With Amlin (AML) shortly to disappear following its takeover by Mitsui Sumitomo Insurance, there will be just four listed Lloyd's of London underwriters. And while the likes of Mitsui may see entry into Lloyd's as a gateway to new business in Europe and the US, the business climate itself has been uninspiring once again.
Total losses from all natural catastrophes in 2015 amounted to $90bn (£62bn). That may seem a lot, but it is the lowest since 2009. However, this has a lot to do with what sort of catastrophe takes place and where. For example, the worst disaster was the Nepal earthquake that killed 9,000 people and racked up losses of $4.8bn. But just $210m of that was insured. A lack of claims may be good news, but it does mean that there is a lot of surplus capital sloshing around the system; a situation exacerbated by a steady influx of fresh capital from other sources such as hedge funds and pension funds. The worry here is the temptation not to maintain underwriting discipline and instead chase unprofitable business. At the same time, premiums soften in the absence of any major claims.
One of the better performances has come from Hiscox (HSX), where pressures on the underwriting business have been offset by a strong performance from its retail insurance arm. The company has concentrated on the luxury end of the market where it can charge higher premiums and, thanks to a sustained marketing exercise, business levels have improved. However, as with all insurance groups, and some more than others, finances could take a knock as increased capital requirements are introduced with Solvency II legislation.
For the companies outside Lloyd's, business for Direct Line (DLG) and Admiral (ADM) has been tough. There is some evidence to suggest that the decline in motor insurance premiums has been levelling out. But there remains a pretty unpalatable cocktail of strong competition from online offerings, new entrants such as Hastings (HSTG) and the prospect of more claims as cheaper petrol encourages drivers.
RSA Insurance (RSA) was another candidate lined up for consolidation after what looked to be an agreed bid from Zurich Insurance. However, the Swiss insurer subsequently withdrew the offer after revealing a weaker-than-expected performance from its own general insurance operation. All is not lost: RSA continues to make progress with its recovery plan, although there is still some way to go.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| ADMIRAL GROUP | 1,695 | 4,773 | 16.1 | 2.8 | 16.7 | Hold, 1,525p 19 Aug 2015 |
| AMLIN | 666 | 3,353 | 14.3 | 4.1 | 37.2 | NA |
| BEAZLEY | 367 | 1,912 | 12.3 | 2.6 | 30.8 | Hold, 323p 24 Jul 2015 |
| DIRECT LINE IN.GROUP | 372 | 5,110 | 12.5 | 3.6 | 19.7 | Hold, 371p 5 Aug 2015 |
| ESURE GROUP | 237 | 988 | 12.0 | 6.2 | 1.5 | Hold, 240p 11 Aug 2015 |
| HASTINGS GROUP | 157 | 1,033 | NA | 0.0 | NA | NA |
| HISCOX | 995 | 2,831 | 13.3 | 2.3 | 27.4 | Hold, 918p 27 Jul 2015 |
| JARDINE LLOYD THOMPSON | 854 | 1,871 | 16.6 | 3.4 | -7.2 | Hold, 1,000p 29 Jul 2015 |
| LANCASHIRE HOLDINGS | 608 | 1,213 | 14.7 | 1.7 | 6.5 | Hold, 599p 8 Dec 2015 |
| RSA INSURANCE GROUP | 408 | 4,148 | 15.2 | 1.1 | -9.0 | Hold, 406p 21 Sept 2015 |
Favourite
It's still early days, but under the stewardship of former RBS chief executive Stephen Hester, RSA has transformed its underwriting operations in the US and the UK, cut losses dramatically in Ireland and completed disposals in Latin America and Asia. It is not out of the woods yet, but Zurich admitted that RSA passed all due diligence checks ahead of the aborted bid, which bodes well for the future.
Outsider
Direct Line admitted at the halfway stage that full-year results would be less flattering than its good first half. The business expects total claims of £110m-£140m from December storms, but the actual insured losses will not be known for a long time, so the impact on the bottom line remains to be seen.
