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Investment Volatility Is Eroding 2019 Global Reinsurance Capital Gains

Red and White Globe with Investment Data Graphs in Background
April 29, 2020

Total capital dedicated to the global reinsurance industry grew 15 percent year-on-year in 2019, standing at $605 billion at the end of the year, according to the Reinsurance Market Report: Results for Full-Year 2019, April 2020, from Willis Re, the reinsurance business of Willis Towers Watson.

Much of that capital growth has likely unwound thus far in 2020, however, due to the steep sell-off in the stock and corporate bond markets, according to Willis Re. The downturn in investment markets in March and April likely resulted in a year-to-date reduction in the global reinsurance capital base ranging from 5 percent to 20 percent, Willis Re said.

A more in-depth analysis of a subset of 18 reinsurers showed the return on equity (ROE) of the group increasing significantly in 2019, to 9.7 percent from 4.2 percent in 2018, Willis Re reported, driven largely by investment gains.

During the same period, however, the group's underlying ROE, which excludes the impact of investment gains, abnormal catastrophe losses, and prior-year reserve development, fell from 4.3 percent in 2018 to 3.2 percent in 2019. Willis Re said the analysis shows that the reinsurance sector's underlying ROE "remains in gentle decline and is well below the industry's cost of capital."

Willis Re said that a primary driver of 2019's lower ROE was the subset's combined ratio, which increased from 99.2 percent in 2018 to 100.6 percent in 2019. On an underlying basis—normalizing catastrophe losses and excluding prior-year reserve development—the combined ratio rose from 102.3 percent in 2018 to 103.1 percent in 2019 and has been increasing every year since 2013, Willis Re said.

In a statement, James Kent, global CEO of Willis Re, said, "This analysis demonstrates how sensitive the global reinsurance capital base is to investment markets. Thankfully strong capital growth in 2019 allied to judicious investment strategies by many companies has put the industry in a good position to weather the current volatile environment."

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