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Lloyd's cat focus adds to attractions: analyst

Rates on US catastrophe-exposed lines are set to rise by a further 10-20 percent at the key mid-year renewals as a result of capacity scarcity, according to analysts at London-based stockbrokers Execution Ltd. The report adds that although non-cat business remains "sluggish", the rise in rates for peak zones will fuel an 18 percent increase in aggregate premiums written by Lloyd's insurers in 2009.

Scrutinising the recent April renewals, the report noted that non-cat business was still struggling to generate significant pricing improvements. But Lloyd's strong focus on catastrophe business - in part a reflection of its move away from US casualty business after the 1997-2002 losses - adds to the market's appeal to investors.

The report projects 14 percent tangible book value growth in the Lloyd's market, compared to 4 percent for its rivals. Execution said its predictions highlight "the growing strength of the smaller niche players and Lloyd's… these companies have a more selective focus in some of the lines [which are] more exposed to rate hardening and more attractive margins".

Amlin, Hiscox, Catlin and Lancashire - which Execution estimates write 30-60 percent of their business in cat-exposed areas - were highlighted as likely to show "significant" top line, EPS and book value growth this year compared to their more monoline Bermudian and Continental European peers - which are weighted at approximately 10 percent in cat-exposed lines.

The report adds: "The only area where new capacity has been raised is within Lloyd's," citing the spate of capital raising on Lime Street. £645mn has been raised from the equity markets and from Lloyd's Names in total.

Buyers' desire for increased risk diversification "is exactly how the Lloyd's model functions", the analysts said, adding: "As such, the Lloyd's companies are beginning to see business which usually would not come to Lloyds as it would be written by a small number of larger players - this also gives an opportunity to some of these smaller names to grow the percentage of a slip which they write, eg from 10 to 15 percent, as the larger shares of other players are reduced significantly."

Another factor that favours Lloyd's is the perspective of the ratings agencies. The latter have doled out several high profile downgrades in the industry this year, but S&P's A+ stable rating for Lloyd's makes the market "now one of the stronger rated entities within the industry", according to the Execution report.

Finally, the stockbroking firm continue to see Lloyd's as one of the net beneficiaries of the exodus of business and talent from troubled insurance leviathan American International Group (AIG).

"[Lloyd's] is the second-largest excess and surplus lines market in the US behind AIG. We expect benefits to come via volume as well as price, as AIG's pricing power continues to diminish along with its business. We do still expect business to move away from AIG, as it is clear that clients are looking to diversify and AIG will have commanded large shares of business (50%+ on some slips)… we expect that business may begin to move more frequently when the full extent of the personnel exodus is felt through 2010 renewals."

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