Slow business: the deserted centre of Leicester during lockdown in June © TIM KEETON/EPA-EFE/Shutterstock

Businesses cannot claim on insurance for coronavirus disruption because lockdown was only voluntary — like eating five portions of fruit and veg a day . . . Employers still had keys to their buildings, so they could have done some sort of work . . . Lockdown was not even linked to the virus, anyway, because it applied on the Isles of Scilly where there were no cases . . . 

Preposterous? Policyholders think so. But these are three of the arguments being used by insurers to contest payouts. New research out on Tuesday suggested they are proving successful. Analysts at Berenberg estimated that, to date, Covid-19 insurance claims were just half the consensus estimate for industry losses. In fact, at $25.1bn, they are half the bottom end of Swiss Re’s $50bn to $100bn global loss range. In language that only people in insurance could use, the analysts concluded that the pandemic “is more like a very large natural catastrophe event than an extraordinarily large one”.

For investors in listed insurers, such a difference can be material. If you avoid “extraordinarily large” payouts, but use “very large” ones to justify premium increases, your profit margins start rising quickly. Low interest rates help, too, by forcing all insurers to charge more in premiums to compensate for lower investment income.

Already, their pricing appears to be hardening. Insurance broker Marsh says commercial insurance prices were up 14 per cent in the first quarter of the year and then 19 per cent in the second. Disputed Covid-19 claims should only sustain this trend as lawsuits make insurers charge more, creating what the industry calls “social inflation”. Add in historical underpricing, and Berenberg sees a recovery that will be “tick-shaped” as underwriting margins bounce to higher levels than before.

Analysts have already tipped reinsurers such as Lancashire, Swiss Re and Munich Re, and insurers including Zurich and Axa, as beneficiaries. Potential returns to new investors are reckoned to be in the low to mid-teens. Little wonder about $13bn of new capital has been raised in recent months, according to broker Willis Re.

But might those investors be overlooking something that insurers try hard not to: mathematical risk? If some of the bizarre excuses not to pay coronavirus-related claims are legally overturned, then losses will be much higher. Last month, a number of reinsurers increased their loss estimates significantly. One industry veteran tells Lombard that $100bn to $200bn is a much more realistic total for Covid-19 losses over the long term, and there will be “a shocking great tail to it”. He adds £50bn to £100bn of investment losses on top.

If that proves accurate, investors will find their paltry $13bn being used to fill insurers’ “black holes” rather than chase rising returns. For insurance companies, then, the problems are the same as they have always been: the long tail, and their own tall tales.

Baillie Gifford’s next move

After nearly 100 years based near Edinburgh’s Charlotte Square, posh fund manager Baillie Gifford moved to the bottom of Calton Hill in 2003, writes Kate Burgess. It now plans to move downhill again, this time to Edinburgh’s Haymarket. But it can still look down, figuratively, on its investment rivals in St Andrew Square.

While they have suffered from poor performance and persistent outflows, Baillie Gifford has not — thanks to savvy decisions to invest in Tesla, Apple, Alphabet and their ilk. Its funds under management have more than doubled in five years to £262bn.

Shares in its flagship investment trust, Scottish Mortgage, have doubled since March on the back of a highly concentrated portfolio focused on tech stocks. In the 10 years to March, the trust’s total return topped 360 per cent, while the FTSE World index rose by about 128 per cent.

SMIT’s top 10 holdings account for nearly two-thirds of its asset value. The biggest investment is Tesla, which represents 14 per cent of the portfolio, followed by Amazon. Alibaba is number five on the list of top holdings. Netflix and Spotify — which has yet to make a profit — are numbers nine and 10. It also has a sizeable holding in Ant Group, the soon-to-float ecommerce arm of Alibaba.

Its fund manager James Anderson talks unrepentantly about buying growth at unreasonable prices. But Iain Scouller, veteran trust analyst at Stifel, says: “Experience suggests to us that trust NAVs and share prices don't rise in a straight line indefinitely.” SMIT’s recent trajectory reflects the current rally in technology stocks which, in turn, is holding up the US stock market. Valuations are sky high. You would not want to be caught out by a 2000-type TMT crash or a reversal like that of tech champion Neil Woodford.

Perhaps being a 100-plus-year-old partnership allows Baillie Gifford to distance itself from the day-to-day oscillations of stock markets and tolerate the mercurial genius of those such as Tesla’s Elon Musk

Buyers of SMIT are buying into the puppy-lovers’ philosophy that investments are for life and not just for Christmas, even if some turn out to be dogs with loose screws. 

Insurers: matthew.vincent@ft.com
Baillie Gifford:
kate.burgess@ft.com

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