Conditions Are Challenging, Claims Are Elevated, but Reinsurers’ Profits Return: Reports

Despite extremely challenging conditions, with persistent and elevated claims activity, the global reinsurance segment returned an underwriting profit in 2022, according to an AM Best report.

“Reinsurers generally have realigned their risk profiles and are in a strong position to generate the underwriting profits that had been elusive for a number of years,” said the report titled “Global Reinsurers Face Challenges Even as Conditions Improve.”

These positive financial trends are continuing into 2023, with the four main European reinsurers, Hannover Re, Munich Re, SCOR and Swiss Re, all reporting very strong results with returns on capital significantly surpassing their cost of capital, said a separate report published by Fitch Ratings. “Price increases above claims inflation and better terms and conditions for property & casualty (P/C) have led to better underwriting margins on average.”

Profits improved significantly during the first half of 2023, “thanks to better pricing, lower claims, more favorable terms and conditions and a rise in investment yields,” said Robert Mazzuoli, director, Fitch Ratings, in the report, titled “European Reinsurers: 1H23 Results.”

A Different Kind of Hard Market

The AM Best report indicated the current market is one of the hardest in decades but is very different to previous hard cycles, which were triggered when a major catastrophic event would erode a significant amount of industry capital, leading to a rapid spike in rates.

In the current hard market, the path to adequate prices has taken longer than expected, said the report, explaining that “the last six years have seen a slow, protracted process of reinsurers realigning their risk profiles, reallocating capital, re-underwriting and repricing,” AM Best said.

AM Best went on to say that the need for steady rate increases was widely accepted before the January 2023 renewal season, but there was no consensus about their adequacy.

Claims patterns, inflation and rising interest rates that started in early 2022 (and hit investment results), “have caught everyone by surprise,” the report said. “Optimism stemming from steep price increases and tighter terms and conditions is counterbalanced by an uncertain environment due to underwriting, economic and geopolitical factors.”

As a result of these market trends and several years of disappointing results, reinsurers have been under pressure to generate returns that cover their cost of capital, leading companies to shift their capital from property-catastrophe risks.

AM Best said this shift has been accomplished by either moving up in the protection tower from the lower and medium layers property catastrophe risks, by tightening terms and conditions, or diversifying into lines seen to be more stable or profitable such as casualty and specialty lines and excess and surplus primary segments. The ratings agency noted that reinsurers’ work to realign their risk profiles “have largely transferred the burden of a heavy cat loss to primary writers.”

Fitch concurred that cedents have had to substantially increase their retentions and accept both reduced limits and increased attachment points. “Reinsurers largely reduced the offering of aggregate covers for high frequency natural catastrophe claims, returning to largely providing capital protection, with earnings volatility moving back to primary insurers.”

Recovery Underway

Reinsurers’ profitability started to improve and stabilize in 2021, the year that marked the start of the recovery, said AM Best. In 2022, however, higher natural catastrophe claims and concerns about inflation triggered sizable reserve strengthening by some key reinsurers. Nevertheless, AM Best’s global reinsurance composite posted a combined ratio of 95.6 in 2022, a 0.8 percentage point improvement over 2021. (Combined ratios below 100 indicate an underwriting profit).

At the same time, investment results in 2022 were severely affected by unrealized losses on fixed-income securities, which led the sector to post a return on equity of 0.8% in 2022, down significantly from a 9.0% ROE reported during 2021.

“Despite a much more cautious approach to underwriting, 2022 technical results, albeit mostly positive, were under pressure due to the unexpected severity and geographical spread of major weather events – Hurricane Ian, European winter storms, and other secondary perils such as severe convective storms in the US, hailstorms in France, and floods in Australia,” AM Best added.

Sharp Rise in Profits in 2023

Reinsurers’ profits continued their upward trajectory during the first half of 2023 as better underwriting results in P/C and life as well as significantly higher investment results have led “to a sharp rise in profits…,” according to Fitch, referring to the H1 2023 results of the four main European reinsurers.

The reported ROE in H1 2023 rose by 12.4 percentage points from H1 2022, Fitch continued. “The return on capital surpassed the cost of capital, which is 8%-10% at all four major reinsurers.”

The four reinsurers reported stable or higher returns on investments in H1 2023 compared to H1 2022, “as (un)realised investment losses weighed less on results and recurring investment income improved thanks to higher interest rates,” Fitch said.

Fitch noted that premium rate increases and rising investment income will continue to support earnings growth during the second half into 2024, “as investment returns increasingly benefit from higher reinvestment yields.”

Following the much harder market conditions seen since the start of 2023, AM Best affirmed that cautious interest in property-catastrophe risks has renewed, albeit with much tighter terms and conditions.