Amlin's (APLCF) CEO Charles Philipps on Q2 2014 Results - Earnings Call Transcript

Aug.18.14 | About: Amlin plc. (APLCF)

Amlin plc. (OTC:APLCF) Q2 2014 Earnings Conference Call August 18, 2014 5:00 AM ET

Executives

Charles Philipps - Chief Executive

Richard Hextall - Group Finance & Operations Director

Simon Beale - Group Chief Underwriting Officer

Analysts

Andrew Ritchie - Autonomous

Ben Cohen - Canaccord Genuity

Joanna Parsons - Westhouse Securities

Maciej Wasilewicz - Morgan Stanley

Kamran Hossain – RBC

Anthony Da Costa - Peel Hunt

Charles Philipps

Okay. I think we are ready to start. Welcome everybody. Welcome to those who have dialled in as well. We’ve had the fire alarm practice bell, all right, however I do have to tell you that should the fire alarm really go then please remain seated and wait until one of the fire marshals come and find us. All right.

Welcome to Amlin’s interim results presentation. We’re going to follow the normal format this morning. I am going to provide a very brief introduction. Richard will walk you through the financial figures. Simon will comment on the current trading environment and I will wrap up.

Before we do that, I have to give you the normal health warning. But having done that, let’s move swiftly on.

We’re pleased to report a good set of results with a pre-tax Profit of £148.5 million. This would have been higher than half-one 2013 had it not been for the foreign exchange swing of £24.6 million on non-monetary assets, which as you know, will unwind over time.

We’ve successfully grown GWP by 8.2% at constant rate of exchange although, as Richard will explain, some of this is from multiyear contracts. With the changes made to our outwards reinsurance programs which we outlined at the time of our 2013 prelims, that has been a £60 million savings in half-one reinsurance premiums ceded. As you may recall, the changes increased mean expected profit while only very modestly increasing tail risk.

The combined ratio was marginally higher than in half-one 2013 as a result of larger catastrophe losses and the FX swing on monetary assets – non-monetary assets. However despite the more challenging environment, the underlying attritional claims ratio improved 3 points to 53%, reflecting the improving trends in a number of areas, which again we outlined at the time of our prelims, Amlin Europe in particular did well.

The investment return of 1.3% was good in the market circumstances and return on equity was 16.2% on an annualized basis, still ahead of our cross-cycle target. We’ve increased the interim dividend by 3.9%, recognizing the tendency for heightened wind activity in the second half and we will review the final dividend and any other active capital management with the full-year results. We do believe that the outlook for the full year is positive with the actions we've taken on outwards reinsurance and improving underlying performance in a number of areas.

Also, I am pleased to say that following our review of strategy last year, there is good momentum building which can only improve our longer-term potential. As I will outline later on we’re in the midst of reorganizing the group, which will increase our growth potential in the long term, better leverage our expertise and make us more efficient and scalable.

On that note, I hand over to Richard.

Richard Hextall

Okay. Thanks, Charlie. Charlie said overall solid set of numbers. At constant rate of exchange, good growth in premium income with efficiency in our reinsurance processing adding momentum at the net level.

Before the impact of FX, profit from underwriting results year on year despite increased cat activity than in 2013. The 2014 FX losses on underwriting of £12 million are largely attributable to non-monetary exchange differences and hence should reverse its premium earned through.

Investment return was a little down year on year but an acceptable return given risk appetite in the options available and a solid profit before tax, with an efficient tax rate delivering above target return on equity for the period.

Forex translation differences also had an effect due to conversion of Amlin AG which is a dollar company and with the exchange rates at the peak of 1.71 at the end of June, it was unfortunate timing.

We turn next to the underwriting, run you through the headlines. Gross written income was up 2.8% the six months or 8.2% at constant rates of exchange. Growth includes £40 million from writing multi-year cat reinsurance contracts. This gives us small boost of written premium but clearly not earned premium at this stage. Overall income growth was a good achievement despite a 3.3% fall in rates and accounting differences slowing premium recognition in Amlin Europe through the treatment of Raets acquisition.

The average reinsurance improvements that we talked about the final results show through here with a £60 million fall in reinsurance expenditure at the stage and dropping the bottom of combined ratio was geared to 87%. The claims cat activity was up with large cats coming in at 48.9 million across the group versus 32.2 for last year. The large events incurred were hail storms in Europe and significant tornado activity in Nebraska. Expenses levelled after removing the impact of FX.

