Stock performances in the banking sector yesterday raised questions: Could insurance companies dominate the market by 2025?
Cashing in on the Change: Insurance Goliaths Outperforming Banks by 2025
Ever since banks celebrated significant stock price gains in 2023 and 2024, there's a new champ expected to enter the ring in 2025—insurers. That's the forecast of Deutsche Bank analyst Rhea Shah. With the changing interest rate environment, insurers are primed to steal the show.
Banks seemingly benefited from the promise of escalating interest rates and swollen net interest margins in 2022 and 2023. However, the European Central Bank threw a curveball in June 2024, slashing interest rates from 4.0 to 3.0 percent in three droplet-like steps. The era of interest rates driving bank stock prices? It's waving goodbye, warns Shah. She's placing her bets on the insurance stocks outshining bank stocks in 2025.
Part of the reason behind this forecast is the insurance sector's robust balance sheets and versatile growth strategies. In fact, the giants of the industry, Munich Re and Swiss Re, gave us a sneak peek of such growth potential in mid-December. They promised higher earnings targets for 2025, causing a surge in their stock prices. The granddaddy of reinsurers, Munich Re, anticipates profits leaping to €6 billion (€5 billion in 2024), due to a sterling operational performance across all business segments. They also forecast insurance premiums reaching €64 billion (€61 billion in 2024) and investment returns exceeding a whopping 3.0 percent (2.8 percent).
Analysts from UBS to Goldman Sachs and DZ Bank quickly jumped on the bandwagon. They issued buy recommendations and scaled up their price targets, all quivering with excitement about the projected numbers and recognizing reinsurers are renowned for their conservative targets—which leaves ample room for further upside.
Munich Re's subsidiary, Ergo, also plays a significant role in bolstering the group's earnings with its sturdy primary insurance business. Experts estimate this division will contribute approximately €22 billion (around one-third of the group's revenue) and €0.9 billion to earnings in 2025.
In these uncertain times, the primary insurance business might merely find gold in them hills. Towering industry titan, Allianz, assumes customers will crave security, stoking the desire for secure protection and savings solutions, especially given rising healthcare costs, insufficiently safeguarded properties, and escalating pressure on state pensions.
READ MORE TO GET THE COMPREHENSIVE REEL DEETS ON THE INSURANCE INDUSTRY AND DISCOVER WHY EUROPE'S SECOND TIER INSURERS DESERVE A GLANCE.
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Investing in the insurance sector could potentially outperform the banking sector in 2025, as analyst Rhea Shah predicts, given the insurers' robust balance sheets, versatile growth strategies, and the changing interest rate environment. The leaders of the industry, such as Munich Re and Swiss Re, have already demonstrated growth potential, with higher earnings targets for 2025 causing a surge in their stock prices.
