Buy Brit for a 15% yield

Admittedly, market conditions could look healthier. Paying out on big catastrophe claims - while bad for short-term profits - actually drives insurers' longer-term earnings prospects. That's because hefty losses force insurers to hike premium rates in order to rebuild their capital. But the claims environment in recent years has been unusually benign, which has left rates coming under pressure as capital-rich underwriters compete for business. As an example, claims from last summer's European hailstorms and German floods - some of 2013's costliest events - generated a combined loss of around €7.5bn (£6.1bn). Yet such losses are tiny compared, for example, with the $70bn (£42bn) loss from Hurricane Katrina in 2005. There has also been a big influx of new capital into the sector, notably through insurance-linked securities, which is also helping to compete pricing down.

Brit is not immune to such pressures and, with its first-quarter update this month, management reported that the "overall rate environment has remained challenging". Pricing pressure is particularly evident in the group's catastrophe-exposed classes such as its property treaty and energy accounts. However, not all business lines are seeing prices fall and rates increased for such lines as marine and specialist liability. So Brit's premium rates overall fell by a fairly modest 2.5 per cent in the first quarter, which is fairly typical for the sector at present. Premium rates are slipping from historically high levels, too, so Brit's earnings prospects should remain fairly robust for some time yet.

Evidence of that resilience is clear from Brit's underwriting performance. Helped by the benign claims backdrop, its combined ratio (of claims to premiums) reached a highly profitable 85.2 per cent in 2013. Moreover, broker Numis Securities expects that ratio to come in at a still highly profitable 89 per cent for 2014. That leaves Brit performing entirely in line with other high-quality underwriters such as Hiscox (HSX), Beazley (BEZ) or Catlin (CGL). The group's investment portfolio - which is mainly focused on bonds and cash - looks in reasonable shape, too. True, in today's low interest rate world, and as bond yields have risen, Brit's first-quarter return of 1.1 per cent doesn't look so great. But it's not bad when compared with the first-quarter returns being generated at Brit's peers - typically 0.3-0.5 per cent - and should have been helped by having 11 per cent of the book in higher-yielding alternative assets and equities.

But what really stands out is the dividend potential. As Brit explained in its IPO prospectus, "the group expects the regular dividend to be supplemented by special dividends when excess capital cannot be attractively deployed". With premium rates coming under pressure, that condition looks set to be met. Numis seems to think so - its forecast payout for 2014 suggests a prospective yield of over 15 per cent. That leaves Brit as the best income play in the UK insurance sector. Shares in the next best, Lancashire (LRE), offer a prospective yield of around 9 per cent, followed by Beazley's with a near 8 per cent prospective yield.