The privately owned bank also predicts a shallow recession in 2022-23 across Europe, the UK and the US, according to a newly issued sector note by Berenberg.
Reasons given include the strength of cash positions and cash flows, solvency ratios nearing historical highs, combined ratios in the 93-95% range, and the extensive rewording of contracts in commercial lines insurance to exclude cyber and pandemic risk and to limit business interruption.
However, a recession would potentially still affect earnings as it increases risk. The company has set out a bear case for 2022 estimates and shows what this would do to valuations (there is still upside but much reduced), and a bull case (gas prices in Europe fall back) and analyses what this would do to valuations.
In the bull scenario,
a recession could dampen inflation risk. A recession would be potentially less of a risk to the insurers’ business model than the current high inflation outlook. This is because inflation affects the back book where pricing can no longer be changed and there are few offsets, whereas recession mainly affects new business where pricing can still be changed.
In the bear scenario,
a 150bp higher combined ratio is assumed for operating earnings, 10% higher nonlife investment income due to higher reinvestment yields, a 5% lower income from unit-linked life due to lower average account balances and 10% lower income from traditional life due to lower realised gains and also impairments. On average, the bear scenario is reflected in a 9% potential downward revision to consensus earnings.
There is attractive upside, particularly given the share price declines since February this year. The bank’s top picks for price increases are Allianz, Aegon, Munich, Aviva, Admiral, Swiss Life, Tryg and Beazley, Zurich and NN Group.