Capital reclaim to boost Novae

Lloyd's insurer Novae finally received court approval last month for the restructuring plan that it announced in December. That involves transferring the liabilities of its non-Lloyd's operation, Novae Insurance Company Limited (NICL), into the Lloyd's business – a move that will allow a significant release of solvency-related capital. NICL has £108m of capital, but only about £40m of that has been used, suggesting a surplus of over £60m. Management won't announce until December whether those funds will be returned to shareholders, but analysts at broker Numis Securities are expecting at least £30m of the surplus – or about 40p a share – to be returned. The rest may support growth.

That process is more than just a means of delivering a fat one-off payout for shareholders. It also addresses a key factor behind the poor sentiment that has dogged Novae's share price for years – the fact that Novae has a weak return on equity compared to rival Lloyd's underwriters. Numis Securities expects Novae's return on net tangible assets to rise from just 6.8 per cent for 2010 to 13.8 per cent for 2011. That's a lot closer to the 15 per cent to 20 per cent returns that are typically generated by listed Lloyd's underwriters.

Another isses dogs Novae, however. That dates back to when the group's book of US liability policies (mainly professional indemnity business) hit the rocks in 2001, forcing Novae – or SVB as it was then – to exit that business line. The process of running down the book then struck trouble in 2004 when Novae was forced to make a £104m provision against this legacy account, leaving investors cautious. But progress with this book since has proceeded according to plan and, with the first-half figures in August, management reported that claims in these discontinued units had fallen 81 per cent during the past four and half years. Essentially, that book continues to wind down satisfactorily, with further provisions now looking unlikely.

Admittedly, Novae's underwriting performance this year hasn't been so good and, in the first half, its combined ratio (of claims to premiums) deteriorated to a loss-making 101 per cent. But that reflects one-off hits from large catastrophes early in 2010 – $20m (£12.6m) or so in total from the Chilean earthquake and the Deepwater Horizon oil-rig disaster. But Numis expects the full-year combined ratio to improve to a reasonably profitable 91.3 per cent – not the best performance in the Lloyd's sector, but not the worst either.

Moreover, and unlike a number of its rivals, Novae reported that premium rates on its policy renewals had risen 1 per cent overall in the first half. That trend may continue because the big catastrophe claims earlier in the year will encourage insurers to keep premiums high in order to re-build their reserves – even if claims hit profits in the short term. Add to that the need to compensate for the weak investment returns that most insurers are suffering with in today's ultra-low interest-rate environment, and the outlook for premium rates doesn't look so poor. Besides, Novae's investment return, at an annualised 3.1 per cent, isn't so bad – Hardy Underwriting, a rival, produced an annualised return of just 1.2 per cent. Yet Novae's portfolio remains entirely focused on safe-looking bonds and cash.