James Dean looks at the ratings landscape.
Moody’s painted a bleak picture of the ratings landscape in a note last week. “Overall credit quality for corporate, sovereign, and banking debt issuers on a global basis worsened as the downgrade-to-upgrade ratio rose to about 3:1 from about 2:1 in the previous quarter,” the ratings agency said. At the end of the first quarter of 2008, 3.8% of rated issuers were on review for downgrade, compared with 1.8% on review for upgrade. Similarly, 13.1% of rated issuers were given negative outlooks, compared with 6.1% with positive outlooks.
Also, more European issuers are on review for downgrade than review for upgrade, and three times as many issuers in the US and Canada have negative outlooks as opposed to positive outlooks. Among industries, real estate, construction, finance, securities and leasing had the largest proportion of downgrades in the first quarter of this year.
Beazley’s underwriting, especially in the US, should help drag it through a time of difficult investing, according to analyst Numis. Total gross premium income in the first quarter was down 2% on last year to £201m. Income written by the Lloyd’s division fell 11% to £171m, which Numis blamed on price softening and more selective underwriting. Income written by the group’s US offices more than doubled to $71m. “Beazley’s US growth and delayed earn-through of specialty profits represent key attractions at this stage of the underwriting cycle,” an analyst said.
Beazley has identified potential exposure to 11 of the 250 sub-prime lawsuits reported by insurance analytics firm Advisen, but said it expected costs to be covered by normal reserves. The main difficulties were occurring in its investments, with positive returns offset by mark-to-market losses on equities, ABS and corporate debt. The total return was 0.1% in the first quarter.
“We continue to assume zero return on equities for the 2008 financial year,” an analyst said. EPS was lowered to 23.7p to reflect this, although Numis hinted this would be reversed if conditions improve. Numis recommended to ‘add’ with a target price of 175p. Beazley shares were trading at 150p as Insurance Times went to press. Earlier this year Beazley shares hit 184p, but have been in gradual decline since.