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Gary, just catching up on some of these posts and thought I would try to add with the benefit of being in the industry (albeit not the investment side). For starters, you are correct about the issue of time lag between premiums being collected and claims paid. You could almost answer some of the ACII (Associate Chartered Institite of Insurers) professional exams with that answer. Indeed, back in the 1990s, many insurers operated claims ratios exceeding 100% purely because the investment income brought them back into profit. However, throw in a financial crisis or two, and we now have ultra-regulation of the industry because there have been too many failures or forced mergers as a result of this approach. After all, no one really wants to fear an insurance company can't afford to pay claims, do they? But regulation severely restricst what insurers can invest in such that much of the money has to be in very secure bonds (e.g. gilts or Tier 1 corporate bonds). Gone were the days of being able to lodge it with the BoE at 5%! Or perhaps not! But equities are not going to count amongs these assets that can be held to cover claims. They are simply too unpredictable. As Trotsky points out, where equities are held it is as Assets Under Management in pensions/ customer investments - but these are not Aviva's shares. They're nominee holdings only, hence they aren't on Aviva's balance sheet. If Aviva does have any equiities of its own (proprietrary trading) it is minimal. Guitarsolo (ACII)
Gary Insurance companies are much more cautious than you think. Since Solvency II came into force asset allocations for capital funds have become much lower risk…..from a capital risk perspective….sadly that means a lot of overpriced govt and corporate debt that has recently fallen in value as yields have risen (not so safe after all - who would have thought they were exposed because of all time low interest rates for years). The publicSFCR document is the one to read to understand the capital position of an insurance company.
Trotsky, I strongly recommend you open you eyes. The reality is that most of the money, collected from premiums has to be paid back either in the form of claims, operating expenses or taxes. Hence, if insurance were simply about taking in and giving out money, it would not be a very profitable business. The key point to understand is that there is a time lag between when the money is collected as premium and when it is paid out. Since there is a time lag involved, insurance companies invest the money they receive from other people and receive investment income on the same. This investment income forms a significant chunk of income earned by insurance companies. Since a lot of this money is invested in the stock market, the increasing market volatility has a major impact on the income generated by insurance companies AND when the stock marker falls so will the SP of the investor. Furthermore, if you read my comment thoroughly you will see I also mention bonds of which insurance companies also invest. When bonds fall, so does the investors SP It really is very simple. You mention declarations, company's balance sheet may show funds it has invested in other companies. Investments appear on a balance sheet in several ways, as common or preferred shares, mutual funds and notes payable.
Gary, I strongly recommend that you don't invest in insurance companies because you clearly don't understand how they run their businesses. At the end of 2021, AV managed £152bn of savings and retirement funds. Check out the balance sheet; you won't find those funds anywhere in AV's fixed assets (because they are held as nominee on behalf of their customers). Further, if you do look at the balance sheet, you will find that AV itslef held just £265m of financial investments, of which £95m was invested in equities. Of those £95m invested in equities, only £1m was actually held for shareholders. AV is not immune to stock market falls but their exposure is primarily via a reduction in the investment fees earned from the assets under management. PS. I would totally agree that greater understanding is needed on your part.
Trotsky - if I am “wide of the mark” in suggesting insurance companies buy equities perhaps a bit of reading is required by yourself. What do insurers do with the often huge sums of cash generated by premium payments? The companies put some aside in reserve to ensure that they'll have enough to pay all claims anticipated over the near term. But then they invest the rest of the money in bonds or stable blue chip stocks. This has been done for decades & for a company the size of Aviva this amounts to many millions of pounds. When the stock marker tumbles so does the investor, fairly logical I think & fairly simple. PS I wouldn’t invest in a share that I didn’t fully understand, perhaps greater understanding is required all round!!
Gary, If you are suggesting that insurance companies invest in shares on their own account you are very much wide of the mark. They invest as nominee on behalf of their customers and charge their customers an investment fee which is usually a set percentage of the assets under management (AUM). Obviously if the AUM fall as a result of stock market falls then the investment fees will fall correspondingly but this will be partially offset by increased bank interest income. It should also be born in mind that both AV and LGEN have significant general insurance businesses and insurance premiums are rising.
Why do you think stock market falls will impact their surplus cash? There may some uninsured exposure through legacy defined benefit schemes but defined contribution schemes should not affect their surplus cash. Please explain your logic.
Tinker, there are a number of reasons but a very big one is rising interest rates. When interest rates rise, the value of stocks tend to take a beating. Stocks are where insurance companies make most of their investment income from. A fall in the value of the stocks reduces the surplus cash available with insurance companies. I for one was thinking of buying here & LGEN around the current SP's but in this rising interest rate environment (more rises to come) I have reduced my personal buy in price by about another 7%.
A 9% drop in the last month is pretty spectacular. I keep looking at “announcements” imagining that there has been a profits warning or some similar news to warrant the decline. I have fared even worse on my oil holdings (BP and Shell). I can understand the oilies going down with the prospect of a recession and less consumption etc but Aviva and insurers generally shouldn’t be affected by that. Any clues anyone? Tinker
I sold all my holdings on 11/4 (as I said here at the time) for 426 ex.div. as I thought the proposed malarkey was dubious. Looking to buy back in now it was settled, expecting the price to have gone up 20% or so (wasn't that the purpose?) but it seems to have fared even worse that I feared. I shall remain elsewhere.