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European insurers could sustain better-than-expected earnings performance

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European insurers could sustain better-than-expected earnings performance

There are signs that Europe's biggest insurers may continue their profitable pace after pleasantly surprising analysts in the first half of the year.

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Nonlife benefits

Most top European insurers' normalized EPS came in ahead of S&P Capital IQ consensus estimates for the second quarter and first half.

Some analysts cited the property and casualty segment side of European insurers' businesses as a big driver of the earnings beat. In 2020, insurers benefited from lower claims frequency in some lines, particularly motor, as COVID-19 lockdowns kept drivers off the roads. The benefit was expected to fall away as restrictions eased, but has been surprisingly resilient.

"The frequency benefits have been lasting longer and have been bigger than most would have anticipated," said Barclays analyst Claudia Gaspari in an interview.

Traffic volumes have increased sharply but patterns have changed as many have continued working from home, cutting the number of drivers on the roads at traditional peak times and reducing the claims potential, Gaspari said. The analyst expects that the world would return to its pre-COVID norms, although it could take a long time as workplaces open up gradually and people continue to work partially from home.

In commercial P&C, companies have continued to benefit from rising prices in many lines of business, with Berenberg analyst Michael Huttner noting that pricing is "very strong." Although commercial insurance prices were no longer accelerating in the U.S., they were not reducing, Huttner said in an interview. In Europe, Huttner observed that pricing had "reached a level well over 10%," which is "unusual."

"It may be that [prices] don't rise much more, but we'll see the benefit in terms of better results for another year or two," Huttner said. As the profitability is likely sustainable, there could be further revisions to analysts' profit expectations, according to the analyst.

Standouts for analysts included Axa SA, Allianz SE and Zurich Insurance Group AG. Axa's second-quarter results "represent the most unambiguously strong set of quarterly results we've ever seen from the company," Jefferies analyst Philip Kett wrote in an Aug. 11 research note.

While Axa's underlying earnings were 11.3% above consensus estimates, Kett said the "breadth of the beat" was impressive, with underlying earnings 14.8% ahead of consensus for nonlife, 5.4% ahead for life and 17.2% ahead for asset management.

Zurich's first-half earnings beat came from both property and casualty and life, UBS analyst William Hardcastle wrote in an Aug. 12 research note. He expects the performance to result in upgrades to consensus EPS estimates.

Legal, regulatory hurdles ahead

While the overall outlook is positive, challenges remain. Allianz's second-quarter results impressed analysts, but casting a shadow over its performance was its announcement that future financial results could be hit by investigations and lawsuits involving the Structured Alpha Funds offered by its asset management arm in the U.S.

The announcement had "signaled a shift" for investors to move into peers, which include Axa, Zurich and Munich Re, Huttner said. Berenberg analysts estimated that the Structured Alpha issue could cost Allianz €6.8 billion in a worst-case scenario.

More broadly, regulatory intervention into insurers' capital distribution during the COVID-19 pandemic is a "drag on valuation" because there is now less distinction between the perceived levels of capital regulation at insurers and banks, Huttner said. Additionally, there were "clearly investor concerns around inflation" that insurers had yet to fully assuage, the analyst said.

For Gaspari, the influence of climate change on natural catastrophe events is "definitely an area to watch" on the nonlife side. Events have become "more unpredictable and more powerful," making it more difficult for insurers to structure reinsurance programs, the analyst said.