Last year was certainly painful for the insurance industry. Insurance analysts estimate that catastrophes – such as earthquakes in Japan and New Zealand, floods in Australia and Thailand and tornadoes in the US – meant losses of around $100bn (£63bn). But that figure isn't as grim as it seems. Big losses mean that insurers have to hike their premium rates in order to rebuild their reserves and that usually results in a dramatic return to profits. Lloyd's insurer Catlin looks especially well-placed to take advantage of that process.
- Catastrophe-related premiums rising fast
- Doesn't share profits with Names
- Robust investment portfolio
- Fat dividend yield
- Hit hard by catastrophe losses
- Non-catastrophe lines sluggish
Sure enough, Catlin certainly didn't avoid heavy losses from catastrophes. For 2011, it reported a chunky $678m net loss arising from 2011's disasters, which left the group with a loss-making combined ratio (of claims to premiums) of 103 per cent. But, crucially, Catlin is recovering fast. For the first half of 2011, Catlin's combined ratio was a much more painful 117 per cent. And for 2012, analysts at investment bank Nomura expect the group to be in a position to report a solidly profitable 88 per cent combined ratio. Moreover, as Catlin owns all of the capacity in the Lloyd's syndicates it manages, so its underwriting profits will only benefit its shareholders, not Lloyd's Names.
CATLIN (CGL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 420p | MARKET VALUE: | £1.52bn | |
| TOUCH: | 419-420p | 12-MONTH HIGH: | 446p | LOW: 328p |
| DIVIDEND YIELD: | 7% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 475p | COMBINED RATIO: | 103% | |
| Year to 31 Dec | Gross premiums ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 3.44 | -13 | -16 | 23.2 |
| 2009 | 3.72 | 603 | 152 | 25.0 |
| 2010 | 4.07 | 406 | 98 | 26.5 |
| 2011 | 4.51 | 71 | 11 | 28.0 |
| 2012* | 4.99 | 448 | 100 | 29.4 |
| % change | +11 | +531 | +809 | +5 |
*Nomura estimates Normal market size: 6,000 Matched bargain trading Beta: 0.8 £1=$1.58 | ||||
That rapid progress will largely reflects the sizeable increases in premium rates that are already working through. Earlier this month, Catlin's bosses reported that rates for policies that renewed on 1 January were up 5 per cent on the year on average and for catastrophe-related business lines rates were up an impressive 9 per cent.
Admittedly, non-catastrophe business still looks flat, with renewal rates up just 1 per cent. Some classes, such as aerospace, actually saw rates fall during 2011. But such business represents a minority of the total written by Catlin. Categories that tend to be affected by catastrophe – such as reinsurance, property and energy – accounted for over 60 per cent of 2011's gross premiums.
Catlin's investment portfolio looks in good shape, too. That delivered a 3.1 per cent return during 2011. That's not bad in today's environment of ultra-low interest rates, and better than returns being generated by many of its rivals. Beazley, by contrast, managed an investment return of just 1 per cent in 2011. Yet Catlin's performance doesn't reflect an appetite for more risk – its portfolio remains focused on bonds and cash. Management attributed the performance to an active investment approach.
The dividend payout looks attractive, too. Based on the forecast payout for 2012 from investment bank Normura (see table), the shares yield 7 per cent – one of the best yields in the sector. In comparison, Hiscox's shares offer a prospective yield of little more than 4 per cent, while Beazley's yield less than 6 per cent. True, management's determination to pay generous dividends while trying to grow the group's insurance book has left some City analysts wondering whether Catlin has enough capital. But there was little evidence of a serious capital shortfall in the full-year figures. Indeed, Catlin's bosses think that, based on their own models, the group has 14 per cent more capital than is strictly needed for the risks it is underwriting.
