Strong Underwriting Results Aside, Reinsurers Face Potential Headwinds

Reinsurers continued to turn in strong underwriting results during the first quarter of 2022, though they are running into headwinds affecting their overall results, according to two new reports.

While the global reinsurance sector successfully absorbed significant volatility over the past 5 years, in some cases, various factors are limiting reinsurers' appetites for underwriting property catastrophe reinsurance, according to a report from Aon.

In its most recent Aon's Reinsurance Aggregate (ARA) report (May 2022), Aon notes that the reinsurance sector kept its capital base and ratings largely intact, despite the recent volatility. "However, in some cases, consequent earnings pressure, coupled with ongoing uncertainties around the impact of climate change, are now constraining appetites for underwriting property catastrophe reinsurance business," the report says.

Reinsurers are also facing a more difficult economic environment, Aon says, with the combination of interest rate increases intended to counter inflation, the lingering effects of the COVID-19 pandemic, and Russia's invasion of Ukraine.

"These circumstances have the potential to affect appetites for casualty and specialty reinsurance as well," Aon says. "These macroeconomic factors were evident in the results of the ARA constituents reporting on the first quarter of 2022."

Aon says the underwriting performance of the 22 reinsurers tracked in its study—representing 50 percent of the world's life and non-life reinsurance premiums—was strong during the first quarter, with an average combined ratio of 92.8 percent. But unrealized losses on bonds and weak stock markets had an impact on investment returns, affecting both returns on equity and the reinsurers' reported book values.

Gallagher Re offers similar views in its Global (Re)insurers' Q1 2022 Financial Results report (May 31, 2022). The companies it tracked saw 11 percent premium growth during this year's first quarter, Gallagher Re says. Meanwhile, underwriting results were strong, with the group posting a combined ratio of 94 percent, an improvement from 96 percent during the same period in 2021.

The improved underwriting results were the result of favorable rates and lower natural catastrophe losses than during 2021's first quarter, the intermediary says.

Still, equity market declines contributed to a drop in the group's average return on equity to 9 percent from 14 percent during the first quarter of 2021, according to Gallagher Re. And, despite their favorable operating results, the group's shareholders equity also saw significant declines resulting from higher interest rates causing a drop in the value of the companies' bond portfolios and equity holdings.

Gallagher Re's report said the strongest increases in premium growth during the first quarter came from global reinsurers with 20 percent growth and North American and Bermudian (re)insurers with 13 percent premium growth.

"Continued favorable pricing for commercial lines and reinsurance business remained key drivers of premium growth in the quarter," the Gallagher Re report says. "Global reinsurers commented on improved risk-adjusted pricing at January 1, albeit with significant variation by line of business and by region. Certain commercial writers reported double-digit premium growth and commented that rate increases continue to exceed claims inflation."

Gallagher Re notes, however, that increases in economic uncertainty and expectations that it will continue have increased uncertainty around the ultimate losses that will be incurred to settle claims.

"These factors, as well as the impact of the sustained low interest rate environment on net investment income, have driven the higher rates," the Gallagher Re report says. "Companies are achieving rate on rate increases in many cases for the fourth consecutive year."

Gallagher Re says management teams at some companies have indicated that they are carefully monitoring pricing and claims inflation trends and will adjust premium growth as needed to support profitability.

Gallagher Re says that while it wasn't a significant factor in (re)insurers' first-quarter result, some have established reserves for claims exposures related to the Russia-Ukraine war.

In addition, one of the biggest challenges for the companies over the next 3 years will be continued increases in social inflation due to its impact on loss costs and loss ratio trends, especially in more liability exposed lines, Gallagher Re says.

In its report, Aon estimates that global reinsurer capital totaled $675 billion at the end of 2021, an increase of $25 billion from the end of 2020.

Most reinsurers reported profitable results for 2021, despite above-average natural catastrophe losses and the continuing effects of the COVID-19 pandemic, Aon says.

Total gross written premiums in the group of reinsurers it tracked rose 15 percent to $331 billion in 2021, Aon reports, with property-casualty premiums increasing 18 percent to $265 billion. Property-casualty 2021 gross written premium increases were driven by risk-adjusted rate increases and robust demand, Aon says, with 9 of the 22 reinsurers it tracked seeing increases of more than 20 percent.

The net property-casualty combined ratio improved to 96.2 percent in 2021, Aon says, from 103.3 percent in 2020, reflecting the reduced impact of COVID-19-related losses. The group's pre-tax underwriting profit for the year was $7.6 billion.

Aon's report notes that according to Aon Catastrophe Insight data, 2021 was the fourth most expensive year ever for insured natural catastrophe losses. Net losses among the Aon tracked group doubled year-on-year to $17.0 billion in 2021, contributing 8.4 percent to the group's overall combined ratio, Aon says. The average natural catastrophe loss ratio over the past 5 years now stands at 8.3 percent.