Analysts from Peel Hunt say that market conditions within the specialty reinsurance and insurance sector remain favourable.
The firm said that inflation is being comfortably covered by rate increases, feeding through to an improvement in underlying margins. It said that while there would be a slowing in growth over 2022, this should kick up against following US renewals in June and July. Premium growth, it said, would likely slow on an organic basis.
“As such,” Peel Hunt wrote, “we expect 2022 to be another year of modest exposure growth with headline premium income driven largely by rate rises.”
It added: “Claims volatility remains high after an active 1Q. Property catastrophe losses were, however, broadly in line with budgets albeit the Ukraine/Russia conflict had a material impact in the London Market. As such, the start of the year has not been as benign as hoped, with the US hurricane season looming ahead.”
There was a ‘welcome tailwind’, said Peel Hunt, with rising interest rates. It said that reinsurers are short duration and investment income will deliver a welcome boost as bond portfolios are reinvested going into next year. Peel Hunt said ROEs should go up up to 10% by the end of the year, up from 7% in 2021. 2023 said sector ROEs should go to 14% next year.
Peel Hunt added: “The specialty (re)insurance sector is down 7% YTD in a weak market but has performed well on a relative basis since the start of the year. The Lloyd’s insurers (-9%) are underperforming, followed by Europeans (-9%), but the Bermudians (-4%) are holding up better. The sector has de-rated despite the fact that the outlook for underlying margins has improved on the back of four years of broad-based rate rises across specialty (re)insurance classes.”
Overall, Peel Hunt said it was positive on the long-term outlook for the sector.
It concluded: “Whilst earnings volatility is elevated due to the rising frequency of Nat. Cat. & large man-made losses, we believe underlying margin improvements together with rising interest rates will support better risk-adjusted returns in the next few years.”
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