Pricing discipline pays off for Munich Re, Swiss Re, Hannover Re and SCOR

Pricing discipline by Munich Re, Swiss Re, Hannover Re and SCOR is proving an important competitive advantage in the face of declining market pricing and investment yields, Fitch Ratings said on Aug. 16.

The four biggest European reinsurers have been able to largely maintain their pricing and policy terms to protect earnings without a significant fall in business volumes, helped by their strong market positions. They all reported strong property and casualty (P&C) underwriting results in 2016, albeit helped by prior-year reserve releases and lower-than-expected major losses, which cannot be counted on to continue.

Most of their operating profit comes from P&C reinsurance but we expect a growing contribution from life reinsurance, driven partly by life insurers seeking to transfer longevity risk in response to higher regulatory capital requirements from the introduction of Solvency II. SCOR in particular is building its life reinsurance business following two major acquisitions in recent years.

All four companies have maintained very strong capitalisation in recent years, which is important for their ratings.

Their financial leverage ratios (FLRs) are low compared with most primary insurers in Europe and likely to remain so while the competitive market limits opportunities for growth. Munich Re's Fitch-calculated FLR is the lowest of the four: 13 percent at end-2016, and now materially lower following repayment of €1.5 billion of subordinated debt, which reduced the Fitch-calculated FLR by 3.8 percentage points.

Pricing in the wider reinsurance market is under intense pressure following several years of below-average major losses and an influx of capital to the sector as investors look for higher returns than they can get from investment markets. The Fitch-calculated combined ratio, excluding the impact of prior-year reserve releases and lower-than-expected major losses, was nearly 100 percent in aggregate in 2016 even for the four major European reinsurers, indicating underwriting profit little better than break-even. Our fundamental outlook for the reinsurance sector is negative and we expect profitability to weaken as pricing and investment yields continue to decline.

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