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Global Reinsurance Industry Results: Capital & Underwriting Performance

    Global reinsurance dedicated capital totaled USD 638 bn, a decline of 12%. When reported on an economic basis, solvency not only remained strong but in fact generally increased during the year, according to Gallagher Re Reinsurance Market Report.

    The decline in reported Return on Equity (ROE) masks a notable improvement in underlying performance, to the point where the reinsurance industry’s underlying ROE exceeded its cost of capital for the first time since at least 2013.

    Property reinsurance rates rose significantly at the January 2023 renewals. The losses from Hurricane Ian last year were a contributory factor, but signals for a market correction had already been mounting.

    Demand for catastrophe-related insurance has risen on evidence of more peril activity since 2017. This is one factor behind today’s hard market in re/insurance. So too are the geopolitical and economic storms the world faces. In particular, fallout from the decade long zero-to-negative interest rate environment, the pandemic, and war in the Ukraine has included high inflation and rising costs in the construction sector in 2022.

    This has increased the value of insured property assets and associated claims for damage caused by weather and other events. High inflation rates have also had financial market impacts given the need for central banks’ to hike policy rates rapidly (see How Global Reinsurance Market Endured a 2023 Renewals?).

    Global INDEX reinsurance companies

    Focusing on the INDEX reinsurance companies, which contribute more than 80% of the industry’s capital:

    • This drop is entirely explained by a decline in the value of investments across all major asset classes — equities, government bonds and corporate bonds.
    • While rising interest rates depress the value of investments, they normally improve economic measures of capital and solvency, and this was indeed the case for most of the large European reinsurers where Solvency 2/Switzerland’s SST disclosure is available. Gallagher Re’s view is that most (re)insurers make decisions based more on economic views of capital than on accounting measures. In our view, the global reinsurance industry’s capital position remains robust.
    • There was also a conspicuous absence of new capacity, despite the potential attraction of much-tightened pricing and terms and conditions.
    • While capital, or ‘supply’, is healthy in our view, demand also increased sharply in 2022 FY, principally due to inflation.

    According to Swiss Re sigma records, the re/insurance industry has experienced poor underwriting results following the step-up in natural catastrophe loss severity since 2017, new risk drivers and fallouts from the pandemic and war in Ukraine, including inflation raising the value of insured property assets.

    The elevated natural catastrophe insured losses of the past six years reaffirm the 5‒7% uptrend in average annual losses established over the last 30 years.

    The growth has been and will be largely driven by rising loss severity of individual catastrophes. This is the result of rising exposures that comes alongside economic development, urbanisation, and population growth, often in areas exposed to natural hazards.

    According to Reinsurance Underwriting Results, underwriting cycle is characterised by periods of soft (falling/stable premium rates, coverage readily available) and hard (rising rates, cover less available) market conditions.

    The driver is re/insurer competition, affected by claims trends, interest rates, industry capital and catastrophe losses. Swiss Re attribute most of the current step up in prices to uncertainty around claims trends and the effect of inflation and interest rates on industry capital and demand.

    Risk appetite and alternative sources of capital affect overall capacity and the speed with which prices adjust to updated risk assessments.

    Recent underwriting experience affects the supply of existing industry capital and also influences expectations of future profits, both of which affect capacity decisions.

    Reinsurance dedicated capital

    Global reinsurance capital declined by 12% in 2022 FY to USD 638 bn, similar to the 11% drop recorded in the first half of 2022.

    The drop is entirely explained by a decline in the value of investments across all the major asset classes — equities, government bonds and corporate bonds.

    Just over 80% of global reinsurance capital comes from the INDEX companies, among which capital declined by 14%. This was slightly offset by 2% growth in alternative capital, to USD 96 bn. The expansion of alternative capital was driven by net inflows and investment returns, which more than offset natural catastrophe losses and USD strengthening.

    Total reinsurance dedicated capital (USD bn)

    Total reinsurance dedicated capital (USD bn)
    Source: Gallagher Re

    The first full-year drop in reinsurers’ accounting capital since at least 2015. Investment losses more than explain the drop in INDEX capital. We have re-stated year-end 2021 capital from USD 728 bn to USD 725 bn, following our annual review of constituents.

