Stock Market Week: Stormy weather batters insurers
Monday 11 January 1999
In the early months of 1998 storms in the UK hit profits and a particularly nasty ice storm in Canada put dark clouds on the horizon for insurers with big exposure there, notably General Accident and, to a lesser extent, Commercial Union.
The subsequent merger of the two insurers was spectacularly well-received. But the underwriting woes of the sector persisted. Bush fires in Australia, hurricanes in Florida - the list was relentless.
This year the same weather nightmare is already recurring. At the end of last week, Warburg Dillon Read slashed its full-year earnings estimates for CGU by more than 10 per cent, from pounds 560m to pounds 500m, in the light of high winds in northern Ireland and flooding in Scotland since its last forecast. It also downgraded its 1998 profit forecast for Royal & SunAlliance, from pounds 400m to pounds 375m.
Shareholders might think the international nature of the businesses would offset the impact of bad weather at home. But it seems the weather, too, has gone global. Large parts of North America are in the grip of one of the coldest winter freezes in years, sharply increasing the projected cost of cold weather claims. Forecasts for CGU in 1999 have dropped from pounds 675m to pounds 630m.
The market could shrug this off if it was clear that profit margins would recover in core insurance lines such as household and motor. The big insurers are still making strenuous efforts to raise premiums and have had some success in motor insurance.
But counting on an upturn amounts to wishful thinking. Salomon Smith Barney points out there is still huge overcapacity in the market - too much capital and not enough custom.
Weak economic growth and lower interest rates will continue putting downward pressure on premiums, and therefore margins.
Those insurers who rely more on life insurance and long-term business are not necessarily safer. A financial storm, in the shape of lower interest rates, threatens to rain all over their balance sheets.
For life insurers, a fall in long-term interest rates means a jump in the value of liabilities. Guaranteed liabilities are particularly expensive - if they have been made in anticipation of higher interest rates, it leaves a big gap between the amount due to be paid out and the assets covering it. This has been estimated at pounds 10bn.
Low interest rates also tend to mean slower asset growth and narrower margins. Add to that the impact of the pounds 10bn mis-selling review and the storm becomes a hurricane.
The renewed bull-run means life insurers have made up much of the ground they lost in the market crises of last year. But Standard & Poor's warns they are still vulnerable, and says many will experience big falls in solvency this year - a big factor in acquiring new business.
If insurers think the year looks gloomy, they might draw some comfort if they look at their fortunes relative to the retail sector. Next week sees a raft of retail trading statements, starting with Kingfisher.
These will be accompanied by the British Retail Consortium's monthly sales monitor for the crucial month of December. DIY shops and garden centres are thought to have performed reasonably well, so Kingfisher may get off lightly.
But rivals selling luxuries may find themselves wondering what happened to Christmas. The monthly sales monitor for November showed sales down 0.4 per cent year on year, and recorded its worst three-month sales trend since it began its existence in January 1994. The sales monitor for December, normally the golden month for retailers, could prove a big disappointment when it is published on Tuesday.
Dixons, the electrical goods retailer, is likely to show some of the scars when it reports on Wednesday. Boots, normally a solid trader through Christmas, should suffer much less when it reports on Thursday. Further statements are due from Great Universal Stores (Thursday) and Laura Ashley Holdings (Friday).
Tomkins, the "buns to guns" conglomerate (known to its own management as an engineer), is expected to report profits narrowly up in the six months to October last year. The consensus is for a boost in profits from pounds 214.9m to a figure between pounds 225m and pounds 235m.
The group said in November that its trading in 1998/99 had been in line with expectations. But analysts have begun to scale back their forecasts. The consensus for the full year is flat profits of just pounds 525m.
Tomkins has maintained it wants to boost growth both organically and by acquisition. The organic side, though, may have been hit by the strike at General Motors last year. General Motors is a big customer for windscreen wipers and engine timing belts made by Gates and Stant, a Tomkins subsidiary.
RHM baking and milling may also have been hit by a softening in commodity prices and reduced demand. Analysts are wondering aloud whether the division should be sold.
Selling RHM and buying an automotive maker would give Tomkins the sort of focus the City has crying out for. The conglomerate has pounds 500m to pounds 700m to spend on acquisitions. BTR's merger with Siebe may well see BTR, that other former conglomerate, sell its automotive division. That could present opportunities.
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