The latest edition of Aon’s Reinsurance Aggregate (ARA) reveals that gross and net property and casualty (P&C) re/insurance premiums, as well as underwriting profit, increased for the group of re/insurers in the broker’s universe in H1 2022. However, a dramatic fall in net income in the period, coupled with the impacts of hurricane Ian, suggests 2022 “seems destined to be another poor year for reinsurer earnings.”
Aon’s latest ARA report includes the performance of 21 companies through the first-half of 2022, a period which the global insurance and reinsurance broker says was notable for an unusual amount of volatility in the capital markets.
Specifically, Aon highlights that the pandemic-related inflationary spike of 2021 was exacerbated by Russia’s ongoing invasion of Ukraine, leading to aggressive interest rate hikes and ultimately fears of a recession.
While the adjustment to higher interest rates will, of course, eventually result in higher investment returns for reinsurers, the short-term impacts have been a challenge. In fact, the total investment return reported through the income statements of the ARA was a loss of $1.6 billion in H1 2022, against a gain of $17.5 billion in H1 2021.
“For U.S, stock markets,” notes Aon, “it was the worst start to a year in more than half a century.”
But while investment returns dwindled, the underwriting result improved for many during H1 2022 on the back of higher rates in certain lines and solid premium growth.
All in all, gross and net P&C premiums increased by 10% to $149 billion and $106 billion, respectively, year-on-year, and would have been even stronger at constant exchange rates.
In terms of P&C underwriting profit, this reached $7.4 billion for the ARA in H1 2022, reflecting growth of 22% on the prior year period. In fact, of the 21 firms, large European reinsurer SCOR was the only one to post an underwriting loss in the six month period.
The improved underwriting performance led to a combined ratio of 93%, which is slightly stronger than the 93.7% reported a year earlier.
Nevertheless, the severe hit on the asset side of the balance sheet meant that overall, the ARA’s reported net income declined from $14 billion in H1 2021, to just $1.3 billion in H1 2022.
At the same time, total equity fell by $39 billion to $171 billion as at the end of June 2022, which Aon says is a reflection of the additional impact of $30 billion of unrealised losses on bonds, booked with other comprehensive income.
The report also shows that total capital reported by the ARA firms declined from $271 billion at the end of December 2021, to $230 billion at the end of June 2022, which partly reflects the strengthening of the US dollar relative to the Euro.
“The long-awaited adjustment to higher interest rates will ultimately boost reinsurers’ profitability through higher investment returns, but the speed of the change is having a significant short-term impact on asset values,” said Mike Van Slooten, Head of Business Intelligence for Reinsurance Solutions.
“In addition, high inflation is creating uncertainty around future and legacy loss costs, which may need to be addressed through higher pricing and/or additions to prior year reserves. In publishing the ARA, we try to include data and analyses that could help re/insurers to navigate potential market volatility, maintain resilience, and make better business decisions,” he added.
On the full year outlook, Aon notes that hurricane Ian will clearly influence underwriting results in H2 2022, while rising interest rates will further pressure total investment returns and reported book values.
“Overall, 2022 seems destined to be another poor year for reinsurer earnings,” warns the broker.
