James Dean says markets were buoyed by US interest rate cuts, but recession fears remain
The FTSE 100 regained some lost ground this week, edging over 6,000 points – and the upward trend was echoed by the S&P 500 and other world indices.
In the US, the Fed shaved interest rates further, with cuts now totalling 2.25 points in four months. This has certainly buoyed global markets, but only time will tell if this is a thin veneer over full recession.
KBC Peel Hunt said in a note this week: “Given that the US is still the source of half the world’s premiums and nearly 40% of Lloyd’s, it is important to put considerable weight on the prospects for the US which remain positive in the short term, but are indicative of sharp price cutting.”
Non-life rates could decline by as much as 10%, and the analyst added: “This will be a trading sector in 2008 as rational and irrational fears bring opportunities.” But, Novae and Beazley both came in for a little criticism.
Beazley shares were expensive relative to assets, KBC said, adding that the company was buying back shares at an overvalued level. It also pointed at “extraordinary” reserve releases, but said: “The group should be able to cushion the effects of any errors and omissions (E&O), and directors’ and officers’ (D&O) problems.”
However, investment write-downs were a possibility given an above average exposure to risky bonds, according to KBC.
Comparing relative levels of reserves and shareholder equity, KBC found that Beazley had a ratio of 4.6 – much higher than the other insurance stocks it analyses. A higher ratio indicates higher risk, but higher reward.
KBC predicts Beazley will make £92.4m in pre-tax profits for 2007, recommending to ‘hold’ and giving a target price of 140p. Beazley shares were trading at 177.75p as Insurance Times went to press.
Despite having a “punchy” business model, Novae brought an unattractive return on equity, KBC said, adding: “Novae is an over-large insurer which may yet get smaller and more efficient with a deal to de-scale its liabilities.”
KBC predicts Novae will make £35m in pre-tax profits for 2007, recommending to ‘hold’ and giving a target price of 33p. Novae shares were trading at 31.75p as Insurance Times went to press.