By Rebecca Delaney

April 8 - (The Insurer) - The reinsurance sector's reported and underlying return on equity remained "well above" the cost of capital in 2024, with global reinsurance dedicated capital increasing by 5.4% year on year to $769 billion, Gallagher Re said on Tuesday.

In its latest reinsurance market report, the broker estimated that traditional reinsurance capital will rise by a further 6% in 2025, equivalent to an increase of around $40 billion.

Gallagher Re said the sector’s reported and underlying ROE (17.0% and 13.9%, respectively) were supported by further improvement in the underlying combined ratio over 2024, as well as increased recurring investment income.

The analysis is based on a reinsurance market index group of companies, which contribute more than 80% of the industry’s capital.

The capital of the index companies increased by 5.3% to $629 billion, driven by strong net income of $117 billion and $59 billion in retained earnings. This was partly offset by capital returns of $58 billion and unrealised investment depreciation of $23 billion, which Gallagher Re noted was "almost entirely attributable" to National Indemnity.

Overall, capital growth among the index companies outpaced growth in premiums, indicating healthy supply-demand dynamics.

Gallagher Re also examined the combined ratio for a subset of the index that provides the relevant disclosure.

Among the subset, the reported combined ratio reduced by 0.5 percentage points year on year to 86.8% – the strongest level achieved since the launch of the reinsurance market report in 2014.

This was primarily driven by a lower ex-nat cat accident year loss ratio of 7.6%, below the normalised nat cat loss ratio of 9.0%.

The report continued that subset companies have carried a lower proportion of nat cat losses over the past three years, with their share falling from 9.2% in 2022 to 6.9% in 2024, reflecting both higher attachment points and the nature of recent cat losses.

Prior-year development impact on the combined ratio declined to 0.6 points in 2024, which was attributable to Swiss Re’s reserve strengthening of $2.6 billion. Excluding this, reserve releases were a 2.5 point benefit to the combined ratio, a year-on-year improvement of 0.7 points.

The subset reported a 17.0% ROE for 2024, albeit Gallagher Re added that this marks a reduction from an "exceptionally strong" 19.5% in 2023.

Underlying ROE within subset companies remained stable at 13.9%, despite some meaningful losses outside P&C reinsurance underwriting, including Scor's life and health reserving and primary P&C reserve strengthening at Everest.

OUTLOOK

Gallagher Re concluded that subset companies are on track to earn an underlying ROE of around 15% for 2025, assuming "normal" nat cat losses and investment markets. Headwinds from year-to-date renewals are projected to be offset by a continued benefit from higher reinvestment yields, although these will be more modest than in previous years.

Assuming that contributions from prior-year development and capital gains match their 10-year averages, the subset is on track to deliver a headline ROE of 18% to 19% in 2025, roughly double the reinsurance industry’s weighted average cost of capital.

However, Gallagher Re provided the caveat that if the Los Angeles wildfire losses prove to be incremental to normalised nat cat levels, this may dent the subset’s headline ROE by 2 or 3 points.

However, even in this scenario, the subset would still be able to deliver a strong ROE well above the cost of capital, the broker said.