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Idiosyncratic risks: H1 earnings preview for the London-listed carriers

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The past 18 months haven’t been easy for the listed London market players Hiscox, Beazley and Lancashire.

They often move as a group, as is the case at present with their underperforming stock prices – Hiscox and Beazley’s share prices recently hit five-year lows compared with the STOXX Europe 600 Insurance index, while Lancashire’s share price is just 15% above its five-year low.

But the carriers can also be very different. As one sell-side analyst put it, the investment cases for the London trio carry rather “idiosyncratic” risks.

Listed carriers analysis july 20 2021

While 2021 looks to be something of a “transition year” for the three businesses, many analysts believe better things are to come.

Most of the short-tail pandemic-related pain of 2020 would seem to be in the past, and strong stock markets, despite low interest rates, are likely to improve investment returns.

Perhaps most importantly, after several years of growth, rate increases should be earning through now, giving the three carriers every opportunity to improve their margins.

Obviously, the imminent hurricane season, already proving to be lively, is a looming uncertainty. But if Hiscox, Beazley and Lancashire can manage to improve their underlying underwriting performance, that will give an indication they are heading in the right direction.

In this first-half results season – with Beazley reporting this Friday – investors will be looking for answers to several major questions.

How exposed will the London carriers be to the recent floods in Germany? Or the wildfires in the US? Are there any more Covid-19 surprises to come? Has Beazley stemmed the deterioration in cyber? And who will take the reins at Hiscox (and when)? But, in addition to these more recent and dramatic developments, there are several other issues to consider.

Improving prices

At Lancashire, price levels are back to 2012-13 levels, “a period of strong returns but not quite back at the levels seen in the early 2000s”, according to RBC Europe analyst Kamran Hussain.

In a recent note on the London carriers, he said Hiscox was hopeful price increases should lead to improved combined ratios, particularly in its London Market business, while Beazley suggested H2 2021 should see a “lower than low 90s combined ratio”.

At Hiscox, retail has seen rate increases, while the carrier has told analysts it believes rate increases will continue in its large-ticket business. The carrier is predicted to grow more slowly than its two listed Lloyd’s rivals, by about 6% over H1, in line with Q1 growth.

Hiscox’s continued focus is the retail business, where management sees the biggest opportunities in digital trading and small and micro businesses – with the company flagging the number of small businesses that have been launched in the US over the past 12 months as growth potential.

Hiscox London Market has so far been the outperformer on growth and in Q1 grew GWP by 9.3% to $303.9mn, helped by double-digit rate growth in 11 out of 17 lines. The most marked rate increases were found in casualty lines such as US public company D&O, US general liability and cyber, all of which grew by more than 20% over the period.

The first quarter also showed a 1.2% GWP contraction at Hiscox Re & ILS as part of portfolio repositioning - continuing a trend seen over 2020, where GWP in the division fell 14.2% over the full year. At the H1 2021 mark, analysts will likely be questioning whether the pruning work on the reinsurance side is now over or whether further shedding can be expected. Management has previously questioned pricing adequacy on this side of the business.

At Beazley, margins are benefiting from better-than-expected rate increases across most of its portfolio.

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Andreas Van Embden, analyst at Peel Hunt, noted that rate increases were above what the insurer budgeted for at the beginning of the year, “and rates are now adequate across 85% of the portfolio”.

He added: “We have pencilled in circa 13% rate rises across the portfolio in 2021 [estimates], up from 10% previously, which boosts our EPS estimates for 2022 [estimates] and beyond.”

Investec analyst Ben Cohen, on the question of whether Beazley would return to “underlying” growth, noted that the carrier saw 16% GWP growth in Q1, in line with rate change, which implies no growth in underlying exposure.

He added: “In some lines, concentrated in cyber and executive Risk, strong re-pricing and risk management meant that the rate increase was well in excess of top-line growth – 32% versus 19%.

“While rate increases may slow going forward, there could be greater scope to increase exposures at healthy pricing levels.”

Beazley has suggested to analysts that its combined ratio could be in the low 90s by the second half of this year.

