Reinsurers underlying ROEs still languishing below cost of capital, warns Willis Re

Global reinsurers' performance in the first-half of 2021 has improved, but their underlying returns on equity (ROEs) are still languishing below the cost of capital, according to the latest reinsurance market report from  Willis Re.

Willis Re found that global reinsurance capital, underwriting results and ROEs performed well in the first-half of the year, driven by a positive pricing environment and strong profits.

Total capital dedicated to the global reinsurance industry measured $688 billion after the first six months of 2021, reflecting a 4 percent increase from 31 December 2020. The rise was driven primarily by strong profit. The report stated that to fuel organic growth in the positive rating environment, reinsurers typically retained more income than has been usual in recent years.

Reinsurers together achieved "exceptionally strong" premium growth of 15 percent during H1 2021. Their weighted average reported combined ratio was 94.1 percent, which closely matches the figures reported for the 2016 to 2019 half years. Despite abnormally heavy natural catastrophe activity so far this year, the ratio marks a dramatic improvement from the Covid-impacted 104.1 percent in H1 2020," Willis Re noted. The reported combined ratios also benefited from slightly higher levels of reserve releases, reversing the trend of declining releases seen since 2017.

Meanwhile, the reinsurers’ underlying half-year combined ratio, excluding prior year development, and normalising for natural catastrophe losses, has improved steadily since 2017. This continued in H1 2021, falling from 98.6 percent in H1 2020 to 98.4 percent. A lower expense ratio supported the improved combined ratios, as rapid premium growth more than offset rising costs.

The average ROE also rebounded strongly, assisted by improved investment returns. The reported ROE recovered from last year’s minus 0.7 percent to reach 13.9 percent, while the underlying ROE more than doubled to reach 6.3 percent. Nevertheless, the underlying ROE still remains below the industry’s cost of capital, warned the report.

James Kent (pictured), global CEO of Willis Re, said: “Reinsurance providers will be heartened by these results. The industry has endured several years of below-par performance, capped by the calamitous experience of COVID-19. Now the remedial work reinsurers have undertaken over the past several years is bearing fruit."

He added: “Unfortunately, though, very strong premium growth in the first half of this year was achieved against combined ratios which are not much lower than during the softer parts of the cycle, therefore leaving underlying ROEs still languishing below the cost of capital.”

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.