Insurance stocks in London traded under pressure as recently as Friday 15 October because of reports HSBC would not buy a business from Old Mutual. But Foster, who runs the IMA fund with the highest weighting to the sector, said it was important to distinguish between life and non life insurance, and that investors stand to make strong gains from current valuations of certain assets.
Financial Express data points to 71 IMA sectorised funds with exposure to the insurance sector. Eight of these have double digit exposure as a proportion of their portfolios, the data suggests. The Hiscox Insurance Portfolio is by far and away the most exposed, with a 96.5 per cent weighting to the sector. Others are shown it the table below:
| Fund |
Insurance sector exposure % |
| AXA - Framlington Financial |
22.59 |
| Artemis - High Income |
20 |
| Baillie Giff - Corporate Bond |
13.40 |
| Baillie Giff - Investment Grade Bond |
12.50 |
| Majedie - UK Opportunities | 11.40 |
| Henderson - Global Financials | 11.10 |
| Psigma European Income | 10.81 |
Source: Financial Express Analytics
Certain types of insurance holdings have been a strong defensive play through the bear market in equities that ended in the spring of 2009. Between 1 July 2007 to 1 April 2009, the FTSE 350 Non Life Insurance index returned 2.08 per cent compared to the wider FTSE All Share index's loss of -37.02 per cent.
The FTSE 350 Life Insurance index was less successful, with a loss of -57.29 per cent over the period, although it has made up some gains in recent months. For example, it has gained 9.21 per cent in the six months to 14 October. And it is up 16.45 per cent in the three months to that same date.
Performance of indices over 3-yrs
Source: Financial Express Analytics
Hiscox manager Alec Foster said it was important to separate non-life insurance from life assurance businesses. He avoids life companies because of the complexity in breaking down their business models to identify drivers of revenue and profit.
"We generally don't own them – where we do it's for specific reasons," Foster said, pointing to the likes of Resolution, which has been buying up books of business in the life space.
There is more focus on property, non-life and casualty insurance. Foster believes there is a strong argument to hold insurance sector exposure this way because of ongoing low valuations. Historically, he said, non-life insurance companies trade at 1.4x their book values. In the past couple of years this has fallen to a 1x ratio or less. At the same time companies active in areas such as catastrophe re-insurance are reporting good markets and those providing car insurance in the UK have been raising premiums up to 50-60 per cent over last year.
The best opportunities are found in the US market, Foster said, which explains why 75 per cent of his portfolio is weighted to that market, led by a holding in Berkshire Hathaway – the company still 41 per cent owned by Warren Buffett. US companies have been buying back shares aggressively, which coupled with ongoing earnings growth and the low price to book multiple all points to strong returns going forward.
M&A activity has seen bids made at a 30 per cent premium in the US market as companies look to fill holes in their geographic or product spread, while in the UK Aviva turned down a bid from RSA for its property and casualty business at a reputed 1.6x price to book value.
"Now is not the time to leave [ the sector]," Foster said.