The first quarter of 2024 has been positive for global property and casualty (P&C) reinsurers as the industry recorded strong underwriting and investment profitability from January to June 2024, benefiting from the ongoing favourable reinsurance pricing environment, lower natural catastrophe losses, and strong fixed income yields, according to a Morning Star DBRS report. However, as hurricane season approaches, and with the continued global economic uncertainty, there could be some challenges ahead.
According to the report, underwriting income was strong for the year’s first three months, as proven by the overall low combined ratios for the selected reinsurers. The average combined ratio for the selected group of reinsurers was 84.2% for Q1 2024, the report stated – 5.8% lower compared to the same period in 2023.
“Overall, the reinsurance pricing environment remains favourable. Reinsurers were able to charge higher rates while also increasing contract volume during the first quarter of 2024. This can mainly be attributed to the persistent hard market conditions, which give the reinsurers higher pricing power and the ability to underwrite with more favourable terms. The industry experienced significantly lower-than-expected natural catastrophe losses in Q1 2024,” the report said.
Notwithstanding the improvement in earnings, the industry should expect headwinds that may hurt 2024 full-year results, the report warned. Underwriting profitability could be affected by potential future natural catastrophes, including the Atlantic hurricane season, as major forecasting organizations expect stronger hurricanes to come,which could potentially destroy more infrastructure and cause above-average natural catastrophe-related losses.
“Nonetheless, we do not anticipate any credit rating impact from the potentially more active hurricane season,” the report stated.
The Morning Star DBRS report said that, although fixed-income investment returns look promising for reinsurers due to the prevailing high interest rate environment, global P&C may still face additional volatility from spread and equity market risks as the global economic and geopolitical outlook remains uncertain.
While the sustained high interest rates in the past months have started to benefit reinsurers as they started to reinvest their maturing fixed-income investments into assets with higher yields, with the global inflationary pressures easing, interest rates have dropped in some countries and spreads have tightened. This may affect fixed-income yields over the long term, the report stated.
“However, on the positive side, we expect the pace of interest rate reductions to be slower compared with when they were being increased by central banks,” the report said. “This gives reinsurers enough time to adjust their investment portfolios accordingly.”
Aside from the interest rate risk, global reinsurers are also exposed to spread risk and equity market risks that may be affected by global economic outlooks and could cause significant realized or unrealized losses, according to the report. Nonetheless, despite the setbacks, the outlook for the global and Bermuda P&C reinsurance markets remains positive, due to the prevailing favourable pricing environment, high fixed-income reinvestment yields, and support from their strong capital positions, it stated.
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