Next slide provides the breakdown of the claims ratio into its component parts. So you can see major cats increased on last year but were relatively modest. However they felt across the business rather than being focused on the core London and Bermuda cat camps as you will see. This was particularly true of the hail activity which gave Amlin Europe claims of £7 million and Amlin Re Europe claims of £16.2 million. At the smaller end, we returned more to historical patterns than in 2013. Main events of note to date is the UK floods at the start of the year, which added £10 million to our UK’s numbers.

So looking at divisions next, starting with Amlin London. Amlin London produced good results, particularly you can note that expense ratio here was increased by 5% through the non-monetary exchange losses. All other things being equal, that will unwind as the premium is earned and reinsurance income held up well, healthy growth was seen in P&C and continued solid foundation from marine underpinned the good return.

Like London, Bermuda’s business benefitted from a strong franchise with income holding steady and the combined ratio was excellent with modest cat activity.

Amlin UK next, income was lower following the transfer of FI international PI account to Amlin London where it’s now being under – as part of an overall PI account. The core commercial account continued to achieve rate increases but UK floods added 7% to the headline claims ratio. The effect of this will dissipate through the year and the business should make a better contribution in the second half.

Amlin Re Europe next, continued to attain growth particularly in non-cat lines. Overall income increased by 26% and the underlying claims ratio also improved to 66% from 68% in the period. The expense ratio improved from 28 to 25, however hail activity was severe for the business partly due to the fact that Paris was impacted through Russia, delivering claims from the motor accounts as well as the normal proxy cat claims.

Finally, Amlin Europe had an excellent first half with a combined ratio of 93%. With Raets accounted for as an Amlin [inaudible] business in these numbers with individual transactions book as bound rather books as binder as before, booked income is low at this stage but that effect will unwind through the year. Underlying that, marine was flat and growth of 7% was achieved in the core P&C business.

Next, reserving. Reserve releases were £40 million in the first half of the year, so a little down. The scale of the release was depressed by acceleration on 2010 New Zealand earthquake claims. Claims advices continued to move adversely and so we’ve loaded the reserves to provide a more effective buffer to cater the future developments. In addition, we had some deterioration on Costa Concordia as market loss estimates increased.

Looking forward, the balance sheet position, as you can see, remains consistent and robust and we would expect to see continued releases.

Next, investments. Steady performance across the piece. Good performance on the bond portfolio is offset by acceptable but relatively lower equity returns. It remains a difficult environment requiring a flexible approach to asset allocation. Equity allocations have increased over last year but we have a hedge program to control the downtime risk.

Finally, capital. Net tangible assets showed little movements in the first half mainly because the 2013 final dividends which was paid and booked in the period. In addition, translation differences on the dollar balance sheet of Amlin AG reduced net assets by £49 million. However improved free cash flow from dividend payments coming through from subsidiaries allowed repayment of borrowings and the dollar weakness also reduced our capital requirements. The two together gave a boost to capital strengths. Simon?

Simon Beale

Okay, thank you, Richard. Good morning everyone. For the first half we have had an overall rate decrease of 3.3% which is the culmination of an increasingly competitive trading environment across a number of our lines of business. However we are confident that positive margins remain available as a result of Amlin’s continued thorough underwriting selection process and its respected brand.

Our renewal retention ratio remains high at 86% but in addition, we continue to find new opportunities to grow and enhance our portfolio. The most substantial reductions are in our catastrophe reinsurance portfolio where a 10.3% decrease overall has been reported. It is here that our brand, expertise and leadership have been as before, have enabled growth of 6.9% despite the increasing pressure on margins. As a leading market, we were able to dictate our position on programs, received preferential signings, achieved increased access to business often not available in the open market and on some business achieved better than market pricing. Our highly respected traditional reinsurance offering is being yet further strengthened through increased collaboration with Leadenhall Capital.

It is important to recognize that we have a growing portfolio of other reinsurance lines which have not come under such extreme pressure as catastrophe reinsurance. For example, Amlin Re Europe continues to develop positively with £30 million of its £35 million of new income in the first half being non-cat reinsurance and in this portfolio an average rate renewal rise of 0.5% has been achieved.

