UK Insurance stocks aren’t as exciting as other financial businesses out there. Yet these companies are perfectly capable of delivering excellent long-term returns, even when markets turn sour. After all, regardless of what the economy might be doing, people still need insurance for their homes, cars, pets, travel plans, or even life.
Let’s take a closer look at how the insurance industry actually works and what risks investors ought to know about before investing in a UK insurance stock.
What are insurance stocks?
On the surface, insurance companies can seem relatively simple. These financial service businesses create insurance policies where a customer pays a monthly or annual premium for financial protection in the worst-case scenario. And there are insurance products for just about everything.
Some examples include:
- Motor
- Property
- Health
- Life
- Pet
- Travel
- Speciality
It would seem that insurance stocks make their profits by selling these products and hoping many of their customers never make a claim. This is known as the underwriting profit. And while that’s true to some extent, it’s not actually the main focus for these businesses.
Instead, they use the cash flow generated by regular premium payments and invest it into the stock market and other financial instruments like bonds. This capital is known as the float, and insurance companies have quite a bit of freedom regarding where they can invest. However, most tend to play it safe with high-quality bonds.
Top UK insurance stocks
Let’s look at some of the top insurance stocks on the London Stock Exchange (LSE).
| Company | Market Cap | Description |
| Prudential Plc (LSE: PRU) | £25.64bn | The largest insurance company in the UK. Offers life and health insurance products, with a primary focus on penetrating the Chinese and African markets. |
| Legal & General Group Plc (LSE: LGEN) | £15.41bn | A global financial service business providing insurance, savings, and retirement products to over 10m customers. |
| Aviva (LSE: AV.) | £12.22bn | Provides savings, retirement, and insurance financial products across the UK, Europe, and Canada. |
| Admiral Group (LSE: ADM) | £6.51bn | Largest motor insurance provider in the UK. |
| Phoenix Group Holdings Plc (LSE: PHNX) | £6.14bn | Provides long-term savings, retirement, pension, and insurance products within the UK and Europe. |
Prudential Plc
Prudential is an international financial services company based in the UK. The group offers a range of solutions, including wealth management as well as life and health insurance.
Prudential’s mission is to help its clients grow and protect their wealth to meet long-term financial goals. Management is predominantly focused on Asia and Africa, as these regions have relatively low insurance penetration. This lets Prudential capture market share more easily than in the saturated European and Western markets.
Its biggest life insurance businesses are found in Mainland China, Hong Kong, and Indonesia.
- Market Cap: £25.64bn
- Average Daily Volume: 4.8m
- HQ: London, UK
- Cash/Debt: $6.42bn / $6.99bn
Legal & General Group Plc
Founded in 1836, Legal & General is a leading financial services company operating on a global scale. The firm provides a wide range of solutions, including pension risk transfers, investment management, asset management, and insurance.
The latter arm offers various products, including life, home, landlord, pet, lifestyle, and general insurance. In total, the group caters to over 10m customers across its various insurance, savings, and retirement services.
- Market Cap: £15.41bn
- Average Daily Volume: 13.97m
- HQ: London, UK
- Cash/Debt: £24.77bn / £5.44bn
Aviva
Aviva is a financial services group that provides customers with savings, retirement, and insurance solutions. While based in the UK, the firm has operations across Europe and Canada.
Today it caters to over 18.5m customers worldwide, 15.5m of which are located within the UK. While the group is predominantly focused on targeting consumers, it does offer various business-facing insurance products.
- Market Cap: £12.22bn
- Average Daily Volume: 5.53m
- HQ: London, UK
- Cash/Debt: £13.74bn / £8.42bn
Admiral Group
Admiral Group is a British insurance company that offers a diverse collection of financial products. While the bulk of the underwriting profit stems from motor insurance, the firm also offers household travel insurance products.
Beyond this core part of the business, the group also provides some personal lending services through its Admiral Loans branch. It operates primarily within the UK but does have some international presence in the US.
- Market Cap: £6.51bn
- Average Daily Volume: 833.7k
- HQ: Cardiff, UK
- Cash/Debt: £395.9m / £776m
Phoenix Group Holdings
Phoenix Group is a relatively new entrant to the life insurance market after being founded in 2018. The firm also provides a collection of other financial services, including long-term savings, retirement, and workplace and personal pensions under the SunLife brand.
The bulk of its customers is located within the UK. However, it does have operations within European markets.
- Market Cap: £6.14bn
- Average Daily Volume: 2.68m
- HQ: Birmingham, UK
- Cash/Debt: £10.7bn / £4.3bn
Investing in international insurance stocks
Given the demand for insurance worldwide, there are plenty of international insurance stocks to choose from. Regulatory restrictions vary from country to country. But at the heart of operations, these businesses are ultimately very similar.
The differentiating factor is the investment management team. The US is home to Warren Buffett’s Berkshire Hathaway, which is considered by many investors to be the cream of the crop. However, there are other insurance companies listed on the New York Stock Exchange:
- United Health Group (NYSE: UNH)
- CVS Health (NYSE: CVS)
- MetLife (NYSE: MET)
- Centene Corp (NYSE: CNC)
- Markel Corp (NYSE: MKL)
Are UK insurance stocks a good investment?
The core business model of UK insurance stocks is quite attractive for defensive investors. Given the nature of the product, these companies tend to thrive during both good and bad times. And the reliability of cash flow serves as a nice level of protection from market volatility.
Having said that, these aren’t risk-free investments. As many insurance investors have discovered in the past, these businesses are ultimately only as strong as their customers.
One metric analysts use when evaluating insurance firms is the loss ratio. This compares the level of premiums paid out to customers as claims. Suppose this metric climbs higher than 100%. In that case, it means the group is paying out more than it’s taking in, causing the investment portfolio to shrink.
Another factor to consider is whether the group is generating enough money from its investments to cover its operating expenses.
During economic turmoil, depending on the makeup of the investment portfolio, earnings can take a heavy hit from the devaluation of its investments. And if it’s too severe, combined with a spike in customer claims, it sets the stage for trouble.
This is why most companies in the insurance sector predominantly buy low-risk assets like bonds.
Investors must consider these risks before adding exposure to this market sector to their portfolios. But while past performance is not an indicator of future returns, UK insurance stocks have proven to be relatively low-risk.