IPC Holdings A Hold On Yield

We maintain our Hold rating on the shares of IPC Holdings Ltd. (IPCR). The company’s operating earnings of $1.62 per share came in significantly ahead of our expectations.

The ongoing turbulence in the credit market had its impact on the investment portfolio. However, we note that there continues to be a number of medium severity catastrophe events around the globe, which could increase premium rates locally in 2008. Though the company has built a track record of strong underwriting results, while maintaining a strong balance sheet and ROE in the mid-teens since its inception, currently we think that the high volatility in its earnings stream based on its near mono-line business model will continue.

We are lowering our 2008 and 2009 earnings expectations to $4.93 per share and $4.55 per share, respectively, from $4.51 per share and $4.45 per share, previously. At the current price, IPC’s shares trade at 6.3x our estimated 2008 EPS and 0.90x its book value of $34.48 per share as of June 30, 2008.

We believe the stock’s discount to the peer group reflects A.M. Best’s negative outlook for this company, the increased risk inherent in the company’s mono-line business model, as well as the risk that catastrophe reinsurance terms and pricing don’t improve as much as currently anticipated. Up until now the share appeared cheap at 0.9x book value (which had incorporated a modest acceleration of top-line growth next year along with risk of further outsized losses) however, the median has moved down the IPCR multiple level.

We note that the generous dividend yield (currently 2.8%) provides some downside cushion for total return. Our new six-month target price of $32.45 per share incorporates a lower price-to-book multiple of 0.9x to our adjusted book value estimate of $36.05 per share at December 31, 2008. This translates to a total potential return of 5.9% over the next six-months.

Read the full analyst report on IPCR

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