    Capital analysis for the INDEX (USD bn)

    Capital analysis for the INDEX (USD bn)
    Source: Gallagher Re

    While global reinsurance capital has dropped as measured on an accounting basis (US GAAP and IFRS), it is a very different picture when measured on an economic basis. While rising interest rates (and therefore falling bond prices) are a negative for accounting measures of capital, they are usually a positive for economic measures.9 This is the case for the EU’s Solvency 2 and Switzerland’s SST.

    From 2023 IFRS is also changing to an economic basis, with IFRS 17 being implemented to replace IFRS 4.

    The EU’s Solvency 2 and Switzerland’s SST measures of regulatory solvency improved for three of the European big four reinsurers last year. SCOR’s Solvency 2 ratio, while declining slightly, remains comfortably above its target (see The Role of Insurance & Reinsurance in Minimizing Risks of the War`s Impacts).

    Rating agency measures of capital fall between US GAAP and IFRS 4 on the one hand, and Solvency 2 and SST on the other.

    European reinsurers solvency ratios

    European reinsurers solvency ratios
    Source: Gallagher Re

    Generally, the agencies so far have taken a benign view of the impact of rising interest rates on reinsurers’ capital positions, provided they deem the reinsurer to have adequate liquidity and therefore not be a forced seller of securities at a loss.

    Many (re)insurance management teams, in setting their capital key performance indicator (KPI), also adjust headline shareholders’ equity to strip out unrealized gains/losses.

    Gallagher Re’s view is that economic views of capital are more relevant than pure unadjusted accounting measures and that they are more relevant for management decision-making at most (re)insurers. In our view, the global reinsurance industry’s capital position remains robust.

    Global Reinsurers’ Underwriting Performance

    Drilling further into profitability, for the SUBSET of companies within the INDEX that provide the relevant disclosure:

    • Premium growth remained strong in 2022 FY at 12.3%, supported by rate increases and exposure growth.
    • The reported combined ratio was broadly stable at a healthy 97.8%. Within that, though, the ex-nat cat accident year loss ratio deteriorated by 2.0 percentage points as price increases failed to keep pace with claims inflation. This was offset by a lighter load of nat cat losses and an improved expense ratio. Prior year reserve development, which provided significant support for reported combined ratios in the past, has been more subdued over the past three years.
    • On an underlying basis, the combined ratio improved for the third year in a row, from 99.7% to 98.8%, driven by the better expense ratio and a lower load of normalized natural catastrophes.
    • The average ROE on a reported basis declined from 11.4% to 6.8% because of a reversal of investment gains (a strong tailwind in 2021 FY, a strong headwind in 2022 FY).

    The underlying ROE has been steadily improving in recent years (2020 FY: 1.3%, 2021 FY: 6.3% and 2022 FY: 11.2%) to the point where underlying ROE now exceeds the industry’s cost of capital (see TOP 50 Largest Global Reinsurance Groups in the World).

    This improvement has been driven by better underwriting results, stronger running investment income, and for 2022 FY, more operating leverage (i.e., a smaller denominator of shareholders’ equity).

    Top 25 Reinsurers by Net Written Premium, $ mn

    RankReinsurers2022FY2021FY
    1Munich Re66 71065 254
    2Swiss Re43 9174 322
    3Great West Lifeco40 57342 124
    4National Indemnity35 07034 348
    5Hannover Re31 48929 384
    6Fairfax22 27218 278
    7MAPFRE20 94121 097
    8QBE15 08114 474
    9RGA13 07812 513
    10Everest Re12 34411 446
    11Arch Capital11 0779 018
    12WR Berkley10 0048 863
    13Markel8 203712
    14Renaissance Re7 1965 939
    15Korean Re5 586524
    16Axis Capital5 2634 927
    17Transatlantic Re4 7345 014
    18Sirius Point Re2 5491 735
    19QIC2 1502 336
    20General Re2 0784 974
    21SCOR1 67916 952
    22RSUI Indemnity1 4351 235
    23Milli Re1 3121 058
    24WMIG Ark1 195906
    25Lancashire1 188816
     Index aggregate382 235368 268
     Subset aggregate255 279238 332
    Source: Gallagher Re

