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JPMorgan sees opportunity to buy some UK insurers as fundamentals still healthy

Published: 20:13 07 May 2020 AEST

Lancashire Holdings Ltd. -

The insurance sector's shares have underperformed the rest of the market by 9% so far this year, which has created the opportunity to buy some of the defensively positioned companies, reckons JPMorgan Cazenove.

The underperformance is no great surprise, the investment bank’s analysts said, given the financial market volatility, ongoing claims uncertainty, and changes to the dividend profile that is key attraction of the sector for many investors. 

Nevertheless, the analysts view the core fundamentals of the sector as “remaining healthy”, with Solvency II ratios estimated at 189%, no material credit default and average cuts to earnings per share of 23% for 2020 and 9% for 2021, with dividends per share cut 15% and 11%, which “looks manageable”. 

For these reasons, the Cazenove number crunchers said they are comfortable about the sector overall, but given the considerable uncertainties that remain, are favouring companies that seem more defensively positioned. 

As a result, Lancashire Holdings Limited (LON:LRE) and Hastings Group Holdings PLC (LON:HSTG) to ‘overweight’, with the share price target upped to 710p from 670p for LRE and to 210p from 175p for HSTG.

Beazley PLC (LON:BEZ) was downgraded ‘neutral’, with its share price target cut to 425p from 455p.

M&G PLC (LON:MNG) and Direct Line Insurance Group PLC (LON:DLG) remained as top picks for the sector among the London-listed names, among with continental cousins AXA, NN Group, Poste Italiane and Zurich.

Noting that investors typically perceive life insurers as being high risk due to asset leverage and exposure to low interest rates, the analysts said they remain cautious on the UK life insurers due to asset risk concerns, including Legal & General Group PLC (LON:LGEN), Prudential PLC (LON:PRU), Aviva PLC (LON:AV.) and Just Group PLC (LON:JUST), with all still rated 'neutral'.

'Overweight' ratings on M&G and Phoenix Group Holdings (LON:PHNX) reflect a view that asset risk is lower.

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