Aon Benfield estimates that total global reinsurer capital, which comprises capital both from the traditional and alternative markets, rose by 4% to a record USD585 billion over the six months to June 30, 2016.
Within this figure, traditional capital rose by 3% to USD510 billion – driven primarily by unrealized gains on bond portfolios associated with declines in interest rates during the period. Alternative capital also increased, a 5% rise to USD75 billion, reflecting additional deployment into collateralized reinsurance structures.
The firm's latest ABA study, which covers over a decade of data, found that the shareholders' funds of the 23 ABA companies* rose by 5% to USD202 billion over the six months to June 30, 2016.
Further key findings include:
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Total premiums written by the ABA rose by 5% to USD130 billion, the main driver being consolidation activity. Two-thirds of the companies achieved growth in P&C premiums and a majority reported expansion of their reinsurance business.
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As well as selling more reinsurance, the ABA companies are buying more reinsurance. The overall cession ratios increased at the majority of constituents, in particular reflecting greater utilization of retrocessional protection.
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The combined ratio deteriorated by 3.3 percentage points (pp) to 94.7%. Major losses increased but remained within allocated budgets, contributing 5.5pp. The most significant events were wildfires in Canada, earthquakes in Japan, floods in Europe and hailstorms in Texas.
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Total investment returns benefited from significant capital gains linked to declines in interest rates. The assumption of higher levels of asset risk stabilized the annualized ordinary investment yield at 2.6%, but this remains 40% below the level seen prior to the financial crisis.
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Net income attributable to common shareholders fell by 19% to USD8.5 billion, representing an annualized return on equity of 8.8%.
Mike Van Slooten, co-Head of Aon Benfield’s Market Analysis team, said: “The combined effects of lower-for-longer interest rates and underwriting margin compression were evident in this period. Earnings have clearly become more sensitive to catastrophe losses and prior year reserve development. However, the return on equity remains attractive relative to other sectors and should be viewed in the context of a continuing decline in the cost of capital.”
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