Lindsey Rogerson considers how the analysts viewed the 2004 results of some of Europe's largest reinsurers

March's reporting season helped clear up some of the questions that analysts covering the European reinsurance sector had been pondering, but threw up a number of others. Not least, some voiced disappointment that reinsurance giants Munich Re and Swiss Re are not planning to return more money to shareholders.

Granted, on the back of strong profit results both increased dividend payments substantially, by 60% and 45% respectively, but the market had been expecting more. Chris Hartwell, an analyst at Morgan Stanley, summed up the general feeling of frustration at what Munich left out. "Management did not adequately address the issue of capital in terms of allocation, excess and distribution."

However, analyst William Elderkin at Citigroup Smith Barney believes that Munich Re is focused on regaining its "AA" rating from Standard & Poor's and that it "will adopt a more positive stance in respect to capital management" once that objective is out of the way.

Indeed, evidence from intermediary group Benfield from January 2005 renewals supports Munich's view of its Standard & Poor's rating. It noted a flight to quality for those placing business as evidenced by Hannover Re and Swiss Re "being shown the most business ... while Converium lost significant business following its downgrade."

Smith Barney also suspects that Munich Re might be eyeing M&A opportunities on the horizon. In a broker note written by Elderkin after the year-end analysts conference he noted the company's reference to its improved capital position as allowing it "option space".

Fund managers the world over are looking for strong dividend growth and opportunities in companies where cash could be returned to shareholders via share buy backs so the fact that Munich Re has ruled this out for the time being may make it less desirable relative to financial stocks in general, in the short term.

Franklin Templeton Investments and Capital Group hold just more and just less than 5% of Swiss Re shares respectively, while Stuart Fraser who manages the European equity Growth fund at Standard Life Investments has seen Swiss Re leap into his top 10 holdings in the last month.

Paris registered SCOR reported a return to profitability but the on-going legal action in the US with regard to the World Trade Center, which has forced the company to add an additional EUR20m to its reserves, leaves an ongoing degree of uncertainty for the time being.

With regard to Axa and Allianz, reinsurance makes up a relatively small part of their overall business that it is not a major factor for fund managers deciding to invest. Indeed, Axa's 2004 annual report shows that the company took a business decision to reduce the amount of revenue its derives from Axa Re by 15% as the sector is presently not to the core group's "liking".

However, market commentators seemed relatively relaxed over the possible consequences of what has been by any measure a terrible year for natural disasters and accepted that those with US operations had been adversely effected by the weak dollar. In fact, reinsurance stocks in general would appear to be gaining popularity with fund managers right now.

Indeed Alex Foster, who manages the Hiscox Insurance Portfolio fund, has 17% of the fund invested in reinsurers, at present. While Feras Al-Chalabi, who manages Odey Asset Mangement's Continentel European Fund, said: "For the first time in several years our research is finding exciting investment opportunities amongst Europe's large cap reinsurance."

Odey's European funds almost doubled their collective holding in Converium in the last month from 5.8% to 11.2%, a move which may surprise others covering or investing in the reinsurance sector at present given that the company remains generally out of favour and unloved by the majority.

However Odey is clearly convinced by chairman Peter Colombo contention that there is value to be had in Converium, after the turmoil of the last 12 months which saw the company's share price plummet after the turmoil in its US reinsurance operations which forced it to place that business into run off.

Colombo said in his annual letter to shareholders that: "Many clients have expressed their confidence in Converium by continuing to do business with us. This gives me personal confidence in the inherent value of our organization."

With contraion and value investing being somewhat back in vogue, as witnessed by the crop of special situations and opportunities funds that have sprung up, Converium may yet find other admirers. Capital Group owns just over 5% of Converium in addition to it holdings in Swiss Re.

Looking to the future, although Benfield recently questioned European reinsurers' upbeat view on pricing, saying that it was at odds with its own research in the broker market, with year-on-year renewals still bringing in some EUR20bn at the European big five and tighter underwriting discipline now prevailing, reinsurers who have reported to date all expressed confidence that profitability would continue.

- Lindsey Rogerson is a financial journalist.

NOTE: At the time of writing Hannover Re had still to hold its annual results conference and analysts meeting for 2004 year end results.

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