Bizarrely, insurers do well when things are at their worst. Costly disasters, and the process of rebuilding capital, force premium rates up which is good news for long-term earnings. So, even though Hurricanes Gustav and Ivan in 2008 cost the global insurance market around $24bn (£15bn), premium rates have been rising solidly ever since. What's more, that coincided with the worst financial crisis for decades, which often meant chunky losses from insurers' investment portfolios - further fuelling the need for rate increases.
The problem facing insurers in 2010, though, is that the rate increases which have been pushed through on the back of those disaster-related claims are now beginning to leave underwriters looking much better capitalised. And, with 2009 having turned out to be so benign for claims, then the momentum for further premium rate increases could begin to dissipate. That could tempt insurers to cut rates in order to win market share - bad for long-term earnings.
Indeed, Brit Insurance, for instance, reported in October that premium rates had risen 4.8 per cent in the first nine months of 2009 - a slower pace of increase than the 5.2 per cent rating improvement at the half-year stage. “A benign hurricane season indicates that January renewal rates may come under pressure, with possible softening in the region of 5 per cent,” said analysts at broker KBC Peel Hunt in a research report in the autumn. “This is consistent with healthy profits, but the psychological impact of softening rates may affect sentiment towards the sector.”
That said, it will take a while for that process to work through and, for 2010, most underwriters look set to remain solidly profitable. Indeed, within the FTSE 350 insurers, investors would do well to focus in on such players as Brit. Its shares, at 197p, trade well below broker Numis’ forecast net tangible assets (NTA) estimate for 2010 of 291p, yet the group’s end-2010 expected combined ratio (of claims to premiums) stands at a decently profitable 92.7 per cent. It’s a similar outlook for most of the other FTSE 350 insurers, although remaining cautious of RSA Insurance looks wise - it’s focused on such areas as competitive personal lines business and the shares, at 212p, trade at a notable premium to Numis’ end-2010 NTA forecast of 99p.
Non-life insurers at a glance
