Jefferies positive on Lloyd’s pricing environment

Jefferies has offered its view on Lloyd’s, saying that the pricing environment remains positive, despite ‘benign’ catastrophe losses.

According to the firm, capacity withdrawals (including ILS capital) have continued to support pricing, particularly catastrophe exposed lines, as well as to improve terms and conditions for insurers.

It added: “In addition, pricing has improved for lines of business that have been impacted both directly and indirectly from the conflict. For example, we expect rising energy prices to be a tailwind for energy lines, in particular benefiting Lancashire, which has the highest exposure to this class amongst our coverage universe.”

The firm also said that it expected to see benign catastrophe losses, saying that US activity was lower than average in the first half of the year, despite the number of worldwide weather-related losses in the period.

It added: “Given that the main exposure for Beazley, Hiscox, and Lancashire is in the US, we expect these names to report better-than-average catastrophe losses in H1. We make a slight adjustment to our combined ratio estimates in 2022F to reflect this, reducing the overall combined ratios by -0.6%pts for Beazley, -0.4% for Hiscox, and -2.0% for Lancashire.”

Rising yields, said Jefferies, are to deliver a short-term headwind that will turn long in the longer term.

It wrote: “With US 2-yr Treasury yields rising a further 87bps in Q2, and credit spreads also widening, we expect this to have a significant impact on insurers’ financials in 2022 and beyond. Rising yields result in unrealised losses on the fixed income assets held by insurers; however, this impact is non-economic assuming that they are held to maturity. Ultimately, we expect rising yields to be a long-term tailwind to the earnings for Beazley, Lancashire, and Hiscox which invest the majority of their portfolios in fixed income.”

Looking towards the future, Jefferies said that it was ‘too early to land on aviation losses’, saying it did not expect insurers to be required to disclose an explicit reserve for losses at this point.

“In addition,” it added, “we believe that the range of potential loss outcomes and varying terms and conditions across policies will make it difficult for auditors to apply read-across or enforce the recognition of an explicit aviation war loss reserve.”