Gallagher Re: Reinsurance capital grows 13% in H1 on improved investment and UW performance
The reinsurance sector’s capital grew 13 percent in the first half from the turn of the year due to strong investment performance and steadily improving underwriting results, while underlying return on equity (ROE) was well above the cost of capital for the second year in a row, according to Gallagher Re.
In a new report, Gallagher Re said that capital dedicated to the global reinsurance sector totalled $709bn at the half-year point in 2023. This was an increase of 13 percent from the restated full-year 2022 base, roughly two-thirds of which was due to unrealised investment appreciation.
The broker noted that industry capital levels are almost back to the $725bn peak in 2021.
Non-life alternative capital increased by 4 percent in the first half to $99bn.
The alternative capital growth was driven by catastrophe bonds, which recorded a $5bn increase in the first half. In contrast, collateralised reinsurance continues to shrink on a relative share basis, in line with developments seen in 2022.
In an interview with this publication, Brian Shea, global head of strategic and financial advisory at Gallagher Re, said that the reinsurance market so far in 2023 has delivered on the favourable conditions that were seen at the turn of the year.
“Given the strength at the January renewals, you probably would have guessed a really strong financial performance for the reinsurers in 2023, and so far that's exactly what's happened,” he said.
Shea continued: “In the first half of the year we've seen much-improved underlying results, and they're very strong. On top of that, there's also been a benefit in that natural catastrophe losses have actually been a bit lighter than normal, and you've had investment markets giving an abnormally positive boost to the underlying performance. So everything's pointing the right way.”
The report stated that the global reinsurance industry’s capital position also remains robust on an economic basis, a measure that Gallagher Re views as more relevant for management teams’ decision-making.
For the four top European reinsurers, average solvency improved to 264 percent, from 255 percent at the end of 2022. In most cases, solvency remains well above these four companies’ target levels.
“Robust increase” in reinsurers’ capital base
Gallagher Re’s reinsurance market report tracks the capital and profitability of the global reinsurance industry.
“Global reinsurers performed well in the first half of 2023, reporting a robust increase in their capital base and improved underwriting profitability and ROEs,” the report said.
The analysis is based on a reinsurance market index group of companies, which for 2023 HY includes 41 reinsurers from across the globe. The index companies contribute more than 80 percent of the industry’s capital.
The capital of the index companies increased by $71bn – or 14 percent – to $581bn. This was driven by $55bn of unrealised investment appreciation, most of which was attributable to National Indemnity whose significant US equity holdings increased in value in H1.
Excluding National Indemnity’s gains, index capital increased by 5 percent.
The index companies’ net income of $22bn benefited from higher investment income due to an increase in the running yield and a return to a positive gains yield, in addition to continued strong underwriting profitability.
All index companies reported higher capital bases, apart from Hannover Re, which was roughly flat due to repayment of €500mn of subordinated debt in the period.
RenaissanceRe had a 39 percent rise in capital due to a $1.4bn capital raise to support its purchase of Validus Re and net income of $0.8bn.
Everest’s net income rose 28 percent due to a $1.4bn capital raise to target growth in the favourable market conditions and net income of $1.0bn.
Gallagher Re said that capital raises and debt reduction accounted for only $4bn in the first half, despite continued favourable market conditions.
Shea said that it could be seen as a “head scratcher” that more capital has not been raised in the reinsurance market.
“If things are this good, and back a year ago were previewed to be this good, why have we not had more capital coming into the industry? One thing is the incumbents in our view don't need to raise capital to fund that growth if they want to grow,” he said.
In addition, there has been a lack of new entrants following five years of reinsurers not delivering what they promised until last year.
“Results had been consistently poor, and there's been a real credibility gap,” he said. “I think that's what held back new capital from coming in a year ago and year to date.”
Shea added that the question is whether investors will be more positive about funding new ventures if reinsurers do have a really good year in 2023.
Reported ROE increases to 19.3%
Reinsurers’ underlying profitability improved in the first half due to a lower underlying combined ratio and higher recurring investment income.
The reported ROE increased to 19.3 percent in the first half of this year, from 4.4 percent in H1 2022.
Gallagher Re in the report also provides details for a subset of the index that provides the relevant disclosure. Some 80 percent of the subset delivered an ROE of 17.9 percent or higher, with only Axis Capital, White Mountains Insurance Group Ark and QBE reporting a meaningfully lower ROE than the average.
The reinsurance industry’s underlying ROE – which strips out investment gains/losses and prior year development and normalises for natural catastrophe losses – improved markedly to 13.4 percent, from 10.2 percent in the first half of 2022.
Gallagher Re said the underlying ROE was well above the cost of capital for the second year running, after an elongated period of sub-par returns.
“Taking into account current interest rate levels and rate increases booked at renewals YTD, a further meaningful improvement is possible,” the report said. “This makes earnings increasingly resilient and leaves a meaningful earnings buffer above the cost of capital.”
Talking to this publication, Shea said that there is still a tailwind that can support further improvements in ROE.
“All the price increases that the reinsurers have put through have not all been fully earned yet, and the earnings benefit of higher interest rates also hasn't fully worked its way in yet,” he said. “You've got this very strong financial position and that just makes the industry better able to cope, for example, in case we do have a bad hurricane season.”
Gallagher Re estimates that, allowing for the exceptionally strong reported ROE in the first half of 2023, the industry would be able to absorb about 17 points of incremental natural catastrophe losses beyond what would normally be expected in the second half of the year and still deliver an underlying ROE in line with the current cost of capital.
Shea said that the 17 points is equivalent to about a $50bn reinsurance loss that could be absorbed by the market and still earn an ROE that is creating value.
Subset combined ratio improves to 87.6%
The combined ratio for the subset improved on a reported basis to 87.6 percent from 89.2 percent in the first half of 2022.
All subset companies reported combined ratios under 100 percent, and all other than QBE and Munich Re reported improved combined ratios.
Prior year loss development had a 1.5 percent positive impact on the combined ratio for the subset, down from 1.8 percent in 2022’s first half.
Gallagher Re noted that reserve releases have been broadly stable recently – at around a 1 percent to 2 percent benefit to the combined ratio since 2018 – but are much lower than in the 2014-2018 period.
“Given continued inflationary pressures we do not expect any material uplift in the near-term,” the report said.
Swiss Re and White Mountains Insurance Group Ark are the only two subset firms that reported reserve strengthening in H1 2023.
The subset’s revenues grew 8.7 percent in the first half of this year, driven by rate increases. This was down from 13.5 percent in the first half of 2022 and 15.2 percent in the first half of 2021.
“Whilst there were significant rate increases for property reinsurance and commercial insurance business, volume growth was muted as a result of increasing attachment points and portfolio management actions,” the report said.
Gallagher Re said that most companies experienced revenue growth with Bermudians leading the pack – Arch was up 54 percent, Lancashire was up 28 percent, White Mountains Insurance Group Ark was up 27 percent, SiriusPoint Re was up 18 percent and RenaissanceRe was up 18 percent.
Discussing the slowdown in premium growth to 8.7 percent, Shea said: “Given the strength of price improvement, it's a little bit surprising. The best explanation we can give for that is that retentions have gone up. Reinsurers have declined to write lower layers, which attract more premium.”