It's been a fairly uneventful year for the insurance sector. Following a virtually hurricane-free 2006 there had been some expectation of more claims in 2007. But while claims are creeping-up after such disasters as the fires in California and a slightly more blowy hurricane season, the fact remains that the sector didn't face especially catastrophic losses in 2007.
That may sound like good news - low claims means companies get to keep their profits. But without chunky claims, insurers don't put up premium rates, which means a more competitive environment. Indeed, when insurers are flush with cash, rates start to come under pressure as underwriters cut prices in order to snatch business. And as 2007 progressed, the evidence began to stack up that premium rates on most business lines were beginning to slip.
True, after 2005's highly destructive hurricane season, rates continue to remain firm on catastrophe-exposed lines. But there's plenty of evidence that rates on virtually every other business line are under pressure. In fact, the only non-catastrophe-related business line that appears to be pushing through rate increases at present is motor - a fact that has been good news for the shares in motor specialists such as Highway Insurance. Indeed, Amlin was typical of the recent round of Lloyd's insurers' trading updates - it reported an average renewal rate reduction of 4.6 per cent in the first nine months of 2007. And it's likely that investors can expect more modest premium rate pressure during 2008.
Moreover, insurers need less capital when conditions aren't so buoyant, so returning capital could be a significant theme in 2008. Amlin, for example, also announced a £120m of return capital with its update. Atrium and Lancashire have also indicated an intention to return capital. Moreover, despite the fact that rates are slipping, they are slipping from historically high levels - so underwriting results should remain solid enough during 2008. On that basis, it's worth focusing on those solidly profitable insurers with decent yields and where there's some prospect of capital returns. Hardy Underwriting, in particular, looks worth watching - it reported a solid trading update in November and its shares, on 1.5 times 2007's forecast net tangible assets, aren't expensively rated.
