Pressure on RoEs continues as traditional reinsurance capital falls: Willis Re

2015 saw a 3.5 percent decrease in traditional capital committed to reinsurance, falling $13 billion from the $370 billion at year-end 2014, according to the latest reinsurance market report from Willis Re.

According to the report, titled “the Willis Re reinsurance market report” which is based on the Willis Reinsurance Index, continued focus on the idea that active capital management is a main driver behind the decrease, as opportunities for acceptably profitable capital deployment remain challenging.

However, the decline in traditional capital was offset by the continued growth in non-traditional capital, which hit $70 billion. In total, global capital dedicated to reinsurance now reaches $427 billion.

The report claimed that in 2015 the index group of companies returned a total of $23.3 billion to shareholders, representing 77 percent of net income, ($20.4 billion in 2014); $5.5 billion was returned through share buybacks, ($7.8 billion in 2014), and $17.8 billion through ordinary and special dividends, ($12.6 billion in 2014).

The decrease in traditional capital is also a result of unrealised investment losses and the strengthening of the US Dollar against the Euro. The record volume of mergers and acquisitions activity in 2015 was also a key driver. For companies within the index, these factors accounted for a reduction of approximately $20.9 billion.

However, despite the headline decline, capital over-supply remains a vital industry challenge and market pressures continue to grow themselves in diminishing return on equity (RoE).

According to the report, companies within the index providing catastrophe loss and prior year reserve release disclosure continue to show a seemingly healthy aggregate reported RoE of 10.2 percent, albeit down from 11.5 percent in 2014. However, based on a more typical catastrophe loss year and excluding prior year reserve releases, aggregate RoE would diminish to just 3.4 percent, down from 5.8 percent in 2014.

A significant rise in expense ratios over several years is a major factor eroding RoEs. As the report highlights, expense ratios for the subset have risen by approximately four percentage point to 33.1 percent between 2007 to 2015. In 2015 alone, expense ratios increased by one percentage point. This comes as reinsurers continue to invest in underwriting and diversify their business portfolios. The increasing costs associated with enhanced regulation and governance is also impacting bottom lines.

“Reinsurers continue to face a myriad of headwinds placing downward pressure on underlying results. However, headline figures remain robust and capital positions are strong – the dual saviours of reserve releases and low severity loss experience continue to underpin reported results,” said John Cavanagh, global chief executive officer of Willis Re.

“Yet underlying RoEs are now beginning to breach minimum target thresholds. The pressure persists with capital remaining at record levels amidst the continued influx of capital from nontraditional sources.

“Given the current climate, the broadening of reinsurer business models is proving a successful strategy for many and increasing relevance to clients, despite the impact on expense ratios. But ultimately, reinsurers will yet again be looking to another below average loss year to maintain acceptable results.”