Wednesday 4 March 2015

BUY: Amlin (AML)--A Fitting Replacement for Catlin?

Price: 507.79
Shares: 126
Predicted annual dividend income: £34.02

I am a bit of a fan of the specialist insurance sector. I have held Catlin (LON:CGL) since August 2014 and Lancashire (LON:LRE) since November 2014.

The sector is under intense pressure as premium prices are depressed due to the sheer volume of capital being poured into the potentially lucrative insurance and reinsurance markets. Many companies operating in the sector are therefore feeling the pinch a little.

However, this is nothing new. In fact, for the specialist insurer it is par for the course. In fact, one of the marked characteristics of the speciality insurance market is the volatility of earnings. Nonetheless, as a result of this the companies are often operated on very disciplined financial grounds.

This is very much the case of the two biggest specialist insurers, Catlin and Amlin (LON:AML). In many regards there is little to pick between the two FTSE 250 companies. Indeed, when I bought into Catlin last year it could just as easily have been Amlin added.

So why add Amlin now?

In some ways timing is not the greatest. A combination of massive capital reserves and depressed share prices, the speciality insurance industry is seemingly set to enter a period of consolidation. Already Catlin is quite a distance through its proposed acquisition by XL. Similarly, Brit is probably going to be snapped up by Fairfax. These are potentially lucrative events for shareholders (certainly, for me the Catlin deal will be very generous).

As a result, Amlin's share price has been bolstered by a mergers and acquisitions premium in recent months.

Indeed, that is why Amlin has been appearing on my radar again recently. Although not for quite the same reason. With Catlin soon likely to leave my portfolio there will be--presumably--a space for another speciality insurer.

For me, Amlin looks the best candidate. Its market cap is about the same. As is its yield and dividend history. What is more, they seem openly resistant to a merger or acquisition (unlike, for example, Beazley or Lancashire).


For a start Amlin looks pretty reasonable value. Unfortunately, earnings per share (EPS) are expected to drop both this year and next. However, even with the consensus drop of 15% this year and next factored in Amlin still looks reasonable value. For this year:

EPSP/E Ratio
Difference (%)45.16
Clearly there is quite a bit of divergence with regards to predictions. With a consensus P/E of about 12 it does not look overly priced at the moment. What is more, even with the analysts weakest predictions we should still see a P/E ratio of under 16. This is a little higher than I would like. However, even then, it does not seem too unreasonably priced. 

The predictions do improve a little from next year, however:

EPSP/E Ratio
Difference (%)46.60
Although both the consensus and lowest predictions are only a small improvement (less than 1.6% and 0.7%). They are improvements which, happily, bolster the dividend cover a little.


The real appeal of speciality insurance stocks like Amlin are their dividend yield. Amlin is no exception. Analysts predict a dividend of 28.52p and 29.73p per share for this year and next. 

This would yield 5.62% and 5.85% for this year and next. Not bad at all. Add to that the final dividend for 2014 of 18.9p per share and additional 15p special dividend and it is clear that I should be paid well to wait for a turnaround in earnings decline.

Dividend cover is not threadbare either. On consensus EPS we should see the dividend covered about 1.4 times by earnings. Even at the lowest EPS predictions it should be covered--just--at about 1.1 times.

Obviously, such cover is less than ideal (assuming the worst EPS predictions above). However, Amlin has a solid history of maintaining its dividend even through tough times. 

What is more, even if the dividend is cut (rather than ended altogether) it should still yield a healthy amount. Let's say that they look to take coverage back to 2 times earnings. This would produce a dividend of 21p per share which would be a yield of about 4.1%. Not to be sniffed at.

Low Debt Levels

Amlin also has a very low debt to equity ratio of 0.23. However, this is not as low as other speciality reinsurers I considered (such as Beazley) and Catlin. Nonetheless, it is encouragingly low even for a sector in which low debt levels is par for the course.

Amlin and My Goals 

Amlin will obviously represent a useful addition for the dividend aspects of my goals for 2015. With a yield over 5.5% and set to grow it should help draw up my target of a portfolio yield of 4% or more.

Similarly, my target of £800 in dividend income for the year will be helped both by the predicted ordinary dividend income of about £34. What is more, with the special dividend included it should help push me even faster to that total.

With regards too volatility, it is not going to add a great deal with a Beta value of about 0.83. This is only a little lower than my target of 0.85 for my portfolio as a whole. It does add a little, therefore, but not a lot.

As a new position in my portfolio it also means that I now have 24 holdings in total. This means that I should easily reach my target of having between 25 and 30 different holdings in my portfolio by the end of the year. 

However, as noted with my HSBC purchase last month, I am acutely aware that I am now very overweight in financial stocks. This I hope to change over the coming months. Of course, if Catlin leaves my portfolio this will in part be rebalanced somewhat.

With regards to my target of reducing my trading fees to 1.3% or less I am also--mostly--helped with my Amlin purchase. All told the fees were less than 1.27% of the total transaction. Slow but sure progress!

[Creative Commons picture reproduced from Flickr user Anders Sandberg]

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  1. I think you made a decent choice. I personally try to keep dividend cover to 1.5 or higher, hopefully 2, but then you often don't get as many value stocks with higher dividend cover. WHat are your thoughts on Beazley? I suspect a takeover...


    1. Beazley was very nearly my choice. As you say, the cover is much better at about 2.3 times consensus earnings. The predicted yield is pretty good as well at around 4%. Also(!), they have a very low debt to equity ratio and about 70 per share in cash. All nice things.

      All these suggest you may be right about a acquisition. This is even more likely when you think about the sheer volume of cash they are holding and the slim premium on book value the share price is currently showing.

      It is also small enough to be gobbled up without difficulty and big enough to make a difference to the acquirers bottom line.

      If I was not so heavy on financial stocks I would have been tempted to pick up Beazley as well with its recent drops. Maybe when/if the Catlin deal goes through...!

  2. Yeah, definitely one to watch maybe for a swap on the Catlin deal, which I think will happen... can't imagine why it wouldn't happen?

  3. I agree. I don't see the Catlin/XL deal as likely to fall through. Both seem very keen for it to go through and it certainly makes sense. Whether or not Beazley has already been pounced upon by the time it goes through will be interesting to see!

    That is part of the reason why I brought my "replace Catlin" plan forward a little. Get in before there is a little too much M&A water under the bridge!

  4. Replies
    1. Let's hope! It can be seen both ways though, as with some M&A premium already in the price it may be that the share price plummets somewhat!

      That being said, they are not expensive as it stands anyway! Of course, if a deal does come to fruition (which seems unlikely with Amlin) it will seem very wise indeed. Whatever the outcome though, I am happy to be holding Amlin!

  5. Hi DD, I bought Amlin this month too.

    Nice blog you have here btw, I'll catch up on some reading - good to see another UK blogger!

    1. Welcome! Thanks, same to you! I just visited your site briefly yesterday after There's Value directed me your way on Twitter but I was on my way out. Looks excellent!

      We missed the perfect point to pick up Amlin last year, I think, but it is still a good pick at this stage as well. It is a great company!

      I will be sad to see Catlin go. But Amlin is as good a replacement as any! Hopefully will fill the gap admirably!

  6. didn't Huw from FFB40 also pick up Amlin last year?

    1. It doesn't look like it. However, he does have Catlin (CGL) according to his portfolio list. It has always been my slight favourite of the two!

  7. oh yes, I knew it was one or the other!

    1. Yes, they are very easy to confuse with one another!