Operational tailwinds offering excess earnings growth for non-life insurers

We launch coverage on the European non-life insurance sector. We expect a three-year period of excess earnings growth, yet the sector is trading close to 10-year relative lows to the wider market, despite exhibiting earnings/dividend resilience. Our differentiated analysis identifies that a lower running yield headwind is far outweighed by the combination of underwriting margin improvement and excess premium growth.

Capital dispersion exposed in modelled stress scenarios

We undertake scenario analysis, assuming:

  1. two catastrophe event scenarios, and
  2. three macro-based scenarios.

A key takeaway from the catastrophe scenarios is that there is material dispersion between sub-sectors and within them.Ìý

How will COVID-19Ìý impact underwriting performance in 2021?

COVID-19 underwriting losses are set to be materially lower YoY at just -5% vs. -46% in 2020. Reinsurers are most adversely impacted, with Retail being a minor beneficiary given lower claims frequency.

Sector trading at 10 year relative valuation lows

Non-life insurance is trading at 10-year relative lows on both one-year forward P/E (25% discount vs. historic 10-25%) and dividend yields (185% vs. historic 140-150%). Despite recognising elevated credit risk, we think this seems harsh given the excess profit growth opportunity identified.