The word insurance comes from the Latin Securus, which means “carefree.”
The phrase does not, however, reflect the current sentiments of investors in UK insurance companies, whose share prices have been impacted by economic and other difficulties. Among the victims is the £27 billion giant Prudential. The year’s best and worst funds: Since January, only 6% have generated a profit due to inflation, rate hikes, and conflict.
As a result of delays in appointing a chief executive and lockdowns in China, its shares have dropped by 24 percent this year. Asia and Africa are now Pru’s primary focuses.
Following a profit warning, shares of Aviva, Legal & General, and Direct Line have fallen 30 percent, 15 percent, and 10 percent, respectively, while Direct Line’s stock is at its lowest level in a decade.
Direct Line, like Admiral, Sabre, and other auto insurers, has been negatively impacted by soaring used-car prices. These factors have increased the cost of claims because when customers’ vehicles are declared a total loss, the amount required to replace them based on current market values is greater.
Consequently, Direct Line’s combined operating ratio (COR) is projected to be between 96% and 98%. The COR, a key metric, represents an insurer’s costs as a percentage of premiums: the closer the ratio is to 100 percent, the less profitable the business.
In the current climate, insurers appear to be an unattractive option. Unless you are willing to take a risk, that is.
Gavin Pickett, an equity analyst at Orbis Investments, argues that the profits of auto insurers should recover, with Admiral well positioned to do so.
If you want to increase your income or support initiatives that are vital to the re-equalization of Britain, the general insurers appear to be a worthwhile investment.
Not only are such projects essential to economic recovery, but they can also provide a return that is inflation-proof.
Companies such as Legal & General, which manages billions of pounds in savers’ funds, are major investors in UK real estate and infrastructure.
Deutsche Bank has reduced its target price for Prudential from 1550p to 1475p but expects positive news shortly. The outlook for Aviva and Legal & General, two other general insurers, is even more optimistic.
Peter Doherty of Sanlam Investments UK argues that these companies are now undervalued because, among other things, they offer “high and dependable dividends.
Under the leadership of CEO Sir Nigel Wilson, the £15.4 billion Legal & General firm has been turned from a sleepy insurer into what Alan Dobbie, co-manager of the Rathbone Income Fund, calls a “great British corporate success story and a pensions giant.” L&G is one of the largest assets in the portfolio.
Aviva has also been revitalized under the direction of Amanda Blanc, who assumed the role of chief executive officer two years ago.
The Anglo-Swedish activist investor Cevian Capital, which holds a 6 percent interest, has also exerted pressure.
Aviva’s reputation has evolved as a result of her reorganization of the company, which included a foray into wealth management.
Ian Lance, co-manager of the Temple Bar investment trust, which holds the company’s shares, says, “Based on a price-to-earnings ratio of nine times next year’s profits and a dividend yield of 7.7 percent, we believe the shares are well priced.”
How can Aviva and L&G be so generous with their shareholders?
The explanation is their function in the drastically transformed field of company pensions. Companies’ overburdened managers increasingly desire to be relieved of their defined benefit (DB) or final-salary pension scheme responsibilities. Aviva and L&G are major players in the multi-billion ‘bulk annuities’ market, in which an insurer gets a capital contribution to become the custodian of a company’s defined benefit (DB) plan and assume the financial and demographic risks involved.
Car-camping? Travel with breakdown insurance.
It is anticipated that many more such transfers will occur. There are clear incentives for companies and pension fund trustees to transfer these liabilities to specialists, according to Dobbie, because the majority of defined benefit (DB) pension plans are closed to new members and their funding positions are somewhat dependent on the market conditions.
To offset these liabilities, L&G invests in build-to-rent housing, urban regeneration, and university science parks, which, according to Dobbie, should generate long-term returns and cash flows.
These infrastructure programs offer some protection against inflation since some of the projects in which they invest have index-linked contracts. A projected reorganization of the stringent European Solvency II requirements should let more cash flow into this and similar endeavors.
The potential benefits of such programs are, in my opinion, the strongest case for providing Aviva and L&G with some funding. There is no promise that holding these shares will be carefree, either now or shortly.
Pharmaceutical is a recession-proof investment since the vaccine bounce.
