Lloyds syndicates - A crowded
hiding place
We prefer lower price to book names such as Catlin;
Initiate on Lancashire (OW)
Insurance
Andrew HughesAC
(44-20) 7325-8609
andrew.x.hughes@jpmorgan.com
Marine Collas
(44-20) 7325-9413
marine.collas@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 71 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
P/B estimates
x
P/BV 08E P/BV 09E
Amlin 1.5 1.3
Beazley 1.1 1.0
Brit Insurance 0.8 0.7
Catlin 0.8 0.6
Hiscox 1.3 1.2
Lancashire 1.1 0.7
Source: J.P. Morgan estimates, Company data.
Implied CoE and RoE
Implied
CoE
Implied
RoE
Amlin 12.3% 14.5%
Beazley 10.6% 11.5%
Brit Insurance 11.4% 8.3%
Catlin 24.0% 6.3%
Hiscox 12.6% 12.6%
Lancashire 10.3% 7.0%
Source: J.P. Morgan estimates, Company data.
• In light of our overweight reinsurance view for 2009, we are refreshing
our view on the Lloyds syndicates and initiating on AIM-listed Lancashire
Re (£700m market cap) with an OW ahead of a potential move into a full
listing. We also amend our ratings from N to UW on Beazley Group, Brit
Insurance and Hiscox.
• Our view is that the reinsurance market will harden for Energy and
Property Cat in 2009. We believe Catlin (OW) and Lancashire are best
placed to capitalize due to their lower valuation (90% of NAV) and mix of
business: Catlin - energy business 12%, property re 18%; Lancashire -
offshore energy 15%, property 47%.
• The ratio of price to book represents the market expected long-term return
on equity divided by the market cost of equity (see our P/B table). The wider
market implies a cost of equity of 12%, which we use in our valuation. The
debt yields (14% plus) suggest that the 10% commonly used to value these
stocks is too low in our opinion.
• The market differentiates price to book based on historical RoEs, with Amlin
having the highest price to book of 1.5x. We the expect returns to normalize
downwards, towards the level of the market (average RoE 8% 2000-2008),
as businesses grow. On this basis, we believe the market overvalues the
sustainability of returns. We prefer both Catlin and Lancashire, which are at
a discount to book value.
• We believe reserve releases will slow and reserve additions may be
required for some of the more recent years as more claims emerge. We
are cautious on companies which have large run-off reserves (eg Beazley, 4x
shareholders’ equity) or have had large reserve releases (eg Amlin, 25%-
50% of earnings). We expect to start to see this in the 2009 results.
• We see outperformance of Catlin (27% upside) and Lancashire (36%
upside) against the peer group, which in our view are already fully valued.

Table of Contents
Strong performance .................................................................3
How does the price to book ratio change? ............................3
How do we set the cost of equity?..........................................4
Sector returns unsustainable..................................................5
We are cautious on D&O & E&O .............................................8
Madoff........................................................................................8
Investment income...................................................................9
Rate increases – could they help the RoE? .........................10
Amlin syndicate fund raising ................................................12
Ike losses ................................................................................12
Model changes following Ike.................................................15
Demand for reinsurance ........................................................15
Energy Outlook.......................................................................17
Company Profiles...................................................................19
Amlin .....................................................................................20
Beazley..................................................................................30
Brit Insurance .......................................................................36
Catlin .....................................................................................42
Hiscox ...................................................................................48
Lancashire ............................................................................55