Another year has passed without any really exceptional loss events hitting the world's insurers. In particular, and in sharp contrast to the exceptionally active hurricane season in 2005, last year was almost as storm-free as 2006. But while an absence of big pay-outs spells good news for short-term underwriting profits, it also signals longer-term pressure for premium rates. Without facing steep losses, capital-flush underwriters are left slashing rates in order to grab market share. As rates slide, margins come under pressure - potentially leaving some underwriters dependent upon their investment books to earn a crust.
Not that every business class is in the same boat. Losses from 2005's hurricanes were so great that catastrophe-related rates remain high and, while these are slipping, such business will remain attractively priced for a while yet. That should benefit such highly profitable players as Catlin or Hiscox - indeed, with shares in both trading on about 1.5 times 2007's forecast net tangible assets, the pair look attractively priced.
The motor insurers - Highway, Admiral and, to an extent, Royal & Sun Alliance - could be better placed than most this year, too. That's because the motor market is the only sector where rates continue to show signs of recovery. But other retail lines, such as household cover, could be in for a rockier ride. And non-catastrophe-related business, such as aviation and marine business - lines that have already seen chunky rate falls in 2007 - look set for further pressure.
The fact that the insurance market has passed its peak is driving some underwriters to return capital. Within the FTSE 350, Amlin has already announced a £120m capital return and, as profitable business becomes harder to find, further pay-outs elsewhere in the sector look likely. However news from outside of the FTSE 350 that Lloyd's insurer, Kiln, is being bought by Japanese insurer, Tokio Marine & Nichido Fire Insurance, shouldn't raise hopes of a deal-doing frenzy. Takeovers have proven traditionally hard to pull-off at Lloyd's and the sector is littered with failed deals.
Caution towards insurance brokers Benfield and Jardine Lloyd Thompson could also prove wise. Brokers are fairly pure plays on the direction of premium rates and, with rates under pressure, their shares could struggle. Sentiment towards insurance brokers has also suffered in recent years after former New York Attorney General Elliot Spitzer focused on the way in which some brokers generate fee income.
| Company name | Price (p) | Mkt val. (£m) | P/E ratio | Div. yld (%) | 12M price chng.(%) | Last IC view |
|---|---|---|---|---|---|---|
| ADMIRAL | 948 | 2,491 | 21.4 | 2.1 | -11.24 | |
| AMLIN | 265 | 1,267 | 4.2 | 5.04 | -23.17 | |
| BEAZLEY | 160 | 581 | 7 | 3.25 | 9.03 | |
| BENFIELD | 272 | 589 | 14.2 | 4.41 | -26.88 | High enough, 286p, 7 September 2007 |
| BRIT INSURANCE | 223.5 | 703 | 5 | 6.71 | -29.44 | |
| CATLIN | 357.25 | 904 | 5.5 | 7.03 | -28.48 | |
| HISCOX | 262.25 | 1,021 | 5.3 | 4.19 | -6.17 | |
| JARDINE LLOYD THOMPSON | 320.75 | 682 | 12.4 | 6.39 | -20.75 | |
| ROYAL & SUN ALLIANCE | 134 | 4,359 | 9.4 | 4.93 | -16.51 |