Our insurance lines have seen mixed market conditions. The UK fleet motor renewal rates continued to rise by 6.5% in the first six months. Most other classes have been flat to modest decreasing. Despite our London property and casualty rates reporting in average rate decrease of 1.7%, we have increased first half income by £44 million with good business adequately rated.

Within our domestic P&C book, Amlin Europe’s property and casualty business has remained competitive but broadly stable. Marine and aviation continues to see decreases in rating average half year reduction of 3.7% with particular pressure on the offshore energy class which has seen an average rate decrease of 10.3%. After $1 billion of aviation losses market sentiment would certainly indicate that we can increase airline rates in the autumn’s renewal season, where we may also see some hardening within the war account.

As outlined in March, we have reduced our first half with reinsurance expenditure to 13.4% of gross written premium and as a result – and that’s a result of the closure of the Special Purpose Syndicate 6106, improvement in structure in terms of our – in terms for our outwards reinsurance [indiscernible] and an increased retention largely by way of internalization of the less catastrophe exposed programs. As a result of the diversified nature of many of our insurance classes, these changes have had the effect of increasing mean expected profitability whilst only modestly increasing its extreme tail risks.

The next slide shows the summary of the first half rating environment. With each bubble representing our major classes and the size of that bubble being relative to the group’s total GWP. As can be seen, the major of classes are in the – of low single digit reductions with UK fleet being the positive outlier and catastrophe reinsurance the negative. However as seen in our rating schedule effective of cat – arise approximately 85% of peak pricing with good margins remaining.

So whilst the first half overall has seen increasing competition, we are optimistic about our portfolio’s performance. As we have written 75% of our income, we have a high retention ratio rate, positive margins in most lines, selective opportunities of growth and the reinsurance savings which goes some way to offset the loss rate.

So with regard to the remaining part of 2014 and the indications of 2015, it would certainly appear that the catastrophe reinsurance rates will continue to weaken. However it should be noted that our underwriters reported signs of a flow being reached in the July renewal season. However that may play out, we are confident that Amlin can retain its prominence in this market largely as a result of its formidable position and reputation but also we will improve our retrocessional position as market conditions allow.

In other classes, we are still cautiously confident. We have some good margins particularly in marine. We have some areas of economic improvements such as offshore energy construction and target which will present opportunities for further growth. We benefitted from recent investments whether in team such as international casualty or businesses such as Robs [ph] marine and we expect these investments to continue to provide some opportunities for growth.

Amlin also benefits from a great diversity of class, geography and distribution which present a multitude of opportunities to exploit as appropriate. In addition, we have seen some significant improvements in Amlin Europe’s performance and whilst Amlin Re Europe and the UK’s first half performance largely due to catastrophe events may be disappointing, the underlying performance gives us much confidence that they will be able to provide support to the bottom line.

We are also excited by the prospects of the organizational changes being implemented which Charles will speak more of in a moment, and their anticipated beneficial impact on the underwriting and the underwriting strategies. Above all, however, in these certain market conditions, we will continue our exacting focus upon underwriting discipline. We are not topline driven. We aim for a 15% ROE and we will continue to protect the bottom line performance.

It may be a tougher underwriting environment but for many reasons, Amlin is in a preferred position to out-perform. I will now pass back to Charles.

Charles Philipps

Thank you, Simon. A bit old strategy. As you know, we have actually expanded the group geographically in recent years in both insurance and reinsurance, building diversity and access to business. The investment is paying off with underlying trends going the right way, also with possible further weakening in the London market and reinsurance pricing, this strategy will become all the more important as much of the business conducted in the areas we’ve expanded into are not subject to the same downward rate pressure as in the London market.

This year we have opened an office in Hamburg and we are opening in Dubai and Miami. Miami has become a significant hub for Latin American reinsurance business and will give us access to business from that region which does not typically come to London. While these developments will not move the needle in the short term, they will further enhance our access to business and growth potential in the medium term.

As I said earlier, we are in the midst of organizing the group and this is designed to enable increased client intimacy. I will come back to this in a moment. And I am particularly pleased with the synergies we are seeing between Leadenhall and our traditional reinsurance business. This has firmly put us in the upper tier of reinsurers making us more relevant to clients who treat us as a long term valued partner. As Simon said, this is really benefitting the business in this more competitive environment enabling us to hold on to business better, increase lines and sometimes at better pricing than the weaker competition can achieve. We are near to concluding our agreement in principle with our partners in Leadenhall to take our holding up to 75% from 40%.

