The stock market tends to consider shares of insurance groups boring and old-fashioned. Investors should not fall for this cliché, however. That the sector certainly also has its attractions has been demonstrated to impressive effect this year. Whereas, for instance, highly regarded automotive stocks entered a downturn and techs even fell off a cliff, the plus sign has dominated for underwriters. The share price of Zurich Insurance, for example, has jumped 13% since the start of the year, even leading the SMI ranking shortly before the end of the year. At the moment the stock is 27 percentage points ahead of the market as a whole. It is a similar picture for our German neighbours: posting growth of 18.3%, the world’s largest reinsurer, Munich Re, occupies third spot on the DAX, outperforming the blue chip index by 27.8 percentage points.
The insurance sector is currently benefiting from its relatively crisis-resistant business model. What is more, rising premiums and high dividend payments are valued attributes in times of geopolitical conflict and economic recession. On top of this is the long-awaited turnaround in interest rates, with central banks changing their monetary policy course this year after many years of negative rates. The European Central Bank (ECB) raised its base rate by 50 basis points in July this year, adding another 75 basis points in both September and October to bring the rate to 2%. Ahead of the last monetary policy meeting of 2022, to be held on 15 December (after we go to press), economists also expect a further uptick of at least half of one percentage point. France’s central bank boss, Francois Villeroy de Galhau, said at the start of December that he anticipated further increases in the year to come as well.
While many companies – particularly highly indebted ones – are suffering from rising rates, underwriters are delighted, because it means the groups will buy fixed-interest securities with higher coupons, enabling them to realise greater profits. To give an example, life insurers largely generate their promised guaranteed payments with low-risk, fixed-interest securities such as government bonds. Whereas the yield on 10-year US bonds was just 1.5% a year ago, it now stands at 3.5%. Times have changed in the eurozone, too: the German government bond is currently trading at 1.9%, despite being in negative territory as recently as March. This is a development that is not without consequence – Allianz Lebensversicherung recently announced that it would raise the overall interest rate for all product lines in 2023, the first such rise since 2008.
Munich Re is currently pinning its hopes on investments in order to reach the targeted net profit of EURbn 3.3 (2021: 2.9) in the current year. While Hurricane Ian caused billions of dollars’ worth of damage, hitting core business, things are looking up at the primary insurance subsidiary Ergo. An accounting effect brings in around EURmn 200 in the life insurance segment alone, which the company expects to deliver greater earnings again in the future due to rising interest rates. Furthermore, the increase to 3.0% in the yield on reinvestment held out the prospect of greater income in the future, said CFO Christoph Jurecka. On the subject of investments, Germany’s two largest reinsurers are also looking to do things together in the future. Munich Re and Hannover Re are planning to collaborate in selective investments in alternative asset classes through a joint venture. Analysts are positive about the prospects for Munich Re and anticipate an increase of one tenth in earnings per share this year. The double-digit percentage growth is set to continue in 2023 and 2024 as well. There is a similarly positive trend for Hannover Re.
Source: Refinitiv, e = expected
Source: Refinitiv