The year 2023 has been unusually eventful and turbulent for insurance companies. In the past year, the business of Italian insurance companies has been significantly less profitable compared to the recent past. However, the upcoming year could mark a reversal of this trend and position insurance company stocks well, which have lagged significantly behind the overall performance of Piazza Affari in 2023. From the beginning of the year to November 29th, the FTSE Italy Insurance sector index gained 11.9%, nearly half compared to the benchmark FTSE MIB index (21.6%).
According to the DBRS Morningstar rating agency, however, “the positive performance of traditional life insurances” such as branch I “should drive the recovery of total life insurance premiums in Italy in 2024,” as stated in a report on November 29th.
Challenges Faced by the Sector: Rise in Rates and Inflation
Signs of the deadlock for the sector were already felt in 2022. Last year, the profitability of Italian insurance companies achieved a return on equity (RoE) of 3.3%, a significant decline compared to 9.9% and 13.5% recorded respectively in 2021 and 2020. The life branch is at the origin of this deterioration, which in 2022 showed a net loss of 0.4 billion, compared to the profit of 4.3 billion in the previous year.
What happened in the last year has been described many times: the increase in yields driven by the restrictive policies of the ECB created a strong gap between the earnings prospects on long-term bonds and those offered by life insurance policies of branch I – which were redeemed as never before, at least since 2007.
The ratio between redemption volume and reserves has increased from 4.7% in the third quarter of 2022 to the current 7.8% – an anomalous peak compared to previous years. According to DBRS, however, “redemptions are likely to return to more normalized levels in 2024 as monetary policies stabilize, and both companies and policyholders absorb the shock of rising interest rates.”
A possible signal of improvement came from the Bank of Italy’s Financial Stability Report, which stated that the profitability (RoE) of the Italian insurance sector returned to improvement in the first half of 2023, although the RoE of the life segment remained negative “due to the persistent reduction in premiums.”
Insurance Sector, Clearing Skies Ahead
“The performance of the sector, which suffered a significant setback in 2022, is expected to improve in the short to medium term, as both companies and policyholders have learned to navigate in a context of higher interest rates, while inflationary pressures have decreased,” said DBRS. In addition to the return of redemptions, it is also expected that “the non-auto insurance segment will continue to benefit from the repricing initiatives implemented this year and the increased penetration into the insurance market segments.”
Meanwhile, unrealized losses on the securities portfolio, affected by the rise in rates, have started to decrease: in December 2022, the net balance between gains and unrealized losses amounted to -52 billion euros, reduced to -45 billion euros in the third quarter of 2023.
For all these reasons, “the performance of the Italian insurance market is expected to continue improving in 2024, supported by the growth of traditional life insurance premiums and steady growth in the non-auto insurance segment.”
On a European level, the insurance sector is, along with technology, the most promising according to investment fund managers. According to the latest survey of fund managers conducted by Bank of America, the ownership of insurance securities by European managers currently deviates the most positively (about two standard deviations) from historical exposure to the sector.
