The drop in capital was driven by a decline in the value of investments. There was also a conspicuous absence of new capacity, despite the potential attraction of much tightened pricing and terms and conditions
Perhaps most notably, for the first time in the past ten years, reinsurers’ average underlying ROE surpassed the industry’s weighted average cost of capital (WACC).
London:
Total capital dedicated to the global reinsurance sector totalled USD 638bn as of the end of 2022, a decline of 12% versus the restated 2021 base.
This is according to the latest Gallagher Re’s Reinsurance Market Report, which tracks the capital and profitability of the global reinsurance industry and is published on Wednesday.
The drop in capital was driven by a decline in the value of investments. There was also a conspicuous absence of new capacity, despite the potential attraction of much tightened pricing and terms and conditions.
This US GAAP / IFRS accounting view of capital, however, masks that in economic terms solvency remained strong and in fact generally increased during the year. In Gallagher Re’s view, the global reinsurance industry’s capital position remains robust.
Premium growth remained strong in 2022 at 12%, supported by rate increases and exposure growth (the latter particularly driven by inflation).
The average combined ratio, on both a reported and underlying basis, was healthy. The reported combined ratio was broadly stable at 97.8% and the underlying combined ratio improved from 99.7% to 98.8%.
The average return on equity (ROE) reported by reinsurers declined from 11.4% to 6.8% due to a swing in investment gains (a strong tailwind in 2021, a strong headwind in 2022).
On an underlying basis, however, the ROE jumped from 6.3% to 11.2%.
This improvement has been drive by better underwriting results, stronger investment income and, for 2022, more operating leverage as shareholders’ equity reduced due to the decline in the value of investments.
Perhaps most notably, for the first time in the past ten years, reinsurers’ average underlying ROE surpassed the industry’s weighted average cost of capital (WACC).
Brian Shea, Global Head of Strategic & Financial Advisory, Gallagher Re, said: “It would be easy to misinterpret 2022, both in terms of reinsurers’ capital positions and earnings. 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.”