A strong full-year 2023 of earnings is predicted for Munich Re, Swiss Re, Hannover Re and SCOR as they see stronger earnings in the first half of the year with improved resilience despite inflation and natural catastrophes, Moody’s analysts have revealed.
The four largest European reinsurers reported combined net results of €5.2 billion for H1 2023, up from €1.9 billion as reported in the same period a year earlier. Both property and casualty (P&C) and life reinsurance contributed to stronger earnings, helped by improving underwriting profitability, as well as higher investment results.
H1 results, analysts stated, helped build a solid base for strong full-year 2023 earnings; although it is subject to natural catastrophe experience, which so far has been relatively benign for most within the peer group, Moody’s noted.
Stronger earnings in 2023, and beyond, are supported by continuous price increases and more favourable terms and conditions, a positive trend seen over 2022 confirmed by P&C reinsurance renewals.
“The management of several of these reinsurers expect the market to remain hard well beyond this year. A common theme is the reduction of frequency exposures in natural catastrophe business, but there are nuances in underwriting strategies. Despite the growth in underwriting exposures the group remains well capitalised,” analysts added.
Despite P&C reinsurers seeing improved earnings, increasing reserve buffers is high on the agenda. Moody’s stated: “With price increases being earned through and natural catastrophe claims for most companies below prior-year levels, combined ratios improved in H1. All companies have strengthened their reserves, in part to reflect rising loss cost trends, but mostly to increase reserve buffers in preparation for a potential turn of the cycle.
“It is noteworthy that reported combined ratios, although generally strong, were negatively influenced by companies strengthening their reserves. We believe that in most cases companies have made use of the favourable market conditions to build reserve resilience in view of still high claims inflation and in preparation for a potential turn of the cycle.”
The rating agency also noted that, for the three insurers reporting under IFRS, high interest rates resulted in a higher positive discounting effect on claims reserves than initially expected, which improved combined ratios by 2-3 %pts.
The corresponding negative effect via the unwinding of discount did not come through, for now. This is due to past low interest rates, but this is a timing effect that will revert if interest rates get closer to discounting rates set in the past, analysts warn.
Finally, life reinsurance and investment returns will provide additional tail wind, Moody’s noted, as they have seen considerable improvement.
“While mortality remained somewhat elevated over the winter, COVID-19 now apparently lies largely behind the industry and life reinsurance results have improved markedly. Reported investment results also improved and the rising interest rates seen over the last 18 months are beginning to feed through into higher investment results,” the rating agency explains.
