The Investment Column: Hiscox blows up a storm, but don't buy just yet
Tuesday 14 March 2006
Although the group took a hit of $730m (£422m) from the three major US storms - Katrina, Rita and Wilma -reinsurance reduced its net loss to a manageable $285m, and even left its global markets division, from which it writes its catastrophe insurance, in profit for the year.
Although Hiscox is now well placed to take advantage of the rise in catastrophe premiums - which have inevitably rocketed since the storms - the most exciting part of the group's business in the immediate future is its non-Lloyd's division, where profits have been booming without any growth in sales.
This business is centred around writing insurance for high net worth individuals and, in spite of being just 10 years old, generated clean profits of more than £40m last year. In the UK, the group currently has just 100,000 policies. However, it estimates its market to have a potential 3 million customers.
Meanwhile, having successfully set up a new office in Bermuda, into which it is attracting a string of new corporate clients who would not trade with it in the antiquated London market, the group now has excellent growth potential in its commercial business as well.
Since we last tipped this stock 18 months ago, the shares have risen 50 per cent, and its prospects now look as strong as ever. Perhaps the only warning note for investors is that its valuation looks a little stretched at 249.25p. However, Hiscox is definitely worth holding on to.
Private equity remains largely an exclusive club for the very wealthy, or institutions, and there are few ways that private investors can get on board. Candover Investments is one of the few routes into the big European buy-out scene and returns over the last three years prove just how lucrative an asset class private equity has been. The shares have more than doubled in the last four years and currently trade at 2,110p.
Yesterday's results were good - net asset value has increased to 1,740p, beating even a resurgent FTSE All Share, and the company is set to return £100m, or 457p per share, of excess capital to shareholders.
The investment trust is a proxy for the much larger private equity funds run by Candover, the last of which closed in November with €3.5bn of commitments. Candover Investments contributed €500m.
Private equity funds make their money by buying companies, publicly or privately owned, growing them and selling them on again. Candover's portfolio currently includes such diverse investments as the bingo hall operator Gala and energy consultants Wood Mackenzie.
It is hard to justify buying an investment trust that trades at a 21.2 per cent premium to net assets. However, if the private equity industry can continue to deliver results at a rate approaching 20 per cent per annum, as it has done for most of the last decade, there is more upside left. Competition for quality assets is increasing, so it is not unreasonable to believe that returns may slow down, but that competitive atmosphere also means a good market for selling existing investments.
The management has an excellent track record. Given the limited ways in to private equity, buy.
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