Barclays lowers European insurers on capital and earnings headwinds

5th May 2015 09:23

Barclays Capital has lowered its recommendation for the entire European insurance sector from 'neutral' to 'negative'.The broker said companies are facing "significant and growing" capital and earnings headwinds, particularly in parts of the life insurance sector."These challenges are primarily a result of low interest rates, but the new Solvency 2 rules - which have been eased the past few years to ensure no major industry casualties - remain a near-term threat and potentially a mid-term drag. In addition, P&C underwriting returns (both primary and reinsurance) are stalling, and growth is elusive," BarCap said.After outperforming the market over the last three years, BarCap said insurers are now trading at record relative highs, "despite fundamentals heading into all-time lows"."We believe this strong sentiment shift was driven by the growing payout ratios and strong dividend growth. But earnings and solvency headwinds should combine to stall or even shrink dividends, reducing this key support," it said."We therefore steer clear of the unpredictable risks associated with interest rate guarantees, and maintain a preference for UK life names (Prudential and Aviva both [rated] 'overweight') and P&C markets where we see solid balance sheets and relative underwriting margin stability."The broker downgraded UK insurer RSA from 'overweight' to 'equal weight' and also lowered peers Allianz, Talanx and Generali.