Reinsurers remained an attractive prospect for investors in 2017 despite falling to an overall underwriting loss for the year amid a series of catastrophes.

But look beyond the headline picture and there is cause for concern for shareholders as the industry leans ever more heavily on share buybacks to prop up prices while expenses pressure return on equity (RoE) results.

willis analysis capital returned through share buybacks

The global reinsurance market just managed to stay in the black last year despite posting a combined ratio of 104.8 percent as realised investment gains jumped nearly $3bn to $9.7bn on the back of soaring global equity markets, according to data compiled by Willis Re.

However, rates have been declining year-on-year in the absence of a significant industry loss, leaving reinsurers to depend more heavily on external factors and capital engineering to maintain values, with Willis Re noting a chunky $15.6bn of capital was returned to investors through dividends and share buybacks. 

Investors may find it jarring to know that total capital returns for the year actually exceeded aggregate net income in 2017, despite the market’s overall net written premiums climbing 11.3 percent to $285bn.

Last year saw a massive uptick in the number of companies looking to return capital to shareholders. While there were just two repurchase programmes announced in 2014 and 2015, and a further two in 2016, a total of nine companies bought their own stock last year, with another three emerging in the first four months of 2018.

But even so, RoE failed only just managed to exceed that of the two prior years when normalised for catastrophe losses despite the mammoth exercise in financial engineering.

According to Willis Re, its global reinsurance cohort’s RoE came in at 3.8 percent last year, including a 4 percent normalisation for the catastrophes and prior year development. This was only just over the 3.3 percent and 3.4 percent posted in the two respective preceding years.

Take out the normalisation however, and we are left with an RoE for 2017 of just 1.4 percent - significantly less than the 8.2 percent and 10.2 percent posted in 2016 and 2015. 

willis roe analysis for the subset

An interesting caveat to the discussions around returns lies in the familiar refrain of the industry’s seemingly interminable expense issue.

Willis Re noted that if each of the constituents had managed to maintain their expenses at the same level as that they reported a decade previously, the eventual RoE for that group would have come in at nearly 2.2 points higher than the 2.8 percent reported in 2017.

“The 2017 result was supported by the aforementioned reserve releases and investment gains which remains a concern and is why many reinsurers continue to try to push pricing on under-performing lines.” Willis Re CEO James Kent commented.

“The pressure on traditional reinsurers from alternative capital suppliers is stronger than ever, as many participants in this market cleared their first true major test. This increase in alternative capital, as well as the global reinsurance market having more capital to deploy, is continuing to dampen price increases in the mid-year renewals.”

Reinsurer Share Buybacks, 2014-17 Source: Willis Re
CompanyDateCapacity outstanding as % of Shareholders’ Equity, Dec 31 2017
Everest Re Nov-14                                          4.4%
Alleghany Nov-15                                          4.3%      
Argo May-16                                          4.7%
Axis Dec-16                                          0.0%
RGA Re Jan-17                                          3.9%
Aspen Feb-17                                          7.5%
XL Catlin Feb-17                                          5.4%
Beazley Mar-17                                         10.0%
Lancashire May-17                                         10.0%
Scor Jul-17                                          3.1%
WR Berkley Aug-17                                          7.6%
Fairfax Sep-17                                          7.7%
Ren Re Nov-17                                         11.4%
Validus Feb-18                                          7.5%
Munich Re Mar-18                                          3.6%
Swiss Re Apr-18                                          4.3%