What does the reorganization involve and mean? This is really a logical extension of the practice boards which we established in 2012 having seen the benefits we were realizing from them. So rather than driving and managing the group by legal entity, i.e. Syndicate 2001 Amlin AG and Amlin Europe, we are switching on the first of September to managing them by major market or product area. As you can see here, reinsurance, margin and aviation and P&C. These three strategic business units will be focused on driving that strategies and on marketing and underwriting. And they will be supported by centrally managed functions, including claims.

I am very pleased by the response of the people and businesses who believe that this is both the right thing to do and it will materially improve our future potential. In 2015, we will be moving to report segmental numbers along strategic business unit lines instead of the way we do today but we will give you some comparisons for 2014 to benchmark against. The benefits include increasing our growth potential, better leveraging our expertise, and will result in meaningful efficiency gains. We believe the power of going to market in this way will be significant, the weight of expertise working together in each of the strategic business units is impressive and so much more so when joined up and working together rather than under different management structures. It is also highly relevant to exporting our know-how and capabilities to the emerging markets which we are doing more actively AKA Miami and Dubai.

Increased efficiency will be realized in outwards reinsurance purchasing, risk modelling, investments in systems and claims processing and adjusting. While the day one, i.e. the September 1, expense savings is only modest, the transformation which this enables can only reduce our expense ratio over the medium term.

Moving on to the outlook. As I said at the beginning, we believe that the outlook for the 2014 full year is promising and beyond that, we expect to be able to navigate through tougher markets environment and continue to deliver respectable returns for shareholders. The overall rate reduction in the year to date is only 3.3%, yet catastrophe reinsurance margins have reduced but we believe there are still margin there and going into 2015, we believe that there will be further opportunities to offset the lower margins with even more attractive outwards reinsurance. There are still good margins in many of our marine and P&C classes and we are looking at further internalizing some of our programs protecting these classes which could result in further savings.

The underlying trends in Amlin UK, Amlin Re Europe and Amlin Europe continue to be positive as demonstrated by their improving underlying claims ratios. We do expect, however, investment returns to remain muted for 2015. However in the medium term we expect to achieve meaningful benefits from our reorg which will result in a lower expense ratio.

So in summary, a good set of half-one results, above our target ROE, even with the adverse effect of FX, a more competitive environment but our strong positions in the market are of real benefit. There is a shift from the weaker class to the stronger ones particularly in reinsurance and that benefits Amlin.

Our product and geographical diversity is critical and will provide capital allocation options as the competitive environment evolves. Our reorg is exciting and will mean that we further strengthen our positions with brokers and clients and our capital strength is growing. So all in all, while the competitive environment is not what it was a couple of years ago, we believe that we are in excellent shape with an even better long term potential.

Thank you very much.

We’re open for questions now. And if people asking questions could please state their name and from whence they come, that will be helpful. Thank you very much.

Question-and-Answer Session

Andrew Ritchie - Autonomous

It’s Andrew Ritchie from Autonomous. Just a general question to open with, the attritional loss ratio improved healthily year on year obviously driven by Europe and UK I think underlying. I mean how do you think about that going forward? Clearly do we expect more margin pressure on the reinsurance lines, cat reinsurance and it looks from the outset at least that underlying UK and Europe are running maybe above target profitability already, if I strip out the impact of the first half weather. So just give us a sense of the balanced positive, negatives for the attritional loss ratio from this point is the first question. The second question, on the capital management, there is lots of moving parts on the assessed capital. Clearly FX reduced the assessed capital in the first half. How do I think about increased internalization as affecting required capital in the second half – I don’t think there is a model update because you are retaining more – that requires more funds at Lloyd’s 2001, because I notice that the RDSs or PMLs have edged up slightly, at least from the northeast windstorm, so just give a sense if the assessed capital jumped up again at year end? Thanks.

