NU Online News Service, Feb. 24, 2:39 p.m. EST
Despite many insurers suffering operating losses in 2011, excess capital remains throughout the industry, and analyst firm Keefe, Bruyette & Woods says it is likely insurers will maintain that capital for 2012 growth opportunities rather than return it to shareholders.
In its latest "P&C Monthly Deductible" report, KBW says more than one-third of insurers it covers reported operating losses for 2011.
However, total capital declined by just 0.5 percent to $232.2 billion at the 2011 fourth quarter compared to the 2010 fourth quarter.
Debt-to-total capital also only increased modestly, KBW says, despite more than $15.3 billion of capital returned to shareholders, global catastrophes, and weak earnings throughout the year.
KBW says, "The slight increase highlights the strong capital position of the industry and the ability of diversified insurers to generate profits despite challenging conditions for the industry."
As such, KBW says it does not "currently have serious capital concerns for any insurers or reinsurers in our coverage universe…."
Flush with excess capital, KBW says insurers have three options: pursue organic growth, pursue acquisitions and investments in technology platforms, or return capital to shareholders.
KBW notes that in 2011, insurers and reinsurers reduced the amount of capital returned to shareholders because of the high level of global catastrophes and pressure on operating results.
"We expect the downward trend to continue in 2012 and 2013 as companies position themselves for a more attractive underwriting environment," the analyst firm says.
The firm notes that companies have seen rate increases at the end of 2011 and beginning of 2012 and are optimistic that these gains will continue as the year progresses.
KBW notes that it expects management teams to take a "more cautious approach to capital management" and deploy capital for organic growth in business lines where rates are experiencing the biggest gains.
"While companies are always trying to right-size their capital base, we have more modest expectations for capital management in 2012 and 2013, as our coverage universe just completed the second consecutive year of returning more capital than they have generated in earnings," says KBW.
The firm notes that insurers and reinsurers may choose to return capital if rate increases disappoint management teams or if 2012 enjoys light catastrophe activity.
As for acquisitions, KBW says it expects activity to primarily target regional and specialty insurers that will help larger companies diversify or grant access to attractive lines of business.
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