As the primary vs reinsurance debate rolls on, analysts in the Deutsche Bank European Insurance Team suggest reinsurers have “won the battle” so far in 2023 in terms of relative share price performance, particularly SCOR and Munich Re.
“Momentum remains generally supportive too, though we would argue that in some cases this is now appropriately reflected in the share price,” Deutsche Bank’s analysts explained in a recent report.
They continued, “Heading into 2024, although much of the improving momentum is already largely baked into market expectations, we do see pockets of opportunity among the primary insurers to drive a rerating of the shares and/or upside to earnings estimates – in particular, UK motor.”
However, given increased large loss frequency and a potentially required adjustment to cat budgets, the bank’s analysts noted it is “challenging to be too positive on the primary insurers as a whole.”
Elsewhere in the report, Deutsche Bank’s European Insurance Team wrote, “It is now well known that the hard reinsurance market will at least continue through 2024 – our base case, however, remains that risk-adjusted pricing will end up broadly neutral/very slightly positive, though this is still an attractive profitability level.”
The analysts noted that in the primary space, although commercial lines have shown signs of slowing momentum for the past two years, pricing likely remains adequate compared with loss cost trends.
They added, “We expect retail lines to continue their current positive momentum and coupled with our strategists’ views of further easing of inflationary pressures through 2024, should be the biggest beneficiaries of relative margin expansion over the course of the next 12-24 months – something we expect to be true on both sides of the Atlantic.”
Deutsche Bank’s analysts also observed that whilst 2023 has been a heavy year for loss activity, it was notably driven by a higher frequency of smaller events.
In that context, the bank stated that it finds it “somewhat surprising” that the reinsurers are still seeing close to 100% utilisation of their loss budget for the year given the supposed risk transfer and also reduced exposure to ‘frequency’ events.
“This said, we note that the average experience, relative to budget, for both the reinsurers and composites has been more broadly aligned in recent years – suggesting that the risk transfers we have seen so far have been broadly appropriate,” The analysts said.
Deutsche Bank’s report concluded, “Overall, it is clear that the reinsurers remain in a good place right now – however, this should now be very well understood by the market (particularly Munich Re), and it is not clear where incremental positive surprises could come from.
“We believe SCOR still has plenty of re-rating opportunity, and should make good progress in that respect through 2024. We see the primary insurers as being increasingly more challenged. The focus will be to what extent they can manage potentially higher underwriting volatility with stronger top-line growth, per the previous section, and/or higher investment income – but in turn, could this lead to a relative derating of the sub-sector
“We consider Aviva, and also possibly Sampo and Generali, to be potentially most adversely impacted by this. In contrast, we believe Direct Line (upgrade to Buy) will be the biggest beneficiary of recent price increases which should translate into a strong rerating due to improved perceptions around the group’s earnings and capital base.”
