Aon warns “2022 has not begun well” in reinsurance

Broking giant Aon has delivered a warning that the year is not going particularly well for its tracked reinsurance cohort so far in 2022, with global issues and major losses likely to reduce returns.

The broker has released the Aon Reinsurance Aggregate (ARA) report today, highlighting better performance in 2021, as the 22 reinsurers it tracks, which together underwrite more than 50% of the world’s life and non-life reinsurance premiums, delivered a return on equity of 10.9% for the year.

That return on equity in 2021 was the best result for Aon’s tracked reinsurance cohort since 2014, with investment returns a significant driver of impetus, alongside a better combined ratio as pandemic-related losses diminished.

The reinsurance result in 2021 also reflected “the benefits of compounded rate increases and tightened terms and conditions” Aon said.

However, there was an overlay of above-average natural catastrophe losses again.

Highlights from the report show that in 2021, the tracked cohort of global reinsurance companies underwrote 18% more in property and casualty (P&C) premiums at $265bn, split between primary insurance $131bn (+20%) and assumed reinsurance $134bn (+16%).

On the back of that, P&C underwriting profit reached $7.6bn, Aon said, reflecting a combined ratio of 96.2%.

The total investment return rose by 20% to $33.0bn, representing a yield of 3.7%, while overall net income reached $22.8bn delivering a return on equity of 10.9%.

As a result, the total capital of the tracked 22 reinsurance firms rose by 1% to $273bn, split equity $211bn (flat) and debt $62bn (+6%), Aon’s report shows.

Mike Van Slooten, Aon’s Head of Business Intelligence, commented on the last year, “These were good results, given the extent of the natural catastrophe activity in 2021, but the past five years have been challenging from an earnings perspective. Results have diverged over this period and recent changes in underwriting risk appetite reflect attempts to manage volatility, in what has become a very complicated risk environment.”

However, while 2021 saw a return to higher levels of profitability, currently there are no guarantees 2022 is as positive, it seems.

While reinsurance rates have continued to rise and terms and conditions tighten further, Aon does not have that much confidence in overall sector performance for this year, it seems.

Looking ahead, Aon’s report “makes it clear that 2022 has not begun well” the broker explained.

Major loss activity continues, while the conflict in Ukraine “has created the potential for sizeable insured losses, as well as exacerbating inflationary pressures.”

Van Slooten said, “Central banks are raising interest rates more quickly than expected to counter the inflationary threat, and mark-to-market losses on fixed income securities had a heavy impact on investment returns and book values in the first quarter. Developments in the capital markets will have a strong bearing on sector performance in 2022.”

This comes against a backdrop of tightened appetites for risk, something he current macro and geopolitical landscape could exacerbate it seems.

Aon’s report states, “The reinsurance sector is to be applauded for absorbing significant volatility over the last five years and emerging with its capital base and ratings largely intact. However, in some cases, consequent earnings pressure, coupled with ongoing uncertainties around the impact of climate change, are now constraining appetites for underwriting property catastrophe reinsurance business.”

Adding that, “More broadly, the sector must also contend with a much more difficult economic environment, as interest rates rise more quickly than expected to counter significant inflationary pressures that are being exacerbated by the lingering effects of the pandemic and Russia’s invasion of Ukraine. These circumstances have the potential to affect appetites for casualty and specialty reinsurance as well.”

The effects were evident in just the first-quarter results for the tracked reinsurance cohort.

Aon noted that while the underwriting performance was strong in Q1 2022, with an average combined ratio of 92.8%, “investment returns were undermined by unrealised losses on bonds and weak stock markets.”

Return-on-equity for the reinsurance cohort was hit heavily by this, resulting in an average non-annualised result of just 0.6%, Aon said, as well as impacts to reported book values.

A more challenging full-year for profitability looks likely, despite the continued price increases the reinsurance market has been enjoying.

However, if you compare the reinsurance sector to many other industries around the world, the fact a positive average return-on-equity was delivered in Q1 is quite admirable and insurance and reinsurance may compare favourably again (to other industry sectors) in the second-quarter too, it currently seems.