We are bullish on the outlook for non-life insurance in particular in 2018, as a significant amount of underwriting capacity has been taken out of the market this year as a result of recent large windstorms. This invariably leads to a period in which the remaining strong players are able to exhibit strong pricing power. In addition the sector has been rife with M&A activity in recent years and we see further bids as a real possibility.
In terms of the CF Canlife UK Equity Income Fund, we have a position in Lancashire Holdings, for example. It is run by a nimble management team with a strong capital discipline. Historically they have delivered special dividends when appropriate, but are also comfortable reinvesting in growth when insurance premiums are lower. The sector’s earnings profile is also uncorrelated to the wider economy and it has been a very strong performer in recent years. We believe this will continue through 2018.
The results of the government’s triennial review into the gambling industry and, in particular, maximum Fixed Odds Betting Terminals (FBOT) stakes has been pushed back to allow a further 12 week consultation period with various interested parties. This suggests to us that the maximum stake per spin is likely to be closer to £20 than £2. This would be positive for businesses such as Ladbrokes Coral and William Hill. While we own neither business, we do hold the predatory GVC which is strongly rumoured to be acquiring a high street gambling business soon. These rumours have been amplified by the recent sale of their Turkish online business. The review will allow a clear environment in which they could choose to proceed. At the same time as this potential regulatory headwind easing in the UK, there is a prospective regulatory tailwind on the horizon in the US.
The Supreme Court is due to meet in June next year, which could open the door for legalised sports gambling across the country. This would benefit UK stocks which already have a market positions in the few states where such gambling is already legal, and could roll this out across the country.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.
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CLI01023 Expiry 1 December 2018