Canadian Underwriter

How the reinsurance sector netted out after renewals

March 23, 2023   by David Gambrill

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Inflation took a small bite of out of global reinsurers’ generally profitable combined ratios, and rising interest rates made a 27% dent in the reinsurers’ shareholder equity, but overall the global reinsurance sector came out of 2022 in decent shape, a Gallagher Re report said.

“Year-on-year premium growth averaged 12.1% for [fiscal year 2022], supported by improved pricing for commercial lines and reinsurance business,” Gallagher Re stated in its report, Global (re)insurers’ financial results for year-end 2022. “The average combined ratio deteriorated marginally to 95.7% [up from 94.7% during fiscal 2021], mainly due to an inflation-driven increase in the attritional loss ratio.”

Attritional loss ratio refers to operational losses that don’t have to do with catastrophe losses.

Commenting more specifically on the drivers behind slightly higher loss ratios, Gallagher Re observed higher inflation drove up reinsurers’ claims costs.

“Even among those companies that reported improved overall combined ratios, however, inflation featured in company disclosures as a contributing factor,” Gallagher observed. ”For some, improvements from lower NatCat losses or the expense ratio [offset a] higher attritional loss experience in the quarter.

“Premium growth also contributed to better combined ratios. This is explained not only by reinsurance price increases but also higher policy retention and organic growth [e.g., more policies sold].

“Sixteen of the 26 [global reinsurance] companies in our data set reported double-digit premium growth and of those, five reported increases over 20%,” Gallagher Re observed. “Earnings call commentary on pricing echoed a theme presented throughout the year, that companies continued to push for rate increases in response to the volatile economy and inflationary trends.

“Although rate increases continue to moderate, some management teams expect overall margin expansion for their commercial lines business in 2023. Margin trends varied by commercial line of business with workers’ compensation and professional liability lines (e.g., D&O) being viewed as challenged while commercial property pricing has benefited from rising reinsurance costs.”

Rising interest rates factored into significant investment losses for P&C insurers and reinsurers generally.

In Canada, federally regulated insurers saw more than $2 billion in net investment income evaporate from their books in 2022, according to 2022 Q4 data from the Office of the Superintendent of Financial Institutions (OSFI).

In reinsurance, the sector’s investment losses “weighed on the average full-year ROE [return on equity], which dropped to 10% [from 12.6% during fiscal year 2021],” Gallagher Re noted. “Shareholders’ equity decreased by an average of 27% in [fiscal year 2022], driven by unrealized losses on investments and to a lesser extent capital return (both dividends and buybacks).”

U.K., global and North American reinsurers all saw shareholder equity take a large hit. Shareholders’ equity for European reinsurers tumbled by 36% for the U.K. industry, 33% for global reinsurers and 22% for North American and Bermuda reinsurers.

“The main driver of the decline in shareholders’ equity came from unrealized losses on companies’ investment portfolios and to a lesser extent capital return (both dividends and buybacks),” said Gallagher Re’s report. “The unrealized losses were driven by a rise in interest rates and threats of recession, which resulted in lower market values of bonds and equities held by (re)insurers.”

Over the course of 2022, the most significant declines occurred in the second and third quarters. Most reinsurers, particularly the North American ones, saw a significant bounce-back occur during the fourth quarter.


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