BAD weather is normally bad news for insurers, as householders claim for snow, flood and wind-induced problems with their homes. However, despite roofs leaking and boilers breaking down all over the UK at the moment , the non-life insurance sector is actually looking pretty attractive for investors.
The insurance sector is poised to deliver returns in the mid-teens this year after a torrid performance in 2009, and when most sectors are suspending or reducing their dividend, some of the largest non-life insurers in the UK continue to pay a healthy dividend with an average yield of 6 per cent.
Why are they flourishing? The benign weather in 2009 and a low number of claimants for hurricane damage hurt companies that provide protection against such catastrophes, known as “cat” in the industry. This meant that more companies could afford to keep offering insurance against cat risks, driving premiums down to nearly 6 per cent, from a high of just under 20 per cent in 2008. This spooked the markets as fears grew about the profitability of the sector.
But Mark Williamson from KBC Peel Hunt says that the chances of two years of benign conditions are very low. He thinks that business (and governments) which took a risk last year and didn’t buy insurance might not feel confident doing that for a second year. They might also be feeling richer than they did twelve months ago.
Williamson also notes that insurers derive their income from two sources, firstly, charging premiums to their customers; and secondly by investing in the financial markets. Usually insurers invest in safe assets such as government bonds or cash. In recent months levels of returns have been miserable, but that could change with the end of quantitative easing in the UK. “At the moment the insurance sector owns bonds with one to two years’ duration, which means that any increase in bond yields caused by a reduction in demand for bonds partly generated from the end of quantitative easing is positive for investment returns.”
A recovery in the insurance sector could take some months, which makes a long CFD position an attractive option. Collins Stewart analyst Ben Cohen and KBC Peel Hunt analyst Mark Williamson favour going long individual companies, including Hiscox, one of the largest providers of personal insurance cover in the UK. “Hiscox looks good because it has an attractive mix of business and its personal insurance division is experiencing growth,” says Cohen. CMC Markets offers a CFD to go long Hiscox shares with a price of 329.20p.
Alternatively, if you would like a broad-based exposure, GFT offers a CFD on the insurance sector of the Dow Jones Stoxx Index, which trades on the Eurex and includes some of the largest non-life companies in Europe and the UK. GFT’s price is 166.4p.