Catlin Shares Rise on Global Growth Amid Insurance Rate Drop

Aug 08, 2014 8:18 am ET

(Updates with airline premiums starting in sixth paragraph.)

Aug. 8 (Bloomberg) -- Catlin Group Ltd, the insurer paying for two Malaysian Airline disasters, rose the most in more than a year in London trading after reporting record earnings even as deteriorating rates plague the industry.

Pretax profit more than doubled to $318 million in the first half compared with a year earlier, the Bermuda-based insurer said today in a statement. That beat the $226 million average estimate of four analysts surveyed by Bloomberg.

International expansion over 15 years has given the Lloyd’s of London insurer scope to boost earnings amid investor concern that declining rates are pushing the insurance market into its worst position in years, Catlin said. The insurer’s average weighted premium rates fell 3.2 percent in the period, with conditions more favorable in North America and Asia than in London and Bermuda.

“There’s a lot of screaming headlines out there about how this market is awful, how pricing has no profit potential in it,” Chief Operating Officer Paul Jardine said in an interview. “And yet we have a business model that allows us to perform not just in fantastic market conditions but also when it gets really tough.”

Catlin shares rose as much as 5.5 percent, the biggest intraday gain since May 2013, and were up 4.8 percent at 509.5 pence at 12:45 p.m. in London. That pared the stock’s decline this year to 12 percent.

Airline Rates

Jardine said he expects the recent spate of airline disasters to “significantly increase premium rates.” According to Fitch Ratings, that will probably occur in the fourth quarter, when most airlines renew policies.

“We expect airline insurers to begin material reviews of rates, policy terms and conditions, and underwriting risk factors,” Fitch analysts said yesterday in a report.

Catlin insured the Malaysian Airline plane that disappeared in March and the jet shot down over Ukraine last month.

The insurer’s losses from the first incident, along with a barge collision in the U.S. and a fire at an offshore drilling rig, amounted to $31 million in the first half, Catlin said today. The downing of Flight MH17 in Ukraine and attacks on airplanes by militia in Tripoli will probably cost the insurer less than $50 million, it said. Losses from catastrophes and large single risks are running less than the historic average, according to the insurer.

Global Risk

While the conflict in Ukraine didn’t significantly affect Catlin in the first half, the dispute and Russian sanctions are adding to global risk that can change underwriting parameters, Jardine said.

“Geopolitical uncertainty is higher today than it was at the start of the year and I think that means you are operating with more caution when it comes to parts of the business like political risk, like terrorism, like war,” Jardine said.

Net income surged 129 percent in the first half to $273 million, the company said. Gross written premiums rose 11 percent to $3.66 billion.

“The rate reductions are still relatively modest overall,” and underwriting outside London is contributing more to profit. Joanna Parsons, an analyst at Westhouse Securities, said in a note to investors.

The company isn’t averse to entering other major emerging markets such as Turkey and Mexico that have “vibrant, growing economies with large insurance sectors,” according to the COO. Even so, most growth will come from expanding product lines in markets the company already serves, he said.

“We spent 15 years investing in our international footprint,” Jardine said. “That build-out is probably largely done.”

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