Strategically Thinking Volume 5

10 April 2018

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Welcome to the fifth edition of Strategically Thinking, a periodical presentation of original research and analysis by JLT Re's global Strategic Advisory team.
 

Economic profitability of (re)insurers
Calendar year 2017 is finally behind us, but impacts of the events of last year continue to ripple out ahead of us. The combination of catastrophes resulted in record levels of insured losses and the first net reduction in dedicated reinsurance capital since 2008.
 
Our composite of sixty-six large, global, publicly traded non-life insurance companies showed a positive, albeit razor-thin, median marginal economic return on capital (Return on Invested Capital [ROIC] less Adjusted Weighted Average Cost of Capital [WACC]) of 0.004% in 2017, down from 1.0% in 2016. Market consensus for 2018 shows an expected rebound to 1.5%, due not only to a return to normal cat activity but also on the back of favorable rate changes, primarily in commercial lines.

 

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Public, stand-alone reinsurance specialists are rather a rare breed these days, and our analysis of the economic profitability of our ever-shrinking composite of eighteen listed global reinsurance companies may suggest one reason why. The 2017 median marginal economic return on capital was a capital-destroying negative 4.5%, ending five consecutive years of positive economic profitability that had been declining despite low levels of catastrophe losses. Losses come with the territory for reinsurers, but despite suffering a material hit to book values in 2017, 2018 economic returns are forecasted to rebound to only 0.9%. 

 

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