October 10th, 2013

Capital Stewardship Option: Return to Shareholders

Posted at 1:00 AM ET

With an abundance of excess capital, negligible growth in global reinsurance spend and the pricing outlook continuing to soften, one of the biggest challenges facing reinsurers is deciding how to deploy this excess capital to generate a return that meets or exceeds the expectation of investors or shareholders. Today we consider the option of returning capital to shareholders.

Return to Shareholders

As a principle, excess capital should be returned to shareholders in periods of low return opportunity (particularly below cost of capital) while more capital should be retained/deployed during periods that offer higher returns. Figure F-6 shows that reinsurers have been relatively disciplined over the last eight years, with carriers returning more capital when the pricing environment has softened. This was clearly evident during the soft market of 2008, when 13 percent of tangible net asset value (TNAV ) was returned to shareholders. Conversely, only 3 percent of TNAV was returned to shareholders when the market hardened in 2006. Given the relatively soft pricing environment of 2013, we expect the level of capital returned to increase from the 6 percent of TNAV seen in 2012.

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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