General insurers are expected to feel the pinch as competition starts to warm up in the wake of further increases in insurance premium tax. At 12 per cent, this has nearly doubled in the past two years, and looks to be on its way to matching VAT at 20 per cent – already a reality in other European countries. It will almost certainly be passed on to customers, who in turn will be more encouraged to shop around.
On a brighter note, legislation to halt the abuse of whiplash claims will save the motor insurance industry up to £1bn, which could itself be passed on to customers. On balance, though, insurance premiums are set to rise, partly because new technologies fitted to vehicles will continue to drive up repair costs. However, profits are likely to be supplemented by continued release of reserves, but to a lesser extent than in previous years because of the risk of potential claims inflation.
Admiral (ADM) was one of the brighter performers in terms of business won, gaining 340,000 new customers in the first half and taking the total up to over 3.5m. Expansion plans included a start-up business in France, where early signs showed strong growth in customer numbers, and its Elephant Auto brand in the US. Sterling’s decline has brought an added benefit for RSA (RSA), with over two-thirds of the group’s operating profit generated in non-sterling currencies. Underlying net written premium income was up 6 per cent in the first nine months. RSA has been through a thorough restructuring, and remains on track to deliver gross annualised savings of over £350m by 2018.
The four remaining listed Lloyd’s of London underwriters experienced part of the costliest natural catastrophe losses for four years at $175bn (£144bn). However, for the industry as a whole around 70 per cent of these losses were uninsured. And, despite the sharp jump, the figures are now closer to the longer-term average. Premiums are expected to grow in 2017, notably in emerging economies, but insurers will be wise to maintain underwriting discipline, thus avoiding the higher risk involved in chasing business as a result of strong competition. In addition, investment income is likely to remain under pressure as a result of the low interest rate environment, although there has been some improvement here since the US election.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Admiral | 1,744 | 4,959 | 16.1 | 4.0 | 6.3 | Hold, 2,059p, 1 Sep 2016 |
| Beazley | 393 | 2,056 | 12.3 | 2.6 | 7.9 | Hold, 390p, 25 Jul 2016 |
| Direct Line | 349 | 4,797 | 11.9 | 4.0 | -5.5 | Buy, 388.3p, 2 Aug 2016 |
| Esure | 202 | 843 | 17.7 | 2.8 | 20.8 | Hold, 269.5p, 8 Aug 2016 |
| Hastings | 232 | 1,526 | 15.2 | 1.9 | 45.1 | Buy, 213.4p, 12 Aug 2016 |
| Hiscox | 1,029 | 2,940 | 10.3 | 2.4 | 5.0 | Hold, 1,090p, 26 Jul 2016 |
| Jardine Lloyd Thompson | 1,001 | 2,193 | 35.2 | 3.1 | 14.4 | Hold, 997p, 27 Jul 2016 |
| Lancashire | 680 | 1,360 | 8.8 | 1.3 | 13.9 | Hold, 606p, 28 Jul 2016 |
| RSA Insurance | 570 | 5,806 | 17.9 | 2.1 | 42.7 | Hold, 509.5p, 8 Aug 2016 |
Favourites: In 2015, there was some doubt as to whether entering a highly competitive listed insurance market was a timely move, but Hastings (HSTG) has made significant progress thanks to its strategic focus on price comparison website business. The shares remain just below the sector average, trading on 13 times forecast earnings.
Outsiders: Gross premium growth at Beazley (BEZ) was a modest 2 per cent in the nine months to September 2016, and there would have been an overall decline had it not been for a 10 per cent rise in premium income from speciality lines. Marine, property and political risk all sustained lower premium income, while renewals were also down. It’s hard to see the shares making much headway this year.
