Simon Moss, senior investment manager at Gartmore, believes the environment for US insurance stocks ...
Simon Moss, senior investment manager at Gartmore, believes the environment for US insurance stocks remains positive over the long term.
Excluding the life assurance sector, Moss says a firmer pricing environment in the US has made him positive on the general insurance sector for the past 12 months.
However, he says recently there has been softening in some areas of the sector, such as automobile insurance, which has put stocks under a bit of pressure.
Other areas of the sector, however, are still strong according to Moss and he says the long-term outlook remains positive.
Moss notes while globally balance sheets have become stretched, US companies are in stronger financial positions and have been able to take advantage of the pressure on their European competitors.
Added to this, Moss says a global contraction in capital has also strengthened pricing in the US and adds there are not many signs of major capital coming into the market.
Alexander Foster, manager of the Hiscox Insurance portfolio fund, says the property/casualty insurance sector, which excludes life companies, is the strongest he has known in 35 years.
This is being driven by strong demand which is being met by a shortage in supply. This demand, he adds, is coming from the desire for investors to protect themselves against a world subject to increasing risk.
He says: 'Following the World Trade Center loss, people have been alerted to the new scale of loss that can be inflicted through man-made events, such as terrorism. Before this, the insurance cover for buildings in New York was lower because it was never an area at risk of hurricanes or earthquakes.' After 11 September, Foster says people had to change their views and they now want to cover themselves from the risks of man-made events, not just 'acts of God'.
Foster has 80% of his fund in the US, where there are many more pure insurance companies than in the UK and Europe.
Other than the UK's Lloyds insurance market, Foster says the UK and Europe have many more composite companies that combine a number of different activities, such as general insurance, life assurance, investments and pensions.
He says the advantage of investing in pure general insurance companies such as those available in the US, is they do not hold large amounts of equities and have not been damaged by the life, pensions and the savings sectors.
In the US, Foster says he likes companies that have a good level of underwriting skills, strong balance sheets and adequate reserves, while steering away from insurance businesses that depend on investments to make profits.
He says: 'Stock selection on companies that are well-reserved is crucial, as the underwriting returns will provide earnings to shareholders. Those companies with inadequate reserves because of their past underwriting indiscretions will have to allocate the profitable underwriting now being undertaken to pay for the past.'
One risk to the sector, says Foster, is that interest rates and investment returns may pick up to the levels seen in the 1990s. If this happens, he says it would lead to weaker insurance pricing.
Outlook for insurance stocks positive.
Pricing remains firm in the US.
Strong demand in the sector.
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