Credit spreads on Ace Ltd have widened on concerns about potential losses from this year's impending US hurricane season, and while the company still risks further spread widening, now may be a good time to buy, according to some analysts.
The cost to insure Bermuda-based insurer and reinsurer Ace's debt has risen by around 12 basis points off its lows to be bid at around 36 basis points, or $36,000 per year to insure $10 million in debt. In recent months the company's bonds and swaps have also has been underperforming those of its peer XL Capital Ltd.
"We believe that XL is likely to have greater exposure than ACE to this year's hurricane season, as it did last year, and, as a result, could underperform again if storm headlines emerge during August and September," analysts at Barclays Capital said in a report.
To take advantage of this possibility, Barclays recommends buying protection on XL at 42 basis points, and selling protection on ACE, at 36 basis points.
"While risk remains elevated for commercial lines and reinsurance companies heading into the 2006 hurricane season peak, we believe that ACE is likely to outperform its peers in terms of storm exposure and trading volatility," the bank said. Ace may also be less at risk because it has minimised its exposure to many risks since last year.
"Their risk profile has changed when compared to this time last year. They have taken a lot of their wind exposure off," said Mark Anderson, investment grade research analyst at Thrivent Financial for Lutherans in Minneapolis.
Much of the company's business is in direct insurance, rather than reinsurance, which also lowers some of the company's risk, he said. Last year the company also strengthened its balance sheet by selling new stock, which has helped its credit profile, Anderson said.
Credits in the broad insurance sector delivered positive excess returns in July after four consecutive months of losses, however, with hurricane season gearing up spreads may be headed for some further weakness.
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