Gallagher Re’s latest annual reinsurance market report, now in its 10th iteration, reveals substantial gains in underwriting profitability and return on equity (ROE) among global reinsurers for the fiscal year 2023.
These improvements have propelled the capital base of the reinsurance sector to its highest mark since the report’s inception in 2014. Notably, the report underscores a significant elevation in underlying ROEs, driven by reduced combined ratios and augmented recurring investment income, forecasting a continuation of this upward trend.
Reinsurance dedicated capital at the close of 2023 stood at US$729 billion, marking a 12% increase from the revised figures of the previous year. This growth was significantly contributed to by both INDEX companies, which account for over 80% of the industry’s capital, and the non-life alternative capital segment.
Specifically, INDEX capital surged by 12% to US$599 billion, primarily through higher net income and supported by unrealized investment appreciation.
Gallagher Re’s analysis also highlights the robust economic foundation of the global reinsurance industry, noting an average solvency ratio of 261% among the top four European reinsurers, an increase from 255% in the preceding year. In addition, the capital growth in 2023 exceeded demand measures, indicating strong capital supply in the market.
Profitability metrics for a specific subset of companies providing transparent disclosure revealed revenue growth of 7.6% for FY 2023, underpinned by higher rates, albeit with volume growth constrained by various factors including rising attachment points. The reported combined ratio for these companies improved to 88.9% in FY 2023, attributed to fewer natural catastrophe impacts and reductions in the attritional loss ratio.
Contrastingly, Gallagher Re estimates that insured natural catastrophe losses remained high at US$123 billion in 2023, with the subset companies bearing a decreasing proportion of these losses over the last three years. This shift is reflective of higher attachment points and the predominance of “secondary” perils over major US hurricanes in 2023’s loss profile.
On an underlying basis, the combined ratio continued its decline to 96.0%, the lowest since the report’s inception, primarily due to lower attritional loss ratios and normalized catastrophe loads.
The substantial increase in reported ROE to 20.2% in FY 2023 was largely fueled by higher investment gains and reduced catastrophe impacts, resulting in what Gallagher Re dubbed as an “exceptionally strong” year and marking a complete recovery from the less profitable years between 2017 and 2020.
The underlying ROE also saw a notable increase from 12.0% in FY 2022 to 14.3% in FY 2023, indicating a resurgence in the reinsurance sector’s profitability above the cost of capital for the second consecutive year.
The report points to further enhancements to the underlying ROE, influenced by higher interest rates and potential increases from renewal rate upticks, underscoring the reinsurance industry’s strengthened resilience and earnings capacity.
This improvement places reinsurers in a favorable position to manage potential earnings volatility from future natural catastrophe events, demonstrating the sector’s robust financial health.
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