A strong financial performance for the first half of 2009 sets the stage for the January 1, 2010 renewal. Investment assets produced gains for reinsurers relative to the first half of 2008, and underwriting earnings approached double-digit growth. A rebound in shareholders’ equity is evident as well, suggesting that last year’s capital woes have given way to recovery. Calmer financial markets have stripped away the primary factor in this year’s reinsurance rate increases, indicating a smooth renewal at the start of next year in the absence of shock losses.
Premium growth was moderate through the first six months of 2009. The Guy Carpenter Global Reinsurance Composite’s gross and net written premiums moved up 6 percent to USD71 billion and USD65 billion, respectively (on a constant currency basis). The whole, however, obscures the diversity of the part. Most European multi-line reinsurers posted considerable gains, while several carriers in Bermuda reported GWP and NWP declines of -2 percent to -13 percent.
Even though aggregate premium growth was modest, earnings surged year-over-year. The companies in the Global Reinsurance Composite had a combined net income of USD4.6 billion for the first half of 2009, a remarkable change from the USD3.5 billion aggregate loss reported for the same period in 2008. The turnaround was driven primarily by a sharp fall in unrealized losses — from USD11.7 billion last year to USD1.5 billion. At the same time, realized investment losses plunged 43 percent to USD1.2 billion. Tightening bond spreads and a stock market rally were responsible for the change.
Investment assets growth was accompanied by a strong underwriting result. An aggregate increase of USD2.2 billion represents a year-over-year increase of 9.6 percent. Combined ratios improved from 85.6 percent to 84.9 percent from the first half of 2008 to that of 2009 (based on an unweighted average of the Global Reinsurance Composite). The European cohort reported an unweighted average combined ratio of 94.7 percent, with the Bermuda sector coming in at 77.1 percent. The latter resulted from a quiet loss year for the companies’ more catastrophe-concentrated portfolios.
Balance sheets became more robust, as well. The Global Reinsurance Composite’s aggregate shareholders’ equity grew 8.2 percent from the first half of 2008 to the first half of 2009 — to USD95.8 billion. A significant inflow was the capital-raising of a single large reinsurer, though most saw increases fueled by earnings and the recovery of investment values. Unrealized losses accounted for only 3.2 percent of shareholders’ equity outflow for the first half of the year — compared to 10 percent a year earlier. Dividend and share buyback outflows also shrank from 8.2 percent to 2.9 percent, as reinsurers held onto their capital as a defensive play during a period of profound uncertainty.
The earnings gains from both underwriting and investment assets — in conjunction with lower shareholders’ equity levels - has led to an aggregate increase in return on equity (ROE). The vastly different results among the Global Reinsurance Composite companies, however, produced ROEs ranging from -2.1 percent to 29.2 percent (not including the effects of unrealized gains and losses).
Overall, the financial results reported for the first half of 2009 confirm the stabilization of financial markets and suggest a quiet conclusion to 2009. Restored balance sheets provide reinsurers with more of a cushion in advance of the January 1, 2010 renewal, even if it is not as substantial as the one enjoyed at the beginning of 2008. It appears that capital availability - the major driver of rate increases in 2009 — is unlikely to be an issue if benign conditions persist between now and the next renewal.