Market Information Department, Guy Carpenter
A tough year for reinsurers is coming to a close. The worldwide financial catastrophe has impaired investment assets and put downward pressure on profits. At the same time, combined ratios were sent higher by an above-average year for catastrophe losses, especially as a result of Hurricane Ike. So, we enter 2009 with capital constrained, shareholders’ funds diminished, and a combined ratio for the Guy Carpenter Global Composite at its second-highest level in five years.
Catastrophe Losses Push Combined Ratios
The Guy Carpenter Global Composite posted a combined ratio of 99.2 percent for the first nine months of 2008, up substantially from the full-year 2007 value of 92.5 percent. This tracks closely with the Guy Carpenter European Composite, which went from 94 percent to 98.2 percent for the same timeframes. The Guy Carpenter Bermuda Composite’s combined ratio showed considerably more volatility, jumping from 85.7 percent at the end of 2007 to 98 percent for the first nine months of 2008.
The volatility displayed by the Bermuda Composite reflects a heavier emphasis on catastrophe excess of loss (XOL) risks. The spike in this group’s aggregate combined ratio is due to disproportionate losses (relative to Europe and the global market) from Hurricanes Gustav and Ike. The companies in the European Composite tend to have greater diversification in their portfolios, resulting in a smaller combined ratio increase.The closer correlation between the Global Composite and the European Composite results largely from the overlap of major reinsurers covered. The presence of large firms in both groups, such as Swiss Re and Munich Re, has led to a nearer alignment of performances. Combined net premiums for these two firms account for 54 percent of the Global Composite and 62 percent of the European Composite.
A Loss of Equity
Shareholders’ equity dropped 15.6 percent for the Global Composite through the first nine months of 2008. The momentum gained by the credit crisis - which grew into a global financial catastrophe by the end of the summer-hit carrier balance sheets severely. Yet, the firms measured in the Global Composite fared well relative to the broader set of public companies around the world. The S&P 500 lost 20.6 percent of its aggregate shareholders’ equity, and the Dow Jones Euro STOXX 50 gave up 30.9 percent for the same nine-month period.
The reinsurers in the Global Composite posted a combined net income of USD3.8 billion for the first nine months of 2008, down precipitously from USD4.2 billion for the same period in 2007. This year’s performance is net of USD4.4billion in realized capital losses and USD4.9 billion in unrealized capital losses. Carriers face an additional USD11.1 billion in after-tax loses, as well, which far exceeds year-to-date net income for the Global Composite.Even with the decimation of shareholders’ fund, many reinsurers returned capital to investors. Thirteen of the 16 firms in the Global Composite reduced outstanding common shares through buyback programs; only Flagstone Re, Hannover Re, and Transatlantic Re did not. All but one, the relatively new Paris Re, paid dividends to its shareholders.
Munich Re and Swiss Re accounted for more than two-thirds of the capital repatriated by the Global Composite. The 16 reinsurers sent USD5.5 billion back to investors.
A Capital New Year
This truly unusual year has made speculation on 2009 a challenge. A year of increased property catastrophe losses-not to mention the newest type of catastrophe: financial-sent combined ratios higher around the world, with carriers in Bermuda suffering more because of their higher North Atlantic exposures. In a capital-constrained marketplace, focus turns once again to the likelihood of a mega-catastrophe in the new year.
Last year, we considered the effects of a market-changing event on reinsurance rates. This year, the concern is a shade different. Beyond pushing combined ratios higher and depleting shareholders’ funds, post-loss recapitalization could be a tricky proposition, particularly if alternative investment institutions pass on insurance risks in the coming year.
In 2008, the global reinsurance market saw the importance of risk management discipline - from diversification to the effects of extreme (and extremely unlikely) events. As we enter 2009, carriers will proceed with caution.