Reinsurers set to benefit investors

Investors in reinsurance companies look set to benefit from a wave of share buy-backs and special dividends following an unusually quiet US hurricane season and a strong rally in financial markets.

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As the hurricane season draws to a close this week, the lack of big storms making landfall in the US this year has pushed reinsurers’ catastrophe losses to historically low levels.

At the same time, bond markets – where many insurers and reinsurers are invested – have recovered strongly, leaving the industry in a better state of health than many had forecast six months ago.

As a result, analysts and executives expect some companies in the US, Bermuda and London to follow the example of Munich Re, and return capital to shareholders. “There is going to be a lot more interest in capital returns on the basis that 2009 is likely to be a very profitable year,” said Thomas Dorner, analyst at Oriel Securities in London. “There have been few large losses and investment returns have been spectacular.”

Munich Re, the world’s biggest reinsurer, launched a €1bn ($1.5bn) share buy-back scheme at the start of October.

Last week, Aspen Insurance Holdings and PartnerRe, two US-listed Bermudan reinsurers, reported large jumps in third-quarter profits. But Chris O’Kane, chief executive of Aspen, said the industry faced a tough market with few growth opportunities. Premium rates have stagnated or declined in many areas, while the supply of insurance and reinsurance remains high.

“Returns on equity have been in the 15-20 per cent range and that sort of money coming in across the industry cannot all be put to work, therefore you are likely to see capital returns to shareholders,” he said.

Hiscox, Amlin and Catlin – the Lloyd’s of London insurers and reinsurers – also reported big jumps in interim profits, back in August.

But with the memory of the financial crisis fresh in insurers’ minds and a period of potentially low investment returns ahead, some are less certain that groups will be willing to hand capital back. A fall in investment income could mean insurers have to hold more capital as a buffer against losses.

Jörg Schneider, Munich Re’s chief financial officer, said that in spite of the market recovery, the capitalisation of the industry as a whole had not been restored to the levels seen before the crisis.

“The reinsurance industry is in good shape, but you cannot say it has been unaffected by the losses on the capital markets,” he said. “I look around the industry and I do not come to the conclusion that there is much redundant capital.”