Aon Benfield Aggregate paints positive picture of 2012


Improved underwriting results and lower levels of international cat losses helped paint a healthier picture for 2012, although a flat investment environment and US losses took the gloss off what would otherwise have been a good year.

Aon Benfield’s analysis of 31 leading reinsurance companies found that global reinsurer capital rose by 11 percent during the period, bringing total capital to $505 billion, markedly up from its 2008 dip of $340 billion. Pre-tax profits for the aggregate group rose to $35.7 billion, the best results achieved since the start of the financial crisis, with every market reporting positive results. While premiums written by the group rose by 6 percent, driven by higher volumes of business ceded by affiliates and the growth of European reinsurance business in the Asia-Pacific region.

Combined ratios improved across the aggregate group, falling from 105.1 percent in 2011 to 92.6 percent in 2012—down on the seven year aggregate average of 93.2 percent. Prior year reserve releases also proved more resilient than many had predicted, continuing to provide further support to combined ratios to the tune of 4.3 percent in 2012.

Despite improved results however, 2012 was the third highest year for cat losses on record, with US losses associated with Sandy and drought in the Midwest accounting for 90 percent of losses—a marked change from the internationally diverse loss set of 2011. There was however a silver lining for reinsurers, with far less of the US losses making their way into the reinsurance sector.

On the investment side, investment returns remained much as they were in 2011, despite the eurozone crisis having subsided. The underlying investment return across the aggregate group actually fell from 3.6 percent to 3.4 percent in 2012, while total investment return rose from 3.8 percent in 2011, to 4.1 percent in 2012, driven by a higher level of capital gains. However, Mike Van Slooten, market analysis – international at Aon Benfield, warned that while decisive action by Mario Draghi, president of the European Central Bank, had preserved the euro and brought some stability back to the continent – with resulting benefits for the investment returns of reinsurers – Europe is not out of the woods yet. The low interest environment was creating significant “headwind for the sector” said Van Slooten, with similar levels of investment return now being generated by a much larger asset base.  

Nevertheless, return on equity for the aggregate group has strengthened to 10.1 percent, a marked improvement on the 2011 average of 5.2 percent. With investment returns down, underwriting performance has emerged as an increasingly important driver of results, said Van Slooten, the steep variation in ROE across the aggregate group reflecting the relative success of company’s individual underwriting performance.  

Increasing buoyancy

Confidence in the sector has meanwhile encouraged five companies in the aggregate group to issue special dividends, while a further five have announced share buy-backs. 2012 saw $16 billion of capital management by the aggregate group, with Van Slooten predicting that there would likely be a further increase in dividends and share buy-backs in 2013, barring a major event.

Improving sentiment has also helped to strengthen valuations in the sector, with a number of companies trading at all time highs. The general picture is of companies hovering around price to book value, markedly up on the low valuations seen at the start of 2012. Van Slooten said that the rises were a product of historic lows and a stock market recovery that has seen “all boats lifted”. The mood in the capital markets – the best it has been for some time – has evidently helped to buoy the sector.

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