According to Willis Re’s latest Reinsurance Market Report, aggregate net income for shareholders’ funds in the Willis Reinsurance Index in HY 2017 plummetted to U.S. $8.3 billion from U.S. $14.5 billion at HY 2016 after what’s been a below-average year for losses and a market still characterised by surplus capital and increased competition.
The aggregate net income of $U.S. 8.3 billion was exceeded by dividends and share buybacks which totalled $U.S. 10.8 Billion for the period.
John Cavanagh, Global CEO of Willis Re, said ongoing market pressures are “undoubtedly manifesting themselves in a diminishing underlying return on equity and further impacting reduced net incomes.
“This deterioration is further weakening the global reinsurance industry’s performance. However, despite these challenging conditions shareholders’ funds have strengthened, maintaining robust balance sheets across the market.”
Combined ratios increased for the Index from 94.1% in HY 2016 to 95%, and investment yields fell from 3.1% to 2.8%.
2017 has furthered the trend of shrinking profit margins and pricing pressure, with a significant reduction in natural and man-made catastrophe losses so far failing to bring about a change in the supply/demand ratio.
“The aggregate Return of Equity (RoE) for the Index reduced to 4.6% from 8.3% at HY 2016, largely due to the accounting of a significant adverse development cover written by National Indemnity.
“Excluding National Indemnity, on a like for like basis the remaining Index constituents returned an aggregate RoE of 7.8% (HY 2016: 8.7%),” Willis explained.
However, when adjusted for prior year reserve releases and normalised catastrophe loss levels, the RoE falls to 3.7% from 4.5% in HY 2016. This level of RoE would be considered to be unsustainable over the longer-term and given the metric has dropped this far in a relatively benign catastrophe environment, it will not take much impact from hurricane Harvey and hurricane Irma to turn it negative.
