As per the BofA Securities annual reserve review, European non-life insurers remain “strongly reserved and well placed to deal with shocks, despite the impact of higher-than-expected inflation in recent years.”
Analysts at BofA Securities noted that buffers acted as an important first line of defence against unexpected inflation shocks last year, adding that overall buffers reduced YoY, though remained strong and “demonstrated the sector’s overall resilience.”
“The outlook for profitability is strong, as pricing has caught up, leading to an attractive margin outlook for non-life insurers, with additional scope to rebuild buffers. Our top non-life picks are AXA, Beazley and Hiscox,” BofA Securities said.
The firm continued, “Our analysis of reserve disclosures shows that the impact of higher-than-expected inflation has had a small, but manageable impact on overall reserve strength. Average buffers fell to 7% of non-life claims reserves (from 9%), impacted by higher inflation and post-COVID normalisation.
“We estimate the greatest reserve strength at Lancashire (19.0%), Hannover Re (9.9%) and Munich Re (9.6%). We see more modest buffers at Swiss Re (1.8%) and SCOR (3.3%), which explains strengthening over the year.”
BofA Securities also observed that combined ratios deteriorated in 2022 as higher-than-expected claims inflation eroded insurers’ underwriting margins. However, according to the analysts, there was a decent recovery over 2023 as the sector reacted with higher pricing.
This has allowed a number of companies to rebuild reserve strength through more conservative current-year loss picks, BofA Securities explained.
The firm continued, “The profitability outlook for 2024 is strong, and we expect combined ratios to improve further.
“We expect this to be driven by meaningful improvement in reinsurance margins after significant reserve building in 2023 and further improvement in primary margins from the hard personal lines market. We see a more stable outlook for commercial lines given moderating price increases.”
The firm concluded, “Our BofA economists expect economic inflation to continue to moderate over 2024, which is reassuring for the outlook for non-life insurers’ claims reserves. We continue to monitor how stickier inflation from wages and medical costs might impact longer-tail assumptions.
“The biggest driver of inflation in liability lines remains social inflation, which has reaccelerated post-COVID and remains a key concern.
“This led most insurers to strengthen reserves over 2022. We think this likely continued in 2023 and see this as an ongoing risk in 2024, particularly given the slowdown in liability pricing.”
