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
0 Alterra Capital
2 Arch Capital
2 Aspen Insurance
0 Axis Capital
26 Flagstone Re
0 Montpelier Re
0 Munich Re
0 XL Group
211 Source: Fitch (2010-2011 Global Reinsurance Review and Outlook)