8 May 2015 News

Reinsurer RoEs flatten as market squeeze continues: Willis Re

Increasing global capital which is focused on the reinsurance industry is adding further pressure on reinsurers and rating conditions, according to the latest reinsurance market report from Willis Re.

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

According to Willis Re, 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 percent in 2014 compared with 2013, to $35 billion.

“The market is being squeezed from all directions with underwriting and investment conditions compounded by the oversupply of capital. For the time being, reinsurers’ Return on Equity (RoE) continues 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,” said John Cavanagh, global CEO of Willis Re.

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 percent 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 percent.

An increase in share buyback from publicly listed reinsurers demonstrated active capital management strategies to address excess capital. 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 percent and 1.2 percent respectively, of their aggregate shareholders’ equity.

A significant 13.8 percent 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.

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