Brokerage Downgrades European Insurance Sector

The European insurance sector has been downgraded by Bear Stearns to "market weight" from "market overweight," saying as asset contagion spreads, the sector's high asset leverage and limited disclosure may lead to further underperformance.

Published on January 16, 2008

The brokerage believes the market is likely to continue to demand a very high risk premium for holding insurance shares, in light of the combined threat of significant economic uncertainty and the sector's high gearing toward risky assets.

"We do not expect the sector risk premium to narrow until economic visibility improves, which is unlikely until second-half 2008," the brokerage added.

Bear Stearns says the market is currently being driven more by fear than fundamentals, and investors buying insurance shares must be prepared to tolerate significant volatility. The brokerage added that it preferred non-life insurers, as companies in this group have stable earnings view, strong cash generation and low asset risk.