    Top 40 Reinsurers by Total Capital, $ mn

    RankReinsurer2022FY2021FY
    1National Indemnity207 276239 470
    2Munich Re27 73340 942
    3Great West Lifeco23 95324 167
    4Swiss Re20 52031 389
    5Fairfax20 33621 316
    6Pacific LifeCorp17 00517 005
    7China Re14 87416 149
    8Hannover Re13 33117 893
    9AXA XL13 13913 139
    10Markel13 12814 718
    11Arch Capital12 91013 546
    12General Re12 73913 927
    13QBE11 73012 144
    14MAPFRE10 67312 270
    15Everest Re8 65910 363
    16SCOR8 30210 216
    17Partner Re8 1018 101
    18WR Berkley7 7777 675
    19GIC India7 2557 903
    20RGA5 65414 133
    21Renaissance Re5 3256 624
    22Axis Capital5 0615 831
    23WMIG Ark4 1193 891
    24Transatlantic Re3 8755 066
    25Validus Re3 5483 548
    26CCR, France3 3313 545
    27Aspen2 7752 775
    28DEVK Re2 5532 717
    29QIC2 4553 081
    30Convex2 4002 400
    31Korean Re2 3052 149
    32R&V Versicherung2 2982 445
    33Sirius Point Re2 0832 503
    34Fidelis2 0782 078
    35Hamilton Re1 7441 744
    36Lancashire1 7141 859
    37Toa Re1 5271 741
    38RSUI Indemnity1 5101 851
    39Peak Re1 4701 470
    40African Re1 0011 001
     Index aggregate518 638605 088
     Subset aggregate166 709205 120
    Source: Gallagher Re

    Top 25 Reinsurers by Income, $ mn

    RankReinsurer2022FY2021FY
    1National Indemnity9 18510 054
    2Munich Re3 6083 467
    3Great West Lifeco2 4732 495
    4Hannover Re1 4791 456
    5Arch Capital1 4362 093
    6WR Berkley1 3811 022
    7Fairfax1 1473 401
    8WMIG Ark793-275
    9QBE770750
    10MAPFRE675905
    11RGA623617
    12Everest Re5971 379
    13Swiss Re4721 437
    14General Re467258
    15Axis Capital193588
    16RSUI Indemnity143191
    17Korean Re136155
    18Milli Re5255
    19Lancashire-3-62
    20Transatlantic Re-129446
    21QIC-178169
    22Markel-2502 389
    23SCOR-316539
    24Sirius Point Re-40345
    25Renaissance Re-1 097-73
     Index aggregate23 253335
    Source: Gallagher Re

    Top 15 Reinsurers by Combined ratio, %

    RankReinsurer2022FY2021FY
    1Milli Re144.1%136.0%
    2SCOR113.2%100.6%
    3Sirius Point Re105.6%116.3%
    4Swiss Re102.4%97.1%
    5Korean Re100.4%100.3%
    6Hannover Re99.8%97.7%
    7Axis Capital99.1%99.0%
    8MAPFRE98.0%97.5%
    9Renaissance Re97.7%102.1%
    10Lancashire97.7%107.3%
    11Everest Re96.4%98.1%
    12Munich Re96.2%99.6%
    13Fairfax94.7%95.0%
    14QBE94.2%93.7%
    15Arch Capital92.2%94.2%
     Index aggregate98.6%98.0%
     Subset aggregate97.8%97.5%
    Source: Gallagher Re

    Global reinsurance market has faced a very late, complex and in many cases frustrating renewal 1/1 2023. As anticipated before negotiations commenced, the two areas of most constraint were peak-zone US property catastrophe capacity and coverage for strikes, riots & civil commotion and war. As renewals approached the end of the year, the market became more bifurcated.

    The consequent environment at renewals led to the most acute, cyclical price increases since the 2001-2006 period, if not before.

    Combined ratio for the SUBSET

    Reported and underlying combined ratios remain sub-100%; underlying continues to improve. Reported combined ratio strong, despite higher ex-nat cat accident year loss ratio.

    The normalized natural catastrophe load is the five-year moving average of the SUBSET’s natural catastrophe losses (excluding COVID-19 losses), calculated on the basis of annual results.

    Reported and underlying combined ratio for the SUBSET

    Reported and underlying combined ratio for the SUBSET
    Source: Gallagher Re

    Underlying ROE for the SUBSET

    Significant improvement in underlying ROE. Underlying ROE exceeds WACC for the first time in ten years.

