European Financials: Insurance in focus | Calamatta Cuschieri

With the rising confidence in the economic recovery, bond yields as well as inflation expectations have fuelled the recovery across cyclical and value sectors. From a year to-date snapshot, European equities have traded ahead of the US equity market by 4%, benefitting from the higher weighting in value stocks, in particular the financial sector.

European financials are among the top contributors to the European equity market performance since the start of the year, up close to 20%. Within the sector, European banks have outshined the insurance industry, rallying close to 30% over the past five months and double the performance of the general equity market of 15%. The strong gains in the banking industry coincided with a strong first quarter earnings season, with sales and earnings growth that were above expectations. During the first quarter, the industry benefitting from two key themes: strong trading revenues and lower provisions for bad debt. Undoubtedly, this reflects the stronger economic and earnings expectations going forward, as economies seek to emerge from economic lockdowns and implement mass vaccination programs.  

On the other hand, the performance across the insurance industry has also traded higher but tracking that of the general equity market index. From an earnings perspective, the first quarter earnings season for top European insurers was characterised by strong sales and earnings growth, on a year-on-year basis. However, despite the improving trends, underlying results were mixed. For instance, companies offering reinsurance still recorded an aggregate negative sales growth for the quarter. Further diverging trends emerged across the different business lines. In comparison to sales expectations, the insurance industry showed strength across life and health insurance, whereas property and casualty insurance strongly beat earnings expectations.

The property and casualty insurance generally includes motor, accident, property, general liability, and travel insurance, both for commercial and personal insurers. This form of insurance is more variable and cyclical dependent when compared to life and health, particularly for commercial insurers. This implies that volume of premiums and claims are highly correlated to the economic outlook. On this basis, the improving economic outlook, on the back of successful vaccination programs and the reopening of economies, is more likely to benefit insurers exposed to property and casualty.

In addition, the current low yielding environment has fuelled a hard pricing market. Over the past year, the insurance industry has recorded strong rate increases that despite showing signs of stabilising, is expected to be sustained. Despite the higher move in yields, bond yields remain relatively low compared to historical levels, and higher inflation is expected to continue to support underwriting discipline. Having said that, the insurance earnings outlook is expected to continue to benefit from the positive pricing environment as the economic activity recovers and volumes pick up.

With regards to life and health, insurance is generally related to savings and retirement products, as well as health and personal protection. During the first quarter, insurers classified as life and health posted strong year-on-year sales growth, which came in 8% higher than expectations. Going forward, the covid-19 pandemic is expected to trigger greater consumer awareness to the need and benefits of having life and health coverage, fuelling positive expectations, particularly for health protection. In this regard, the health market is expected to be among the strongest contributor to growth within insurance for the upcoming years.

Most of Europe’s largest insurers, such as Axa, Allianz and Zurich are considered as multi-line insurers, exposed both to property and casualty insurance as well as life and health coverage. Such insurers also generate revenue through an asset management arm, which over the first quarter have also benefitted from higher assets under management, as financial markets and sentiment continued to recover. Furthermore, despite the negative impact from the covid-19 pandemic, insurance companies have also maintained high solvency ratios that allow for the resumption of dividend pay-outs.

Overall, given the diversified exposures to the different underlying insurance segments, the European insurance industry is expected to continue to benefit from the buoyant outlook which supports higher earnings momentum over the coming months.

Disclaimer:

This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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