Diversification across EU insurance market provides downside protection: Goldman Sachs

Analysts at Goldman Sachs have reported that the European multi-lines represent c.60% of the market cap under the company’s coverage and offer diversification of earnings both geographically and by line of business.

“In a macro environment where policy rates are expected to decline, with 10-year yields still broadly stable while GS strategists highlight some caution, we like the diversification and downside protection that the multi-lines can provide,” Goldman Sachs commented.

Furthermore, analysts revealed that they look for organisations that stand to benefit from policy rate easing.

The financial services company highlights Generali’s life business, noting that it could benefit from greater competitive positioning and alleviated lapse concerns, and Allianz’s asset management business where lower policy rates should be supportive for both flows and AUM.

All in all, Goldman Sachs reveals that it sees greater upside risks to margins in retail vs. commercial P&C which plays into both Generali and Allianz.

Importantly, business mix improvement is said to have been a key driver of historical re-ratings.

Looking at the 2023-2026 business mix development for the multi-lines, Goldman Sachs notes that Aviva’s business mix is now very similar to the European multi-lines and it screens as having the greatest mix improvement over the period driven by the run-off of its heritage life business and the growth in its P&C, health and wealth businesses.

Moreover, analysts noted that within a macro environment – where policy rates are expected to decline –  10-year yields remain broadly stable. However, highlighting some caution, analysts stated that they like the diversification and downside protection that the multi-lines can provide.

“The subsector has outperformed Eurostoxx over the past year, with all 5 names outperforming the index. Despite the outperformance, valuations do not appear stretched as all five companies screen as broadly in-line or inexpensive based on adjusted historical dividend yields,” the firm added.

Concluding: “Key subsector themes include the impact of central bank policy easing, the retail vs. commercial P&C pricing / claims cycle, earnings volatility and capital intensity, capital light life new business flows, diverging fee based strategies and capital returns. We believe that this leaves room for interesting individual stock ideas.”

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