European insurance stocks have demonstrated a notable resilience since the onset of the Iran War on February 27. According to a recent research note from RBC Capital Markets, the sector has only seen a 7% decline, which contrasts sharply with the broader Stoxx Europe 600 index’s 9% drop and an 11% decrease in European banks. This relative outperformance can be attributed to the non-discretionary nature of insurance demand, robust balance sheets within the sector, and the capacity to re-price policies amid inflationary pressures.
The performance within the insurance sector has been marked by significant divergence. Notably, UK Motor stocks have risen by 6.8% since late February, while UK Life insurers suffered a dramatic 9.8% decline, making it the worst-performing subgroup. Reinsurers experienced a 4.9% drop, while Composite insurers saw an 8.0% decline during the same timeframe, as highlighted by Datastream data.
At the individual stock level, some companies have displayed stark differences. Beazley has outperformed, surging 54% relative to the Stoxx 600 since February 27, while XPS and Standard Life experienced declines of 20% and 13%, respectively, according to Bloomberg data.
The underperformance in the UK Life sector has been linked to the highest asset leverage in comparison to other sectors, compounded by significant rate movements in the UK and previous strong share price gains. Specific figures indicate that Standard Life’s asset leverage stands at a remarkable 178.7 times, compared to Legal & General at 50.4 times and Aviva at 9.5 times.
In terms of inflation, break-even rates have increased sharply since the conflict began, particularly in the UK, although they remain below the post-COVID highs. During the COVID-19 downturn, the sector’s forward earnings per share declined by a maximum of 16%, far less severe than the broader Stoxx 600’s 27% drop.
Solvency ratios for the sector remain comfortably above target ranges despite year-to-date market fluctuations. Munich Re leads with a solvency ratio of 295%, well above its target range of 175-220%. In contrast, Standard Life is on the tighter end of the spectrum, holding a 175% ratio within a 140-180% range.
The insurance sector currently holds an average forward dividend yield of 7%, with a payout ratio of 64%. Notably, companies like HNR1, MUV2, ALV, and CSN are recognized for their strong track records in dividend payments, with average payout ratios around 55%, indicating reliability in dividend sustainability.
As of March 23, the sector’s average forward price-to-earnings (P/E) ratio stands at 11.4, which is above the long-term average of 10.5. Individual P/E ratios vary significantly, with Conduit Holdings at 6.1 and Admiral at 13, according to Bloomberg data.
Looking ahead, RBC cautioned that the most significant downside risk for the sector remains a potential severe recession combined with lower long bond yields and increased credit defaults. In such a scenario, reinsurers are expected to outperform while life insurers may continue to struggle.
