A brighter earnings outlook for reinsurance: Moody’s

In a new report, rating agency Moody’s Investors Service has highlighted the much improved outlook for reinsurance-linked returns, through its comments on the big four reinsurers.

The report details the challenges faced, including a reduction in earnings in 2022 for many of the major reinsurance firms, driven by claims loads, inflation and catastrophe risk, as well as investment side challenges.

But now, with reported reinsurance price increases from the big four reinsurers as high as 18.8% for some market segments, Moody’s says brighter earnings prospects are ahead.

While rate increases are just one component of the outlook, a further and considerable driver are the improvement to contract terms at reinsurance renewals.

As a result, Moody’s cites “more favorable renewal terms and conditions, with cedants retaining more risk overall,” which drives greater earnings potential for the major reinsurance firms in 2023.

“All companies expect terms to remain favorable through 2023 as the supply of traditional reinsurance and alternative capital remains scarce,” the rating agency added.

Natural catastrophe risk appetite is mixed among the big four, Moody’s notes, with Munich Re the only one seeming to increase its appetite, Swiss Re and Hannover Re remaining relatively flat, and SCOR continuing to reduce exposure to peak catastrophe perils.

Premium growth has been moderate, but with the better pricing and terms Moody’s sees improved margin potential as key for reinsurance returns in 2023, it seems.

Rising loss costs will continue to be a concern though, with inflation a driver, and this will decide just how much more profitable the current pricing environment really is, Moody’s believes.

Commenting on prospects for the biggest four reinsurers, Moody’s said, “P&C reinsurance contract renewals in January 2023 brought the strongest price increases in decades. All four companies anticipate significant margin improvement in the months ahead, despite an expected increase in losses because of claims inflation and rising frequency and severity of natural catastrophes.”

The management of exposure is set to be key for these companies and of course the mid and smaller tier reinsurance players as well, with catastrophe risk aggregation and concentration a challenge during a period of significant inflationary uplift on claims costs.

But, for those strategies able to take more concentrated natural catastrophe risk, such as insurance-linked securities (ILS), this could actually be positive, as long as risks are priced to account for loss cost trends.

As a result, Moody’s comments read across positively for well-managed ILS investment strategies.