Kiln (KIN) is one of the oldest brands in the Lloyd's of London market, underwriting a wide range of specialty property/casualty insurance and reinsurance. Historically Kiln has been amongst the most profitable companies in the sector. We expect that earnings will be driven by robust premiums following a spate of disasters, and a reduction in capacity in recent years. We believe that sentiment toward the shares will also be bolstered by the inevitably of consolidation amongst the Lloyd's insurers.

Kiln was established in 1962 as an international insurance and reinsurance underwriting group that specialises in complex, unusual risks. The group has £703 million of capacity under management for the 2005 year, making it one of the largest agencies trading in the Lloyd's insurance market. R J Kiln manages four syndicates: Kiln Combined 510, Kiln Catastrophe 557, Kiln Mathers 807 and Kiln Life 308. Today the company has a market leading position in five core business areas (reinsurance, accident and health, aviation, marine/special risks, and property).

KIN listed on the LSE in August 1998 with an opening price of 116.40p. The stock quickly proved popular with investors, and by December it had reached an all-time-high of 143p. However, the good times proved fleeting with the arrival of a protracted bear market. Over the course of the next 18 months, the stock declined by 80 percent to a record low of 28p. Along with many other insurers, Kiln's earnings were impacted by excess industry capacity, which caused over-aggressive pricing, and an unusually high number of catastrophes, including the World Trade Center (WTC) attacks.

In recent years KIN has regained some of the ground lost during the previous bearish phase, with earnings recovering on the back of strong growth in premiums across the industry. From a charting perspective, KIN has spent the past two and a half years locked within a trading range between 107p and 71p. In our opinion in will be only a matter of time before the share price breaks to the upside as the market pays credence to Kiln's low valuation.

We were impressed by the record result delivered by the insurer in the year to 31 March 2005. Pre-tax profit rose 15 percent to £38.1 million following a strong underwriting performance. KIN reported a combined ratio (claims and costs as a percentage of premiums) of 86 percent which is excellent by industry standards. A favourable underwriting environment resulted in gross written premiums increasing 17 percent to £313.5 million. As a result management increased the dividend fivefold.

Underwriting profit earned from participation in Lloyd's syndicates totalled £23.4 million, a 15 percent decline on 2003. However, we consider this a fair performance given that it included an after tax cost of around £19.4 million in relation to last year's fierce hurricane season.

Commissions earned from managing agency operations increased 57 percent to £15.3 million. A proven skill in short-tail underwriting (where claims are notified and settled quickly) has bolstered Kiln's ability to secure management deals from third parties. These arrangements not only provide incremental revenue but allow KIN economies of scale.

KIN also has a 20 percent stake in insurer W. R. Berkley, which gives the insurer exposure to the longer tail of the insurance cycle. Despite still being in start up mode, Berkley delivered an investment return of £1.7 million compared to a £0.2 million loss last year.

Overall we are particularly heartened by the proactive manner in which capacity has been managed. Management have sought to increase exposure in areas where rates are still rising while pulling back from businesses where growth is muted. Accident & Health is one business where rates are still increasing. As a result KIN took the opportunity to secure Personal Accident business for contractors working in Iraq. Property remains the largest sector, accounting for 53.6 percent of premiums.

We regard the insurer's business model as attractive. Kiln is less reliant on investment income compared to other competitors, with the primary focus on delivering healthy underwriting returns. This strategy is possible because Kiln specialises in risks where the incidence of claims is known and settled in a relatively short time frame.

In our opinion Kiln's conservative reserving strategy is also a great strength. Kiln's share of losses from the four US hurricanes and the Japanese typhoon are expected to total £34.6 million but well within previous risk provisions. Amounts set aside for claims relating to the WTC attacks declined a further 14 percent in 2004 to £15 million. The release of prior provisions bolstered earnings last year by £8.0 million, highlighting the 'margin of safety' contained within Kiln's already impressive earnings figures.

Kiln's future earnings profile is highly encouraging in our opinion. The company reported a 16 percent increase in the net unearned premium reserve to £97.0 million, which will bolster profitability in future years. Meanwhile KIN has unearned profit commission of £18 million before tax to flow through earnings in the next two years. Management also reported that the underwriting environment has remained robust this year. In the early stages of 2005, rates had risen across 18 out of the 43 classes of business where pricing is monitored.

In our opinion premium rates in the industry will remain solid. The damage inflicted by natural and man-made disasters highlights the routine risks that insurers face, and underlies the need for the industry to keep rates high to maintain profitability.

The much anticipated consolidation of quoted Lloyd's insurers suffered a setback recently after a deal between Amlin and Chaucer collapsed. Nevertheless we continue to believe that corporate activity in the sector is inevitable. A tie-up between companies would generate substantial cost efficiencies, including better rates for reinsurance cover.

From a charting perspective, we have been encouraged by recent price action with the shares stabilising above the base of the range before rebounding strongly. The latest rally has resulted in KIN trading towards the upper end of the range, highlighting the strong underlying demand for the stock. A break above trend-line resistance at 105p would be positive and suggest that a new advance is getting underway. Eventually, we believe that KIN has the potential to trade beyond the all time high of 143p.

We believe Kiln's valuation is undemanding with a prospective price earnings ratio of just 6 times, which compares favourably to the average multiple for Lloyd's insurers of 8 times. In addition, KIN offers a dividend yield of 3 percent. As such we recommend KIN to all Members as a Buy up to 100p.