Reinsurers’ profitability has been in decline over the past five years and the industry’s total capital fell in 2018, according to a report by Willis Re.

However, alternative reinsurance capital — including insurance-linked securities such as catastrophe bonds — continued on its growth trend last year.

Willis Re, a global reinsurance broker and adviser, said profitability, measured by underlying return on equity, was 2.7 per cent last year, having fallen from 6.7 per cent in 2013.

Underlying return on equity was calculated by stripping out the impact of both losses from natural catastrophe claims and gains from reserve releases.

In its Reinsurance Market Report, published yesterday, Willis Re said total capital dedicated to the global reinsurance industry measured $462 billion at the end of 2018.

The largest component of this figure is the total shareholders’ equity of the 32 reinsurance companies tracked in the Willis Reinsurance Index which was down 10 per cent to $335.7 billion, reversing growth of 8 per cent in 2017.

The second largest component is alternative capital which grew by 6 per cent to a record high of $93 billion, or just over 20 per cent of total reinsurance capital, according to Willis Re’s calculations.

Alternative capital has risen by 43 per cent since 2013, while total reinsurance capital has risen by just 6.3 per cent over the same period.

The continuing influx of capital markets money has been credited with smoothing out the peaks in the pricing cycle that would traditionally follow major catastrophe loss years like 2017.

Many Bermudian reinsurers now have their own alternative capital management arms, which can earn fees for their underwriting services, but this has apparently not proved to be as profitable as underwriting against their own balance sheets.

Willis Re said two Bermudian companies, Validus Holdings and XL Catlin, had left its index through being acquired by AIG and Axa respectively, causing a reduction of $13.7 billion in index capital.

Index companies made $20.5 billion in net income and paid out $17.6 billion, or 86 per cent of it, in the shape of dividends and share buybacks.

“The overall decrease in index capital was due to unrealised investment depreciation of $21.4 billion, mainly due to falling equity markets and rising bond yields,” Willis Re’s report stated.

“Notably, National Indemnity reported $10.2 billion of unrealised investment depreciation.”

James Kent, Global chief executive officer of Willis Re, said: “Overall shareholders’ equity figures for the index suffered a negative impact due to unrealised investment losses, owing to external factors largely beyond the control of risk carriers, as well as shareholder buy backs and dividends.

“The report’s findings show that the remedial actions taken by many risk carriers in 2018 were essential and we are seeing an acceleration of these actions in 2019 as companies seek improved underwriting terms and rates to drive RoEs.”