Analysts at Goldman Sachs believe that London Market (LM) names can benefit from the current tailwind of cat reinsurance lines as price increases earn through to the P&L.
LM names have focused on growing profitable business lines with attractive rates and, according to Goldman Sachs, property cat reinsurance is exactly the type of line LM companies want to grow into.
Analysts have said that, according to their thesis, the LM insurers had delivered attractive returns over the insurance cycle and were well-placed to benefit from the current tailwind to insurance pricing.
They believe that this thesis has started to play out, with earnings in the first half of 2022 showing the benefits of the hard-cycle earning-through to the P&L.
Analysts said: “In our view, the property catastrophe pricing cycle has lagged the primary and Specialty cycle, but we believe it is entering into a hard market which can last longer than the primary/Specialty cycle.
“Climate change is a medium-term tailwind to this business, in our view, driving both higher pricing and increased demand for the products. We believe London Market names can benefit from this as price increases earn through to the P&L.”
Analysts have said that a prolonged hard cycle could result from a combination of climate change, increasing demand and pricing for risks, coupled with the risks themselves becoming more specialty-oriented and the decline in alternative capital seeking a return.
They added that while there are some potential short-term headwinds from inflation (e.g., if inflation is ahead of pricing expectations), the sector has the ability to reprice contracts every 12 months.
Therefore, analysts see inflation as a medium-term tailwind for companies, driving incremental top-line growth and prolonging the hard market.
Goldman Sachs said: “Looking ahead, we expect London Market names to continue their strong underwriting performance as the strong rate increases from 2020/21 earn through to the P&L, as can be seen from our forecasts for improving CORs and higher ROEs in future years.
“As rate increases continue, albeit moderate, we expect the LM names to continue to grow in their profitable lines, delivering strong premium growth.”
