Insurance
Initiation on Lloyd’s of London
Insurers – OW Amlin, UW Brit
Initiating on Lloyd’s of London insurers: We
recommend being Overweight on Amlin, Equal-weight
on Catlin and Hiscox, and Underweight on Brit. Our
Overweight on Amlin is predicated on our view that the
market is still not giving enough credit to Amlin for its
acquisition of ACI (ex-Fortis business) from the Dutch
government in July 2009. Our Underweight on Brit, on
the other hand, reflects our cautious view towards
longer-tail lines of business.
Upside to ACI acquisition – Overweight Amlin: We
believe there is significant earnings potential from the
ACI acquisition – our bull case assumes an 11% uplift to
our base case earnings estimate. Our analysis suggests
that ACI is fundamentally a sound business with a strong
competitive position in Benelux. In addition, Amlin
deserves to trade at a premium valuation due to its high
quality business with a proven track record of an
average RoE of 26.1% and an average net combined
ratio of 76.8% over the last 6 years.
Cautious on longer-tail lines – Underweight Brit:
The uncertain inflation outlook and low interest rate
environment coupled with the lack of rating improvement
in casualty insurance places significant uncertainty over
future margins of longer-tail lines of business. In addition,
Brit’s pricing models have yet to compensate fully for the
low interest rate environment. Our Underweight is a
relative one – Brit has the largest exposure to long-tail
lines (35% of its portfolio) where we see significant
downside risk to valuation.
A fragmented picture across the market: The current
outlook for the non-life market is extremely varied
depending on business line. While catastrophe-exposed
business is at the peak of its pricing cycle, we see no
sign of rating improvement in longer-tail lines. We
expect overall rates to remain flat to slightly down in the
near-term but expect to see some upward pressure on
prices in the medium-term due to lower reserve releases,
potential higher inflation outlook and the low interest rate
environment.
Contents Page
Investment Summary 2
Order of Preference 3
Key Overweight: Amlin 4
Key Underweight: Brit 9
Lloyd's of London Overview 11
Valuation Comparatives 17
Risk-rewards 18
Company Overviews 22
Company Valuations 30