Reinsurers tend to experience broad profit fluctuations. This is evidenced by the data in the chart below, which shows the average historical return on common equity (RoCE) of the Guy Carpenter Bermuda Reinsurance Composite group of companies. Note the recent large losses incurred in years 2001, 2005, and 2008. Although these were followed by periods of above-normal profitability, returns look likely to be lower in 2010 and could deteriorate quickly if losses occur.
Source: Guy Carpenter & Company
This trend of healthy profitability during benign periods and large losses following catastrophes is typical for reinsurers. Judging a reinsurer’s profitability only by looking at recent earnings is both insufficient and inaccurate. The true picture can emerge only when returns are viewed over the long-term. For constituents of the Guy Carpenter Bermuda Reinsurance Composite, stockholders’ returns on equity over the last 20 years have averaged 11.7 percent. This represents a return sufficient to continue operating but by no means ‘outsized’. It is notable that during this period, several Bermuda-domiciled reinsurers have been acquired or forced into run-off due in part to large losses.