Given today’s fairly benign claims backdrop, most insurers are making solid underwriting profits - Lloyd's insurer Amlin (AML) included. But low claims also leave insurers well capitalised and tempted to compete for business by cutting premium rates. The competitive pressure from an influx of new capital, notably insurance-linked securities, is also putting rates under pressures. That softening outlook could prove bad news for the more expensively rated shares in the sector and Amlin’s shares are amongst the priciest.
- Makes solid underwriting profits
- Owns all of its underwriting capacity
- Premium rates under pressure
- Modest investment return
- Better dividend yields available elsewhere
- Shares expensively rated for the sector
Claims have certainly been low of late. Last year, for example, some of the highest claims in the sector arose from European hailstorms and German flooding which, combined, generated around €7.5bn (£6bn) of losses for insures. But that’s tiny compared with the $70bn (£41bn) or so hit from Hurricane Katrina in 2005, or the $100bn or more of losses in 2011 from such events as a Japanese earthquake, Australian floods, or tornadoes in the US.
A relative lack of capital-consuming events since has, therefore, allowed pricing pressure to build - especially for catastrophe-related business lines. Amlin’s catastrophe reinsurance account, on average, saw premium rates fall 8.8 per cent on renewal in the first quarter with rates on US catastrophe lines down 10.3 per cent. Elsewhere, price pressure is less prominent but still apparent. Renewal rates on Amlin’s US property and casualty book, for instance, fell 1.6 per cent in the first quarter.
AMLIN (AML) | ||||
|---|---|---|---|---|
| ORD PRICE: | 473p | MARKET VALUE: | £2.4bn | |
| TOUCH: | 472.9.-473.2p | 12-MONTH HIGH: | 491p | LOW: 372p |
| FORWARD DIVIDEND YIELD: | 5.9% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 335p | COMBINED RATIO: | 86% | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 2.3 | -194 | -30.3 | 23 |
| 2012 | 2.4 | 264 | 49.5 | 24 |
| 2013 | 2.5 | 326 | 59.1 | 26 |
| 2014* | 2.7 | 240 | 40.8 | 27.7 |
| 2015* | 2.8 | 246 | 41.9 | 29.2 |
| % change | +6 | +3 | +3 | +5 |
*Numis Securities forecasts, adjusted PTP and EPS figures Normal market size: 5,000 Matched bargain trading Beta: 0.59 | ||||
In today’s low interest rate world, and as bond yields have risen, Amlin can’t look to its investment book for much support, either. True, Amlin’s relatively greater exposure to such higher-yielding assets as equities and property has left it generating a better return than at some rivals. But in the first three months, the return from its portfolio of mainly low-risk bonds and cash reached 0.6 per cent - implying a hardly astounding annualised return of 2.4 per cent. That’s too low to compensate significantly for premium rate pressure and broker Numis Securities expects Amlin’s earnings to slip almost a third in 2014 with little bounce predicted in 2015.
Neither is Amlin’s near 6 per cent prospective 2014 dividend yield especially impressive for an insurer. After all, less than ideal prospects - as price pressure continues - are persuading some underwriters to return capital that can’t be profitably deployed. On a prospective basis, and buoyed by expectations of special payouts, shares in rival Brit (BRIT), for instance, yield over 14 per cent, while Lancashire's (LRE) yield nearly 10 per cent. Special payouts aren’t thought so likely at Amlin, however. "Our earnings expectations for 2014 would see Amlin’s distributable excess capital position below the level at which it would consider a special dividend," reckon analysts at Berenberg.
