Reinsurance capacity on the slow mend, awaiting new profit trend: Aon

New capacity on the reinsurance market will likely have to wait for major players to build up solid profits for allocation after a long-running losing streak, leaders in  Aon's reinsurance business are suggesting.

While capital adequacy “generally remains strong,” Aon sees the rebuilding of equity after 2022 investment losses not in fresh capital, but in a plodding turnaround from a six-year period of weak earnings.

“Aon expects depleted shareholders’ equity to be restored over time, via higher retained earnings and the ‘pull-to-par’ effect of bonds approaching maturity,” top analysts at Aon Reinsurance Solutions wrote in their regular industry study, the “Reinsurance Aggregate.”

Flows of new capital have been “modest” and the best hope is that flows “may increase as earnings delivery is confirmed.”

That need to retain earnings may become palpable in the tug of war between capital needs and investor demand for dividends.

“Rating agency capital adequacy has generally become more constrained in 2023, and this may act as a brake on repatriation, despite the pressure to meet investor expectations,” Aon analysts said.

On the plus side, the earnings outlook is as supportive of profits as has been felt in many years.

“Renewals so far in 2023 appear to be delivering on the expectation of better future returns,” Aon said of 1/1 and 1/4.

The earnings story over the past six years has spoken of difficulties. The group of major reinsurers tracked by Aon suffered a 100.3% combined ratio and a 5.9% return on equity, about one third below the average cost of equity.

2022 brought a reported net income of $9.6 billion for the group, less than half the level of the prior year and the fourth weakest result from the past decade.

But the top line did show continued progression. Total GPW rose by 6% to $343 billion across all segments.

Property and Casualty (P&C) gross written premiums increased by 9% to $272 billion, split between an 11% increase for primary insurance to $134 billion and a 7% increase in assumed reinsurance premium to $137 billion. In original reporting currencies, the average growth in P&C GPW in 2022 was close to 15%, Aon calculated.

Most study constituents reported strong growth P&C, “driven by higher pricing and strong demand for risk transfer in a volatile operating environment,” Aon analysts wrote.

The decline in 2022 profits couldn't be blamed on nat cat. Net nat cat losses reported by the study group were marginally lower than the prior year at $15.3 billion, contributing 7.2 percentage points to the overall combined ratio.

That made 2022 the fifth most expensive year for insured nat cat losses following a major hit from Hurricane Ian, record floods in Australia and South Africa, hailstorms in France, winter storms in Europe and the U.S. and droughts in Brazil, Aon noted.

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