Europe insurers not ready to return capital

 

European non-life insurers have begun to return a little excess capital to shareholders, but acquisition opportunities and tight margins mean the trickle is unlikely to turn to flood.

In stark contrast to banks, where cash has streamed from shareholders to barren company coffers, non-life insurers and reinsurers have put themselves in a position where share buybacks or special dividends are possible.

Conservative investment strategies shielded most of them from the worst of the financial market crisis, while recession-resistant products and a benign 2009 hurricane season have helped them rebuild their capital reserves to a healthy level, analysts say.

But with intense competition not giving much scope for insurance price rises, some say there is little incentive to write business at wafer-thin margins, and a better use for their money would be to give it back to investors.

Barring an upturn in insurance prices, more of the world's top reinsurers are likely to start actively mulling capital returns next year, according to ratings agency Moody's.

"If rates do turn out to be disappointing, the question facing managements may be, 'Should we return capital?'" Moody's analyst Dominic Simpson said during a presentation to clients in London on November 17.

CAPITAL CONSTRAINTS

Two European insurers have already taken the plunge, with German reinsurance giant Munich Re restarting a suspended 1 billion euro share buyback in October, and London-listed Lancashire Holdings announcing a $263 million (159.6 million pounds) special dividend earlier this month. 

But others say that after last year's financial crisis, insurers in Europe are more likely to cling on to the security of any capital buffer they accumulate, or else take advantage of a unique buying opportunity.

"I don't think we'll see too much above and beyond what we've already seen" said Execution analyst Joy Ferneyhough.

"A number of companies are still in capital preservation mode, and I don't really see an obvious candidate."

Aside from Munich Re, Europe's reinsurers in particular are seen as too thinly capitalised, with the industry's number two player Swiss Re focused on repaying a $2.9 billion loan it accepted from U.S. investor Warren Buffett last year after being hit by asset writedowns.

"I would be surprised (by further capital repatriation) because the industry is not exactly overcapitalised" Munich Re chief financial officer Jorg Schneider told Reuters at a press conference in London earlier this month.

The prospect of a sharp drop in investment returns in 2010 after strong gains this year thanks to a rebound in financial markets may also prompt companies to hold onto their money.

Lloyd's of London insurer Hiscox is not planning anything beyond its regular dividend because it expects returns next year to fall as low as 2 percent, its finance director, Stuart Bridges, told Reuters.

DEAL PRESSURE

Rival Lloyd's insurer Amlin, which in August took the unusual step of explicitly disclosing that it had surplus capital of 429 million pounds, including 250 million pounds of undrawn bank debt, may prove a better bet. 

However, sceptics reckon investors in the company, which has said it will look for further acquisitions once it has digested its $500 million takeover in July of Fortis Corporate Insurance, are unlikely to see any of the money.

Amlin declined to comment on its capital intentions.

Analysts say cashbacks may take a back seat to acquisitions as life and non-life companies alike pursue rare opportunities to buy rivals cheaply in the wake of the financial crisis.

Axa, Europe's second-biggest insurer, earlier this month launched a 2 billion euro rights issue to fund a buyout of its part-owned Asia Pacific operations, while RSA, Britain's biggest commercial insurer, was reported in September to be planning a $1 billion fundraising for a major deal.

Execution's Ferneyhough says that given the competing demands for their capital, insurers with spare cash are adopting the flexible approach of paying generous dividend increases instead of committing themselves to formal cashbacks.

She estimates this has lifted the average 2009 dividend yield for leading European non-life shares to an eye-catching 5 percent, beating the average 3.6 percent yield for Britain's FTSE 100 share index.