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Bet against the banks but don’t bet against the insurance companies

·3-min read
<span>Photograph: Alessia Pierdomenico/Reuters</span>
Photograph: Alessia Pierdomenico/Reuters

There is a grim calculus for insurers handling coronavirus claims, laid bare by Legal & General’s half year results. It paid out £36m in life insurance claims to the families of those who sadly died from Covid-19 – but made a £32m gain from mortality, as it will pay out pensions for fewer years than expected as the elderly pass away.

In late March, the Bank of England strong-armed banks into halting dividends and bonuses, and made it clear that insurers should consider doing the same too.

But while the guidance made sense for banks, facing huge losses from bad debts, for insurers coronavirus has turned out very differently – with some parts of their business doing rather well.

Take Direct Line’s results earlier this week. It pocketed a huge gain on its motor insurance book as shunts, prangs and whiplash virtually disappeared during the lockdown.

In the first half of 2020, Direct Line paid just £402m in motor claims, down from £519m in the same period last year, more than offsetting the £35m paid on travel and business interruption claims.

Home insurance claims have also collapsed as we stayed home and kept burglars away, as Aviva’s results shortly will doubtless show. It’s only insurers focused on business interruption, such as Hiscox, who are at significant risk.

L&G remains robust and it appears to retain enough cash to fund its activities and future growth. When it defied regulators and paid out a dividend in early April, it looked like a risky gamble, just as the virus was taking grip and the economy was in freefall.

It turned out to be probably the right thing to do; dividends don’t just go to the rich – they are also the lifeblood of income funds used by the elderly to finance their retirement. Now, L&G has decided to maintain its dividend, and the only note of disapproval comes from fund managers who wanted it to pay out even more.

The stock’s current dividend yield of 8% is, as one analyst said, a “blatant invitation” to buy given how starved of dividends investors are elsewhere. Yet worries remain; L&G has a vast “bulk annuity” business underpinned by corporate bonds. Should there be widespread corporate bankruptcies and insolvencies, these bonds will slide, although there is no indication of that yet.

But equally there’s the huge pool of savings built up by households that couldn’t spend during the lockdown, inflows from auto-enrolment, and an ageing society. All these forces play into L&G’s hands. By all means bet against the banks, but don’t bet against the insurance, life and pension companies.

Was Sweden’s anti-lockdown approach worth it?

Sweden adopted a different approach to Covid-19 than most of the rest of Europe. Stores and restaurants stayed open, for the most part children continued to go to school. The assumption by the government was that a full lockdown of the economy was not needed because Swedes would behave responsibly.

So was it worth it? Despite all the social distancing that has been going on, Sweden’s death toll from the pandemic has been far higher than neighbouring Denmark and on a per capita basis exceeds that of the United States. That said, the number of new cases has been on a sharply declining trend, at least until recent days.

As far as the economy is concerned, Sweden did less badly in the second quarter than most of the European countries that have so far reported, but the difference was not all that large. Output contracted by a record 8.6% compared to a 10.1% drop in Germany and a 12.1% decline in the 19-nation eurozone.

Of course, the crisis is by no means over yet. Sweden might have developed herd immunity. Its anti-lockdown approach could pay economic dividends in the event of a second wave. All that can be said at the moment, though, is that it has paid a high price for being the best of a bad bunch.

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