Based on the Willis Reinsurance Index, the report states that dedicated global reinsurance capital from both traditional and non-traditional sources remains at $425 billion, unchanged from the record level reached at year-end 2014.
The levelling of capital comes as reinsurers accelerate their active capital management strategies as acceptably profitable capital deployment opportunities in the market diminish. In the first half of 2015, the publicly listed companies within the Willis Reinsurance Index have returned virtually all earnings to shareholders - a total of $16 billion - via share buybacks and ordinary and special dividends. This compares to just $9.7 billion returned to shareholders across the full 2014 year.
A number of reinsurers have also committed to returning earnings to shareholders at year-end if they believe additional retained capital cannot be deployed profitably.
Capital levels are also being affected as merger and acquisition activity intensifies and transactions are completed. 10.5 per cent of the shareholders’ equity reported within the Willis Reinsurance Index is currently involved in major merger activity.
However, ultimately the challenge of oversupply remains and market pressures continue to manifest themselves in diminishing Returns on Equity (RoEs). The report shows that underlying reinsurer RoEs during H1 2015 are even lower than during H1 2014:
• At H1 2014, companies providing catastrophe loss disclosure were showing a seemingly healthy 12.8% aggregate reported RoE. However, the report’s calculations based on a more typical catastrophe year and excluding prior year reserve releases show that the underlying RoE would diminish to just 7.8 per cent.
• At H1 2015, companies providing catastrophe loss disclosure were showing 11.1 per cent aggregate reported RoE; based on a more typical catastrophe year and excluding prior year reserve releases, underlying RoE would be 5.1 per cent.
The report notes that market pressures continue to be exacerbated by the sustained low levels of global insured catastrophe losses, which are now at the lowest level since H1 2006 at $16.5 billion. At year-end 2014, losses were at $35 billion. Natural catastrophe losses at H1 2015 were down 35 per cent compared to H1 2014, to just $12.9 billion.
Commenting on the report, John Cavanagh, Global CEO of Willis Re, said, “Markets clearly continue to face significant over-capacity and competitive pricing conditions, and overall underwriting margins remain under substantial pressure. But the evolution in the Willis Reinsurance Index is another indicator that we are beginning to see the emergence of rationality in the market - just as we saw price stabilization beginning to emerge at 1/6 and 1/7, there may now be evidence of capital stabilization as supply and demand begin to equalize.
“The Willis Reinsurance Index also demonstrates that we have entered a new reality for underlying reinsurer RoEs. Yet while a significant shift in RoE levels is being accepted by shareholders, the profitable deployment of excess capital remains a key challenge for reinsurers and is exacerbated by the low levels of loss activity. Ultimately, however, reinsurance remains attractive to investment capital in the long-term despite the diminishing underwriting and investment returns being delivered, as recently evidenced by Exor’s purchase of Partner Re.”