Global reinsurance capital falls 5% in 2018, finds Willis Re

Capital earmarked for the global reinsurance industry fell by 5 percent in 2018, according to analysts at Willis Re.

In its Reinsurance Market Report, the company said dedicated capital for reinsurance had dropped to a total of $462 billion at year-end 2018.

The largest part of this, made up of total shareholders’ equity of 32 reinsurance companies tracked in the Willis Reinsurance Index (WRI), had plunged by 10 percent to $335.7 billion.

This represents a reversal of the 8 percent growth recorded in 2017.

In contrast, Willis Re analysts said that alternative capital, which was the second largest component of total capital, had grown by 6 percent.

Willis Re explained that a reduction of $13.7 billion in index capital had been caused by the departures of Validus and XL Catlin via M&A deals. It said indexed companies paid out the majority of $20.5 billion of net income as dividends and buy-backs which further slashed capital by $17.6 billion, equalling a pay-out ratio of 86 percent of net income.

But, analysts said, the overall decrease in index capital was caused by “unrealised investment depreciation of $21.4 billion”, with falling equity markets and rising bond yields cited as the main reason. Willis Re said: “Notably, National Indemnity reported $10.2 billion of unrealised investment depreciation.”

Further analysis of companies that disclosed figures for catastrophe losses and prior year reserve releases found the reported return on equity (RoE) had “recovered “from 2017’s nat cat-affected 1.4 percent to 4.2 percent.

Willis Re said normalising for a 4 percent nat cat loss and removing the benefit of reserve releases resulted in an underlying RoE of 2.7 percent for the subset versus 2017’s 3.8 percent RoE.

It said that the main driver of RoE improvement and drop in underlying RoE was the combined ratio, which recovered from 107.4 percent in 2017 to 99.2 percent in 2018. However, the report added that stripping out 4.6 percentage points of reserve releases and 8.6 percentage points of nat cat losses results in an ex- nat cat accident year combined ratio of 95.3 percent for the subset, representing a deterioration compared to 94.6 percent in 2017.

James Kent, global CEO at Willis Re, said: “Overall shareholders equity figures for the Index suffered a negative impact due to unrealised investment losses, owing to external factors largely beyond the control of risk carriers, as well as shareholder buy backs and dividends. The report’s findings show that the remedial actions taken by many risk carriers in 2018 were essential and we are seeing an acceleration of these actions in 2019 as companies seek improved underwriting terms and rates to drive RoEs.”

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