Reinsurers’ capital was at a low point at the end of 2018, largely due to returns to shareholders and unrealised losses held on the investment side. Expect those numbers to bounce back for Q1
Capital at reinsurance companies is expected to bounce back in the first quarter of 2019, after December’s low-point captured in snapshot by Aon’s recent Reinsurance Aggregate (ARA) report.
That was the view of Mike Van Slooten (pictured), head of business intelligence for Aon’s Reinsurance Solutions business, speaking to GR.
A 5% or $13bn dip in capital was observed at the end of last year among the 23 major reinsurers making up the ARA, published earlier this month.
“I’d expect it to bounce back,” Van Slooten told GR. “When you take a snapshot of capital at end of 2018, it was at a low point, due to investment market volatility in December, followed by a strong recovery in the first quarter.”
The low-interest decade since the 2008 financial crisis have seen unrealised gains on bond portfolios held by reinsurers, he explained, part of the reason why the industry’s capital numbers have climbed over that period.
“With the movement in US interest rates in 2018 that build-up was reversed, and the industry had to report unrealised losses; that’s not captured in earnings but in capital positions,” said Van Slooten.
“Activist shareholders have been unhappy with the returns achieved by certain companies in recent years and have become a lot more vocal.
“Most of companies tracked are looking to support share prices and continuing to return capital to investors,” he said.
“With dividends and share buybacks in the first three quarters, and then some catastrophe losses in the fourth quarter, earnings did not cover capital returned to investors,” Van Slooten added.
Among the reinsurers tracked by the ARA at the end of last year there was also a 13% rise in gross property and casualty reinsurance premiums, to reach $86bn.
“There continues to be a lot of excess capital in the industry. Reinsurers could be writing a lot more than they are if they saw the opportunities,” Van Slooten said.
Increased demand from primary insurers aiming to boost their own capital strength, and in some cases facing cat losses, lies behind the rise in reinsurance premium, he suggested.
That has played more of a role than the “rather limited price rises” at renewals, Van Slooten suggested.
“Most of the increases seen on the reinsurance side is driven by solvency relief type deals,” he said.
“Insurance companies looking for capital support through quota share reinsurance protection for their Solvency II models,” Van Slooten continued.
“Those tend to be big deals involving a lot of premium, which can move the dial quite quickly,” he said.
If reinsurers capital numbers rise after the first quarter – helped by the unrealised value of their bond portfolios – they could deploy further capital, depending on risk appetites and the pricing environment.
“The more capital they hold, the more comfortable they are with the rating agencies, allowing them to write more business, with additional risk appetite,” said Van Slooten.
“Of course, there is a difference between capital under GAAP and IFRS accounting rules, and their ability to deploy capital into the market, but the trend is useful. If reported capital numbers are up, that tends to indicate more capital is available,” he added.