Insurers Likely to Maintain Capital in 2012, Rather Than Return It to Shareholders

Despite many insurers suffering operating losses in 2011, excess capital remains throughout the industry—and analyst firm Keefe, Bruyette & Woods (KBW) says it's likely that 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 the insurers it covers reported operating losses for 2011. However, total capital declined by just 0.5 percent to $232.2 billion at Q4 2011 compared to 2010's 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, the firm does not “currently have serious capital concerns for any insurers or reinsurers in our coverage universe.”

KBW says insurers that are flush with excess capital have three options: use it to 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.

The firm says that insurers and reinsurers may choose to return capital if rate increases disappoint management teams or if 2012 enjoys light catastrophe activity.