Unbeknown to the man in the street, the cost of insurance is rising. Not because the hurricane season is expected to be worse this year than last, but because key players such as AIG have substantially shrunk their operations and many others don’t have the capacity to fill the void. With the supply-demand balance tilting in favour of the insurers, premiums are hardening and 2009 looks like being a bumper year for rates.
Brit Insurance (LSE:BRE)
One beneficiary should be Lloyd’s of London stalwart Brit Insurance. It underwrites a broad spectrum of risks, such as for natural disasters, director & officer (D&O) indemnity, marine, aerospace and motor cover. Around half its reinsurance book is renewed on 1 January.
So far this year the firm has achieved average rate hikes of 8.1%, and the board reckons this trend will “accelerate during 2009”. This is welcome news for the battered industry because investment returns have been hit by the stockmarket crash. Brit hasn’t escaped the carnage, but it has weathered the storm better than most. Of its holdings, 93% are now in cash or bonds, with just a small portion assigned to equities and other more volatile assets. That said, its balance sheet could do with bit more weight to exploit the lucrative growth opportunities available. There have been rumors of a possible £150m rights issue, but for the time being this is off the cards – chief executive Dane Douetil asserts that the group has a decent “buffer over its required capital”.
On a more upbeat note, Brit is relocating its head office from the UK to the Netherlands, which should halve future tax bills. It is also benefiting from the stronger dollar because around half its revenues are derived from America. Its capital base could even get a lift from the recently relaxed US ‘mark to market‘ accounting rules. Results for 2008 were solid. Earnings per share came in at 21.5p with the dividend held at 15p a share (yield of 7.5%). I would expect the business to generate a sustainable 11% return on equity across the economic cycle (against 14.9% for the last five years), and so would value the stock at one times tangible net assets, or around 250p a share. There are funding issues to iron out and possible legacy D&O exposure. But assuming we’ve reached the bear-market bottom, Brit should be well placed to benefit.
Recommendation: speculative BUY at 182p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments