While 2009 looks set to be a grim year for most financially-related sectors, it's a very different story for the general insurers – comprising such players as household specialist Royal & Sun Alliance, motor players such as Admiral, and the listed Lloyd's insurers. Certainly, the past year or two has seen insurers struggling against soft market conditions, characterised by falling premium rates. But the outlook for the sector has suddenly brightened.
That's largely down to catastrophes. The odd thing about the insurance market is that it's not really such a dreadful thing when big catastrophes force insurers to pay-out claims. Naturally, that does mean a short-term earnings hit but, longer-term, it also means that insurers have to hike premium rates in order to rebuild their reserves. Since Hurricane Katrina in 2005, however, the insurers have faced one of the most benign claims environments on record. And that has set the pace for an increasingly soft market in the last year or two as capital-rich insurers slashed rates in order to grab market share.
But that situation is changing fast. To begin with, 2008's fairly active hurricane season has meant some chunky hits for insurers. Indeed, insurance broker RMS estimated that Hurricane Ike has cost the global insurance market between £13bn and $21bn, while Hurricane Gustav is though to have meant a hit of between $4bn and $10bn. On its own, hurricanes probably wouldn't have been enough to turn the market. But add in the losses being sustained by many insurers on their investment portfolios amidst grim financial market conditions and enough capital destruction appears to have taken place for insurers to need to begin raising premium rates.
That optimism for the future was definitely on display with the autumn's round of trading updates from the Lloyd's insurers. Management at Hardy Underwriting felt confident enough to say that "a number of factors are coming together to create conditions for an end to a soft market," adding that "we are now expectant of a significant increase in rates during 2009 for most business lines". Meanwhile, Robert Hiscox, chairman of Lloyd's underwriter, Hiscox, sounded even more enthusiastic claiming that "the tide has turned." He went on to say that "rates have now switched from softening to hardening."
This decent outlook has helped insurers' shares to hold up despite an otherwise grim equity market backdrop. In fact, the general insurance sector outperformed the FTSE All-Share index by 3.63 per cent in the year to the beginning of December – the only sector to outperform the index in that period. But with insurance company shares still trading at generally undemanding multiples of brokers' forecasts for net tangible assets, then the scene has been set for further outperformance in 2009.
