Reinsurers have enjoyed a significant recovery in 2009. Effective and disciplined capital management in previous years and good-natured weather enabled them to sit out the financial storm and build up strong cash positions. Meanwhile, the broader financial services industry is still coping with the effects of the worldwide financial crisis. Stability has returned to the reinsurance market, though it remains delicate. But, by all measures, the savvy management of capital and underwriting has been successful.
As late as the first quarter of 2009, the implications of the financial crisis were still evident. The companies comprising the Guy Carpenter Global Reinsurance Composite had made little progress toward recouping the capital they had lost in 2008. Financial markets remained effectively frozen, though reinsurers were still supported by balance sheets that remained sufficient despite an 18 percent aggregate plunge in shareholders’ funds. The second quarter results, however, proved to be the turning point this year, thanks to the easing of financial markets and an up-tick in earnings.
For the first half of 2009, the Global Reinsurance Composite posted aggregate earnings of USD4.6 billion — a profound change from the USD3.5 billion loss at the end of 2008. The earnings gain fed an 8.2 percent increase in aggregate shareholders’ funds, driven by both investment and underwriting gains. The upturn resulted primarily from a precipitous decline in unrealized losses — from USD11.7 billion last year to USD1.5 billion. Realized investment losses dropped 43 percent to USD1.2 billion.
Milder loss activity and disciplined underwriting accompanied the recovery of asset values in contributing to the Global Reinsurance Composite’s aggregate earnings gain. Underwriting profits grew by USD2.2 billion year-on-year, reflecting a 9.6 percent change. Combined ratios improved from 85.6 percent to 84.9 percent, based on an unweighted average of the Global Reinsurance Composite, with the European cohort posting a result of 94.7 percent and the Bermuda companies reaching a combined ratio of 77.1 percent. The Bermuda sector benefited from a benign catastrophe year, as a result of the region’s portfolio focus.
Alongside the general increase in capital came a resurgence of cash. From an aggregate level of USD1.9 billion at the end of the second quarter of 2008, cash holdings spiked 316 percent to USD7.9 billion for the same period this year. The increase in operating cash flow from underwriting earnings more than offset the outflows from realized investment losses and decreased inflows from investing activities.
The accumulation of cash and capital in the first half of 2009 suggests that reinsurers will face a range of opportunities and challenges in the coming year. Increased capital provides the opportunity for growth, but it also presents a challenge to extract the best return as supply pressures on rates ease. In the first half of 2009, earnings increases — and lower levels of shareholders’ funds — did lead to an aggregate increase in ROE for the Global Reinsurance Composite. The overall gain, though, masks a wide range of individual company results within this cohort.
ROEs ranged from -2.1 percent to 29.2 percent, not including the effects of unrealized gains and losses. A general capital trend, therefore, does not necessarily signal consistent industry-wide performance. Specific risk and capital management activities do make a difference, even in this mature marketplace. And, these differences may provide opportunities for acquisition and consolidation of market positions.
Reinsurers have navigated the financial crisis successfully and are now turning their attention to growth and gearing. Earnings, shareholders’ equity and cash have all ticked upward, but renewed stability will bring with it fresh challenges and opportunities. The major test for reinsurers in the coming year will be to find profitable opportunities for their capital in a mature industry. Though the market is competitive, the range of ROEs posted in the middle of 2009 demonstrates that it is possible to gain a significant lead. To do so, reinsurers will have to adapt to a quieting market.