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Despite further losses, the ARA’s CR strengthened in Q3: Aon

13th January 2021 - Author: Luke Gallin

In an improvement from the end of the second-quarter, Aon’s Reinsurance Aggregate (ARA) reported a net combined ratio of 102.9% for the first nine months of 2020, amid losses from both the COVID-19 pandemic and natural catastrophe events.

growth chartWhen compared with the end of Q2, the ARA’s reported net combined ratio strengthened by 1.1 percentage points.

It’s worth noting that typically, the ARA examines the performance of 23 leading reinsurers that are tracked by insurance and reinsurance broker Aon. However, for 9M 2020, just eighteen constituents of the ARA reported results.

According to Aon, losses relating to the pandemic contributed 7.9 percentage points to the combined ratio, while losses from natural catastrophe events contributed 4.7 percentage points.

Throughout both the second and third quarter of the year, reinsurers continued to report losses related to the pandemic.

Data collected by Zurich-based financial services advisory, PeriStrat LLC, shows that as of December 2020, publicly reported COVID-19 pandemic-related losses, IBNR reserves and estimates from insurance and reinsurance companies stood at USD 29.53 billion. And, it’s expected that this will figure will rise further in the coming weeks as re/insurers report their Q4 and full-year 2020 financial results.

As well as the pandemic, reinsurers were faced with a record-breaking Atlantic hurricane season, which included a huge 30 storm formations and a record-setting 12 landfalls. But it wasn’t just the wind and rain that caused damages in 2020, as the fifth warmest year on record contributed to the most active wildfire year ever in the U.S.

While elevated losses dented the performance of property catastrophe players, in life and health reinsurance, technical results were challenged by an additional USD 1.4 billion of losses related to the coronavirus, reports Aon.

Furthermore, investment returns were lower across the board amid the lower for longer interest rate environment which was exacerbated by COVID-19-related financial market volatility and uncertainty.

Overall, Aon reports that eight reinsurers within the ARA reported overall losses, as net income, in the aggregate, reached USD 2.6 billion.

Across the cohort of reinsurers that reported, total equity remained unchanged in U.S. dollar terms. However, Aon does add that 10 firms reported reductions in original reporting currencies.

Turning to valuation, and Aon’s data shows that the ARA ended 2020 trading at a trailing price-to-book ratio of roughly 1.1x.

As the reinsurance market continues to firm on the back of elevated losses and a renewed focus on underwriting profitability to offset dwindling returns on the asset side of the balance sheet, companies appear optimistic and confident of improved results in the year ahead.

Although the January 1st, 2021 reinsurance renewals have been described as adequate yet somewhat of a disappointment, there’s an expectation that more pronounced rate movements will be seen at the April, June and July renewals, when much of the loss-hit business is up for renewal.

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