Europe’s biggest reinsurers experienced both highs and lows in their recently announced first-half year results. Some saw profit fall, others posted a rise but they are all facing a second half of either further catastrophe losses or softening rates

The results in the first half of 2010 of Europe’s four biggest listed reinsurers – Swiss Re, Munich Re, Hannover Re and SCOR – were all marked by the welter of catastrophe losses that characterised the period. But there are fundamental differences between the performances of the various companies.

In addition, they face the prospect of either further catastrophe losses or softening rates in the second half of this year, which could affect future results.

The reinsurers all posted increases in their combined ratios as a result of natural catastrophes. Swiss Re came off worst, with a 16.1 percentage point jump in combined ratio.

Hannover Re performed the best of the bunch. Its combined ratio only increased by 2.4 percentage points, and it was the only one of the four to post a combined ratio below 100% – though only just – at 99.5%.

One particular area of difference was the net profit. Both Hannover Re and SCOR’s net profit fell, by 28.4% and 15.2%, respectively. Munich Re’s profit increased 5.3% to €1.19bn ($1.5m), on the other hand, while Swiss Re transformed a $212m loss in the same period in 2009 into a $970m profit this year.

Swiss Re is a special case here: it made realised investment losses of $2.3bn in the first half of 2009, but gains of $363m in the first half of 2010.

Profits = investments

According to investment bank WestLB analyst Thomas Noack, bottom-line profitability in the first half was investment-driven. “It very much depends on asset allocation,” he explains, “because, from a purely technical point of view, the reinsurers had poor combined ratios, especially in the first quarter.

“Munich Re’s result stood out because its first-half profit was boosted by investment returns. It realised capital gains on its bond portfolio in particular.”

As a result of the gains, Munich Re appears to be on track to hit its €2bn profit target for the full year of 2010. However, Munich Re chief financial officer Jörg Schneider warned when presenting the results that the realised gains may not be sustainable in the second half of the year. Any losses, therefore, could ruin the reinsurer’s chance of hitting its target for the year.

“If we see the same loss situation in the second half as we have in the first, it would be pretty difficult to achieve a comparable result to the first half in the second half,” Noack said. “If the combined ratio is more than 100% in the second half, it would be very difficult for Munich Re to achieve the full-year net profit target of €2bn.”

Another differential between the reinsurers is top-line growth. Swiss Re was the only company to post a reduction in gross written premium. It is continuing to pare back its book as it recovers from the losses and capital erosion it suffered in 2008. The firm was downgraded to A+ from AA- by rating agency Standard & Poor’s (S&P) in early 2009 after revealing that realised investment losses on its credit default swap portfolio had severely eroded its shareholders’ equity for the full year of 2008.

“I would say the company is doing anything it can to require less capital in a bid to achieve an upgrade from S&P to double-A in 2011,” Noack says. “Capital recovery is very much in focus, which distinguishes Swiss Re from Hannover Re.”

Softening market

If there are no further catastrophe losses in 2010, a common problem facing all reinsurers will be softening rates on the non-life sides of their business.

“I am hearing from Hannover Re, Munich Re and Swiss Re that the rate situation was flat in the 1 April and 1 July renewals, but my interpretation is that the tone has turned slightly negative,” Noack says. “Every company mentioned that the claims in the first half are not enough to keep the market hard, and if nothing severe happens in the second half, I personally would expect the premium rates to decrease at the next renewal season on 1 January.”

While softening rates would not hit results in 2010, 2011 and 2012 could be affected. However, Noack says that, rather than resulting in losses, softening is more likely to prompt reinsurers to cut their top line.

“If there is no big loss in the second half, it could make profitability more challenging,” Noack says. “But the bigger companies, especially Munich Re, are willing to walk away from business if they feel the premium is not risk-adequate.” GR