Novae Group today releases its first interim management statement for 2012. This covers underwriting and investment performance for the first three months of 2012, the Group’s business review for the year to date and its outlook for 2012 as a whole.
Group highlights
– Group gross written premium for the first three months of 2012: £231.1 million, up 5.7% (Q1 2011: £218.7 million). This represents 37% of the planned gross written income for the year (Q1 2011: 34% of planned income)
– Net claims ratio for the first three months: 59% (Q1 2011: 98%)
– Whole account renewal rates were modestly positive in the first quarter, driven by rate improvements in loss-affected classes (Q1 2011: 2% decrease)
– Strong investment return during the first three months of 2012: £6.9 million (Q1 2011: £3.7 million)
– Successful exchange offer for the Group’s 2017 subordinated bond generates a pre-tax gain of £4.9 million
Commenting today, Group Chief Executive Matthew Fosh said: “A year ago the high incidence of catastrophe losses obscured the substantive changes underway at Novae. In Q1 this year the effect of these changes has gained momentum, building towards the 13-15% pre-tax returns on equity that we have targeted.”
Underwriting
In the first three months of the year the Group wrote £231.1 million of gross premium income (Q1 2011: £218.7 million). This represents 37% of the planned gross written premium for the year (Q1 2011: 34% of planned income).
The composition of first quarter gross premium by segment, together with the comparative information for 2011, is set out below:
|
Q1 2012 £m |
Q1 2012 % |
Q1 2011 £m |
Q1 2011 % |
|
|
|
|
|
|
|
| Insurance |
106.1 |
46% |
93.4 |
43% |
| Reinsurance |
125.0 |
54% |
125.3 |
57% |
| Total |
231.1 |
100% |
218.7 |
100% |
The Board continues to expect the premium split for 2012 as a whole to be around 65% for the insurance segment and 35% for the reinsurance segment (excluding inwards reinstatement premiums).
On a whole account basis, rates on renewal business in the first quarter were modestly positive reflecting rate improvements in loss-affected classes. This compares to a 2% decrease in the equivalent period in 2011.
Insurance
During the first quarter the insurance segment performed in line with business plan.
In the property hub there was a reduction in loss estimates from the Japanese tsunami and earthquake offset by an increase in the loss estimate from Thai floods. The UK property units benefited from a much more benign winter than in the two previous years.
The marine hub saw a higher level of claims activity in the first quarter, including losses currently estimated at less than $10 million from the Costa Concordia; this was partially offset by reserve releases from earlier years.
The financial institutions and professional indemnity hub performed in line with business plan. The credit & political risk hub performed slightly better than plan.
Reinsurance
In the reinsurance segment there was a broadly neutral impact from the major catastrophe events of 2011. For property reinsurance there were modest reductions in loss estimates from the Japanese tsunami and earthquake and the Thai floods and an increase in the New Zealand earthquake losses. There was also a reduction in loss estimates from the marine reinsurance hub in respect of the Thai floods.
Elsewhere, there were some reductions in premium estimates in respect of the agriculture reinsurance hub but a benefit from benign loss experience in the aviation reinsurance hub.
Investments
As at 31 March 2012 the Group had investment assets of £1,173.7 million (Q1 2011: £1,143.6 million).
Investment return for the first quarter of 2012 was £6.9 million on average assets of £1,191.3 million, equivalent to a return of 0.58% on average assets (Q1 2011: £3.7 million, £1,136.8 million and 0.33% respectively). The portfolio had an overall duration at 31 March 2012 of 0.8 years (Q1 2011: 0.9 years). Its estimated yield to maturity at the end of Q1 was 1.0% (Q1 2011: 1.5%).
The performance in the first quarter is a result of the Group’s asset allocation to strong investment grade bonds, primarily denominated in sterling and US dollars. As central banks continue to guide towards low interest rates in the short to medium term, the first quarter’s performance reflects a transfer of the recognition of return from future periods. The Board has re-confirmed its total return target for the year as whole of 1.00-1.25%.
2017 subordinated notes
On 12 March 2012 the Group announced an exchange offer under which holders of its £69.4 million (nominal value) 2017 subordinated notes could exchange their existing holdings for new 6.5% 2017 senior notes at an exchange ratio of £900 new senior notes for every £1,000 existing subordinated notes.
On 19 March 2012 Novae announced that it had received valid acceptances under the exchange offer in respect of £66.6 million (nominal value) existing subordinated notes, equivalent to 96.0% of the outstanding subordinated notes in issue. The exchange offer therefore generated a pre-tax gain of £6.7 million before deduction of residual unamortised original issue costs of £1.8 million, and thus a net gain of £4.9 million.
Following completion of the exchange offer £2.8 million (nominal value) subordinated notes remain in issue; and £59.9 million (nominal value) of new senior notes have been issued.
Outlook
Compared to Q1 2011, the first quarter of this year shows a pronounced improvement. This is consistent with the absence of major insured natural peril losses so far in 2012. 2009 and prior underwriting years are generally stable. 2010-2012 underwriting years are performing in line with business plan.
Although a significant proportion of the year remains on risk, performance to date in 2012 has been much more satisfactory than at the same stage last year. Rating across the whole account is modestly positive with further momentum expected in the second quarter which includes the important 1 April renewal date. However, there is little evidence in the first quarter of a broadly-based market turn. Given this environment, Novae’s focus remains on optimising its business mix to enhance return on equity and deliver on the targets set by the Board.
