This insurer's valuation and yield seem too good to be true.
A near 9% yield combined with a discount to net assets and a forward price-to-earnings ratio (P/E) of just 5.5 rings a few alarm bells. Surely some mistake!?
Well, "no" would seem to be the short answer from insurer Chaucer Holdings (LSE: CHU). But the company has had something of a chequered history in recent times. Whether that justifies the discount to its peers, though, is another matter.
Chaucer is a London-based Lloyd's underwriter specialising in insurance and reinsurance in marine, energy, non-marine and aviation with UK motor and nuclear -- with operations in Copenhagen, Houston and Singapore.
Strong performance
Its final results for 2009 from last week were generally upbeat and optimistic. Pre-tax profit before the impact of foreign exchange on non-monetary items was £75.3m (versus a 2008 loss of £59.5m), earnings per share were up at 5.8p from a loss of 6p the previous year and both underwriting and investments made positive contributions to profits.
At the current price of 46p, last year's P/E is just 7.9 and the brokers expect this to fall to 5.5 for the current year.
But the market is generally more interested in net asset value and yield with insurers and on these scores, the story looks equally strong. Net tangible asset value per share stood at 55.5p at the end of December, whilst the company intends to a pay a total dividend of 4p per share for 2009.
Anyone wishing to grab the final divi of 2.7p can do so before 7 May. Chaucer says it will maintain the 4p in dividends for the current year, barring disaster.
What's the problem?
So what's the problem? In short, it seems to be a lack of trust and worries over weaker sectors.
In February of last year, Chaucer raised funds of £74.9m to enable it to "take advantage of good rating conditions in 2009" following financial and insurance losses during 2008. This would have done nothing for the share price, but at the same time, the company told us there had been a possible offer. A number of parties seemed interested, including rival Brit Insurance (LSE: BRE).
After the deal was called off, a number of senior executives quit Chaucer and a new management line-up was announced last December.
The market doesn't like such uncertainty. Even worse is uncertainty in performance. And during 2009, Chaucer had problems with its UK motor, financial institutions and political and trade risks.
Recession-related motoring claims combined with the "farming" of bodily injury claims (all those dreadful advertisements you see on TV) caused Chaucer's UK Division to record an underwriting loss of £12.2m. Even so, this performance was still better than most of its competitors.
Swings and roundabouts
Chaucer also managed to avoid the worst losses associated with financial institutions whilst the other four divisions: aviation, energy, nuclear and property made good profits. Such is the way with insurers; loss-making sectors one year do well the next, and vice-versa; swings and roundabouts.
But 2008's poor performance and need to raise fresh capital may linger in investors' minds. Perhaps it shouldn't. The company's investment portfolio is almost all accounted for by bonds and cash. This gives investors searching for value more solidity than they may be used to with most insurers and should help allay the kind of fears often associated with insurers' opaque investments.
On a balanced risk-reward basis, Chaucer looks undervalued to me. OK, insurers often are due to the risks associated with them and their naturally erratic performance. In Chaucer's case, though, this looks overdone for no good reason. And until the share price catches up with reality, there's a near 9% yield to keep buyers happy.
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