Insurers on the LSE

PAA Insurers

Insurers on the London Stock Exchange using only the IFRS 17 Premium Allocation Approach are valued in quite a different way to those who aren't, and there is a lot of value and insights to be gained from grouping them together, and looking at them seperately from their GMM/VFA cousins. But there are only a few 100% PAA'ers on the LSE!

  1. Admiral Group plc (ADM)
  2. Conduit Holdings Ltd (CRE)
  3. Direct Line Insurance Group PLC (DLG)
  4. Hiscox Ltd (HSX)
  5. Lancashire Holdings Limited (LRE)
  6. Sabre Insurance Group PLC (SBRE)

Net ISR% and Reinsurance expense %

Net insurance service result (ISR) as a percentage of insurance revenue to 30 June 2023.

Reinsurance net expenses on business ceded equals recoveries less reinsurance premiums. Don't panic about Lancashire's high reinsurance expense %, they have an even higher ISR margin.

Earnings yields of insurers on the LSE

Forward earnings yield based on double the interim earnings over the 6 months to 30 June 2023; with the negative earnings yield for Direct Line Insurance indicating tough pricing conditions in UK motor.

Risk adjustment as % of LIC

Conduit Holdings : 26 Aug 2023 note

Don't think I've ever shared stock tips here , so, I'm not going to start, but if I had a bit of spare cash; I'd have a close look at #ConduitHoldings (LON:CRE), a Bermuda-based pure play #reinsurer, listed on the London Stock Exchange, as they tick a number of boxes:

1. Execs are buying!

2. Price to book just over parity (value investors take note!)

3. Decent risk adjustment at 80%

4. Discounting their LIC at the lowest (most conservative) rates of the LSE PAA insurers.

5. Forward earnings yield of 17%

I'd prefer them not to be deferring acquisition costs, but this is easily adjusted for, and the price to book is still decent.

Conduit well placed to capitalise on market conditions

Key documents

Equity bridge 31 Dec 2021

Conduit Holdings equity bridge from IFRS 4 to IFRS 17 on 31 Dec 2021

The following factors resulted in an increase to shareholders' equity:

Equity bridge 31 Dec 2022

Conduit Holdings indicated a much larger ($53m) difference between IFRS 4 and IFRS 17 shareholders' equity on 31 Dec 2022 (than 31 Dec 2021, only $7m), largely as a result of movements in interest rates during 2022.

Conduit Holdings equity bridge on 31 Dec 2022 from IFRS 4 to IFRS 17

Acquisition costs deferred

With Conduit's acquisition costs being deferred, it's important to get a handle on them. A start are their IFRS 4 deferred acquisition cost assets:

Conduit Holdings deferred acquisition expenses asset 2022

30 Jun 2023 : 1st set of IFRS17 results!

Hot off the press are the first real and fresh (but unaudited!) IFRS 17 interim results to 30 Jun 2023. Caveat: IFRS17 allows insurers to take different accounting options, which mean shareholders' equity is not calculated on a comparable basis from insurer to insurer. So a-levelling playing fields we will go!

Based on the above a very adjusted IFRS17 equity can be calculated:

Of course the risk adjustment is there to compensate for taking on non-economic risk, so booking it to profit would only make sense if you didn't feel that you need to be compensated for non-economic risk! So, treat these numbers as me kicking around ideas, it's certainly not my final thought on this, as investors demand compensation for risk, the question is how much is appropriate (maybe vary across different lines of business) and how do we adjust for it from what is disclosed.

NB to note that there are other adjustments which need to be made (beyond the above) to allow for a fair comparison. We'll delve into that in due course, but this is enough for today.

Discount rates

IFRS 17 allows insurers some latitude in determining discount rates, and there's particular subjectivity in deciding on what illiquiditypremium to inlude. In the image below we can see the GBP discount rates being used by Conduit Holdings, Lancashire Holdings and Sabre Insurance; for 1, 3 and 5 year periods. The longer the period the bigger a difference in discount rates make, over 5 years the discount factors with which cashflows would be multiplied are:

Note that this only compares the GBP rates, some insurers also use rates in other currencies, and for Lancashire Holdings I suspect the USD rates are more important than the GBP discount rates.

Discount rates of LSE insurers on 30 June 2023

Accounting choices making shareholders' equity incomparable

There are many accounting choices and assumptions which would result in 2 insurers, who are identical in ever way, having different shareholders' equity; e.g.

Risk Adjustments

If events unravel as expected, the amount accounted for as risk adjustments will flow through to profit. It is therefore key to get a handle on how much each insurer is accounting for as a risk adjustment. Some insurers will exercise accounting choices to allow lower risk adjustments and more to flow through to equity now, whilst other insurers are more prudent.

RA as a % of the LIC

For these PAA insurers it's likely that most, if not all, of the risk adjustments are part of their liability for incurred claims (LIC).

Conduit Holdings

Conduit Holdings disclosed that their risk adjustment formed 8% of their total LIC on 31 Dec 2022; which corresponds to a risk adjustment which is roughly at the 80th percentile (the midpoint of their target range).

Conduit Holdings' risk adjustment as percentage of their liability for incurred claims

Risk Adjustment percentiles

IFRS17 requires insurers to disclose the percentile at which their risk adjustments lie. Here's the disclosure info of the LSE's PAAs (at the time of writing, 11 Aug 2023, note that for some insurers we're still awaiting their disclosure):

Risk adjustment and acquisition cost deferral decisions of LSE PAA insurers

Admiral Group has chosen the highest risk adjustment percentile of the PAA insurers on the London Stock Exchange, 93%, and Direct Line the lowest of those currently disclosed, at 75%; with Lancashire Holdings and Sabre Insurance still to disclose their exact percentiles. I could only find Hiscox's percentile for 31 Dec 2022 (not 31 Dec 2021) of 78%. It's possible that I the percentiles are lying around somewhere, and I haven't dug around hard enough.

Acquisition Costs deferral

To compare insurers' shareholders' equity on a like-for-like basis, we need to either:

LSE PAA insurers, acquisitino costs analysis

Shareholders Equity on 31 Dec 2021

We can see that for London Stock Exchange insurers following solely the Premium Allocation Approach, there were no huge movements in shareholders' equity at 31 Dec 2021, as the premium allocation approach is similar to the valuation methodology they were previously using.

Admiral Group 31 Dec 2021

Admiral Group equity bridge from IFRS4 to IFRS17  on 31 Dec 2021

The main issues impacting Admiral's shareholders' equity were:


Acquisition costs deferred

With Hiscox's acquisition costs being deferred, it's important to get a handle on them. A start are their IFRS 4 deferred acquisition cost assets:

Hiscox IFRS4 DAC 2021 & 2022

Lancashire Holdings Limited

Acquisition costs deferred

With Lancashire's acquisition costs being deferred, it's important to get a handle on them. A start are their IFRS 4 deferred acquisition cost assets:

GMM & VFA insurers on the LSE

Interesting list of players in the DB derisking transaction market, compiled by Just Group:

UK DB derisking transactions players


For legal reasons please consider everything written on this website to be for entertainment purposes alone. It's vitally important to question everything and apply your own mind.