However, the decline in traditional capital was offset by the continued growth in non-traditional capital, which hit new heights of $70B.(*1) In total, global capital dedicated to reinsurance now stands at $427B.(*2)
According to the report, which is based on the Willis Reinsurance Index, continued focus on active capital management is a main driver behind the fall in traditional capital as opportunities for acceptably profitable capital deployment remain challenging. In 2015, the Index group of companies returned a total of $23.3B to shareholders, representing 77% of net income (FY 2014 $20.4B); $5.5B was returned through share buybacks (FY 2014 $7.8B) and $17.8B through ordinary and special dividends (FY 2014 $12.6B).
The decrease in traditional capital is also a result of unrealised investment losses and the strengthening of the U.S. Dollar against the Euro. The record volume of mergers and acquisitions activity in 2015 was also a key driver. For companies within the Index, these factors accounted for a reduction of approximately $20.9B.(*3)
However, despite the headline decline, capital oversupply remains a fundamental industry challenge and market pressures continue to manifest themselves in diminishing Return on Equity (RoE). According to the report, companies within the Index providing catastrophe loss and prior year reserve release disclosure (“the subset”) continue to show a seemingly healthy aggregate reported RoE of 10.2%, albeit down from 11.5% in 2014. However, based on a more typical catastrophe loss year and excluding prior year reserve releases, aggregate RoE would diminish to just 3.4%, down from 5.8% in 2014.(*4)
A significant rise in expense ratios over several years is a major factor eroding RoEs. As the report highlights, expense ratios for the subset have risen by approximately four percentage points to 33.1% between 2007-2015. In 2015 alone, expense ratios increased by one percentage point. This comes as reinsurers continue to invest in underwriting and diversify their business portfolios. The increasing costs associated with enhanced regulation and governance is also impacting bottom lines. (*5)
Commenting on the report, John Cavanagh, Global CEO of Willis Re, said: “Reinsurers continue to face a myriad of headwinds placing downward pressure on underlying results. However, headline figures remain robust and capital positions are strong – the dual saviours of reserve releases and low severity loss experience continue to underpin reported results.
“Yet underlying RoEs are now beginning to breach minimum target thresholds. The pressure persists with capital remaining at record levels amidst the continued influx of capital from non-traditional sources.
“Given the current climate, the broadening of reinsurer business models is proving a successful strategy for many and increasing relevance to clients, despite the impact on expense ratios. But ultimately, reinsurers will yet again be looking to another below average loss year to maintain acceptable results.”
Further highlights from the report include:
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Despite intense softness in the market, a number of reinsurers achieved premium growth during 2015. However, while noting that an accurate comparison of aggregate premiums written in 2015 is compromised by foreign exchange movements, aggregate reported net written premium actually decreased in 2015 by approximately 4.2% for the constituents of the Willis Reinsurance Index.
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For the subset of Willis Reinsurance Index companies, combined ratios increased to 94.5% in 2015, compared to 91.6% in 2014 (excluding natural catastrophe losses and prior year reserve releases). Adjusting results for a normalised natural catastrophe load and on the assumption of no prior year reserve releases, the overall combined ratio would be much closer to 100%.
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Average reported portfolio investment yields showed little improvement as improvements in interest rates remain elusive. Investment yields for the Index companies remained low at 2.9% in 2015, broadly unchanged from 2.7% in 2014.
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Capital pressures continue to be exacerbated by the unprecedented period of low severity losses. Based on Swiss Re Sigma figures, 2015 saw the lowest losses on record from natural catastrophes since 2009, and approximately half the $55B-$60B annual average over the last decade.
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