Lloyd's of London insurer Novae (NVA) slumps 18.6% to 679.5p as it reveals that, at best, its underwriting operations will barely scrape a profit in 2016.
Although they also make money by investing the capital they hold as a buffer against insurance claims, the core activity of an insurer is underwriting. Insuring individuals and businesses against the risk of loss from a number of different factors including weather, crime and accidents.
HEAVY LOSSES
The aim is to receive more in premiums than you have to pay out in claims. The metric for measuring a company's ability to do this is the combined ratio. Any figure below 100% means a company is receiving more in premiums than it pays out in claims. Novae is now guiding for its combined ratio to be at 98% or 100% this year thanks to a number of large loss events.
MORE TROUBLE
The company also reveals a hit from a 'significant bond market sell-off' post the US elections and a £17m from accounting changes on deferred acquisition costs.
In response Stockdale cuts its recommendation from 'add' to 'hold' and its price target from 940p to 780p, slashing its 2016 pre-tax profit forecast by 43% to £43.9m.
Analyst Joanna Parsons is more positive on the medium-term outlook though and comments: 'Today’s news is clearly disappointing and the share price reaction is no surprise.
'However, we believe Novae’s strategy is correct with benefits already accruing eg improved investment yield and lower tax rate. The underwriting focus onto specialist lines makes sense and we see good growth potential in its SPS and classes such as Cyber,
albeit the latter is not without risk.'
