European Insurance : Strong solvency provides comfort
The European Insurance sector suffered in recent years from the low-interest rates low-growth environment. In 2016, the sector retreated by 6% in absolute terms (-4% relative to the market). However, the sector witnessed a strong recovery in 4Q16 led by expectation of stronger growth and inflation prospects (+15% in absolute terms, +10% relative to the market). Higher interest rates should relieve the sector from downside pressures on margins and solvency constraints. We focus here not only on recent trends in the Insurance sector in its key European markets (France, Germany, Italy and Spain) but also at the implications of Solvency II.
When reviewing developments of the European life-insurance segment over the past year we note the following trends: In France, inflows in traditional products (products with guaranteed return and unit-linked products represent almost 80% market share) have been impacted by falling crediting rates. In Germany, falling interest rates led to outflows from traditional endowment policies. On the other hand, attractive crediting rates in Italy benefited traditional guaranteed products (>70% market share). Finally, Spain benefitted from increased annuity reserves (annuity products represent 51% of the market share), thanks to declining surrender rates. Moving on to the non-life business, the rising number of car accidents led to a surge in automobile claims in France and in Germany (automobile and homeowner policies account for ~58% of non-life premiums). In Italy, the market is mainly driven by automobile policies (48% market share) where premiums could see an uptick in 2017 on the back of improved pricing. The Spanish market could see an uptick in the claims for motor vehicle public liability after the reform of the country’s system for assessing damages in personal injury claims (Baremo) came into force last 1 January 2016.
Insurance is a balance sheet-driven business that should be viewed from an assets and liabilities perspective. The enforcement of Solvency II directive on 1 January 2016 has changed the way insurance companies’ risk profile is assessed. The initial Solvency I directive was based on regulatory capital requirements solely on liability risks and did not take into account the asset risk faced by the insurer. Solvency II has a much wider scope, reflecting new risk management practices to define required capital and manage risk. Asset quality is also taken into consideration with some assets incurring a “capital charge” and requiring additional capital to be held. The additional disclosure required by Solvency II third Pillar (market transparency) is likely to be published in 2Q17. Insurers will disclose annual solvency and financial condition reports. These aim to describe activities and results, operations, risk profile, asset valuation principles, technical provisions as well as other liabilities and capital management. The European Insurance and Occupational Pension Authority (EIOPA) stress test in 2016 highlighted that European Insurers are adequately capitalised with an aggregate 196% Solvency ratio. Additionally, asset duration has increased for most insurers since 2008 while sensitivity to interest rates change declined. While this is primarily an attempt to close the duration gap with liabilities, lower interest rate sensitivity should also lower risk level.
With dividend yields around 5%, the European insurance sector is the third-highest dividend paying sector in the region. Looking ahead, we expect most companies to hold a sufficient buffer over the minimum required levels, both from a Solvency II and a dividend policy perspective.
NN Group is our preferred stock in the sector. In our view, the company exhibits one of the best capital-return stories in the European insurance space. NN also benefits from its strong position in CEE markets, where growth prospects remain attractive given higher GDP growth than Western Europe and low insurance penetration.
Data & recommendations as of 17 April, 2017 close
This document is an objective and independent explanation of the content of the recommendation and cannot be considered as adapted to a person or based on the analysis of the situation of a person.