Every cloud has a silver lining – and that’s certainly the case for non-life insurers such as Catlin. The Bermuda-based firm got hammered in the first half of this year after suffering losses of $40m due to BP’s Gulf of Mexico oil spill and $140m to the Chilean earthquake. On top of that, there was a $49m foreign exchange hit, which saw profits dive 64% to $86m.
The flipside, of course, is that after a series of major disasters, insurance premiums rise as the price of risk is reassessed. The Deepwater Horizon rig explosion could boost profits for many years. That’s because Catlin is the leading energy underwriter of Lloyd’s of London (generating 15% of revenues), and rates and volumes are already rising. Why?
Traditionally the large oil explorers have self-insured these sorts of events in-house, while many smaller players are woefully exposed. But after the disaster, the energy sector is fast realising that it needs far more balance-sheet protection. Catlin also specialises in property and casualty insurance and offers a broad spectrum of other services, including professional indemnity, medical malpractice and directors’ liability.
As for its investment book, Catlin has an almost neurotically defensive approach, in a bid to avoid the worst of any future equity slump. As at 30 June, the firm had $7.6bn of assets under management. Of this, 44% was in cash, 52% in fixed income and only 4% in more volatile asset classes, such as hedge funds. The bond portfolio has no direct exposure to sovereign debt from Portugal, Ireland, Greece or Spain.
Tip of the week: Catlin (LSE: CGL), rated OVERWEIGHT by HSBC
So how much is Catlin worth? The City expects 2010 earnings per share (EPS), dividend and net tangible assets (NTA) of 42.9, 25.7p and 400p a share, rising to 57.5p, 27.0p and 440p in 2011. Assuming these targets are met, the firm is on attractive p/e, yield and NTA multiples of 8.2, 7.3% and 88%. This looks good value for both income seekers and growth investors alike – delivering a total shareholder return of 17.6%. And that’s not all. The existing price attaches no value to Catlin’s strong franchise (worth another 120p a share of intangibles), which is expanding. So I would rate the firm on at least one-times tangible book, offering more than 15% upside from today’s levels.
So why the poor performance? The bears are concerned that (even after the £200m rights issue at 205p in March 2009) Catlin may still be undercapitalised, leaving it vulnerable to another catastrophe. But while this is possible, the board carefully monitors its positions to ensure that overall exposure is manageable. And there seems to be plenty of spare capacity. At the last count, the buffer over its economic capital requirement for 2010 was a robust 19%, well inside the firm’s target range of 10%-20%.
So, given that natural disasters are par for the course, Catlin looks a sound place to park one’s funds in an increasingly uncertain world. There is also a chance that the group could become a target; rival Brit Insurance recently succumbed to Apollo, the private-equity house. HSBC has a target of 450p a share. Third quarter results are out on 2 November.
Recommendation: BUY at 350p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments