What’s new
• Suffering catastrophe losses
• Premium rates down 1.4 per cent overall
• Sector-leading investment return
Along with its Lloyd’s peers, Amlin’s first quarter trading update this month flagged up a string of losses from recent disasters. Its biggest hit came from February’s Chilean earthquake, and management expects a loss of $142m-$165m (£99m-£115m) from that. Moreover, and while losses from February’s windstorm Xynthia and March’s Australian hailstorms aren’t expected to be material, a $15m hit is on the cards from last month’s Deepwater Horizon oil rig disaster.
But while that’s bad news for short-term earnings, it’s not so grim on a longer timescale. That’s because rising claims force insurers to hike premium rates in order to rebuild reserves - meaning a decent longer-term earnings outlook. And while recent catastrophes aren’t necessarily enough to send rates soaring, they could help firm up a market that has been softening - indeed Amlin reported at the first-quarter stage that, overall, its premium rates had slipped 1.4 per cent.
Still, despite that weaker premium rating backdrop, Amlin also reported a 2 per cent investment return for the first four months of this year. That suggests an impressive annualised return of 6 per cent - not bad at all in today’s low interest rate environment.
Numis Securities says…
Buy. The 1.4 per cent average rate decrease reported with the trading update was broadly in-line with Amlin’s peers and management says that decent margins can still be found within the catastrophe reinsurance account. In our view the prospective share price to net tangible assets ratio of 1.16 times, along with a 5.7 per cent dividend yield, look attractive given the group’s high-quality and very strong surplus capital position - which provides funds for growth and dividend security. Expect pre-tax profits of £306m for 2010, with EPS of 49.5p and a combined ratio (of claims to premiums) of 84.8 per cent.
KBC Peel Hunt says…
Buy. In a solid first quarter trading update, Amlin was notably cautious about the outlook for premium rates. But the group is benefiting from increasing business line diversity, while a 6 per cent annualised investment return is sector-leading. And while the group took a loss from the Chilean earthquake, that’s in line with the sector - the group’s reinsurance programme leaves Amlin well protected should further catastrophe events strike. Overall, Amlin remains the class act of the non-life sector, yet the shares trade at only 1.17 times our net tangible assets estimate.
