Pressures intensify as reinsurance capital reaches $425 billion

New Willis Reinsurance Index highlights unprecedented capital levels and reinsurer RoEs under strain

The growth in global capital dedicated to reinsurance continues to exacerbate the challenge of oversupply, placing further pressure on already weak rating conditions for the remainder of 2015, according to the latest Reinsurance Market Report from Willis Re, the reinsurance division of Willis.

The report - based on the newly-launched Willis Reinsurance Index - highlights that dedicated global reinsurance capital is now at $425 billion, representing a 5% increase in aggregate shareholders’ equity in 2014. This includes capital from non-traditional sources.

The increasing supply of capital has been compounded by the third successive year of low global insured catastrophe losses, which the report outlines were down approximately 25% in 2014 compared to 2013, to just $35 billion.

According to the Index, market pressures are now manifesting themselves in diminishing underlying Return on Equity (RoE), which continue to be supported by prior year developments as well as the below average catastrophe losses. Companies providing catastrophe loss disclosure are showing a seemingly healthy 11.5% aggregate reported RoE. However, the report’s calculations based on a more typical catastrophe year and excluding prior year reserve releases show that aggregate RoE would diminish to just 5.9%.

Active capital management strategies to address excess capital were reflected by a number of publicly listed reinsurers accelerating their share buybacks. In total, the publicly listed companies within the Index returned $7.3 billion through buybacks and $2.4 billion through special dividends to shareholders, in addition to normal dividends. This represents 3.7% and 1.2% respectively, of their aggregate shareholders’ equity.

A significant 13.8% of the total shareholders’ equity reported within the Index is involved in the recently announced major M&A activity. This amounts to $48 billion, of which $15 billion is in the ‘acquired’ companies.

Commenting on the Report, John Cavanagh, Global CEO of Willis Re, said: “The market is being squeezed from all directions with underwriting and investment conditions compounded by the oversupply of capital. For the time being, reinsurer RoEs continue to be flattered by low catastrophe losses and strong support from prior year reserve releases, but the continuing shift of the reinsurance market reflects the required balance sheet scale and breadth of product offering required for reinsurers to remain relevant in this highly competitive market. The Willis Reinsurance Index underscores the challenging outlook for the reinsurance industry.”

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