Reinsurance return on equity (ROE) continued to track down over 2020, with returns remaining “well below” the industry cost of capital, according to analysts at Willis Re.
The broker found that both the reported and underlying ROE of the reinsurance industry declined significantly in 2020 as a lower contribution from investment income more than offset better underlying underwriting.
The average reported ROE for the companies analysed by Willis Re dropped from 9.7% in 2019 to 2.7% last year.
Source: Willis Re
Analysts noted that the 2019 figure had been boosted by abnormally high investment gains, and the 2020 ROE was burdened by COVID losses.
However, on an underlying basis and excluding investment gains, Willis Re calculated that industry ROE was 1.3% in 2020, versus 3.2% in the previous year.
It may seem counter-intuitive that the reinsurance industry’s underlying ROE declined in 2020, while the underlying combined ratio improved.
But while the underlying underwriting contribution improved by 1.3 percentage points on average, Willis Re notes that this was more than offset by the impact of declining investment yields, with the contribution to ROE falling by 2.9 percentage points.
There was also a negative swing in ‘Other income/expenses’, which includes the non-reinsurance activities of the reinsurers in question, which were also negatively affected by COVID last year.
Thus, while the reported ROE jumped briefly above the industry’s weighted average cost of capital in 2019, underlying performance continues to track significantly below, Willis Re concluded.
