Lloyd's insurer Novae (NVA) has historically traded at a discount to the sector. However, the company's return on equity has soared, so the valuation is looking increasingly anomalous. Between 2005 and 2010, Novae managed an average pre-tax return on equity of just 8 per cent, compared with the Lloyd's sector average return of nearer 15 per cent. That reflected the need to set aside regulatory capital to back its non-Lloyd's operation, Novae Insurance Company Limited (NICL). But, in 2010, it transferred NICL's liabilities to its Lloyd's business, which allowed for a significant release of capital and £32.9m, or 45p a share, was returned to shareholders. Accordingly, by end-2012, the group's underlying pre-tax return on equity had soared to 17.6 per cent, which beat both the group's own 13-15 per cent target and the returns achieved by many peers (see table).
- Premium rates still rising
- Benign claims environment
- Rapidly improving return on equity
- Shares cheaply rated for the sector
- Historic sentiment issues
- Low dividend yield for the sector
A legacy of low returns isn't the only sentiment issue that Novae has struggled with. Back in 2001, its book of US liability business (largely professional indemnity cover) hit the rocks and Novae - or SVB as it was then - decided to exit that business. It therefore set about running down the book, but that process hit trouble in 2004 after being forced to make a surprise provision of £104m. Indeed, Novae only closed that legacy book in February 2011 and it's debatable whether Novae's reputation, even now, has fully recovered.
NOVAE (NVA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 486p | MARKET VALUE: | £314m | |
| TOUCH: | 486-488p | 12-MONTH HIGH: | 486p | LOW: 343p |
| DIVIDEND YIELD: | 4.4% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 455p | COMBINED RATIO: | 90.5% | |
| Year to 31 Dec | Gross premiums (£m) | Pre-tax profit (£m) | Earnings per share (p)† | Dividend per share (p)† |
|---|---|---|---|---|
| 2009 | 389 | 4.20 | 41.4 | 12.4 |
| 2010 | 529 | 35.1 | 38.4 | 15.7 |
| 2011 | 606 | -6.30 | -11.8 | 18.0 |
| 2012 | 598 | 39.9 | 44.2 | 20.0 |
| 2013* | 574 | 38.8 | 47.4 | 21.4 |
| % change | -4 | -3 | +7 | +7 |
Normal market size: 500 Matched bargain trading Beta: 0.20 *Numis Securities estimates †Restated for December 2010's eight-for-nine share consolidation | ||||
However, now is actually a good time for insurance companies. That's because the hefty losses that hit the sector during 2011 - from catastrophes such as tornadoes in the US, earthquakes in New Zealand and Japan and floods in Australia and Thailand - have left insurers pushing up premium rates on some business lines in order to compensate. Yet, with the exception of Hurricane Sandy and the Costa Concordia cruise ship disaster, last year turned out to be benign for claims. This year hasn't seen any really big losses yet, either. That combination of low claims and rising rates is good news for Novae.
| Insurance comparisons | |||
| Company | Price/net tangible assets (NTA)† | Prospective yield† | Return on equity* |
| Amlin | 1.4 | 6.2% | 17.4% |
| Beazley | 1.6 | 3.9% | 19.1% |
| Catlin | 1.2 | 5.8% | 11.3% |
| Hiscox | 1.5 | 3.4% | 16.9% |
| Lancashire | 1.6 | 9.1% | 16.7% |
| Novae | 0.99 | 4.4% | 17.6% |
| RSA | 1.7 | 5.7% | 9.1% |
†Based on Numis Securities' end-2013 estimates | |||
*End-2012 reported figures | |||
Indeed, during 2012, Novae's premium rates rose 1 per cent overall, with more significant increases on catastrophe-facing classes. Add that to a benign claims environment and Novae's end-2012 combined ratio (of claims to premiums) improved to a solidly profitable 90.5 per cent, from 2011's lossmaking 101.5 per cent. And, while rival Hiscox (HSX) has said it expects reinsurance rates to start falling during June and July, there's little sign of weakness at Novae where premium rates rose 1 per cent in the first quarter. "The absence of a major impact from natural catastrophe losses contributed to a promising start to the year," said chief executive Matthew Fosh.
