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Reinsurance capital from traditional sources drops in 2015

Reinsurance capital from traditional sources drops in 2015

Traditional capital dedicated to reinsurance dropped 3.5% from the previous year to $357 billion in 2015, driven by a focus on active capital management and investment losses, among other factors, Willis Re said Friday.

But the decline in traditional capital was offset by the continued growth in nontraditional capital, which hit a new high of $70 billion, Willis Towers Watson P.L.C.'s reinsurance unit said. Nontraditional capital includes insurance-linked securities such as catastrophe bonds, sidecars, industry loss warranties and collateralized reinsurance, Willis said on its website.

In total, global capital dedicated to reinsurance stood at $427 billion at the end of 2015, up from $425 billion at the end of the first half of 2015, according to Willis Re.

Continued focus on active capital management was a main driver behind the fall in traditional capital, according to the latest Reinsurance Market Report from Willis Re, as opportunities for acceptably profitable capital deployment remained challenging.

Decrease in traditional capital was also a result of unrealized investment losses and the strengthening of the U.S. dollar against the euro, according to the report, which is based on the Willis Reinsurance Index. The record volume of mergers and acquisitions activity in 2015 was also a key driver.

For companies within the index, these factors accounted for a reduction of roughly $20.9 billion.

However, capital oversupply remains a fundamental industry challenge, Willis Re said, and market pressures continue to manifest themselves in diminishing return on equity.

Companies within the index providing catastrophe loss and prior-year reserve release disclosure continue to show a seemingly healthy aggregate reported RoE of 10.2%, the report said, although it's down from 11.5% in 2014. However, based on a more typical catastrophe loss year and excluding prior-year reserve releases, aggregate RoE would diminish to just 3.4%, down from 5.8% in 2014.

The report said that despite deterioration in underlying performance due to further rate weakening, reinsurers' capital positions have remained strong through 2015 due to the absence of large catastrophe losses and strong reserve releases.

“However,” the report said, “as RoEs are starting to breach minimum target thresholds, we have seen some key players withdrawing capacity from the market. Nevertheless, there is abundant capital in the alternative space as asset managers seek more insurance risk to diversify their investment portfolios and enhance returns. The outlook remains challenging for the remainder of 2016 as markets continue to face significant overcapacity and competitive pricing conditions.”

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