Recovery trend for underwriting expected in 2024. Despite the global economy being expected to cool down in 2024 due to tightening monetary conditions amid the burden of high rates, premium growth of insurers under our coverage is likely to remain robust in both the life and health (L&H) and property and casualty (P&C) segments.
In the life segment, the Asia market will continue to lead in 2024 with double-digit value of new business (VNB) growth, mainly driven by HK, China, and ASEAN with their fast-growing affluent and middle-class customers and huge protection gap. In Europe, we expect rising demand for savings insurance due to better policy returns and a low base effect, supporting single-digit premium growths for large European insurers. In the P&C segment, benefiting from premium repricing, we expect premiums to expand with single-digit y/y growth in 2024 for insurers under our coverage. This will offset pressures from economic slowdown across major markets. We also expect their combined ratio (COR) to improve, driven by easing inflation pressure, resulting in an improved loss ratio and higher underwriting profit.
Investment returns to increase, benefiting from elevated interest rates. After multi-year lows or negative interest rates in major developed countries, 10Y government bond yields are expected to stay elevated in 2024 compared to the past 10-year average (est. 4.4%/2.6%/1.2% on average in US/EU/JP in 2024 vs. past 10-year average of 2.3%/ 0.5%/0.2% respectively), despite 100 bps policy rate cuts being expected in the US and the EU in 2024. We expect gains from higher reinvestment yields to continue accruing for average portfolio yields in 2024, with new money investing at higher rates than those of the current portfolio, translating into higher investment results for insurers under our coverage. We also expect investment results to be a more important component of industry returns in the coming years.
We prefer names with robust earnings growth and fewer concerns on macro headwinds. Given the mixed macro picture for 2024, we remain cautious on headwinds from: 1) China insurers’ exposure to property and trust, where the turmoil is likely to persist in 2024, despite their exposure being limited and risks being manageable; 2) JPY appreciation against the USD resulting in FX losses for Japanese insurers due to their high exposure to overseas business; and 3) declining interest rates leading to book value retracement due to negative duration gap for life insurers.
We hence prefer selective names with 1) robust growth of underwriting performance in L&H and P&C segments, 2) low asset-liability duration gap and interest rate sensitivity to mitigate impact from declining interest rates, and 3) an improving investment return outlook with fewer concerns about macro headwinds.
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