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LONDON (Alliance News) - Specialist insurer Amlin PLC Monday said it is well positioned for a more challenging environment as it warned of tough times ahead due to a combination of increasing pricing competition and the persistence of historically low interest rates.
Insurers such as Amlin have been operating against the backdrop of a changing marketplace, with low interest rates and benign claims resulting in a flood of capital from the capital markets as investors hunt for yield, while lower catastrophe losses for traditional participants has also led to pressure on premium rates.
The cautious outlook was revealed as Amlin said that pretax profit fell by 21% to GBP258.7 million in 2014, hit by lower reserve releases and a reduced investment return. While return on equity was close to Amlin's cross cycle target of 15%, at 14.1%, it was lower than the 19.8% reported for 2013.
Despite the fall in pretax profit, Amlin said it will increase its ordinary dividend for the year by 3.8% to 27.0 pence per share, while also moving to declare a special dividend of 15.0 pence per share, citing confidence in its capital position.
Amlin Chief Executive Charles Philipps said he expects the Lloyd's of London insurer to continue to deliver "attractive" returns on equity. While Philipps is confident that Amlin is better able to grow in areas that offer more favourable returns, he also was clear that the insurer is ready to take action in less attractive parts of the market.
"Where necessary, we will temper our growth ambitions and, in some areas, will even retract if pricing falls below levels we consider to be technically sound. With the lower pricing in catastrophe reinsurance we have reduced our catastrophe risk appetite," Philipps said.
Speaking to reporters in a conference call, Philipps backed the case for Amlin's future as an independent company, amid increasing consolidation as reinsurers look for economies of scale to help combat pressure on premiums. Lloyd's of London insurers, including Amlin, Lancashire Holdings PLC and Novae Group PLC, have been touted as acquisition targets due to their access to the venerable insurance market.
His comments follow a takeover offer for Brit PLC by Canada's Fairfax Financial Holdings Ltd, which made it the second major London-listed insurer to attract interest from North America in the wake of XL Group PLC's GBP2.8 billion deal to acquire Catlin Group Ltd in January.
"What's been happening is driven by people's desire for scale and to achieve some cost synergies. This is not new," Philipps told reporters. "I have been saying consistently for the last three years that scale is important. It has been an important part of our strategy."
Philipps also said that Amlin's reorganisation after a strategic review in 2013 into three strategic business units - comprised of reinsurance, marine and aviation, property and casualty - positions the group well for today's insurance market. Leadenhall, the insurance-linked securities investment manager in which Amlin has a 75% stake, also has been focused on increasing synergies with Amlin's existing reinsurance business.
"One of the big benefits of combining our reinsurance businesses is we've been able to broaden our product base with our clients, which gives us more growth opportunities subject to pricing being satisfactory. We believe we are a strong business. We believe we have been addressing issues which are driving this M&A activity. We don't see an urgent need to participate in such activity," Philipps said.
"We think we've got a very bright future as an independent company," the CEO added.
Amlin shares were down 4.3% at 506.50 pence late morning Monday.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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