Richard Hextall

The last one, Andrew, really is back to diversification credit in many ways. So the internalization that Simon was taking about and I think we’ve referenced this at the final results is on the non-cat lines and clearly if you’re writing profitable business and that is diversifying against the core capital need which is driven by cat, that’s helpful to the margin to improve your capital efficiency. So I don’t think internalizing necessarily should push up the capital ratios, and actually last year we placed a more effective retro – and I know we got the northeast and the RDS in the pack. So I think if you reference back to the finals, quite the number of the RDSs were actually dropping because of the better retentions that we got on lots of the zone. So it’s probably on some of the peaky zones where the market is full of risk that you are struggling a bit more to get that impact through. But I guess we are managing and aggregate capital part when we are thinking about capital not single RDSs and I think it’s very difficult to get that picture across because aggregates cast their cat numbers, meaning what does that mean, but that’s what does drive capital and that is the full gamut of the portfolio that hits capital needs. And as you roll that forward, it clearly depends on profitability and what’s available out there. The internalization should help as long as the core net profit is good and it’s not clashing with cat and then the equation on capital depends on how we manage that falling potential rates with retro falling and better – better purchasing capabilities, but you get back to what Simon was saying on underwriting, got a very familiar, and understand how risk based capital works in a declining market, if you can’t find extra net income against the risk, then it’s inefficient for capital and we don’t want to get caught into that capital trend, if the business gets twitchy.

Attritional loss ratios, I mean it depends on your mix, it depends on opportunities for business. I mean we are not sitting here at the moment getting terribly uncomfortable about that core attritional loss ratio, partly because on the reinsurance side, as Simon articulated, that the retro piece was helpful in terms of that core mean expected profitability. So we actually placed the same retro program at a bit lower retentions but followed the exposures of the SPS into that retro program. So all achieved premiums, so yes we are giving cuts on the inwards, but the outwards equation worked very well for this year and again it depends very much as the rest of capital have those two pull in play but I think we’ve got a comfortable position as a foundation at the source of attritional loss ratios we recommend.

Andrew Ritchie - Autonomous

There was nothing exceptional about the attritional performance of Europe?

Richard Hextall

Not really. I mean the exception – if there is one it’s definitely on the reserve release side. So they had strong reserve release in the quarter, some of that frankly is just simply transferring the reserve margins from the developed years to the new underwriting unit. And there was a little in in excess of that, I can’t precisely remember the numbers but it was small tens of millions. It’s performing much better. The development curves were steady, that’s stabilized in terms of volatility which may well have been us putting volatility into the curve as we improve our claims.

Andrew Ritchie - Autonomous

I guess as you’re more comfortable you can take down the initial loss ratios a bit in Europe, so that’s what we’re seeing I guess, is it?

Richard Hextall

Yeah, and they are actuarially driven in terms of the way that those reserves are set. So we are not sort of anticipating heavily what we are doing in the underwriting, it’s just quite a big renewal book coming through and the development curves are relatively stable. There is a much less volatile class of business or series of class of businesses – you will get in some of the London areas and so much more predictable.

Charles Philipps

If anything, the reserving strength of Europe has been maintained, if anything it’s a tiny bit stronger than it was since it sort of came out.

Simon Beale

Just one other thing on the attrition bit, I mean yeah, one of the things our underwriters know very very well is that it’s the under-priced attrition which really does cause the trouble in your accounts. And so that’s what they focus on day in, day out is making sure that the pricing is correct, to couple that attritional position.

Ben Cohen - Canaccord Genuity

Thanks very much. Ben Cohen at Canaccord. I just had a few questions on sort of your operational plans in a number of areas. Firstly, could you just say something about Germany, about how you expect to grow in that market and what your targets are? Secondly, on the Amlin Re Europe, sort of where you’re getting that growth from and what I guess competitors are showing as increasingly tough market. And then thirdly, the team that you hired, I think, a couple years ago in the US to start to do a little bit more onshore in the US, how is that going and does that rating allow you to look at more of those things now?

Charles Philipps

Okay. Simon, do you want to try Germany?

Simon Beale

So Germany, first of all, is not a hugely ambitious target certainly for the first few years. We’re just building a team up trying to ensure that we get some profitable underwriting on the books. So it’s really not going to be as substantial part of the business plan for some time. Just looking at the ARE growth, that’s largely be coming about as I said £30 million of the £35 million of new business as being brought on to those books is non-cat. So it’s the more of the quota shares of – property quota shares or motor or construction upper lines, where they are writing for clients for significant, about 300 European clients and they’re building out that portfolio slowly and surely. So it’s just sort of – and it’s a much wider book of reinsurance than we actually have traditionally in the London and Bermuda book which is dominated by catastrophe. This is very much less catastrophe oriented.

