Shareholders poised for more Novae cash

Lloyd’s insurer Novae could return more excess capital to shareholders in 2011, following the £32.9m surplus redistribution announced last week, according to chief underwriting officer Peter Matson.

“There may be a possibility of a further payback of our surplus cash sometime next year, but we thought that where we are now is a prudent stance,” Matson said.

Novae plans to return the £32.9m capital – or 45 pence a share – to shareholders following the completion of the transfer of liabilities from its FSA-regulated insurance company, Novae Insurance Company Ltd (NICL), to its Lloyd’s syndicate, Syndicate 2007. This transaction freed up capital previously trapped in NICL.

Novae first revealed the transfer plans in December 2009, and announced the completion of the transfer in its November interim management statement.

NICL’s audited net assets at 31 December 2009 were £107.7m, and around £40m was being deployed to support the division’s underwriting, leaving a surplus of more than £60m.

This excess was placing a drag on Novae’s return on equity (ROE), but Matson said that redeploying it would have prompted a rating agency downgrade, thus putting the existing business under threat.

“Sadly, we decided that the way to improve ROE was to fold everything into the Lloyd’s vehicle,” he said.

While the £32.9m earmarked for return to shareholders falls short of the £60m surplus identified within NICL, Matson explained that Lloyd’s required Novae to put up some of the capital to support the business being transferred to Lloyd’s from NICL.

Matson says the 45-pence-a-share payback came in above analysts’ and shareholders’ expectations of between 35 pence and 40 pence. He attributed this higher than expected return in part to reduced Lloyd’s capital requirements imposed on Novae for the 2011 year.

Novae’s capital requirement for 2011 is £337.5m, or 58.7% of Syndicate 2007’s 2011 premium capacity of £575m. This level was in part driven by the reduction in risk attributed to Novae’s 2002 and prior underwriting years, which it is looking to sell.

“Lloyd’s has looked rather favourably on what we have in our outstanding back years and has taken the same view that we have – that they are not a problem for us any more.

“As a result, our capital has come down substantially for next year,” said Matson.