Willis Re’s latest market report reveals the intense pressure profit margins have been under in current reinsurance market conditions. Analysis of the group of reinsurers the broker tracks shows aggregate net income reduced to $26.6 billion from $30.3 billion, causing a drop of return on equity (ROE) at 8.0% down from 2015’s 9.3%.
These declining profits come despite a 4% increase of aggregate shareholders’ funds for companies, marked at $344.1 billion as of December 2016, according to Willis Re in its Reinsurance Market Report for Year-End 2016.
And the figure for insurers’ aggregate funds shoots up significantly to $449 billion, growing from $427 billion last year, when including capital from alternative markets and a pro rata share of capital from insurers where reinsurance makes up more than 10% of their total premium – demonstrating the rate of growth of alternative capital influx and insurers ceding premiums onto reinsurers.
John Cavanagh, Global CEO of Willis Re, said; “The continued challenging conditions of the market further impacts pressure on margins. However buyers can take comfort from the fact that the market balance sheet and headline figures remain robust in the face of persistent market softening due to continued reasonable net income and measured capital management strategies.”
Reinsurers have managed to boost balance sheets despite sinking profit margins with active capital management through dividends and share buy backs – which reached a total sum of $16.4 billion for reinsurers tracked by Willis Re.
However, for companies which provided more detailed financial disclosure – what Willis calls the Subset of the Willis Re Index – the percentage of ROE decline showed tighter pressures, falling to 8.2% from 10.2% in the previous year and when adjusted for reserve releases and normalized annual catastrophe losses, the underlying ROE for the Subset reduced to 3.3% from 3.4%.
Willis explained that Subset ROE figures continue to be undermined by firm’s rising expense ratios “which, using the 2007 expense ratio as a base resulted in a 2.5% reduction in reported ROE, an increase from 2.4% in the previous year.”
Increasing spend in an environment where returns are shrinking seems unsustainable, leaving some to call for price increases, but the chances of a turn in the market significant enough to rescue reinsurer returns looks increasingly slim, as capital continues to increase and competition remains high.
