Rising premiums and low catastrophe losses boost U.S. and Bermuda reinsurers’ earnings in first half

According to a report by Moody’s Investors Service, U.S. and Bermuda reinsurers delivered strong operational performance for the first half of 2022, supported by continued rate increases across most reinsurance and specialty lines of business, as well as stricter terms and conditions and low disaster losses. .

Gross premiums written for the group increased by more than 10% in the first half compared to the same period last year, mainly reflecting higher premium rates and increasing exposures in certain business segments, indicates Moody’s report, titled “Rising Prices, Low Disasters Boost Operating Returns for the First Half of 2022.”

Despite improving rates and strong demand for property catastrophe reinsurance, some reinsurers continued to reduce natural catastrophe exposures in the second quarter, “as management teams focus on improving bottom lines and reduced earnings volatility,” the report said, noting that they are opting instead to increase their writings in accident, specialty and other (non-catastrophe) property lines.

“The Florida market experienced a particularly difficult renewal season on June 1, with reinsurers generally holding their course on increasing exposures, while improving underlying margins thanks to strong pricing conditions. Florida’s smaller national cedents have had the hardest time obtaining reinsurance coverage,” according to Moody’s.

Reinsurance management teams took different approaches to property catastrophe write-offs during the quarter, with companies such as Arch and PartnerRe seeing healthy property line growth, while others such as Everest Re and Alleghany chosen to reduce their exposures to real estate catastrophes, Moody’s explained.

In June 2022, AXIS announced its intention to exit the property catastrophe market and focus its reinsurance business on specialty lines. In July, French insurer Covéa completed its acquisition of PartnerRe, which Moody’s said will likely benefit from being part of a larger insurance organization. Covéa has significant capital resources that could help “mitigate capital stress in the event of large catastrophic claims or help fund profitable growth opportunities.”

The cohort of US and Bermuda reinsurers analyzed by Moody’s – Alleghany, Arch, AXIS, Everest Re, PartnerRe and RenaissanceRe – all recorded strong underwriting results in the first six months of 2022. Arch recorded the strongest combined ratio low for the first half of 2022, at 78%, thanks to the strong performance of the company’s mortgage portfolio. (A combined ratio below 100% indicates an underwriting profit).

A relatively low level of catastrophe losses in the first half of 2022 also contributed to reinsurers’ earnings, with catastrophes contributing less than four percentage points to the six-month loss ratio for the cohort of companies analyzed by Moody’s. According to Swiss Re, this reflects a reduction in insured natural catastrophe losses worldwide of $35 billion in the first half of 2022, compared to $46 billion in the same period of 2021.

Pricing to stay favorable

Until the 2022 Atlantic hurricane season ends, Moody’s said, it’s too early to tell whether reinsurers will post strong profits for the full year of 2022.

“Given inflationary pressures, particularly reconstruction costs as well as higher disaster frequency and severity, we expect price momentum to continue through the January 2023 renewal season,” continues The report.

“Despite favorable pricing conditions, the sector remains exposed to potentially large catastrophic events, increased loss costs due to economic and social inflationary trends, and uncertainty regarding exposures related to the ongoing military conflict in Ukraine.”

War in Ukraine

The military conflict in Ukraine contributed to modest losses for the cohort in the first half of 2022, representing $50 million in losses for PartnerRe, $45 million for Everest, $44 million for Alleghany, $30 million for AXIS and $25 million for RenRe, Moody’s said.

Arch recorded 2.1 points of current-year catastrophe losses in its insurance segment in the first six months of 2022, mainly due to the military conflict in Ukraine and natural disasters. It also reported 7.0 points of current-year catastrophe losses in its reinsurance segment during the same period, part of which were Ukraine-related losses.

Investment losses

Rising interest rates combined with stock market volatility in the first half led most companies to report large realized and unrealized losses on their investments, Moody’s said.

The reinsurance cohort analyzed by Moody’s reported a 12.6% decline in equity, due to volatility in investment valuations.

“While investment portfolios are likely to experience valuation volatility in the coming months, barring one or more outsized catastrophic events requiring very large claim payments, we expect reinsurers US and Bermuda recoup most of their unrealized losses on fixed income investments over time, given the relatively short duration of their portfolios and their ability to hold bonds to maturity,” said the rating agency.

Depending on the type of cover, claims settlement by reinsurers can take 12 to 18 months and sometimes longer, which “helps protect the industry from an accelerated decline in its fixed income portfolios”.

Strong underwriting performance in the first half of 2022 led to improved operating return on equity, which ranged from 11% to 16% for the cohort, the rating agency said.

Source: Moody’s Investors Service

Catastrophe trends Profit loss reinsurance price trends