The current “Goldilocks environment”, a macro environment of moderate growth, moderate inflation and moderate interest rates according to Berenberg, will allow insurers in the European Union (EU) to deliver on their strategic plan targets.
Berenberg analysts arrived at this conclusion following the publishing of the Financial Stability Report by EIOPA, the EU insurance regulator, in late June.
“Simply put, the regulator does not appear to see any very significant risks for now. We believe this means that the current macro environment of moderate growth, moderate inflation and moderate interest rates, which our strategy team terms a “Goldilocks environment”, offers a relatively benign backdrop for insurers to deliver on their strategic plans,” Berenberg stated.
However, the current relatively stable market environment may encourage insurers to consider M&A more, making this the main potential risk that worries analysts.
Even though this could potentially reduce the cash available for buybacks and dividend growth, many of the deals announced in the past 18 months have actually been associated with strong performance of the buyer’s share price.
EIOPA has a stable outlook for the sector, with the June Financial Stability Report highlighting that the insurance and pension fund sectors have demonstrated considerable robustness in recent years and are well positioned to tackle sustainability-related challenges.
According to the report, profitability in the sector – in countries part of the EU – is back to 2021 post-COVID-19 levels. The ratio of profits to the excess of assets over liabilities, a proxy for capital, is 8.3%, above 2022’s 6.1% and in line with 2021’s 8.3%.
Berenberg believes this means the sector has successfully overcome the threat from higher inflation and the spike in interest rates in the first half of 2023.
Solvency is also in a good position, as it keeps rising in Life and is now 243%, up from 232% in 2022. Solvency among the composites is 225%, well above 2022’s 207%.
At 215%, solvency has modestly gone down in non-life, from 216% in 2022. Analysts believe this is mainly due to the high cost of natural catastrophes in Italy.
Additionally, EIOPA’s Q1 2024 risk dashboard is also stable. The arrows in the risk dashboard are almost all flat, with the exception of digitalisation and cyber, which are up, partly offset by macro, which is down, according to Berenberg.
“We believe the main potential risk to growth in cash distributions is M&A. European insurers are delivering on cash, with a strong commitment by most insurers to a progressive dividend and also in many cases to buybacks. However, there is one potential risk, in our view, which is that large M&A could dilute the cash available for shareholder distributions,” analysts stated.
Adding: “However, the recent share price reaction to M&A has been positive. Unipol Gruppo is up by 62% since it announced its offer for the UnipolSai minorities; Talanx is up by 43% since it announced the acquisition of Liberty Mutual Latin America; and Generali is up by 25% since it announced the acquisition of Liberty Mutual Iberia.”
Berenberg concluded that insurers will be able to over-deliver on their strategic plan targets thanks to the current Goldilocks environment.
“For this reason, while we highlight the potential risk from large M&A and while we recognise the short-term risk from the early start to the hurricane season, we see continuing upside in our top picks: NN Group, Aviva and Swiss Life in life, Swiss Re and Conduit Re in reinsurance, Allianz and AXA among the composites, and Tryg, Coface, Beazley and Admiral in non-life,” said Berenberg.
