Fairfax and Munich Re lead impressive Q1, tipped for upgraded earnings forecasts
Global re/insurers managed an “exceptionally strong” improvement in underwriting income in the first quarter on an 11% rise in premiums and a decline in nat cat losses, sufficient to heighten faith in earnings growth through 2023, Gallagher Re said in a summary report on the first quarter.
“Q1 22 year on year underwriting results were exceptionally strong,” authors wrote, citing a two percentage point (pps) decline in average combined ratio for the global sample in which “nearly every” insurer posted a technical gain on insurance.
Q1 earnings season created new believers, evident in a series of upgrades to earnings forecasts from equity market analysts. Consensus EPS forecasts for 2023 rose 1.1%, including stand-out upgrades for Fairfax and Munich Re.
“While the Q1 investment result headwinds dampened ROEs in the quarter, the outlook for ongoing earnings power has improved,” authors noted. For the listed firms tracked by Gallagher, recipients of forecast upgrades outnumbered downgrades roughly 2:1.
Leading drivers for upgrades started with stronger than expected premium growth, an enduring theme, plus a new anticipation of improving investment income due to the recent increase in bond yields.
Premium growth across the global industry, “supported by continued favourable pricing for commercial lines and reinsurance business,” was led by a 20% top-line surge for global reinsurers and followed by a 13% gain for North American and Bermuda-based re/insurers.
“Continued favourable pricing for commercial lines and reinsurance business remained key drivers of premium growth in the quarter,” authors claimed. January reinsurance renewals brought highly varied rate gain. In commercial lines, writers “reported double-digit premium growth and commented that rate increases continue to exceed claims inflation.”
But that inflation has risen higher and higher on the industry’s list of concerns. For now, despite mind-bending replacement costs in some core lines, authors speak to “more uncertainty around ultimate losses” and cite industry vows to “carefully monitor trends” for potential pricing adjustment “where required to support profitability.”
Reduced nat cat made the single greatest contribution to the decline in combined ratios Q1 to Q1. Amongst insurers providing a combined ratio breakdown by driver, the reduction in nat cat accounted for some 85% of the overall reduction. Attritional loss ratios added to combined ratios; prior year adjustments and expenses took it the other way.
Aggregate combined ratios were down for all classes save European re/insurers, hit by European windstorms. The decline was most pronounced for North American and Bermuda-based names on account of prior year winter storm costs in the US.
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