Twelve Capital predicts positive trends for 2022

Twelve Capital said it believes the sector will benefit from a number of factors in 2022, including higher interest rates, improved pricing and an increased focus on ESG.

In a note to investors, the company said it sees attractive opportunities in insurance fixed income due to higher credit spreads than corporates, despite very low default rates for insurers and bondholders. strengthened fundamentals.

“In particular,” write the authors of the note, “we see the environment of increasing returns in the United States and the United Kingdom, and to a lesser extent in the European Union, as the main positive driver of a macroeconomic point of view.

They added: “Higher rates ease capital pressure from old life insurance contracts with guarantees (also known as back-book) and support capital releases. In addition, higher interest rates will also have a positive impact on the continued generation of working capital (OCG) for life and non-life insurers as their investment income increases and pressure on the new business capital decreases.

The authors said that despite the positive outlook for returns, they noted that life insurers were steering new business towards small-cap products with higher shares of unit-linked and hybrid products, while P&C insurers continued to focus on subscription products.

One of the threats the authors foresee for P&C reinsurance was rising inflation, although these costs could be passed on to policyholders in the short term through repricing.

They added: “Higher long-term inflation (and social inflation) would represent a bigger headwind for long-tail lines (such as general liability, D&O and casualty) although we would not expect not that it will lead to a strengthening of sector-wide reserves.”

Covid, meanwhile, should become less of a concern for the industry, as stricter wording in business continuity and event cancellation policies, higher vaccination rates with resulting lower excess mortality, and a continuation of the frequency of minor auto and property claims possibly driven by more work-from-home.

Other areas of the industry should see positive momentum, Twelve Capital said.

The authors wrote, “We are seeing positive momentum for mergers and acquisitions, divesting of overdue books and investing in technology. The sector remains relatively fragmented and we see areas of potential consolidation, for example, in the Lloyd’s space and in the UK car market. We also see potential for simplification in the structure of certain groups that would probably benefit from splitting up.

They added: “Disposal of capital-heavy, low-profit legacy portfolios is also a catalyst for strengthening insurer solvency and improving remittances and capital flows. Digitization and technology remain a key topic for the sector.

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