Motor underwriter breaks even after rate rises and scaling back of unprofitable business

Lloyd’s motor underwriter KGM is out of the red and is now at “break even” point, according to Canopius chairman Michael Watson.

Canopius bought KGM in June last year, despite KGM playing a significant part in pushing its parent, Optimas, into a £3.5m loss in 2008.

Since the acquisition, Canopius has raised rates by around 20% and scaled back unprofitable business, which has led to a reduction in gross written premium from around £80m to £50m.

KGM is also refusing to insure policyholders in a significant number of postcodes with poor claims experience.

Watson said KGM should be making a profit by the end of this year, adding: “The early signs are encouraging, but it will be some time before you can say with conviction that everything in the garden is okay again.”

He was speaking after Canopius Group’s posting of a £43m profit for the year, down 14% on the £50m it made last year. The combined ratio deteriorated to 92% from 88%.

Canopius is the largest UK household writer in Lloyd’s, as well as a capacity provider and shareholder in Arista.

Watson said he was “delighted” with Arista, which is expected to make between £200,000 and £300,000 in 2010. Arista was set up as a managing general agency in 2007 with Canopius’s backing.

“I’m delighted and I have to temper that by saying that the trading conditions they have had to contend with have been more challenging than they and we anticipated. The build up and the scale of the business has been somewhat slower than originally anticipated,” said Watson.

Globally, Watson said the catastrophe losses would have been significantly worse, were it not for the layers of reinsurance protection.

Despite the earthquake in Japan last week, there was still capital for acquisitions, he added.

“The reality is that we probably have a bit less money today than we did prior to the Japanese quake. That is something which will affect most Lloyd’s participants,” Watson said.

“We certainly had surplus capital in the company at the end of 2010 and we would like to try to find ways to deploy that profitability and I think it is arguably easier for us to do that through acquisitions than through organic growth,” he added.