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Questor says BUY
The BP oil spill wasn't only bad for the Gulf of Mexico and Tony Hayward, it was also damaging for insurers operating in the Lloyd's of London insurance market, the 322-year old City institution that covers some of the world's most complex risks.
Catlin, one of the larger players in Lloyd's, was no exception. Insurance claims related to the explosion on the Deepwater Horizon oil rig, which resulted in the deaths of 11 workers and led to the worst offshore oil spill in US history, saw Catlin facing a $180m (£115m) bill in the first half of the year.
This – combined with losses from the Chilean earthquake in February – sent profits at the company down 64pc during the six months ending June 30 to $86m (£54m), falling from $240m in the corresponding period last year. The performance fell short of analysts' forecasts of a profit of $105m as Catlin said it had also been hit by $49m in foreign exchange losses, while its investment returns fell 30pc to $140m as yields on government bonds dropped.
Losses of this nature are commonplace in the Lloyd's market, where company profits are hostage to natural disasters, investment returns and rising and falling insurance premiums.
However, Stephen Catlin, the insurer's chief executive, said the BP leak – which was finally plugged last weekend – was likely to have a huge impact on the insurance industry, with legal complications meaning it could take up 20 years to untangle all liability for the spillage. He added that the cost of covering energy risks was also likely to jump significantly, particularly for offshore drilling platforms, a fact that would benefit revenue streams for insurers.
Last September, Questor retained its buy recommendation on Catlin – which is domiciled in Bermuda – after the company posted a record half-year profit as investment returns more than tripled. Despite conditions being less fertile one year on, Questor believes Catlin remains an investment opportunity shareholders should explore.
Catlin now covers about 30 different types of risks and has a operations in 17 countries across five continents. The company also recently set up a reinsurance company in Switzerland.
Although short-term risks continue to hang over the Lloyd's market – namely the Atlantic hurricane season – Questor believes Catlin shares are still worth buying for their impressive yield of 7pc, a figure that is expected to grow to 10.4pc by 2013. The company's price to earnings ratio follows a similarly positive pattern at 7.7, but expected to fall to 3.6 in three years' time. These compare strongly to its peers such as Amlin and Brit, who also operate in Lloyd's.
The only downside is the company's share price, which has dipped over the past year - albeit by just 0.64pc - while others in the sector have grown significantly. Despite this, Catlin remains a buy.