Reinsurance capital rises, underlying ROE ‘well above’ cost of capital: Gallagher Re

Global reinsurance capital rose 13% from the end of 2022 to $709 billion at half year 2023, as reinsurers benefited from improving underwriting results and a strong investment performance, according to reinsurance broker Gallagher Re.

Industry capital levels are almost back to their 2021 peak of $725 billion, and have again breached the $700 billion mark at the half year on the back of growth in both traditional and alternative capital, reports Gallagher Re in its latest Reinsurance Market Report.

Capital for INDEX companies rose from $510 billion in 2022 to $581 billion at H1 2023, while alternative capital hit a new high of $99 billion, up from $96 billion in 2022. Major regional and local reinsurers and pro-rated portion of capital within major groups also increased, from $23 billion to $29 billion.

The reinsurance broker attributes the rise in capital to a strong investment performance and steadily improving underwriting results, but notes a lack of new capacity despite the favourable market environment.

Premium growth across the cohort was strong at 8.7%, driven mostly by rate increases. Gallagher Re notes that volume growth was limited in part as a result of rising attachment points and a shift in business mix.

On a reported basis, the combined ratio strengthened from 89.2% at half year 2022 to 87.6% at H1 2023, and from 99.7% to 95.4% on an underlying basis.

In fact, Gallagher Re says that the underlying combined ratio was the strongest achieved over the decade it has conducted this analysis.

The average return on equity (ROE) also improved for the group of reinsurers on an underlying basis, from 10.2% at 2022 half year to 13.4% this year. The reported ROE improved strongly as well, from 4.4% to 19.3%, driven by additional capital gains.

The analysis shows that for the second year running, the underlying ROE is well above the cost of capital.

“Global reinsurers have shown strong performance in the first half of this year, reporting increased capital alongside improved underwriting profitability and ROEs,” said Tom Wakefield, CEO, Gallagher Re. “On an economic basis, capital adequacy also remained robust and indeed generally improved. Higher interest rates and rate increases booked at renewals YTD provide a tailwind and the potential for reinsurers to improve ROE further.”

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