The last month has seen so much going on in and around Lloyd's that it will take some time for the full ramifications to sink in for investors. But initial soundings, specifically with regard to Warren Buffett's intervention, are positive, reports Lindsey Rogerson.
The month opened at lloyd's with a spate of upbeat interim statements and recommendations for how Names - who still account for around one fifth of all Lloyd's money - will interact with the market going forward. It was quickly followed with the announcements by Hiscox and Omega that they intend to redomicile from London to Bermuda. By far the biggest impact for the Lloyd's market, however, was Berkshire Hathaway's $7bn Equitas deal, with Warren Buffett at the helm as an unlikely saviour of Names with remaining liabilities.
Lloyd's players will have doubtless drawn relief from rating agencies Standard & Poor's and Fitch Ratings' quick announcements that they had put the market under review with a positive outlook. In fact, the pair probably had their hands somewhat forced: for years rating agencies and brokers have cited the uncertainty of the Equitas settlement as a key reason for keeping the rating for the market down (see table 1). Benfield's most recent Lloyd's market review was typical in saying that "serious threats to the group's ultimate success remained". With the boost given to Names' fortunes by the Berkshire tie-up, it would have been difficult for rating agencies to do anything other than positively review their stance on the London market.
In publishing its proposals Hiscox was keen to play up both the possibilities for revenue enhancement and share price increases by moving to Bermuda. In talk clearly designed to get existing investors to back the move the company said: "Many of the group's principal competitors already enjoy the substantial potential tax benefits that would become available to Hiscox Ltd and this scheme should improve the prospects for the group's overall share price."
That Hiscox and other Lloyd's syndicates are pushing ahead with ambitious expansion plans and capital raising certainly suggests they are confident about the future. And this is a view shared by Alex Foster, fund manager of Hiscox's £66m insurance portfolio fund, who believes the shortfall between supply and demand will keep rates high.
Speaking about the prospects for the January renewals, Foster said, "We are confident that 1 January renewal rates for cat-exposed risks will improve as this is the first renewal date when all market participants will be buying their reinsurance cover with reference to the new catastrophe models introduced in April and May. The clear consensus from the recent Monte Carlo industry gathering (The Rendez-Vous de Septembre) was that 1/1 will play catch-up to the increases seen at this year's June and July renewals irrespective of this year's hurricane activity."
Lloyd's participants including Kiln, Amlin and Catlin certainly all concur with Foster's view, albeit peppered with the now ubiquitous cautionary mentions of the hurricane season not being quite over yet. The upbeat view is also shared by investment brokers monitoring Lloyd's. Broker Bridgewell raised Amlin to buy this month, despite a 13.2% drop in half year profits.
Dismissing the profit drop as a currency fluctuation glitch Charles Philipps, chief executive, certainly saw no reason to believe 2006 would not be a good year for Amlin, saying: "This has been a busy and productive first half for Amlin. The six month results again demonstrate the strength of our business. While the profit is a touch down on last year, owing to exchange rate fluctuations, our annualised return on equity is still a very healthy 24%. With Amlin Bermuda building its potential and our reinsurance exposures repositioned to address changes in the market we are well placed going forward."
Atrium also blamed its less than shiny results on adverse currency fluctuations and analysts and investment managers obviously agree. Amlin is the biggest holding of the Hiscox Insurance Portfolio at 6.45% of the fund's total assets, while Atrium is forth at 4.3%. For its part, Catlin has been upgraded by both Citigroup and UBS in recent months. Most recently, Credit Suisse reiterated that the group retains its preferred stock in the Lloyd's marketplace and increased its price target for Catlin from 530p to 592p - at the time of writing Catlin's share price was 483p. Figure 1 shows a divisional breakdown of Catlin in terms of net written premiums.
Credit Suisse, which also has Amlin as outperform, believes there is no better proof that the future lies with Catlin's business model than the fact it is now being emulated by other Lloyd's groups - most notably the Hiscox relocation mentioned previously - and say they find the recent decision by rating agency AM Best to put Catlin on credit watch negative hard to fathom (see figure 2).
Indeed Merryleas Hyde and George Shippam, analysts at Credit Suisse, are somewhat scathing of the AM Best decision. "We consider the financial strength of the company to have improved significantly since the same time last year, when no action was taken by AM Best despite hurricane losses of $359m," they say in a note. The pair include five reasons as to why the rating review is bizarre, before eventually concluding it is perhaps a move to bring it into line with its view on other Bermuda-domiciled reinsurers.
If this is the case, AM Best's view would be shared by Joshua Shanker, an analyst at Citigroup, who has taken an altogether negative view of the entire Bermudian reinsurance market of late, urging clients to take profit and pair down holdings in October. Explaining his view, he said: "Benign hurricane seasons do not bode well for rate increases. Just as the combined impact of Hurricanes Katrina, Rita, and Wilma, joined by the saber rattling of meteorologists worldwide, was able to drive up rates for property risk in the Southeast and Gulf of Mexico regions, the lack of meaningful storm activity and the cowering of the doomsday soothsayers are likely to have the opposite effect. While we do not expect a return to 1 January 2005 levels, the directionality of a rate is as important as the rate itself."
For now, Shanker's and AM Best's somewhat dissenting voices are being drowned out by a more upbeat crowd whose opinion is best summed up by Edward Creasy, CEO of Kiln. Capturing the prevailing optimistic attitude of Lloyd's players - with and without Bermuda operations - he said there were still "excellent opportunities to exploit".
- Lindsey Rogerson is a freelance journalist.
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INVESTMENT - TABLE 1 - LLOYD'S OUTLOOK REVISED TO POSITIVE
Following the announcement of National Indemnity's $7bn reinsurance deal with Equitas, Standard & Poor's revised its outlook from stable to positive on the Lloyd's insurance market and the Society of Lloyd's. The rating agency said the deal could "remove any realistic potential for reserve inadequacy at Equitas to undermine confidence in Lloyd's - in particular, amongst clients, brokers, and capital providers".