After experiencing a significant capital impairment in 2022, re/insurance capital is “slowly returning to its previous levels,” and as reinsurers continue to benefit from hard market conditions, the sector should exceed its cost of capital for the first time in this cycle, according to Howden Tiger.
Global reinsurance broker Howden Tiger has released its interim re/insurance market update report, which highlights a strong underperformance in the first half of the year on the back of premium growth, stable reserves, and steady capital levels as a result of investment recoveries.
Despite these positive factors, Michelle To, Executive Director and Head of Business Intelligence at Howden Tiger, in an accompanying video presented alongside David Flandro, Head of Industry Analysis and Strategic Advisory, noted “significant countervailing factors”, including headwinds in the U.S. personal lines market, higher retentions for primary carriers, elevated reinsurance costs, and north of $50 billion of insured catastrophe losses.
“In spite of all of this, results were positive on average. Consensus estimates were mostly exceeded. Reinsurers in particular have their first opportunity this cycle to exceed their cost of capital and create economic value added,” said To.
In previous years, consistently high catastrophe losses and weak investment results during a soft market made it a real challenge for reinsurers to meet their cost of capital.
But as the chart below highlights, economic value added, which is the return on invested capital minus the weighted average cost of capital (WACC), has been on the rise since the second half of 2022 and is forecast to approach 4% at the end of this year, according to Howden Tiger.
“As you can see, reinsurers have had a tough go of it during this cycle. So have insurers. But we estimate that for the first time in this cycle, reinsurers should exceed their cost of capital creating economic value added on a forward basis,” said Flandro.
“So, in summary, it’s clear that insurers and reinsurers can create economic value in this environment, if they use reinsurance effectively and allocate portfolios strategically.
“Capital levels are recovering and should have stabilised back to previous levels if we have a normal second half. And you know, a large portion of the second half really depends on catastrophe losses and hurricane season, which are in turn a function of climate change and the El Nino cycle,” he added.
