Total, dedicated reinsurance industry capital declined by 5% year-on-year in 2018, ending the year at $462 billion, according to Willis Re, the reinsurance broking arm of Willis Towers Watson.
The reinsurance broker has released its 2018 Reinsurance Market Report, which shows a decline in the volume of dedicated, global reinsurance capital.
According to Willis Re, the largest component of the $462 billion total is the total shareholders’ equity of the 32 reinsurance companies the firm tracks via the Willis Reinsurance Index, which declined 10% to $335.7 billion, reversing the 8% growth witnessed in 2017.
The exit of both Validus and XL Catlin, as a result of merger and acquisition (M&A) activity, contributed to a $13.7 billion decline in Index capital.
Willis Re highlights that through 2018, reinsurers paid out most of the $20.5 billion net income as dividends and buy-backs, which, combined to lower Index capital by $17.6 billion, resulting in a payout ratio of 86% of net income.
In-depth analysis by the broker on a subset of reinsurers which disclose nat cat losses and prior year reserve releases, shows that the reported return on equity (RoE) for the subset recovered after the heavy cat experience in 2017, from 1.4% to 4.2%. Once normalised for a normal 4% nat cat loss and also excluding the benefit from reserve releases, the underlying RoE for the subset in 2018 hit 2.7%.
According to Willis Re, this was driven by the combined ratio, which, for the subset improved to 99.2% from 107.4% in 2017, suggesting recovery from 2017 cat events. However, the broker warns that once the 4.6 percentage points of reserve releases are stripped out, and 8.6 percentage points of nat cat losses, the subset has an ex-nat cat accident year combined ratio of 95.3%, compared with 94.6% in 2017.
James Kent, Global Chief Executive Officer (CEO) of Willis Re, commented: “Overall shareholders equity figures for the Index suffered a negative impact due to unrealised investment losses, owing to external factors largely beyond the control of risk carriers, as well as shareholder buy backs and dividends.
“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.”
