Gallagher blames the accountants: real reinsurance supply never fell

Actual reinsurance supply likely never fell in any real-money sense as underlying earnings for the industry have now blown past the cost of capital, analysts at  Gallagher Re have claimed.

Investment results have been the only real swing element in capital measures and their volatile mark-to-market accounting “overstates the actual drop in supply, if in fact there was a drop at all.’

“In our view, the global reinsurance industry’s capital position remains robust,” Gallagher Re analysts wrote, brushing off the 14% decline in reported capital excluding a bump in alternative capital.

But stability is not growth and Gallagher tips its hat to "a conspicuous absence of new capacity" despite the heavy improvement in market conditions.

Against a hard market built on talk of reinsurer retreat after years of losses and ROE below cost of capital, Gallagher Re sees a much more silvery lining to the market clouds.

Cleaned of the mark-to-market investment results, underlying economic results showed ROE at 11.2% in 2022, beating the cost of capital for the first time since at least 2013, analysts wrote after review of 2022 earnings from the bulk of the industry.

To the 6.8% ROE the industry wrote into their collective 2022 reports, Gallagher Re would add 5.0 percentage points (pps) in brushing over the investment loss, another 0.5 pps to normalize cat loss to trend, then cut 1.2 pps for the aggregate reduction in favourable prior year development.

That finally beats the Gallagher Re estimated weighted average cost of capital which, while trending upwards since 2019, has yet to break into double digits.

“This improvement has been driven by better underwriting results, stronger running investment income, and for 2022 FY, more operating leverage [lower equity],” analysts said.

For the group, premium growth in 2022 looked “strong” at 12.3%, supported by rate increases and inflation-driven exposure growth.

The reported combined ratio was “broadly stable” at 97.8%, but here again, Gallagher Re prefers its own adjusted measure which has now improved for the third year running.

That adjusted measure fell another 0.9 percentage points in 2022 from its 2019 peak at 103.1% to 98.8%, “driven by the better expense ratio and a lower load of normalized natural catastrophes.” Expense ratios are down for the fourth year in a row.

The problem is not cat, but the attritional losses where rate trailed inflation, Gallagher Re claimed.

Left with the traditional accounting measure, total reinsurance capacity may have fallen 12% to $638 billion from a restated 2021 count, led by the investment losses which were only half offset by retaining prior profits. The overall capacity decline does however include a 2% increase in alternative capital to $96 billion.

Gallagher Re built its analysis on a group of core reinsurers accounting for more than 80% of the industry's capital or, for most earnings data, the subset offering the sufficient reporting.

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