Listed carriers analysis july 20 2021

Lancashire, meanwhile, should see this year as the ideal time to grow, although the carrier sees itself as being focused on “opportunities” rather than “growth”. Among analysts, a slowdown in “very strong” top-line growth is expected.

Indeed, it seems likely the top-line growth of 46% in Q1, boosted by big increases in catastrophe reinsurance volume, will not be maintained in H1.

Cohen estimated 22% top-line growth in Q2 and 34% growth in H1, “which is likely to compare well with peers”.

Because rate adequacy is the focus, however, rate deceleration should be of lesser concern for the insurer – indeed, for all three of them.

Cats, Covid and combined ratios

All three carriers are exposed to nat cat risk, but Q2 was fairly benign for cats and a welcome respite for the three carriers, given the hefty claims arising from winter storms over Q1.

In H1 results discussion, some analysts might hope to see early guidance on how much exposure each will have to the floods in Germany or the wildfires in the US West.

Meanwhile, claims development for Covid-19-related claims appears to be in line with expectations across the board, according to RBC’s Hossain.

“The Lloyd's insurers were somewhat overweight event cancellation/contingency claims in 2020 compared to other parts of the market, with these claims fastest to develop,” he said in a recent report.

“Third-party Covid-19-related claims appear to be developing at a slower rate than expected, although management teams did stress that these might not emerge until economies fully reopen.”

At Beazley, Q1 losses were relatively high due to material losses on winter storms, and analysts are predicting a combined ratio of around 95% for the first half and for the low 90s by year-end, once cat losses are averaged out. Investors will be keeping a weather eye on the cat budget in light of an active start to the hurricane season and higher-than-expected cat events so far this year.

Listed carriers analysis july 20 2021

Of the three carriers, Lancashire, which has a significantly shorter tail to its business mix than its rivals, is the most exposed to cat reinsurance, but, according to Investec’s Cohen, it has “shown the appetite to grow” now that margins are at attractive levels.

The carrier has focused its strategy on diversifying its book, with less capital-intensive cat exposed lines.

Cohen said: “We have taken a cautious view on H1 catastrophe losses [at Lancashire] after a $35mn-$45mn hit from Winter Storm Uri in Q1 and would hope our 90% combined ratio forecast is conservative, while noting it should be materially better than UK peers.”

Meanwhile, analysts have noted the positive long-term impact of Hiscox’s re-underwriting actions on margins, but problems remain.

These include the “lingering recessionary impacts of Covid-19”, the low interest rate environment, cyber losses, reserve actions and an active H1 for cat losses.

Notwithstanding several recent settlements, including the Hiscox Action Group and UK nightclubs, many are expecting a further impact from UK BI claims.

Analysts expect Hiscox to report a “modest” H1 underwriting loss and have forecast a combined ratio of about 95% versus 96% for the full year.

Spotlight on cyber

As a market leader in cyber with an approximate $500mn premium cyber book, the actions taken and the performance in Beazley’s cyber and executive risk division are closely scrutinised by analysts, investors and the market.

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Disclosure around the performance of cyber books is notoriously opaque and as such, the trends reported by Beazley can provide a lens on the wider market.

In H1 results, Beazley is expected to try to dampen down cyber concerns after 2020 disclosures showed a sharp increase in loss ratios, and many analysts have made positive noises about “encouraging” underwriting actions taken in this division since September 2020.

In the market-wide wrestle with ransomware a number of tactics have been deployed – including the implementation of sub-limits and co-insurance, however Beazley believes risk management and education of its clients around good cyber hygiene is the best approach – and the early results of this strategy will clearly be a focus for analysts’ questioning.

The carrier has upgraded its cyber infrastructure to improve its underwriting decisions, allowing it to receive more live information about clients and independently scan them for vulnerabilities.

It has also noted the growing barriers to entry in the cyber insurance market, given the increasing need for this type of infrastructure to assess clients’ risks.

Needless to say, progress on the performance of Beazley’s cyber book will be keenly anticipated in H1 results.

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