1. UK Insurance Industry Landscape

The insurance sector is one of the biggest growth contributors to the GDP and provides significant employment. It encapsulates list of companies that mitigate risk through the insurance contracts. Moreover, the basic concept of insurance is that the insurer will pay certain amount for the occurrence of an uncertain event. Meanwhile, another party, the insured or the policyholder, used to pay a premium amount on a regular basis to the insurer in exchange for the assurance as and when that uncertain event takes place. There are two broader categories of insurance - Life Insurance & General Insurance. Aviva PLC and Prudential PLC are the most prominent players in terms of employment in the UK insurance sector as of 2021.

The UK insurance industry is the largest in Europe and the fourth largest in the world. Moreover, the tax contributions had contributed approximately £75.5 billion during 2019, which remained the highest contribution by any sector within the UK. The UK insurance sector was also a world leader as an exporter of insurance to the rest of the world. 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 London Market had witnessed a growth of approximately 10% in the commercial insurance premiums written during 2020 as compared to 2018.  London's wider reach make it feasible to insure virtually any activity in any location. Furthermore, London remained the only place in the UK, where the top 20 insurance and re-insurance firm is actively present. 

Growth catalysts in the Insurance Sector

Risk Exposures to the Insurance Sector

• Regulatory Risk: Insurance sector is highly susceptible to change in the government’s policy, legislation and capital requirement. Any lack of meeting the regulatory requirement can result in the additional cost and penalty.
• Decline in Asset Value: The negative mark to market movement on the hedging instruments or low return from the investments to meet the claim payments can harshly impact the value of the assets.
• Higher Mortality Rate: If a higher number of policyholders die early, it would increase the claim payments and affect profitability.
• Increasing Claims: If the numbers of claims increase, it could impact the profitability of the insurance companies.

SWOT Analysis

Benchmark Index Performance

Based on the year-to-date performance, the FTSE All-Share Life-Insurance index has outperformed the FTSE 100 index and FTSE 250 index. Furthermore, the FTSE All-Share Life-Insurance index generated a return of about 11.94%; however, the FTSE 100 generated a return of around 11.06%, and the FTSE 250 index produced a return of about 10.86%.

Figure 1: YTD Benchmark Index Performance

 (Analysis done by Kalkine Group)

Insurance Sector Outlook

As per the Statista data, the UK’s life insurance and non-life insurance gross written premium (GWP) is expected to remain around £186.8 billion and £80.1 billion, respectively in 2020. Both the life insurance and non-life insurance gross written premium is expected to grow at a CAGR of around 3.6% between 2018 and 2023. The number of middle-class populations will grow to ~1.2 billion in 2030, which shall create more wealth to demand for insurance solutions. Moreover, the slowing growth in developed markets, rising sovereign debt concerns, and instability of capital markets shall boost the demand for insurance products. The strategic alliance with the digital partners and use of artificial intelligence to offer a diverse range of consumer services such as risk factor identification, telemedicine and digital payments would further boost up the insurance industry.

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

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

A. Phoenix Group Holdings PLC (LON: PHNX)

(Recommendation: BUY, Potential Upside: 16.38%, Market Capitalization: GBP 7.23 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 had paid a final dividend of 24.1 pence per share on 18 May 2021, while the ex-dividend date was 01 April 2021. Phoenix Group is likely to pay the next interim dividend on 03 September 2021.

                                                                                                                                                                      

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.38% over the closing price of GBX 723.40 (as of 15 June 2021).

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

(Recommendation: BUY, Potential Upside: 14.36%, Market Capitalization: GBP 3.99 billion)

Direct Line Insurance Group PLC is an FTSE 250 listed General Insurance Company, which operates across four segments – Motor, Home, Rescue, and other personal lines and Commercial.

DLG had paid a final dividend of a final dividend of 14.7 pence per share on 20 May 2021, while the ex-dividend was 08 April 2021. The group is likely to pay the next interim dividend on 3 September 2021.

 

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.36% over the closing price of GBX 295.80 (as on 15 June 2021).

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

(Recommendation: Hold, Potential Upside: 16.90%, Market Capitalization: GBP 16.52 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, Legal & General Capital, Legal & General Investment Management, Legal & General Insurance and General Insurance business.

LGEN had paid a final dividend of 12.64 pence per share on 27 May 2021, while the ex-dividend date was 15 April 2021. The group is likely to pay the next interim dividend on 20 September 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.90% over the closing price of GBX 280.40 (as on 15 June 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy” recommendation is also valid for the current price as covered in the report as on 16 June 2021.

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