Alternative Capital Up 12%, Traditional Reinsurance Drops 4% in 2015: Aon Report

April 6, 2016

Alternative capital continues to make its presence felt in the reinsurance market, increasing by 12 percent during 2015 to $72 billion, while traditional capital decreased by 4 percent to $493 billion, according to a report published by Aon Benfield.

Capital from both traditional and alternative markets stood at $565 billion at Dec. 31, 2015, a drop of 2 percent from year-end 2014, said the Aon Benfield Aggregate (ABA) report, which analyzes the 2015 financial results of 27 major reinsurers.

The report also found that reinsurers’ average combined ratio in the decade since Hurricane Katrina was 92.5 percent.

“Ten years have now elapsed since the last major land-falling hurricanes in the US,” said Mike Van Slooten, co-head of Aon Benfield’s Market Analysis team.

“This has been a decade of unprecedented profitability for global reinsurers, as seen in the average combined ratio of 92.5 percent and average return on equity of 11.1 percent reported by the listed ABA companies over this period,” he added.

“The growing pressure on underlying earnings should be viewed against this backdrop, but in reality is likely to drive further M&A activity in the short to medium term,” Slotten affirmed.

Further key findings relating to the listed ABA companies include:

  • In original reporting currencies, two-thirds of the ABA companies achieved growth in property and casualty (P&C) premiums in 2015.
  • The combined ratio was stable at around 90 percent for the third year running, despite another uptick in the expense ratio (1 percentage point). The expense ratio increase was due to “franchise investment, higher ceding commissions and business mix changes, taking the total increase over the past decade to almost 5pp.”
  • P&C underwriting profit fell by 9 percent to $15.1 billion, of which 55 percent was derived from favorable prior year loss reserve development.
  • The total investment return declined by 25 percent to $25.1 billion, a yield of 2.7 percent, compared with 3.7 percent in 2014 and 4.4 percent in 2007.
  • Net income fell by 12 percent to $22.1 billion; headline return on equity has eroded modestly, but remains resilient at 9.8 percent.
  • Shareholders’ funds fell by 4 percent to $326 billion at Dec. 31, 2015. However, when calculated at constant exchange rates the total was shown to have increased slightly, as solid earnings were generated in the absence of major insured catastrophe losses.
  • M&A activity has resulted in an increase in the median capital size, from $6 billion in 2014 to $7 billion in 2015, with half ABA companies now falling in the $5 billion – $12 billion range.
  • The availability of more favorable terms and conditions resulted in most ABA companies reporting increased reinsurance cession ratios in 2015.
  • Record cat bond issuance occurred during the first quarter of 2016, which also saw increased retrocession purchases and higher investor allocations to reinsurance sidecars.
About the ABA Reports

ABA reports, which are produced on a half-yearly basis, aim to highlight current trends in the P&C reinsurance marketplace. The ABA now comprises 25 publicly listed holding companies and two US-domiciled subsidiaries of Berkshire Hathaway, namely National Indemnity Co. and General Reinsurance Corp.

Was this article valuable?

Here are more articles you may enjoy.