Expected problems in 2008 lead to creation of £300m debt facility

Shares in Benfield plunged as the reinsurance broker warned that year-end profits were set to decline for the second year in a row, with gloomy prospects for the following year.

In a trading update released this week, Benfield said the decline of the dollar was the main culprit, but also pointed the finger at continuing market deterioration, which it expected to cause further problems in 2008.

Benfield shares, valued at 304p before trading com-menced on Monday, dipped below 280p following the news – an initial loss of over 8%.

However, the price had recovered to 297p as Insurance Times went to press.

Benfield also announced plans for a two-year £150m share buy-back scheme – a repurchase of approximately 22% of existing shares.

This will be funded in part by a new £300m debt facility.

It said its broking operations continued to generate growth on a constant currency basis “driven by significant new business wins and a sustained increase in demand for property catastrophe reinsurance cover in peak exposure zones”.

But the broker said it did not believe that the reinsurance pricing cycle would turn in the near future. It added: “the current trend for insurers to retain more risk is expected to continue into 2008.”

Numis, which downgraded Benfield from ‘add’ to ‘reduce’ following the release of its interim results in September, said that the broker’s gloomy outlook for 2008 was the greatest cause for concern, and expected to make a “moderate” reduction on 2008 earnings per share (EPS) as a result.

It added that Benfield’s share repurchase programme would not improve the 2008 EPS.

Benfield posted pre-tax profits of £53m in 2006 and £53.8m in 2005. In its interim report this year, Benfield said year-end profits would be comparable to those of 2006.

Investment bank Goldman Sachs recently failed in a takeover bid for Benfield, and at the end of November, there was speculation that Aon was showing interest in the broker.