Earlier this year the global insurance industry was under pressure. Claims for losses from the Australian and Californian wildfires were coming in, Covid-19 was expected to lead to an avalanche of claims for lost business and the hurricane season lay ahead. But the hurricane season passed without serious incident, the wildfire losses are quantified and those from the pandemic are proving manageable.
Steep rises in premiums
As a result, “this is a fantastic time” to consider the sector, says Nick Martin, manager of Polar Capital’s £1.4bn Global Insurance Fund. “Covid-19 has accelerated the insurance-pricing cycle, creating the best underwriting market in at least a decade.” Marsh & McLennan’s global pricing index, which tracks premiums, rose at an annual rate of 20% in the third quarter after 19%, 14% , 11% and 8% in previous quarters.
There are no investment trusts focused on the sector, while direct exposure in the UK is largely confined to the life insurance, household and retail markets. Polar’s fund has 16% exposure to the UK, but 78% to North America and avoids the savings-orientated life sector. About 43% of the portfolio is in commercial insurance, 18% in retail, 14% in reinsurance and 11% in insurance brokers, with weightings changing according to the insurance cycle.
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“Insurance is a must-have product, often required by law,” says Martin. “The role of the insurance industry is to take on the volatility from unexpected perils that individuals and companies do not want. If the underwriters price that risk appropriately, they will earn a good profit.” The fund was launched over 20 years ago by veteran expert Alec Foster as a Hiscox fund, but it moved to Polar in 2011. The current team have been managing the fund for over 15 years. It invests in 30-35 stocks with low turnover, targeting an 8%-9% annual return from a “conservative” 9%-10% annual growth in book value. Until earlier this year, when the price dropped by 25% (it has since partly recovered), volatility was low, reflecting shrewd management and good diversification.
“US industry valuations are really attractive at about 120% of book value,” says Martin, “down from 150% at the start of the year and halfway between the 30-year average of 135% and the 95%-100% levels we saw in the great financial crisis. We don’t think the fall in valuation is justified. Good insurers will come out of the pandemic with solid results and as a result of the losses, prospects over the next couple of years are very, very strong.” Book values were flat in the first half, but are estimated to have risen by 3% in the third quarter.
Neither growth nor value
The insurance sector is neither high-growth nor a clear value proposition, just a very attractive, but out-of-favour, sector with steady long-term returns. The Polar fund combines experienced management with a long-term record of outperformance; 2.5% per annum ahead of the MSCI insurance sector over five years, but 5% ahead since launch. Annualised performance of 9.2% lags the tech-driven MSCI World index by 3% over five years but, at 8.8%, is 2% ahead since launch, and that is for the relatively expensive “retail” share class, charging 1.25% per annum. Those fees are reduced to 0.75% in the “institutional” share class, available through some platforms.
As Martin points out, “the insurance industry is in the risk business and over time we have seen a relentless rise in risks. New ones are always emerging; wildfires, pandemics and cyber-events, perhaps enhanced by working from home. As long as we have severe weather, catastrophes, accidents, human negligence and ignorance, there will be robust demand for insurance”.
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