J.P. Morgan, a leading global investment bank, has delivered an optimistic assessment of the European insurance sector, even in the face of its underperformance during the initial months of 2023.
The investment giant has shed light on several pivotal factors that render this sector a highly attractive investment avenue. These include robust capital returns, the potential for favorable surprises in profit margins and top-line growth, and a firm belief that asset-related risks are unlikely to significantly impact the sector.
J.P. Morgan’s updated Risk-Quality framework, which meticulously evaluates capital, market volatility, and credit risks, has unveiled a wealth of promising stocks within the European insurance sector. These stocks offer sound fundamentals, allowing investors to sidestep the perils of high asset or balance sheet risks while enjoying an enticing cost of equity.
The investment powerhouse has issued a strong recommendation for investors to turn their attention towards the European insurance sector and contemplate expanding their investments within it. JP Morgan has spotlighted three principal themes for consideration:
1. Attractive Dividend and Buyback Yields
The European insurance sector presently boasts a combined dividend and buyback yield estimated at around 7% for the year 2024. This figure stands at a decade-high premium in comparison to the broader European equity market. Even amidst the backdrop of higher bond yields, the sector retains its appeal, particularly in stocks hailing from the UK life insurance sector and Benelux region.
2. Balanced Capital Returns with Controlled Risk
JP Morgan urges investors to focus on stocks that strike a harmonious balance between high total capital return and restrained risk scores within the Risk-Quality framework. Notably, Aviva takes the spotlight with the highest capital return yield among the stocks covered, with NN Group following closely behind.
3. Resilience in the Reinsurance Market
The reinsurance market continues to exhibit resilience, with no signs of disruption emanating from alternative capital sources. Reinsurers have taken a cautious approach towards recognizing increased margins upfront, creating a ripe environment for potential positive margin surprises. JP Morgan advises investors to channel their attention towards stocks boasting a robust underwriting track record within the reinsurance domain.
JP Morgan firmly contends that the market is presently overlooking the substantial potential for capital returns within the European insurance sector when juxtaposed against the broader European equity market. Additionally, the allure of dividend yield spreads that surpass higher risk-free rates remains strong, especially in the realm of UK life insurance and Benelux stocks.
The sector’s balance sheets are perceived as sturdy, with the capacity to withstand asset-related risks and safeguard capital returns. While some stocks may exhibit asset leverage and credit exposure, many within the sector offer attractive fundamentals paired with minimal asset-related risks.
J.P. Morgan also identifies several potential areas that could yield positive earnings surprises and drive top-line growth over the next 1-2 years. These optimistic factors encompass anticipated growth in key life insurance markets, such as the UK pension risk transfer and workplace pensions, a buoyant pricing environment across most commercial lines property and casualty products on a global scale, and accelerated pricing in personal lines.
Of note, is J.P. Morgan’s most favoured sub-sector within the European insurance realm remains reinsurers. The hard market conditions prevailing in terms of pricing and contract conditions persist, creating good potential for margin expansion.
The affirmative stance on the European insurance sector stands firm, emphasising the sector’s robust fundamentals, attractive yields, and resilience in the face of potential risks. Investors are urged to take heed of these insights as they contemplate their investment strategies in the evolving financial landscape.