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Insider Vital Insurance Statistics - November 2009

Lloyd's stocks and valuations suffer in October

With October proving a disappointing month for equity markets as some investors looked to take profits from the strident recovery that began in late March, reinsurance stocks underperformed the major indices, driven down by falling Lloyd's and European stocks.

Share prices of 26 out of the 32 companies that make up the Atlas Partners (AP) (Re)insurance Index dropped in the month with a knock-on effect on price to book value (P/BV) ratios.

Overall, only 8 of the companies are now trading at a premium to book value, compared to 12 at the end of September, and the average P/BV ratio has come in from 0.96x to 0.90x month-to-month.

Meanwhile, the AP index, which had outperformed strongly on a 12 month basis, has now underperformed the FTSE 100 index for the second month in a row - up 12.6 percent over the 12 months to 31 October compared to a rise of 16.4 percent on the FTSE 100 - and is being slowly caught up by the S&P 500 and Eurotop 100.

On a one month basis reinsurance stocks have underperformed all three of those indices however, with an aggregate 3.4 percent fall in October.

Those falls have been driven by a 6.8 percent fall in Lloyd's offshore domiciled stocks - a group that includes Catlin, Hiscox and now Beazley - and a 4.6 percent fall in Lloyd's onshore domiciled stocks, which currently include Amlin, Brit, Chaucer and Novae.

The biggest fall came from Beazley with a 9.2 percent drop to 107.10p, while Hiscox shares were down 7.6 percent to 320p and Omega shares declined 6.8 percent to 120p. Amlin was down 6.9 percent at 353.90p, and Chaucer lost much of its gains over the last three months to close October 6.7 percent lower at 46.18p.

Indeed, the only Lloyd's stock to trade up in the month was Brit - 3.1 percent higher at 208.30p.

The recent falls mean that, in the main, the stocks' P/BV ratios have come in markedly.

Comparing P/BV ratios for Lloyd's stocks at the end of October with where they were at the end of January - when Lime Street was arguably viewed as a safe haven for investors sheltering from the financial storm - makes for interesting reading (seefigure5).

The majority of Lloyd's stocks are now trading at a lower premium (or greater discount) to book value compared to nine months ago.

Lime Street's perennial pace-setter Amlin, for example, has come in from a premium of 1.59x to a still industry beating 1.29x, while Beazley, Hiscox and Hardy have all come in closer to 1x book over the period.

For Omega, the last nine months have seen its shares move from trading at a 1.32x premium to below book at 0.96x.

The only notable exception to the trend is Chaucer (Novae has remained broadly flat), which has traded up largely on ongoing uncertainty about its future ownership - only partially resolved as Pamplona began executing its stake building strategy after eventually getting the green light from the FSA (see page 4).

As a result, the valuation gap has continued to narrow between the Lloyd's and Bermudian sectors.

Premium for ROE

Nevertheless, as figure 4 shows, Lloyd's and European (re)insurers still enjoy a trading premium over their mid-Atlantic rivals for their return on equity (ROE) performance.

Several of the former group - including the likes of Omega and Munich Re - clustered around the 10-12 percent 2009E ROE level are trading at or above 0.95x book; but a group of Bermudian counterparts predicted to generate 14-18 percent ROE this year struggle to trade above 0.90x, with the exceptions being Arch and Lancashire.

The only outlier among the Bermudians - RenaissanceRe - trades at just 1.04x book despite analysts expecting a 25.6 percent ROE for 2009.

Commenting on the downward movement of Lloyd's stocks and the AP Index, Atlas Partners' Jon de Jager said: "It feels like a slight pause is happening at the moment. It's been a year where there's been a lot of volatility and speculation - the Lloyd's play was seen as defensive, and Lloyd's stocks have also managed to track their way back with the rest of the market as well.

"But now you've got the underlying market not doing anything, so it's probably a turning point where people take the decision on what's going on in the insurance sector but also the underlying market and potentially look to take profits, putting downward pressure on prices."

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