AM Best's population of global reinsurance companies posted a return on equity (ROE) of 22% in 2023, a five-year high, driven mainly by a turnaround in unrealised losses from the previous year and strong underwriting performance.
The new Best’s Special Report, “Significant Increase in Global Reinsurers’ ROE Due to Investment and Underwriting Results”, notes that AM Best’s composite of reinsurers’ gross premiums written represented almost 90% of total reinsurance industry gross premium written in 2022 and includes companies reporting using US GAAP and IFRS 17 standards. (The analysis in this report uses the five-stage DuPont ROE formula to break down the sources of the composite’s ROE.)
AM Best’s Global Reinsurance Composite is composed of global reinsurers, leveraging group financial statements for the 25 largest reinsurers groups. The composite is reviewed annually to reflect M&A and other events.
According to the report, reserve leverage for the composite dropped, led by non-life reinsurers, other than the Big Four, which have life as a significant line of business and whose reserve leverage was relatively stable. The fall in reserve leverage was offset by a significant increase in operating margins. Consequently, the composite’s ROE surpassed its cost of equity after a number of years of falling short, helped additionally by lower taxes and proportionally lower interest on debt.
Hurricanes
For 2024, a significant proportion of insured losses stemming from hurricanes Milton and Helene are likely to be transferred to the global reinsurance market. However, stricter reinsurance terms and conditions, which led to higher attachment points, also should help make reinsurers’ losses manageable.
“Fourth-quarter 2024 reinsurers’ results will be negatively affected, but full-year earnings should still be favorable,” said Mr Guilherme Monteiro Simoes, senior financial analyst, AM Best. “Further reinsurance market hardening is unlikely, but Helene and Milton will probably stall any softening of the market cycle.”
Given the nature of the investment allocations over time and risk profiles, as well as the fact that companies’ actions to earn higher interest rates generally have a limited impact on investment income, AM Best continues to see underwriting profitability as the essential factor in the composite’s operating performance assessments and analysis.
AM Best expects ROEs to continue to exceed the cost of capital over the medium term, as new capital seeks enterprises with established track records or with the liquidity of the insurance-linked securities market, which provides investors with quicker entry and exit points in the reinsurance industry.