Reinsurers’ profits are down, yet industry capitalisation grew in 2016, according to a Willis Towers Watson study.
Net income among reinsurers fell to $26.6bn on aggregate last year, according to Willis Re’s annual reinsurance market report, from $30.3bn the preceding year.
Net written premium on the other hand rose by 2.2% to reach a $256bn aggregate figure.
“The continued challenging conditions of the market further impacts pressure on margins,” said John Cavanagh, Willis Re’s global CEO.
Aggregate shareholders’ funds for the 38 reinsurance companies making up the reinsurance broker’s annual index increased by 4% to reach a total $344.1bn, as of December 31 2016.
Overall reinsurance sector capital was estimated at $449bn, including a $75bn alternative reinsurance capital estimate, plus that of insurers with a reinsurance arm making up at least 10% of their premium, up from an estimated $427bn total a year before.
The reported combined ratio deteriorated to 92.9% from 89.3% in 2015 for the subset of 25 firms that had disclosed relevant data, representing 58% of the index capitalisation.
The subset reporting greater detail in their financial results beat the wider index aggregate combined ratio, of 94.4% from 91.4% over the same period.
"Profits continue to be highly reliant on reserve releases, which represented 49% of total profitability," said James Vickers, chairman of Willis Re's international arm, speaking at Lloyd's today.
"The reality of these numbers is really starting to hit home," said Vickers. "The reality behind the reported figures is that they are barely sustainable."
He suggested there is still a "disconnect" between companies' financial results and the operational figures being fed to senior management.
In response, reinsurers are starting to launch expense control plans, as well as seeking mergers and acquisitions and authorising increased share buybacks.
Global insured catastrophe losses increased to $54bn, Willis Re noted, up to a more normalised level from the comparatively low figure of $38bn in 2015.
Investment yields contributed little to any change between 2015 and 2016, as they were broadly flat at approximately 2.9%.
From a shareholder’s perspective, reinsurers’ headline return on equity (ROE) for 2016 was down to 8%, from 9.3% in 2015; reinsurers spent $16.4bn on share buybacks and dividends last year, Willis Re noted.
Underlying ROE reduced to 3.3% from 3.4% the previous year, however, when adjusted for reserve releases and a normalised level of catastrophe losses.
Rising expense ratios were blamed for this by the reinsurance broker; they increased marginally to 33.2% against 33.1% in 2015’s financial year.
"You might say it is beginning to plateau but the expense ratio is 4% higher than it was ten years ago," said Vickers.
Buyers face a rosy picture in comparison, he suggested, owing to their reinsurers' continued strong capitalisation as well as still-lowering prices.
Cavanagh continued: “However buyers can take comfort from the fact that the market balance sheet and headline figures remain robust in the face of persistent market softening due to continued reasonable net income and measured capital management strategies."
Vickers said saw little reason for change at upcoming June renewals, with further slight price drops anticipated from reinsurers.
"Why would it change? If nothing untoward happens in the next few weeks, why would the situation change?" he said.
Even if reinsurers are brought to a position where they take overall losses, he suggested any price rises would be tempered by continued oversupply of capital.
"Things would need to go quite badly wrong, in terms of major capital destruction and a loss of confidence for the capital still coming in," Vickers added.