Berenberg says more London-market M&A on the cards as global carriers reportedly circle Hiscox

Berenberg said it is not surprised by press reports that global insurers are “circling” Lloyd’s carrier Hiscox because it believes London-based specialty (re)insurers are currently underpriced.

The note from the investment bank follows an article from Insurance Insider that says Japanese carrier Sompo and Italian group Generali are interested in buying the £3.8bn market capped Hiscox, with other “large insurance groups” potentially entering the race.

Hiscox shares jumped more than 10% on the news and Berenberg said the bid rumours “did not really come as a surprise”.

“The depressed post-Covid-19 valuations of specialist London-based (re)insurers – including peers Beazley, Lancashire and Conduit Re – always raised questions as to whether they would be potential targets,” it said.

Berenberg also believes that Hiscox is undervalued compared to London-listed peers Beazley and Lancashire, making it particularly ripe for acquisition. Berenberg said Hiscox’s valuation never recovered to pre-Covid levels despite more attractive underwriting conditions, with London market insurers’ combined rations now regularly in the 80s, and better investment opportunities.

In a separate note, Berenberg said London market insurers could be “sitting ducks” if valuations stay at historically low levels, given the sub-sector’s strong fundamentals.

And the bank clearly expects more London-market M&A as rates stabilise and potentially begin to soften, while Japanese insurers, in particular, look to expand globally.

“Historically speaking, M&A activity tends to be counter cyclical – i.e. it largely occurs in a soft market environment, where opportunities to deploy capital organically to drive growth are scarce and the capacity available to deploy is high following periods of strong profitability,” it said.

“Although we are not yet in a soft market – the market is instead largely expected to stabilise at this attractive level for longer – we cannot rule out M&A, especially given the more idiosyncratic drivers behind the firepower and willingness of Japanese insurers to expand internationally via M&A,” it added.

The Insurance Insider article says that any deal for Hiscox could depend on the potential divestment of its US operation, which brings in around $900m of premium. Berenberg said this is interesting given that the US retail business is largely seen as Hiscox group’s “crown jewel” by many investors.

“The US business will certainly carry different strategic value to different bidders. Approximately 55% of the c$900m US premiums come from Hiscox’s US Direct & Partnerships (DPD) business, while the remaining 45% are broker-driven. The broker business has experienced sluggish growth recently due to changes in Hiscox’s risk appetite, which saw it exiting larger-scale commercial lines and cyber risks in favour of working with smaller micro-SME businesses,” it said.

“The US DPD business also experienced a slowdown in growth following Covid-19 and, more recently, due to temporary-deliberate slowdown to upgrade to a new platform to enable the next phase of growth. Growth has now bounced back and is expected to be at a low-double-digit level in H1 2024,” it added.