RSA Insurance Group PLC (LON:RSA), Admiral Group PLC (LON:ADM), Aviva PLC (LON:AV) and Direct Line Insurance Group (LON:DLG) are faced with a challenging UK home insurance market and regulatory headwinds in motor insurance, according to HSBC.
In a note on insurers and asset managers, HSBC said the companies have been affected by inflation for so-called ‘escape of water’ claims for water damage in homes, while the market continues to be competitive.
The bank noted that insurers have been increasing rates to offset claims inflation.
In car insurance, premiums have fallen after Britain announced plans in September to change the Ogden rate for calculating personal injury payments, which is expected to cut the size of the payments.
The Ministry of Justice has proposed an Ogden rate of between 0% and 1%, although uncertainty remains relating to the date of implementation. The Ogden rate was cut to -0.75% from 2.5% in 2017.
The government’s reforms on how whiplash injuries are compensated were meant to be implemented in the second half of 2018 but there has also been no update on the timeline.
RSA hit by hurricane insurance claims
HSBC cut its target price on RSA to 612p from 736p but left its rating at ‘buy’, citing improving trends.
“Claims inflation currently remains above price inflation although group has seen some signs of stabilisation in the third quarter,” it said.
The bank lowered its 2017 operating earnings estimates by 8% to reflect claims from recent hurricanes in the Americas and large losses.
RSA, however, achieved £330mln of gross cost savings in the first half against its target of more than £400mln by 2018. HSBC expects £30mln of net cost savings in 2017 and £45mln in 2018.
HSBC remains cautious on Admiral
On Admiral, HSBC said it remains “well placed” in UK home insurance, where it has a lower expense ratio.
In UK motor insurance, Admiral increased average premiums by 10% in the first half on an underlying basis but reported average premiums were flat due to impact of risk changes, multi-car policies and discounting.
But HSBC said it remains “cautious”, given Admiral's capital returns have been delayed and there is still "limited certainty" around the success of the US business.
It cut its target price on the stock to 2,045p from 2,100p and left its rating at ‘hold’.
Aviva left on 'hold'
The bank also kept Aviva at ‘hold’ and lowered its target price to 535p from 550p. The company saw some softening of rates in UK motor in the third quarter, though it stabilised near the end of the quarter, HSBC highlighted.
Claims inflation in UK home is running at a slightly lower rate than the market, mainly driven by lower number of escape of water claims.
Direct Line awaiting updates on reforms
As for Direct Line, HSBC left its rating at ‘buy’ and target price at 440p, noting the lack of updates on timelines for Ogden rates and the Whiplash reform.
The Ogden rate cut last year led to a £217mln adverse impact on the firm’s 2016 pre-tax profit.
However, HSBC said the group’s capital position remains strong and expects special dividends in fiscal years 2017 to 2018.
UK life insurance
In UK life insurance, HSBC expects the market to see operating earnings increases of 5% per year on average during 2016-19, supported by stable industry new business growth.
“In our view, investors are concerned about the potential impact of Brexit on new business growth, widening of credit spreads (and defaults) and Solvency II (SII) capital positions,” HSBC said.
“However, insurers are actively managing their balance sheets, while SII capital generation has been stable over the past year.”
The Prudential Regulation Authority and the European Insurance and Occupational Pensions Authority are conducting independent reviews into Solvency II but HSBC does not expect any changes before 2019.
L&G 'well-placed to benefit from growth drivers'
HSBC raised its target price on Legal & General (LON:LGEN) to 295p from 290p and maintained its ‘buy’ rating, saying it has a strong pipeline for future transactions in bulk purchase annuities in the UK and the US.
L&G is also a “market leader” in the fast-growing equity release mortgages (ERM) market with a 32% share, HSBC said.
"We have a Buy rating on L&G as we believe it is well-placed to benefit from a number of growth drivers in insurance and asset management markets both in the UK and selected markets around the world to deliver relatively attractive AUM (assets under management), IFRS profits, net release from operations and dividend growth, despite an uncertain regulatory landscape.
"Furthermore, the shares offer a dividend yield and growth above the FTSE100 average."
Asset managers
Looking at asset managers, HSBC said UK and European industry inflows have been strong over the first nine months of the year and the outlook from firms has been positive.
But HSBC remains wary on net inflows for 2018-19 and assumes a decrease going forward, on average.
Jupiter cut to 'hold'
It downgraded Jupiter Fund Management PLC (LON:JUP) to ‘hold’ from ‘buy’ but raised its target price to 610p from 575p, saying it thinks the stock is fairly valued.
"The increase in our TP is driven by higher earnings and free cash flow estimates, and roll-forward of our valuation date."
HSBC expects a revenue margin reduction of 5 basis points from 87bps to 82bps over 2016-19, reflecting lower margin net inflows into unconstrained fixed income products.
Management aims to achieve a 50% adjusted underlying (EBITDA) margin over the medium term but HSBC thinks it “may be optimistic”, given higher investment costs, driven by continued IT upgrades, expanding distribution overseas, and increasing regulatory compliance requirements for MiFID and PRIIPS.
“Despite this, we estimate 7% per annual growth in EBITDA and earnings per share over 2016-19 (vs 10% per annum AUM and 8% per annum revenue growth) which is still ahead of the sector average EPS growth (ex-HL and SJP) at 5%,” HSBC said.
“If the group achieves 50% margin over 2017-19e, it would lead to a c5% average uplift to our adjusted EBITDA estimates.”
HSBC hikes TP on Standard Life Aberdeen and St James's Place
Fellow asset manager Standard Life Aberdeen PLC (LON:SLA) had its rating left at ‘buy’ and target price hiked to 475p from 470p as HSBC thinks the shares "appear attractively valued" as net outflows for Global Absolute Return Strategies and emerging market funds have stabilised.
HSBC sees the merger of Standard Life and Aberdeen in August "as a sensible (but defensive) move" rather than "a combination with significant revenue and net inflow benefits".
The bank reiterated a ‘buy’ rating on St James's Place (LON:STJ) and lifted the target price to 1,380p from 1,350p, reflecting higher cash earnings, free cash flow and value estimates.