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Benfield shares still falling as bearish forecasts continue

Shares in reinsurance broker Benfield Group are continuing to fall following another bearish note from analysts at Numis Securities.

On 28 December Numis analyst Nick Johnson again reiterated his recommendation of REDUCE and a target price of 245p on the shares following the broker’s downbeat trading forecast on 10 December, which said 2007 profits are set to be “marginally lower than previously indicated”.

From an opening price of 283p on 28 December the shares have fallen 2.1 percent to 277p at the time of going to press.

Johnson said: “Our adjusted earnings per share forecasts fall by 10 percent to 16.2p for 2007 and by 12 percent to 16.0p for 2008. The 2008 change reflects a more cautious view on reinsurance broking revenue than when we first downgraded in September, as well as the inclusion of steeper rate decreases within Benfield Corporate Risks.”

He added: “Reinsurance broking profits remain under pressure:  We continue to expect increased risk retention by insurers to undermine brokerage in 2008.  In the trading update Benfield stated that it was too early in the cycle for falling reinsurance rates to drive a pickup in demand.”

Benfield’s shares have fallen over the last few weeks as analysts responded negatively to the 10 December news – particularly on 2008 prospects.

Indeed Jonathan Firkins of UBS downgraded his recommendation on the stock to Sell as he suggested consensus earnings per share estimates for 2008 need to fall by around 20 percent “to reflect the difficult trading conditions and the higher debt expense”.

“While Benfield’s trading statement yesterday pointed to only mild downward pressure on 2007 forecasts, mainly due to the weak US dollar, we remain much more concerned about 2008 estimates,” he commented.

“Premium rate reductions are likely to put further downward pressure on revenues and there is little evidence of any pick up in demand in the short term,” Firkins continued.

ABN Amro has also cut its rating on the company from “buy” to “hold” and lowered its target price to 280p from 325p following the profits warning.

In a note, ABN Amro said the announcement of a £150mn share buyback was insufficient to offset the disappointing trading outlook.

ABN Amro had been the source of a surge in Benfield’s share price in late November after analyst Joanna Parsons commented on links with a potential takeover by Aon, suggesting the brokers would be a good fit.

In recent months, US fund managers such as Harris Associates LP, Artisan Partners, Deccan Value Advisors LP and Tradewinds Global Investors have been buying Benfield stock while observers have speculated over a potential takeover of the broker.

But the Aon link looks less likely after the Chicago-headquartered giant revealed that it would return all the proceeds of the $2.4bn sale of its Combined Insurance Co operations to shareholders.

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