1. UK Insurance Industry Sector Landscape

Insurance is an instrument that hedges risk through a contract between a policyholder and an insurance company, and it can be broadly bifurcated into life insurance and non-life insurance. The United Kingdom is regarded as the birthplace of modern insurance since privately owned and technically advanced insurance companies first emerged in Britain. Presently, UK Insurance is fundamentally changing since macroeconomic, regulatory, and social trends continue to impact life and general insurers.

Meanwhile, according to the report from ResearchAndMarkets.com, the market size for the global insurance industry is projected to decline at 2.3%% from USD 5,939.5 billion during 2019 to USD 5,807.3 billion for 2020. The industry slowed down in 2020 as compared to 2019 due to the economic slowdown led by the Covid-19 pandemic. Nonetheless, the market is expected to recover and forecasted to grow at a CAGR of 6.0% from 2021 and reach USD 6,840.7 billion by 2023. The North America remained the largest market for global insurance, and it accounted for 34% of the market in 2019. It is mindful to note that the United Kingdom is the largest non-life insurance market in Europe.

The insurance sector is one of the biggest growth contributors to the GDP and provides significant employment. The insurance products include life insurance, health insurance, motor insurance, property insurance and accident insurance. The insurance policies are sold through different distribution channels such as direct underwriting, brokers, agents and bancassurance. The insurance companies receive a premium from the sale of insurance products to the customers, and the premium received from the customers is invested in high-quality assets that generate returns to pay for the claim.

Key Trends in the Insurance Sector

• Rising Aged Population - Nearly two billion people are expected to be aged over 60 by 2050, which would support a huge demand for retirement solutions.
• Drug Resistance and Health Problems - The increasing drug-resistant diseases are likely to heighten risk and liabilities. The global rise in the population could create a health crisis, and thus, the higher rates of insurance premium.
• Technological Disruptions - The data analytics has transformed the decision making processes, and the Companies need to adopt a data-driven and insight-enabled approach to measure risk, develop innovative solutions and proactively meet customer needs.
• Develop new operating models - The insurers require to seek out strategic partnerships, acquisition targets, and new distribution partners to create a wider ecosystem with enhanced capabilities and cutting-edge technology solutions.

Risk Exposures to the Insurance Sector

• Macro-economic Uncertainties - The volatility arising from the prevailing COVID-19 mayhem, Brexit and US-China tension can significantly impact the market prices of assets, liabilities, equity, and credit markets.
• Liquidity Risk - The inability to attract finances amid recessionary economic conditions to pursue technological advancements could create both liquidity and strategic risk.
• Online Marketplace - The inability to attract finances amid recessionary economic conditions to pursue technological advancements could create both liquidity and strategic risk.

Benchmark Index Performance

Based on the last six months performance, the FTSE All Share Financials index has outperformed the FTSE 100 and FTSE 250 index. The FTSE All Share Financials index generated a return of about 29.63%; however, the FTSE 100 generated a return of around 16.86%, and FTSE 250 generated a return of around 26.95%.

Figure 1: Six Months Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Insurance Sector Outlook

According to the report from Grand View Research, the market size for the global insurance analytics market is expected to reach USD 18.30 billion by 2027, representing a CAGR of ~11.7% during the forecasted period from 2020 to 2027. The rising usage of big data and artificial intelligence by insurance companies with an objective to automate the significant part of the process. Moreover, the increased usage of smartphones and the rising demand for digital transformation would bring further growth to the global insurance analytics market. Meanwhile, the UK insurance brokerage market is expected to exceed USD 19.9 billion in market size by 2025 due to the increased opportunities for healthcare and accidental insurance market. However, the rising automation and technological developments such as artificial intelligence have become one of the major challenges for the insurance brokerage market. According to the data from FCA (Financial Conduct Authority), the UK insurers had paid around 470 million pounds in business claims to those impacted by the Covid-19 pandemic. Nonetheless, 2020 has proven to be a challenging year for the insurance industry. However, insurers can bounce back into 2021 as they got an opportunity to readjust their exposures to Covid-19 related risks and other risks.

2. Investment analysis and stocks under discussion (DLG, BEZ, LGEN, PHNX)

After gaining insights into the insurance sector, we would look at the business model of four insurance players listed on the London Stock Exchange.

A. Direct Line Insurance Group PLC (LON: DLG)

(Recommendation: Buy, Potential Upside: 22.57%, Market Capitalization: GBP 4.27 billion)

Direct Line Insurance Group PLC (LON: DLG) is a General Insurance Company, which operates through four segments – Motor, Home, Rescue, and other personal lines and Commercial. The Company is currently a constituent of the FTSE 250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.57% over the closing price of GBX 313.30 (as on 23 March 2021).                   

                                                                               

B. Beazley PLC (LON: BEZ)

(Recommendation: Buy, Potential Upside: 14.77%, Market Capitalization: GBP 2.13 billion)

Beazley PLC (LON: BEZ) is a FTSE 250 listed specialist insurance Company. It has operations in Europe, Asia, Latin America, and North America. The Company manages six Lloyd’s syndicates.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.77% over the closing price of GBX 346.60 (as on 23 March 2021).

C. Legal & General Group PLC (LON: LGEN)

(Recommendation: Hold, Potential Upside: 11.55%, Market Capitalization: GBP 16.30 billion)

Legal & General Group PLC is an FTSE 100 listed Company, which provides financial services across the UK, and the US. The Company operates with four business segments - Legal & General Retirement (which manages individual retirement, and pension risk transfer business), Legal & General Capital (manages direct investments, and treasury assets), Legal & General Investment Management (which caters to retail and institutional investment management and workplace savings businesses), Legal & General Insurance and General Insurance business (deals in personal insurance needs).

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 11.55% over the closing price of GBX 273.10 (as on 23 March 2021).

D. Phoenix Group Holdings PLC (LON: PHNX)

(Recommendation: Hold, Potential Upside: 9.81%, Market Capitalization: GBP 7.16 billion)

Phoenix Group Holdings PLC (LON: PHNX) is an FTSE 100 listed Company, which is the largest life and pensions consolidator in Europe.  The Company operated across three broader business segments – UK Heritage, UK Open and Europe.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 9.81% over the closing price of GBX 716.60 (as on 23 March 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy” recommendation is also valid for the current price as covered in the report as on 24 March 2021.

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