A new note from Goldman Sachs states that all four large cap reinsurers have underperformed the sector this year, despite a hard market.
The financial giant said that this was likely attributable to the impact of higher inflation, higher weather losses, losses resulting from the Russian invasion of Ukraine, along with Covid.
It wrote: “We note Lancashire has also underperformed, and indeed been one of the worst performing stocks in the sector, we believe due to the potential of material aviation losses. In contrast, Hiscox and Beazley have been the two best-performing names in the sector, in our view due to their structural growth (US SME for Hiscox, cyber for Beazley), coupled with US dollar earnings (albeit this has not helped Lancashire), strong price increases and profitability in their core specialty markets, and limited exposure to Russia/Ukraine. In our view this shows what the sector can do when pricing starts to earn through the P&L.”
It added: “We believe Q1 has started to put some of these issues and headwinds behind the sector, with COVID mortality losses expected to decline materially post Q1; inflation, whilst remaining a concern, seemingly under control (companies already took action in Q421 and pricing assumptions reflect a more cautious view on inflation); and the range of outcomes from Ukraine/Russia losses narrowing (albeit still highly uncertain).”
Goldman Sachs drew particular attention to pressure felt by reinsurers due to weather losses in recent years.
It said: “The strength of Beazley and Hiscox year to date shows the impact when the hard market does start to come through the P&L and estimates. In our view, reinsurers need a period of benign losses or at least an average catastrophe year (in line with cat budgets) to help them re-rate, but have not yet had a relatively quiet period for nat cat.”
The firm drew particular attention to Q1 of this year, which it said was only modestly above a normal Q1 cat quarter, even if overshadowed by Russia and Ukraine. The second quarter of this year was also relatively benign, it said,
It added: “However, we believe the increasing worries around climate change should support further price increases and demand for nat cat covers, and we expect to see another strong renewals season in the mid-year, which could be an attractive environment for both margin and growth. Indeed, the Swiss Re chief underwriting officer said at our Rome conference that the nat cat market was now hard (vs hardening), and he thought climate change would be a tailwind for pricing for a number of years.”
Goldman Sachs said that reinsurance remained a safe haven in an uncertain market, particularly in the current environment.
