Reinsurance growth dispels ILS concerns
Concerns by some that the proliferation of alternative risk transfer mechanisms such as insurance-linked securities (ILS) could hamper growth among traditional reinsurers could be misplaced – based on the findings of a recent report by Aon Benfield.
Global reinsurance capital rose by 11 per cent in 2012, according to a report by the reinsurance broker, bringing total capital to $505 billion. It has substantially grown since 2008 when it dipped at $340 billion.
Aon Benfield analysed the 31 leading reinsurance companies globally for the report. Gross premiums written by the group rose by 6 per cent. The report said this was driven by higher volumes of business ceded by affiliates and the growth of European reinsurance business in the Asia-Pacific region.
The industry’s growth would appear to dampen concerns that the fast growth of the ILS markets could harm traditional reinsurers’ ability to grow.
The healthy capital position of the industry in part stemmed from a very profitable year for reinsurers. Pre-tax profits for the aggregate group rose to $35.7 billion in 2012, the best results since the start of the financial crisis, with every market reporting positive results.
Improved underwriting results and lower levels of international catastrophe losses helped paint a healthier picture for 2012, although a flat investment environment and US losses took the gloss off the year, the report said.
The group’s aggregate combined ratio also improved, falling from 105.1 per cent in 2011 to 92.6 per cent in 2012 – up on the seven year aggregate average of 93.2 per cent. 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 per cent in 2012.
Despite improved results, however, 2012 was the third highest year for cat losses on record, with US losses associated with Hurricane Sandy and a drought in the Midwest accounting for 90 per cent of losses – a marked change from the internationally diverse loss set of 2011.
Confidence in the sector encouraged five companies in the aggregate group of reinsurers to issue special dividends, while a further five have announced share buy-backs. 2012 saw $16 billion of capital management by the aggregate group and Mike Van Slooten, market analysis – international at Aon Benfield, predicts there will 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.
