Aviva and Beazley remain the UK-listed buys in a bullish update on the European insurance sector from analysts at Berenberg.
The broker has 26 buy recommendations across its coverage, based on what it sees as an ongoing conducive environment for insurers from less volatility in interest rates and inflation, though natural catastrophe costs are likely to remain high.
“This is a favourable environment for insurers because low volatility leads to reduced solvency capital required, higher solvency ratios, more excess capital, and more cash to spend on buybacks and M&A,” says the broker.
Stocks with reliable annual buybacks such as Aviva are certain to do well, suggests the broker, but lower perceived asset risk and rising asset valuations are likely to be positive for stocks with large asset leverage to real estate and private equity and also to corporate bonds.
Life insurers and in particular UK life insurers, should be beneficiaries as they are most exposed to credit.
The winners are the reinsurers, and the losers are the small local primary insurers, which have no diversification offset against the sharp rise in the likely cost of nat cats.
For the risks. Berenerg highlights M&A as one because "if the sector valuation continues to rise, as we expect, then the trade-off between buybacks and M&A will shift away from buybacks and towards M&A".
“The reason M&A is more of a risk now than for example a year ago is that the sector has rerated and this means that when insurers compare the financial benefits of M&A with those of a buyback, the benchmark to consider M&A is lower than a year ago.”
Shares in Aviva eased slightly to 429.6p.