Willis Re, the reinsurance arm of international broker Willis Towers Watson, has reported that shareholders’ equity in 34 reinsurance firms tracked via the Willis Reinsurance Index increased to $371 billion at the end of 2017, with alternative capital increasing also, to $88 billion.
The year-on-year growth in shareholders’ equity of 7.8% to $371 billion occurred despite the impacts of 2017 catastrophe events, which, according to Willis Re led to a weighted combined ratio of 104.8%, up 10.4% from the end of 2016.
The broker, in its latest Reinsurance Market Report, also reports that alternative reinsurance capital grew further in 2017, reaching $88 billion at the end of 2017, compared with $75 billion a year earlier. Willis Re notes that alternative capital increased despite the draw-down on certain catastrophe bonds and collateralized reinsurance and retrocession layers in the aftermath of hurricanes Harvey, Irma, and Maria.
James Kent, the Global Chief Executive Officer (CEO) of Willis Re, commented: “2017 was one of the worst years on record for insured natural catastrophe losses. However, today the global reinsurance market is able to deploy more capital than at the same time last year. When a few exceptional transactions are considered, total reinsurance capacity is roughly stable, despite the hurricanes, earthquakes, wildfires, and other events which brought misery to millions of people in 2017. That’s a significant achievement for the reinsurance market, and a testament to its strength.”
Willis Re states that the growth in equity was mainly driven by unrealized investment gains of $34.7 billion, but does stress that when excluding National Indemnity from the group, total shareholders’ equity was roughly stable, at $343.7 billion.
The Willis Reinsurance Index delivered return on equity (RoE) of 3.4% in 2017, which is down from the 8% reported a year earlier as net income fell from $26.6 billion in 2016, to $12 billion in 2017.
Once again, underwriting losses were offset, in part, by high prior-year reserve releases, and Willis Re states that profits were heavily reliant on significant realised investment gains of almost $10 billion, which is an increase of 38.6%, mostly driven by a $2.7 billion investment gain realized by Fairfax after the sale of two subsidiaries and equity gains.
The group of reinsurers tracked by Willis Re also returned $15.6 billion to shareholders through dividends and buybacks, which far exceeded the aggregate net income of $12 billion.
Interestingly, and in light of the heavy catastrophe loss experience in 2017, Willis Re compares the combined ratio of a subset of reinsurers (which comprise 49% of the aggregate capital Index) in 2017 with that of other, severe catastrophe-affected years of 2005 and 2011.
This analysis reveals a combined ratio for 2017 of 107.4%, compared with 108.2% in 2011 and 112.8% in 2005. This means that the impact of natural catastrophe losses in 2017 was 18.1% lower than 2011 and 2005, says Willis Re.
“Comparing the 2017 natural catastrophe experience with 2005 and 2011 shows that a number of large global property catastrophe reinsurance accounts were not impacted by the events of 2017. The primary market retained more of the losses from the year’s numerous catastrophe events under higher retentions. The Ex-Cat Accident Year comparison of only a 5pt increase from 2005 may be viewed as surprising given the years of rate reductions in the past decade. The 2017 result was supported by the aforementioned reserve releases and investment gains which remains a concern and is why many reinsurers continue to try to push pricing on under-performing lines,” said Kent.
Adding, “The pressure on traditional reinsurers from alternative capital suppliers is stronger than ever, as many participants in this market cleared their first true major test. This increase in alternative capital, as well as the global reinsurance market having more capital to deploy, is continuing to dampen price increases in the mid-year renewals.”
