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Insurers face growing risks if coronavirus crisis persists, but Goldman keeps most on 'buy'

Insurer's search for yield means the sector is “particularly sensitive to spread movements and exposed to rating migration and/or credit default”

Admiral Group -
The Lloyds of London building

Goldman Sachs lowered its share price targets on all but two life and non-life insurance companies in its coverage as the industry and investors look to navigate the coronavirus crisis. 

Insurance company shares will continue reflect growing risks the longer that interest rates remain near zero, credit spreads remain wide and equity markets remain depressed, Goldman analysts said in a note to clients, though they kept ‘buy’ ratings on almost all the UK names. 

“The longer that capital markets remain dislocated, the greater the risks for the sector,” the analysts said.

The analyst also noted that low interest rates and tight credit spreads have driven insurers to “search for yield”, leading to them herding into lower-quality investment grade corporate credit. 

This means, the analysts said, the sector is “particularly sensitive to spread movements and exposed to rating migration and/or credit default”.

Any challenges in large or problematic parts of the business may require insurers to utilise holding company resources and draw on short-term liquidity facilities. 

There have yet to be any major negative shocks in the insurance sector either transmitted via wide-spread cancellation of share buybacks, dividend cuts or capital raises.

But the analysts said if drawing on short-term resources was not sufficient, “capital returns may need to be rationalised via the pausing/cancellation of share buybacks and/or cutting of dividends, before equity issuance is required”.

Fundraisings should only be necessary if solvency position decreases dramatically as the crisis becomes extremely severe, the analysts said, with some companies having resorted to state resources during previous crises. 

Among non-life insurers, Admiral Group PLC (LON:ADM), where its share price target was lifted to 2,650p, from 2,470p; Hastings Group PLC (LON:HSTG), up to 225p from 203p; and RSA Insurance Group PLC (LON:RSA), down to 475p from 620p, were Goldman’s preferred ‘buy’ recommendations.

In the life insurers, Aviva PLC (LON:AV.) remained ‘buy’ rated and on the ‘conviction list’ even though its price target was slashed to 325p from 525p; while Prudential PLC (LON:PRU) also remains a ‘buy’ with its target also slashed to 1,050p from 1,560p. 

Wealth focused players Quilter PLC (LON:QLT) and Standard Life Aberdeen PLC (LON:SLA) were both kept at ‘buy’, though price targets were cut to 140p from 200p and 230p from 350p respectively.

Lloyds market operators Hiscox Ltd (LON:HSX) and Lancashire Holdings Ltd (LON:LRE) both stayed at ‘buy’ with targets cut to 1,300p from 1,590p, and 715p from 860p respectively. 

Beazley PLC (LON:BEZ) and Direct Line Group PLC (LON:DLG) were both kept at ‘neutral’ with its target trimmed to 440p from 555p and to 290p from 330p respectively, while St James’s Place PLC (LON:STJ) was the only UK-listed ‘sell’ and its target cut to 625p from 900p.

Quick facts: Admiral Group

Price: 2200 GBX

Market: LSE
Market Cap: £64.54 m

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