Capital Levels Remain Resilient
The elevated loss activity and the catastrophe model changes during the past year put some pressure on reinsurance capital in 2011. At the end of the third quarter, the Guy Carpenter Global Reinsurance Composite (1) reported approximately USD20 billion in catastrophe losses for the first nine months of the year. Catastrophe model changes, particularly the impact of RMS v11, also put some strain on capital levels, although the full impact has yet to be realized.
The evolution of shareholders’ funds in 2011 for the Guy Carpenter Global Reinsurance Composite is illustrated in Figure 1. After an impairment in the first quarter, net income recovered to make a positive contribution to shareholders’ funds in the second quarter. Share repurchases did continue in 2011 but not at the pace of prior years and, therefore, were less of a drawdown on shareholders’ funds. By the end of the third quarter, shareholders’ funds had recovered from the year’s lowest level.
Although the financial impact of 2011’s catastrophe losses are significant, and roughly equivalent to the dollar amount of 2005 reinsured losses, it had a less severe impact on reinsurers’ capital when compared to the catastrophic events of 2005. For perspective, Figures 2 and 3 illustrate the impact on major reinsurers of 2011 events relative to 2005. As shown in Figure 2, several reinsurers also lost over half of their shareholders’ equity in 2005. The events of 2011 had a smaller impact on capital as (re)insurers were better capitalized going into 2011, enabling them to withstand these significant events. Since the 2008 financial crisis, (re)insurers have tended to retain more of their excess capital amid concerns about the ability to recapitalize after a major event. Reinsurers, for the most part, have also embraced ERM practices, and for many the investment is paying off.
Despite major catastrophes and global economic uncertainty, capital within the reinsurance sector currently remains resilient and sufficient to support industry needs. Although the past year’s events significantly diminished reinsurers’ earnings, they only slowed long-term capital growth, as the reinsurance sector began the year in a position of strength.
In other words, the sector currently remains solvent and liquid. At the start of 2011, Guy Carpenter estimated that excess dedicated reinsurance sector capital was about USD20 billion. Although this excess capital position was significantly diminished at mid-year, much of it had been recovered by the end of the third quarter when dedicated reinsurance capital stood in the range of USD165 to USD175 billion. The effect of the Thailand floods on the sector’s capital position will be significant and only fully quantifiable after fourth quarter results are published.
The chart below shows the long-term evolution of the Guy Carpenter Global Reinsurance Composite companies’ shareholders’ funds (2).
1 The Guy Carpenter Global Reinsurance Composite is comprised of 26 companies.
2 The Guy Carpenter Global Reinsurance Composite’s combined capital is not the same as the reinsurance sector’s dedicated capital position, cited elsewhere in this report.