The traditional and alternative capital sides of the global reinsurance market both declined by around 3% in the first-half of 2020, according to the latest data from broker Willis Re.
At the same time, the pressure on traditional reinsurance companies ramped up further as dwindling investment yields drove down their returns on equity (RoE).
Willis Re sees total global reinsurance capital as having fallen by 3% in the first-half, from $605 billion to $587 billion.
The traditional and alternative, or insurance-linked securities (ILS), sides of the reinsurance market fell at the same rate and alternative reinsurance capital shrank from $91 billion at the start of 2020 to $88 billion by the end of June.
One of the drivers of the further decline in alternative capital through 2020 so far is the fact that losses and trapped capital, particularly in collateralised reinsurance sidecar vehicles, has not been fully replenished to-date, Willis Re explained.
The reinsurance broker breaks down the industry into its Index, which tracks specific companies that make fuller disclosures more closely and Willis Re turns up some interesting insights.
One of these is that, despite the significant attention paid to capital raising in recent months, the companies that have raised capital have returned more than three times the amount raised to their shareholders in the same period, so freshly raised capital isn’t really additive to the industry’s size.
It perhaps suggests the freshly raised capital isn’t really needed, as reinsurers could retain more capital by not returning as much to shareholders if they wanted to.
Of course, raising fresh capital from private equity investors, while also returning capital to existing shareholders, does mean you’re keeping everyone happy, so it’s perhaps understandable why this is happening at this time.
The small 3% decline in reinsurance capital at the half-year is much smaller than the fall of 30% up to late-March, following the impact of COVID-19 on investment markets.
This has been largely recovered by now, Willis Re notes, and total reinsurance capital is now 12% higher than at the end of 2018.
Willis Re notes it suggests that, “Based on current investment market levels, COVID-19 has not been a capital event for the industry.”
While capital remains abundant it seems, profitability is not so easy to come by still for the traditional reinsurers.
Willis Re measures the underlying returns on equity (RoE) of a subset of its Index of reinsurers and found that while the reported RoE for the subset of companies dropped to -0.7%, the underlying RoE also fell, from an already low 4.2% in the first half of 2019 to just 2.7% for the first-half of 2020.
This remains well-below the industry’s cost-of-capital of roughly 7% to 8%, Willis Re notes.
S&P also highlighted this, saying that the reinsurance industry will fail to earn its cost-of-capital again in 2020.
This is another reason the returns of capital to shareholders continue apace, as they aren’t earning the returns on equity they would perhaps have liked, making dividends and other capital returns the only options to compensate reinsurers’ backers.
James Kent, Global CEO, Willis Re, commented on the first-half of 2020, “This half-year analysis shows a reinsurance market understandably in a state of change. While reinsurers have so far resiliently shouldered the combined effects of COVID-19 losses and investment market volatility, underlying profitability remains challenging. Uncertainty therefore remains, particularly over the potential impact of COVID-19 on long-tail lines, which is driving reinsurers to deliver additional improvement in underwriting returns. We expect to see further reinsurance market discipline as well as continued differentiation between regions and clients based on past performance and underlying risk.”