In a recent analysis, JP Morgan has expressed a positive outlook for the European insurance sector, despite its underperformance in the first part of 2023.
The investment bank highlights several key factors that make the sector an attractive investment opportunity, including strong capital returns, the potential for positive surprises in margins and top-line growth, and a belief that asset risk is unlikely to have a significant impact on the sector.
JP Morgan’s updated Risk-Quality framework, which assesses capital, market volatility, and credit risks, indicates that there are numerous stocks within the European insurance sector with attractive fundamentals, where investors can avoid high asset or balance sheet risks while maintaining an appealing cost of equity.
The bank recommends that investors take a closer look at the European insurance sector and consider increasing their exposure to it, focusing on three key themes:
The sector currently offers a total dividend and buyback yield of approximately 7% for 2024, which is at a decade-high premium compared to the European equity market. Even with higher bond yields, the sector still appears attractive, particularly in UK life and Benelux stocks.
Investors are encouraged to consider stocks that combine a high level of total capital return with contained risk scores in JP Morgan’s Risk-Quality framework. Aviva stands out with the highest capital return yield among the stocks in their coverage, followed closely by NN Group.
The reinsurance market continues to experience a hard market, with no signs of disruption from alternative capital sources. Reinsurers are taking a cautious approach to recognising higher margins upfront, which creates the potential for positive margin surprises. JP Morgan advises investors to focus on stocks with a strong underwriting track record within the reinsurance sector.
JP Morgan believes that the market is currently overlooking the substantial capital return potential of the European insurance sector compared to the broader European equity market. Additionally, dividend yield spreads above higher risk-free rates remain attractive, particularly for UK life and Benelux stocks.
The sector’s balance sheets are viewed as relatively strong, capable of withstanding asset risk and protecting capital returns. While some stocks exhibit asset leverage and credit exposure, many within the sector offer attractive fundamentals with low asset risk.
JP Morgan also identifies potential areas for positive surprises in earnings and top-line growth over the next 1-2 years. Factors driving this optimism include the expected growth in key life insurance markets, such as the UK pension risk transfer and workplace pensions, a strong pricing environment in most commercial lines property and casualty products globally, and accelerated pricing in personal lines.
Notably, the bank’s most preferred sub-sector within the European insurance sector remains reinsurers, where the hard market for pricing and terms & conditions persists, creating significant potential for margin expansion.
