I. Sector Landscape and Outlook

Insurance contracts that do not come under the ambit of life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non-life insurance. It is a policy or agreement between the policyholder and the insurer which is considered only after realization of the premium. The premium is paid by the consumer who has a financial interest in the asset covered. The insurer will protect the insured from the financial liability in case of loss.

The insurance industry is often perceived as complicated and slow-moving. Yet insurance is one of the largest global industries, generating more than $5 trillion in annual revenue. It plays a critical role in today's economies, offering financial protection and risk mitigation to individuals, small businesses, large corporations, non-profit organizations, and even governments. Property and casualty (P&C) insurance represent $1.6 trillion in premiums, according to the McKinsey & Company report of April 2020.

The UK Insurance Market

The UK insurance industry is the largest in Europe and the fourth largest in the world. It plays an essential part in the UK’s economic strength, managing investments of almost £1.7 trillion and paying nearly £12bn in taxes to the Government according to the latest report of The Association of British Insurers (ABI). It employs around 300,000 individuals, of which around a third are employed directly by Insurance providers with the remainder in auxiliary services, such as broking.

Fig 1: Key Facts about the UK Insurance Market (2019)

Source: The Association of British Insurers (ABI)

The UK General Insurance Sector

As per ibisworld data, the market size of the UK general insurance industry, measured by revenue terms stood at £70.1 billion at the beginning of 2020, and during the year 2020, the general insurance market size of the UK is expected to grow by 0.8%. Though, in between 2015-2020, General Insurance in the UK has declined 4.7% per year on average because of macroeconomic challenges such as Brexit related uncertainties. However, Industry revenue is expected to grow over the next five years provided no large exogenous shocks, barring the UK's exit from the European Union. Profit margins are expected to become less volatile as a larger proportion of claim liabilities are born by reinsurers, and regulatory changes begin to take full effect. However, the increasing effects of climate change may increase the number of natural disasters in the future, increasing claims costs.

The UK general insurance market continues to be fiercely competitive but is troubled by sustained low profitability fuelled by the predominance of online distribution channels (aggregators, brokers and other direct distributors). The battle for repeat business is keeping downward pressure on pricing, while a changing regulatory agenda increases costs.

Fig 2: General Insurance Market Size in UK

Source: ibisworld

Impact of COVID-19 on the UK General Insurance Companies

The planet earth is facing the deadly spread of COVID-19. The unfolding human tragedy would have massive short and long-term social, economic, and geopolitical implications. In contrast, it is too early to assess the full spectrum of its impact on the insurance industry. Insurance is closely linked to the broader economy, and this pandemic is likely to affect the industry operating model in several ways, with implications for both growth and profitability. At the same time, the impact would differ significantly on a line-by-line basis. The consensus estimates of global leading industry research firms expect some decline in premium revenue because of the expected economic downturn. The drop may be especially apparent in commercial insurance, which is more vulnerable to economic conditions compared with personal lines. The cumulative losses that the industry might sustain are not yet clear. After countries were in lockdown because of Covid-19 pandemic, the UK streets became empty. The number of car trips dropped dramatically. According to the survey conducted by Sentiance- a data science and behaviour change company, globally number of trips and kilometres decreased by 40%. However, at the same time, the total distance of short trips increased. The Use of public transport for commuting to work reduced significantly, with Fewer people that drive together, so less carpooling.

The insurance companies are likely to pay higher claims driven by the cancellation of events, business closure and travel cancellation, etc., which is likely to increase the claim ratio in the near term.

Post-Covid-19: More private cars, more new drivers, higher risks

According to data collected by Sentiance from China, it reported that the percentage of people who prefer using private cars has doubled after the Coronavirus outbreak. The main motivation for this is to reduce the chance of getting infected on public transport. As a result, families are getting a second or third private car. It is likely to give a boost in new car sales and second-hand car sales, and in lieu, it is going to benefit the Insurers.

Fig 3: Mode of Transportation, pre and post COVID -19
 

Source: Sentiance

It is widely expected that passenger taking public transport will reduce post-COVID-19 because of social distancing which would boost demand for alternative transport modes, mainly private cars. According to a global survey by Capgemini Research Institute, half of the consumers under the age of 35 aim to use public transportation less often and take their car more often in the future. The risk on the road could be higher, because of more cars, and the increasing number of less-experienced drivers.

