Go back to early 2010 and the insurance outlook seemed fairly bright. Bizarrely, that reflected a string of costly disasters - such as the Chilean earthquake and the Deepwater Horizon rig disaster. Prior to that, the sector had experienced a fairly lengthy period of low claims which, though good for short-term earnings, had left capital rich insurers competing for business by cutting premium rates. But falling rates are bad news for longer-term earnings growth and the run of disasters had raised hopes that rates may again start rising.
But that didn't happen. Those disasters weren't enough by themselves to trigger sustainable rate increases and 2010 turned out to be fairly light, overall, on costly events. Even last year's hurricane season turned out to be quite benign. So, with the sector's round of trading updates at the end of last year, the news on rates wasn't impressive. Take Lloyd's underwriter , for instance, it said that US catastrophe reinsurance rates had slipped 5.4 per cent. While reported that, overall, rates had fallen 0.5 per cent compared to a 6 per cent rate hike a year earlier.
What's more, further premium rate pain looks set to dominate in 2011. According to broker Numis Securities rates fell 7.5 per cent overall with January's renewal process and the broker anticipates that rates will fall 5 per cent, on average, during 2011. "Guy Carpenter [reinsurance broker] thinks that a $150bn (£97bn) loss is needed for a sustained upturn, which we would consider to be a very low probability scenario," says Numis. And in today's ultra-low interest rate world, investors shouldn't expect much from insurers' investment portfolios, either.
Although, one business line should make progress during 2011 - motor insurance. Indeed, said in November that motor rates had jumped 18 per cent, while pointed to "increasing premium rates". What's more, share prices could receive a boost from consolidation moves in 2011. Brit has nearly been swallowed by Apollo Global Management and analysts reckon some of the smaller insurance players, outside of FTSE 350, could yet become targets.
| NAME | PRICE (p) | MARKET CAP (£m) | PE RATIO | YIELD (%) | 1 YEAR PRICE CHANGE (%) | LAST IC VIEW |
|---|---|---|---|---|---|---|
| ADMIRAL GROUP | 1567 | 4208.52 | 24.4 | 2.95 | 34.74 | |
| AMLIN | 417 | 2068.66 | 5.5 | 4.8 | 12.65 | |
| BEAZLEY | 117 | 607.73 | 4.5 | 6.05 | 19.09 | |
| BRIT INSURANCE HDG.N V | 1050 | 831.21 | 4.2 | 2.86 | 39.69 | |
| CATLIN GROUP | 382 | 1372.91 | 3560.5 | 6.64 | 11.46 | |
| HISCOX | 399 | 1519.39 | 5.3 | 3.76 | 22.88 | |
| JARDINE LLOYD THOMPSON | 631 | 1367.23 | 18.9 | 3.33 | 30.1 | |
| LANCASHIRE HOLDINGS | 575 | 879.87 | 4 | 1.72 | 25.71 | |
| RSA INSURANCE GROUP | 132 | 4614.65 | 10.8 | 6.4 | 4.76 |
