The profitability of the reinsurance industry appears inextricably linked to the continuing hurricane season. Lindsey Rogerson investigates.

Trawling through analyst reports, financial results statements and market reviews leaves one with the overwhelming impression that until the US hurricane season closes no one really has a clue how 2006 will turn out for European reinsurers. Granted, some players have seen considerable uplift in premium income from hurricane affected business lines but there have been softening or falling prices elsewhere. All of which means that the profitability, if not the future of some companies, more than ever this year will depend on how the wind blows.

Big boys

In its most recent review of the European reinsurers, Benfield says it believes they have all got off to a solid start in 2006. The broker says its universe of companies (Converium, Scor, Munich Re and Hannover Re) all present themselves as disciplined with regard to underwriting and well reserved.

The report says, "Their business diversity was also appreciated. Cession rates for the Benfield European Quarterly companies do not appear to have changed significantly when compared with the same period last year, despite a tightening retro market." Benfield says it has also been pleased to see the reinsurers taking advantage of opportunities in the capital markets to further sure up balance sheets to buffer future weather-related losses. However the report says that whether the year proved a profitable one for underwriting would ultimately come down to "where and how hard" the wind blew.

Over at Credit Suisse decisions, over which of the big European reinsurers is worthy of investment, also come down to predictions of where the hurricanes may hit.

According to analysts Robin Mitra and Farooq Hanif Hannover Re is "potentially the most volatile of the reinsurance companies, especially as it has written much wind coverage, to benefit from the high prices available."

Equally, they hold that Swiss Re should benefit from the higher US natural catastrophe prices; but clearly would suffer were there to be a severe hurricane season. But that is where the fortunes of the two European players diverge according to Credit Suisse. It has raised Swiss Re to outperform while maintaining its underperform stance on Hannover Re, as the analysts continue to see the latter as overvalued compared to its peers.

The pair have maintained their long-term outperform view of Munich Re not least because, as often stated in these investment articles, analysts and fund managers alike love to see companies commit to or actually buy back their own stock. A commitment Munich Re reiterated at its most recent results briefing.

Contrasting fortunes

Rating agencies played a part in the contrasting fortunes of Scor and Converium according to Benfield. It notes "Scor's positive result (in the first half of 2006] was due in part to the upgrade in its financial strength by S&P ... while Converium continued to experience difficult operating conditions with a 'BBB+'/'B ' financial strength rating." Indeed, in July, Scor's rating looked set to become even rosier when it was placed on "positive watch" and "review for upgrade" by Fitch and Moody's respectively. Both rating agencies believing its acquisition of Revios would be business enhancing.

For its part, Credit Suisse believes that Converium's return to profitably hinges on it regaining its "A" rating. Hanif and Mitra say "It is critically dependent on regaining at least an "A" rating, for it to be able to move back into the profitable non-proportional areas it had to forego when it lost its rating." Converium is on record as being committed to regaining its lost higher credit rating and Inga Beale, CEO, says the company is prepared to lose business rather than write at unprofitable rates. Her strong opinions have been matched by similar comments from her counterparts at all of the European reinsurers.

The rating agencies have held their ratings of Axa Re - now on course to become Paris Re Holdings at the beginning of 2007. This suggests they concur with the view held by the companies, who have stumped up the cash to turn Axa Re into Paris Re, that it has proved to have a successful business model under its current management and should be left alone to grow its book after the name change takes effect.

Indeed, Hans-Peter Gerhardt, CEO of Axa Re, has enthused about the prospect of being allowed to continue to build the business. He says, "Paris Re will build upon the successful business model developed over the past three years, thus providing continuity to our teams and our clients. We are very excited to work with the new investors led by Stone Point Capital, which has a highly successful track record in forming and funding insurance and reinsurance firms." Specifically, Axa/Paris Re, which credits itself with operating a Bermudian-style reinsurance practice, which just happens to operate from Europe, has said it will focus on identifying and profiting from capacity shortfalls on the lines of business it writes.

New kid on the block

Glacier Re, set up slightly more than 18 months ago, might still be just a young pup but with financial backers such as legendary Soros Fund Management it has got off to a good start. It has twice increased underwriting capacity, most recently last December by a further $50m. And in April it announced plans to write around $10m worth of business annually in Mexico after gaining a licence to write reinsurance business in the Central American country.

However the fortunes of the company, which writes across five key lines of business including aerospace, catastrophe reinsurance, European property and casualty, marine & energy and war & terrorism, are "on hold" after AM Best placed its "A" rating under review in July.

Rising to the challenge, Robbie Klaus, CEO as well as chief underwriter, says, "We are confident that the outcome of our AM Best rating review will be satisfactory. Glacier Re is a stronger business than when it commenced operations in 2004. While Glacier Re suffered a trading loss in 2005 the company ended the year with a solid capital base following the issuance of $100m of equity and $100m hybrid capital, bringing our total underwriting capital base to $406.5m.

"In 2006 we continue to diversify our business and are experiencing excellent trading conditions consisting of premium income growth, significant price increases and a benign claims environment. Factors which all add to our strong overall financial position." Only time will tell whether his confidence is well founded.

- Lindsey Rogerson is a freelance journalist.