Thursday, April 14, 2005
SVB: new cash, new position
On Tuesday at the price of 24.12p I took out a new position in insurer SVB.
SVB has had a tough time of it lately, is thoroughly loathed by the market and trades at a large discount to tangible asset value. The company's recent final results reported net tangible assets totalling 31.6p per share. That's a 31% premium to my buy price, meeting my 30% margin of safety rule and the shares were bought.
SVB struggled in 2004 and it's balance sheet suffered a real hammer blow as huge provisions were made for potential losses from insurance written previously. This time last year, SVB showed net tangible assets of 55.6p and the shares traded at around 50p. SVB was unpopular already at the time. Losses from it's discontinued US units had pushed the group's combined ratio, a key measure of insurance profitability to 99.9%, it would have been impossible to be any closer to a loss. In June 2004 SVB was forced to bite the bullet on losses on its syndicate 1241 and announce a:
provision at Group level of £103 million in excess of June 2004 syndicate reserves
Bolstering reserves like this is a sign of sickness in an insurer. The company is setting money aside to meet expected future claims that will be arriving at a rate far higher than previously envisaged. Insurers use their reserve base to write insurance against. The premiums are an income stream which are calculated to replace any money that be paid out to meet claims - and hopefully leave some profit left over. Increasing reserves is not only expensive, it severely hampers a company's ability to operate at the same level. What SVB announced was the equivalent of a three pint blood donation and the shares duly tanked.
The investment case revolves around the new management having got this reserving decision right and developing a profitable business from what remains. If SVB can manage this I'd expect the share price to recover to the level of declared tangible asset value at 31.6p or higher and I'd take my exit.
Good news today arrived from Chaucer Holdings, my first insurance position. Chaucer cheered the market with the announcement merger talks with Highway Insurance are off. Though I would have liked to have seen a merger between the two, the prospect was preventing the market making a collective and reasoned valuation on Chaucer. Shares moved almost two percent higher on the news.
My SVB stakes is being paid for mainly through new funds that weren't in my possession at the start of the year. This confuses the return year-to-date calculation. I'll be telling you how I will be calculating return in my next blog.
And if that wasn't enough, shares in the Fayrewood, a possible share purchase highlighted recently have fallen further today, making a buy very attractive indeed. Depending on market movements, this could happen tomorrow. Whatever, I'll be keeping you informed of developments.
The Artful Dodger
SVB has had a tough time of it lately, is thoroughly loathed by the market and trades at a large discount to tangible asset value. The company's recent final results reported net tangible assets totalling 31.6p per share. That's a 31% premium to my buy price, meeting my 30% margin of safety rule and the shares were bought.
SVB struggled in 2004 and it's balance sheet suffered a real hammer blow as huge provisions were made for potential losses from insurance written previously. This time last year, SVB showed net tangible assets of 55.6p and the shares traded at around 50p. SVB was unpopular already at the time. Losses from it's discontinued US units had pushed the group's combined ratio, a key measure of insurance profitability to 99.9%, it would have been impossible to be any closer to a loss. In June 2004 SVB was forced to bite the bullet on losses on its syndicate 1241 and announce a:
provision at Group level of £103 million in excess of June 2004 syndicate reserves
Bolstering reserves like this is a sign of sickness in an insurer. The company is setting money aside to meet expected future claims that will be arriving at a rate far higher than previously envisaged. Insurers use their reserve base to write insurance against. The premiums are an income stream which are calculated to replace any money that be paid out to meet claims - and hopefully leave some profit left over. Increasing reserves is not only expensive, it severely hampers a company's ability to operate at the same level. What SVB announced was the equivalent of a three pint blood donation and the shares duly tanked.
The investment case revolves around the new management having got this reserving decision right and developing a profitable business from what remains. If SVB can manage this I'd expect the share price to recover to the level of declared tangible asset value at 31.6p or higher and I'd take my exit.
Good news today arrived from Chaucer Holdings, my first insurance position. Chaucer cheered the market with the announcement merger talks with Highway Insurance are off. Though I would have liked to have seen a merger between the two, the prospect was preventing the market making a collective and reasoned valuation on Chaucer. Shares moved almost two percent higher on the news.
My SVB stakes is being paid for mainly through new funds that weren't in my possession at the start of the year. This confuses the return year-to-date calculation. I'll be telling you how I will be calculating return in my next blog.
And if that wasn't enough, shares in the Fayrewood, a possible share purchase highlighted recently have fallen further today, making a buy very attractive indeed. Depending on market movements, this could happen tomorrow. Whatever, I'll be keeping you informed of developments.
The Artful Dodger
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