The major US-listed players have released their figures for 2010 and despite remaining overcapitalised and failing to boost profit margins in many cases, there are reasons to be proud
If the reinsurance industry was hoping to shed some capital in 2010, it appears at first glance that it failed.
The major US-listed (re)insurance groups that have reported their 2010 results so far saw their collective shareholders’ equity increase by 6.6%, or $5.3bn, to $86.3bn. If the industry was overcapitalised going into 2010, it is more so now.
The increase comes despite the swathe of share buy-backs and special dividends the industry embarked on throughout 2010 in a bid to keep excess capital in check, maintain underwriting discipline and improve returns on equity (ROE). However, the rise in capital levels has been driven in part by turnarounds and M&A activity, rather than a failure to manage capital.
XL Group, for example, saw its shareholders’ equity increase 12%, from $9.4bn to $10.6bn, bringing it back up to 2007 levels. The financial crisis hit the company hard in 2008, evidenced by its dip in shareholders’ equity to $6.1bn for that year, and it was still very much in recovery mode in 2009.
But 2010 has been a much better year for the firm. In addition to its substantial increase in shareholders’ equity, XL was one of only four firms to report an increase in net profit for 2010 – the others being Axis, Alterra and Ace. XL made a profit of $643.4m in 2010, a rather significant improvement over the $75m profit it made in 2009.
While the shareholders’ equity figure rose overall, seven of the 16 companies studied reported falls in shareholders’ equity, indicating that efforts to return capital are taking effect.
Perhaps not surprisingly in a year blighted by $37bn of insured catastrophe losses, overall profitability slipped noticeably in 2010. The 16 companies studied reported combined net income of $9.9bn for 2010, down 12% or $1.4bn on the $11.2bn it made in 2009. The average profit margin – profits as a percentage of net written premium – for the group, as calculated by Global Reinsurance, was 23.6% in 2010 compared with 34.3% in 2009.
The effect of the catastrophe losses can clearly be seen in the (re)insurers’ combined ratios. The group average combined ratio for 2010 rose 9.6 points to 89.1% from 79.5%. The only company that managed to improve its combined ratio was Alterra, which enjoyed a 2.4% cut to 85.7% from 88.1%. However, this is likely related to the effects of combining Harbor Point and Max Capital rather than a genuine bucking of the overall trend. Alterra reported that catastrophes cost the company $54.9m in 2010, compared with $10.4m in 2009.
Even though (re)insurers’ combined ratios worsened in 2010, the industry can take heart from the fact that it collectively still made a very creditable underwriting profit in the face of adversity. Only one member of the group, Flagstone Re, posted a combined ratio of above the all-important break-even point of 100%.
In addition to the catastrophes, the (re)insurers’ profits were further eroded by falling investment income caused by the persistently low interest rates in the post-crisis financial environment. Net investment income for the group dropped 2.6% to $7.3bn in 2010 from $7.5bn in 2009.
But seven of the group boosted investment income despite the general trend. Everest Re in particular showed strong growth, raising net investment income by 19% to $653.3m in 2010, from $547.8m in 2009.
PartnerRe also turned in a good investment performance, increasing net investment income by 12% to $672.8m, from $596.1m.
A few winners
Thanks to the reduction in profits, ROE for the group also dipped to an average of 11.3% in 2010, compared with 18.4% in 2009. Despite the general downturn, however, two firms out of the 16 studied boosted ROE. XL’s shareholders will no doubt be much more pleased with 2010’s return of 6.42% than they were with 2009’s 0.96%, even though it still lags the industry average by quite a way. Axis had a storming 2010 in ROE improvement terms, posting 14.7% in 2010 compared with 9.26% in 2009.
But the prize for the best shareholder returns goes to Bermudian (re)insurer Arch Capital Group, with 18.5%. ROE rankings can often be dominated by catastrophe specialists, but Arch shows that larger, more diversified firms can also make the grade. The firm has clearly impressed rating agencies over the past year. Standard & Poor’s upgraded the firm’s insurance financial strength ratings to A+ from A in July.
Arch has stiff competition from Bermudian catastrophe specialist RenaissanceRe – a consistently high performer in ROE rankings – which posted an 18% ROE for 2010.
Overall, the major US-listed (re)insurance groups should be pleased with their strong performance in 2010. They remained profitable despite pressures from all sides, and for the most part served shareholders well. However, with the soft market settling in, it will be interesting to see how price cutting – to the extent it takes place – will affect 2011’s full-year results. GR