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Survey Report

Willis Re Reinsurance Market Report September 2020: Results for half year

Reinsurance
Climate Risk and Resilience|COVID 19 Coronavirus

September 9, 2020

Global reinsurance dedicated capital fell 3% in the first half of 2020 to USD 587 billion.

Welcome to the 12th semi-annual publication of Willis Re’s Reinsurance Market Report which tracks the capital and profitability of the global reinsurance industry.

The most visible features of global reinsurers’ 2020 HY operating performance and capitalisation have been the gradual emergence of COVID-19 losses and tremendous volatility in investment markets. Less visible, but as important, is the sector’s continuing low level of underlying profitability.

Taking the first six months of the year as a whole, the impact on reinsurers’ capital has been fairly modest – we calculate that global reinsurance dedicated capital fell 3% in the first half of 2020 to USD 587B. This masks, however, a significantly contrasting picture between the first and second quarter. In late-March, with investment markets tumbling, we had roughly calculated a 30% hit to the global reinsurance capital position.(1) The strong recovery of investment markets in Q2, however, largely restored that deficit. Moreover, the industry’s capital base is still 12% higher than at the end of 2018 (on a restated basis).(2) This suggests, based on current investment market levels, that COVID-19 is not a capital event for the industry.

Focusing on the INDEX(3) companies, which contribute the largest component of the industry’s capital:

  • Capital in aggregate also declined by 3%.
  • Each of the individual moving parts was also quite insignificant, with net income being a negligible positive and unrealised investment losses being a small negative (although this latter item would have seen a big swing quarter to quarter).
  • While the industry’s capital raising has attracted much attention, in the first half these companies actually returned to shareholders three times more than they raised. Drilling further into profitability, for the SUBSET of companies within the INDEX that provide the relevant disclosure:
  • The SUBSET’s average combined ratio worsened from 94.9% in 2019 HY to 104.1%. This is principally due to COVID losses, which added on average 11% to combined ratios. A lesser benefit from reserve releases was also a factor, continuing a trend we have seen since 2016.
  • Replacing COVID and other nat cat losses with a normalised loss level, and stripping out prior year reserve movements, we estimate the underlying combined ratio at 98.6%. This is better than 2019 HY’s 100.5%. The improvement is attributed in our view to industry price increases, which began to gain traction last year, and to the drop in claims frequency seen in 2020 HY.
  • Combined ratios also benefitted from a drop in the expense ratio: 32.0% in 2019 HY to 30.7%.
  • While underlying underwriting performance improved, it did not improve enough to boost ROEs. While the reported ROE for the SUBSET companies fell to negative 0.7%, the underlying ROE also fell, from an already low 4.2% in 2019 HY to 2.7%.
  • The driver was a drop in investment yield, which more than offset the improved underlying combined ratios. The running investment yield (ie excluding the volatile gains component) fell from 2.9% to 2.2%.
  • Whether you look at the reported -0.7% or underlying 2.7%, the SUBSET’s ROE remains well below the industry’s cost of capital of roughly 7-8%.
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