May 26th, 2009

Shareholders’ Funds Gain Masks Market Conditions

Posted at 1:00 AM ET

David Flandro, Senior Vice President
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Reinsurers have attained aggregate shareholders’ funds of USD92.8 billion, as measured by the Guy Carpenter Global Reinsurance Composite. This represents an increase of 4.6 percent from the fourth quarter of 2008. Excluding the effects of securities reclassifications and revaluations — and reserve releases — actual growth is a much lower 1.4 percent for the first quarter of 2009.

Over the first three months of 2009, reinsurer shareholders’ funds grew by USD4 billion — from USD88.8 billion to USD92.8 billion — with realized investment losses offsetting the contributions of technical income to retained earnings. Equity market declines and widening spreads on fixed income securities were responsible for the impact on carrier investment assets.

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The 4.6 percent increase may obscure the economic reality underlying the market. Securities reclassifications and revaluations contributed substantially to the first quarter 2009 shareholders’ funds gain. Absent these effects, the Global Reinsurance Composite grew only 1.7 percent, and the exclusion of 2008 reserve releases reported in the first quarter of 2009 reduces shareholders’ funds growth to only 1.4 percent.

This low level of adjusted capital growth comes after a year in which the Global Reinsurance Composite’s total shareholders’ funds fell 18 percent — leading to an 8 percent increase in the Guy Carpenter World Rate on Line Index at the January 1, 2009 renewal. The effective 1.4 percent increase in shareholders’ funds contributed to continued reinsurance rate increases at the April 1, 2009 renewal, as well.

The recent decline, and only moderate subsequent increase, in reinsurer capital underscores the importance of both reinsurer selection and timing. Careful counterparty evaluation and early market entry are most likely to result in cost-effective coverage, and the July 1, 2009 renewal is around the corner.

Additional Contributor:

  • Marie-Emilie Teissier, Assistant Vice President
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