Insurance: Boring is Good

Insurance is not the most exciting business, but insurers are a key part of the financial system. Below we take a look at some of Europe’s leading players and why boring is good.

 

Insurers have a long history …

Most insurers have a long history. The oldest insurance company in the world – Hamburger Feuerkasse – was founded in 1676 and provided fire insurance. Today’s biggest insurers in Europe are also around since a long time. Axa’s roots go back to 1816, while Generali was founded in 1831. Zurich Insurance, Munich Re and Allianz were formed in 1871, 1880 and 1890 resp.

 

… and a bright future ahead of them

As worldwide wealth continues to increase, so does the need for insurance. Therefore we expect insurance companies to continue to remain relevant and thrive in the future. Although insurance is a competitive business, companies in the industry are protected by barriers to enter such as scale, consolidated markets, required capital and know how.

 

Making money on the insurance business itself

As long as interest rates were high, insurers often incurred losses on the insurance policies they underwrote. But this was easily more than made by their investment income.

Since long term interest rates came down starting in the nillies, but especially since the great financial crisis, insurers have become much more prudent. These days insurers typically earn a decent profit on their policies (next to earnings from investment income). In other words they realize a positive technical result (= earned premiums – incurred claims – operating expenses) and as a result their combined ratio is below 100%.

 

 

European insurers tend to pay out a large portion of their earnings (75% is not uncommon), usually via a combination of dividends and share buybacks. As a result, most European insurers offer a handsome dividend yield.

 

Large players are mostly integrated …

The activities in the insurance industry can be categorised in 3 domains: Property & Casualty (re)insurance, Life and Health (re)insurance and Asset Management. Some small or medium players focus on one specific domain, but the large players are mostly integrated players which means they are active in multiple domains.

 

… with strong balance sheets

Since insurers mostly have long term obligations, liquidity is less important than for banks. On the other hand meeting long term obligations – solvency – is however crucial for an insurance company. Investors therefore pay a lot of attention to the solvency II ratio of an insurer.

SCR is the amount of capital required for an insurer to meet its obligations over the next year. All of the big five European insurers we look at all have a solvency II level in exces of 200%.

 

The European big five

 

Source: companies, Bloomberg

 

French company AXA is Europe’s second largest insurer and the global number 1 in commercial lines. Axa is active in 3 business lines: P&C, life & health insurance and asset management. It boasts 95 mln customers in 50 countries. Of its insurance business, half stems from commercial insurance and half from retail insurance. 80% of its income is generated by P&C, health and protection. Axa’s ‘Unlock the future plan’ targets underlying earnings growth of 6 to 8% per annum, underlying return on equity of 14 to 16% and cumulative cash remittance of over EUR 21 bn for the period 2023-2026. Axa targets to pay out 75% of its underlying earnings through dividends (60%) and share repurchases (15%).

 

With 128 mln private and corporate customers in nearly 70 countries, German company Allianz is a leading player in the insurance and asset management industry. In Property & Casualty (P&C) insurance, the company is the world’s number one. The group has also strong positions in health insurance and asset management (PIMCO). Some 47% of the group’s operating profit is derived from P&C, 33% from Life and Health insurance products and some 19% from Asset Management. For the period 2024-2027 the company expects an average annual growth of earnings per share of 7 to 9% and a return on equity of 17%+. Over that period, Allianz aims to pay out 75% of its earnings, i.e. 60% via dividends and 15% via share buybacks. Of its investment portfolio of EUR 752 bn, 80% is invested in debt instruments, 10% in equities, 7% in real estate and 2% in cash or other. Allianz boasts a strong record: it beat the midpoint of its earnings guidance 9 times out of ten in the past decade.

 

Generali is a Italy-based integrated insurance and asset management group, serving 71 million customers in over 50 countries. The group is Europe-centered, but is also selectively present in Asia and South America. Generali’s ‘Lifetime Partner 27’ strategic plan aims for 8-10% (>6% from insurance, 1% from asset management and >1% from capital allocation management) combined annual average earnings growth rate and a average annual dividend increase of 10% in 2025-2027 and cumulative cash flow generation in excess of EUR 11 bn. Over the period, Generali intends to pay dividends in excess of EUR 7 bn. In addition the company plans to buy back at least EUR 1.5 bn worth of shares during the same timeframe.

 

Munich Re provides reinsurance, primary insurance, related services and capital market solutions. In reinsurance Munich Re is a global leader and through subsidiary Ergo, the company is the European leader in health and legal expenses insurance. The group operates in over 50 countries. For 2025, management is looking for insurance revenue of EUR 64 bn, net result of EUR 6 bn and return on investment of >3%.

 

Zurich Insurance is a leading multi-line insurer with over 75 mln customers in over 200 countries. Some 60% of earnings stem from the US P&C commercial market. Assets under management amounted to USD 279 bn at the end of 2024. For the period 2025-2027, the group expects earnings to grow at a compound annual growth rate of 9%, core ROE >23% and cash remittances in excess of USD 19 bn. Zurich Insurance pays out around 75% of it net income through dividends and its share buyback program.

 

 

Source: LSEG Datastream

 

Conclusion

The big European insurers have been around for a very long time. Over the past decade, they proved to be very good investments compared to the broader market (STOXX Europe 600). Going further they might continue to do well although one should not overestimate their growth potential as they pay out most of their earnings.