Reinsurers capital position 'robust' despite slump in profits due to COVID-19: Aon

Aon's Reinsurance Aggregate report shows that reinsurers will not cover its cost of capital this year due to the impact of COVID-19 crisis, though their capital position remains robust after a strong market recovery in the second quarter of 2020.

The report, which analyses the financial performance of 23 of the world’s leading reinsurers in the first half of 2020, found that total capital stood at $255 billion at the end of Q2, "unchanged" relative to the end of 2019, split equity $201 billion (-1 percent) and debt $54 billion (+6 percent).

Approximately $3.7 billion of new equity issuance in the period was out-weighed by dividends and share buybacks of $6.8 billion.

The ARA group of reinsurers underwrites approximately 50 percent of the world’s non-life reinsurance premiums, and a large majority of the life reinsurance premiums, making their dynamics a reasonable proxy for the reinsurance sector as a whole, according to Aon.

The report noted that the impact of COVID-19 dominated reinsurers financial results in the first half of 2020. As a result, the underwriting results were undermined by reserves established for associated claims, while investment returns showed the effects of the extreme capital market volatility experienced in March. Consequently, an overall loss was sustained for the period.

However, the capital base has remained resilient, after a strong capital markets recovery in the second quarter.

Furthermore, Aon reported that property and casualty (P&C) insurance and reinsurance gross premiums written (GPW) rose by 5 percent to $114 billion, assisted by risk-adjusted renewal rate increases. P&C insurance and reinsurance net premiums earned rose by 6 percent to $84 billion.

The net combined ratio stood at 104.1 percent, split losses 72.8 percent and expenses 31.3 percent. COVID-19-related losses of $8.2 billion contributed 9.7 percentage points (pp) and natural catastrophe losses added another 2.8pp. Prior-year reserve releases provided 0.6pp of benefit.

Meanwhile, life and health reinsurance GPW stood at $25 billion. This segment generated additional COVID-19-related losses of $1.0 billion.

The total investment yield reported through income statements fell to a post-financial crisis low of 2.1 percent, driven by the capital market volatility associated with COVID-19 and the impact of emergency cuts in interest rates following the onset of the pandemic.

The net loss for the period was $1.1 billion, representing an annualised return on equity of -1.5 percent.

“While it is already clear that the ARA will not cover its cost of capital in 2020, more positively, the group’s capital position remains robust, after a strong capital market recovery in the second quarter," said Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions business.

"Several constituents demonstrated their financial flexibility by raising new funds, and others were successful in attracting new alternative capital to support their business positions, despite the challenging market conditions,” he added.