NU Online News Service, April 26, 3:03 p.m. EDT
The recent increase in share-repurchase programs among U.S. property and casualty insurers is manageable and unlikely to jeopardize the companies' capital positions, according to Moody's Investors Service.
"We typically analyze the magnitude of share repurchases relative to a company's annual earnings and evaluate the adequacy of its capital both before and after the repurchases," the rating agency says in a special comment.
Moody's adds that, on average, "repurchases have generally been less than annual earnings, so insurers have not meaningfully de-capitalized operating subsidiaries and have maintained relatively steady underwriting and financial leverage."
Moody's says it holds a negative view of debt-financed share repurchases "as they place creditors at greater risk for the benefit of shareholders," but the rating agency notes that it has not seen any meaningful activity in that regard among U.S. insurers.
Insurer share buybacks have changed since 2002, Moody's notes. Buybacks as a percentage of earnings remained relatively low from 2002 to 2005, the rating agency says, as companies deployed capital to write business during the hard market. From 2006 until the financial crisis in 2008, buyback activity relative to income accelerated due to light catastrophe years and strong earnings.
"Since 2009," Moody's says, "share buybacks have represented a meaningful portion of earnings given the strong capital positions, diminished exposures due to the weak economy and soft pricing in the market."
Moody's explains that the large share-repurchase programs in late 2007 differ from today because insurers were better capitalized then. "Loss-reserve positions were generally stronger, the P&C underwriting cycle was not long past its peak of 2005-2006, and catastrophe losses were virtually nonexistent during 2006-2007."
Despite the differences, Moody's says companies' capital positions are "in good shape today," though reserve strength has diminished.
Moody's says it expects share repurchases to continue at an elevated level in 2011. But, Moody's adds, "at some point in 2012, we believe companies will receive considerably less benefit in reported earnings from reserve releases and profitability will also be negatively impacted by lower investment yields. As such, share repurchases are expected to slow."
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