The insurance sector is possibly a good example of how an industry can learn from its mistakes and emerge stronger from a crisis. Following a difficult period in early 2000’s when the sector experienced a near meltdown as high exposure to equities and lax underwriting standards led to significant losses.

Then, as a reaction, in 2009 in came Solvency II, but it took up to the 1st of January 2016 before it came fully into effect with the aim of unifying the EU insurance market and enhance consumer protection. The third update of the Insurance Directive establishes an EU single passport for insurers to operate in all member states.

The noble intentions, which are meant to protect policyholders and promote confidence in the financial stability of the insurance sector, are rather a headache for insurers who are now faced with complex compliance and risk reporting, and much tighter capital controls.

Thus while being a step in the right direction for the client, for the investor in the Insurance sector, as in any other sector, changes in regulation are a major source of uncertainty. Still, the European insurance sector somehow continues to outperform.

One factor which contribute to the relative stability of the sector is the improvement in Risk management techniques and discipline on both the asset and liability sides of the balance sheet.

The sector’s resilience was evident in the financial crisis of 2008-2009 which saw the sector emerge relatively unscathed especially relative to banks. A turning point was probably the move away from traditional interest rate guarantee product towards capital-light products such as unit-linked savings.

A consistent top pick in the sector is the German insurer Allianz SE. Allianz is recognized as having one of the best management teams around which on its own is a prime investment rationale. Also, despite their scale Allianz continue to offer innovative solutions in the insurance business.

Allianz delivered a good operating performance in 2017, with strong capital generation and solvency. Management has guided cautiously; however we believe that the recent pullback in global equities presents a unique opportunity to purchase a valuable stock at a discounted price.

Capital structure
Following the introduction of Solvency II in 2016 all major European Insurers shifted gear towards a more capital efficient business models. This meant selling more unit linked products as opposed to guaranteed products. The focus on these capital-light products and strong operating earnings means that Allianz is able to release more capital.

Share buybacks
Allianz has offered the biggest buybacks in European insurance in the past 15 months with €5bn in FY17 and FY18. Allianz appears more interested in M&A going into the second half of 2015. However, given management’s cautious approach to acquisitions the option of further buybacks cannot be excluded. Our base scenario includes yearly share buybacks.

Allianz is very satisfied with the progress being made at Pimco amid stronger net inflows. Pimco is sensitive to two important factors;
• If interest rates rise too fast, this may prompt investors to switch out of existing fixed-income funds. We believe that most of the interest rate changes are priced-in.
• Pimco generates USD earnings. The impact in 2017 was significant as the dollar lost over 11% against the euro. 2018 appear to be more stable for the dollar.

Profit guidance
In 2018 Allianz is targeting profits between €10.6 billion and €11.6 billion. Estimates target the top range of this figure. Allianz has consistently beaten its guidance since 2012. The company offers the prospects of regular dividends and consistent growth for the long-term investor.

Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.


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