Rising premium rates boost Brit

With memories of last year's financial market meltdown still fresh, investors could be forgiven for being jittery about taking a risk on a Lloyd's insurer. But such caution doesn't reflect the reality of the current state of the insurance market, which is experiencing an impressive hardening of premium rates. That should prove to be excellent news for most Lloyd's underwriters, including Brit Insurance.

Strangely, that buoyant outlook reflects the impact of the hefty payouts that insurers were forced to make last year, largely arising from hurricanes Gustav and Ike. In fact, according to reinsurance giant Swiss Re, those two storms alone cost the global insurance industry $24bn (£14.6bn). At the same time, miserable financial conditions have also meant chunky losses for insurers' investment portfolios. Certainly, these events have been bad news for underwriters' profits in the short term. But they have also forced insurers to hike premium rates in order to rebuild their reserves.

That effect is certainly making itself felt at Brit. With its third-quarter trading update earlier this month, the company reported that premium rates overall had risen 4.8 per cent in the period - in contrast, rates had slipped 1.9 per cent in the nine-month period to end-September 2008. Brit's catastrophe and reinsurance-related lines are doing especially well, with the reinsurance book having pushed through a 7.8 per cent rate rise in the nine-month period. The rating environment for the group's UK book, which comprises such lines as motor and property, is also improving - rates there grew 3.4 per cent in the nine months to end-September.

Although Brit has suffered its fair share of payouts - these included a £12m loss from June's Air France disaster and ongoing claims from last year's hurricanes. Accordingly, the group's half-year combined ratio (of claims to premiums) of 93.8 per cent ranks Brit as only a modestly profitable underwriter by sector standards. In contrast, rival Amlin is forecast by broker Numis Securities to deliver an impressive 80.1 per cent combined ratio for end-2009. But Brit's underwriting performance is profitable enough and, while the group was also forced to take a painful first-half £73.6m foreign-exchange hit due to a weakening dollar, earnings are expected to bounce back strongly as rising premium rates work though. In fact, Numis expects pre-tax profits to soar to £145m by end-December 2010. Moreover, the group owns all of its managed capacity so those profits only benefit shareholders - not Lloyd's Names.

That said, it's not inconceivable that unexpected losses could hurt Brit's underwriting performance further. While the current Atlantic hurricane season has been benign so far, for example, weather experts at America's National Oceanic and Atmospheric Administration (NOAA) think there's a 70 per cent chance of between three and six Atlantic hurricanes in the 2009 season. As many as two of those, says the NOAA, could turn into major hurricanes and this year's hurricane season isn't quite over yet - potentially meaning big payouts for insurers.

Brit's investment book needs watching, too. The group's portfolio is a shade more exposed to higher-risk investments than is the case at many of its rivals - with the third-quarter figures Brit reported that 5.8 per cent of the book was invested in equities and specialised investment funds. And during the worst of the financial crisis, Brit's investment return was decimated - in fact, this small but higher-risk portion of the book delivered a chunky £106.6m loss in the year to end-2008. Still, that dreadful performance had been turned around and the group reported a 3.6 per cent investment return with its third-quarter figures. Moreover, the remainder of the £3.4bn book is placed in safe enough high-quality bonds and cash. Management cautions, though, that returns in 2010 are likely to be "muted", reflecting narrower credit spreads and lower yields on government securities.