    S&P estimated WACC (weighted average cost of capital) figures. Underlying ROE excludes investment gains/losses for 2018 FY onward. 2022 FY WACC is Gallagher Re estimated, by taking the S&P WACC for 2022 HY and adjusting it for the change in risk-free rates.

    ROE analysis for the SUBSET

    Significant improvement in underlying ROE
    Source: Gallagher Re

    ROE for the SUBSET

    Underlying ROE exceeds WACC for the first time in ten years
    Source: Gallagher Re

    Expenses for the SUBSET

    Expense ratio reduces further as premium growth exceeds expense growth. Investment income reduces due to negative gains yield; running yield stable. The revised methodology has introduced with report produced a discontinuity in our time series of SUBSET expense ratios.

    Several of the companies removed from our constituent list, particularly Lloyd’s companies, have high expense ratios.

    Therefore, revised methodology expense ratios for 2017 and 2018 are approximately one percentage point lower than the ratios we originally reported.

    Weighted average expense ratio for the SUBSET

    Weighted average expense ratio for the SUBSET
    Source: Gallagher Re

    Investment yield for the SUBSET

    Running yield captures items such as bond coupons, equity dividends and interest income.

    Investment yield for the SUBSET
    Source: Gallagher Re

    One of the most talked-about features of the January renewals was the absence of new capacity, despite the potential attraction of much tightened pricing and terms and conditions. There was virtually nil equity raising and the balance of debt issuance/redemptions almost exactly netted to zero (-USD 0.2 bn). Moreover, no start-ups entered analysis, whether as an INDEX company or as a major regional or local market player.

    The drop in overall INDEX capital was mirrored nearly across the board with the individual INDEX companies.

    The reinsurers who saw the biggest drops in capital were the ones with the highest ratio of assets/equity and whose investment portfolios had the longest duration.

    For example, the long-duration and asset-intensive life portfolio of RGA drove its significant drop in reported capital. As mentioned above, on an economic basis we would expect to see a very different, and potentially opposite. As noted, Hannover Re, Munich Re and Swiss Re also recorded improvements in their regulatory solvency position in 2022.

    Only 4 reinsurers recorded an increase in capital. Milli Re led the way as a depreciation in the Turkish Lira led its non-Lira investments to increase in value when translated back into Lira.

    Return of reinsurance capital

    Return of capital stabilized in 2022, both as a percent of net earnings and of equity. The payout ratio as a percentage of earnings, by its nature, can be volatile given the variability of earnings.

    Changes or trends in the payout as a percent of equity should therefore be more telling.

    As a percent of equity, the payout hump over 2019–2020 is largely due to a single company — Berkshire’s National Indemnity. Excluding National Indemnity, the total payout declined slightly, from 5% in 2021 to 4.6%.

    Return of capital (as a percent of opening shareholders’ equity) and payout ratio for the INDEX

    Return of capital (as a percent of opening shareholders’ equity) and payout ratio for the INDEX
    Source: Gallagher Re

    Notwithstanding the lack of capital raises to take advantage of firming reinsurance market conditions, this decline in payout was likely driven by reinsurers seeking to keep more deployable capital for the renewals.

    Expense ratios

    Expense ratio reduces further as premium growth exceeds expense.

    The average expense ratio for the SUBSET further improved to 28.7%, continuing its downward trend since 2018 FY.

    This improvement reflects strong premium growth which has exceeded the growth in absolute expenses. Premium growth in 2022 FY was 12% compared to growth in absolute expenses of 8%.

    Lower expense ratios provide important support to combined ratios, particularly given the increased ex-nat cat accident year loss ratio and less support from reserve relea

    Weighted average expense ratio for the SUBSET

    Weighted average expense ratio for the SUBSET
    Source: Gallagher Re

    The revised methodology we introduced with our half-year 2019 report produced a discontinuity in our time series of SUBSET expense ratios. Several of the companies removed from our constituent list, particularly Lloyd’s companies, have high expense ratios. Therefore, our ‘revised methodology’ expense ratios for 2017 and 2018 are approximately one percentage point lower than the ratios we originally reported.

    ……………………

    Edited & fact-checked by Oleg Parashchak – Editor-in-Chief Beinsure Media, CEO Finance Media Holding.

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