The British 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 have experienced large fluctuations in their profits, making healthy profits in one year before suffering considerable losses the following year.
Likewise, insurance stocks have tended to rise and fall, 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 industry, typically with low margins, while many investors who make their own investments may find it difficult to understand the complexity of the financial results and data reported.
However, it remains popular among investors who enjoy generous dividend yields and the reliability of a steady stream of income during boom and bust times.
The previous two years have been more challenging for the sector, especially for British car insurers, which have struggled with reduced margins following the end of Covid-related travel restrictions.
This has been caused by the rising cost of vehicle repairs, spare parts and used cars, as well as an increased number of accidents increasing the volume of claims.
In 2022, motor insurers recorded their worst underwriting performance in a decade, recording a net combined ratio (NCR) – the level of claims and costs as a percentage of premiums – of 109.5 per cent. according to the consulting firm EY.
Any figure above 100 percent denotes a loss.
EY forecasts an improvement this year, but only to 108.5 percent, even though insurers raised premiums to make up for earlier underpricing.
The FTSE 350 SuperSector Insurance, an index that tracks the performance of London-listed insurers, is down about 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: some suppliers posted bumper profits in the past 12 months, while others struggled.
Reflecting this troubled environment, Direct Line recently reported a £183.8m loss in its motor insurance segment for the first half of 2023, down from a £53.2m profit last year. .
Since the start of the year, the company’s shares have slumped around 30 per cent, trailing a loss of 8.5 per cent for the broader FTSE 250 index.
However, rival Admiral Group has shown significant resilience, posting first-half pre-tax profits of £298m in its engines division. Its shares have risen 11.3 percent since the beginning of the year.
The pair will focus on ensuring premium price increases outpace the rate of inflation over the next year, although EY anticipates motor insurers will reach an NCR of 97.4 per cent in 2024.
Profitability: British car insurers have struggled with reduced margins following the end of Covid-related travel restrictions
The home insurance sector, which has also struggled to avoid losses, will expect fewer extreme weather events such as flooding and extreme heat, a major risk factor in subsidence.
Last year, British home insurers paid out more in claims than they received in premiums for the third year in a row. awarding £1.22 in claims and expenses for every £1 they received in premiumsaccording to trade body the Association of British Insurers.
To try to compensate for this, many insurers have diversified their product offering; Beazley is known for offering cybersecurity coverage, 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 record profits of $366.4 million to growth in its European cyber business, as the conflict between Russia and Ukraine raised concerns about ransomware.
Beazley could see even bigger profits next year as the international cyber insurance market continues to expand. Analytics provider GlobalData estimates that double from $16.7 billion in 2022 to $33.4 billion in 2027.
Health insurance is also expected to continue to gain popularity, including in the UK, where long NHS waiting lists have left large numbers of Britons paying out of pocket for vital treatments.
Private healthcare revenue at Aviva rose 58 per cent in the first half, helping to boost the London-listed company’s operating profit and full-year profit 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 “best-regarded stocks” in the insurance industry, says Richard Hunter, head of markets at Interactive Investor, highlighting its digitalisation drive and reinvestment through acquisitions.
Under Amanda Blanc’s leadership, the company was praised for returning more than £5bn to shareholders following pressure from Cevian Capital, which later congratulated the company for an “excellent job” in reviving its fortunes.
It’s not just about Aviva, though. Hunter notes that the largest insurers “continue to be in poor financial health,” supported by healthy solvency coverage ratios.
It says they are “for the most part well positioned to benefit from the ever-evolving and growing generation of savers and investors”, particularly income-seeking shareholders enjoying “impactful” dividend yields.
Interactive Investor highly recommends Legal & General, M&G and Aviva, but says Prudential is most loved by the markets.
Although headquartered in London, the group’s operations span Asia and Africa, two continents whose demographics and economic prospects offer enormous potential for the British insurance industry.
On top of that, Hunter adds, Asia has low levels of life insurance coverage compared to other developed economies and China, despite current economic problems, is urbanizing, aging rapidly and has a thriving middle class.
Charlie Huggins, head of equities at Wealth Club, gives his verdict on the top London-listed insurers:
Aviva – Offers broad exposure to a variety of insurance markets, including home, motor, protection and health, as well as investment and retirement solutions. This gives the business a good level of diversity, although it also makes it difficult to understand.
Direct line – Direct Line’s profits have been particularly affected. This makes it a kind of catch-up game.
Admiral – It has held up much better than most of its peers. Its leading position in the UK market 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 appears to be better positioned than many.
Phoenix Group – Its cash generation history is good, but its balance sheet is complex and it uses several hedging strategies.
This makes Phoenix quite opaque and could explain the low valuation and high dividend yield, which is currently over 10 percent.
Prudential – If the Chinese economy takes a cold, Prudential will probably feel it. In the long term, growing wealth in China and other Asian markets could offer greater growth opportunities than insurers that rely on Western markets.
beazley – A ‘hard’ market [of increasing prices] It should be good news for Beazley because it can charge more for its policies; in fact, the risk-reward ratio leans in his favor.
While catastrophic events will always be a risk for Beazley, at this time, given the very “tough” dynamics of the market, the growth opportunities for the business look better than they have for some time.
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