Moody's, Fitch flag up huge surge in share buybacks in US P/C market

Moody's, Fitch flag up huge surge in share buybacks in US P/C market

As previously blogged on InsuranceCapitalRisk, 2009/10 remains clearly the season for share buybacks. Handing excess capital back to twitchy shareholders has become an all-too ubiquitous way to vitalise a (re)insurance company in what remains, ostensibly, a tough market.

The increase in share buybacks, however, is stark, and seems set to continue - notwithstanding extra capital requirements that (re)insurers may have to account for under future solvency regulation.

Moody’s and Fitch have both published summaries of the US P/C industry’s second quarter/half-year results. Fitch reported that share buybacks were up nearly seven times over the previous-year period.

It said: “With profitable growth opportunities scarce and GAAP underwriting leverage at relatively low levels, the pace of share repurchases has, not surprisingly, accelerated… Companies in Fitch’s universe repurchased roughly $8.4bn of common equity in the first half of 2010 versus $1.2bn in the previous period. In general, Fitch views measured share repurchases as a more prudent use of capital rather than funding acquisitions or premium growth in a softening rate environment.”

Moody’s said that while second-quarter 2010 earnings for US publicly traded property and casualty insurers were down on catastrophe losses, capital positions remain solid.

The agency said that insurers' equity capital increased on average 5% during the first half of the year due to rebounding investments and net income, offset by ongoing share repurchases. Share buybacks were up “almost five times over the prior-year period”, it added, reflecting continued earnings, improved capital positions, and limited growth prospects in a slowly recovering economy.

Fitch concluded that in the absence of a clear catalyst for a reversal in current pricing trends or the prevailing low interest rate environment that pressures investment income, it expects run-rate operating profitability to continue to decrease, which may “increase pressure on underwriters to return capital to shareholders to boost returns”.

Reinsurer share repurchase activity ($m)
H1 2010 H1 2009
Allied World 49 0
Alterra Capital 44 2
Arch Capital 450 2
Aspen Insurance 200 0
Axis Capital 409 0
Endurance 122 26
Flagstone Re 58 0
Montpelier Re 172 0
Munich Re 895 80
RenaissanceRe 411 0
PartnerRe 600 0
Platinum 213 101
Transatlantic 141 0
Validus 444 0
XL Group 2 1
Total 4,209 211
Source: Fitch (2010-2011 Global Reinsurance Review and Outlook

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