Despite reinsurers’ strong premium growth and improving underlying profitability, total capital dedicated to the global reinsurance industry declined 11% at half-year 2022, primarily as a result of mark-to-market investment losses. Although capital has reduced on an accounting basis, rating agency and regulatory measures of capital adequacy have been less impacted. The global reinsurance industry’s financial strength thus remains healthy, according to the latest Reinsurance Market Report from Gallagher Re, the global reinsurance broker.
Total global dedicated reinsurance capital of $647 billion at the half year reflects a decrease of $82 billion versus the end of 2021. The most important driver is $78 billion of realised and unrealised investment losses due to the sell-off in fixed income and equity markets in the first half of 2022. Additionally, capital returned through buybacks and dividends exceeded the modest contribution from net earnings.
Reinsurers together achieved strong premium growth of 14% during H1 2022, supported by continued favourable pricing. Their weighted average combined ratio was 93.0%, marking a continued improvement from the 94.1% achieved in H1 2021. However, the accident year loss ratio, excluding natural catastrophe losses and reserve developments, slipped slightly from 59.8% in H1 2021 to 60.2% this year, as rate increases failed to keep pace with increases in loss costs. A higher load of ‘normalised’ natural catastrophe losses pushed the underlying combined ratio up to 99.7% (H1 2021 98.4%).
Reported return on equity was impacted by investment losses and declined to 0.4%. Underlying ROE, however, continues to improve, rising from 6.3% at the 2021 half year to 7.5% for H1 2022. Nevertheless, while this is the best performance achieved since 2014, the figure remains below the industry’s weighted average cost of capital.
James Kent, Global CEO of Gallagher Re, said: “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. 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.”
The Gallagher Re Reinsurance Market Report is a biannual publication providing in-depth analysis of the size and performance of the reinsurance market. Analysis is based on the Reinsurance Market Index group of companies, which in 2022 includes 46 reinsurers from across the globe.