Deutsche Bank has released its 2025 outlook for European and UK P&C insurers, highlighting the increasing importance of efficiency in the face of evolving P&C market dynamics.
The report notes that primary insurers have outperformed reinsurers in 2024 in terms of relative share price performance, particularly given reserving issues at SCOR.
Heading into 2025, although much of the improving margin momentum is already largely baked into market expectations, Deutsche Bank analysts believe opportunities exist, particularly for Allianz and AXA.
According to the report, reinsurers like Hannover Re and Munich Re are poised to benefit from favourable US macroeconomic tailwinds, along with the likelihood that rates could remain supported.
Additionally, analysts anticipated that reinsurance pricing will remain mostly flat through 2025, with risk-adjusted pricing predicted to end up broadly neutral.
Commercial lines in the primary market show signs of softening, though pricing likely still remains adequate compared with loss cost trends.
Meanwhile, analysts expect moderating inflation in retail lines to continue to generate relative margin expansion over the course of the next 12 months – though where pricing may begin to moderate here to.
Deutsche Bank noted the high level of loss activity in 2024 was driven by a higher frequency of events around the world, mainly experienced in Spain, Canada, Eastern Europe on top of the normal candidates of the US and Western Europe.
The report stated: “In that context, despite the risk transfer to the primaries in early 2024, we find it somewhat surprising that the primaries on the whole have seen events just below their annual loss budget (apart from Generali, which has stated it will raise its budget from 2025) – to be fair, AXA and Aviva raised their budgets earlier this year.
“The question from here is whether higher cat budgets will be absorbed within combined # ratios (i.e. can underlying margins continue to see margin improvement) or whether we could see the differentials emerge across the insurers with regards to loss and expense efficiency.”
Deutsche Bank compared the earnings sensitivity to group operating profit for the primary insurers and predicts a 50bps deterioration in underwriting margins
According to experts, this works regardless of whether this comes from worse attritional loss ratios, expense ratios, or catastrophe ratios.
The report noted that Helvetia seems to be the most sensitive, contributing to an already elevated combined ratio. It added: “There is not much to differentiate among the large caps: Zurich has the highest sensitivity, but it has been reducing cat exposures in recent years; meanwhile, Generali appears least exposed, but it is potentially most adversely impacted – as we saw in 2024.”
In the UK, Direct Line has a higher-than- expected earnings sensitivity too due to its profit gearing. Given the extent of the price increases in 2023-2024, it may prove challenging to justify further increases to combat added loss volatility.
Deutsche Bank concluded: “Investment yields could begin to roll over – Separately, we note that investment yields may begin to roll over the next 12-18 months as European bond yields begin to come down (though we expect investment portfolios to continue growing for this reason, so the net effect to the bottom line may be neutral at worst).
“The chart overleaf shows the split of investment and insurance margins within overall operating margins – again, the quality names will be those who derive a higher level of earnings from insurance whilst being able to see through softening pricing trends – the reinsurers stand out on this front.”
