Gamble of the week: an insurer with low subprime exposure
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Not all financial sector stocks are necessarily tarred with the same brush. Those insurers who have managed to avoid the siren song of subprime mortgage investments may be well placed for a market bounce.
Gamble of the week: Hiscox (HSX)
Hiscox comprises a group of companies operating in the UK insurance market as an insurer and reinsurer. The Daily Telegraph’s Questor Column describes Hiscox as a “rather exclusive Lloyd’s underwriter”, dealing in everything from fine art to kidnap insurance.
Hiscox booked a tiny £5m of losses from its UK household account in its recent first-half results, but the bulk of claims relating to this year’s flooding have yet to come in – they expect overall losses of around £30m. (Hiscox anticipates that total UK insurance industry losses from the floods will amount to something like £5.5bn; rival estimates are as low as £3-3.5bn.) Last week the company said that its syndicate forecasts for its flagship Syndicate 33 for 2005 and 2006 remained unchanged. First-half pre-tax profits rose by more than 70%, helped by particularly strong performance by its catastrophe insurance and global markets units. Pre-tax profits for the half year ending in June, at £105.6m, were comfortably ahead of consensus estimates of £89m.
The company’s investment returns also look sound, with reported gains up 8% to £48m. Hiscox assured its investors that it had minimal exposure to US subprime loans. The company’s portfolio of shorter-dated bonds can now be reinvested into more attractively priced assets as they mature.
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The City verdict on Hiscox is mixed. Eleven analysts follow the business; five rate the stock a ‘buy’, with six maintaining a ‘hold’ opinion on the shares. The stock has come off its recent high at £3.04 and, provided that Hiscox remains relatively untouched by Hurricane Dean or other catastrophic events, it should provide good returns for those investors willing to take a little extra risk.
Recommendation: HIGHER-RISK BUY at current levels (approximately £2.60).
Tim Price is CIO of Global Strategies at Union Bancaire Privée, London. Tim also runs his own share-tipping service, The Price Report.
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