London Market packs inflation fear into reserves, denies current impact

Major London Market players are tipping the hat to runaway inflation, packing added inflation load into reserves at the half-year earnings season, while adamantly swearing of all sign that current claims inflation might be rivalling top-line gains.

In just the latest swathe of reporting firms,  Beazley,  Hiscox and  Markel stepped forward amongst the top names building up the bulwark against rising loss cost trends.

“Look, the storm is coming,”  Markel's co-CEO Tom Gayner said during his company’s Q2 earnings call. His message to his team: “Make sure we get out ahead of it, rather than to try to catch up with it after the storm is already there.”

Those storm clouds now appear “six percent plus” in terms of trend and, after forcing more into reserves earlier in the year, are now notably altering how  Markel is managing prior-year accident reserves, particularly in inflation-susceptible longer-tail general liability, officials admitted.

Hiscox, in turn, openly announced another $55 million in inflation load into its reserves when it released Q2 financial results, citing the need to stay well ahead of possible inflation surprises.

“As we came into this year, whatever our inflation assumptions were, we doubled and in many lines quadrupled,”  Hiscox CEO Aki Hussain told his investors at the Q2 call. Inflation isn’t “new news,” Hussain admitted, but  Hiscox feels the need “to front run things, to put this in the rear-view mirror.”

Officials at  Beazley declined to name numbers, but didn’t argue away one analyst’s back-of-the-envelope estimate of some $70 million in new inflation loading.

“We have increased our reserves this year for excess inflation, both social and economic because our expectation for both level and persistence of inflation have increased,”  Beazley CEO Adrian Cox told his company’s Q2 earnings call.  Cox claimed his company has been hawkish social inflation since 2016 and began padding reserves for economic inflation in early 2021.

Precautionary actions may take accolades, providing “further reassurance that the London Market companies are now in a very strong position to withstand inflationary pressures while still generating strong margins,” analysts at the Berenberg equity brokerage told clients of the latest developments.

But admitting to inflation precautions is clearly not the same as admitting to inflation.

Q2 earnings calls show CEOs and CFOs who admit to inflation fears or precautions are under clear pressure to swear off any and all palpable inflation impact. Analysts press repeatedly during Q&A sessions to feel out the risk of further impending provisioning. In response, corporate executives have a rehearsed singular chorus:  we are way ahead of the curve.

“This is not what we are seeing today, but a forward-looking view to what could happen,”  Hiscox CEO Hussain insisted, building hopes that 2022 inflation fears are only an earnings delay, not an earning eater:  today’s “over-conservatism” could yet fuel tomorrow’s reserve releases.

“If it doesn't happen, you’ll see reserve releases,” Hussain said. “If it does happen, we are well protected.” As of today, rates and underlying asset valuations have current inflation beaten, CFO Joanne Musselle insisted.

Likewise at  Markel. "We haven't really seen current accident year misbehaving," co-CEO Richard Whitt said.

Arguably the first big mover of the Q2 2022 earning season came from across the pond. US P&C insurer Chubb made arguably the season’s first big headline splash with word it had upped its call for loss cost trend, an announcement even appeared to overshadow the group’s outperformance vis-à-vis consensus forecasts.

Chubb thus increased their loss cost call in North America to 6.5% in anticipation of rising costs. Greenberg speaks to short-tail loss trend up half a tick to 7%, long-tail excluding workers comp up half a tick to 6.5% and first-dollar workers comp somewhere between 4 and 4.5%.

CEO Evan Greenberg set the season’s tone for response as well, assuring repeatedly his comments are pure outlook, not catch-up accounting.  “The actual trends we are observing at this time are lower,” Greenberg told his company’s Q2 earnings call in late July.

“While the level of rate increases is moderating, the vast majority of our portfolio is achieving favourable risk adjusted returns and additional rate is therefore required primarily to keep pace with loss costs, which are hardly benign,” he said.

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