Insurance Sector Outlook

A growing segment of HSBC UK Financial Institutions team’s focus is on the P&C (Property and Casualty) industry, with a particular emphasis on insurance and reinsurance underwriters - including Lloyd’s of London (“Lloyd’s”) - Legacy and insurance distribution. All three sub sectors have seen growth in recent years and the outlook remains positive, albeit with headwinds to contend with.

Regarding underwriters, the global (re)insurance market has seen very significant premium rises providing pricing conditions that some market participants may describe as the best in a generation. There are various reasons cited for this including: a more disciplined market approach to underwriting, following a pronounced multi-year softening of prices, since 2017: the frequency and severity of global natural catastrophes has been increasing; higher economic and social inflation and the emergence of new threats such as cyber resulting in exponential demand for cover.

To illustrate the increasing claims, insured losses in 2023 are expected to exceed $100bn, for the fourth consecutive year¹. It is therefore even more crucial that those underwriters providing cover have strong capital buffers and very disciplined risk selection to ensure underwriting profitability is maintained.

Recent results suggest that the market is adapting well: Lloyd’s have seen underwriting profitability improving with the Combined Ratio dropping each year from 104.5% in 2018 (excluding 2020 Covid-19 related losses) to 91.9% in 2022. Furthermore, Lloyd’s guided in their 2022 annual results presentation to a 2023 Combined Ratio of < 95%².

Turning to the legacy market, this is broadly defined as any business that has ceased taking new premiums for a class or classes of business previously written.

Driven by the increased profile and positive view of the sector, major new capital has entered the market to support both new and established consolidators. Buyer and seller demand has shown huge growth with PWC estimating that over 150 legacy deals were undertaken from 2019 - 2022. Despite the strong activity, they estimate that there are still around $960bn of legacy liabilities spread across North America, Europe, and Asia³.

With so many deals undertaken in a short space of time, there appears to be a pause in 2023 as the buyers focus on integrating what has already been acquired. This was reflected in 2023 with 20 deals completed by Q3⁴.

With Legacy now regarded as a viable option for underwriters’ capital strategies, alongside the hard live market encouraging sellers to redeploy capital to seek higher returns, the long-term growth dynamics remain.

Discipline remains key for consolidators both in terms of avoiding deals that are either a poor fit and/or pricing incorrectly and being able to successfully integrate the acquisitions to realise synergies. Moreover, consolidators’ inability to re-underwrite the acquired liabilities means the recent inflationary environment must be reflected in their pricing models.

Whilst a very different profile to underwriters, intermediaries play a key role in the overall insurance value chain. Although disintermediation has been seen in personal/commoditised lines, for the more complex P&C risks they are expected to continue to dominate the distribution of insurance.

Consolidation has been a long-term feature of the market but that has accelerated in the last decade especially in the UK. Consolidators have developed into very significant entities, often backed by Private Equity and other institutions. The cash generative profile has seen them attract interest from debt funds, the capital markets and banks leading them to operate at elevated leverage levels. This was particularly evident when interest rates were at historic lows.

Managing General Agents (MGAs) have also grown in popularity as they develop products that are attractive to capacity providers and there are few signs to indicate that the popularity will decrease.

The overall market dynamics point to a positive outlook but the debt that supported the high acquisition multiples is now having to be refinanced into significantly higher rates potentially increasing the overall cost of capital.

Recent activity by larger consolidators of overseas acquisitions suggests they may see better value in Europe and other territories. Whilst early indicators suggest such acquisitions may generally be successful currently, as ever, discipline remains key especially around entering new markets.

Generally, these sub sectors have demonstrated strong growth characteristics for several years. Management have been disciplined and exhibited a good understanding of their respective markets.

We are supporting our clients in these markets through HSBC's global network and diverse range of products and look forward to continuing that support as the markets develop.