More Market Pressures; Reinsurance Capital at $425 Bn: Willis Re Report

May 8, 2015

Willis Re’s latest Reinsurance Market Report notes that the “growth in global capital dedicated to reinsurance continues to exacerbate the challenge of oversupply, placing further pressure on already weak rating conditions for the remainder of 2015.”

The report – based on the newly-launched Willis Reinsurance Index – highlights the fact 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.”

Willis Re said 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 to 2013, to just $35 billion.”

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 analysis, which is based on “a more typical catastrophe year and excluding prior year reserve releases,” shows that aggregate RoE would diminish to just 5.9 percent.

Willis Re’s report also points out that as a result, “active capital management strategies to address excess capital were reflected by a number of publicly listed reinsurers accelerating their share buybacks. 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.”

John Cavanagh, Global CEO of Willis Re, commented: “The market is being squeezed from all directions with underwriting and investment conditions compounded by the oversupply of capital. For the time being, reinsurer RoEs continue 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.”

Source: Willis Re

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