“We struggle to identify a recent period when the fundamentals of the London Market sub-sector have been so strong, both on the asset and the liability side of the balance sheet,” suggest analysts at investment bank Berenberg.
Given the strong rate momentum year to date, Berenberg anticipates an improvement in London Market combined ratios in 2023, from an already attractive level in 2022.
According to the analysts, pricing across most speciality lines continues to remain strong, even after compound rate increases that began in 2019.
Meanwhile, most companies are expanding across property reinsurance after emerging from a period of being relatively underweight.
Berenberg explains that again, this is a class that has been structurally repriced (c30% risk-adjusted), with pricing levels reaching multi-decade highs.
The analysts continue, “Significant strides have been made in reducing some of the hidden and not easily quantifiable risks, such as a) cyber accumulation risks linked to state-backed attacks or war, b) litigation due to loose policy wording, and c) pricing of speciality risks (which are being unbundled and can therefore be better priced for), all of which should lower risk for investors and increase profitability.”
At the same time, Berenberg states that all London Market companies will be the quickest to benefit from higher interest rates, due to the short duration of their assets.
“There is minimal asset risk, as balance sheets remain relatively liquid and are invested mostly in government and investment-grade corporate bonds,” the investment bank suggests.
Berenberg’s analysts note that all companies have had a strong start to the year, in terms of both top-line growth and claims.
Of them, Beazley has grown net premiums by 24% as it continued to deploy capital in the hard reinsurance market, growing premiums by 56% in Q1, well ahead of 19% rate increases.
The analysts write, “Growth was also supported by cyber premiums and, although we believe that growth in Q2 in cyber will remain relatively subdued due to the short-term dislocation in the cyber market, returning back to growth in the region of 20%+ should be a matter of when, not if; we expect this to come in H2 2023.”
Lancashire also grew significantly YoY, by 23%, well ahead of 17% rate increases, and, while exposures to property natural catastrophes remain relatively flat, it remains “extremely geared to the hard market, with the highest exposure versus peers.”
The analysts conclude, “The fact that the Q1 trading statements provided no numbers for large events should be taken as a good sign, meaning that the claims from the two major events in Q1 (the New Zealand cyclone and floods and the Turkey earthquake) did not exceed expectations for the quarter.
“It appears that during Q2 there have not been any significant events that would lead to higher-than-expected losses; we anticipate a relatively strong first half of the year in terms of profitability.”
