Catastrophe? What catastrophe? European reinsurers like to project an aura of solidity, but their record has been patchy. Although premium hikes and investment returns are meant to bolster their reserves to absorb nature’s knocks (and man’s), heavy claims and bad investment decisions (hello, Swiss Re) have taken their toll in the past. Since the financial crisis, however, reinsurers have honed their risk management and been more careful about investments. So, while earthquakes in Japan and New Zealand and floods in Thailand made 2011 a year to forget – the worst since 2005 – Europe’s reinsurers are in better shape than expected.
Last year’s catastrophe losses totalled nearly $100bn, according to Deutsche Bank. But the reinsurers’ better spread of business means they are less affected by big claims than, say, London’s catastrophe specialists such as Hiscox or Beazley. Hannover Re, whose earnings have been volatile for a decade, seems to be turning a corner: it made a €610m profit last year even after paying out €980m on major losses – a quarter on Japanese exposure. Record investment income softened the blow. Despite low interest rates, its funds returned almost 4 per cent. Munich Re also made a good profit.
As for the outlook, Hannover Re predicts gross premium growth of 5 to 7 per cent. Deutsche estimates that the reinsurer raised those rates by 3 to 4 per cent in January, more than its peers. Munich Re expects to increase rates in looming renewals on its Japanese and Australasian books. It predicts profit of €2.5bn this year, though its Ergo primary insurance business could be a drag. That is reflected in the 14 per cent return on Munich Re’s shares over the past year, half that of recovery stock Swiss Re and 8 per cent behind Hannover Re’s.
But the steadier state of the reinsurers is not fully reflected in price-to-book multiples of around 0.9 times for the German duo and 0.7 times for Swiss Re. With returns on equity in the low teens, Europe’s reinsurers still lag London peers, but their resilience is unrewarded.
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