Reinsurer results look good news for buyers

European insurance and reinsurance buyers who observe the results of the big reinsurers closely to try and work out the ultimate impact on their renewals will justifiably have turned away from their analysis of the first half 2011 against first half 2010 numbers with some trepidation. Despite the impact of hurricane Irene and any other events that may have occurred since we put pen to paper the half year results do not look that healthy as we enter the reinsurance renewal round and do not auger well for renewals. According to our numbers, the big four European reinsurers—Munich Re, Swiss Re, Hannover Re and SCOR—managed to increase gross written premiums from €46.4bn at the half year stage 2010 up to €52bn so far this year.hideSwiss Re only gives quarterly figures and they are in US dollars so we added up the first and second quarter numbers and exchanged dollars to Euros on the June 31 number of 1.4562 dollars to the Euro. So a gross written premium increase of just over 10% was the good news for the reinsurers. But the other numbers did not look so healthy for insurance and reinsurance buyers. The combined ratio of the four companies leapt from an average of 103% for the first half of last year to 119% so far this year, an increase of 16.4% for the group and well north of 100%. Not good news. In a happily ‘stable’ but hardly exciting investment market for those taking a conservative view on life, this meant that the impact on profits was obviously bad. The four companies managed a total profit of €3.07bn for the first half of last year but only just managed to make a profit of €478.1m between them so far this year. Quite a drop. Before the insurance and reinsurance buyers go wailing to their CFOs, however, a serious lump of context is required because this match really was a half of two very different quarters. The first quarter was horrible as catastrophes in New Zealand, Australia and Japan combined to make it one of the worst first quarters on record. The second quarter of this year was, however, so much better. Swiss Re, for example, reported a tiny combined ratio of 78.4% for the second quarter of this year against a huge 163.7% for the first quarter, a massive difference of 85.3 percentage points. This explains why the shareholders’ equity of the group fell but did not collapse over the six month period compared to the end of last year and buyers did not feel they had to go running to their brokers for advice despite some meaningful share buy-backs over the period. It was a tough period but not one that saw the credit rating agencies slap credit warnings left right and centre and insurance and reinsurance buyers should not fear a knee-jerk ‘correction’ in rates on this basis. For example. Munich Re returned to profit in the second quarter with a result of €738m against €709m for the same quarter of last year despite a consolidated loss of €210m for the first half compared with a profit of €1.2bn last year. Compared with year-end 2010, equity fell by 11.8% to €20.3bn. Nikolaus von Bomhard, Chairman of the Board of Management, said: “It was an exceptional accumulation of major losses, but that is precisely what reinsurance is for. After all, a well-developed and functioning insurance and reinsurance system helps to overcome disasters of this scale.” Mr Von Bomhard said that the cats stressed the need for a diversified model which underlined the group’s recent focus on primary business through ERGO, it chief insurance operation, and its recently invigorated corporate risk division. “Primary insurance provides stable earnings and balances the burdens that occur in reinsurance due to high claims costs for natural catastrophes or major industrial risks,” he said. Swiss Re reported a group net profit of $960m in the second quarter of 2011.This followed a massive loss in the first quarter of $665m and combined led to a profit of $295m for the first half against $950m last year. Stefan Lippe, Swiss Re’s Chief Executive Officer, said: “Swiss Re’s future growth prospects have been underscored by our strong July 2011 renewals, during which we benefited from the gradual firming of pricing in Property & Casualty.” Shareholders’ equity at Swiss Re increased to $24.8bn from $24.4bn at the end of the first quarter still down from the $25.3bn at the end of 2010 but that included a dividend payout in the second quarter of $1bn. Hannover Re reported group net profit of €218.5m for the first half of this year against €310.6m for the same period last year after swallowing a net burden of major losses of €625.2m against €407.6m for the first half of last year. The second quarter profit was €166.2m. “Our group net income of €218m for the first half-year should enable us—given a normal experience in the second half of the year—to comfortably attain our targeted year-end profit of around €500m,” Chief Executive Officer Ulrich Wallin said. Hannover Re’s shareholders’ equity totalled €4.3bn at the end of the half-year against €4.5bn at the year-end but it did pay a dividend of €277.4m in the second quarter. Paris-based SCOR reported net profit of €40m for the first half of this year against a profit of €156m for the same period last year, a fall of 74.4%. The underwriting result fell from a profit of €36m last year to a loss of €59m on the back of a total pre-tax cost