Premium rates still rising for Catlin

Bermuda-based Lloyd’s insurer Catlin reported plenty of good news with its 2009 results. During the year, the underwriter's premium rates grew 6 per cent on average across all its business classes, and catastrophe-related premiums grew by 10 per cent. Airline business has performed particularly well, with rates rising by an average of 15 per cent. That delivered solid underwriting profits for Catlin, which improved its combined ratio (of claims to premiums) from 2008’s 95 per cent to an even more profitable 89 per cent.

Bizarrely, that performance reflects the losses that hit insurers in 2008. Those related to hurricanes Gustav and Ike - estimated by Swiss Re to have cost the insurance industry as much as $24bn (£15bn) - as well as the hit to underwriters’ investment portfolios as the financial crisis struck. Certainly, those events were bad news for short-term profits and Catlin itself made a loss in 2008. But that misery also forced insurers to raise premium rates in order to rebuild their reserves and, longer-term, that has been good news for profits.

However, this part of the insurance cycle may have passed its peak. That’s because 2009, unlike 2008, saw hardly any big claims, leaving underwriters able to afford to chase business by cutting their premium rates. Inevitably, falling rates will put profits under pressure. The evidence, following a year or so of bumper rate rises, is already beginning to show. While Catlin reported that its rates grew on average by 1 per cent during January’s renewal period, other underwriters are reporting tighter conditions. Hiscox's trading update last month, for instance, reported that reinsurance rates had fallen by between 5 per cent and 7 per cent on average during January.

But investors shouldn’t be too alarmed. After rising so strongly, rates are now gliding down from historically high levels and that should allow underwriters to go on making decent - albeit slowly diminishing - underwriting profits for quite a while. “Overall we expect the downturn to be relatively shallow, helped by rate increases in certain segments (eg, motor, political risk, aviation) and a possible late-cycle pick-up in demand driven by an upturn in global economic activity,” said analysts at broker Numis Securities in a research note last month. Besides, 37 per cent of Catlin's gross premiums come from outside the Lloyd's market, where Catlin's management reckons that rates will hold up better. And, after raising $289m through last March's rights issue, Catlin has the capital to support the new business it writes.

Indeed, Numis is forecasting that Catlin will serve-up a perfectly-acceptable combined ratio of 89 per cent in both 2010 and 2011. What’s more, as Catlin owns all of the capacity that it manages, those profits will only benefit shareholders, not Lloyd’s Names. However, Catlin isn’t the sector’s most profitable underwriter. Rival Lloyd’s player, Amlin for instance, is forecast by Numis to report a 2009 combined ratio of 70.5 per cent; nearly 19 percentage points better than Catlin's underwriting profitability.

But the group’s investment performance has bounced back after making a $91m loss in 2008. Catlin delivered an impressive 5.9 per cent return on investments during 2009 on the back of a portfolio that, at end-December, was largely (93 per cent) invested in cash and decent-quality bonds. That’s better than most of its rivals - Novae, for instance, reported a third-quarter annualised return of 3.3 per cent and Hardy managed a mere 1.5 per cent in that period. That said, Catlin’s performance was helped by some exposure to high risk but higher return assets, such as equities and hedge funds, which comprised 7 per cent of its investments at the end of December. Management sounds keen to continue cutting that riskier element back, so investment returns could become more mundane going forward.