London market best poised in primary margin vs. reinsurance growth

London market insurers may be in the sweet spot to pick up investor favour from a hardening reinsurance market while still soaking up benefits from margin gains to date on primary coverage, analysts at a key equity brokerage are telling investment clients.

The moderation of insurance rate gains in primary commercial coverage rather proves the point that margins have finally reached acceptable levels, analysts at Bank of America Securities wrote in research for investor clients. Now reinsurance is fully ready to take the baton for the top line chase.

Primary commercial rates “are now stabilising/softening as business is meeting profitability hurdles,” analysts wrote. “We expect reinsurance pricing to accelerate, given the attractive market conditions.”

Lancashire may be able to leverage that more than peers. “Out of the London Market insurers, we expect Lancashire to report the strongest rate momentum given its greater exposure to property reinsurance,” analysts wrote. Lancashire may win the London market’s rate race, with higher reinsurance rates offsetting moderating primary rates.

By the numbers, gross written premium at Lancashire may rise 23% year on year in Q1 with a 14 point contribution from rate and a 9 point contribution from exposure growth, all aided by the Q1 focus of reinsurance, implying that the growth rate can’t hold year-long.

But don’t be overly guided by measures of gross written premium. It’s not just the move to IFRS17 which erases all premium measures. Across the board, insurers may increase net exposures by scaling back on reinsurance, BofA analysts wrote.

Growth at rival Hiscox, while far from balanced, at least shows the firm back firing all pistons. The group’s London market division may “finally begin growing exposure” after the long struggle to achieve rate adequacy, BofA analysts forecast. But with 5% growth there is still no match for 26% in Re & ILS where management has said it hopes to deploy more capital, implying both growth and a shift to greater net exposure.

While the top line has gained and is poised for more thanks to reinsurance, costs appear contained. “We do not expect any outsized exposures” BofA analysts said of a first quarter otherwise dominated by rather distant events, chiefly the Türkiye earthquake, New Zealand floods and US storms. Loss costs will end up “within management expectations.”

London market names could be a great way to buy into the reinsurance hardening and primary margin magic on the cheap, given the 33% stock valuation discount to insurance peers and 24% discount to the major European reinsurance peers, BofA has told institutional investors.

And, despite having likely recorded the slowest top line growth amongst major London market names, Beazley takes the BofA award for best investment pick going into that Q1 earnings season. A market-lagging 9% GWP gain only looks low on turbulence for cyber, hit by quickly moderating rates and the Q1 impact of Beazley’s early move to tighter exclusions, BofA said.

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