Goldman Sachs analysts have published a cautious outlook for the U.S. property & casualty insurance sector for 2014. The analysts say that momentum is slowing which, with catastrophe losses low and reserves high, shows a narrowing window for outperformance.
Of course the market conditions for U.S. P&C insurers will greatly affect the prospects for property catastrophe reinsurers in the year ahead. With primary insurers expecting rate rises to moderate, the ability of reinsurers to keep any pressure on reinsurance prices looks a tough ask.
Goldman Sachs’ analysts, led by Michael Nannizzi, said that they expect business and pricing conditions in reinsurance will continue to deteriorate in 2014, citing both new and incumbent capital seeking new business to write as well as insurers continuing the recent trend of increasing retentions.
The analysts acknowledge that while the outlook is deteriorating for primary insurers, it is reinsurers who face the most prominent challenge to their business models. Continuing increases in capital supply, with third-party capital a major factor, combined with lower demand for coverage from primary insurers, will continue to squeeze traditional reinsurers ability to write business.
The Goldman Sachs analysts take a long-term view when it comes to the impact of alternative capital on reinsurers, saying that they see it as having a structural impact on reinsurance capital in the market.
Looking ahead for reinsurers the picture does not look much better. The Goldman Sachs analysts said that slowing pricing momentum, low catastrophe losses and strong reserves equates to an unsustainable situation which will see primary insurers coming under more earnings pressure. This will have a knock on effect for reinsurers, possibly leading to even less demand for reinsurance covers from primary writers.
Declining margins among primary insurers, with a continued low catastrophe loss environment, would also make any reinsurance rate rises very difficult for reinsurers to push through.
If demand for reinsurance drops further the traditional players, which have already lost a chunk of their core business to alternative capital and ILS, may find the pressure too much to bear, particularly those where expenses result in a higher cost-of-capital.
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