Berenberg says that it remains positive about the London market, despite an elevated risk environment.
Citing the risk factors of property reinsurance from climate change and claims inflation, casualty arising from ongoing social inflation, and cyber due to the increase in ransomware attacks, the bank said it remained positive despite investor sentiment remaining ‘subdued’.
In a written note, it said: “Valuations across the board remain supportive in relative terms versus historical multiples, as well as where we stand in the pricing cycle, while the recent positive data points on reinsurance renewals bode well for continuous improvement in underlying profitability and earnings. All companies currently trade below their five-year average P/B multiples and significantly below pre-COVID-19 levels, despite the material improvement in underlying fundamentals of the industry and businesses.”
The company also said that the reasons for underperformance in 2021 should reverse this year.
It added: “For example, at the full-year 2020 results, Hiscox pushed its Retail profitability target to 2023 (2022), which drove EPS downgrades. Furthermore, while uncertainty on the COVID-19 BI exposure still lingers, this had a much smaller impact as the company indicated that claims are now settling in line with expectations and there is now much better clarity on total payout stemming from the outcome of the FCA’s BI test case and reinsurance recoveries, versus this time last year.”
Berenberg pointed to two companies—Conduit Re and Beazley—for their underperformance last year.
Regarding Conduit Re, Berenberg said: “[Their] decision to write more quota share business meant that its premiums and earnings are lagging behind, and have been pushed further out to 2022 from 2021. In contrast to this being a headwind in 2021, it should actually act as a catalyst in 2022 and this is not reflected in the current share price, in our view.”
It added: “Beazley underperformed in H1 2021 off the back of the increasing risk aversion to the systemic element of cyber risk and uncertainty over the short- to medium-term profitability of cyber insurance in light of the very the volatile claims environment, but also due to the $50m of potential additional COVID-19 claims from event cancellation. The former has – to a large extent – been addressed by management actions and significant increase in cyber rates. We now expect early signs of profitability to manifest in the combined ratio at the year-end, which should provide a boost to the shares given that this is a prerequisite to enable future growth.”
The coronavirus pandemic, reported Berenberg, no longer poses ‘a material risk’ to the earnings of companies it follows with the exception of Hiscox, which is still settling BI claims.
