Insurance_ Outlook 2025_ Taking a more cautious stance

Key Points Industry Overview 1. Sector Performance in 2024: European Insurance was the second best performing sector in 2024, up c.25% and outperforming the market by c.15%. This was driven by pricing momentum and favorable market conditions. 2. Sector Outlook for 2025: The outlook for the insurance sector in 2025 is more cautious. Key themes include lower bond yields, peak pricing levels, and increased M&A activity. 3. Downgrade in Industry View: The industry view has been downgraded from Attractive to In-Line due to the current stage in the interest rate cycle and pricing cycles, as well as higher valuations. Key Themes 1. Lower Bond Yields: Bond yields are expected to fall through 2025, which could negatively impact insurance earnings, particularly for P&C businesses. This is due to the new accounting methodology (IFRS 17) making insurance earnings more sensitive to interest rate movements. 2. Peak Pricing: Most lines of business and industries are at or near peak pricing levels, with the risk of further declines in pricing. This is particularly evident in commercial and reinsurance sectors. 3. M&A Activity: Insurers will need to focus on volume growth to drive top-line and bottom-line momentum, leading to increased M&A activity. This is expected to be driven by in-market consolidation rather than large-scale transactions. Top Picks 1. a.s.r.: a.s.r. is highlighted as a Top Pick due to its strong balance sheet, potential for positive surprises from the Aegon integration and PIM approval, and higher PRT business appetite. 2. AXA: AXA is another Top Pick, offering attractive total distribution yields and a free cash flow yield of c.9.2% in 2026e. The company is also well-positioned to benefit from the sale of AXA IM to BNP. 3. Hannover Re: Hannover Re is a quality compounder with a strong track record of outperforming in softer pricing environments. The company is well-positioned to benefit from the expected decline in reinsurance pricing in 2026. Downgrades 1. NN Group: NN Group is downgraded to Underweight due to ongoing pressures on its Dutch Life solvency position, which is sensitive to financial market movements. 2. Zurich: Zurich is downgraded to Underweight due to limited upside to valuation and its leverage to a decelerating commercial lines pricing environment. Other Important Points 1. Solvency: The insurance sector is well capitalized, with strong solvency ratios. However, there could be some volatility in solvency ratios through 2025 due to falling bond yields. 2. Debt Leverage: Debt leverage levels have improved in recent years, with the sector generally in good shape. However, there is a risk of higher interest costs if bond yields were to rise. 3. Asset Risk: The insurance sector is exposed to potential financial asset market shocks, particularly in the event of a major credit shock. However, the risk of this is considered low at present. 4. Technology: Technology is expected to play a key role in the need for consolidation within the insurance sector, with companies that are further ahead of the curve in this respect being better positioned to benefit.