BofA Securities anticipates a robust FY 2023 update for European reinsurers and London Market insurers, signaling a positive turnaround in the sector.
The stable pricing for commercial insurers and a potential peak in pricing for reinsurers in 2024 provide a constructive outlook for earnings.
However, the report highlights disparities in valuations between the two closely related sub-sectors.
The report notes that while reinsurers trade in-line with historic levels (10x earnings), London Market insurers are trading at distressed levels (6x vs. 14x historically).
BofA Securities finds this inconsistency puzzling and emphasizes a preference for de-rated London Market insurers, suggesting that valuations have fallen too far and a catch-up trade is imminent.
BofA Securities singles out Beazley as their top pick among London Market insurers, projecting a potential c.46% total return.
The report positions Beazley on the SMID Best Ideas list, attributing the positive outlook to improved pricing offsetting lower interest rates. The Price Objectives (POs) across the sector increase by an average of 6% on a valuation roll-forward.
After six years of disappointment, European reinsurers are finally on track to deliver a strong year of earnings in 2023. The report credits this success to a combination of the hard market and a fortuitous year of large losses, marked by the absence of a major US hurricane. The sector’s attractive returns are expected to replenish reserve buffers.
The report forecasts an attractive outlook for 2024, supported by stable renewals with expected risk-adjusted rate increases of 0-1%. Earnings are projected to continue their strong trajectory, with further margin improvement from pricing earn-through and no explicit reserve building.
However, the potential deterioration of casualty reserves poses a potential negative headwind, with variations among companies in their ability to navigate this challenge.
While the report maintains a positive outlook for 2024, it highlights uncertainties beyond that point. BofA Securities expects the reinsurance pricing cycle to peak in 2024, with industry capital recovering rapidly.
Early signs of increased competition at 1/1 renewals may put pressure on pricing and terms and conditions, signaling potential challenges ahead.
Anticipating a steady end to an excellent year, BofA Securities expects European reinsurers to deliver steady Q4 2023 updates, rounding off a strong performance year.
Despite potential impacts from lower rates in the markets, strong year-end earnings are expected from London Market insurers, driven by robust top-line growth, underwriting margin expansion, and fewer large losses.
