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Sandy's losses could leave Amlin beached

Lloyd's insurer Amlin could be facing painful losses as claims flood in from Hurricane Sandy - leaving the shares set to struggle
November 8, 2012

A string of natural catastrophes in 2011 meant painful losses for insurers. Happily, a benign claims environment in 2012 looked set to signal a return to underwriting profits for insurers. Then there was Hurricane Sandy. The scale of losses as the hurricane ripped up the east coast of the US and deluged New York isn't yet clear. Lloyd's insurer Hiscox, for example, has said that it remains "too early to produce any meaningful estimate of claims". But risk modeller AIR Worldwide thinks the insured losses could range between $7bn (£4.4bn) and $15bn, and that could prove especially painful for Lloyd's underwriter Amlin (AML).

IC TIP: Sell at 372p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • Attractive dividend yield
  • Non-Sandy loss experience good
Bear points
  • Hurricane Sandy losses could be painful
  • Premium rates may soften
  • Dull investment return
  • Shares highly rated for an insurer

The problem is that Amlin looks more exposed to catastrophe-related business than many of its rivals and tends to suffer more when catastrophes strike. Last year's heavy losses demonstrate this (see table). Most of the damage came in the first half when Amlin's combined ratio (of claims to premiums) was a heavily loss-making 122 per cent. In contrast, Beazley didn't slide nearly so far into loss, with a combined ratio of 108 per cent in 2011's first half.

Ironically, less than two weeks before Sandy appeared - when it seemed that 2012's hurricane season would pass without serious incident - analysts at broker Numis Securities pointed to Amlin's greater sensitivity to catastrophe claims as a possible bull point. "Amlin is the biggest economic winner from a quiet year for catastrophes," the broker said in a research note.

The upside from catastrophe claims is that they leave insurers needing to hike premiums in order to rebuild their reserves - good news for longer-term earnings. But Hurricane Sandy may not cause sufficient losses to trigger this. Sandy's possible maximum loss of around $15bn is modest compared with losses of $45bn in 2005 from Hurricane Katrina - an event that did boost rates. While 2011's accumulated losses for all insurers - $116bn according to Swiss Re - only boosted premium rates noticeably on catastrophe-exposed business lines. Before Sandy struck, Numis had even been expecting insurers' average premium rates to fall around 3 per cent during 2013 and it's not clear whether Sandy-related losses will be enough to change that. So Amlin could be left nursing a heavy one-off loss with little scope to bolster rates to compensate.

AMLIN (AML)

ORD PRICE:372pMARKET VALUE:£1.85bn
TOUCH:372-372.5p12-MONTH HIGH:408pLOW: 282p
DIVIDEND YIELD:6.6%PE RATIO:6
NET ASSET VALUE:297pCOMBINED RATIO:84%

Year to 31 DecGross premiums (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20081.0312217.116.0
20091.5450994.117.5
20102.1725945.020.7
20112.30-194-30.323.0
2012*2.5938364.624.5
% change+13--+7

*Numis Securities estimates

Normal market size: 7,000

Matched bargain trading

Beta: 0.7

Returns from Amlin's investments won't help much, either. True, they are focused on fairly conservative looking bonds and liquid investments and, in the first of 2012, delivered a 2 per cent yield, largely in line with many of Amlin's peers. But Amlin's returns can also look volatile and during 2011, for example, its investments yielded just 0.9 per cent.

Still, putting Sandy aside, Amlin's performance in 2012 has been reasonable. With no other significant losses, the group reported a solidly profitable 84 per cent combined ratio for the first half. The dividend yield is nearly 7 per cent, too, based on Numis's full-year forecast payout (see table) - that's one of the best among the UK's listed insurers, with only shares in RSA and motor insurer Admiral yielding more.