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Bloomberg says European P&C insurers to struggle on portfolio returns

6th December 2022 - Author: Pete Carvill

A senior analyst at Bloomberg Intelligence says that European P&C insurers may struggle to register positive returns on their portfolios.

Money, monopoly, oligopolySpeaking on a Bloomberg Intelligence, Matthew Palazola, senior analyst for P&C insurance, spoke about the current challenges in the US and European P&C markets.

He said: “Many European insurers have struggled to meet their cost of capital, and pressure to do so better on this front is likely to build. This in turn could prompt further consolidation. The gap between prices and rising loss costs means that 2023 will see margins squeeze harder. If investment markets remain volatile, P&C insurers will struggle to register positive returns on their portfolios. All this will crimp the 2023 earnings outlook, as for some this runs through the PML. Consensus estimates could trend down during the year.”

Elsewhere on European P&C, Palazola said: “Inflation costs may become even more pronounced in 2023, and we suspect insurers won’t be able to raise prices enough to fully offset rising costs. This follows 2021’s steady recovery in premium volumes, as economies emerge from lockdowns. Aside from cyber insurance, there are few obvious areas where companies can boost premium volume.”

Across the pond, Palazola said that US P&C stocks could continue to perform well if fears of inflation and recession continued. He said that higher interest rates will continue to help investment income and rising insured values could keep premium growth above historical averages.

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He added: “Still, we see downside risk to underlying loss ratio assumptions and weakening reserve adequacy. A move out of defensive names if macro fears recede is a risk to stock performance.”

He went on: “Despite above average valuations, personal lines carriers could have an advantage as they’ve already been pricing for inflation and auto repair costs. While commercial insurers have yet to see margins hurt as acutely.”

Palazola said that P&C pier premium growth in Asia could stay robust next year and offset high auto claims as road traffic increases.

He added: “Japan ensures dividends are likely to be solid at fiscal 2023 thanks to risk reduction efforts and solid balance sheets. Share buyback next year might recover from a drop this year which was dragged down by market volatility, COVID claims and natural catastrophes.”

Palazola also commented on the US and European life insurance markets.

On the US, he said: “The volatile equity markets could remain a near-term earnings drag, and the FASB’s January 2023 accounting change is expected to make book values. The fundamental outlook for North America life insurance is strong. The end of an over decade long, ultra-low interest rate environment which necessitated good expense controls in recent years, is a major boost for the group. Higher interest rate should bolster portfolio yields, putting gradual upward pressure on organic profit growth and returns. Robust employment conditions which we don’t think pull back all that much in a mid-recession, are supporting top line gains in key group benefit units and 41k deposits. […] With cash leverage and RBC ratios broadly in line, the pace of share buybacks should stay in place.”

In Europe, Palazola said: “Rising interest rates are positive for the European life insurers’ solvency ratios and investment margins because of the guarantees embedded in historic savings policies. Higher rates will likely increase opportunities to do back book deals and release capital. This should all support further dividend and share buybacks, even if an economic slowdown harms new business generation.”

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