The amount of capital held by reinsurers worldwide increased to a record $505bn last year as reinsurance companies more than recovered from the losses seen in 2011, Aon Benfield said today.
The consultancy's latest Aon Benfield Aggregate report details a $50bn increase in reinsurers' capital last year from the total recorded at the end of 2011 - equivalent to 11% growth in capital. This comes after 2011's record catastrophe losses pushed reinsurers' capital down 3% to $455bn.
According to today's report, the main drivers behind last year's increase were the generally solid earnings of 'traditional' reinsurers and unrealised investment gains being taken directly to equity. Reinsurers also benefited from a continued flow of new capital entering the industry in support of rated start-ups and the 'non traditional' sector.
Among the 31 leading reinsurers specifically covered by the Aon Benfield Aggregate analysis, reported capital grew by $33bn, or 12%, last year to $313bn. This was primarily driven by $29.5bn of net income and $15.9bn of unrealised capital gains, but partially offset by dividends and share buybacks totalling $16.1bn.
Mike Van Slooton, head of the company's international market analysis team, said reinsurers' earnings were being affected by the changing nature of the market.
'The low interest rate environment not only has impacted what reinsurers earn on their invested funds but it has added significantly to the competitor landscape,' he explained. 'Diversified yield seeking investors are now adding material pressure (in terms of price and value competition) and benefits (in terms of lower cost underwriting capital) to the reinsurance market.
He added: 'We expect material changes to the capital structure of the largely equity financed reinsurance market as material new flows of capital are integrated into reinsurance underwriting capital.'
Overall, the 31 firms in the ABA universe saw their pre-tax profits more than double last year to $35.7bn, the highest level seen since the financial crisis hit in 2008. All 31 companies recorded a profit last year.
They wrote $192bn of property and casualty (P&C) insurance and reinsurance premiums last year, up 6% from the previous year. Their return to profitability was shown by their combined ratio for P&C insurance and reinsurance standing at 92.6% at the end of 2012, compared to 105.1% a year earlier. The combined ratio is calculated by taking the sum of losses and expenses and dividing them by earned premiums.
The companies' P&C underwriting profit amounted to $11.7bn, aided by catastrophe losses only contributing $11.9bn to the combined ratio, compared to $29.6bn in 2011.