Reinsurers face earnings pressure despite strong first-half: Aon report

Property and casualty (P&C) reinsurers globally powered to a 22% rise in first-half underwriting profit to $US7.4 billion ($11.7 billion), according to an Aon report.

The results came on the back of rate rises and robust demand, helping the industry to offset the impact of worsening catastrophe losses and unrealised returns on investment portfolios, the Aon Reinsurance Aggregate report says.

But the full-year outlook appears grim as the industry counts the cost of Hurricane Ian and ongoing economic impacts, especially the tightening interest rate environment.

“The production of this report has been overshadowed by the devastating impact of Hurricane Ian, which will clearly influence underwriting results in the second half of the year,” Aon says.

“In addition, interest rates are continuing to rise, which will further pressure total investment returns and reported book values.

“Overall, 2022 seems destined to be another poor year for reinsurer earnings.”

The report says the long-awaited adjustment to higher interest rates will ultimately boost reinsurers’ profitability via higher investment returns.

However, the speed of the change is having a significant short-term impact on asset values and 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.

The report covers 21 reinsurance providers that underwrite more than half of non-life and life premiums globally.

It says the first six months of the year were notable for an unusual amount of volatility in the capital markets.

“The pandemic-related inflationary spike that began in 2021 was exacerbated by Russia’s invasion of Ukraine in February, prompting aggressive interest rate hikes that, in turn, have raised fears of recession,” the report says.

Gross P&C insurance and reinsurance premiums written rose 10% to $US149 billion ($236 billion) in the first half of 2022, driven by rate increases and robust demand.

The 22% rise in underwriting net profit to $US7.4 billion represents a net combined ratio of 93%, down from 93.7% a year earlier.

“Underwriting results have shown significant improvement over the last 18 months, despite ongoing high levels of insured losses from natural catastrophe events,” the report says.

“This reflects the benefit of compound rate increases, coupled with movement away from low-lying layers and aggregate covers.”

Click here for the report.