Global Reinsurers’ ROE Jumps to 22% in 2023, but Market Softening Unlikely: AM Best

AM Best’s population of global reinsurance companies posted a return on equity (ROE) of 22% in 2023 – a five-year high that was driven mainly by favorable investment income and strong underwriting performance. The fundamentals are excellent, but Hurricanes Helene and Milton “will probably stall any softening of the market cycle,” AM Best said.

Net investment income in 2023 led the contribution to surplus growth, followed closely by underwriting gains and unrealized capital gains – all components that pushed ROEs well above the cost of equity capital, said AM Best in an analysis of reinsurers in its Top 25 Global Reinsurance Composite.

“In 2023, a year in which premium rates continued to move up, interest rates remained high, and capital markets performed well, the composite recorded its highest ROE in five years,” said the composite report titled “Significant Increase in Global Reinsurers’ ROE Due to Investment and Underwriting Results.”

At the same time, the report added, retained earnings were bolstered by strong underwriting and favorable net investment income, while unrealized capital gains, muted dividends, and share buybacks also propelled increases in surplus, strengthening balance sheets.

Reduced Frequency Exposures

While secondary natural catastrophe events were the norm in 2023, reinsurers helped to reduce exposures when they “adjusted their policies to move away from lower layers close to the primary peril, posting the lowest combined and operating ratios in five years,” AM Best indicated.

AM Best said a significant proportion of the potential incurred insured losses from Hurricanes Milton and Helene is likely to be transferred to the global reinsurance market. “However, stricter reinsurance terms and conditions, which led to higher attachment points, are expected to make reinsurers’ losses manageable.”

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The impact of the two hurricanes is more of an earnings event than a capital event for the composite reinsurers, AM Best explained. “Fourth-quarter 2024 results will be negatively affected, but full-year earnings should still be favorable. Further reinsurance market hardening is unlikely, but Helene and Milton will probably stall any softening of the market cycle.”

Hurricane Helene hit Florida, Georgia, South Carolina, North Carolina, Virginia and Tennessee in late September, while Hurricane Milton hit Florida in early October. Milton caused private insured losses of about $36 billion, according to catastrophe modelling firm Karen Clark & Co., which further estimated that insured losses from Hurricane Helene will be about $6.4 billion – from wind, storm surge and inland flooding in nine states.

“Based on FY2023 results for the global reinsurance companies, and ignoring tax implications, it would take net claims losses of around $15 billion for the composite’s ROE to equal the cost of capital in excess of 15%…,” AM Best said.

“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 in the composite’s operating performance assessments and analysis,” the ratings agency said.

ROEs are likely to continue to exceed the cost of capital over the medium term, AM Best explained, “as new capital seeks enterprises with established track records or with the liquidity of the insurance-linked securities market, which provides investors quicker entry and exit points in the reinsurance industry.”

AM Best’s Global Reinsurance Composite Explained

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. To keep data consistent year over year, previous years’ data is adjusted when companies are added or removed from the composite. The Top 25 reinsurers’ gross premiums written represented almost 90% of total reinsurance industry gross premium written (as measured by the Top 50 reinsurers) in 2022.

Photograph: Homes lie in a debris field in the aftermath of Hurricane Helene, Thursday, Oct. 3, 2024, in Pensacola, North Carolina. (AP Photo/Mike Stewart)