The outlook might be grim for many financially related operations, but the picture is becoming increasingly brighter for the insurers - with many in the FTSE 350 especially well placed to benefit.
The insurers' fortunes are largely driven by what's happening to premium rates and that will generally depend on the scale of the pay-outs that underwriters are being forced to make. Essentially, when insurers are paying claims, the pressure is on them to raise premium rates in order to rebuild reserves and - longer-term - rising premium rates mean rising earnings. And 2009 looks like turning into a year that will see rates turn solidly upwards.
Certainly, since Hurricane Katrina in 2005, the insurance sector has passed though one of the most benign claims period on record. That has left capital-rich underwriters slashing rates in an attempt to grab market share. But the second half of 2008 saw a big shift on this front, as losses from fairly big hurricanes - such as Ike and Gustav - combined with companies' investment book losses to leave insurers once again short of capital. That, in turn, is beginning to drive a hike in premium rates across most business classes.
Indeed, when commenting on the rate movements seen so far with January's reinsurance renewal season, broker Numis Securities said in a recent research note that ''catastrophe exposed risks appear to have experienced the strongest rate increases with non-cat reinsurance segments either seeing smaller increases or stabilisation from the previous downward trend''. And insurance broker Willis has reported that US property reinsurance rates have risen by up to 25 per cent, while European property reinsurance risk has seen rates rise by up to 10 per cent.
That leaves the FTSE 350 Lloyd's insurers looking well placed. Hiscox, Amlin, Catlin and Brit in particular are high quality underwriters that should be able to take advantage of the improving rating environment, although some are better placed than others when it comes to investment book performance. Amidst grim financial market conditions, Brit, for instance, reported an £11.8m investment book loss with its trading update in October, while Beazley's third-quarter investment book loss reached £26m.
But Royal & Sun Alliance’s focus on retail lines offer less scope for growth, and the shares - rated at over twice end-2008's expected net tangible assets - are expensively rated compared to those of rivals in the Lloyd's market. Caution looks wise regarding insurance broker Jardine Lloyd Thompson, too. True, rising rates will eventually feed into a better performance for insurance brokers. But former New York Attorney General Elliot Spitzer's probe into how brokers generate commission income remains a drag on sentiment.
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