Brokers' Views: KBC Peel Hunt

Initiating coverage of the sector, broker KBC picks out its winners and losers from the non-life insurance space, which has ‘deservedly’ rallied recently following the interim results season. Analyst Christian Stobbs argues that ‘stock selection remains critical’ as it is likely that performance will not be consistent across the sector, but will depend more upon ‘the efficiency of balance sheet capital utilisation and relative exposures to CAT [catastrophe] and non-CAT lines’.

‘The good news is that CAT rates have hardened and 2009 should be a bumper year for profitability, should the hurricane season remain benign. This will allow certain players to return capital.’ As such, the three key picks are those with good CAT rate exposure, consistent reserving records, efficient capital utilisation and attractive valuations. As such, this filter throws up the names of corporate client Hardy Underwriting Bermuda, where Stobbs sees 10 per cent upside, and FTSE 250 pair Beazley and Lancashire, where upside is estimated at 17 and 39 per cent respectively. If there is a gentle hurricane season, Amlin is a fourth.

The bad and the ugly

Not all lines have remained as profitable and this provides the other side to the coin. ‘The bad news is that most other rates have not hardened, nor will they meaningfully before 2011,’ observes the broker. ‘It also seems only a matter of time before adverse claims development rears its ugly head, particularly in liability lines.’

This analysis implies, it is argued, Brit, Catlin, Chaucer and Hiscox are trading ‘close to fair value’ and, therefore, all four receive a hold recommendation.

Even worse is feared for Omega Insurance, which is described as ‘over-capitalised and… likely to remain so until at least 2011, diluting shareholder returns’. Moreover, at Novae, its ‘liability focus is suggestive of stock underperformance, a point further supported by its valuation’, with 19 per cent downside anticipated. Both are a ‘sell’.