A nearly decade inability to offer a return on equity capital will eventually cost the reinsurance industry investor backing, according to a report issued by Standard & Poor’s on Monday.
“The current valuations for most global reinsurers reflect, in our view, investors’ relative skepticism about the reinsurance sector’s future operating performance and whether the results will exceed the modest returns produced over the past decade,” S&P said in a report titled For Some Reinsurers, Returns May Not Be Enough To Cover Their Loss Of Equity.
According to the report, the average return on equity (ROE) for a group of publicly traded reinsurers during the years following the September 11 terrorist attacks was 9.9%.
That “modest” return was nearly equal to the companies’ estimated cost of capital during the same period, the S&P report stated, meaning that the industry had little ability to offer even a sliver of profit in relationship shareholder equity.
Axis Capital had the highest ROE average for the period — returning 17.5 percent — while SCOR SE returned 1.3 percent.
The report explained that firms like AXIS were able to generate a better return because they were created with a “clean balance sheet” after 2001. However, ROE for those firms is beginning to suffer as they absorb losses and are unable to release reserves to boost earnings.
“This translates into single-digit ROEs and reflects significant decreases in profit margins, given the competitive market conditions in recent years,” S&P said.
Despite the promise of a hardening market and the ability of reinsures to boost pricing once again, S&P remains sanguine on the sectors ability to put together a ROE rebound.
“Reinsurers, ultimately, are at risk of losing support from the capital markets–and face weakened liquidity and credit quality–if they don’t improve their profitability through core operations,” the report states.
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