2024 Outlook: Equity Capital Market

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine” – Warren Buffet (1987). A Benjamin Graham protégé, Mr. Buffet’s unwavering focus on durable cash flow generation has resulted in great rewards and convincingly validates his commitment to the insurance industry. While the pandemic-era zero interest rate environment saw the equity market detour from this fundamental commandment, recent Fed policy has delivered a normalization in which profits and stability are paramount. The insurance industry and its fundamental qualities are uniquely positioned to attract capital against this evolving backdrop.

2023 equity issuance has increased ~25% year to date versus the depressed levels of 2022. In comparison, Insurance sector issuance increased roughly 300% in the same period. Drivers of the strong issuance are multi-faceted. Contrary to the consensus view at the outset of the year, aggregate quarterly earnings have exceeded consensus estimates by an increasingly greater margin vs. prior year and 10-year averages. Low levels of monetization in 2022 increased opportunistic activity supported by public investors deploying capital against fewer opportunities. Corporate M&A, new platform formation, and hard market-related capital shortages were funded in part with equity. In equities, success begets success. Insurance deal performance in aggregate was positive in both 2022 and 2023 YTD, reflecting strong investor demand, strong execution by businesses and their management teams, and thoughtful deal structure and underwriting.

2024 is setting up to outperform 2023 in deal count and total proceeds despite the macro volatility that has made equity market access intermittent. BMO has confidence that these transactions will be well received for the fundamental attractiveness of the insurance sector, strong management teams, supporting shareholders, durability of valuations through rate cycles, and alpha generation realized to date. The insurance sector Sharpe Ratio in aggregate is best within Financials. One member of the IPO class of ’23 has delivered a 2.9 Sharpe Ratio year-to-date, better than six of the “Magnificent Seven” technology stocks. This type of risk-adjusted alpha reinforces the foundation of the IPO environment. These pillars of alignment between issuers and investors augur our optimism that 2024 will bring forth a continuation of the success experienced to date.

The insurance industry navigates many perils: social inflation, climate change, and crippling cyber-attacks to name three prescient forces. In contrast to the literal and real risk of rising sea levels, the insurance industry sits buoyant in a rising tide while investors concurrently seek safe harbor in high-quality businesses. Following weak aggregate return performance in 2022 and 2023, investor skepticism persists. Positioning and factor performance exhibit this disbelief that the Fed will manufacture a perfect landing. Further opaque in realism is rate cuts ushering back the heady days of pandemic-era growth-led valuations. Corporations are acting in concert prioritizing margin over growth at all costs. As observed throughout 2023, investors and businesses alike will deploy capital accordingly prudent in 2024. Investors will continue to analyze opportunities with rigor however when presented with attractive returns, the capital flows, especially from money markets, will be material.

The transaction pipeline for the coming year is robust. Successful issuance year to date, the business opportunities for organic growth and M&A in concert with supportive investors provide foundational support for an extended period of favorable conditions. The insurance sector will continue to access the equity markets for both primary and secondary transactions. The window is open.