In a marked shift of sentiment, capital markets are displaying renewed interest and confidence in the specialty (re)insurance industry, as evidenced by a recent analysis conducted by Insurance Capital Markets Research’s (ICMR).
Following a tumultuous period, including the banking sector turmoil earlier this year, the sector’s performance has rebounded strongly, as demonstrated by favourable results in the first half of 2023.
ICMR’s analysis, focusing on price to trailing book multiples (P/b) for the RISX equity index comprised of publicly listed Lloyd’s owners, reveals a promising trend.
The P/b ratios have surged to levels comparable to those observed just before the 2008 financial crisis, indicating a growing trust and willingness among investors to invest in the industry.
Comparing these positive metrics with broker rate on line (ROL) indices, which have a reliable track record in indicating sector direction, offers further insights.
A composite of multiple broker ROL indices shows a robust recovery post-COVID. However, when this recovery is compared against the RISX portfolio of (re)insurance company P/b’s, a noteworthy divergence is observed.
Despite the substantial increase in P/b ratios, they remain disproportionately lower than what would be anticipated based on the rise in ROL indices.
This discrepancy is depicted graphically through the P/b-to-ROL Index ratio, essentially presenting a ‘Price to Profit Potential’ indicator.
Strikingly, the equity pricing relative to the ROL indices appears stagnant and falls below expectations. This intriguing observation might shed light on the hesitation of some Private Equity-owned (re)insurers to reenter public markets.
Moreover, it raises the possibility that the window for fresh Private Equity acquisitions might not be as closed as previously thought.
Industry experts see these trends as indicative of an imminent growth phase for the (re)insurance sector in the forthcoming years.
Investors willing to embrace risk and seize early mover advantage could potentially reap substantial rewards. This shift in sentiment, as depicted by the ICMR analysis, underscores the evolving dynamics of the (re)insurance industry and its attractiveness to market participants.
