In a recent report, Goldman Sachs offers an optimistic outlook for the insurance industry’s third-quarter earnings, particularly favouring reinsurance and auto insurers.
The analysis suggests that property catastrophe reinsurers are poised for a robust quarter, driven by strong earnings and favourable pricing trends.
Goldman Sachs anticipates that property catastrophe reinsurers will deliver impressive earnings results for the third quarter of 2023.
The report highlights a supply of capital that is slowly recovering, while the demand for reinsurance is significantly outpacing it.
This dynamic is expected to result in stronger-than-normal returns for reinsurance companies, ultimately benefiting their Book Value Per Share (BVPS) compounding.
The report identifies reinsurers and property catastrophe-exposed primary insurers as relative winners for the third quarter.
A notable absence of major storms in the period has led to an upward revision of earnings estimates by an impressive 37% for Goldman Sachs’ Property and Casualty (P&C) coverage group.
However, the report also raises concerns about potential overhang on sentiment due to exceptionally strong results, which could lead to questions about returning capital to the sector and increased competition.
Despite the potential influx of capital into the reinsurance market, the report does not foresee a “diminishing return” scenario for two key reasons.
Firstly, discipline in underwriting is expected to persist in the near term, as these companies work to restore their Book Values and earnings over multiple quarters.
Secondly, the market still grapples with a significant supply-demand imbalance, with reinsurers having a clearer understanding of expectations regarding terms and conditions.
Goldman Sachs acknowledges that the third quarter typically witnesses various seasonal factors that can influence underlying results.
These include lower property renewals in the third quarter, potential skewing of pricing and Net Premium Written (NPW) metrics for companies with substantial exposure to commercial property lines.
Additionally, capital influx into the reinsurance market, notably through catastrophe bonds, tends to slow as market participants adopt a “wait and see” approach during hurricane seasons.
Lastly, the third quarter features seasonally significant renewals for crop and agricultural lines, which is particularly significant for some insurers.
