Q3 earnings preview: Analysts bullish on reinsurer outlook, but “lumpy” cat losses to overshadow primary carrier results

As the industry prepares to unveil third quarter earnings over the coming weeks, analysts are broadly optimistic about the prospects for reinsurers, but warned heightened catastrophe activity will cast a shadow over the performance of some primary carriers.

The Insurer TV spoke with Robert Farnam, managing director of P&C equity research at Janney Montgomery Scott, and DBRS Morningstar’s global head of insurance credit ratings Marcos Álvarez to gauge their expectations for the forthcoming Q3 results season.

Farnam and Álvarez highlighted several key trends likely to emerge during the reporting season:

  • The impact of secondary peril cat losses on primary carrier earnings
  • Continued upward pricing momentum
  • Concerns over casualty reserves and prior year development
  • Further conversations over reinsurance costs for insurers and the higher retentions they’re taking

For brokers, the analysts said the focus will be on M&A, organic growth, economic outlook and margins.

“Lumpy” cat losses

As highlighted in The Insurer’s Q3 cat loss analysis published earlier today, industry losses are expected to total more than $30bn during the quarter, with around $25bn of that stemming from events in North America.

This was largely driven by what have traditionally been considered secondary perils, with severe convective storms in the US costing insurers an estimated $16bn+ (based on Gallagher Re estimates) and wildfires in Hawaii and Canada an additional ~$5bn.

During the interview, Farnam highlighted how losses from these secondary perils are becoming more frequent and severe.

Commenting on the Canadian wildfires, Álvarez said: “At the beginning of Q3, we were estimating that wildfire insured losses would be between C$700mn and C$1.5bn. We think that's still a good range in terms of the estimated insured losses for the industry, which are manageable.”

Farnam said the distribution of cat losses among carriers will be “kind of lumpy” depending on geographic exposures, but said the impact of Q3 events would likely be offset in part by favourable reserve development.

“I think the workers’ comp favourable reserve development is the gift that keeps on giving,” said Farnam.

Good time to be a reinsurer

Reinsurers are anticipated to perform well in the third quarter following continued positive rate momentum.

Recent improvements to terms and conditions, notably steps taken by reinsurers to raise attachment points, are expected to see them avoid the bulk of the quarter’s catastrophe activity.

“I think one of the benefits to being a reinsurance company these days is you have been getting strong rate increases, and the primary companies have been taking more of the risk on themselves, so you're benefiting from less risk and more price, which sounds like a pretty good combination for reinsurance companies,” said Farnam.

“After the 1.7 renewals, you don't have a huge amount of volume coming through, but I still think that by year-end, the reinsurance companies are still going to be telling a positive story,” he added.

Farnam said the 1 January 2024 renewals were likely to be more orderly than those at the start of this year.

“Reinsurance companies are still going to be able to generate positive pricing increases at 1.1. In fact, I think it's going to probably be a better situation for everybody than it was this prior 1.1,” said Farnam.

According to Morningstar’s Álvarez, capital supply is on the rebound, with demand remaining robust.

“But the reinsurance market is probably driving the performance, to some degree, of primary insurers around the world,” said Álvarez.

He said primary carriers were adapting to the new landscape of increased retentions at a time of elevated secondary peril losses.

Álvarez said these tougher reinsurance market conditions will continue “in the short to medium term”, sharply testing insurers’ risk management capabilities.

Inflationary pressures

Both Álvarez and Farnam expect some moderation in inflationary pressures over the coming quarters.

Farnam said inflation will “slowly but surely” slow down.

“I looked specifically at the areas where the insurance companies are exposed, and you're talking about auto parts, you're talking about construction materials. Those seem to have been coming down off their peaks this past year or so,” said Farnam.

Farnam said rising interest rates had potential upside for investment returns, with no unexpected stress on reinsurers’ liquidity.

“I'm curious to see how investment income performs,” he said.

“When you talk to management teams, they're pretty excited about investment income and where it's going to be going over the next few years.

“They may still come out stronger than we were expecting. I think the new money rates versus what's expiring is going to be generating more investment income. I'm hoping that's going to be the case. You can start seeing companies more profitable in that sense,” he said.

Watch the 13-minute video interviews with Robert Farnam, managing director of P&C equity research at Janney Montgomery Scott, and DBRS Morningstar’s global head of insurance credit ratings Marcos Álvarez for more on Q3 expectations, including what companies are expected to stand out.