For the first time in a decade, reinsurers’ average underlying return on equity (ROE) exceeded the industry’s weighted average cost of capital (WACC), according to the latest Reinsurance Market Report by Gallagher Re.
The report found that the total capital dedicated to the global reinsurance sector sat at $638 billion by the end of 2022, indicating a 12% decline from the restated year-end 2021 capital of $725 billion.
The drop in capital was largely driven by the decline in the value of investments, Gallagher Re said in its report, as there was no new capacity despite tightened pricing and terms and conditions.
However, this US GAAP / IFRS accounting view of capital does not provide a complete picture of the situation, the report argued, noting that it masks how, in economic terms, solvency remained strong and actually increased during the year.
“Gallagher Re’s view is that economic views of capital are more relevant than pure unadjusted accounting measures and that they are more relevant for management decision-making at most (re)insurers,” the report said. “In our view, the global reinsurance industry’s capital position remains robust.”
Furthermore, premium growth was found to have remained strong at 12%, supported by rate increases and exposure growth driven by inflation.
The report also revealed that the average combined ratio, on both a reported and underlying basis, was healthy, with the reported combined ratio broadly stable at 97.8%, and the underlying combined ratio improving from 99.7% to 98.8%.
And although the average reported ROE declined from 11.4% to 6.8%, the underlying ROE jumped from 6.3% to 11.2%, driven by better underwriting results, stronger investment income, and more operating leverage.
This improvement marks the first time in the past 10 years that reinsurers’ average underlying ROE surpassed the industry’s WACC.
“It would be easy to misinterpret 2022, both in terms of reinsurers’ capital positions and earnings,” said Brian Shea, global head of strategic & financial advisory at Gallagher Re. “While capital, as measured on an accounting basis, and the average reported ROE both declined materially, economic measures of solvency remain strong, and reinsurers have achieved a strong improvement in underlying performance such that the underlying ROE has finally moved above the industry’s cost of capital.”
Gallagher Re publishes its Reinsurance Market Report biannually to provide in-depth analysis of the size and performance of the reinsurance market. It is based on the Reinsurance Market Index group of companies, which for 2022 comprised 41 reinsurers from across the globe.
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