The UK insurance sector has endured a particularly turbulent few years, with a global pandemic, Brexit, climate change and economic stagnation contributing to significant volatility.
Many companies experienced wild swings in their earnings, making a hefty profit one year before suffering a significant loss the following year.
Likewise, insurance stocks tended to fluctuate, creating uncertainty among shareholders.
Challenging times: The UK insurance sector has endured a particularly turbulent few years, with a global pandemic, Brexit, climate change and economic stagnation contributing to significant volatility
Shareholders face a highly competitive sector that typically has low margins, while many do-it-yourself investors may struggle to understand the complexities of financial results and reported data.
Nevertheless, it remains popular with investors who enjoy generous dividend yields and the reliability of a continuous source of income through boom and bust times.
The last two years have been tougher for the industry, particularly for UK car insurers, which have struggled with squeezed margins following the end of Covid-related travel restrictions.
This is due to rising costs for repairs, vehicle parts and used cars, as well as a greater number of accidents driving up claims volumes.
According to consulting firm EY, motor insurers recorded their worst underwriting performance in a decade in 2022, recording a net combined ratio (NCR) – the amount of claims and costs relative to premiums – of 109.5 percent .
Any number over 100 percent means a loss.
EY forecasts an improvement this year, but only to 108.5 percent, even as insurers increase premiums to make up for previous underpricing.
The FTSE 350 SuperSector Insurance, an index that tracks the performance of London-listed insurers, has fallen around 1 percent in the last year, lagging behind the FTSE 100’s return of around 11 percent.
However, this hides a disparity in performance across the sector, with some providers enjoying huge gains over the last 12 months while others have struggled.
Given this difficult environment, Direct Line recently reported a loss of £183.8 million in its motor insurance segment for the first half of 2023, compared to a profit of £53.2 million a year earlier.
Since the start of the year, the company’s shares have fallen about 30 percent, a loss of 8.5 percent for the broader FTSE 250 index.
However, rival Admiral Group has shown significant resilience, posting a first-half pre-tax profit of £298m in its automotive division. Its shares have risen 11.3 percent since the beginning of the year.
The pair will focus on ensuring premium price increases are above inflation next year, although EY expects motor insurers to achieve an NCR of 97.4 per cent in 2024.
Profitability: UK motor insurers are struggling with falling margins following the end of Covid-related travel restrictions
The home insurance industry, which has also struggled to avoid losses, is hoping for fewer severe weather events such as flooding and extreme heat, a key risk factor for land subsidence.
Last year, British home insurers paid out more claims than they took in premiums for the third year in a row, paying £1.22 in claims and costs for every £1 they received in premiums, according to industry body the Association of British Insurers.
To compensate for this, many insurers have diversified their product offerings. Beazley is known for providing cybersecurity protection, 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 attributed record profits of $366.4 million in part to growth in its European cyber business as the Russia-Ukraine conflict heightened concerns about ransomware.
Beazley could see even higher profits next year as the international cyber insurance market continues to expand. Analytics provider GlobalData estimates its revenue will double from $16.7 billion in 2022 to $33.4 billion in 2027.
Health insurance is also expected to continue to grow in popularity, including in the UK, where long NHS waiting lists have left large numbers of Britons having to pay for vital treatment out of pocket.
Private healthcare revenue at Aviva rose 58 percent in the first half, helping to boost the London-listed company’s operating profits and full-year profit outlook.
Losses: According to the Association of British Insurers, British home insurers awarded claims and costs of £1.22 for every £1 they received in premiums last year
Aviva is one of the “more respected stocks” in the insurance industry, says Richard Hunter, head of markets at Interactive Investor, citing the digitalization push and reinvestment through acquisitions.
Led by Amanda Blanc, the company won praise for returning more than £5bn to shareholders after Cevian Capital urged it to subsequently congratulate the company on its “outstanding job” in reviving its fortunes.
It’s not just Aviva though. Hunter points out that the largest insurers “remain in a very poor financial position,” supported by healthy solvency coverage ratios.
He says they are “for the most part well positioned to benefit from the evolving and ever-growing generation of savers and investors”, particularly income-seeking shareholders who enjoy “strong” dividend yields.
Legal & General, M&G and Aviva are highly recommended by Interactive Investor, but he says Prudential is the market’s favorite.
Although the group is headquartered in London, it spans Asia and Africa, two continents whose demographics and economic prospects offer huge potential for the UK insurance industry.
Additionally, Hunter adds, Asia has low life insurance coverage compared to other developed economies, and despite its current economic woes, China is urbanizing, aging rapidly and has a thriving middle class.
Charlie Huggins, Head of Equities at Wealth Club, weighs in on the leading London-listed insurers:
Aviva – Offers broad exposure to a range of insurance markets including home, motor, protection and health, and retirement and investment solutions. This gives the company a good level of diversity, but also makes it difficult to understand.
Direct line – Direct Line’s profits suffered particularly badly. This makes it a type of recreational game.
admiral – Performed much better than most of its competitors. Its market leading position in the UK gives it a cost advantage over most of its competitors.
Combined with strong execution, this means the company has an excellent long-term track record and outperforms its competitors. For those looking to get involved in UK car insurance, Admiral appears to be better positioned than many others.
Phoenix Group – The track record of cash generation is good, but the balance sheet is complex and various hedging strategies are used.
This makes Phoenix rather opaque and could be the reason for its low valuation and high dividend yield, which is currently over 10 percent.
Cautious – If the Chinese economy catches a cold, Prudential will likely feel the pinch. In the long term, growing prosperity in China and other Asian markets could provide greater growth opportunities than insurance companies that rely on Western markets.
Beazley – A “hard” market [of increasing prices] should be good news for Beazley as the company can charge more for its policies – so the risk/reward ratio is tipped in its favour.
“While catastrophic events are always a risk for Beazley, the company’s growth opportunities are currently better than they have been for some time, given very ‘tough’ market dynamics.”
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