Investment yield bounces back in H1 2023 after volatile 2022

New report ahead of Monte Carlo Rendez-Vous shows reinsurers’ investment yields far higher than same period a year ago.

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The report said the rise in capital was due to strong investment performance and improving underwriting results.

Total yields fluctuate 

Reinsurers have seen an upward swing in their H1 2023 investment returns compared to the same period in 2022, which reported a loss in total yield. 

A new analysis, Reinsurance Market Report from AJ Gallagher, revealed that investment income had increased due to improved running and positive gains yield. Running yield came in at 2.2% for H1 2022, whereas it was 3.2% for the same period in 2023.

Gains yield experienced a fair-sized jump from -3.5% in H1 2022 to 0.5% in H1 2023 – and total yield went from -1.3% in H1 2022 to 3.7% in H1 2023. 

At the start of H2 2023, capital dedicated to the global reinsurance sector totalled $709 billion, which was an increase of 13% from the previous year’s data.

"Volume growth was limited, partly due to rising attachment points and a
shift in business mix."

The report, which tracks the capital and profitability of the global reinsurance industry, highlighted that this rise in capital was due to “strong investment performance and steadily improving underwriting results”.

However, as others have pointed out, there was a noticeable lack of new capacity – despite continued favourable market conditions. This situation could present notable concerns going forward, especially given the continuance of natural catastrophe events.

The analysis said that rate increases were the “main driver” of the “continued strong premium growth” of 8.7%. “Volume growth was limited, partly due to rising attachment points and a shift in business mix,” it added.

The information in the report came from the Reinsurance Market Index group of companies – which, in 2023, includes 41 global reinsurers.

Investment versus underwriting 

Like other reports that have been released ahead of next week’s events in Monte Carlo, the analysis highlighted the wide income gap between underwriting and investment performance.

The most commonly cited factor was recent years’ macroeconomic volatility – which has spurred strong reactions from central banks, in the form of rate hikes, to curb high inflation. As a result, the profitability of fixed income investments has seen changes, particularly for US-domiciled insurers. 

More than three quarters of the capital increases seen by Index companies – currently standing at 14% – were attributed to unrealised investment appreciation, the report said, “most of which [were] attributable to national indemnity”.

"Possible further uplift in the underlying ROE of 2-5 percentage points (ppts)." 

The rise in capital was also supported by strong net income due to “significant improvement in investment income and steadily improving underwriting performance”. 

The return on equity (ROE) for H1 2023 was 13.4%, which the report said was a “material improvement [from] 10.2% in [H1] 2022”. This boost was also partly due to the higher running investment income. 

However, Gallagher said that portfolio investment yields were still coming in “well below reinvestment yields”. This mean that there was a “possible further uplift in the underlying ROE of 2-5 percentage points (ppts)”. 

Earlier this week, in AM Best’s Market Segment Report “Global Reinsurers Face Challenges Even as Conditions Improve”, the global ratings agency said that, despite the bearish pressures on investment results, it expected that reinsurers would “generate underwriting profits in 2023” – ultimately keeping them in the black