As far as the US casualty portfolio, the market conditions just have not been helpful to those guys too. So it’s been a very, very slow start but we are happy with that. Yet we are absolutely right from the work-go, they were very supportive of the fact that they would only underwrite business when they saw the margins available. I would say that there is a much greater opportunity for those guys under the new organizational structure within the reinsurance portfolio. They do know a lot of the US classes exceedingly well from a casualty point of view. And for us then to be able to put them together with our cat underwriters and actually offer a combined service and different products to clients, I think they’re going to have a much more involvement in the reinsurance portfolio going forward –

Charles Philipps

Europe a bit as well. I mean recognize, I mean it started in 2010, they established really good client base there. Some of what they’re doing is growing with those clients as they have earned – so to speak, all right. Others is in Germany for example, they are making some good inroads, it takes time in Germany we believe. So you have to beat through the door at least two or three times before you will start to see the business. So they’re making some good progress. As Simon said, on a lot of that business actually half a point rate increase, then reference the better claims and combined ratio underlined in that business head in the right direction.

Operator

(Operator Instructions)

Joanna Parsons - Westhouse Securities

Thank you. Joanna Parsons from Westhouse. First question, please. You mentioned about perhaps seeing a flow on the reinsurance pricing, perhaps you could comment a little bit more about that. Do you mean a flow year on year or January, great to see further reductions? Following on from that, you mentioned opening an office in Miami. One or two people would say they have already done that and been a bit ahead of you. Could you say why you think it’s now a good thing to do? And then finally on the investment in the business, in the claim side and bringing down the expenses, perhaps I missed that but did you say that the expense ratio wouldn’t actually go up? There would be no sort of negative impact short term on the expense ratio, perhaps you could give us a little bit more color about that and just generally what it means to the claims handling service?

Charles Philipps

Right. Flow on – first, Simon.

Simon Beale

Yeah, [indiscernible] would it be like in 2015, one month 2015 but as we’ve seen through this year, there has been an increasing decline in rate month from month. But in July some of the renewals we saw -- actually there was some limited amount of market available for them. So what all I am saying is that whilst there has been sort of this continual decrease for some period, it just looked like it might be getting to the point that people weren’t being able to accept it anymore. And we always have felt that there will be a floor at some point because there is much better use of models, there is much better management within the cat underwriting markets, and we believe that there will be a floor but occasionally you think is that ready, when you see some of the reductions that have happened, you just sort of begin to doubt that. But all I am saying is that we did see signs of that. But on the other hand that could just be because a lot of the reinsurers are reasonable comfortable with the income levels they have got, come January it’s a whole new world path and we will see but so that was what was trying to signal.

Charles Philipps

On Miami, I am going to comment on – yes, I know one or two others who have already gone there. Our view – we look at whether we should be on the ground in various countries in Latin America. For now we’ve chosen to go to Miami. We are sending individual from London out there. He will be supported by or working with locally hired individuals where we are making some progress. And you’ve got to look at these sort of things as a long term – for their long term potential, with obviously good growth coming from Latin America economically.

In terms of the reorg, we don’t expect the expense ratio to go up in the short term. There are some – as I said some modest savings although there will be some cost associated with those savings but not massive this year. I think we have – until we are not going to sort of stage what we expect to save going forward because what this change in structure really does is gives us quite a lot of opportunity to transform certain parts of our operations. What we don’t want to do is announce those now and cause unrest and low morale. But it does give us some meaningful opportunities and we will be working on those and you will probably see the results of those over the next nine or so months. Some of them earlier.

In terms of claims service, what it doesn’t mean is that we are distancing ourselves from clients. What I said was we’re going to centrally manage these functions. So take for example, reinsurance, where we have a first class reputation for our claims service. We do in some other areas as well. What we want to do is get process efficiencies. We also want to get greater consistency for the service that we provide to clients, and draw some clarity [ph] between what we are doing which we evidently have in pockets of our business and our competitors. Does that answer your questions? Thank you, good.

Operator

(Operator Instructions)

Maciej Wasilewicz - Morgan Stanley

Hi, it’s Maciej from Morgan Stanley. Two questions if I can. The first is just on the dividend that you paid. I mean if I look at the underlying number that you’ve gotten, FX is quite unhelpful this year, very helpful last year. Investment returns were a bit boosted last year. The underlying PBT you could argue is better, attritional was flat and earnings are up. So I am just wondering why you – I guess you might be accused of being modest in your increase of that dividend. I am wondering why you went a little bit punchy with that message there. And the second question is just on the motor fleet market which is a very, very positive message in terms of rates. A very, very strong increase which is in stark contrast to perhaps what’s happening in the retail side of that business. What do you think happens from here? I mean do you think that you will continue to see rate of improvements there or do you think that we’ve now reached a nice profit margin that probably trades sideways from here?

