Europe’s biggest reinsurers see mixed investment trends

Four of Europe's largest reinsurers see a volatile five-year average of their net investment ratios, amongst other financial data.

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SCOR, Swiss Re, Hannover Re, and Munich Re see a volatile five-year average of their net investment ratios.

Recent data has revealed that reinsurers are suffering from losses in their investment portfolios due to poorly performing fixed income stocks, with the European reinsurance field experiencing a drop off in net investment ratios.

In a pre-Rendes-Vous de Mone Carlo report published by AM Best, the ratings agency compared the returns of Europe’s four largest reinsurers, Swiss Re, Hannover Re, Munich Re and SCOR, in a Market Segment Report called “Global Reinsurance: The European Big Four”.

The analysis said that a hard market was benefiting the major reinsurers. It specifically mentioned that three of the four — all except SCOR — were experiencing a boon in their property and catastrophe (P&C) segment, whereas SCOR was “paring back its natural catastrophe exposures”.

In August, the major four revealed their Q2 investment results, which saw many experiencing lukewarm investment returns. Swiss Re’s return on investments stood at 2.8%, compared to 1.2% in the first half of 2022, and Munich Re’s Q2 investment result represented a return of 1.1% on the average market value of the portfolio, the company said. Its running yield was 3.3%, and its yield on reinvestment was 4.3%.

SCOR was more ebullient about its results, despite little difference comparatively: “In investments, [we continue] to benefit from high reinvestment rates and reports a strong increase in the regular income yield,” it said in its statement. Investments generated a regular income yield of 3.1% in Q2 2023, benefitting from a high reinvestment rate of 5.1% as of 30 June 2023.

Investment sights

The report revealed net investment ratios for the ‘big four’ and compared their results on average from 2018 to 2022.

The net investment ratio for the four in 2018 was 16.1%, which has fluctuated wildly since then: in 2019, it was 26.5%, before falling to 12.5% in 2020, 14.2% in 2021, and 9.6% in 2022, the smallest number of the average.

This put the five-year average at 15.8%.

“Despite the positive ROE performance overall, the absolute level of shareholders’ equity for the European Big Four declined significantly in 2022.”

Return on equity (ROE) has increased on average over the same time – from 5.8% in 2018 to 8.3% in 2022, a 6.4% average over five years.

The total net written premium was 5.7% across the five-year average – 2.7% in 2018 compared to 6.0% in 2022, though with a lot of variation in between.

For P&C only, net written premiums were healthier with 12.3% for 2022 and 8.6% as the five-year average.

“Despite the positive ROE performance overall, the absolute level of shareholders’ equity for the European Big Four declined significantly in 2022,” said the report. “The drop of 37.8% was driven by negative movements in the valuation of fixed income investments due to the rapid rise in interest rates.”

Future movements

“The European Big Four are benefiting from the hard reinsurance market conditions evident during the 2023 renewals with improved pricing and terms and conditions across reinsurance lines of business and geographies,” said the report. “Higher inflation expectations are reflected in pricing, attachment points and updated asset values.”

“The European Big Four are benefiting from the hard reinsurance market conditions evident during the 2023 renewals with improved pricing.”

The Big Four were aiming for growth in specialty segments, too, where the price increases achieved since 2018 allowed for good returns, the report continued. “The growth in these lines is not purely opportunistic, but also aimed at achieving increased levels of diversification and in turn more stable earnings,” said Mathilde Jakobsen, Senior Director, Analytics, at AM Best. “Within specialty lines, the appetites for different types of business varies, but generally there is more caution around risks associated with cyber, war and recession, given the potential for a systemic loss.”

The results from a hard market and complicated investment return picture — especially when compared to slightly less favourable North American and Bermudian results in the past few years — show divergent trends. A J Gallagher’s 2022 overview of reinsurance results said there were “Significant drops in ROE reported by several North American and Bermudan re/insurers, largely due to unrealised investment depreciation as a result of falling equity markets.”

Nevertheless, the analysis still specified that “rising reinvestment yields continue to support ROEs for all segments”.

It remains to be seen what H2 will bring — and if these numbers will continue or if improvements will be made.