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Europe's Reinsurers Find Themselves in a Tough Slog As Capital Markets Turn Swampy
(BestWire Services Via Acquire Media NewsEdge) European reinsurers have been on edge about softening prices and terms in worldwide property/casualty markets, and as always, fear the big catastrophes that can strike at their bottom lines any time, anywhere.
But as first-quarter results emerged over the past week, another threat is bubbling up. The investment portfolio, the mostly silent partner in the fortunes of reinsurers, is a mess.
Mostly, the reinsurers are saying they're just slogging through generally volatile capital markets, a situation made more difficult by mark-to-market accounting that insists on recording unrealized losses to the current quarter. Adding to the burden is the pernicious effect of a perpetually weakening U.S. dollar, which discounts profits made in the all-important U.S. market.
Top Tier Misery...
Swiss Re and Munich Re, the worlds largest reinsurers, both reported significant slumps on the investment front. Swiss Re is bogged down by serious missteps in the subprime credit swamp, with a 53% fall in first-quarter profit fed by structured credit default swaps drained an additional mark-to-market loss of 819 million Swiss francs (euros) from the reinsurer in the first quarter. Those swaps were placed in runoff last year after taking a 1.2 billion franc hit from the U.S. subprime mortgage market.
While this business is in runoff, Swiss Re said it continues to be exposed to market value fluctuations on the underlying securities, so it estimates a further loss of 200 million francs for the month of April.
Munich Re's first-quarter profit fell 19.4% in what it described as a difficult environment with sharply falling share prices and a 46% fall in its investment result, to 1.7 billion euros.
Contrasted with Swiss Re, Munich Re has only about 280 million euros of exposure to the U.S. subprime market through financial instruments including credit derivatives. The reinsurer wrote down about 5 million euros of that in the first quarter.
Munich Re also pointed out that part of its investment fall this year was related to nearly 1 billion euros in disposals of real estate and equities in the first quarter of 2007, which were not matched in this year's quarter.
...And Second-Tier Relief
Moving further down from the reinsurance world's summit, second-tier players Hannover Re and Scor had considerably better luck in tough investment times.
Hannover Re posted a 59.3% rise in first-quarter profit on a strong underwriting performance, and even though it also felt the negative effects of the markets on its investments, Hannover Re still managed to boost net investment income 1.7% to 262.6 million euros.
Another bright light is Scor, which boosted its first-quarter net income 63%. On the investment front, net invested assets including cash stood at 18.5 billion euros on March 31, down from 19.1 billion euros at year end 2007, mainly driven by exchange rates. Scor said it realized a return of 3% on average assets, down from 4.6% in the previous year.
Adverse developments in the equity markets had a negative impact 35 million euros, with 17 million euros of impairments, 5 million euros of realized losses and 13 million euros of fair value movements net of currency gains were partly offset by realized gains on the bond portfolio of 23 million euros, Scor said.
It certainly could have been worse. Scor and Hannover Re both made it a point to say they have little exposure to instruments tied to the U.S. subprime market, making them look like more conservative investors than their big brethren -- particularly Swiss Re.
Another difference between the top tier and second-tier reinsurers: Over the past five years or so, both Hannover Re and Scor did some regrouping, pulling back notably from riskier underwriting exposure in the United States. Scor did do some acquisitions of note in Europe, true, but both became choosier in the markets they wanted to write.
Caution in underwriting, caution in investment -- could the smaller guys be on to something?
(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)
Copyright ? 2008 A.M. Best Company, Inc.
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