Reinsurance sector proves resilient, led by strong performance from P&C – BCG

The reinsurance industry continues to demonstrate its resilience in the face of market volatility, with investors consistently valuing the sector for its stability, according to insights from the Boston Consulting Group’s (BCG) 2024 Insurance Value Creators Report.

Despite the high-stakes nature of the business, where claims often total in the billions, the reinsurers with the most consistent year-over-year performance have proven to be the most reliable value creators over the past decade.

Reinsurers delivered an annual total shareholder return (TSR) of 11.5% over the past decade and 13% over the past five years, outpacing the broader insurance industry. BCG notes that this performance would place reinsurers close to the first quartile among all sectors in global value creators rankings.

The industry benefited from a relatively quiet period after major natural catastrophes in 2018 and 2019, followed by the disruptions caused by the COVID-19 pandemic in 2020 and 2021.

A significant portion of reinsurers’ TSR over the last decade has come from dividends and share buybacks, accounting for more than half of total TSR in the past 10 years and 40% over the past five years, according to BCG.

Growth in tangible book value (TBV) for reinsurers has also improved, trailing only the pure-play property and casualty (P&C) insurance segment. This improvement has been driven in part by a higher return on equity for reinsurers in recent years.

Top reinsurers, including Hannover Re, Munich Re, and the Everest Group, have consistently generated long-term value through effective risk selection, assessment, pricing, and the use of advanced data and technology.

BCG reports that these companies not only excel in TSR but also rank highly in terms of risk-return performance. However, not all reinsurers have met these benchmarks, with some delivering TSRs below the cost of equity.

P&C leading the way

Within the reinsurance sector, property and casualty (P&C) reinsurers outperformed life and health (L&H) reinsurers. According to BCG, P&C reinsurers achieved higher returns, while L&H reinsurers faced negative underwriting margins.

The five-year return on tangible equity (RoTE) for reinsurers has improved over the past year but still lags behind the primary insurance sector’s RoTE, especially in P&C and L&H segments.

Looking ahead, reinsurers will need to address shareholder expectations for continued TBV growth, BCG advises. Top performers will focus on balancing profitable growth, cash flow contributions, and multiple expansion.

Although dividends and share buybacks have played a significant role in supporting TSR, BCG notes that over-reliance on these strategies could weaken companies, especially if market conditions soften.

The robust market of recent years should have allowed companies to build reserves, but softening in some commercial lines in primary insurance markets could impact reinsurance pricing in the near future.

Prepping for climate risks

BCG highlights that as climate change leads to more frequent natural catastrophes, reinsurers may need to adopt a longer-term view, potentially accepting lower cash flow contributions to TSR as they shore up capital for increased capacity requirements.

The growing need for additional capacity, particularly driven by investments in the green transition, could place further strain on the sector. According to BCG, $19 trillion in green transition investments committed through 2030 will require an estimated $10 trillion in additional insurance coverage.

Premiums for physical risks and natural catastrophe protection are expected to rise by 50% by 2030, reaching between $200 billion and $250 billion globally, BCG reports. This increase will be driven by climate-related events and other factors, including the need for more protection against large-scale disruptions.

In addition to climate risks, cyber threats also pose significant challenges to the industry. BCG and Howden, an insurance intermediary, have noted that a recent global cyberattack, triggered by a flaw in a software patch, could result in billions of dollars in insured losses, underlining the growing risk in a highly connected world.

Amid these developments, reinsurers are likely to remain a source of relatively stable returns for investors, despite the mounting challenges posed by climate change, cyber threats, and shifting market dynamics.

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