Lloyd’s insurers are expected to experience strong earnings growth for the H1 season, driven by good underwriting results and low natural catastrophe losses, according to analysts at J.P. Morgan.
Analysts expect the H1 earnings season to build on the promising results of Q1, with further topline growth driven by a combination of improved pricing and volume in the larger ticket, catastrophe-exposed lines of business.
Loss activity in 2018 has been relatively benign and catastrophe losses are expected to be well under budget, which, combined with the stable 2017 industry level loss estimates and prudent reserving approach of Lloyd’s companies, is likely to allow reserve releases in excess of the long-term average.
Earnings will also be characterised by unusually low investment returns given the significant increase in U.S interest rates during the period, as Lloyd’s companies do not use available-for-sale accounting for their investment portfolios, meaning any movements in interest rates are taken directly through the Profit & Loss Statement (P&L).
Investment returns are therefore expected to be only modestly above zero for H1, although the growth in interest rates points to stronger earnings outlook in future periods, with J.P. Morgan estimating average rises of 4% across the sector for FY19E.
Of the three Lloyd’s insurers analysed, J.P. Morgan continued to view Hiscox as having the most favourable outlook (overweight), followed by Beazley (overweight), and then Lancashire (Neutral).
It noted that all three companies had benefitted from pricing improvements following 2017’s catastrophe events, and predicted topline growth of 10% for Beazley and Lancashire, and 17% for Hiscox.
Analysts attributed part of Hiscox’s particularly strong growth to the additional premium written on behalf of its insurance-linked securities (ILS) and quota share partners in reinsurance, as well as to the H1 GWP growth of 18% in its retail lines.
J.P. Morgan has updated its models across the sector accordingly, with changes principally reflecting interest rate movement as profit before tax is expected to fall by around 5% for Beazley and Hiscox at FY18E but increase again by 5% in FY19E/20E.
For Lancashire, another significant factor is its benign claims experience for the year to date, which is expected to result in a 20% increase to its FY18E profit before tax following strong Q1 results.
