Insurers’ Q1 profits hurt by market volatility

Many insurers were dealt a double blow in the first quarter as intense competition in the insurance and reinsurance market combined with financial market turmoil in January and February.

Concerns over slowing global economic growth sparked considerable volatility in debt and equity markets. This led to lower investment returns and potential write-downs on investments for some leading insurers. Together with soft market conditions, less favourable reserve developments and US storm losses, this meant that several international insurers and reinsurers posted lower profits in the first quarter.

This week, Spanish insurer MAPFRE announced that its results were hit by the depreciation of Latin American currencies, particularly the Venezuelan bolivar and Brazilian real. Its first quarter revenues fell 3.4% while net profit was 4.8% lower at €192m.

European insurer Allianz said that it expects a good set of results, although its operating profits were also lower in the first quarter. The Munich-based group said that operating profit decreased 3.5% to €2.8bn, while total revenues were 6% lower.

Large US commercial insurers experienced an even tougher start to the year, hurt by investments and storms in Texas and elsewhere.

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Most notably, AIG reported a net loss of $183m in the first quarter, compared with net income of $2.5bn in the same period last year. The insurer’s operating profit fell 54% to $773m in the first quarter, partly due to restructuring costs of $122m.

The disappointing AIG Q1 results were below analysts’ expectations and were the third successive quarter in which poor hedge fund results hit earnings. The insurer says that it is now scaling back its hedge fund investments.

AIG, which has been under sustained pressure from activist investors Carl Icahn and John Paulson to break the group up, saw its operating income for property/casualty fall 38% to $720m in the first quarter, reflecting lower investment returns. The insurer’s accident year loss ratio increased slightly, reflecting increased ratios in casualty and specialty and higher attritional losses in property.

Several other US commercial insurers suffered from investment woes and catastrophe losses. Travelers reported a 17% drop in profits, following a near doubling of catastrophe losses, lower investment income and lower favourable reserve releases. The Hartford reported a 31% fall in its first quarter 2016 net income.

XL also saw its profits fall in the first quarter. It reported net income of $21.8m, down from $36.2m in the prior year. Like AIG, XL’s reduced profits reflected lower investment returns linked to hedge fund investments.

Worse than expected insurance market conditions also led XL’s chief executive, Mike McGavick, to warn analysts that the insurer is unlikely to meet its target of a double-digit return on equity (RoE) for 2016. Mr McGavick had previously said that the insurer’s merger with Catlin would yield double digit RoE in 2016.

Several Bermudian specialty insurers and reinsurers also got off to a bumpy start in 2016. Arch Capital Group saw its first-quarter net earnings slump 46%, reflecting lower realised investment gains, while AXIS Capital Holdings saw its net income fall to $38m in Q1 from $156m in 2015.

Reinsurers have also seen profits fall in the first quarter. Munich Re’s shares fell 6% last Wednesday after the insurer revealed that its Q1 profits would be below expectations.

The reinsurer has been forced to take write-downs on its investments, prompting its chief executive Nikolaus Von Bomhard to warn that its profit target for the year was now looking “ambitious”.

Munich Re’s rival Swiss Re also reported a fall in profits. The Swiss group posted earnings of $1.2bn in the first quarter, 14% down on the same period of 2015.

Its property/casualty business posted net income of $587m in the first quarter, down from $808m in Q1 2015. It blamed a lower underwriting result, pricing pressures and prior year developments.

Swiss Re’s Corporate Solutions unit fared even worse, with its profits falling by more than half. It reported net income of $80m in the first quarter of 2016 compared with $167m for Q1 2015. The result was negatively affected by realised losses from insurance in derivative form, due to the continued impact of the unseasonably mild winter.

Everest Re and PartnerRe also reported lower income on lower underwriting and investment returns. Bermudian-based Everest Re Group saw its first-quarter net income fall 47% while PartnerRe saw its net income for the quarter fall to $201.4m from $231.7m in Q1 2015.

Separately, AXA said that its corporate insurance unit and international business had grown in the first quarter. Releasing its first quarter revenue figures, AXA said that international insurance revenues increased by 6% in Q1, reflecting strong new business sales at AXA Corporate Solutions.

Overall, AXA said that property and casualty premiums were 3% higher in the first quarter at €11.7bn, driven by average rate increase of 3.4%.

UK insurer RSA Insurance Group announced a dip in premiums this week. The insurer did not disclose its Q1 profits, but said it benefited from benign weather and a strong underwriting result in the first quarter.

However, RSA’s net premiums were 1% lower at £1.6bn, reflecting the impact of disposals and a reduction in premiums in Scandinavia and Canada. This year RSA has sold businesses in Brazil, Colombia, Chile, Argentina and Russia. It expects to dispose of its two remaining Latin American units later this year.