Total capital dedicated to the global reinsurance industry fell 11% in the first half of 2022 despite strong growth in reinsurer premiums and improving underlying profitability, according to a new report from Gallagher Re. explained mainly by investment losses at market value.
Although capital has declined on an accounting basis, rating agencies and regulatory capital adequacy measures have not been so heavily impacted, Gallagher Re said. The financial strength of the global reinsurance industry therefore remains healthy. , according to the report.
Total global capital dedicated to reinsurance was $647 billion in the six-month period, down $82 billion from the end of 2021. The largest contributor to the drop was $78 billion of realized and unrealized investment losses due to the sale of fixed income securities. and equity markets during the first half. Capital recovered through buyouts and dividends also exceeded the contribution from net income.
Reinsurers recorded strong premium growth of 14% in the first half of 2022, thanks to still favorable pricing. Their weighted average combined ratio stood at 93%, an improvement compared to the combined ratio of 94.1% posted in H1 2021. However, the loss ratio, excluding claims relating to natural catastrophes and changes in provisions, declined slightly from 59.8% in H1 2021 to 60.2% this year as rate increases failed to keep up with claims cost increases. A higher charge from “normalized” natural catastrophe losses pushed the underlying combined ratio to 99.7% from 98.4% in the first half of 2021, Gallagher Re reported.
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Reported return on equity was impacted by investment losses, falling to 0.4%. The underlying ROE however continued to improve, rising from 6.3% in the first half of 2021 to 7.5% in the first half of 2022. Although this is the best performance recorded since 2014, this figure remains below the industry’s weighted average cost of capital.
“Investment losses hurt what was otherwise a more positive first half for reinsurers, and the sharp overall capital decline overestimates the impact on economic capital positions,” said James Kent, Global CEO of Gallagher Re. “But the numbers nevertheless show the need for continued vigilance given today’s macroeconomic and geopolitical uncertainties and the ongoing debate over natural disaster exposures.”