In the latest six-month trading period, BP Marsh’s net asset value (NAV) increased by £14mn to an all-time high of £203.5mn, which underpinned a total shareholder return (TSR) of 7.9 per cent. Moreover, the post-period-end disposal of the company’s 18.7 per cent stake in Kentro, an independent speciality MGA, realised £51.5mn, equating to an impressive internal rate of return (IRR) of 24 per cent and 3.4 times money multiple on the investment. It means that the debt-free company now has net cash of £51mn to recycle into new investments, a sum equating to two-fifths of its market capitalisation of £127mn.

The backdrop remains positive, with premium rates across the global insurance industry registering a 3 per cent increase in the latest quarter, the 23rd consecutive quarter of rate rises. Rate increases have been relatively consistent across all regions in which BP Marsh’s portfolio companies operate. Property classes registered the highest growth rate (10 per cent in the second quarter of 2023), driven by strong capacity demand, limited new entrants and the cost of reinsurance. Casualty classes reported rate growth in line with the industry average.

Largest holdings delivering bumper gains

• NAV up 7.3 per cent to record £203.5mn (567p)
• Interim pre-tax profit of £15.6mn includes unrealised gains of £14.8mn
• Current cash of £51mn (142p)
• Special dividend of 2.78p per share

The positive trading environment, ongoing organic growth and contribution from new product lines are proving a boon for BP’s Marsh’s second-largest investee company, London-based Lloyd’s insurance broker CBC.

In the first seven months of 2023, the business reported 183 per cent growth in cash profit to £7.5mn, smashing its full-year budget of £5.5mn. The valuation of BP Marsh’s 47.1 per cent holding in CBC was £19.2mn at the start of 2023 and has since been lifted by £11.3mn (59 per cent) to reflect the improved financial performance. The £30.5mn stake accounts for 15 per cent of the company’s latest NAV and has delivered an eye-watering 38 times return on BP Marsh’s £0.8mn original investment. This highlights the investment team’s ability to back the right management at an early stage, providing a combination of equity and loan capital, and then reaping the rewards as they grow their businesses.

The £11.3mn valuation gain on CBC and the £1.8mn valuation uplift on Lilley Plummer Risks (LPR), a specialist marine Lloyd’s broker, accounted for the vast majority of the £14.8mn unrealised investment gains in the six-month period. LPR’s core marine book continues to perform well, with premium income increasing and insurer loss ratios tracking much lower than in previous years. The uncertainty caused by the war in Ukraine has led to elevated war premiums, too.

Furthermore, LPR’s expansion into niche and diverse areas (political violence, terrorism and property and casualty insurance) has proved a prescient move, as has the addition of a new North American property team, which continues to outperform. BP Marsh’s 30 per cent stake in LPR is now worth £8.9mn, or 29 times invested capital, a valuation that reflects a fivefold rise in LPR’s cash profit to £2mn in the past two years and the ongoing strong operational performance.

Unwarranted share price discount

Despite more than trebling NAV per share from 171p to 567p since I first suggested buying the shares, at 88p (‘Hyper value small-cap buy’, 22 January 2012), and paying out total dividends of 34.95p per share excluding the forthcoming special dividend of 2.78p per share, BP Marsh’s shares are rated on a deep 38 per cent discount to NAV.

Effectively, the £127mn market capitalisation company’s equity portfolio of £133.5mn and loan portfolio of £22.4mn are in the price for half their carrying value once you factor in net cash of £51mn (142p). This offers a huge ‘margin of safety’, hence why BP Marsh’s share price is at the level of my last buy call (‘Dividends’ buybacks and an unwarranted discount’, 13 June 2023) despite the FTSE Aim All-Share Total Return index shedding 13 per cent of its value in the same four-month period. Expect the unjustified deep share price discount to narrow markedly in more favourable equity market conditions. Buy.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.