As investors constantly value stability, the reinsurance business has proven to be resilient in the face of market volatility, according to findings from the Boston Consulting Group’s (BCG) 2024 Insurance Value Creators Report.
Over the past 10 years, the reinsurers who have demonstrated the most consistent year-over-year performance have emerged as the most dependable value producers, even in the highly volatile industry where claims frequently amount to billions of dollars.
Outperforming the whole insurance business, reinsurers produced an annual total shareholder return (TSR) of 11.5% over the previous ten years and 13% over the previous five. According to BCG, with this kind of performance, the reinsurers would rank in the first quartile of all sectors in the global value creators rankings.
After significant natural disasters in 2018 and 2019, the sector enjoyed a period of relative calm before the COVID-19 epidemic disrupted operations in 2020 and 2021.
According to BCG, dividends and share buybacks have contributed significantly to reinsurers’ total shareholder return (TSR) over the previous ten years, making up over half of the overall TSR in the past ten years and 40% in the past five.
Only the pure-play property and casualty (P&C) insurance industry has seen slower growth in tangible book value (TBV) for reinsurers. A larger return on equity for reinsurers in recent years has contributed to this development.
Prominent reinsurers, such as Munich Re, Hannover Re, and the Everest Group, have continuously produced long-term value by using cutting-edge data and technology along with efficient risk assessment, pricing, and selection processes. According to BCG, these businesses do very well in terms of risk-return ratio in addition to TSR. Not all reinsurers, nevertheless, have fulfilled these standards; some have produced TSRs that are less than the cost of equity.
P&C setting the standard
Property and casualty (P&C) reinsurers did better in the reinsurance market than life and health (L&H) reinsurers. BCG reports that L&H reinsurers experienced negative underwriting margins while P&C reinsurers saw stronger profits.
Although it has improved over the past year, the five-year return on tangible equity (RoTE) for reinsurers still trails the RoTE of the main insurance sector, particularly in the P&C and L&H segments.
While buybacks and dividends have been important in promoting TSR, BCG warns that a reliance on these tactics that is too great could hurt businesses, particularly in the event of a softening of the market. Recent strong market conditions should have enabled companies to accumulate reserves; nevertheless, the near-term impact on reinsurance pricing may come from weakening in some commercial lines in primary insurance markets.
Being ready for climate-related threats
According to BCG, reinsurers may need to have a longer-term perspective and tolerate less cash flow contributions to TSR in order to raise capital for greater capacity requirements as climate change causes natural disasters to occur more frequently. The sector may be further strained by the increasing need for extra capacity, which is mostly being driven by investments in the green transition. The BCG estimates that an additional $10 trillion in insurance coverage will be needed to cover the $19 trillion in green transition expenditures committed through 2030.
Cyber threats present the sector with serious hurdles in addition to climate-related hazards. A recent worldwide cyberattack that was caused by a software patch defect may have cost billions of dollars in insured losses, according to BCG and Howden, an insurance intermediary. This highlights the rising risk in an increasingly interconnected world.
In the midst of these changes, reinsurers are probably going to continue providing investors with comparatively steady profits, even with the growing difficulties brought on by cyberattacks, climate change, and changing market conditions.
