James Dean examines the problems facing PI insurers

A small group of Credit Suisse traders eclipsed alleged French rogue trader Jerome Kerveil with some dodgy dealings of their own last week, forcing the bank to reveal £1.4bn in losses. The traders had overvalued their positions – in other words, covered up poor performance – and most have been sacked. But they, alongside senior management, now face an FSA inquiry.

Professional indemnity underwriters must be feeling queasy. Aside from investor claims relating to the purchase of (now decimated) subprime-backed securities, they must also be worried about traders keen to hold on to lucrative bonuses in markets that are not conducive to big gains. And the fact that senior management at Credit Suisse have been dragged into an FSA inquiry shows that, should internal processes fail to pick up misconduct lower down the chain, the sphere for investor suits – and therefore professional indemnity claims – gets bigger.

Other trader upsets from last week also helped churn the markets, with the Bank of England – like the Fed with Bear Stearns – wading into the ring with HBOS. The bank moved to stamp out rumours – believed to have been circulated by traders attempting to sell short against HBOS – that the two were in emergency funding talks. There was no truth whatsoever in the rumours and regulators are investigating. Initially, HBOS recorded a 17% fall in share price.

Meanwhile, weekend reports suggested the big banks and the Bank of England and Federal Reserve, have talked about bulk-buying mortgage-backed securities in a bid to end the credit crisis.

Nevertheless, insurance stock remained relatively stable during this eventful week. Commenting after the slew of full-year results, analyst Numis said: “Results have been strong across all companies, with reported EPS on average 13% ahead of consensus EPS forecasts and many exceeding the top end of the forecast range. However, share price reactions have been more mixed.

“Overall, we think the muted movement for the sector is attributable to investor realisation that downward pressure on rates and investment earnings mean that 2007 is likely to represent peak earnings for the current underwriting cycle.”

The analyst also estimated 10% upside in Hiscox stock on the back of a fall in share price, and raised its recommendation to ‘add’ from ‘hold’.