Total capital dedicated to the global reinsurance industry declined 11% at half-year 2022 despite reinsurers’ strong premium growth and improving underlying profitability, according to a new report from Gallagher Re. The decline was driven primarily by mark-to-market investment losses.
Although capital has reduced on an accounting basis, rating agency and regulatory measures of capital adequacy have not been impacted as strongly, Gallagher Re said. The global reinsurance industry’s financial strength thus remains healthy, the report found.
Total global dedicated reinsurance capital was US$647 billion at the half-year, a decrease of US$82 billion from the end of 2021. The most important driver of the fall was US$78 billion of realized and unrealized investment losses due to the sell-off in fixed income and equity markets during the first half. Capital returned through buybacks and dividends also exceeded the contribution from net earnings.
Reinsurers posted strong premium growth of 14% during the first half of 2022, driven by continued favourable pricing. Their weighted average combined ratio was 93%, an improvement from the 94.1% combined ratio posted in H1 2021. However, the accident year loss ratio, excluding natural catastrophe losses and reserve developments, fell slightly from 59.8% in H1 2021 to 60.2% this year as rate increases failed to keep up with hikes in loss costs. A higher load of “normalized” natural catastrophe losses pushed the underlying combined ratio to 99.7% from 98.4% in H1 2021, Gallagher Re reported.
Reported return on equity was hit by investment losses, declining to 0.4%. Underlying ROE, however, continued to improve, rising from 6.3% in H1 2021 to 7.5% for H1 2022. While this is the best performance seen since 2014, the figure is still below the industry’s weighted average cost of capital.
“Investment losses have hurt what was otherwise a more positive first half for reinsurers, and the steep headline decline in capital overstates the impact on economic capital positions,” said James Kent, global CEO of Gallagher Re. “But the figures nonetheless show the need for continued vigilance given today’s macroeconomic and geopolitical uncertainties and the continuing debate over natural catastrophe exposures.”