Global reinsurer capital continued to rise in 2017, despite the $136 billion in insured losses from natural catastrophes last year, according to a reinsurance market report published by Aon Benfield.

Indeed, capital levels stood at $605 billion at Dec. 31, 2017, an increase of 2 percent from the end of 2016, said the report titled Reinsurance Market Outlook — Capacity Builds Ahead of Mid-Year Renewals, April 2018.

By year-end 2017, traditional capital rose by $2 billion to $516 billion, while alternative capital rose by $8 billion to $89 billion, it continued.

Aon Benfield said the following factors explain why capital continued to rise despite the high catastrophe losses:

• A portion of the losses from the major events in the were retained by various government agencies – estimated by Aon Benfield at $20 billion.
• The reinsurance market picked up a relatively low proportion of the private sector losses – approximately one-third – due to the generally high retentions carried by primary insurers.
• Within traditional reinsurer earnings, elevated catastrophe losses were mitigated by continued favorable prior year reserve development and better than expected investment returns.
• Capital markets investors continued to show strong appetite for insurance risk, both before and after the third quarter hurricanes.
• Weakening of the U.S. dollar against most major currencies benefited the year-on-year comparison.

Alternative Capital

The report went on to note that alternative capital and insurance linked securities (ILS) grew significantly in 2017. “[T]he market and institutional investors responded by showing renewed commitment to an asset class that has delivered relatively attractive, non-correlating returns over time.”

Strong inflows of alternative capital in the first half of 2017 coincided with record volumes of catastrophe bond issuance, said the report, noting that the sector’s losses from natural disasters in the second half of 2017 are estimated at $15 billion, mostly in retrocession, lower attachment point reinsurance and aggregate covers, with another $5 billion of collateral trapped.

The report explained that most of the capital lost or trapped has since been replaced. (While “lost collateral” is capital that has suffered loss due to an event, “trapped collateral” can occur when a cedent does not know the full extent of its losses and will thus wait to allow those losses to fully develop until the end of the contract period, which is likely to be year-end.)

“Many investors previously enjoyed excellent returns and losses in 2017 generally fell within published risk tolerance ranges,” the report said. “In addition, the prospect of improved returns in the classes and territories most affected has attracted new participants.”

The report said that the range of geographies and perils covered by alternative capital is broadening and a growing number of jurisdictions are enabling ILS issuance:

• London has become a mainstream onshore alternative, having recently passed legislation that will allow it to develop as an ILS centre.
• Singapore is bidding to become a hub for ILS activity in Asia, announcing in November 2017 that its regulator would fund 100 percent of the upfront costs incurred in issuing catastrophe bonds locally.
• Further growth in the alternative capital market can be expected during 2018. Passing the test posed by the 2017 catastrophe events has dispelled any remaining doubts about the sector’s permanency, boosting the confidence and acceptance of both investors and the broader marketplace.

Financial Results

In an analysis of 21 major reinsurers comprising the Aon Benfield Aggregate (ABA)*, the report noted that the traditional reinsurance sector as a whole continued to make money in 2017, even with the catastrophe claims. (Domiciled in developed markets, Aon Benfield said, these 21 reinsurers write approximately 50 percent of global property and casualty premium on a combined basis.)

Net income across the group stood at $4.0 billion, contributing toward a 2.5 percent increase in total equity to $204 billion, while average return on equity stood at 2.0 percent, the report said.

Across the ABA companies as a whole, pre-tax profit fell by 75 percent to $5.1 billion in 2017, it added.

Property and casualty (P/C) underwriting losses stood at $10.6 billion, on net premiums earned of $144 billion. The combined ratio increased to 107.4 percent in 2017, which took the five-year average to 94.7 percent. (A combined ratio over 100 percent indicates an underwriting loss).

Net natural catastrophe losses of $23.6 billion contributed 16.4 percentage points to the combined ratio, said the report, noting that about one-quarter of these losses came from the reinsurers’ primary insurance operations.

At least $1 billion of the reported reinsured losses were ultimately passed to the alternative market, via third party investors, the report continued.

Losses were partly offset by favorable prior year reserve releases of $5.9 billion, which benefited the combined ratio by 4.1 percentage points in 2017. The ABA companies analyzed had a total investment return of $29.5 billion, the report said.

Gross premiums written by the ABA totaled $249 billion in 2017. The volume of P/C business stood at $174 billion, with primary insurance up 8 percent to $89 billion and assumed reinsurance up 5 percent to $85 billion. P/C net premiums earned rose by 6 percent to $144 billion.

* The ABA companies carry significant exposures to large natural catastrophe events in the U.S. and their performance is not necessarily representative of the traditional reinsurance market as a whole. The ABA constituents are Alleghany, Arch, Argo, Aspen, AXIS, Beazley, Everest Re, Fairfax, Hannover Re, Hiscox, Lancashire, MAPFRE, Markel, Munich Re, Partner Re, QBE, RenRe, SCOR, Swiss Re, Validus and XL Catlin.

*A version of this story appeared previously in our sister publication Insurance Journal.