JPMorgan upgrades Beazley and Hiscox, downgrades Lancashire

(Sharecast News) - JPMorgan Cazenove upgraded Hiscox and Beazley to 'overweight' from 'neutral' on Tuesday, but downgraded Lancashire Holdings to 'neutral' from 'overweight' as it took a look at Lloyd's of London insurers.
JPM said the Lloyd's sub-sector was one of the best performing sub-sectors in European insurance between 2008 and 2017, delivering strong performance supported by consistent growth, uncorrelated underwriting earnings, benign natural catastrophes, M&A premium and disciplined capital management.

"However following 2017, the performance of the Lloyd's insurers derailed due to consecutive years of heavy catastrophe losses, casualty-related reserving concerns and the impact of Covid-19 impact."

As a result, the sector has de-rated from trading at an average 2.4x P/TNAV in 2017 to 1.6x currently.

"Going forward, there remains some uncertainties around casualty and cyber risks in particular, but we believe that management teams are taking steps to address them through price increases, higher initial loss picks and portfolio actions which we believe could help normalize combined ratios while maintaining healthy growth," JPM said.

"Consequently we are upgrading Beazley and Hiscox to overweight and downgrading Lancashire to neutral." JPM upped its price target on Beazley to 452p from 425p and on Hiscox to 1,016p from 885p. Lancashire's price target was cut to 725p from 860p.

As far as Beazley is concerned, JPM said key uncertainties around cyber risks continue but it reckons management is able to drive strong rate increases in cyber as well as other loss-affected lines such as D&O, Specialty lines etc.

"This supports an attractive premium growth circa 11% per annum over FY21-23E," it said. "The shares are now trading at 1.5x P/TNAV and compare with a pre-Covid multiple of 2.6x which in our view offers an attractive entry point to a well-balanced business from a mid-to-longer term perspective."

JPM said that for Hiscox, similar to Beazley, there are also near-term uncertainties, especially in its US casualty exposure.

"As a result of adverse casualty trends, the recovery of both combined ratio and growth in the Retail business may take some time. However management is taking active steps through portfolio pruning, reinsurance, conservative initial loss picks which help prevent negative surprises in the future. With shares trading at 1.8x P/TNAV versus peak of around 3x pre-profit warning in 2019, we believe that current valuations offer reasonable discount to take on the uncertainties."

JPM said that while Lancashire is not facing any material risk around casualty, it is more exposed to climate change risks through higher cat losses as well as competition from third-party capital in the reinsurance business.

"Given the current strong pricing momentum in cat-exposed lines, Lancashire is well positioned to take opportunity of current market conditions and grow faster than expected. However we remain cautious on the mid-to-longer term prospects due to uncertainties from climate change and potential pricing slowdown from 2022 onwards."