Re-rating potential at Charles Taylor

Charles Taylor has spent the past three years expanding its range of products and services and moving into new regions. This has paid off for the insurance services specialist, with pre-tax profit growing by almost half between 2012 and the end of last year.

Recent half-year results suggest that investors can continue to rely on the group's insurance support services and management services divisions to drive growth, they respectively accounted for 38 per cent and 46 per cent of operating profits during the six months.

The group's management services business caters to the mutual market and manages the Standard Club, which provides protection and indemnity insurance to around 10 per cent of the global shipping industry. During the first-half of this year the business introduced measures to diversify the club's income streams, including starting-up Syndicate 1884 at Lloyd's in April. Charles Taylor also took over management of the Strike Club. While start-up costs associated with these ventures kept management services profits flat in the first half, revenue grew 16 per cent to £23.6m. Benefits to the bottom line should show up more in the full year, especially as revenue are typically weighted towards the second-half.

Meanwhile, the insurance support services business had a great first half. The business grew revenue by 57 per cent to £15.3m and profits were up 130 per cent to £2.6m. Charles Taylor Insurance Services, which provides back office services to the Lloyd's, London and international insurance markets, has benefited from increased business for its static and elective claims management services. Its non-life insurance businesses are also making an increasing contribution. These include the newly established Charles Taylor Managing Agency (CTMA), which was appointed to manage its first syndicate at the start of the year, Syndicate 1884. Management intends to open this to other Lloyd’s syndicates in future.

Life is less easy for the adjusting services business, which is facing a benign complex claims environment. Munich Re estimates insured losses from natural disasters almost halved to $12bn during the first half of this year. It is more impressive then that the group grew revenue for this segment by 11 per cent to £29.4m in the first half, although, profits were well down. The business is beholden to the forces of nature, but a pick-up in fortunes seems likely at some point. In the meantime Charles Taylor has been investing in its capabilities in preparation for the return to a more normal claims environment. While this meant costs associated with new offices and senior adjusters depressed the first-half profits, it puts the division in a strong position to stage a recovery.

In April the group launched a rights issue (this accounts for the declining forecast EPS in our table), which raised around £29m after expenses. Management plans to use the money to acquire small to medium-sized businesses that will beef up and complement services already offered by the group. To this end it made a £5m investment in Fadata in July to boost its insurance technology operations. Future acquisitions could prompt earnings-forecast upgrades from brokers.