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.

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Chris Klein, Global Head of Business Intelligence

After a challenging 2008, the companies in Guy Carpenter’s Bermuda Composite experienced substantial recovery in their balance sheets as a more positive investment environment and the absence of a major US hurricane drove income higher. The composite’s net income improved to $7.28 billion in the first nine months of 2009, up from a $440 million loss in the same period last year.

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With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

Reinsurer Financial and Cat Losses High, Bermuda Hit Most: A tough year for reinsurers is coming to a close. The worldwide financial catastrophe has impaired investment assets and put downward pressure on profits. At the same time, combined ratios were sent higher by an above-average year for catastrophe losses, especially as a result of Hurricane Ike. So, we enter 2009 with capital constrained, shareholders’ funds diminished, and a combined ratio for the Guy Carpenter Global Composite at its second-highest level in five years.

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Lloyd’s 2008 Results — Resilience in a Tough Market: Lloyd’s of London (”Lloyd’s”) competitive position strengthened in 2008, largely because of effective risk management oversight and relatively conservative investment allocation. The capital structure has proved resilient in the face of the worldwide financial catastrophe and financial strength ratings remain strong and stable. As a result, Lloyd’s is well-positioned to benefit from current market dislocation.

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Given the record losses in investment asset values, the rate of return on equity (ROE) for the Guy Carpenter Global Reinsurance Composite dropped from 13.4 percent in 2007 to 10.4 percent in 2008. The decline continued into the first quarter of 2009 — dropping to 7.8 percent. Reinsurers felt under pressure to produce higher returns, and so pushed for rate hikes.

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Christopher Klein, Global Head of Business Intelligence
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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.

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Net cash inflow surged by USD7.9 billion in the first half of 2009 compared with a USD1.9 billion increase for the first half of 2008, a rise of 316 percent for the Guy Carpenter Global Reinsurance Composite. Increased operating cash flow from underwriting earnings more than offset outflows from realized investment losses and the decreased inflows from investing activities. The curtailing of dividend payments and share buybacks also led to lower financing cash outflows.

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Generally positive earnings developments, along with recovering asset values restored a considerable amount of capital to reinsurers’ balance sheets. Aggregate shareholders’ equity for the Guy Carpenter Global Reinsurance Composite climbed 8.2 percent during the first half of 2009, though individual results varied. The gains from earnings, in addition to isolated capital-raising activity, were only partially offset by outflows from unrealized losses and the return of capital to shareholders. Unrealized losses represented only 3.2 percent of shareholders’ equity — an improvement from more than 10 percent a year earlier. Dividend and shareholder buyback outflows fell from 8.2 percent in the middle of 2008 to 2.9 percent a year later.

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For the second quarter of 2009, tightening credit spreads and a stock market rally brought about a substantial change in earnings. The Guy Carpenter Global Reinsurance Composite posted an aggregate loss of USD3.5 billion for the first half of last year. For the same period in 2009, it showed an increase of USD4.6 billion. A significant reduction in unrealized investment losses was largely responsible — from USD11.7 billion last year to USD1.5 billion this year (a favorable change of 87 percent). Realized investment losses also contributed, dropping 43 percent to USD1.2 billion.

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Christopher Klein, Global Head of Business Intelligence
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Underwriting and investment gains contributed to a general increase in capital in the first half of 2009. Some reinsurers have even regained half or more of what they lost as a result of last year’s hurricanes and financial shocks. Financial market stability has opened several options unthinkable nine months ago, including share buybacks, dividends and even maintaining a bit of extra capital as a cushion — after all, it was the excess capital held at the beginning of last year that helped reinsurers withstand the effects of the financial crisis.

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Christopher Klein, Global Head of Business Intelligence
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The Guy Carpenter Global Reinsurance Composite’s net loss narrowed from the first quarter of 2008 to that of 2009. This year, the group showed an aggregate net loss of USD127 million — an improvement of 86 percent. Declines in unrealized losses and better non-life underwriting results are the primary drivers.

[Chart after the jump]

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