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Benfield
Benfield Group, the reinsurance intermediary, announced flat operating results for the half year to June 2004. Reported operating revenue was up 0.4% to £206m while the reported trading profit was up 1.4% to £97.3m. In constant currency terms the performance was slightly better with revenue growth of 6.9% and the trading profit growing by 12.8%. Reported group trading margin improved to 47.2% from 46.8%
Pre tax profits grew 113% to £113m, boosted by a number of exceptional items principally the sale of its entire stake holding of Montpelier Re Holdings Limited warrants resulting in an operating net exceptional gain of £26.1m. This gain together with cash earnings generated in the first half of the year, led to a significant improvement in the Group’s net cash position to £89.6m after deducting gross debt of £57.3m.
Whilst unfavourable foreign currency movements have affected the reported result the underlying performance has been reasonable. Of more concern is the state of the underwriting market, which, despite a second year of unprecedented catastrophe losses, has seen increasing competition forcing underwriters to choose between sacrificing premiums, profit or capital.
Overall property rates for 2005 have softened further in most areas (by as much as 15%), except for those affected by hurricane losses. Casualty rates have remained stable with some exceptions, most notably D&O (directors and officers liability which covers public company directors and officers in the event they are sued as a result of their corporate service). While pricing has softened in many lines, terms and conditions showed little or no change, which translates to a higher level of risk for the insurance company.
Unfortunately, investment returns which could compensate for the greater level of risk are lower than the level experienced in the last cycle and are unlikely to compensate for the poorer underwriting.
Trading at 280.75p, the prospective PE of 13.3× is at the upper end of the sector. The yield is 4.2%.
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