While the equity market experiences cycles, not all sectors experience the same cycles at the same time. Take non-life insurance: although few customers cut this completely in a downturn, the industry is still subject to some cyclicality. However, insurance cycles are more influenced by capacity in the market (i.e. the number of companies willing to offer a policy) and the pricing environment, than by economic growth.

As such, investing in the non-life insurance sector when capacity is reducing, prices are rising, and valuations are attractive should lead to good returns over the medium term, despite the broader economic context. This is the position we believe the sector is in currently – and we have been investing accordingly.

The motor insurance underwriting cycle has been in a downturn since 2019, with poor pricing discipline and stringent regulation putting industry profits under significant pressure. This has been exacerbated by high inflation, which means, for instance, the cost of repairing a car has been more expensive then when an insurance company initially wrote its insurance policy.

However, insurance policies reprice annually meaning that insurers can recoup losses rapidly.  With unprofitable capacity exiting the market and price discipline returning, premium prices have been rising.  Data from analyst Consumer Intelligence has shown that in the twelve months to June 2023, the average premium has risen by nearly 50%, with inflation-adjusted premiums now sitting at their highest point in six years.  With claims inflation now also easing, this should lead to a sharp recovery in profits.

Within the portfolio we own Sabre Insurance, an underwriter in the UK motor insurance industry of typically non-standard risks, such as young or elderly drivers and expensive cars, where there is less competition. The company is disciplined in terms of only underwriting risks when pricing is favourable and suitably compensates for the risks taken. After a very tough 2022, we believe the company could see a sharp recovery in margins and profits, alongside a return to attractive dividend levels given the large price rises the industry is pushing through.

Another way the portfolio has gained exposure to the recovery in insurance pricing – but outside the sector – is through a new holding in MoneySuperMarket.com.  The company is one of the market-leading price comparison website in the UK and should benefit from consumers looking to manage their bills among the rising cost of living.  Significant premium rises in car and home insurance are likely to lead to higher switching volumes in its insurance segment and, along with the ongoing recovery in travel insurance, should drive strong profit growth. This investment case is underpinned by the company’s high margins, strong cash generation and attractive dividend yield.

Outside of motor and home, similar pricing dynamics can be seen in other insurance markets.  Property and catastrophe insurance prices have also come under pressure in the recent past, as alternative investors entered the market in a bid for yield amid ultra-low interest rates. A heightened number of large insurance events – such as hurricanes and wildfires – means these investors have experienced significant losses and have retrenched from the market.  For those companies remaining, this has reduced competition while demand has held up: a strong environment for premium price increases. The Guy Carpenter Global Property Catastrophe Index, which measures the rate of change in the price paid for insurance coverage in this market, is up 43% in less than 2 years.

Earlier in the year the portfolio initiated a position in Conduit Re, a specialist property and casualty reinsurer (companies which offer financial protection to insurance companies), with a diversified portfolio of global reinsurance risks. With premium rate increases coming through, the company’s returns and cash flows should be well underpinned over the medium term. Conduit Re’s valuation is compelling, with the company trading at a discount to its net asset value while paying an attractive dividend.

Our focus on finding well-managed businesses that can generate cashflow, but are temporarily out of favour, has led us to look squarely at the non-life insurance sector. Our view is that the insurance cycle has now troughed and can recover quickly, which should provide the Trust with a useful source of diversification away from the uncertain economic environment.

Disclaimers

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

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