Bill Cooper says money is pouring into UK insurance because it is an attractive investment.
Despite the gloomy economic outlook and softening of the insurance market in many classes of business, investors are still pouring money into the UK insurance market.
In the past few weeks we have seen a substantial investment in Giles Insurance Brokers by private equity firm Charterhouse, Japanese insurer giant Tokyo Marine completing the acquisition of Kiln, and several new reinsurance-to-close (RITC) operations set up in Lloyd’s, one backed by JC Flowers and another by legendary investor George Soros. This follows record years in 2007 for Lloyd’s start-ups and for insurance-linked securities (catastrophe bonds and the like).
Why is the insurance industry so attractive to investors? Can this continue? And what effect will this investment have on the industry? As ever in the insurance industry, there isn’t an easy answer. There are a myriad of complex factors underpinning investment decisions and the insurance industry is so large and diverse that there can be plentiful opportunities in one part, while another looks in the doldrums.
However, it is possible to pull together a few conclusions.
First, the UK insurance industry remains one of the most vibrant in the world. The domestic market is one of the most competitive in Europe, but it is also one of the most open to non-domestic businesses. Virtually all of the global giants have major businesses here – the British are big buyers of insurance – in contrast to France and Germany which remain dominated by local firms. In addition, the UK contains the London market, the greatest concentration of insurance talent on the planet. So if you want to be anyone in insurance, you have to be in the UK.
Second, the fortunes of the insurance industry are not tied to the general economic climate in the UK. Anyone with a car has to have car insurance and anyone with a house is likely to have buildings and contents insurance. Most businesses need liability cover. So just because the outlook for the UK economy seems bleak, that doesn’t mean there isn’t money to be made in insurance.
“The insurance industry is so large and diverse that there can be plentiful opportunities in one part, while another looks in the doldrums.
Third, investors are increasingly keen on diversity, or non-correlation. This is the investment equivalent of not putting all your eggs in one basket. If you own lots of shares in UK house-building companies, you might not think the outlook is too good, but if you switch 50% of your portfolio to UK life insurers, you have hedged your bets and can now make money in very different circumstances.
The increasing importance of hedge funds in the global investment community has fuelled this search for non-correlated returns. This is why hedge funds have started piling into the catastrophe bonds issued by reinsurers and esoteric areas like Lloyd’s start-ups and insurance run-off deals.
So what are the dangers? Well, insurance is a business based on the availability of capital and if there is too much of it prices tend to fall, and fall fast. Profits disappear even faster and, sometimes, when this has been going on for a while, a large catastrophe hits and significant capital is destroyed. So this is the classic boom-bust insurance cycle. And it is alive and well.
But what might happen? Given the lack of attractive investment opportunities around the rest of the economy, I think we will continue to see interest from trade and financial investors in the UK insurance industry. The UK broker sector remains fragmented, there are an increasing number of run-off books on the market and Lloyd’s has huge attractions for overseas investors because of its strong rating, global licences and capital advantages. If the rating environment for domestic business picks up, as some are forecasting, this will add to the attractiveness.
Bill Cooper is managing director and head of relationship management, financial institutions, at Lloyds TSB Corporate markets.