Following the UK referendum, European insurance stocks have fallen indiscriminately – with little differentiation around asset gearing, beta, business models, earnings trajectory, solvency levels, capital structures, currency exposures, and idiosyncratic risks.
The first-half results may be the time the companies can actually differentiate themselves with the winners and losers appearing. We would highlight Prudential and RSA as two clear winners, both of which are major beneficiaries of the weak sterling. Prudential is our top pick in the sector, and we believe the first-half results will again demonstrate the resilience and growth in the business, while we expect RSA to demonstrate further tangible progress towards its ambitious 2018 targets. We would also highlight Hastings as being the major beneficiary of the accelerating UK motor cycle with the tailwind allowing it to exceed its IPO targets.
UK life insurers in the eye of the storm ... The focus will be on the impact, if any, of the decision of the UK to leave the European Union, particularly on capital and solvency ratios.
We expect solvency ratios to decline to the February lows, and the companies to give more colour on the levers they are able to pull to protect the ratios. The underlying firsthalf earnings themselves should be fine; however, growth may slow if the UK does enter a recession and the levers to protect capital also have earnings implications.
... but the European insurers will be bracing themselves for the storm. The concern for the European insurers will be the implications of a further step down in European interest rates. Non-life earnings will be impacted by higher weather costs (European floods, Canada wildfires, US hailstorms) while we expect the Life insurers are likely to have a lower level of realised gains than the abnormally high levels seen in 2015. The moves in solvency are likely to be less extreme for the European insurers as swaption volatility is lower with an average of a high-single-digit negative impact.
We expect UK P&C insurers to be standout performers. The UK motor pricing cycle inflected 12 months ago and started to accelerate in the third quarter of 2015, making this the first earnings period where earned pricing will start to flow through the P&L.
Hastings is our preferred name among UK motor insurers, and the tailwind of pricing increases will allow the company to meet or exceed its IPO targets. We also expect RSA to be a stand-out performer with improvements in its underlying profitability in each of its three regions, coupled with a strong tailwind from FX into the second half of the year.
Adjusting estimates and price targets: We adjust our estimates and price targets as shown in the table on Page 3 to reflect for year-to-date operating trends and market movements. The most significant change is for Aegon for which we lower our price target by 17% to EUR 3.40.
Barclays Equity Research