Already in the first half of the year, reinsurers are reporting high losses from natural catastrophes.
(Photo: IMAGO/AAP)
Frankfurt Due to high losses from natural catastrophes and weaker investment results, the four major European reinsurers Munich Re, Swiss Re, Hannover Re and Scor reported a drop in profits, some of them significant, for the first half of the year. Higher insurance premiums only partially offset inflation in claims costs.
According to a recent study by the rating agency Moody’s, claims inflation and natural catastrophes could lead to further burdens in the second half of the year.
“Reinsurers seem confident that their price increases are sufficient to offset rising claims costs,” write the experts around Moody’s credit analyst Christian Badorff. But it is questionable whether the loss reserves are actually sufficient. At the same time, most reinsurers have already exhausted their claims budget for natural catastrophes.
Reinsurers push through higher prices from primary insurers
The high inflation is noticeable with increasing building material and spare parts prices, especially in motor vehicle insurance and home insurance. In the course of the year to date, reinsurers have been able to push through higher prices with primary insurers and largely offset inflation, according to the Moody’s analysis.
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Above all, damage from previous years that has not yet been settled could cause them problems. According to the rating agency, the loss reserves that the reinsurers had set up for this may be too low – because inflation has risen much more sharply than expected this year. There is a risk that reinsurers will have to increase their loss reserves.
In a recent industry study, analyst Darius Satkauskas from the investment bank KBW describes the inflation environment as one of the key challenges for reinsurers. In his opinion, however, companies with higher reserves such as Munich Re or Hannover Re should be able to cope well with them.
Losses from natural catastrophes are often higher in the second half of the year
Moody’s also points out that losses from natural catastrophes are usually higher in the second half of the year than in the first. The main reason for this is the Atlantic hurricane season, which according to experts is likely to be above average again this year.
In September 2021, Hurricane Ida hit the US state of Louisiana. But hurricane season is only just beginning.
(Photo: imago images/ZUMA Wire)
However, due to the floods in Australia and South Africa and the storms in Europe, reinsurers already recorded high natural catastrophe losses in the first half of the year – at Swiss Re they were even above budget for the first six months.
According to Moody’s, the actual losses from natural catastrophes are even higher than stated by some providers: Hannover Re and Scor therefore do not include losses from a drought in Brazil here. According to Moody’s calculations, the claims/expenses ratio, which compares damage and costs to the premium, rose from 95.5 percent to 98.9 percent for the four reinsurers.
In the life reinsurance business, however, providers benefited from the fact that the effects of the corona pandemic are gradually easing. The damage from the Russian war of aggression in Ukraine has also been manageable so far, although there are still uncertainties here.
Some companies stick to profit targets
According to Moody’s, the net profit of the four reinsurers fell by 47 percent to 1.9 billion euros in the first six months of 2022. In the same period last year, it was still 3.6 billion euros. The results of Swiss Re and Scor were significantly weaker than those of their German competitors, which is also due to lower investment results.
Hannover Re in particular stood out positively here. The company, like Munich Re, confirmed its profit targets for the full year, while Swiss Re put a question mark behind them.
A positive aspect for the industry is that demand from primary insurers for reinsurance protection, particularly in property and casualty reinsurance, remains high. The premium income of the four reinsurers rose by an average of 15.9 percent in the first half of the year. While Munich Re, Swiss Re and Hannover Re continue to expand the reinsurance business for natural catastrophes, Scor is more cautious.
Meanwhile, Moody’s describes capitalization as a “core strength” of reinsurers. Due to the rise in interest rates on the markets, the already high solvency ratios, which indicate the ratio of available to required own funds, have increased significantly. The investment bank KBW also praised the fact that the reinsurers’ defensive balance sheets could give investors some security in times of rising recession risks.
More: Munich Re’s profit collapses – shares still rise