Reinsurance companies have delivered outstanding returns to shareholders over the past five and ten years, outperforming not only the broader insurance industry but also many other sectors, including oil and gas, according to a BCG report.
The annual total shareholder returns (TSR) for reinsurance averaged 10% and 12.2% for the past five and ten years, respectively, compared to 3.9% and 9.4% for the insurance industry as a whole.
One of the key drivers of this performance has been the strategic use of cash flow by reinsurers to sustain high dividends and repurchase shares.
However, as the industry enters a new phase, operating performance is expected to take precedence over cash flow in driving shareholder returns. Reinsurers have historically lagged in tangible book value (TBV) growth, accounting for about 60% of TSR, while cash flow constitutes 30%.
Recent years, particularly from 2017 to 2022, have been challenging for reinsurers due to heavy catastrophe losses, depleting their cash reserves. Looking ahead, the focus is shifting toward growth in TBV, largely determined by return on tangible equity (RoTE), as a key metric for success.
The industry is currently experiencing a sustained hard market for property catastrophe rates, particularly in excess of loss, driven by increased ceded losses and disciplined decisions by reinsurers.
While this has improved RoTEs and risk profiles, there are challenges in other areas, such as casualty and some other property and casualty (P&C) reinsurance lines where pricing lags inflation.
Furthermore, the impact of climate change is a significant unknown factor. The volatility and unpredictability of climate-related events pose a challenge for reinsurers in assessing the adequacy of current catastrophe rates for sustained profitability.
Climate change threatens lives, infrastructure, assets, and businesses, impacting both primary carriers and reinsurers.
