Capital transfer to boost Novae's ROE - analyst

Lloyd's insurer Novae's plans to transfer capital and liabilities from Novae Insurance Company Limited (NICL) to its Lloyd's syndicate could help boost the company's return on equity (ROE) to 12.5% by 2012, according to Joy Ferneyhough, an equity analyst at boutique stockbroker Execution Noble.

Novae announced on Monday that it had obtained court approval for the transfer, which would allow it to free up surplus capital held within NICL for underwriting elsewhere in the group or to return to shareholders. Proposals for the return of any surplus to shareholders will be published in early December 2010.

Ferneyhough said in a research note that Novae has suffered from a low ROE of between 6% and 7% for the past 4-5 years because of its overcapitalisation and the fact that 90% of its business was focused on long-tail casualty business.

In addition to the NICL transfer, Ferneyhough noted that, judging by Novae's first-half 2010 results, the shift in forcus to shorter-tail lines was on track if not ahead of Execution Nobl;e's expectations. "The combination of better business on a more efficient capital base leads to an estimated ROE of 12.5% in 2012 versus 7% in H1 2010," she wrote.

Execution Noble has upgraded its estimate of Novae's fair value to 450p from 396p, offering 38% upside in the share price.