Further, travel insurance would be another growth catalyst for the sector post COVID-19, as in response to the pandemic the travel insurer providers are creating more products geared toward the domestic traveller, which includes trip cancellation coverage and low medical benefits. Also, travellers want assurance that they can cancel a trip and get reimbursed if another unprecedented situation occurs to disrupt their travel plans.

Key Risks

As the industry is closely linked to the broader economic performance, which is widely expected to struggle for the next few quarters, it could have a weigh on the property and causality insurance sector as well. Further, the falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.

Outlook

The UK insurance industry is well-positioned to sustain the current blow, but the financial impacts will take time to play out. We believe the financial impact of COVID-19 pandemic to the insurers would be manageable; however, there is likely to be a pressure on the performance in the near term. Also, the well-diversified insurer will be the most insulated from losses arising from COVID-19. On the other hand, those with a concentration of business classes most exposed to coronavirus could be adversely impacted.  Companies which are in our coverage in this report including Direct Line Insurance Group PLC, RSA Insurance Group PLC, Hiscox Ltd and Beazley PLC. Also, three out of four general insurers under coverage except Hiscox Ltd have reported positive price return on a 1-Month and 3-Month basis, which reflects that after steep discount to pre-COVID-19 price, the market has started adjusting the next three-four quarters of poor earnings and supporting stocks on their long-term growth outlook. Going forward, the rate rise along with expense reduction, on which most of the insurance companies are focusing is likely to mitigate the challenging operating conditions in the near to medium term.

II. Investment theme and stocks under discussion (DLG, BEZ, RSA and HSX)

After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Price to Book Value.

1. LSE: DLG (DIRECT LINE INSURANCE GROUP PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 3.86 Billion)

United Kingdom-headquartered Direct Line Plc is a general insurance company. The insurer's operational segments include Motor, Home, Rescue and other personal lines, Commercial and Run-off.


 
 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~19% over the current price of GBX 291.2 at 2:00 PM GMT on 14 July 2020. We have considered Sabre Insurance Group PLC (LSE: SBRE), Prudential PLC (LSE: PRU) and Hastings Group Holdings PLC (LSE: HSTG) etc., as a peer group for the comparison purpose.


 
 
 
2. LSE: BEZ (BEAZLEY PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 2.59 Billion)

Beazley Plc is an FTSE 250 listed specialist insurance Company. The company’s major operations are based in Europe, the United States and the Pacific region.


 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~21% over the current price of GBX 422.4 at 2:00 PM GMT on 14 July 2020. We have considered Direct Line Insurance Group PLC (LSE: DLG), Lancashire Holdings Ltd (LSE: LRE) and Hastings Group Holdings PLC (LSE: HSTG) etc., as a peer group for the comparison purpose.

 
 
 
3. LSE: RSA (RSA INSURANCE GROUP PLC)

(Recommendation: Hold, Potential Upside: High Single Digit, Mcap: GBP 4.32 Billion)

London-headquartered RSA Insurance Group plc is a global insurance player. The company provides personal, commercial and speciality insurance products and services direct-to-customers.

 
 
 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~7% over the current price of GBX 418.3 at 2:00 PM GMT on 14 July 2020. We have considered Direct Line Insurance Group PLC (LSE: DLG), Hiscox Ltd (LSE: HSX) and Hastings Group Holdings PLC (LSE: HSTG) etc., as a peer group for the comparison purpose.


 
 
 
4. LSE: HSX (HISCOX LTD)

(Recommendation: Watch, Potential Upside: Low Single Digit, Mcap: GBP 2.82 Billion)

Hiscox Limited is a Bermuda-based insurer company. The Company is a holding company for subsidiaries involved in the business of insurance and reinsurance in Bermuda, the United States, the United Kingdom, Guernsey, Europe and Asia.

  
 
 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~4% over the current price of GBX 802.4 at 2:00 PM GMT on 14 July 2020. We have considered Direct Line Insurance Group PLC (LSE: DLG), Lancashire Holdings Ltd (LSE: LRE) and Beazley PLC (LSE: BEZ) etc., as a peer group for the comparison purpose.

 
 
Note: All the recommendations and the calculations are based on the current price at 2:00 PM GMT on 14 July 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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