Analysis of Europe’s big four reinsurers by Morgan Stanley (MS) states that when compared with its peers, German reinsurance giant Hannover Re is the main beneficiary from improving property and casualty (P&C) rates.
In a recent industry report, analysts at Morgan Stanley discuss the current rate environment following the January 1st renewals and explore what improvements might mean for European reinsurers’ valuations.
The firm highlights a fragmented marketplace and as such, feels that capital allocation will continue to be a key differentiator as the reinsurance industry turns its attention to the important April and mid-year renewals.
Analysts explore how sensitive the price target of each reinsurer is to an average 1% increase in its book of business, explaining that as expected, the firms with the higher operational leverage – defined as the ratio between net earned premium and equity – are typically the most sensitive to improvements in P&C rates.
“However the benefits of rate improvements are mitigated by business mix and underlying profitability. For example at the same level of operational leverage, the insurer with the lowest combined ratio, would be less sensitive to a 1ppt improvement in combined ratio,” explains Morgan Stanley.
The analysis, which considers sensitivity to rates, current business mix, capital allocation ability, and the geographic footprint of Europe’s big four, finds that Hannover Re continues to be the main beneficiary from improving P&C rates. According to analysts, for an average improvement of 1% in Hannover Re’s book they would expect to see the target price move by 6.4%.
The second most sensitive stock to improving rates is SCOR, which again is mostly a result of the reinsurer’s relatively high operational leverage. Analysts state that for an average improvement of 1% in the company’s book of business, they would expect to see an increase of 5.6% in valuation.
Overall, reinsurer Munich Re is the least sensitive to improvements in rates in the P&C space, with the firm’s operational leverage ranking third in its peer group. Morgan Stanley notes that for an average improvement of 1% in Munich Re’s book, they would expect to see a 4.2% increase in valuation.
For Swiss Re, the analysis fails to provide how sensitive the stock is to a 1% improvement in average rates across the reinsurer’s book, but does state that the company’s earnings screen as the least sensitive to the improving rate landscape despite the fact it has a higher proportion of premiums in the P&C market than Munich Re. Analysts explain that much of the difference is a result of a relatively lower combined ratio in its base case.