Global Reinsurers' ROE Surges to 22 Percent in 2023 Amid Strong Performance

A.M. Best's global reinsurance composite reported a return on equity (ROE) of 22 percent in 2023, marking a 5-year high attributed to a rebound from prior-year unrealized losses and solid underwriting results. The findings, published in the Best's Special Report titled "Significant Increase in Global Reinsurers' ROE Due to Investment and Underwriting Results," cover nearly 90 percent of the industry's gross premiums and analyze performance through the 5-stage DuPont ROE model. This analysis includes companies reporting under US generally accepted accounting principles (GAAP) and International Financial Reporting Standard (IFRS) 17 standards.

According to the report, the composite's ROE improvement was partly driven by a decline in reserve leverage, especially among non-life reinsurers outside of the "Big Four" with significant life insurance portfolios. Although reserve leverage dropped, the effect was offset by stronger operating margins. Lower taxes and reduced debt interest further lifted the ROE, allowing the composite to exceed its cost of equity after several years below that benchmark.

Despite anticipated 2024 hurricane-related losses from storms Milton and Helene, A.M. Best projects these to remain within manageable levels due to higher reinsurance attachment points set by stricter terms. "Fourth-quarter 2024 reinsurers' results will be negatively affected, but full-year earnings should still be favorable," said Guilherme Monteiro Simoes, senior financial analyst at A.M. Best. However, he noted that while market softening is improbable, the impact of Helene and Milton could halt further hardening.

A.M. Best highlighted that long-term underwriting profitability continues to play a pivotal role in the composite's performance evaluations, as investment allocations typically yield limited gains in investment income. ROEs are expected to exceed the cost of capital over the medium term, with new capital flowing toward established reinsurance firms and the insurance-linked securities market, offering investors more liquidity in the sector, according to the rating agency.

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