Charles Philipps

I will comment quickly on the dividend and Richard might want to throw it up. It’s a modest increase. As normal we reserve ourselves to the full year when we can review it more. I mean we are, as you know, committed to a progressive dividend policy, that grows over time. And we think that’s a value to shareholders. But I wouldn’t draw any sort of conclusions that it’s too modest. Anything else you want to add to that?

Richard Hextall

As you said in the comments, we will get to the end of the year – we just need to look at the whole capital position, and whether you are sitting there looking at dividend capital return or investment, I think it’s more sensible to take that question, or series of questions together. And at this stage we are halfway through the year and it’s a reflection of what we have been doing through times, so it’s progressively increasing the dividend, we tend to be more modest at the interim stage. So it’s nothing more – than that to be answering those.

Simon Beale

Yeah, I mean we’ve seen, I think we’re probably about 35% cumulative increase, so the rates started increasing in about 2010, I think. So I think it’s difficult to know what the market will do. We are seeing the size of increase reducing. So we’d probably expect to be at the sort of towards the end of those levels of increase but I think there are still areas of people’s portfolios which just aren’t performing well enough and so therefore it’s one of the areas they’re particularly carving out and doing things with it, and we are able to take advantage to that.

Charles Philipps

I mean the other lines within Amlin UK have seen modest increases. If you follow previous cycles, they lagged behind fleet motor. And there is some prospect there in the fullness of time.

Kamran Hossain – RBC

Good morning. It’s Kamran Hossain from RBC. Just one question with a couple of follow-ups there. Just on the US regional reinsurance business, could you give us a discrete July kind of price decline or increase maybe? And also in the environment, in that business going forward, we’ve had a competitive large European competitors talking about entering this business, they say, it’s a highly attractive market which you clearly said. Could you just give a few comments on why you think you will be able to hold on to business there?

The US regional reinsurance, so the mutual comments you’ve got behind you at the moment.

Charles Philipps

Okay, that’s why.

Simon Beale

So the first part of the question was – no, around July. But as far as our position in that business, we are the number broker, underwriter for – at least two of the key brokers in London. And we are the number one market there for placing their US cat business. And that really is all around service – service in the claims side which as Charles said, you can see some comments sitting behind us. But it’s also a service from an underwriting point of view. And the brokers are measuring that markets in numerous ways and we have regular high level stewardship meetings with them where we see data from them, and we actually exchange results of questionnaires et cetera to try and understand what they are looking for from their markets and one of the things that they are continuously sort of monitoring now is the consistency of the market and the consistency of the offering, the pricing in particular. We are the number one lead market in London. We are quoting on this business all the time and one of the things that the brokers are talking about is that quite often markets will put a price up, the quoted price and then the order comes in at significantly lower than that quote, and those underwriters still grab hold of that despite the price is significantly below what they said they wanted. So that consistency is really, really difficult for the brokers to be able to explain to their clients. And so it’s those sort of things that we work really hard on. Our teams are working hard on with the brokers to try and make sure that we are giving them a consistent professional approach which they can then pass on to their clients.

Charles Philipps

I would say – I mean by its nature the regional accounts are lot of county-mutuals and state mutuals within that portfolio of business. They tend to be pretty conservative people. We’ve got deep-seated relationships over a long period of time. Leadenhall adds a bit more to what we can do for them as a group as a whole. And because it’s spread and it’s quite a lot of relationships, it’s a lot harder work to develop relationships like those than it is writing the cat for the very big multi-state companies which is where a lot of the market gets the crumps.

Kamran Hossain – RBC

[Question Inaudible]

Richard Hextall

As we know, there are number of larger insurers out there that don’t have the reputation like that for claims service. And if these guys are that massive, because this is cash flow and it’s very, very important that they share at those moments of difficulty. So the fact that you understand that and you deliver is what it’s about.

