16th Mar 2023 14:55
(Alliance News) - Insurance stocks were caught in the cross-hairs of Wednesday's market panic, though investor concern was overstated according to analysts at RBC.
There are a number of worries for banking that insurance companies do not have, the Canadian bank said, among them are liquidity concerns.
Beazley PLC shares were 1.4% lower in London on Thursday, having fallen 2.9% on Wednesday. Prudential lost another 1.9%, after a 12% slump following annual results on Wednesday. Hiscox Ltd recovered 0.3% on Thursday afternoon, after a 3.4% fall on Wednesday. M&G dropped 9.2% as it went ex-dividend, having fallen 4.8% on Wednesday.
"Since the collapse of SVB, investor concern has not been limited to other banks but insurers' share prices have also seen significant falls," RBC analysts commented.
"We see the reduction in share prices as a buying opportunity and we highlight the UK annuity writers as attractive at current valuation levels, with all outperforming earnings expectations at 2022 results. They should benefit from the rapid acceleration in the bulk annuity opportunity, a slowdown in future longevity improvements, and Solvency II reform."
RBC said that unlike banking firms, insurers cannot be hit by a "run", meaning when a larger number of customers quickly look to withdraw their deposits.
RBC explained: "There is no such thing as a run on an insurer. Banks only keep a small proportion of their assets as cash. Bank runs can start from a simple doubt that a bank may be in trouble which causes customers to withdraw money. However, there is no such concept as a run on an insurer. Insurers provide protection against risk. Customers pay in premiums, which insurers put into reserves. The whole basis of insurance is risk sharing – the customers who claim are subsidised by those who do not. The event that causes a customer to claim is one which they do not choose – eg death, illness, damage to their property, vehicle. This contrasts with a bank when a customer can choose to withdraw his deposit at any time assuming he is not locked in."
A concern that may surround troubled banks is one of liquidity. Insurers, however, "have an abundance of liquidity".
RBC added: "The solvency regime which UK and EU insurers are regulated under has been strengthened since 2016. Under Solvency II no insurer has needed financial assistance."
Another concern is on investing. RBC believes there a little to know worries for insurers there, however. Insurance companies learned the lessons of the last crisis and instead only invest in "investment grade credit".
"While investment grade corporate bond defaults did not occur in 2008/9, insurers subsequently took the decision to reduce weightings in cyclical sectors, which include banks. An often underappreciated point is that insurers only invest in investment grade credit – the Solvency II regime applies onerous asset charges to sub-investment grade bonds," RBC summarised.
By Eric Cunha, Alliance News news editor
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