Europe’s big four diverge on strategy in face of growing palette of risks: Moody's

Europe's largest reinsurers can ride 2021 profitability gains and continued market hardening into 2022, but rate gains are slowing and the palette of risks growing, analysts at  Moody's warned following review of earnings at  Munich Re,  Swiss Re,  SCOR and  Hannover Re.

Reported combined ratios came down by nearly 12 percentage points to 97.1% in 2021 as the drop-off in COVID-related claims more than offset a 1.3 percentage point rise in the natural catastrophe claims rate.

Normalized combined ratios also improved, chiefly as four years of market hardening moved further into earned premiums and indicate "further improvement in the underlying underwriting profitability of their P&C operation," analysts wrote.

"Additional price increases paired with changes in business mix in the January 2022 renewals should support further improvements in the reinsurers' combined ratios," Moody's analysts wrote.

Pricing indications from the January renewals show market rates "now rising at a slightly slower pace." And some companies are accepting overall lower premium growth "as part of an effort to reposition their books."

Hannover Re, Munich Re, and Swiss Re continued to be bullish nat cat and leaned into a hardening market, analysts noted. But even these players pressed to increase the relative share of less volatile lines and to reduce aggregate and frequency covers.  In contrast, Moody's noted, SCOR reduced its nat cat exposure citing insufficient prices.

On the strong profits, solvency has risen to the top end of target ranges for the group as a whole and the relatively heavy flow of new business is doing little to burden capital. "New business brought diversification benefits, and its modeled underlying profitability was strong," analysts explained.

Volatile nat cat trends, a very broad swath of inflation drivers and the Russian invasion of Ukraine show the field of risks expanding into 2022, analysts warned.

Inflation may run the gamut from American social inflation as court reopen to shock verdicts, though general price inflation on rising labour costs and materials costs. Look for the Russian invasion to Ukraine to add additional energy price and supply-chain inflation to the mix.

"Companies in the peer group say they have fully reflected claims inflation trends in their pricing and reserving," Moody's said of their take following Q4 earnings season. Long tail lines and US-exposed reinsurers are naturally at greater risk.

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