New analysis from Gallagher Re, the global reinsurance broker, shows that total, dedicated reinsurance capital fell by 12% from the end of 2021 to $638 billion as at the end of December 2022, driven by a decline in the value of investments.
The broker’s latest reinsurance market report tracks the capital and profitability of the reinsurance sector at an interesting time for the marketplace.
While rates in many areas are on the rise, with some significant rises seen at the April 1st reinsurance renewals, notably for property catastrophe business in the Asia Pacific region, the financial market turmoil has challenged profitability.
According to Gallagher Re, the 12% dip in reinsurers’ accounting capital in 2022 represents the first time this has happened since at least 2015.
The chart below, provided by Gallagher Re, shows that the decline was driven by traditional reinsurance capital, which fell from $605 billion in 2021 to $519 billion in 2022, while alternative capital slightly offset this with growth of $2 billion to $96 billion. At the same time, Gallagher Re notes that capital attributable to major regional and local reinsurers fell from $27 billion to $24 billion.
“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,” says the broker.
In contrast to the headline capital figures for 2022, Gallagher Re notes that this US GAAP / IFRS view of capital does mask the fact that, in economic terms, solvency actually remained strong and generally increased during 2022. This leads Gallagher Re to view the global reinsurance industry’s capital position as still robust.
In terms of top line growth, the report finds that premium growth was also strong in 2022 at 12%, and was supported by rate rises and exposure growth on the back of inflation.
Importantly, the average combined ratio on both a reported an underlying basis was healthy in 2022, at 97.8% and 98.8%, respectively.
However, financial market volatility saw the average return on equity (ROE) reported by the cohort of reinsurers decline from 11.4% in 2021 to 6.8% in 2022, as the swing in investment gains that served as a tailwind in 2021 transitioned to a strong headwind in 2022.
On an underlying basis, however, the ROE moved from 6.3% in 2021 to 11.2% in 2022, which Gallagher Re attributes to better underwriting results, stronger investment income, and greater operating leverage in 2022 as shareholders’ equity reduced on the back of the decline in investments.
In fact, Gallagher Re finds that for the first time in the past decade, reinsurers’ underlying average ROE exceeded the industry’s weighted average cost of capital.
“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,” said Brian Shea, Global Head of Strategic & Financial Advisory, Gallagher Re.