The Unbearable Lightness of Reinsurance ROE

While capital may be stable, reinsurers continue to lose long-term profit ground.

Return on equity (ROE) for the reinsurance industry hit new post financial crisis lows in 2011 as the industry struggled to survive cataclysmic events and poor investment returns.

Reported return on equity for the reinsurance fell from 10.4 percent in 2010 to 4.6 percent in 2011, according to Aon Benfield’s 2011 Aggregate report released Wednesday.

The poor showing also pulled the reinsurance industry’s five year average ROE to 8.6%, the report added.

All reinsurance industry players saw ROE drop in 2011, with Flagstone seeing the worst performance with a 42.2 percentage point drop in ROE and RenaissanceRe the next worst performer with a 24.2 percentage point drop.

Return on equity is a key metric for institutional investors because it measures how well a company can generate a profit from each common share. Reinsurers have continually struggled to maintain a decent equity return, with some industry watchers arguing that large investors may abandon the sector does not reverse course.

Prior to the financial crisis the reinsurance industry averaged 14.4 percent ROE 2007, but the metric tumbled to 1.9 percent in 2008

Last year Standard & Poor’s issued a report saying that, “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.”


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