While total dedicated reinsurance capital dropped in 2018, alternative capital continued its steady rise, according to a report published by Willis Re.

Total dedicated reinsurance capital – which includes traditional and alternative capital – dropped 5 percent to US$462 billion at year-end 2018. At the same time, alternative capital grew by 6 percent, said the report “Reinsurance market report, Results for year-end 2018, April 2019.”

The largest component of the overall figure for total reinsurance capital is the shareholders’ equity of 32 reinsurance companies tracked in the Willis Reinsurance Index, which was down 10 percent to US$335.7 billion in 2018. This reversed growth of 8 percent seen during 2017. (The Willis Re Index tracks the largest global reinsurers).

The second largest component affecting the reinsurance capital total was alternative capital which grew by nearly 6 percent to $93 billion, said Willis Re, the reinsurance business of Willis Towers Watson.

Despite the fluctuations of traditional reinsurance capital tracked by the Willis index, alternative capital has risen steadily over the past five years from $65 billion in 2014; to $70 billion in 2015; $75 billion in 2016; $88 billion in 2017; and $93 billion in 2018.

On the other hand, capital from those traditional reinsurers dropped from $369.6 billion in 2014 to $357 billion in 2015, rising again in 2016 and 2017 to $374 billion and $398 billion, respectively. In 2018 the level dropped to $369 billion, nearly level to that seen in 2014. (These figures are calculated by adding the capital levels of Willis Re’s index companies and other major regional and local insurers, which it also tracks).

Willis Re’s Analysis of Index Reinsurers

Reinsurance capital for the Willis Re Index companies dropped by 10 percent in 2018 to $335.7 billion, which was driven by mergers and acquisitions. The report explained that two acquisitions – AIG’s purchase of Validus and AXA’s purchase of XL Catlin – reduced the index’s capital in 2018 by $13.7 billion.

Investment losses also played a role in the overall drop in the drop in capital, said Willis Re, noting that falling equity markets and rising bond yields had a meaningful negative impact on investment performance.

Willis Re said it conducted a more in-depth analysis on a subset of reinsurers within the index, which included a look at return on equity (RoE), which has seen “a relentless decline since 2013.” (The subset companies are those that make relevant disclosure of cat losses and prior year reserve releases.)

Indeed, in 2013, the RoE for the subset of reinsurers was 6.7 percent, which had dropped to 3.8 percent in 2017 and 2.7 percent in 2018, said the report, noting that the main driver of the drop in underlying RoE was the combined ratio.

The headline combined ratio for the subset recovered from 2017’s 107.4 percent to 99.2 percent, as a result of lower natural catastrophe activity from 2017 to 2018. (When a combined ratio is over 100 percent, the company loses money on its underwriting.)

However, the report said that if 4.6 percentage points of reserve releases are removed from the combined ratio as well as 8.6 percentage points of nat cat losses (significantly down on 2017’s 18.1 percentage points), the subset companies had an attritional (or non-nat cat) accident year combined ratio of 95.3 percent. The report said this represents a deterioration from 2017’s 94.6 percent.

“Overall shareholders equity figures for the index suffered a negative impact due to unrealized investment losses, owing to external factors largely beyond the control of risk carriers, as well as shareholder buy backs and dividends,” said James Kent, global CEO, Willis Re. 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.”

The Willis Re Reinsurance Market Report is a biannual publication providing analysis of the size and performance of the reinsurance market, based on the Willis Reinsurance Index group of companies.

Source: Willis Re

*This story appeared previously in our sister publication Insurance Journal.