The constituents of Aon’s Reinsurance Aggregate (ARA), who collectively underwrite more than 50% of the world’s life and non-life reinsurance premiums, reported strong growth in P&C premiums in 2022, driven by higher pricing and strong demand for risk transfer in a volatile operating environment.
According to Aon Catastrophe Insight data, 2022 was the fifth most costly year for global insured losses from nat cat events, behind 2017, 2011, 2021 and 2005.
Aon states that the estimated total of $142bn in 2022 was dominated by Hurricane Ian, which was included at $52.5bn. Further, the year also featured an unusual amount of volatility in the capital markets, while geopolitical risk and fears of recession drove poor stock market performance.
Despite this backdrop of volatility, the ARA reported that P&C gross premiums written (GPW) rose by 9% to $272bn in 2022, split insurance $135bn (+11%) and reinsurance $137bn (+7%).
Meanwhile, P&C net premiums earned (NPE) rose by 11% to $212bn and underwriting profit of $8bn represented a marginally improved net combined ratio of 96.2%.
Aon suggests that, “Underwriting results were generally resilient, reflecting the benefit of compounding rate increases and lower exposure to NatCat event frequency.”
However, total investment returns in 2022 were badly affected by the decline in asset values.
The total investment return reported in pre-tax results fell by 61% to $12.3bn, representing a yield of only 1.5%, driven by $11.1bn of unrealised losses. This led to a net income fall of 56% to $9.6bn, representing a return on equity of 5.2%.
Including a further $37bn of unrealised losses reported outside headline earnings, the total comprehensive loss was $31.8bn, representing a return on equity of minus 14.7%.
Aon notes that on a like-for-like basis, the ARA’s total capital declined by 16% to $214 billion in 2022.
Sherif Zakhary, CEO of Aon’s Strategy and Technology Group (STG), said, “While capital is a complex issue and businesses are not affected equally, it is more about how you tell your risk/reward story and your access to capital focusing on delivering a stable outlook rather than on an episodic one which is dictated by whatever cycle we’re currently in.”
As for the outlook this year, Aon writes, “The six-year period from 2017 to 2022 was challenging for earnings. Over this timeframe, the ARA reported an average net combined ratio of 100.3% and an average return on equity of 5.9%, which was only around two-thirds of the average cost of equity.
“Investors, and in some cases rating agencies, are demanding improved results and this is a major driver of current underwriting discipline.
“Renewals so far in 2023 appear to be delivering on the expectation of better future returns, with higher interest rates also offering a potential tailwind.”
Aon anticipates depleted shareholders’ equity to be restored over time, via higher retained earnings and the ‘pull-to-par’ effect of bonds approaching maturity.
The firm continues, “In the meantime, capital adequacy generally remains strong under risk-based regulatory and rating agency capital models. Recent inflows of new capital have been modest, but may increase as earnings delivery is confirmed.
“As always, the main downside risks are extreme loss activity and unexpected macroeconomic volatility. Geopolitical developments are being closely monitored and reserve adequacy may be threatened by any broadening need to revise long-term inflation assumptions.
“Aon will continue to closely monitor the financial performance of the reinsurance sector. However, the introduction of IFRS 17 from 2023 is likely to present considerable challenges in producing global peer studies like the ARA, given that the new regime diverges significantly from U.S. GAAP.”
The 19 companies included in the ARA are Arch, AXIS, Beazley, Everest Re, Fairfax, Hannover Re, Hiscox, Lancashire, Mapfre, Markel, Munich Re, PartnerRe, QBE, Qatar Insurance, RenRe, SCOR, Swiss Re, SiriusPoint and W.R. Berkley.
