Kiln Interim Results - 14.09.07

Kiln released its interim results on 5 September.  The Press Release is attached together with research from KBW and Shore Capital here, with extracts copied below.

Highlights

Financial summary

· Profit after tax of £17.2 million (2006: £16.3 million)

· Profit before tax £20.8 million (2006: £24.3 million)

· Earnings per share of 5.89p (2006: 5.59p)

· Annualised return on equity 14% (2006: 15%)

· Cross-cycle minimum dividend increased from 4p to 5p

· Interim dividend 1.33p per share (2006: 1p per share)

Operational summary

· Gross written premium £241.3 million (2006: £230.8 million)

· Net earned premium £129.0 million (2006: £121.2 million)

· Rates very slightly reduced from last year (less than 2%)

· Managed syndicates' combined ratio of 85% and claims ratio of 48% (2006: 86% and 49% respectively)

· Investment income £11.0 million (2006: £8.7 million)

· New corporate structure established and operating effectively

Outlook

· Committed to maintaining underwriting discipline through the cycle; planned capacity at Lloyd's £847 million for 2008 year of account, a reduction of 14%

· Continued progress on establishing a presence for Kiln in the USA and developing distribution channels

Commenting on these results, Kiln Group chief executive officer Edward Creasy said: "Kiln has made good progress during the first six months of 2007. Our profits after tax are up 5% despite the costs of our redomiciliation to Bermuda. Although market conditions are becoming more challenging, rates in our portfolio have remained stable, being less than 2% down on last year, and we expect full year premiums for 2007 to show a small increase on the 2006 equivalent.

Although this is somewhat below our initial expectations, we strongly believe that our shareholders' interests are best served by maintaining our underwriting discipline, writing for profit rather than volume. For 2008 we are planning to reduce the capacity that we manage at Lloyd's by 14% to £847 million and to continue to focus on developing our distribution access and international reach."

Underwriting environment

While there has been considerable comment in the market about falling rates and the arrival of the soft market, rates in the first half of 2007 for Kiln's flagship Syndicate 510 actually remained only marginally below 2006 levels, at 98.4% of last year's rates, although rates in some areas of the property and reinsurance books have indeed been below the levels we had expected. As is shown in the table below, overall rates to 15 August 2007 remain 16% ahead of those of 2002, which was itself a good year.

Our continuing commitment to underwriting discipline at Kiln means that we do not simply follow market pricing when it begins to turn down. We adhere to the principle of pursuing underwriting profit, which will inevitably have an impact on premium volume at some stages during the insurance cycle. If we do not believe that a piece of business offers sufficient opportunity to generate adequate returns on capital for shareholders, we will choose not to accept the associated risk. To date this year, not all pricing across our insurance portfolio has reached or maintained the levels that we expected. We actively manage our exposure to pricing fluctuations and expand and contract our portfolio of business accordingly. We expect full year premiums for 2007 to show a small increase on the 2006 equivalent. Although this is somewhat below our initial expectations, we strongly believe that our shareholders' interests are best served by maintaining our underwriting discipline, writing for profit rather than volume.

The table below shows current pricing levels still significantly ahead of those in 2002:       

Kiln Premium Rating Index for Syndicate 510

with 2002 as base year

*Premium Rating Index to 15 August 2007

In terms of loss experience to date, 2007 has developed in a similar fashion to 2006, with attritional and large loss activity being broadly in line with expectations. European storm Kyrill and Hurricane Dean passed through with relatively little insured losses to Kiln. The UK floods have affected us and we expect their impact to be around £5 million in total for the June and July incidents combined.

Our decision to reduce our overall capacity at Lloyd's by 14% to £847 million for 2008 reflects our policy of underwriting for profit rather than volume; rates are reducing in some sections of the market in which we specialise and it is our intention to exercise strong discipline with regard to the delivery of satisfactory levels of risk adjusted returns on the capital we manage. This means we must be prepared to walk away from business if it is not in the interests of our shareholders and other capital providers to accept it. It is during the hard market, however, that a company such as Kiln prepares for a possible future deterioration in underwriting conditions. We do this by focusing on the development of longer term business that will form the core of our portfolio through the downturn; such business is built on the relationships on which we set great store as a company. The quality of Kiln's underwriting portfolio, the strength in depth of our underwriting team and the investments we have made over the past few months give us confidence that we will be able to continue to produce robust returns for our shareholders"