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Increased focus on capital returns…

With opportunities to deploy capital becoming constrained by current market conditions, (re)insurers turned to capital repatriation in Q1 2014 in an effort to maintain shareholder value and reduce excess capital positions.

Short-tail specialists responded to the deteriorating reinsurance rating environment and continued low cat activity with a 150 percent jump in share buybacks to $545mn in the first quarter, almost equal to that of the entire first half of 2013.

Global reinsurers - which typically prefer dividends over repurchases as a means of capital return - took a similar approach as group-wide Q1 buybacks tripled to $1.2bn versus the prior-year quarter, driven by the hefty EUR1bn share repurchase programme announced by Munich Re last year.

In contrast, dividends in the period fell by 80.9 percent to $388mn, mainly due to Swiss Re's payments lapsing into Q2 2014.

Meanwhile, Bermudian carriers were divided on capital management in Q1 2014 as share buybacks fell by 30.4 percent to $454mn.

Half of the composite opted to hold onto to excess capital in case of a chance to deploy it into new areas of business or M&A.

The other half, meanwhile, took advantage of compelling valuations by bolstering their share repurchase activity.

Key points:

• Greater emphasis on capital repatriation as carriers strived for value creation in a highly competitive marketplace

• Enlarged appetite for share repurchases in the period, largely driven by favourable price-to-book multiples

• Certain Bermudian (re)insurers sought opportunities to deploy capital rather than return it to shareholders

• M&A more actively being considered as a means to effectively utilise excess capital and survive the softening cycle

What can we expect in Q2?

With the first quarter reporting season now long gone, what can we expect in the forthcoming Q2 results? The Insurance Insider investigates...

Short-tail top line woes continue

Following the considerable pricing declines at 1 January, news from the 1 April and 1 June renewals has not been any better, with sources describing the rating environment as "horrible" and even a "bloodbath".

With this in mind, it is likely that top line growth will continue to slide in the second quarter - especially for reinsurance business. However, this shouldn't necessarily be seen as a negative.

Rapid expansion in a soft market is a dangerous and risky game and could end in disaster, whereas slower or even stalled growth is a sign that (re)insurers are acting sensibly and exercising underwriting discipline.

A further shift away from reinsurance business toward insurance lines could also appear in Q2, as carriers try to evade market headwinds.

RoEs could slide further

Additional strain on premium income would inevitably create further pressure on returns, especially as investment yields are expected to remain at low levels for the foreseeable future.

This comes as a result of continued uncertainty over when interest rates will finally pick up again.

Buyback baby

(Re)insurers are likely to offset these constraints by returning capital to shareholders.

Management commentary from Q1 suggested that carriers will continue to actively buy back shares in the second quarter in order to deflate balance sheets bloated with excess capital, particularly if share prices remain below book value.

Nevertheless, another option is increasingly on the agenda: M&A.

Companies are now looking to consolidation as an alternative means of surviving the soft market cycle.

And there's no better example than the Endurance-Aspen debacle.

Earlier today (2 June), Endurance announced that it had privately increased its bid for Aspen to $49.50 per share on 7 May, only to be rejected five days later.

A $50bn hurricane?

Although cat losses remained relatively low in the first quarter, 1 June marked the official start of this year's Atlantic hurricane season.

While the hurricane season was relatively quiet in 2013, there is no telling what the rest of 2014 will hold.

According to Barclays analyst Sarah Dewitt, recent consensus suggests that even a $50bn+ hurricane would not be sufficient to tighten the property catastrophe reinsurance market, in part because there is still substantial third-party capital on the sidelines.

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