Britain’s insurance sector has navigated a particularly turbulent few years, with a global pandemic, Brexit, climate change and economic stagnation all contributing to significant volatility.
Many firms have seen wild fluctuations in their earnings, making a healthy profit in one year before swinging to a considerable loss the following year.
Likewise, insurance stocks have tended to ebb and flow, creating uncertainty among shareholders.
Challenging times: Britain’s insurance sector has navigated a particularly turbulent few years, with a global pandemic, Brexit, climate change and economic stagnation all contributing to significant volatility
Shareholders face a highly competitive sector, typically with low margins, while many do-it-yourself investors may find difficulty comprehending the complexity of the financial results and data it reports.
Yet it remains popular with investors who enjoy generous dividend yields and the reliability of a continuous income stream through boom and bust times.
The previous two years have been more challenging for the sector, especially British car insurers, which have struggled with squeezed margins following the end of Covid-related travel restrictions.
This has been caused by the surging cost of repairs, vehicle parts and used cars, as well as a greater number of crashes driving claims volumes higher.
In 2022, motor insurers recorded their worst underwriting performance in a decade, posting a net combined ratio (NCR) – the level of claims and costs as a share of premiums – of 109.5 per cent, according to consultancy EY.
Any number above 100 per cent denotes a loss.
EY forecasts an improvement this year, but only to 108.5 per cent, despite insurers jacking up premiums to compensate for previous underpricing.
The FTSE 350 SuperSector Insurance, an index tracking the performance of London-listed insurers, is down roughly 1 per cent over the last year, trailing the FTSE 100’s return of around 11 per cent.
However, this masks a divergence in performance across the sector, with some providers seeing bumper gains over the last 12 months while others have struggled,
Reflecting this troubled environment, Direct Line recently reported a £183.8million loss in its motor insurance segment for the first half of 2023, against a £53.2million profit last year.
Since the beginning of the year, the company’s shares have plunged by about 30 per cent, trailing an 8.5 per cent loss for the broader FTSE 250 Index.
Rival Admiral Group, however, has demonstrated significant resilience, posting first-half pre-tax profits of £298million in its motor arm. Its shares are up by 11.3 per cent since the start of the year.
The pair will be concentrated on ensuring premium price hikes outpace the rate of inflation over the next year, although EY anticipates motor insurers will achieve an NCR of 97.4 per cent in 2024.
Profitability: British motor insurers have struggled with squeezed margins following the end of Covid-related travel restrictions
The home insurance sector, which has also struggled to avoid losses, will be hoping for fewer wild weather events like flooding and extreme heat, a major risk factor in subsidence.
Last year, British home insurers paid out more in claims than they took in premiums for the third consecutive year, awarding £1.22 in claims and expenses for every £1 they received in premiums, according to trade body the Association of British Insurers.
To try and offset this, many insurers have diversified their product offering; Beazley is well-known for providing cyber security cover, an increasingly common form of insurance, given how much the pandemic has accelerated people’s reliance on technology.
In its half-year results, the group partly attributed making a record $366.4million in profits to growth in its European cyber business as the Russia-Ukraine conflict heightened worries over ransomware.
Beazley could score even higher profits in the coming year as the international cyber insurance market continues its expansion. Analytics provider GlobalData estimates it will double from $16.7billion in 2022 to $33.4billion by 2027.
Health insurance is also predicted to continue growing in popularity, including in the UK, where long NHS waiting lists have caused massive numbers of Britons to pay out of pocket for vital treatment.
Private healthcare revenues at Aviva jumped by 58 per cent in the first half, helping boost the London-listed company’s operating profits and full-year earnings outlook.
Losses: Last year, British home insurers awarded £1.22 in claims and expenses for every £1 they received in premiums, according to the Association of British Insurers
Aviva is one of the ‘better-regarded stocks’ in the insurance industry, says Richard Hunter, head of markets at Interactive Investor, pointing to its digitisation push and reinvestment through acquisitions.
Under Amanda Blanc’s leadership, the company received praise for returning over £5billion to shareholders following pressure from Cevian Capital, which subsequently congratulated the firm for an ‘excellent job’ in reviving its fortunes.
It’s not just Aviva, however. Hunter notes that the largest insurers ‘remain in rude financial health,’ supported by healthy solvency coverage ratios.
He says they are ‘for the most part well-placed to benefit from the evolving and ever-growing generation of savers and investors,’ particularly income-seeking shareholders who enjoy ‘punchy’ dividend yields.
Legal & General, M&G and Aviva are highly recommended by Interactive Investor, but he says Prudential is the one loved most by the markets.
Though headquartered in London, the group’s operations span Asia and Africa, two continents whose demography and economic prospects provide enormous potential for the British insurance industry.
On top of that, adds Hunter, Asia has low levels of life insurance coverage relative to other developed economies and China, despite current economic troubles, is urbanising, rapidly ageing, and has a thriving middle class.
Charlie Huggins, the head of equities at Wealth Club, gives his verdict on the top London-listed insurers:
Aviva – Offers broad exposure to a range of insurance markets, including home, motor, protection, and health, as well as retirement and investment solutions. This gives the business a good level of diversity, although it also makes it difficult to understand.
Direct Line – Direct Line’s profit has suffered particularly badly. This makes it somewhat of a recovery play.
Admiral – Has held up much better than most of its peers. Its market-leading position in the UK gives it a cost advantage over most of its rivals.
This, combined with strong execution, means the company has an excellent long-term track record of outperforming its peers. For those looking to gain exposure to UK motor insurance, Admiral looks to be better positioned than many.
Phoenix Group – Its track record of cash generation is good, but its balance sheet is complex, with various hedging strategies used.
This makes Phoenix rather opaque and might account for the low valuation and high dividend yield, which currently stands in excess of 10 per cent.
Prudential – If the Chinese economy catches a cold, Prudential will likely feel it. In the long-term, growing wealth in China and other Asian markets could offer greater growth opportunities than insures reliant on Western markets.
Beazley – A ‘hard’ market [of increasing prices] should be good news for Beazley because it can charge more for its policies – in effect, the risk-reward is tilted in its favour.
‘While catastrophe events will always be a risk for Beazley, right now, given very ‘hard’ market dynamics, the growth opportunities for the business are looking better than they have done for some time.
This post first appeared on Dailymail.co.uk