Anthony Da Costa - Peel Hunt

Good morning. It’s Anthony Da Costa from Peel Hunt. I have two questions if I may. The first is how does Amlin think about outwards reinsurance expenditure given the attractive rates? And the second question is you’ve increased extreme tail risks to increase mean expected profitability. How should we think about this – could you possibly even give us a range of numbers for profitability possibly? Thank you.

Charles Philipps

You want to deal with outwards –

Richard Hextall

So from point of view of an outwards RI, formulating a program, we know what sort of level of expenditure we’ve had spent, it does depend on what pricing you are getting on the inwards. And it also obviously depends on what price you can get on the outwards. And as a rule, we tend to buy more when more coverage, not necessarily more costs when the prices are weakening for our reinsurance programs. So as the reinsurance market weakens, we would expect to be able to buy more coverage, more effective coverage which has some help – gives us some help to offset some of the weakening on the inwards underwriting.

Charles Philipps

In terms of tail risks, what we said at the – with the prelims I believe was quite a material increase in the mean expected profitability. I think that we put a number on it.

Richard Hextall

£80 million savings was in – apply a loss ratio to that, and that gives you the savings. So you take 55, 60% loss ratio of expected then, you can see the savings that are reasonably material.

Charles Philipps

Okay. And the tail risk was increased very marginally, it was between – it was just over 1% I think. So what you are talking about there is one in two 50 year aggregate cat year and that sort of thing. It was modest. So economically it made a lot of sense.

Any other questions from here? We have one more from the front.

Andrew Ritchie - Autonomous

It’s Andrew Ritchie again from Autonomous. Richard, what's going on exactly with the debt, you repaid short-term borrowings but increased the bank facilities. Just tell us what -- I think you mentioned something that you were getting more dividends out of Europe or AG? And the facilities a temporary increase, or what's going on there? And secondly, did you say on reinsurance expenditure it will fall again in 2015, given the plans to internalize, or is that -- shouldn't we think that?

Charles Philipps

We are looking at greater internalization. So for lot of our insurance classes –

Andrew Ritchie - Autonomous

Right. Presumably you said apply a loss ratio; we should also take down a ceding commission on it as well?

Richard Hextall

We have replaced the SPS last time through which had a pretty big PC on it as well. So clearly that will drop away – in what we manage to do. It’s one of the things that you ignore when you are talking about just the straight numbers is about putting that coverage plus extra coverage into the same program. So how you value that – very, very difficult, unless you sit there and play with models. But it’s just intuitively the core mean center of distribution has just got a lot of how – on the facilities, you might have run it but we’ve got these sort of I think – they are full year now [indiscernible] full year remaining bank facilities, which we tend to use for working capital purposes. And to some degree it’s trying to deal with fungibility of capital because you’ve got Amlin AG that’s a Swiss company, legally that can only a dividend once a year. So you are trying to make sure that we are paying dividends, keep the flow coming through from the subsidiaries and then the way that we present to capital here then plays back into the group. But fungibility I think is an important for – in order to remember when we are looking at capital strength. All that happened in the period was that we paid the Swiss dividend through – we were able to repay the bank facilities that were there. Therefore, you get an uplift in that available working capital facility. We have though, if you remember, got subordinated debt within the capital structure. So we’ve got $50 million that flows to what’s called the call option at the end of November, we would intend to repay that, there is now one in March we would intend to repay that, and frankly we’re going to look at whole debt structure, debt to equity structure again because there is a bigger tranche coming through in 2015, let’s call those and we will look through the next year at market conditions, we will look out what economic there is a sensible thing to do out in the market there.

Andrew Ritchie - Autonomous

So you're saying -- you're not saying about refinancing, because you could refinance it before you call it, or are you saying you'll call it and then think about refinancing?

Richard Hextall

Exactly that, because part of the early tranche is too just small and when we first placed the sub-debt, it was partly experimental, we were trying to find out what the market was out, we had two private placements and about a year – 18 months later, we placed a large public debt issue and with the scale of the company, I’d rather go back to that and effectively refinance the bigger tranche and look at the scale of what that should be at that point in time, couple ways you just get poor economies of scale out of the whole lot.

Charles Philipps

Okay. Are there questions in there? No. Do we have any questions from the telephone lines? We don’t, apparently. All right. Last chance. Excellent.

Well thank you very much for coming. I hope you felt that informative. Obviously, we're around if anybody else wants to have – chat about anything and we will see you next time.

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