Insurance: a good hiding place for investors in uncertain times

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I’m Sam Slator from FundCalibre, and today I’ve been joined by Nick Martin, who’s manager of the Polar Capital Global Insurance Fund. Thanks for joining us today, Nick.

Absolute pleasure, Sam, great to be here.

So, it’s all a bit doom and gloom in the world at the moment. So, I thought we could start with something positive, which is actually the performance of your fund. It’s not only done well over five and 10 years, but over the last year when pretty much everything has been struggling, it’s up about 19%, which is great. Is it normal for your fund to perform this well when markets are volatile or when everything’s falling? Can you sort of let us know what the secret is, please?

[00:39] Yes, well first of all, thank you very much for your kind words, on the performance. I think, if there is a secret at all, I think it’s [that] the long-term returns of the fund really mirror the returns of our portfolio companies, and non-life insurance is a sort of ‘get-rich-slow-compounding-of-returns’ kind of story. And we measure that success by growth in book value per share, or NAV growth over time. And for the 24 plus years of the fund, that’s been about 11% a year.

And the good news is that sort of fund performance of 10-11%, has been good enough to be about double our benchmark return each year, and also about 3% per year better than the broader financial markets as measured by the MSCI World [Index]. And I think what’s helpful in sort of periods like this, is that that outperformance tends to come in those more challenging times.

And really that’s due to the nature of the non-life insurance industry itself. You know, it’s quite a defensive product; it’s not a discretionary, it’s often required by law. So, just think about car insurance, [or] your mortgage lender will insist on your home insurance. And it’s the same for businesses as well.

And the other thing we’ve had in the last couple of years, has been some help on the reporting and regulatory side. You know, you’ve got ESG [Environment, Social and Governance investing], you’ve got the TCFD – that’s Tasks for Climate-related Financial Disclosures – and those kinds of things are shining a brighter light to stakeholders on the risk that companies have. And maybe obviously, insurance is a way that management teams can demonstrate that they’re managing those risks appropriately.

And I think the sort of final thing to think about in terms of why this year has been good for the sector, is that Mr Market is, sort of, in part acknowledging the much better earnings power we’ve got for our companies. And we’re about four years into an improving insurance pricing environment. The reinsurance market is starting to turn positive as well, in part due to another heavy catastrophe year.

And Hurricane Ian has been a big contributor to that. But you know, with that sort of robust underwriting profit outlook, you can now add some additional earnings from higher investment income.

You know, our companies have dull and boring balance sheets; they need cash and short-dated two-to-three-year bonds because claims can happen at any time. And really since the financial crisis, those returns on those kinds of assets have been mediocre at best.

But if you look at what’s happened to short-term bond yields, particularly in places like the US where we have about 70% of the portfolio, those yields have almost doubled in this period of time.

And what that’s, ‘long-story-short’, it [has] sort of turned that earnings power that’s been sort of, as I say, 11% a year historically, into more sort of mid-teens at the moment. And therefore, you know, that’s one reason why the sector’s continued to do well, is that much better earnings outlook than you see in many other parts of the market.

And going into a possible global recessionary environment and with continued high inflation, are you still positive about the outlook for the sector?

[03:46] Yes, absolutely. I mean, we’ve discussed why insurance is non-discretionary. It’s quite disconnected with what’s happening in the broader economy. And you can think about insurances generally, in terms of long-term demand, what you really need to believe [is] that risk is going up in the world. And I think, sadly, we can all agree that that’s the case, whether it be climate change, whether it be wars or supplier change disruption; inflation is obviously a big topic at the moment as well. And, as I’ve just mentioned, in terms of investment portfolios, actually higher bond yields is very good news for the earnings of our companies.

And inflation actually, it tends to be good news for top line growth as well, because a lot of insurance gets priced off of things like asset values from company revenues [and] payrolls. So, therefore, if there’s inflation in the system as it works its way through, premium volumes naturally rise. And you combine that with a good pricing outlook as well for our companies; we’re expecting some very solid revenue growth over the next couple of years, you know, well into the double digits, I would say.

And you know, that’s in potential complete contrast to what you see in many other sectors that could be very negatively affected by, as you say, a global recession. So, this is a good hiding place in uncertain times.

And you’ve mentioned climate change there and a hurricane earlier, insurance has quite a big role to play in all of this. Can you perhaps explain why that is, please?

[05:26] Yes, I mean, if you think, “what is an insurance policy at its fundamental level?” It’s a promise to pay if something a bad happens in the world, that insurance company gives you a little bit of money back and unfortunately climate change now is leading to more natural catastrophes, it’s leading to more insured losses. And, you know, I’ve been doing this now for over 20 years, and when I started, the fears in the industry were more sort of hurricanes and earthquakes and not much more, but in the last five or six years, you can add wildfires, you can add droughts, you can add flood, all these sort of so-called ‘secondary perils’ that have greatly sort of come [about], arguably as a result of climate change.

And I think the insurance industry overall, has an important role to play in supporting global resilience and sustainability. And it’s been shown in numerous studies that, if insurance is in place and a disaster happens, the recovery in GDP is so much quicker as a result of that insurance being there.

And it is important of course, that the insurance industry picks up a good part of the bill, post a disaster. But an even better solution, of course, is to try and prevent that loss from happening in the first place.

And there’s a number of things the insurance industry can do I think to sort of help with this. I think, the industry can be something where you can nudge behaviours in the kind of right way, through the pricing of its insurance premiums. And maybe an example of that would be say that, for whatever reason, someone wanted to build a new coal facility and if they can’t get insurance, the financing of that facility might be very challenging and therefore, the industry, by pricing its products appropriately or not having cover in certain places, can help us all down the road to a greener future.

And there’s other things the industry can do as well. And nature-based solutions is a good example of that, where the insurance industry is actually using nature as a risk prevention partner.

So, an example of that might be you know, helping support mangroves. They [are] actually very helpful in helping mitigate a storm surge post a hurricane, and that’s a much better solution than just having ever higher cement walls. That helps against that sort of flooding risk.

And I think that we touched on climate change here, but I think if you look more broadly for the industry, you could argue it touches probably all of the 17 UN Sustainability Development Goals, the SDGs. And I think that’s one reason why insurance, non-life insurance, is a sort of ESG-friendly industry.

And it’s one reason why we’re designated article 8 under the SFDR [Sustainable Finance Disclosures Regulation].

So, are there any other sort of unexpected or unusual aspects to insurance that you might be able to tell us about?

[08:29] Yes, I think when people hear the word insurance, you know, probably the first thing they do is yawn. But then if they go beyond that, they always think about a difficult claims experience. They probably think [of] insurance being a grudge purchase, you know, we’re all better than average drivers, of course, it’s not going to be our homes that get burgled or have an issue with. And if they don’t think that, they probably hear [the word] insurance and they think [of] meerkats and larger-than-life opera singers.

And I think that it’s important for the industry to try and change that perception because I think people don’t always appreciate that, without insurance, planes don’t fly, ships don’t sail [or] when your Amazon package doesn’t turn up tomorrow. And I like to say, that insurance is the oil that greases the wheels of world trade; as risk goes up in the world, the insurance industry has a critical role to play in offering that resilience to individuals and communities at large. And if we can support an industry like that and continue to produce good returns for investors along the way, that’s a great place for us to be.

As always, Nick, that was far more interesting than I think viewers might have anticipated with the title of the video. So, thank you very much indeed for joining us today.

Always, always a pleasure. Thank you.

And if you’d like to find out more about the Polar Capital Global Insurance Fund, please go to FundCalibre.com.