Twelve Capital has said it believes the sector will benefit from a number of factors in 2022, including higher interest rates, improved pricing, and an increased ESG focus.
In a note to investors, the firm said that it sees attractive opportunities in insurance fixed income due to credit spreads being higher than those of corporates, despite insurers’ very-low default rates and strengthened fundamentals.
“In particular,” wrote the note’s authors, “we see the rising yield environment in the USA and UK, and to a lesser extent in the European Union, as the key positive driver from a macroeconomic standpoint.”
They added: “Higher rates alleviate the capital pressure of legacy life contracts with guarantees (also known as back-book) and support capital releases. Moreover, higher interest rates will also have a positive impact on ongoing operating capital generation (OCG) for both life and non-life insurers as their investment income increases and the capital strain of new business reduces.”
The authors said that despite the positive outlook for yields, it noted that life insurers were steering new business towards capital-light products with higher shares of Unit Linked and hybrid products, while P&C insurers continued to focus on underwriting products.
One threat that the authors foresee to P&C reinsurance was from rising inflation, even if those costs could be passed in the short-term to policyholders through repricing.
They added: “Higher long-term inflation (and social inflation) would represent more significant headwind for long-tail lines (such as general liability, D&O, and casualty) although we do not expect it to cause sector-wide reserve strengthening.”
Covid, meanwhile, should become less of a worry to the industry as tighter wording in business continuity and event cancellation policies, higher vaccination rates with consequent lower excess mortality, and a continuation of benign claim frequency in motor and property possibly driven by more working-from-home.
Other areas of the sector should see positive momentum, said Twelve Capital.
The authors wrote: “We see positive momentum for M&A, disposal of back-books, and investments in technology. The sector remains relatively fragmented and we see areas of potential consolidation, for example, in the Lloyd’s space and in the UK motor market. We also see potential for simplification in the structure of some groups that would probably benefit from breaking up.”
They added: “The disposal of capital heavy legacy back-books with low profitability is also a catalyst for strengthening insurer solvency and improving cash and capital remittances. Digitalisation and technology remain a key topic for the sector.”
