A new note from Goldman Sachs around P&C insurance reports that reinsurance capacity is strained with rates potentially up by over 50% for US cat.
The note arises from conversations the financial giant had with property and casualty insurers, that the firm said were ‘most optimistic’ with the current environment favourable despite the macro uncertainty.
However, Goldman Sachs analyst team said that it had been told that new capital has not shown up to help with a restrained reinsurance renewal.
Goldman Sachs wrote: “This capacity strain sounds likely to push conversations into January with some primaries potentially facing decisions about retaining more risk.
“While our takeaway is that the earnings impact for the primaries we spoke with sounds manageable, it’s still unclear how investors will react to the potentially increased volatility. On the flip side, both WRB and HIG pointed out that more adequate pricing is also an opportunity for their respective reinsurance businesses with WRB potentially having an opportunity to deploy more capital this year.”
Elswhere, Goldman Sachs wrote: “Reinsurance pricing continues to be an important topic with commentary suggesting 50%+ property cat price increases in the US are a real possibility with the potential that year end renewals don’t get resolved until well into January. While the primaries we spoke with suggested this is a manageable headwind that can be priced for over time, we think the strain on capacity could push some insurers to retain more risk potentially increasing earnings but adding volatility.”
The analysts also suggested that rate increases for catastrophe reinsurance renewals elsewhere, including Europe, could still be some of the most significant seen for years.
Other themes within P&C, said Goldman Sachs, are that net investment income is a strong tailwind, while more business is spilling over into excess and surplus lines.
Around the former, Goldman Sachs said: “WRB, HIG and ALL commented further on new money yields and how they compare to roll-off yields. For WRB and ALL in particular, duration has actually been meaningfully reduced which should allow for the turnover of the portfolio and earn in of higher yields to occur more quickly. Despite this strong tailwind from net investment income, all the underwriters suggested that they are not prepared to allow erosion to the underwriting results just because net investment income is coming in stronger. We see this potentially allowing for a couple years of very strong ROEs from the commercial underwriters in particular.”
The same firms, wrote Goldman Sachs, commented on the excess and surplus lines.
Goldman Sachs wrote: “They all mentioned the potential for more business to be written out of E&S markets as freedom of rate and form will be of increased importance. WRB was the most vocal on this and is the best positioned in our view to capitalize on the opportunity. While HIG is more of a standard lines underwriter, the management team also seamed optimistic on growth opportunities for the Navigators specialty business. While it’s not clear exactly how strained reinsurance capacity will impact property spill over into E&S markets, we felt at a minimum it’s likely to see E&S continue to outgrow standard lines business in 2023.”
The firm also pointed to auto insurance rate taking off next year, alluding to a conversation with Allstate.
Goldman Sachs wrote: “Allstate discussed its approach to rate taking in the auto business and expressed a high degree of confidence in restoring the margins of the business. However, it was also mentioned that the company intends on continuing to take rate well into 2023 and prefers to risk overshooting rather than betting on severity trends subsiding. While we view this commitment to profitability favourably, we note that a greater inflection point may still take some time as the severity pressures go beyond just used car prices which have begun to decline more meaningfully.”
