Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
Last month, legendary investor Warren Buffett announced his biggest deal in six years. Digging into very deep pockets, his company, Berkshire Hathaway, agreed to buy insurance company Alleghany for $11.6 billion in cash.
Cathy Seifert, a Berkshire analyst at CFRA Research, commented: “For Berkshire, the transaction increases its presence in the specialty insurance and reinsurance segments at a time when market conditions remain attractive for growth.”
Because insurance is, in fact, one of Berkshire’s ‘bread-and-butter’ businesses. The conglomerate already owns several firms in the sector, including Geico auto insurance and General Re reinsurance.
Insurance isn’t the most exciting of subjects and it’s the one product we buy hoping to never have to use. But it does have a number of attractive qualities for investors.
For starters, non-life insurance is not a discretionary purchase. It is often required by law. If you think about it in a personal capacity, you must have car insurance to legally drive a car and your mortgage lender requires you to have home insurance. It’s the same for businesses.
This means demand is less sensitive to macroeconomic conditions because it is required in good times and bad. And when the cost of living is increasing as it is today, and we are making cuts in our budgets, this type of insurance will be one of the monthly outgoings we continue to pay.
In an increasingly global, complex world with accelerating technologies, the value of insurance in helping to manage risk is also rising. Cyber security rates are more than doubling in some geographies, for example. The industry is also significantly less vulnerable to the big disruptors like Alphabet, Amazon and Uber.
Finally, many insurance contracts get repriced annually, which means they can be adjusted for inflation and the non-life insurance sector is also ESG-friendly – playing a key role in the transition to a green economy.
Nick Martin, manager of Polar Capital Global Insurance fund, told us more in this podcast:
James Yardley, senior research analyst at FundCalibre, says that the insurance sector had a very difficult period during Covid. There were a lot of issues with businesses which were forced to shut and wanted to claim damages,” he said. “This depressed sentiment towards the sector whilst fundamentals were quite good. This has come through this year with insurance outperforming strongly.”
According to Nick Martin, the sector is poised to benefit from rising inflation and interest rates.
“Premium rates are going up, which is usually as a result of balance sheet stress or a major catastrophe,” he said. “But this time it is a little bit different, and I think we have the best underwriting market in at least a decade.”
“Low interest rates have meant insurers haven’t been able to earn much from the capital on their books,” said James. “But this is now changing. The sector is not screamingly cheap, but we like it as a long-term allocation that is somewhat less connected and less correlated to the rest of the market. It’s a get rich slowly sort of investment.
Warren Buffett isn’t the only investor to find the insurance sector attractive.
Baillie Gifford Japanese Income Growth has an 8.6%* weighting to the sector, including top ten holding MS & AD Insurance Group Holdings, which has a basic policy of providing stable dividends and will repurchase its own shares flexibly, and as opportunities arise.
Jupiter Financial Opportunities has 7.3%* invested in no-life insurers and 3%* in life insurance. Run by Guy de Blonay the fund also invests in areas such as stock exchanges and online payment companies, with the manager looking at the wider trends driving the economy, and the impact these have on the financial services sector.
Alexandra Jackson, manager of Rathbone UK Opportunities fund added to the sector earlier this year. “We add to life insurance company, Phoenix, and a slightly smaller specialty insurance company called Beazley,” she told us in February 2022. “They’re benefiting from rising interest rates, but also very chunky growth in their premiums in areas like cyber security.”
Several bond funds also invest in the sector. Rathbone Ethical Bond fund has 41.5%** of the portfolio invested in the debt of insurance companies, for example.
GAM Star Credit Opportunities has traditionally found most of its best ideas in junior debt of banking and insurance firms too, while M&G Strategic Corporate Bond 9.9%* in the sector, including a top ten position of 1.8%* in AXA, the French multinational insurance company.
*Source: fund fact sheet, 31 March 2022
**Source: fund factsheet, 28 February 2022