Morgan Stanley downgrades Hiscox, upgrades Lancashire

As part of its review of European insurance, Hiscox was cut from 'overweight' to 'equal weight' (price target reduced from 1,387p to 1,233p) and Lancashire was moved from 'underweight' to 'equal weight' (price target increased from 627p to 692p).

European insurance stocks are trading at 9x earnings – a 24% discount to the broader stock market, compared with the 15-year average discount of 29%. "Given the cash flow profile (7.5% capital return yield), strong Solvency capital (229% S2 ratio) and rising interest rates benefits, we believe there is further upside for the sector and thus we maintain our Attractive view going into year end."

Nevertheless, on Hiscox, Morgan Stanley said its previous positive rating centred around the company's "diversified growth profile, which provided more stable earnings than peers as well as improved underwriting following corrective actions in Retail and London Market."

The stock has now outperformed Lloyds of London peers Beazley and Lancashire by 11% and 5% so far this year, respectively. "Following the 1H23 results we move down to 'equal weight' as we see less visibility on improving growth and underwriting from here," the bank said.

In regards to Lancashire, the stock has underperformed European insurance peers by 15%, despite delivering higher top-line growth and better pricing conditions than others. The bank pointed out that shares now trading at just 5.3x forward earnings "which we view as attractive".

By 1133 BST, Hiscox shares were down 0.2% at 993.5p while Lancashire was up 2.9% at 587.47p.