of €423m for natural catastrophes so far this year. Shareholder’s equity was down from €4.35bn at the end of last year to just over €4bn so far this year. Looking forward, Munich Re said it should still make a profit this year despite its net loss of €210m by half year. Mr Von Bomhard said: “Despite the exceptionally heavy claims burdens, we aim to achieve a positive result for the year.” He said that this still applied even if there were additional major losses during the rest of the year, provided these did not ‘significantly exceed’ the average figure to be expected. So no more big cats and the German reinsurer will be OK, fingers crossed. Munich Re said that it expects a combined ratio in property-casualty reinsurance of around 97% of net earned premiums over the market cycle as a whole but conceded that this is likely to be ‘significantly exceeded’ in 2011. The normal estimate is based on an average major-loss burden of 6.5 percentage points from natural catastrophes. But, so far this year, major losses have already accounted for about 22 percentage points of the loss ratio. Munich Re said that it does not expect any significant rise in capital market interest rates in 2011 and regular income from fixed-interest securities and loans is therefore likely to be ‘somewhat lower’. Beyond this, it said that the impairment of Munich Re’s portfolio of Greek government securities has ‘noticeably affected’ the group’s investment result. Munich Re thus projects a return of just under 4% on its investment portfolio. Munich Re said that it still sticks to its long-term objective of a 15% return on risk-adjusted capital (RORAC) after tax across the insurance cycle and interest-rate markets. But the Munich-based group conceded that this target will be difficult to achieve with the currently low level of interest rates and said it should be ‘beyond reach’ for 2011 because of the high level of losses so far. “In reinsurance, we are seeing a general stabilisation of prices and hardening markets in individual segments. We can exploit this to profitably expand our portfolio,” said the group. Swiss Re’s return on equity for the period was 156%. “Amid ongoing volatility and the moderate nature of the global economic recovery, Swiss Re is seizing opportunities for growth in its chosen areas of focus. The company expects significant potential in emerging markets such as China, Brazil and Vietnam. China is already Swiss Re’s third-largest market (measured in gross premiums written during the first half of the year). Within 10 years, Swiss Re economists predict that China will be the world’s second-largest insurance market,” stated the company. Swiss Re also pointed out that broader demographic developments relating to the ageing population of many countries also present an ‘opportunity’ for reinsurance companies like Swiss Re. Hannover Re was also bullish. It said that because of the ‘highly satisfactory’ conditions prevailing on international reinsurance markets, it expects to achieve its growth and profit targets for 2011. At constant exchange rates, net premium volume should grow by 7% to 8%, said the group. Hannover Re said that because of the ‘business opportunities that are opening up and the advantageous situation on reinsurance markets’ it felt able to confirm its guidance of group net profit for the year of about €500m. Comment on future renewals was thin and non-committal. Swiss Re did say, however, that the reinsurance market has ‘started to turn’ and expects further improvements over the next 6–18 months. Hannover Re said that a ‘favourable’ outcome of the 1 April treaty renewals was followed by further ‘good to very good’ results from the 1 June and 1 July renewals. “We were able to obtain further significant rate increases in Australia and New Zealand, while the North American market also showed appreciable tendencies towards hardening,” Mr Wallin noted. “Although rates climbed sharply here in property catastrophe business, additional rate improvements are still needed in casualty lines,” added the reinsurer. SCOR said that the June and July renewals were ‘excellent’ and delivered growth of 22% at constant exchange rates on the €320m of premiums it offered for renewal. SCOR said that the average weighted price increase was slightly higher than 2%. “Positive pricing momentum seems moreover to be becoming more pronounced and is extending beyond the markets most affected by the events of the first quarter,” said the group. On this basis one would suggest that reinsurance and large corporate insurance buyers should not expect further decreases from their reinsurers at this renewal. But the big reinsurers are clearly not in trouble following the big cats of the first quarter and, fingers crossed, nothing too nasty has happened out in the Atlantic this summer. Irene was a wake-up call more than a major event in reinsurance terms, and so yes the reinsurers need to maintain that price discipline that they talk about all the time. The bottom line seems to be, however, that, given these first half results and the relative lack of wind activity as this article went to press, that insurance and reinsurance buyers can expect a reasonably comfortable renewal over the coming months as we head towards year-end, again.

Reinsurer results look good news for buyers

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