Analysts at investment bank Berenberg have warned that the timing of the transition to IFRS 17 is “very unfortunate” for reinsurers and their investors, given the current hardening state of the market.
In a new report, Berenberg argues that “transparency is low” when it comes to the transition between earnings reporting between the 2022 and 2023 periods.
It comes after Hannover Re reported its preliminary 2022 results under IFRS 4 with net profit of €1.41 billion, but upped its forecast for 2023 to €1.7 billion, when it will have begun reporting under IFRS 17 for the first time.
“There is no bridge between these two figures and no way of knowing how the 2023 outlook fares relative to 2022 (ie whether the 2022 starting point under IFRS 17 would have been lower or higher),” Berenberg noted.
“We believe most of the sector will report 2022 results like Hannover, using the old accounting standard for 2022 and the new accounting standard for the 2023 guidance, and that most of the insurers in the sector will also avoid providing the IFRS 17 equivalent for 2022 results until later this year.”
As a result, analysts say that investors in the sector will be “flying blind on earnings” this year, which could mean that the sector will underperform for the year, or at least until September or October, when insurers will start providing comparatives with their Q1 results.
When it comes to the reinsurance sector specifically, investor expectations for growth in earnings are already very high due to the increasingly hard market conditions that materialised at the January renewals.
“As a result, we believe the timing of the transition to IFRS 17 is very unfortunate as the new standard will create a lot of noise and make it harder for investors to assess the underlying earnings power yoy,” Berenberg said.
“We think IFRS 17 will increase the volatility of P&C (property and casualty) earnings given the introduction of discounting of claims reserves, but we also expect it to introduce more earnings seasonality. For example, Hannover Re said that there will be a loss component recognised initially due to its prudent reserving, which will subsequently unwind (earn) over the course of the contract.”
