Aon’s Van Slooten: Nat cat losses at $132bn and capital market volatility key concerns in latest ARA report

Aon’s Reinsurance Aggregate (ARA) report has estimated global insured nat cat losses last year at $132bn, which Mike Van Slooten said was the main focus for the report’s constituents* with 2022 marking the fifth most expensive loss year since 2017.

Speaking to The Insurer TV ahead of the launch of the report, Aon’s head of business intelligence said that while 2022 was a “challenging year for a host of different reasons”, it was led by the focus on nat cat, in particular Hurricane Ian, with the report pegging losses from the storm at $52.5bn.

“Nat cat losses certainly created a headwind to earnings and was a big focus for the companies included in this report and the way in which they’re looking at 2023,” Van Slooten said.

“However, while this element is headline dominating, something that was also very significant was what happened on the asset side last year,” he added.

“We had an inflationary spike, which obviously impacts loss costs. We had central banks responding very aggressively to that by raising interest rates. And those hikes in interest rates caused some quite significant reductions in asset values, particularly fixed-income securities,” he said.

Van Slooten also drew attention to the ongoing war in Ukraine, which is continuing to cause uncertainty in the capital markets.

“This has also exacerbated the inflationary situation, creating doubt around the future economic outlook, and that in turn, has impacted stock markets.”

While summarising the impact of the devaluing of both equities and bonds in 2022, Van Slooten said: “This was felt particularly on the bond side which is a major asset class for reinsurance companies. Those reductions in asset value had a significant impact on investment returns, and that, in turn, impacted reported equity positions.”

Resilient results

According to the report, most ARA constituents reported strong growth in P&C premiums, driven by higher pricing and strong demand for risk transfer in a volatile operating environment.

Underwriting results were generally resilient, reflecting the benefit of compounding rate increases and lower exposure to nat cat event frequency.

P&C net premiums earned rose by 11 percent to $212bn while underwriting profit of $8.0bn reflected a marginally improved net combined ratio of 96.2 percent.

“The combined ratio was probably better than a lot of people were anticipating, given the extent of the natural catastrophe activity that we saw,” observed Van Slooten.

“However, the issue is that you have to look at it in the context of what's happened over the last six years. This has been a difficult period for earnings and, overall, the average combined ratio for that period is just over 100 percent.

“That's quite a long period of time for these companies not to be making underwriting profit. Obviously, some companies have done better than others in that period. But certainly for the companies that have been underperforming, investors are not happy with that level of performance and there's been a lot of pressure on management teams to improve results, as a result of that,” he added.

“Dramatic” loss on equity

Capital market conditions were very volatile in 2022, with rapidly rising interest rates undermining the market value of fixed-income securities carrying lower coupons, while equity prices were impacted by poor stock market performance.

According to the report, declining asset values had a significant impact on the reported earnings and equity positions of the ARA constituents.

“The return on equity came in at 5.2 percent, on a reported basis, for the companies that we're tracking,” said Van Slooten.

“The issue with that is that maybe that doesn't sound too bad, given all the difficulties that we’ve been describing, but again, going back to 2017, over that six-year period, the average return on equity is just under 6 percent. We think the average cost of equity moves in a range of 8-10 percent and is probably at the top end of that range at the moment.

“So again, investors are not happy with that level of overall return. And actually in some cases, that's causing some concern for the rating agencies, in terms of the sector's ability to cover its cost of capital.”

Van Slooten also flagged the return on equity is actually a bit misleading, due to the inconsistencies in the way that companies report these movements in asset values.

“So, if you actually go back into the accounts and take all of that volatility, all of those reductions in asset value and look at it consistently across the industry, there was actually a loss on equity of more like 15 percent which is a dramatic movement and that tells you that there really was something very unusual happening on the asset side last year,” he said.

Opportunities amidst the challenges

Despite the challenging operating environment, with the prospect of a number of those headwinds continuing into 2023, the CEO of Aon’s Strategy and Technology Group Sherif Zakhary said there’s “always opportunity”.

“These are times of volatility, complexity and opportunity as the report will show,” he said.

“It’s so important that during these times, we are able to support our reinsurer and insurer partners by enabling them to tap into Aon's vast data analytics insights, market and domain knowledge. It’s important to be able to not only understand the variables that are impacting the micro/macro economy, and specifically our clients' balance sheets and our clients' operations, but also give them that fact-driven, data-driven approach to decision-making,” he explained.

“There's always opportunity, whether it's geographic, whether it's product, whether it's new risks, climate, intellectual property, supply chain,” Zakhary highlighted.

“Similarly, the insights and the ability to understand the drivers, how to differentiate oneself, and then ultimately how to enter those markets and capture those opportunities, is the sort of the direction that we want to stand shoulder to shoulder with reinsurers and insurers as we continue to expand the understanding of those opportunities, and the best pathway to capturing those opportunities,” he concluded.

*The 19 companies now included in the report are: Arch, Axis, Beazley, Everest Re, Fairfax, Hannover Re, Hiscox, Lancashire, Mapfre, Markel, Munich Re, PartnerRe, QBE, Qatar Insurance, RenaissanceRe, Scor, Swiss Re, SiriusPoint and WR Berkley.

Watch the full 16-minute interview to hear more on how Aon’s Mike Van Slooten and Sherif Zakhary view the capital position of the industry more generally and how the Strategy and Technology Group will be supporting Aon’s Reinsurance Solutions during these complex and volatile times.

More coverage of the report will be featured on The Insurer website.