Berenberg, a European investment bank known for its expertise in financial markets, has released a new report highlighting the changing outlook for the insurance sector.
Key Insights
In a recent note, Berenberg suggests that insurers are now benefiting from a unique combination of strong cash flow, expanding technical margins, and sustainable top-line revenue growth of approximately 6%. This “triple trend” provides an optimistic outlook for the sector, with Berenberg expecting continued outperformance from certain insurers, particularly those that stand to gain the most from rising revenue.
Featured Companies
Among the companies highlighted in the report is Munich Re, which, despite Berenberg maintaining a Hold rating, is still expected to benefit from the positive trends. Berenberg believes Munich Re will see growth, albeit at a lower level than the Buy-rated companies, allowing for increased shareholder cash distribution.
Growth Expectations
Berenberg anticipates a steady organic growth rate of around 6% annually over the forecast period. Insurers in the composite sector have already reported strong performance in early 2024, and Berenberg expects this momentum to continue.
The driving forces behind this growth include rational pricing strategies, greater demand for coverage due to rising costs from natural catastrophes, and an increasing awareness of risk among policyholders. This heightened awareness is expected to especially benefit health insurance lines, fostering additional growth.
Impact on Profit Margins
A noteworthy aspect of the current growth cycle is its impact on profit margins. Historically, non-life insurance has grown at a pace slightly above nominal GDP, with pricing competition playing a key role. However, Berenberg points out that the current landscape is different due to a more disciplined approach to pricing.
Changes in Competition
Berenberg observes that in the past, listed insurers faced significant competition from mutual insurers, which, due to their lower cost of capital and lack of profit-driven pressures, were able to undercut pricing. However, this dynamic is no longer the case.
A combination of a tighter reinsurance market and inflationary pressures on claims since 2021 has forced mutual insurers to adopt more rational pricing strategies.
Rate Hikes in Europe
In Europe (excluding the UK), composite insurers are encountering significant rate hikes, especially in motor insurance, where rates are expected to rise by approximately 14% in 2025. Notably, the German market is seeing an average increase of 20%.
Berenberg attributes these increases to mutual insurers’ reduced reinsurance support, which forces them to price for catastrophe coverage in full.
With reinsurance attachment points rising from around EUR 100 million in 2022 to around EUR 400 million currently, mutual insurers are now pricing their offerings for profitability, leading to a return to underwriting profits after previously squeezed margins caused by escalating claims costs.
Beneficiaries of Market Dynamics
Berenberg identifies several groups that are best positioned to benefit from the combination of strong growth, rational pricing, and solid cash flow.
Among the companies expected to outperform are reinsurers such as Munich Re, SCOR, and Swiss Re, as well as composite insurers like Allianz, Ageas, AXA, Generali, and Zurich. Focused motor insurer Admiral is also expected to gain from these market dynamics. These groups stand to benefit most from growth in property and casualty (P&C) insurance as well as health insurance.
Berenberg also highlights Swiss Life, anticipating that a turning point in its German real estate developments will lead to stronger cash remittances and an increase in dividend growth.
Risks to Growth
While Berenberg is largely optimistic about the sector’s growth potential, the bank acknowledges two key risks to the expected rerating of insurers: large mergers and acquisitions (M&A) and ongoing inflationary pressures. However, Berenberg believes that the risk of significant M&A activity is relatively low, given the strong organic growth within the sector.
Additionally, insurers have already priced in the current inflationary environment, reducing the potential for further impact from rising claims costs.
