Global reinsurance capital has climbed to a record $805 billion and is set to grow a further 8% this year on the back of retained earnings, but despite the rising capacity, pricing momentum remains tied to structural profitability rather than new inflows, with sector returns still running at nearly twice the cost of capital, according to Gallagher Re’s Michael van Wegen.
“Looking at the full year, we expect capital to grow around 8%, that’s at least $57 billion in additional traditional reinsurance capital, of which roughly $40 billion comes from retained earnings,” van Wegen told Reinsurance News.
Discussing how sustainable the growth momentum of capital is, van Wegen said, “Retained earnings are a very important driver of capital right now.
“As long as profitability remains as attractive as it is, we’re likely to see continued, meaningful capital build, unless management teams decide to return more capital to shareholders. We are seeing some of that.
“Our full-year projection of 8% traditional capital growth assumes payout ratios will rise to about 60%, up from roughly 50% in 2024. The half-year data so far is in line with that expectation.
“Can capital continue to build? Yes, as long as profitability stays strong and unless we see a material step-up in shareholder payouts, that growth almost mechanically continues.
“On pricing, I think it’s important to stress that the upward pricing momentum we’ve seen since 2023 hasn’t really been driven by capital levels. It was driven by structural profitability challenges. That’s why rates increased, terms and conditions tightened, and attachment points shifted.
“Notably, we haven’t seen a big influx of new capital into the industry, certainly not on the traditional side, and only a limited amount in ILS, especially compared to historic hard markets.
“The pricing dynamics right now are more a function of profitability than capital. Profitability remains very attractive, even if results this year are a touch lower than last year so far, the full-year outlook suggests we’ll end up at least as strong. That profitability backdrop is probably the better indicator of where the market is heading.”
Elsewhere in the interview, we asked van Wegen, as reinsurance rates ease from their 2023 highs, what will be critical for the sector to continue generating returns above its cost of capital.
“The starting position is very strong. Our headline outlook for this year is 17–18% on an underlying basis, or 13–14% on a reported basis, well above the cost of capital, which is around 8%. So we’re talking about returns that are roughly one-and-a-half to two times the cost of capital. A lot would need to change before returns dropped below that threshold,” he explained.
Van Wegen continued, “To underline that, the pricing trends we’ve seen so far this year haven’t materially affected the attritional loss ratio. For example, in the first half, the attritional loss ratio remained stable at 66.8%, showing no visible impact from rate developments at renewals. That’s a solid starting point.
“It’s also important to recognise that the cycle isn’t uniform across all lines of business. The softening we’ve seen year-to-date is largely in some property catastrophe lines in certain geographies. Other lines are more stable, and in some cases, are still experiencing a bit of hardening.
“Depending on the reinsurer, diversification helps, so while some segments are softening, the overall picture remains healthy. And again, that’s reflected in the relatively unchanged attritional loss ratio.”
Closing the interview, van Wegen reflected on the report in more detail, highlighting what he sees as the key findings.
“For me, there are four main takeaways from the report, some of which we’ve already touched on. Capital is very healthy and continuing to build, largely driven by retained earnings; it was up 4.8% in the first half, and we expect full-year growth of about 8%, with more than $40 billion coming from retained earnings,” van Wegen reiterated.
He continued, “Profitability remains strong: first-half headline ROE was 17.7%, down slightly from an exceptionally strong 19.6%, but still well above the cost of capital, supported by solid combined ratios and investment returns. For the full year, we expect headline ROEs of 17–18% and underlying ROEs of 13–14%.
“Looking at the cumulative experience since 2017, the industry has fully recouped the weaker years of 2017–2020 and generated a margin over that period; even assuming a $115 billion insured loss event on top of normal catastrophe losses, the industry would still average a 10% return from 2017 to 2025, highlighting its resilience and robustness.
“Growth in the first half slowed to 3.1%, the lowest since 2017, and combined with accumulated retained earnings, this creates some pressure on reinsurers to redeploy capital; otherwise, returns could start to come under pressure.
“On underwriting, the headline combined ratio rose about three points to 87.5%, mainly due to higher net gap losses compared to last year, but the underlying combined ratio deteriorated only half a point, driven entirely by the expense ratio, while the attritional loss ratio remained unchanged.
“Catastrophe losses were above normal, 9.6 percentage points versus a 9.0 percentage point norm, in a heavy first half for the broader insurance industry, with about $84 billion in insured losses, well above the decade average.
“However, looking at the impact on individual reinsurers by event, most losses came from large events like the California wildfires, accounting for roughly 15%, while small and mid-sized events accounted for 2% or less, showing that reinsurers mainly absorb losses from major events while smaller losses remain with primary insurers.
“This pattern reflects the attachment point and terms-and-conditions changes implemented since early 2023, and the half-year data clearly demonstrates the impact of those changes.”
About the Author
