Inclement weather and absent rate hikes to press on insurance?

Insurance routinely invests in government bonds and benefits from the income they yield. Low rates equal low income. High rates…. well, you can fill in the second bit for yourself! If you’re expecting rates to go up, you might therefore go long an insurance company, and boy did people go long insurance companies last year. 8 out of 9 UK 100 insurance firms beat the index with 3 posting gains north of 20%. And the weather? Well, it’s fair to say that the floods have brought short term volatility to the table.

What’s changed?

Falling stock markets, although not really a good indication of a country’s economic health, are often seen as such by a fickle and ill-informed investment community. Let’s look at Direct Line Group, since we highlighted it in our Q4 2015 report. It’s becoming less likely we’ll see a UK interest rate rise imminently, which may pressure the share price. Additionally, the weather has got and will continue to get weirder, but higher premiums should mitigate potential damage in that arena, and more policies will be taken out too. Things are looking a little less bullish overall, but don’t forget that stock markets generally don’t reflect the underlying economic situation, which might be improving… so, UK rate hike anybody?

Direct Line (DLG)                                         Nonlife Insurance

Having dropped down below 15-month rising support, is now the time to buy shares on the dip, or go short?