The major European reinsurers Hannover Re (AA-/Stable), Munich Re (AA/Stable), SCOR SE (A+/Stable) and Swiss Re (A+/Stable) reported lower earnings for 2022 as high inflation, rising interest rates and climate-related costs led to lower underwriting and investment results, Fitch Ratings says.
Efforts to raise prices proved to be insufficient to compensate for higher-than-expected claims inflation.
This was due to major losses related to weather events and the war in Ukraine often exceeding budgets, record inflation requiring reserve strengthening for more recent underwriting years; and higher interest rates leading to lower fair values for all major asset classes.
The capital position of the big four remained very strong in 2022 due to a varying mix of increases in subordinated debt capital, a positive correlation of solvency ratios to higher interest rates and lower investment risks (see How High Reinsurance Costs Will Impact for European Insurers Operating Margins?).
A note from Goldman Sachs says that all four large European cap reinsurers have underperformed the market so far in 2022.
That this was because of higher inflation, higher weather losses, potential Russia/Ukraine losses, and COVID losses.
Inflation, whilst remaining a concern, is largely under control, companies already took action in Q4 2021 and pricing assumptions reflect a more cautious view on inflation; and the range of outcomes from Ukraine/Russia losses appears to be narrowing (albeit still highly uncertain).
Three out of four reinsurers have decided to increase capital returns to shareholders.
The momentum of reinsurance price increases across large parts of the business that were up for renewal in January 2023 accelerated significantly compared with 2022 for all four major European reinsurers.
Property lines of business and those specialty lines affected by the war in Ukraine showed the highest premium rate improvements.
Fitch believes that a hard market environment with better prices and terms and conditions will help to improve underwriting margins in 2023, while the macro-economic uncertainty and financial market volatility will remain challenges this year.
Hannover Re and Munich Re are well positioned and have the capital and capacity to take advantage of the hard market in property cat reinsurance.
Investors are concerned about how effective the cat exposure reduction is on improving earnings stability, especially when nat cat pricing is entering a hard market and the group’s peers are increasing exposures here.
by Yana Keller