BULL POINTS:
■ Game-changing effect of Japan's earthquake
■ JLT to benefit from rising premiums
■ Decently performing core operations
■ Potential bid target
BEAR POINTS:
■ Too focused on organic growth
■ Investment income under pressure
With enormous payouts facing the world's insurers following the Japanese earthquake, investors might feel inclined to steer clear of insurance companies' shares. But things aren't that simple. True, underwriters will suffer big short-term losses from earthquake-related claims. Longer-term, however, insurers will need to re-build their reserves, which will force premium rates higher. And that's especially good news for insurance broker Jardine Lloyd Thompson. It doesn't underwrite any risk, and so won't suffer losses, but rising premiums will boost its commission income and, therefore, its profits.
IC TIP RATING | |
---|---|
Tip style | Growth |
Risk rating | Medium |
Timescale | Long-term |
What do these mean? Find out in our |
What's more, and even though it's far too early for higher premiums to have begun working through, evidence is mounting that Japan's catastrophe will be a game changer for the global insurance industry. Risk modelling agency AIR Worldwide estimates that earthquake-related claims alone in Japan - that's excluding claims relating to the resultant tsunami - could reach $35bn (£22bn). Bring in the $20bn or so of losses seen in 2010, from such catastrophes as earthquakes in Chile and New Zealand and the Deepwater Horizon oil-rig disaster, then aggregate losses over the past 12 months could exceed $50bn. Ben Cohen, an analyst at broker Collins Stewart says that figure is important: "Consensus is that a $50bn reinsured event is needed turn the global cycle," he explains. Kevin Ryan, an analyst at broker Investec Securities, concurs, adding: "This could see the soft-rating environment, which characterises many lines of insurance in much of the world, come to an end."
Even without the forthcoming effect of rising premiums, Jardine Lloyd Thompson (JLT) looked in good shape. Despite the hindrance of softening premiums seen in the past year or so, it bolstered trading profit at its core risk & insurance unit by 31 per cent in 2010 to £130m. The performance was especially robust in Asia and Latin America, where the division's retail business, which is focused on advisory broking services, generated organic revenue growth of 20 per cent and 25 per cent, respectively. And the group's smaller employee benefits arm grew its organic revenue by a respectable 4 per cent last year. Just on the basis of its performance before Japan's quake, broker Numis Securities had forecast that the group's underlying earnings would rise 12 per cent in 2011 to 46.6p, then 11 per cent in 2012 to 51.8p. As the impact of premium rate rises works through during the year, investors can expect City analysts to upgrade their forecasts.
ORD PRICE: | 661p | MARKET VALUE: | £1.43bn | |
TOUCH: | 659-661p | 12-MONTH HIGH: | 697p | LOW: 513p |
DIVIDEND YIELD: | 3.5% | PE RATIO: | 14 | |
NET ASSET VALUE: | 136p | NET DEBT: | 25% |
Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2007 | 473 | 95 | 33.7 | 20.5 |
2008 | 536 | 93 | 29.6 | 20.5 |
2009 | 613 | 102 | 33.3 | 21.0 |
2010 | 741 | 119 | 41.8 | 22.5 |
2011* | 761 | 144 | 46.6 | 23.0 |
% change | +3 | +21 | - | +2 |
*Numis Securities' estimates (earnings not comparable with historic figures) Normal market size: 4,000 Matched bargain trading Beta: 0.7 |
Still, JLT's growth is largely being generated organically, a fact that analysts have criticised in the past. The problem is that, while the company is making good progress, JLT remains dwarfed by the scale and clout of US rivals Aon and Marsh & McLennan, whose stock market values are $17.4bn and $16bn, respectively. True, JLT has made some small bolt-on acquisition in recent years, such as December 2009's £27m acquisition of HSBC Actuaries and Consultants for its employee-benefits division. But its bosses seem to have little appetite for transformational deals, such as those that created its giant US competitors. That said, the absence of such deals does leave JLT looking like a takeover target itself. Only last October rumours circulated that Aon or Marsh & McLennan were considering a bid at roughly 800p a share.
Nor does today's world of ultra-low interest rates do JLT any favours. In 2010, the group's investment income slipped 13 per cent to £5.6m. And, with about 35 per cent of its revenue in dollars, JLT is highly sensitive to movements in the sterling/dollar exchange rate - not so great when sterling is strengthening. Management says that a one-cent movement will change sterling revenues by £1m. Elsewhere, management is looking to slash £16m from its annual cost base by June 2012.