AM Best has reported that the global reinsurance sector achieved a return on equity (ROE) of 22% in 2023, marking a five-year high. This strong performance was primarily driven by favorable investment income and robust underwriting results. However, the agency cautioned that recent hurricanes, Helene and Milton, may hinder any potential softening of the reinsurance market cycle.
Key Highlights
High ROE: The 22% ROE reflects significant growth in surplus, largely due to net investment income, underwriting gains, and unrealized capital gains, which have all contributed to ROEs surpassing the cost of equity capital.
Market Conditions: The report noted that premium rates continued to rise in 2023, interest rates remained elevated, and capital markets performed well, all contributing to the composite’s highest ROE in five years.
Strengthened Balance Sheets: Retained earnings were bolstered by strong underwriting performance and favorable net investment income, alongside muted dividends and share buybacks, which further strengthened the reinsurers’ balance sheets.
Response to Natural Catastrophes
In 2023, while secondary natural catastrophe events were prevalent, reinsurers effectively reduced their exposure by adjusting policies to avoid lower layers close to primary perils. This adjustment resulted in the lowest combined and operating ratios in five years.
Impact of Hurricanes: Hurricanes Helene and Milton are expected to transfer a significant portion of their insured losses to the global reinsurance market. However, stricter reinsurance terms and higher attachment points are anticipated to keep reinsurers’ losses manageable.
Earnings vs. Capital Impact: The hurricanes are viewed more as an earnings event rather than a capital event, with fourth-quarter 2024 results likely to be negatively impacted but full-year earnings expected to remain favorable.
Estimated Losses
Hurricane Milton, which struck Florida in early October, is estimated to have caused private insured losses of about $36 billion, while Hurricane Helene is projected to result in insured losses of approximately $6.4 billion across several states. AM Best indicated that it would require net claims losses of around $15 billion for the composite’s ROE to equal the cost of capital, which is in excess of 15%.
Future Outlook
AM Best anticipates that ROEs will continue to exceed the cost of capital in the medium term. This is attributed to new capital seeking opportunities in established enterprises and the liquidity provided by the insurance-linked securities market, which offers investors more flexible entry and exit points within the reinsurance industry.
About AM Best’s Global Reinsurance Composite
AM Best’s Global Reinsurance Composite includes the financial statements of the 25 largest global reinsurers, which collectively represent nearly 90% of the total reinsurance industry’s gross premiums written in 2022. The composite is reviewed annually to account for mergers and acquisitions and other market changes, ensuring consistency in data year over year.
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