) Insurer Financial Strength (IFS) rating to ‘A+’. The Outlook is Stable. Fitch has also affirmed Amlin AG’s IFS rating at ‘A+’ and Amlin plc’s Long-term Issuer Default Rating (IDR) at ‘A-‘. Amlin plc’s subordinated notes have been affirmed at ‘BBB-‘. The Outlooks on the IFS ratings and IDR are Stable.
KEY RATING DRIVERS
The upgrade of AE reflects the advanced stage of its integration into the Amlin Group, which has included further embedding of the group risk framework and adoption of group-wide underwriting standards. Under Fitch’s rating methodology, AE is viewed as core to the group. AE is a new entity formed in 2012 from the merger of Amlin France into Amlin Corporate Insurance (ACI).
The upgrade also reflects the marked improvement in AE’s underwriting performance, with a FY12 combined ratio of 98% (FY11: 113%). The improved result is largely due to a significant re-underwriting of the marine portfolio, which was concluded in 2012. Fitch expects that AE will maintain a sub-100% combined ratio through 2013, as the benefits of the re-underwriting continue to feed through into the results. The re-underwriting process led to a decrease in AE’s gross written premiums (GWP) of 13.5% to EUR587.2m at end 2012 (end-2011: EUR678.5m) and was assisted by Amlin London underwriters.
In 2012, Amlin plc reported an improved combined ratio of 88.8% (end-2011: 107.6%), which was aided by a reduced burden from catastrophic losses of 8pp (2011: 26pp). Amlin’s cross-cycle technical performance remains strong, reflected in a five-year average combined ratio of 86.5%. Excluding the effects of unrealised gains on the bond portfolio, 2012 investment income was in line with Fitch’s expectations. Fitch believes Amlin is potentially better placed than some peers to weather a protracted period of low investment returns, as the insurer has historically used this source of income to supplement, rather than drive profitability.
At end-2012, Amlin’s level of risk-adjusted capitalisation was commensurate with the current rating. The modest increase in shareholders’ funds (5% yoy) was offset by higher premium-risk charges due to a 3% increase in net written premiums. Although Amlin’s risk-adjusted capitalisation is lower than that of most of its peers, it remains supportive of the rating. Fitch expects risk-adjusted capitalisation to improve over the next 12-24 months, supported by retained earnings. The agency expects that the disciplined approach to underwriting will be maintained, resulting in the generation of profitable earnings through the underwriting cycle.
RATING SENSITIVITIES
An upgrade of Amlin’s ratings is unlikely in the near to medium term, given Amlin’s operating profile. However, over the long term, successful and meaningful expansion into new markets, with maintenance of leading positions in existing markets, is the most likely upgrade trigger. In addition, Fitch’s measure of risk-adjusted capitalisation and the insurer’s earnings profile would need to be commensurate with a higher rating.
A downgrade may be triggered by a prolonged weakening of Fitch’s measure of risk-adjusted capitalisation, although the insurer’s ability to raise fresh capital if required following any further significant losses would be taken into account. A combined ratio consistently above 103% or fixed-charge coverage consistently below 5x could also lead to a downgrade.
Amlin is a specialist international non-life underwriting group focusing on a range of commercial and reinsurance business classes, with 2012 GWP of GBP2.4bn (2011: GBP2.3bn). The group is organised as a small number of underwriting businesses: Syndicate 2001 represents Amlin’s Lloyd’s operation, writing more than 30 re-insurance classes through four main business units; Amlin AG contains Amlin Bermuda, an international reinsurer, and Amlin Re Europe, established in 2010 to write non-life treaty reinsurance in Continental Europe; Amlin Europe N.V., writes marine, commercial property and liability insurance in the Benelux region and France. Amlin plc is the ultimate UK-domiciled holding company of Amlin Group.
The rating actions are as follows:
Amlin AG: IFS affirmed at ‘A+’; Outlook Stable
Amlin Europe N.V.: IFS upgraded to ‘A+’; Outlook Stable
Amlin plc: Long-term IDR affirmed at ‘A-‘; Outlook Stable
Amlin plc subordinated debt affirmed at ‘BBB-‘
