Conditions in the insurance sector are not getting any easier, even if Lancashire Holdings seems to be successfully swimming against the tide. Its results for 2016, therefore, along with some good figures from Beazley last week, can be seen as a snapshot for the sector as a whole.
Lancashire’s figures are not too bad even if the fourth quarter seems to show some deterioration, the fall in total gross premiums accelerating slightly. The problem continues to be the amount of capital that is flowing into the sector as investors seek a return not available elsewhere. This pushes down the premiums insurers can charge.
There are various ways the industry can counter this. Lancashire is protecting its core business while refusing to take on unattractive business. Meanwhile, the company is lessening its risk to historically low levels by taking out more reinsurance. It specialises in big-ticket items, marine assets such as oil rigs and ships and aircraft.
The combined ratio, the main measure for insurers’ performance and the difference between cash out and income from premiums and return on capital being held, deteriorated slightly to 76.5 per cent for the year from 72.1 per cent the previous year, but this is a healthy result that rivals may have difficulty emulating.
Its return on investments improved from 0.7 per cent in 2015 to 2.1 per cent in 2016, aided by better returns from fixed income. Lancashire also had a boost from the release of reserves not needed from earlier years, running at about the same level as the previous year on a strictly comparable basis.
The shares, up 59½p at 740p, have generally been held for two main reasons. The amount of consolidation in the insurance sector has had it identified as a potential bid prospect, though the share price’s hefty premium to net assets per share would make this an expensive takeout.
Meanwhile, it is committed to returning surplus capital to investors by means of a series of special dividends. Last year’s payment raised the total to 90 cents including a 75 cent special, a bit down from 2015’s 110 cents. This year’s payment will probably be a bit lower but still suggests a yield of 7 per cent. The same reasons to hold, then.
My advice Buy
Why The dividend yield is attractive and Lancashire is as well placed as any in the sector, while that much suggested bid may yet arrive
Primary Health Properties
When a company is as attractive to investors and as successful as Primary Health, one is required to ask what could one day go wrong. The company, featured here regularly for its steady investment income, buys NHS properties and pharmacies and rents them to their occupants. About 90 per cent of the rent roll, therefore, is paid by the NHS and is as assured as it can be.
All the other metrics are pointing the right way. There has been a slowing of the rate of growth in the value of the portfolio through 2016, but unlike other areas of the property market it is still growing. Debt is down to a level that allows for further growth in that portfolio after a capital raising last spring.
Dividends for last year are now covered by cashflow. They have been increased now for 20 years in a row and can continue to grow. The long-term drivers remain an ageing population and the need for the NHS to shift patients into local health centres and relieve the pressure on hospitals.
What could go wrong? PHP could stop finding further properties, though it is confident enough for this year and has just bought its first in Ireland, with plans to grow fast in an undeveloped market.
Rising interest rates and inflation could make the yield on the shares, 4.9 per cent for the current year on dividends paid quarterly, look less attractive, though inflation should move the value of the portfolio upwards and allow further increases in the payout. All in all, a perfect income stock.
My advice Buy
Why No prospect that the good yield will disappear
Drax Group
If a quoted company says it is talking to investors about reviewing its dividend policy, the general assumption is that the direction of travel is upwards. In the case of Drax, the market seems to have assumed the opposite, marking the shares back 20p to 359p. It ain’t necessarily so.
Drax has been a trial for investors because its earnings vary wildly according to factors beyond its control, and the dividend policy is to pay out half of what comes in. A 2.5p total for 2014 is less than half the previous year’s figure and represents a yield of well below 1 per cent. Drax, which has always had a single biomass and coal station, has been adding to its assets to make its earnings more reliable, buying Opus Energy, which supplies small and medium-sized business with energy, and four gas-fired projects.
There is also a contracts for difference deal that will smooth out future earnings. The gas stations will only be built later this year if the right price can be gained in the wholesale market. The eventual dividend policy should therefore provide a more reliable and rising income, though what this will be is not clear yet. Best avoided for now.
My advice Avoid
Why There are too many uncertainties to be resolved
And finally . . .
When Vectura bought Skyepharma last summer it was seen as a complementary merger between two middle-ranking pharmaceuticals companies in a rapidly consolidating industry. The deal brought with it various legacy arrangements, including one with Glaxosmithkline over Ellipta, Skyepharma’s asthma drug. Vectura said yesterday that, given the strong sales of Ellipta by Glaxo in its 2016 results, it had reached the £9 million cap a year on royalty payments in 2016, a year earlier than suggested.
