Take insurers’ first-quarter financial results with a pinch of salt

Global reinsurer Swiss Re did not hold back on its negative report card. The giant blamed its US$248 million net loss in the first quarter on three macroeconomic and geopolitical headwinds: the war in Ukraine, heightened financial market volatility, and the continuing COVID-19 pandemic.

Those three elements – which will likely impact reinsurers and insurers with global exposures more aggressively – are not going to disappear any time soon. I believe they will continue to challenge insurance organisations worldwide for the rest of 2022 at least.

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Swiss Re was not alone in highlighting recent market volatility and the impact of inflation on insurers’ financial results. In an interview with Bloomberg TV on Monday, May 05, Tom Wilson, CEO of American property and casualty (P&C) insurance giant Allstate Corp. said premiums will have to climb further for insurers to recoup some of the expenses lost due to inflation.

As a major personal home and auto insurer, Allstate has had to navigate aggressive price increases in repair costs and used cars, as well as extensive supply chain delays. All of Allstate’s competitors in North America are facing the same issues, Wilson stressed, and the same can be said for similar insurers in other countries around the world.

Surely, no insurance business can be immune to macro – possibly even systemic – events like the war in Ukraine and ensuing geopolitical fallout, the global pandemic, or a major global recession.

Some have perhaps simply not felt the impact yet. One reason why I’m a tad sceptical about the insurers who are shouting about fantastic financial results in Q1 is that many have attributed their success to premium growth, which is largely driven by rate increases.

The commercial insurance market has been hard for quite some time. In fact, Marsh reported the 18th consecutive quarter of commercial insurance rate increases in Q1 of 2022, but the rate of increase (11%) has moderated across most lines of business and in almost all regions, continuing a trend of rate moderation that began in the first quarter of 2021.

This means hard market conditions are tempering, and, therefore, insurers who have achieved premium growth driven solely by rate increases may have to find another way to shore up their financial performance. That could be difficult in the context of the major headwinds highlighted by Swiss Re and felt by many insurers whose Q1 results were not quite so positive.

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When it comes to market volatility, I like to look to Warren Buffett as my unofficial market calculator. At Berkshire Hathaway’s annual meeting on Saturday, April 30, Buffett announced he had spent more than $50 billion in the first quarter, shrinking the conglomerate’s mountain of cash to $106 billion – from $147 billion at the beginning of the year.

What interests me is the fact that the investment juggernaut still has billions to spend, and I’d hazard a guess that he’s looking to capitalise on further volatility in the stock markets in the coming months.

That suggests that insurers’ investment portfolios could remain pinched through the second and third quarters of 2022 (at least), which could have a negative impact on their quarterly financial results. Even if the volatility hadn’t quite made its mark in Q1, I imagine insurers will have less to celebrate in the coming months.

Now, I’m not trying to disparage insurance organisations who have performed well in Q1. There are many examples of insurers and reinsurers applying excellent business strategy to secure both organic and inorganic growth in a challenging marketplace.

My point is that I think everyone’s going to be impacted by these negative financial events, and therefore, all financial reports – positive or negative – should be taken with a pinch of salt.