Why investors still love insurance

Quindell Portfolio’s ability to attract a £20m equity injection from an anonymous institutional benefactor shows that the insurance industry continues to be a lure for investors.

The acquisitive insurance and telecoms outsourcer announced this morning that it had sold more than 153.8 million shares to “a major new institutional investor” for 13p a share. In addition, the company secured £13m additional funding from the Royal Bank of Scotland.

At first glance, investors’ love for the insurance market might seem strange. The industry’s money-making mechanisms can be tough to understand, especially when everything can be thrown up in the air by a couple of poorly timed severe weather events. Also, insurance for some is counter-intuitive. As a general rule, investors like to see growth, but in insurance, rapid growth can sometimes be a sign of weakness.

But unlike other potential investment opportunities, such as banking or property, insurance has proved generally resilient to the financial crisis. It certainly hasn’t escaped unscathed, however. People and companies are trying to cut back on insurance spending, claims are rising, and investment returns are paltry thanks to low interest rates.

But nonetheless, need for insurance by individuals and businesses remains. The economy cannot function without it. Therefore, it is a rare opportunity for investors, who have few other options.

Opportunities for growth

The amount of regulatory change that the industry is going through is also presenting growth opportunities, despite the economic downturn.

Quindell chief executive Rob Terry said in the statement this morning that his company was continuing to see “unprecedented opportunities for organic growth in what is a unique time in the UK insurance industry’s evolution”.

It is likely that Terry is talking about telematics - the technology that allows insurers to monitor policyholders’ driving and price policies accordingly.

Quindell has a technology deal with telematics broker Ingenie. It also bought insurance software house IT-Freedom (now Quindell Enterprise Technology Solutions) back in May to boost its telematics capability to cope with the work it expects once the restrictions on its deal with Ingenie are lifted and it can work with other providers. It is clearly expecting growth here.

If telematics was the clincher for Quindell’s new mystery investor, it wouldn’t be the first time. Private equity investor Edi Truell’s interest in the UK motor insurance industry is fuelled by the opportunities he sees arising from the technology.

Legislative changes, such as the forthcoming EU Gender Directive, mean that the market is crying out for the ability to base premiums on individual drivers rather than broad-brush criteria such as gender.

Women are understandably disgruntled that their car premiums could go up by 25% once the directive is implemented in December. The status quo seems equally unfair – men are upset that they have had to pay such high prices for so long regardless of driving ability.  

Insurance may be esoteric and difficult to understand for investors, but it is where the action is at the moment.