With few costly catastrophe events in 2014, the non-life insurance sector benefited from another year of low claims. According to insurance broker Aon Benfield, the global insured loss in 2014 came in just below $39bn ($26.6bn). That's 20 per cent less than the 2013 tally, which itself was low by historic standards, and modest indeed compared with the 2011 total loss of around $130bn. Even last year's Atlantic storm season ran out of puff: 2014 was the quietest period for hurricanes since 1997.
But that benign claims backdrop is a doubled-edged sword. It's good news for short-term earnings, but it also leaves companies flush with capital and tempted to compete for business by cutting premium rates. Another factor is the influx of new capital into the sector from such sources as hedge funds and pension funds, which is also acting as a catalyst for pricing pressure. In an era of low interest rates, this reflects investors' search for yield, which has drawn them to less traditional asset classes.
Several years of such conditions are now taking a heavy toll on pricing - especially for catastrophe-exposed business. Insurance broker Guy Carpenter's reinsurance review revealed that its global rate index had fallen 11 per cent in January's renewals. "The continued lack of demand and oversupply of capital can only keep driving prices down," notes this month's renewals report from rival broker Willis Re. That doesn't help brokers such as Jardine Lloyd Thompson (JLT), either, as their commissions are usually linked to rates.
However, this capital glut is likely to lead to significant special dividend payouts, as insurers look to return cash that can't be profitably invested. It also builds pressure for "long-rumoured M&A activity" to become a reality, according to Willis Re. There was evidence for that in December, when US insurer XL made a bid for Lloyd's insurer Catlin (CGL). Others in the Lloyd's market are also perceived as possible targets, with analyst Joanna Parsons at Westhouse Securities seeing Novae (NVA) and, to a lesser extent, Lancashire (LRE) as "easy to swallow".
That said, the history of the Lloyd's sector is littered with failed takeovers, reflecting the difficulty of combining underwriting teams with often very different cultures. As a result, analysts at Berenberg think companies are likely to remain "focused on capital returns", with M&A activity set to reflect "small bolt-on deals and selective disposals, in-market consolidation and some expansion of growth footprints".
Meanwhile, after several years of softening premium rates among the UK's motor players - Admiral (ADM), esure (ESUR) and Direct Line (DLG) - things could be looking up. In their half-year figures most felt rates were at least stabilising, although it remains unclear when pricing will actually turn upwards.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC View |
| Admiral | 1,442 | 4,019 | 13.5 | 3.3 | 1.9 | Hold, 1,403p, 13 Aug 2014 |
| Amlin | 490 | 2,454 | 8.3 | 5.4 | 14.2 | Sell, 445p, 18 Aug 2014 |
| Beazley | 283 | 1,476 | 7.5 | 3.2 | 6.1 | Sell, 264p, 13 Nov 2014 |
| Brit | 256 | 1,027 | 11.4 | 2.4 | NA | Buy, 247p, 14 Aug 2014 |
| Catlin | 698 | 2,531 | 7.7 | 4.5 | 28.6 | Take profits, 460p, 18 Dec 2014 |
| Direct Line Insurance | 307 | 4,610 | 13.2 | 4.2 | 16.0 | Hold, 300p, 26 Sep 2014 |
| esure | 229 | 952 | 16.0 | 4.9 | -21.5 | Hold, 260p, 4 Aug 2014 |
| Hiscox | 741 | 2,364 | 12.3 | 1.0 | 12.4 | Sell, 693p, 29 Jul 2014 |
| Jardine Lloyds Thompson | 951 | 2,083 | 19.1 | 2.9 | -9.3 | Hold, 1,041p, 30 Jul 2014 |
| Lancashire Holdings | 583 | 1,104 | 7.9 | 1.7 | -23.3 | Hold, 640p, 24 Jul 2014 |
| RSA Insurance | 452 | 4,588 | NA | 2.2 | -0.4 | Hold, 423p, 8 Aug 2014 |
Favourites
Having returned to the stock market in March after a three-year absence, Brit (BRIT) looks in good shape. It must navigate pricing pressure like the rest of the sector, yet it remains solidly profitable. Moreover, the weakening market looks set to drive impressive returns of capital - Numis's estimates suggest a prospective yield of around 9 per cent - even as the shares, trading at about 1.3 times forecast net tangible assets, remain among the cheapest in the sector.
Outsiders
Although Beazley (BEZ) is a quality underwriter, pricing pressure is building. At the third-quarter stage, for example, the group reported that its reinsurance rates had tumbled by more than 10 per cent. Meanwhile, the shares, trading on about 1.8 times Numis's end-2014 net tangible assets estimate, are the most expensively rated in the Lloyd's sub-sector. As pricing continues to slide, that premium rating seems vulnerable.
