Contagion is a strong word to use in the context of insurance rates. We have known for some time — and trading statements from the likes of Beazley and Jardine Lloyd Thompson have emphasised — that a relatively benign catastrophe season with few huge disasters, plus the poor return on investments from bonds, have drawn fresh capital into the market.
This has meant a softening of rates to the extent that some reinsurance business is unattractive. The effect is twofold, involving more than merely reinsurance, for if that is less expensive, insurance rates also will fall — and this, according to Bronek Masojada, the chief executive of Hiscox, is the more significant effect. As alternative sources of finance become more confident about insurance as an investment class, they are moving away from reinsurance into large infrastructure projects such as buildings, bridges and energy installations.
Hiscox’s response has been to walk away from unprofitable business while seeking areas where its expertise allows it to outperform the competition. The size of its reinsurance portfolio has shrunk by 15 per cent in the United States and 10 per cent in international business.
Gross written premiums, though, were almost unchanged year-on-year at £1.36 billion at the end of September as it sought business elsewhere. Retail insurance, concentrated in America on providing a full service for small and mid-sized businesses, is now half the group total; premium income in the first nine months from the US was up by 25 per cent. In continental Europe it was almost 9 per cent higher, not bad in an economy that is contracting.
Hiscox was not affected greatly by floods and storms in Britain and Europe, the only real hit being $11 million from Hurricane Odile in Mexico in September. At some stage, though, catastrophe losses will return and much of that excess capital will leave the market.
For now, the omens are good for a further return of capital when the company announces results next spring, after £150 million handed back this year. That prospect makes the shares, up 6½p at 684p, attractive for now, selling on about 11 times earnings. One day, though, the cycle will turn again.
£150m Special return for 2013
£1.361m Gross written premiums
My advice Buy
Why Hiscox is one of the best operators in the market and there is a good prospect of a further special return to be announced next spring
This column has championed infrastructure funds as a safe and reliable source of income for private investors. These buy assets with a long life and guaranteed income and pay out dividends from this income. I wonder, though, if the sector is becoming a little overheated.
This would be no surprise, because the market has favoured such high-yield stocks rather than more cyclical ones for much of the year for their defensive properties. This has pushed prices higher, widened the premium to net assets that the shares trade on and reduced the yield to new buyers.
International Public Partnerships (INPP) shares, up ¾p at 139¼p, are on a premium of more than 10 per cent to net assets, although that NAV is an historic figure. Buy the shares now and the yield on this year’s dividend is 4.5 per cent.
The other question is whether there are sufficient assets available to add to the portfolio. INPP, unusually, gets in as first investor and should see a better return than some others, while it has produced an impressive list of potential projects with its third-quarter trading update. That yield is attractive, but it is also available elsewhere. Worth a look.
6.3p Total dividend for 2014
My advice Hold for income
Why Sector is looking less attractive to yield investors
When your shares are trading on an earnings multiple in the mid-twenties, any slip-up is likely to be punished severely. The markets were beginning to question the Aveva Group story even before a shock profit warning in September sent the shares plunging from above £22.
They recovered 105p to reach £15 yesterday as halfway figures to the end of September came in largely as guided. Revenues were down 21 per cent, adjusted pre-tax profits by 47 per cent to £17.1 million. Aveva, which makes software for engineers to put together ships and other substantial projects, had already indicated that the usual second half weighting would be more pronounced this year.
There are three problems: almost all revenues are from overseas, so there is the effect of the strong pound; there is disruption from changes to the sales force; and, most of all, there is Brazil, where almost all Aveva customers work for Petrobras, the state oil company. This stopped putting much work out to tender before the recent election. This also affected customers in South Korea, who largely supply Brazil.
Against that, the company is cutting back on new hires and expects to make £10 million of savings this year. Its new E3D product has notched up sales of £5 million so far and a cloud-based version is being tried out. Aveva does not need to develop new software for a while.
The shares sell on a more lowly 20 times’ this year’s earnings, which should be the trough. There seems no reason why they should not recover some of those losses. Buy.
Revenue £85.9m
Dividend 5 1/2p
My advice Buy for long term
Why There should be some shares recovery in due course
And finally. . .
Smurfit Kappa, the Irish packaging producer, has said that it might consider joining the drift away from the Dublin market and going for a London listing. The chief executive’s remarks were hedged with ifs and buts, not least because the company is not yet large enough to qualify for inclusion in the FTSE 100. Analysts at Jefferies have concluded that its Irish listing is one reason that the shares have consistently traded at a discount to other packaging companies such as Mondi and DS Smith, though.
Follow me on Twitter for updates @MartinWaller10
