German reinsurance duo best positioned to take advantage of opportunities at “late and messy” 1.1 renewal

Germany’s big two reinsurers Munich Re and Hannover Re will enter the 1 January renewal with superior financial flexibility to capitalise on opportunities compared with their European peers having materially outperformed their rivals during 2022, according to KBW analyst Darius Satkauskas.

In an extensive interview with The Insurer TV, Satkauskas warned that the upcoming renewal will be “very late and messy” with no rush to deploy capital, “even if pricing changes materially”.

Expectations of lower capacity at 1.1 compared with previous years is being driven by a reduction in nat cat-related exposure at some reinsurers, a meaningful reduction in available traditional capital and a decrease in available alternative capital, he explained.

“Companies understandably remain vague [about 1.1 guidance],” Satkauskas said.

He added: “It’s very apparent to us that this time it is different and there is no rush to deploy capital, even if the pricing changes materially. So companies are taking a wait-and-see approach. I think 1.1 will be very late and a messy renewal as capacity providers will be testing demand.”

But he predicted Munich Re and Hannover Re are best positioned of Europe’s big four to take advantage of opportunities at the upcoming renewal.

“It's clear that there are some differences in financial flexibility among the European reinsurers, meaning that the Germans could theoretically grow their exposures at a much faster rate if the market conditions allow for it, where Swiss Re and Scor are more likely to grow in line with rate,” he said.

“If you look at share price total returns for the year to date, it's clear the German reinsurers – Munich Re and Hannover Re – have materially outperformed Swiss Re and Scor,” he said.

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Shares in the industry’s largest global reinsurer Munich Re have traded up 15.7 percent in the year to date, with Hannover Re up 9.7 percent. In contrast, Swiss Re is down more than 6 percent this year with Scor falling by 26.3 percent since the start of 2022.

Satkauskas said all four had reported strong solvency ratios, but cautioned that Swiss Re and Scor’s IFRS and US GAAP leverage ratios remain elevated.

He said this could impact capital deployment, with the German reinsurers maintaining superior financial flexibility.

Satkauskas highlighted that 2022 has been “yet another year of high natural catastrophe losses”. Swiss Re recently estimated $115bn of insurance industry losses this year, compared with a 10-year average of ~$80bn.

“Some of the major differences we've seen in results season have been related to the ability to absorb these high losses, either through more adequate budgets or finding positives elsewhere to offset the spillover.

Munich Re positively profit-warned, reiterating its full-year target, as it should find positive one-offs in its investment portfolio and its underlying operating performance remains strong.

Hannover Re has not changed its full-year guidance as well and its normalised combined ratios remain strong.

“On the other hand, Swiss Re and Scor have had challenging results so far, reporting combined ratios above 100 percent due to high large loss numbers and reserve charges.”

Satkauskas said it was likely Swiss Re and Scor will report either a loss or a very small profit for the year, in contrast to the strong results expected from the German reinsurers.

He said investors were also “much more at ease” with the German reinsurers’ ability to weather inflation due to the strength of reserving practices at the two companies.

In this 10-minute interview, Satkauskas also discusses:

  • The strengths and weaknesses of the four largest European reinsurers ahead of 1.1
  • How Scor has improved its position since implementing its remediation strategy
  • How nat cat losses are affecting these reinsurers’ balance sheets and their views on the 1.1 renewals
  • How reinsurers are reserving for the effect of economic and social inflation