More on Brit Insurance Holdings
British Insurance Holdings
British Insurance Holdings reported strong full year results to December 2004. Net earned premia grew 27.3% to £854.5m and the technical result almost doubled to £80m. Operating profit grew 22% to £122m. British Insurance Holdings’ combined ratio decreased to 92.5% (2003:88.5%) a big drop from the 86.9% seen at the half year due to an abnormally high level of catastrophic claims which added 10.5 percentage points to the combined ratio. A strong investment performance of £77.3m (2003:£50.9m) helped boost the pre tax result.
Brit Insurance Holdings plc is an insurance holding company that writes both direct and reinsurance business through Lloyd’s and its Financial Services Authority (FSA) regulated company, Brit Insurance Limited. British Insurance distributes its underwriting products mainly through broker channels. It also has 34.1% holding in a holding company which controls two FSA regulated investment managers, EPIC Asset Management Limited (EPAM) and Epic Specialist Investments Limited (ESI).
In 2004 the company completed the restructuring of its underwriting operations into three ‘customer facing’ units - the London Market, Reinsurance, and UK Underwriting Centres. The London Market Underwriting Centre is the largest of Brit’s 3 underwriting centres accounting for £431.6m (40%) of gross written premium in 2004 and reported a combined ratio of 92.1%. The
Reinsurance Underwriting Centre has shown progress in developing the property division outside of the US. The property division is expected be further boosted in 2005 by the acquisition of a new team which is reportedly “well respected for leading US and Canadian business.” Despite the major storm loss claims the reinsurance business has achieved a combined ratio of 95.1% (2003: 65.7%).
The UK underwriting centre wrote gross premia £345.4m (up from £309.4m) and its combined ratio improved from 95.3% to 91.9%.
British Insurance Holdings unearned premium reserve decreased marginally to £566m. This unearned premium represents a book of business written at excellent terms, principally during 2003 and 2004, the results of which will be reflected in the profit and loss account over the medium term. British Insurance Holdings looks sound but the outlook for the insurance market appears to have weakened with early indications of 2005 rates looking poor.
British Insurance Holdings’ profitability has been at least partly due to good pricing of risk. A benign claims environment in the first half, with the company reporting claims activity below average for the first six months of 2004 was offset by a high level of catastrophic losses in the second half. Despite a significantly higher level of claims in the second half the company has managed to report excellent results which is commendable.
The insurance market has also continued to weaken, which is surprising given the bad storm season this year, partly due to higher levels of competition.
A recent report from Benfield estimates that overall property rates for 2005 have softened further in most areas, except for those affected by hurricane losses. Casualty rates have remained stable with some exceptions, most notably directors and officers liability (over for company directors and officers in the event they are sued in connection with their work). While pricing has softened in many lines, terms and conditions showed little or no change, which translates to a higher level of risk for the insurance company. Investment returns are not expected to compensate for the poorer pricing either (as they did in the 1990s).
British Insurance Holdings shares are trading at 87.25p prospective PE of 9.2× is within the sector range. The yield is attractive at 7.6%.
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