How inflation and the turnaround in interest rates are affecting insurers

Munich It is a mixture that makes even long-time industry experts such as Jefferies analyst Philip Kett speak of a “complex matter” for European insurers: with the Russian war of aggression against Ukraine, the ongoing pandemic, above-average losses from natural catastrophes, extreme inflation and With the onset of a turnaround in interest rates, the industry is faced with so many new imponderables as never before in recent years.

For the industry, which is always concerned about security and stability, the framework conditions are changing fundamentally. The CEO of the French insurer Axa, Thomas Buberl, speaks of an “uncertain macroeconomic environment”.

It is all the more interesting to take a look at the half-year figures of the industry giants in Europe. What traces is the new environment already leaving behind in the figures? What insights can be gained from these? The following is an overview of the most important facts that can be derived from the quarterly reports.

Uncertain times fuel the need for protection. This has led to a significant increase in insurance premiums for Europe’s insurers. This applies in particular to what is usually the division with the highest turnover in any insurance industry: property and casualty insurance.

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The fact that Allianz, Europe’s largest provider, generated a sales increase of 7.2 percent in the first half of the year was due, for example, to business with vehicle policies, but demand for liability, residential building and household insurance also increased. Competitor Zurich even achieved an increase of 13 percent in premium income. Increased demand meant that higher prices could be achieved there, especially among industrial customers.

In contrast, Axa only managed a plus of two percent. There, however, the reinsurance subsidiary Axa XL had scaled back its business with the protection of natural catastrophes after many high claims and thus waived premiums. Talanx proved that there is another way. The insurer, whose reinsurance subsidiary Hannover Re accounts for more than half of sales and profits, increased its premium income by 17.7 percent in the first half of the year. Even if this number were adjusted for currency effects, there would still be a high 13.5 percent at this point.

Conclusion: Insurers are benefiting more from the many different crises around the world than they have in a long time. An end to this development is not in sight for the time being.

The burdens

Uncertain times not only drive the demand for insurance protection, but also ensure that the sums flowing to customers for compensation are above average. Particular attention is paid to the so-called major losses, which include cases that lead to insurers being charged at least ten million euros.

As a rule, it is natural disasters that are particularly expensive. According to calculations by Munich Re, the great devastation cost economies around the world a total of 65 billion dollars in the first half of the year, a good half of which was insured. For the usually more damage-intensive second half of the year, chief meteorologist Ernst Rauch is already anticipating more tropical cyclones over the Atlantic than usual. In addition, the damage caused by the Russian war of aggression in Ukraine weighs heavily on it.

The Italian insurer Generali felt the consequences particularly badly. Write-downs on Russian securities and the stake in the Russian insurer Ingosstrach caused earnings to drop by a good nine percent to 1.4 billion euros. Allianz is also threatened with burdens. CFO Giulio Terzariol expects a loss of 400 million euros in the third quarter due to a partial sale of the Russian business to Interholding. In addition, there are large sums that are expected to flow to damaged customers.

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Talanx has therefore set aside 346 million euros. Damages of 200 million euros are emerging at Munich Re. The corona pandemic, on the other hand, has lost its terror recently. Damage has been declining since the first quarter. Christoph Jurecka, CFO at Munich Re, even expects that the forecast EUR 300 million in damage this year should be sufficient, although EUR 259 million of it was already due in the first half of the year.

Conclusion: The first half of the year was already expensive, the second could be even more expensive. The biggest question mark is behind the hurricanes, which are expected to move across the Atlantic again in the coming weeks and could cause damage worth billions. In addition, it is not foreseeable how high the burdens from the ongoing Ukraine war will be.

The capital investment

Hardly any industry is such a large pool of capital as the insurer. Their portfolios, some of which are in the three-digit billion range, have felt the effects of the turnaround in interest rates and the high market fluctuations of the past few months. Investment income fell everywhere.

Hannover Re got off lightly, where the in-house asset managers parted with a large part of their shares in January and sold the rest in April. This not only brought a whopping price gain of 95 million euros, but also saved price losses in the turbulent stock market spring.

The competitor Munich Re, which only slightly reduced its shareholding during this time, was hit much harder. Among other things, it was high write-downs on shares that weighed on the second quarter. The current yield fell to 1.6 percent in the months from April to June, 2.5 percent would have been the target. At Zurich, the upheavals on the capital markets weighed on net income, which fell short of analysts’ expectations. The insurers who have a mainstay as asset managers for third parties continue to earn good money.

Example Allianz: In the turbulent market phase, income from assets under management grew. Compared to the same period of the previous year, the operating result increased by 1.8 percent to 1.6 billion euros.

Conclusion: Insurers will continue to feel the effects of the interest rate turnaround that has only just begun. As interest rates rise, the prices of fixed income securities, which still make up the majority of investments, fall. However, any maturing paper can be invested at higher interest rates in the future. In the long term, the industry will benefit.

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Life insurance

There have recently been plenty of warnings that customers would be reluctant to take out life insurance in view of the significantly increased cost of living. In practice, this is not yet the case. At Allianz, things went particularly well in the home market of Germany and in the USA in the first half of the year.

The effects of higher interest rates, which increased margins in new business, were already evident. Things went even better for the Italian competitor Generali. The increased operating profit in life insurance in the first half of the year by a whopping 17 percent to almost 1.7 billion euros. The division also recorded strong premium growth at the Munich Re subsidiary Ergo. Talanx increased new business by 12.2 percent to EUR 205 million.

Conclusion: The fact that people have less money available for old-age provision due to persistent inflation is not yet reflected in the new contracts. However, if there is a threat of high additional payments for energy in the fall, the industry, which has been spoiled by success, could face a decline in the number of deals.

>> Read also: The gap between strong and weak life insurers is widening

The share buybacks

Jefferies analyst Philip Kett described the share buyback of one billion euros, which Axa had announced in the first days of August, as “surprisingly large in scope”. Competitor Generali immediately promised a buyback of half a billion euros. This was followed by Zurich, which is now leading the trend with a CHF 1.8 billion program.

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Buy-back programs already have a tradition at Allianz. In February, the Munich-based company announced that it would buy back its own shares for a billion euros. It was the sixth time since 2017, since then ten billion euros have been invested. Andrew Sinclair, an analyst at Bank of America, is already anticipating a further program of EUR 500 million when the Q3 figures are published in November. “After that, we expect a buyback of 1.5 billion euros each in 2023 and 2024,” said the analyst.

Conclusion: For insurers, a buyback program usually has a direct impact on earnings. Earnings per share increase because the number of shares is reduced. This usually gives the stock price a boost.

More: Hedge fund debacle, dividends, business in Russia: what is important for Allianz now.

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