Four Largest European Reinsurers Maintain Pricing Discipline

Pricing discipline by Munich Re, Swiss Re, Hannover Re, and SCOR is proving an important competitive advantage in the face of declining market pricing and investment yields, according to a Fitch Ratings report (account upgrade required for access).

The four largest European reinsurers have been able to largely maintain their pricing and policy terms to protect earnings without a significant fall in business volumes, helped by their strong market positions. They all reported strong property and casualty (P&C) underwriting results in 2016, albeit helped by prior-year reserve releases and lower-than-expected major losses, which cannot be counted on to continue.

Most of the companies' operating profit comes from P&C reinsurance, but Fitch said it expected a growing contribution from life reinsurance, driven partly by life insurers seeking to transfer longevity risk in response to higher regulatory capital requirements from the introduction of Solvency II. SCOR in particular is building its life reinsurance business following two major acquisitions in recent years.

All four companies have maintained very strong capitalization in recent years, which is important for their ratings. They all score "Very Strong" or "Extremely Strong" in Fitch's Prism factor-based capital model. Their financial leverage ratios (FLRs) are low compared with most primary insurers in Europe and are likely to remain so as the competitive market limits opportunities for growth. Munich Re's Fitch-calculated FLR is the lowest of the four: 13 percent at the end of 2016 and now materially lower following repayment of 1.5 billion euros of subordinated debt, which reduced the Fitch-calculated FLR by 3.8 percentage points.

Pricing in the wider reinsurance market is under intense pressure after several years of below-average major losses and an influx of capital to the sector as investors look for higher returns than they can get from investment markets. The Fitch-calculated combined ratio, excluding the impact of prior-year reserve releases and lower-than-expected major losses, was nearly 100 percent in aggregate in 2016 even for the four major European reinsurers, indicating underwriting profit little better than break-even. Fitch says its fundamental outlook for the reinsurance sector is negative and it expects profitability to weaken as pricing and investment yields continue to decline.