The latest Aon Benfield Aggregate (ABA) report, which examines 23 major reinsurance companies based in developed markets, shows that firms continue to report premium growth in spite of the testing market landscape, although profitability has declined and is expected to come under further pressure in the months ahead.
During 2016 ABA companies’ property & casualty (P&C) premiums written grew by 6% to a reported $170 billion, with direct insurance accounting for $78 billion and assumed reinsurance accounting for the remaining $92 billion.
Despite the increasingly challenging operating environment for reinsurers, improved leverage of alternative reinsurance capital and solutions of the insurance-linked securities (ILS) market, combined with growth in large bespoke transactions and expansion into niche lines, has resulted in recent growth in assumed reinsurance, says Aon Benfield.
“Reinsurers have been able to take advantage of lower catastrophe risk transfer costs through the formation of sidecar vehicles, sponsorship of catastrophe bonds and increased utilization of retrocession protection,” says Aon Benfield.
But despite premium growth and reduced risk transfer costs, Aon Benfield reports that during 2016 the ABA combined ratio increased, P&C underwriting profits fell, and the overall profitability of the 23 reinsurers analysed declined, with further pressures expected in the coming months.
Catastrophe losses did increase during 2016, with a number of reports citing the highest level of re/insured losses for four years. However, Aon Benfield explains that major losses fell within allocated budgets in 2016, and support from prior year reserve releases remained “resilient.”
The ABA combined ratio weakened to 93.5% in 2016, with major losses contributing 5.5pp, compared with 4.0pp in 2015, and reserve releases provided 5.3pp of benefit during the last year, compared with 5.7pp a year earlier.
The group of 23 reinsurers reported a P&C underwriting profit of $9.1 billion in 2016, which is a decline of 28%, and of which $7.5 billion was derived from prior years, explains Aon Benfield.
“Earnings have become increasingly dependent on catastrophe experience and prior year loss reserve development; share prices show heightened sensitivity to reported results,” says Aon Benfield.
Net income declined by 13% during the year to $17.5 billion for the ABA companies, while returns on common equity totalled 8.4%, compared with 10% in 2015 and a median cost of equity of 7.6%.
Aon Benfield reports that the total capital of the 23 ABA firms amounted to $255 billion at the end of 2016, which is growth from the $246 billion reported a year earlier.
Profitability is expected to come under further pressure throughout 2017 and possibly into 2018 as market conditions remain favourable to buyers and rates continue to decline in the softening market cycle.
Catastrophe losses so far in 2017 have been put at an estimated $7.6 billion, and should the trend of increased losses continue throughout the year combine with an expectation of lower reserve releases, the profitability of the ABA companies could fall further in 2017, underlining just how challenging the softening cycle is for reinsurers around the world.
