Prefer P&C insurers amid rate downcycle – Global Insurance Sector
- Expect underwriting performance to continue to recover in 2024
- Investment outlook to further improve, driven by higher reinvestment yield
- Our stress test suggests China insurers have limited downside and offer attractive dividend yield of 7-9%
- Prefer P&C over lifers on better asset/liability position amid rate downcycle. Top picks: Allianz and PICC P&C. We also like AIA for its secular growth potential
Underwriting performance to continue to recover in 2024.
We expect global property and casualty (P&C) insurers to benefit from the alleviation of inflation risk, successful repricing of premiums, and improvements in the combined ratio outlook. Life insurers in the Asia Pacific region may also continue to benefit from the recovery of growth in premiums, driven by the structural demand for health & protection and continuously robust growth from the Mainland China visitors (MCV) segment in HK.
Investment outlook improving on higher reinvestment yield.
The recurring investment yield is expected to further improve, driven by the higher reinvestment yield, despite the European Central Bank (ECB) and FED likely cutting benchmark rates in FY24F. P&C insurers are expected to benefit from the rate downcycle, given their positive duration gap. Lifers with low interest rate sensitivity will also show robust investment return. Insurers with strong asset management franchises may also benefit from cyclical demand and an inflow of bond funds.
Our stress test suggests China insurers have limited downside and offer attractive dividend yield of 7-9%.
Our stress test suggests China insurers may at most see a 14%-30% downside risk to the current share prices, even under an unlikely extreme and distressed scenario. We hence believe the current share prices have factored in much of the negativity. With the risk-reward looking increasingly attractive and insurers offering dividend yield of 7-9%, we recommend investors gradually accumulate shares upon a further share price pullback.
BUY Allianz, PICC P&C, and AIA.
We prefer P&C insurers, such as Allianz (ALV GY) and PICC P&C (2328 HK), over lifers, given their better asset/liability position (i.e., positive duration gap) and lower interest rate sensitivity amid the rate downcycle. We also like AIA (1299 HK) for its secular growth potential and undemanding valuation