Insurance: the quiet strength of a defensive sector

Among all the usual ‘awareness’ days, National Insurance Awareness Day – observed annually on June 28^th – is unlikely to get the same attention as, say, Father’s Day. However, its mission is a laudable one, aiming to raise awareness of the importance of various types of insurance policies, and encourage people to review their coverage. 

For most people, insurance is a necessary evil. It is a tool to protect against a worst-case scenario. This helps shape the return profile for insurance companies. They are generally a defensive option – companies and households usually keep paying insurance in all economic conditions. This makes insurance a potential portfolio ballast in an environment of rising risks.

With this in mind, it is perhaps unsurprising that insurance companies have been one of the success stories of 2025. The MSCI World Insurance index is up 18.1% for the year to date, compared with a rise of just 5.2% for the wider MSCI World index*. More surprising is that insurance companies have outpaced the MSCI World index over the past five years – delivering an annualised return of 21.5% versus 14.7%*. 

The sector is not as homogenous as it might initially appear: property and casualty insurance forms around 39% of the index, with life and health insurance another 23%. Insurance brokers, multi-line insurance and reinsurance are the other major sectors. 

Polar Capital, which runs the dedicated Polar Capital Global Insurance fund, characterises the sector as having, “demand less sensitive to macroeconomic conditions”, but also being less vulnerable to big tech disruptors. Insurers will tend to do well at times of higher interest rates. They usually hold large cash balances that they need to set aside for liabilities. If they can earn more interest on that, it helps their earnings. This helps explain the sector’s recent success. 

Some insurers will also be affected by global weather events – wildfires, volcanoes, earthquakes and so on. This can create significant liabilities as insurance companies need to pay out compensation. The California wildfires, for example, led to losses of around $50bn. That’s around a third over the usual annual catastrophe ‘budget’**. This can affect their profitability in the short term, though this is often rebalanced through rising premiums in the longer term. 

Insurance is also a potential beneficiary of AI. Guy de Blonay, manager of the Jupiter Financial Opportunities fund, says: “Insurers are increasingly adopting AI to help  reduce costs, including headcount, while increasing customer satisfaction, enhancing customer offerings and addressing the myriad challenges in a rapidly evolving market.” Insurance companies have been able to use AI to streamline underwriting, improve pricing and risk analysis. 

However, there are challenges to this. As Guy points out, AI adoption across financial services comes with issues such as data privacy concerns, algorithmic biases and regulatory compliance. However, it remains a source of potential growth across the sector and a means to improve efficiency. 

Insurance companies will also tend to be cash generative and pay higher dividends. This means they are often a feature of income portfolios. For example, BlackRock Continental European Income holds AXA and Munich Re, for example, among its top 10 holdings***. Munich Re is the world’s largest reinsurance company, while AXA is the fourth largest financial services company by revenue in France.Manager Brian Hall sees “attractive and sustainable levels of return coming from the banks and insurers and that’s being distributed to the shareholders.” 

The £2.5bn Polar Capital Global Insurance fund is one of the few specialist funds in this area. It is a low turnover strategy, holding 30-35 companies, split across commercial, retail and life/health insurers, plus reinsurance and brokers. Its largest weighting is in commercial insurance and its largest holdings include RenaissanceRe Holdings, Arch Capital and Chubb***. 

The fund has been a consistent performer and has proved a useful ballast for a portfolio. Manager Nick Martin says: “The performance has usually come through in more difficult times because of the nature of the sector and the nature of how we construct the fund.” The fund has only had a single negative calendar year in the past decade – 2020, when it lost 6.1%**.

Can insurance continue its recent strength? The backdrop appears favourable, with plenty of risk aversion, relatively high interest rates, and a good tolerance for price rises. This is in addition to longer-term supports such as AI adoption. Valuations remain significantly below the market average – with a forward p/e of 12.9x versus 19.1x. 

Insurance has another advantage in the current environment. It is largely out of the line of fire on tariffs. Nick says: “We’re politically insensitive. The US is regulated state by state, it’s very unlikely that we wake up and Trump has done something that can change our prospects. Tariffs could be inflationary, but that’s something that insurance companies can take in their stride as well.” For investors looking for a place to hide, the insurance sector has some appeal. 

*Source: index factsheet, 30 May 2025

**Source: Polar Capital Global Insurance Webcast, 6 May 2025

***Source: fund factsheet, 30 April 2025