Integrated Lloyd's Vehicles (ILV) should be turning the corner, finds HSBC. They have consistently outperformed the Lloyd's market and with the expected hardening of rates, will be a good bet for investors....

If the bubble is about to burst, HSBC would recommend shareholders invest in the cluster of Integrated Lloyd's Vehicles (ILV). Its April report finds the sector remains heavily out of favour – reflected in the number of ILVs trading at deep discounts to asset values, and the bad press from Lloyd's about the loss making 1997-1999 years.

However, HSBC believes much of the deterioration in forecast results is due to provisions being made against these losses. This shows up both in the figures and is reflected in the share price. Also, one of the major impacts of annual accounting is to speed up the recognition of open year returns – both positive and negative. So, the results to December 1999 should represent the nadir for those companies annual accounting.

In addition, HSBC believes the 1999 may well represent the bottom of the insurance cycle. The worst has passed. Now is the time when investors should revisit insurance shares, as the potential for a market correction becomes far more likely.

There is no single event that indicates that the market has turned, but instead it is a combination of factors. HSBC expects the momentum to gather pace through the year, with real evidence of an upturn in 2001.

Market overview
The number of catastrophe losses during 1999 have taken their toll on reinsurers and retrocessional capacity has dried up, while the collapse of the Australian reinsurance market has removed a main supplier of lower attachment 'working layer' capacity.

A recent market review by brokers Jardine Lloyd Thompson found that, although the direct and facultative markets remain soft as tightening reinsurance coverage and high reinsurance costs have yet to feed through into their rates, property prices are expected to increase as the impact of 1999 losses is felt.

Casualty rates are stabilising, but the marine and aviation markets continue to be difficult on the back of surplus capacity.

Price increases are being seen on the unprofitable cargo accounts, but most business is currently being renewed as expiring.

The energy market is mixed, with rates for onshore property risks increasing, as are the prices in the offshore construction/drilling risks.

However, other areas of the market are stable. Rates on Accident & Health/Medical Expenses have hardened dramatically and rates on original business in the US are rising significantly.

Personal Accident rates have stabilised as have the Political and Credit Risk markets.

The motor market has already seen strong increase in rates during 1999 and this is expected to continue into 2000 and beyond.

The insurance cycle turn is broadening, but has yet to embrace all classes. However, the losses working through the system will change this. Reinsurance cover is getting tighter and more expensive so more risk will have to be retained.

Some insurers will experience cash flow difficulties as premium income failed to offset losses and reinsurance recoveries are delayed – or not forthcoming (bad debt). Capacity has, and will exit the market.

Brokers will find certain types of business harder to place and are already priming clients for a changing market.

The delay built into this year's renewals will result in the upturn gaining momentum into 2001.

The reports key findings:
A number of ILV's are trading at discounts to asset values. The sector is oversold and yet to reflect improving sentiment.

The insurance cycle has turned: when results deteriorate across the board, insurance shares can start to offer value.

The poor underwriting years of 1998/99 are in the price.

Average return on capacity 1989-98e
  1989 1990 1991 1992 1993 1994 1995 1996 1997 1998e Average
Atrium 3.1% 6.3% 8.0% 9.7% 35.9% 17.5% 17.8% 13.4% 7.2% -0.9% 12.8%
Amlin 6.0% -0.2% -1.3% 8.0% 19.6% 10.7% 11.0% 7.8% 2.4% -4.2% 6.3%
BRIT (Wren) -0.5% -6.6% 2.4% 5.4% 7.5% 4.5% 8.3% 5.3% -4.3% -10.2% 1.6%
Chaucer 5.7% 0.6% 0.5% 3.3% 8.7% 9.0% 9.1% 5.9% -2.0% -5.8% 4.0%
Cox -5.8% -0.9% 5.2% 11.1% 21.7% 18.8% 16.1% 11.0% 1.4% -1.8% 6.5%
Hlscox 2.4% 0.5% -2.6% 7.3% 19.7% 14.8% 19.2% 14.1% 2.9% -5.0% 8.2%
Kiln 0.7% -6.1% 6.2% -0.5% 15.9% 9.9% 8.0% 7.2% 1.4% -3.9% 4.7%
Limit 3.1% 7.3% 8.6% 6.6% 56.3% 16.0% 20.1% 15.0% 1.9% -5.3% 13.1%
SVB 6.2% 6.5% 6.1% 7.3% 40.6% 16.8% 13.5% 12.2% 9.5% 5.6% 12.1%
Wellington 6.9% 8.4% -2.5% 5.8% 27.5% 17.0% 15.6% 9.8% 7.2% 1.2% 11.1%
Lloyd's Average -17.2% -18.4% -10.7% -2.2% 17.9% 10.3% 11.6% 6.1% -1.7% -10.0%  
Note: 1990-1992 results have been adjusted for double counted losses. 1999 forecasts are for the pure year results. Source: Lloyd's