UK-based specialty insurer Novae has recorded a pre-tax profit of £62.6m, up from £42.8m the previous year, on gross written premiums of £638.5m, up from £590.3m. The combined ratio deteriorated a fraction of a per cent, to 91.0%, from 90.3%.
Net investment income improved to £14.3m (1.2%), from £11.1m (0.9%) in 2013.
A final dividend of 18.2p a share was declared, up from 16.5p a share. A special dividend of 20.0p a share was declared, the same as for 2013.
Novae said that its pro-active management of the group's underwriting portfolio had resulted in "particularly strong performance" from the Marine, Aviation & Political Risk Division, with premium income up 28.1%. Property (premium income up 3.9%) recorded strong growth in the facilities units, offset by cutbacks in several classes, most notably Agriculture.
Meanwhile there was a net reduction in casualty business, with premium income down by 6.8%. The majority of the reduction was a result of international liability, professional indemnity and motor business. This was partially offset by growth at the new cyber unit.
There was an increased outwards spend on reinsurance, most notably for property catastrophe business.
Foreign exchange movements generated a gain of £10.2m for the year, compared with a loss of £11.4m in 2013.
For 2014 the £9.6m of incurred losses, contributing 2.0pp to the 2014 claims ratio, were mainly a result of adverse winter weather in the UK and US. Although the loss was down from last year (£10.6m, 2.1pp), the relative gain was a fraction lower than the estimated average gain for the market as a whole, given that the industry estimate of insured losses in respect of natural catastrophes was, at about £31bn, the lowest for four years.
Reserve releases made a greater positive contribution to the combined ratio in 2014 than they did the previous year – 6.5pp in 2014, compared with 4.2pp in 2013. The margin held over actuarial best estimate edged upwards to £73.4m, from £71.0m.
Novae chairman John Hastings-Bass noted that the industry was faced with a developing regulatory environment. "Lloyd's minimum standards, the Solvency II regime and FCA's conduct risk agenda have all been areas of focus for the business in 2014". He said that he remained hopeful that "an appropriate balance" between regulation and innovation will be found. "In particular, we hope that all our regulators work together to remove any overlap that may arise in their activities".
On the investment front, Novae said that it had recently undertaken a comprehensive review of its investment strategy, "evaluating opportunities to enhance yield on the portfolio without introducing undue risk or volatility". The change in allocation from the end of 2013 to the end of2014 appeared to be an increase in "government agencies" and certificates of deposit, while "corporate" and "government" were reduced. That resulted in a decline in triple A-rated/government investments, a small increase in double-A rated investments, a decline in single-A rated investments, and an increase in unrated investments, from 3.8% of the overall portfolio, to 7%.
Novae chief executive Matthew Fosh reported that progress had been made in Bermuda since Novae's announcement last September that it intended to establish a presence there. "We have subsequently started to build this operation, including opening an office in Hamilton and relocating Philippe Chevereau to the island". Fosh also noted that the UK tax authority HMRC had "confirmed in writing that any profits arising in the Bermudan Lloyd's coverholder and on the planned intra-group reinsurance should not be subject to UK corporation tax".
Fosh reiterated the warnings he issued in Novae's interim statement for 2014. Headwinds facing the industry "continue to manifest themselves in the form of a softening market, low investment returns, increasing regulatory burden and an uncertain outlook for the global economy".
The most interesting part of Novae's results was the announcement on investment strategy and the change in the investment mix. This looks to be a move in the direction of no longer sitting and waiting for interest rates to rise, but learning how to cope with a sustained low-interest rate environment. The majority of insurer investment portfolios continue to have an average short-term duration, continuing to wait for the bus that has now been some six years in coming, and shows little sign of arriving before 2016, unless you plan to invest in Ukrainian bonds. Novae appears to have shifted ever so slightly away from this. Its investment return ticked up nicely as a result, but fund managers will not want to see any signs of undue volatility. Those managers, in the end, invest in insurers these days for their underwriting skills, not for their investment prowess.