BofA initiates coverage of London Market insurers, Lancashire named 'top pick'

Bank of America has initiated coverage of London Market insurers, naming Lancashire its top pick with a ‘buy’ recommendation.

The bank said: “Out of our European insurance coverage, we believe London Market names offer the greatest gearing to the commercial (re)insurance pricing cycle. We estimate the sub-sector can deliver top-line growth of 13% CAGR over 2019-2023.

“We expect London Market combined operating ratios to improve 11 percentage points over this period, to 85%, supported by favouring pricing dynamics and improving operating leverage. We forecast earnings per share CAGR of 29% over 2019-2023, and we expected return on equity to reach 16% by 2023, which would be the highest since 2016. The compares favourably to reinsurance peers expected to deliver 12% by 2023.”

It has a ‘buy’ rating on Beazley, and is ‘neutral’ on Hiscox. It highlighted Lancashire as its top pick “as we believe now is the right time to buy into the hardening commercial (re)insurance pricing cycle through the stock.”

BofA conceded that 2020 had been a “painful” period for the sector, but was optimistic the worst was now over.

“Despite suffering outsized losses from Covid in 2020, which also largely consumer the sub-sector’s 15-20% equity raises, we believe risks are finally fading,” it said. “We expect limited Covid impacts in 2021.”

It added: “We have increased conviction that the commercial pricing cycle will outlast the reinsurance cycle. We believe underlying profitability has been weaker in commercial lines, with existing players continuing to reduce capacity and raise prices.

“On the other hand, reinsurance price rises will likely be dampened by capital inflows, a few that is reflected across our London Market and European reinsurance coverage.”

It is targeting 880.0p for Lancashire, suggesting a 34% total return potential; 410p for Beazley, suggesting 30% total return potential; and 920p for Hiscox, suggesting 15% total return potential.

As at 1345 GMT, Lancashire was ahead 5% at 694.5p, Beazley was up 4% at 340.0p, while Hiscox was nearly 3% stronger at 845.2p.