The London insurance market has emerged as a generational investment opportunity, according to a recent report by Berenberg.
The report highlights several key factors that support this assessment, including the sector’s strong fundamentals, attractive valuations, and a growing appetite for insurance products.
In the report, Berenberg noted that earlier concerns about the London insurance market’s underperformance have been dispelled by several developments.
Firstly, the absence of mega-sized natural catastrophes and robust Q3 financial results from industry peers have bolstered confidence in the sector.
Secondly, the fundamentals of the London market have grown even stronger, with expectations of a prolonged positive cycle. Thirdly, valuations have shifted from being merely attractive to exceptional.
On average, London-listed insurers are trading at 1.1 times price-to-book (P/B) ratio with a 20% return on equity (ROE). Berenberg emphasises that investors who remain on the sidelines risk missing out on this opportunity, the report noted.
Berenberg’s top picks in the sector include Beazley, Conduit Re, Lancashire, and Hiscox, with an estimated 42% upside to their price targets.
The report also addressed the impact of the transition to IFRS 17 accounting standards, which brought complexity and earnings volatility to non-life insurance companies.
This shift resulted in a higher cost of equity for London-listed insurers compared to their US-listed and Bermuda-based peers.
Berenberg sees this cost of equity as a contributing factor to the widening spread between London and non-London insurers, suggesting that London-listed players may surprise with stronger full-year results.
European reinsurers are highlighted as an attractive option for investors looking for exposure to the insurance sector. Their smoother transition to IFRS 17, transparent financial communication, and higher cash payouts to shareholders have proven rewarding.
However, the report suggests that London insurers may have untapped potential for capital returns given their earnings expectations for the coming years.
The London insurance market benefits from strong fundamentals, including near all-time high property (re)insurance pricing, expectations of a prolonged cycle, and heightened demand for natural catastrophe protection.
Additionally, companies in the London market are positioned to benefit from higher interest rates and minimal asset and liquidity risks.
