Global Reinsurers’ ROE surpasses cost of equity in 2023

ROE of reinsurers reached 22% last year.

A five-year high return on equity (ROE) of 22% for global reinsurers in 2023 was driven by a rebound in unrealized losses and strong underwriting performance, according to AM Best.

The ratings agency’s latest “Significant Increase in Global Reinsurers’ ROE Due to Investment and Underwriting Results” report, highlighted improved operating margins despite a drop in reserve leverage, especially among non-life reinsurers.

The report finds that while reserve leverage declined, operating margins grew significantly, enabling the composite ROE to surpass its cost of equity for the first time in years. 

Lower taxes and reduced interest expenses further supported this favourable performance. 

The AM Best composite represents nearly 90% of the industry’s gross premiums written in 2022 and includes both USGAAP and IFRS 17-reporting companies.

For 2024, reinsurance claims from hurricanes Milton and Helene are expected to impact the market, though higher attachment points and tighter terms should contain losses. 

Whilst fourth-quarter results will reflect these claims, AM Best anticipates that full-year earnings will remain favorable. 
Senior financial analyst Guilherme Monteiro Simoes noted that further market hardening is unlikely, although these events may delay any softening in the reinsurance cycle.

AM Best views underwriting profitability as central to the industry's sustained ROE, especially as interest rates have limited effects on investment income. 

Over the medium term, ROEs are expected to continue exceeding the cost of capital, with new capital likely favoring firms with proven stability or the flexible liquidity of the insurance-linked securities market.