Tied to the Covid-19 pandemic recovery and reopening theme, European banks have blasted higher this year, but right behind that sector have been insurers.
Stoxx Europe 600 banks
sector is up 20% so far this year, while the Stoxx
Stoxx Europe 600 Insurance Index
has gained nearly 14%, both beating a 9% return for the main
Stoxx Europe 600.
Singing the praises of Europe’s insurers in a note to clients on Tuesday, JPMorgan analysts say they are sticking to a constructive stance they have held on the group since the start of 2021.
Analysts Ashik Musaddi and Jackie Cui list several reasons why they believe there is more upside to come for the sector, including improved capital rules positioning, known as Solvency II (S2) and robust dividend flow.
As for earnings momentum, JPMorgan points out the Covid-19 impact for insurers will be low headed into 2021—the analysts, in fact, see improved underwriting results this year and zero impact for 2022. “Overall, from a fundamental perspective, the insurance sector is delivering strong results from a cash, capital and earnings perspective and any support from rising interest rates (if it continues) would lend further upside,” says the team.
One of the biggest drivers for insurers is capital. The average S2 ratio for the group climbed to 200% for full-year 2020, after dropping to 190% at the peak of the Covid-19 crisis, from 206% at the end of 2019, the team says. “The reason why a strong capital position is important is that it helps insurers absorb macro volatility (rates, credit equities) which remains the single largest risk factor for insurers we believe,” say Musaddi and Cui. They see 211% as possible.
Meanwhile, normalized free cash flow yields, which determine how much insurers can return to shareholders, is hovering at 9%, which the analysts describe as attractive. Even amid Covid-19 losses and regulatory worries, 70% of the sector has paid 2019 and 2020 dividends, they note. “The dividend yield is 5%-6% and compares with SXXP average yield of 3% showcasing the relative attractiveness of the sector overall.”
Finally, valuations are another plus, as the insurance sector has outperformed the European Union markets by 4% year to date, but still trades at a 38% discount to European markets, versus the past 10-year average discount of 28%.
As for where to invest, JPMorgan on Tuesday upgraded
to overweight, with the Spanish insurer joining
—the bank’s top idea—
M & G
as preferred plays.
Grupo Catalana Occidente
was cut to neutral.