Christopher Klein, Global Head of Business Intelligence
Underwriting and investment gains contributed to a general increase in capital in the first half of 2009. Some reinsurers have even regained half or more of what they lost as a result of last year’s hurricanes and financial shocks. Financial market stability has opened several options unthinkable nine months ago, including share buybacks, dividends and even maintaining a bit of extra capital as a cushion — after all, it was the excess capital held at the beginning of last year that helped reinsurers withstand the effects of the financial crisis.
For the second quarter of 2009, tightening credit spreads and a stock market rally brought about a substantial change in earnings. The Guy Carpenter Global Reinsurance Composite posted an aggregate loss of USD3.5 billion for the first half of last year. For the same period in 2009, it showed an increase of USD4.6 billion. A significant reduction in unrealized investment losses was largely responsible — from USD11.7 billion last year to USD1.5 billion this year (a favorable change of 87 percent). Realized investment losses also contributed, dropping 43 percent to USD1.2 billion.
Premium growth helped, as well, though it was modest year-over-year. Both gross and net written premium showed 6 percent increases, to USD71 billion and USD65 billion, respectively, in aggregate for the Global Reinsurance Composite. Most European multi-line carriers reported significant increases. Several Bermuda-based reinsurers, however, reported declines of 2 percent to 13 percent with insufficient pricing cited as reason in several cases. A mixed performance, therefore, exists behind the overall result for the group.
Underwriting earnings were more substantial for the Global Reinsurance Composite companies — up 9.6 percent relative to the first half of 2008. For the group as a whole, underwriting earnings reached USD2.2 billion. Combined ratios fell from 85.6 percent to 84.9 percent year-over-year (unweighted average), with the European cohort reporting an unweighted average combined ratio of 94.7 percent and the Bermuda companies achieving a combined ratio of 77.1 percent. The lower combined ratio for the Bermuda segment of the Global Reinsurance Composite reflects a relatively benign loss year for more catastrophe-heavy portfolios.
Generally positive earnings developments, along with recovering asset values restored a considerable amount of capital to reinsurers’ balance sheets. Aggregate shareholders’ equity for the Global Reinsurance Composite climbed 8.2 percent during the first half of 2009, though individual results varied. The gains from earnings, in addition to isolated capital-raising activity, were only partially offset by outflows from unrealized losses and the return of capital to shareholders. Unrealized losses represented only 3.2 percent of shareholders’ equity - an improvement from more than 10 percent a year earlier. Dividend and shareholder buyback outflows fell from 8.2 percent in the middle of 2008 to 2.9 percent a year later.
Financial markets have calmed, but this has not been enough to compensate from the damage caused by last year’s financial catastrophe. The 18 percent fall in shareholders’ equity last year will take time to restore, but improvements in 2009 have given reinsurers some flexibility in a fairly short period of time.