Dear Friend,

Lloyd’s and Bermuda (re)insurer Amlin had some great results out today – the banner headline read “Record profits despite worst natural catastrophes in history”.

Great stuff – Amlin ran a paltry 57% loss ratio last year and what’s more, looking ahead to 2006 it says prices are well up in its key lines of reinsurance, property and energy.

But the results announcement contained a very interesting strategic admission — Amlin is going to buy less retro cover this year — and here’s the reason quoted:

“Retrocessional reinsurance, which is the reinsurance of reinsurance portfolios and which we have historically purchased to protect against extreme frequency and severity of loss, has become so expensive that we believe it appropriate to run more catastrophe risk internally whilst reducing our peak exposures”.

And this after getting some spectacular value from its retro underwriters last year:

Amlin said its gross estimated ultimate claims were $860.9m “which reflects the severity of the 2005 hurricanes. The resultant claims were better absorbed by the reinsurance programme purchased by the Group which is designed to deal with severity of losses.”

Yet Amlin went on to reveal that the 2005 storms cost it $236.7m, net of reinsurance, meaning a staggering $624m in retro claims. The high-level Cat design of Amlin’s retro protections meant that it estimates that it only ended up retaining 27% of Cat losses in 2005 against 53% for the more attritional but less severe 2004 season.

In 2005 it could be argued that Amlin’s retro programme saved its results, protected its capital and even allowed it to be in a strong enough position to raise the funds to start Amlin Bermuda.

Yet after all that — in 2006 this life-giving cover is suddenly “so expensive”.

Last month Wilhelm Zeller said that he was confident that Hannover Re was more “weatherproof” going into 2006 than it was going into the 2005 season.

It only remains to be seen exactly how much less peak exposure Amlin plans to underwrite now that it has decided to retain a higher proportion of its Cat exposure for 2006. I am awaiting guidance from the company as to how much more or less weatherproof it plans to be as I write.

It takes opposing views to make a market — buyers need sellers and ultimately everyone needs and respects net underwriters. But I wonder if Amlin has stopped to think what sort of message its actions are giving to its own customers wishing to remove peak exposures in Florida and the Gulf of Mexico from their balance sheets?

“I’ll sell some to you, but at these prices I’m not buying much of it myself!”