Analysts at investment bank Berenberg have insisted that the hard market “has legs to run” in 2023, anticipating that rate rises will continue throughout the year, while capital raised so far remains “minuscule” at $3.3bn.
These statements follow a host of investor meetings held by Berenberg since publishing its 2023 outlook report on the insurance sector in early January.
The analysts note that despite expecting additional capital to come through in 2023, Berenbeg does not believe it will be enough to put significant pressure on rates.
Another key discussion point of these meetings focused on whether reinsurers will be guiding to strong top-line growth and improved margins, and the extent to which rate rises will be used to rebuild reserve buffers.
“We believe, given the magnitude of rate rises, that there is room for both,” writes Berenberg.
“We explained why we believe SCOR and Conduit offer the most upside, and that lack of reinsurance capacity means that even reinsurers that are already up strongly, like Munich and Beazley, still offer strong upside.
“Investors were least interested in Hannover Rück, which some were using as a source of funds to buy into those reinsurers which had lagged (eg Swiss Re).”
Meanwhile, Berenber suggests that investors are looking to buy Allianz and reduce Zurich as they believe that the pricing in retail insurance is recovering and should rise more, while the pricing in commercial lines is slowing.
“They were particularly interested in the remaining pricing gap relative to inflation in motor insurance, as they believe inflation will likely moderate further,” state the analysts.
IFRS 17 was another topic that came up frequently in the meetings, as investors are aware of the potential risk of the dip in shareholders’ equity but also the offset from higher target ROEs.
Berenberg notes that investors were also interested in its view that the planned new IFRS 17 reporting standard could make insurance more attractive to generalist portfolio managers.
The analysts write, “For example, Zurich and AXA have each prepared in Excel format a draft disclosure template, which is clean and straightforward and can easily be used as the basis for a simple earnings model.”
Concluding, Berenberg states that while they discussed many more topics in the meetings, they were surprised by the degree of interest in Generali and also Poste, both in Toronto but also in New York (but not in Boston).
The firm adds, “Investors were interested in our belief that Generali’s rating is disconnecting from that of Italy, and in the potential catalysts of a potential sale of the Cattolica life back book and further rate rises in Italian motor.”
