Following this year's catastrophic hurricane season is it really a case of good times ahead in the London market, or is this just optimistic posturing? asks Lindsey Rogerson
The path of destruction left by this season's hurricanes in the Gulf of Mexico will ultimately provide a feast for reinsurers, according to a leading insurance figure. However, whether all Lloyd's syndicates will have a seat at the table when it begins remains uncertain, in the wake of ratings and profits downgrades, and a call from the Financial Services Authority for clarity.
Hiscox's chairman Robert Hiscox predicts that good times lie ahead for reinsurers, and indeed the insurer has already put its money where its mouth is and repositioned syndicate 33 to ensure it captures its fair share of the expected increase in reinsurance business, upping its capacity almost £200m on what it had originally planned for 2006, to £833m.
It is far from alone in moving swiftly to take advantage of any upturn. Edward Creasy, chief executive of RJ Kiln & Co, is also on record as saying he expects Katrina will ultimately generate good opportunities. Kiln increased its interim dividend by 66% to 1p per share when it announced its half-year results, a popular move with investment managers.
However, it has not been as easy for all of those transacting business in the London market. The current Lloyd's estimate for Katrina and Rita exposure stands at £1.4bn and Standard & Poor's has issued a string of downgrades in the aftermath of Katrina and Rita: most notably in the London market against Advent and GoshawK. For its part, Citigroup said in a recent broker note that it felt many reinsurers were "relentlessly talking up their own book" post Katrina.
Indeed the fact that GoshawK has already left the table, having been forced into a deal with private equity investors, appears on the surface to lend credence to Citigroup's view that there is a lot of macho bravado doing the rounds in reinsurance circles at present. But the fact that share prices have held up reasonably well, considering the multi-million pound hurricane losses being admitted in trading statements around the globe, suggests fund managers are more confident that a feast does indeed lie ahead.
Nick Martin, an analyst on Hiscox Insurance Portfolio fund is not fazed by loss statements, or by the FSA's decision to ask Lloyd's reinsurers to clarify their exposure to the recent hurricanes. He said, "I think that is just standard practice now. The Americans are a lot quicker at getting estimates out. If I was the regulator and I saw that companies over there were estimating losses of $30m-$40m upwards I would be taking steps to get figures out of companies here fast."
Lloyd's exposure for Hiscox Insurance Portfolio fund is capped at 20%, and the fact that it is presently sitting at around that mark is a vote of confidence in the market. Key to the fund's choice of holdings is underwriting discipline. For this reason, Atrium is seen as a good bet because of the underwriting abilities of Christine Danridge. Martin believes that with her expertise in the offshore energy sector she will be ideally placed to capitalise on the much talked about post Katrina opportunities. "She is already talking about price rises of 300% to 400%. Yes, Atrium will take a hit from the hurricane, but it is the first underwriting loss on her watch, and we are talking about some very difficult markets. So we are very confident Atrium will be writing good business that will be profitable for the next 12 to 18 months."
Other companies in favour at Lloyd's are Kiln, Catlin and Amlin. Amlin, like Atrium a long term holding, recently announced it is launching a new Bermuda reinsurer - Amlin Bermuda - and is also increasing the capacity of Syndicate 2001 by 17.6% to £1bn. The fund is also hoping to rebuild its holding in Chaucer. Martin explains: "We were opportunistic in when we went in, we quite liked Ewan Glimour and his team, and thought it was cheap. It turned out that Amlin agreed and they went for the bid, we sold the majority of our holding in June, but then the bid didn't happen and the price fell and we bought back in." Ultimately Martin agrees that Katrina will only accelerate returns at Lloyd's.
In July, brokers at Benfield said they thought the Lloyd's market was showing great improvement. Indeed first half results for 2005 showed impressive returns on equity. Given that the huge bill from Katrina is expected to force borderline risks back into the specialist market, there is the feeling that Lloyd's expertise is about to come into its own.
"A lot of people are quite worried that models are broken and that they are running a bit scared in terms of their exposure," says Martin. "What you will probably see is that a lot of business at the margins will start coming back to specialty writers, and that is, after all, what Lloyd's is all about."
This view that Lloyd's is well-placed to capitalise on this year's hurricane season is echoed in a recent report from Risk Management Solutions that predicts greater emphasis on profiling super catastrophes. All the indicators are that the wider fund management community agrees the London market is well-placed, as signified by the resilience of share prices. Kiln is a case in point. Its most recent estimate of the effect of its Katrina exposure on shareholders is between £30m and £35m, but its share price has barely faltered.
Good times ahead
If the experts are right, 2006 and 2007 look set to be profitable years for Lloyd's and more syndicates will look to increase underwriting capacity. The drive for business could see a fall off in dividend growth and share buyback activity, as companies redirect resources to this growth, but if predictions of 300% price increases turn out to be correct, it is unlikely shareholders will disapprove.
- Lindsey Rogerson is a freelance journalist.