Chris Klein, Global Head of Business Intelligence
European reinsurers saw their balance sheets impaired in 2008 by the ‘perfect storm’ of high investment losses, significant claims losses from US Hurricanes Ike and Gustav and softening rates. However, the European cohort did prove its resilience owing to a strong capital position before the financial storm. In 2009, the main focus for the European reinsurance community was to replenish balance sheets and boost capitalisation. Modest catastrophe activity, hardening rates in some lines of business and improved capital market conditions helped them to achieve this ambitious target.
Capital Bouncing Back
During 2008, the aggregate shareholders’ funds for the Guy Carpenter European Reinsurance Composite (the “Guy Carpenter European Composite”) lost 21 percent, or more than $20 billion, dropping to $77 billion, with most of the losses coming from almost $12 billion of unrealized investment losses. During the first nine months of 2009, the same Composite saw its aggregate shareholders’ funds notably increasing by 18 percent, or $5.7 billion, to $90.9 billion, helped by a significant increase in unrealized investment gains, stemming from the tightening of bond spreads.
The combined net income for the Guy Carpenter European Composite more than doubled to $5.2 billion due to the lower level of natural catastrophes experienced in 2009 and improved underwriting earnings coupled with higher net investment income. Little outside capital was raised, with only Swiss Re issuing CHF3 billion of convertible perpetual capital to Berkshire Hathaway in February 2009. Excluding this inflow, the aggregate shareholders’ funds would have grown by 14 percent.
Since both sides of the balance sheets were impaired at the end of 2008, all the European reinsurers included in the Guy Carpenter European Composite decided to stop buying back shares (which cost a total of $4.7 billion in 2007) and some also significantly reduced their dividend payouts. These actions enabled balance sheets to recover more quickly during 2009.
The fact that the capital position of the Guy Carpenter European Composite is returning to pre-financial crisis level raises the prospects of the resumption of share buyback programs and increased dividend payments. On October 1, 2009 Munich Re was the first company to announce its intention to resume its suspended share buyback programme and repurchase shares with a volume of up to €1 billion, equivalent to 4.7 percent of the share capital by 2010.
Life & Health acquisition drove top-line growth
The companies in the Guy Carpenter European Composite also saw their gross premiums written increasing by a 6 percent weighted average to $102 billion during the year to date ending September 30, 2009. The 41.1 percent year-on-year increase in Hannover Re’s life & health gross premiums written was driven by the acquisition of ING Life Re but the growth was only 18 percent excluding this acquisition. At SCOR, the 20 percent year-on-year growth on the Life & Health segment resulted from the acquisition of Prévoyance Re and also growth in the geographic regions of Europe and the Middle East. In addition, the French reinsurer acquired XL Re America in May 2009, which should further help to develop its US life reinsurance market position. Ace also saw its life & health top line grow by 26 percent due to inclusion of the business from Combined Insurance, which was acquired in April 2008. At Munich Re, the 35.3 percent growth year-on-year of the Life & Health gross premiums written was attributable to the acquisition of Sterling Life and also large-volume quota-share treaties concluded in the first quarter of 2009. The growth in life reinsurance business for the Guy Carpenter European Composite has shifted the balance between life & health and non-life business (Swiss Re being the exception), further diversifying portfolios.