Analysts at Jefferies have examined the potential impact of the Russia-Ukraine conflict, European storms and the pandemic, and say they expect that the bulk of Ukraine related claims won’t be booked until the next quarter.
In the Jefferies loss model, Munich Re will potentially assume €500m of reinsured claims from the ongoing crisis in Eastern Europe.
However, although these claims have already been incurred, Jefferies understands that Munich Re’s accounting means that the only claims that can be booked are those that have been reported, or where there is sufficient information to confirm a loss.
However, overall the analysts have cut their earnings forecasts, but their solvency forecasts are positively impacted by rising Bond yields.
The company also expects Hannover Re to book €200m in 1Q.
Jeffieries annual estimated cost of €500m (1.8%pts) for Munich Re and €200m (1.1%pts) for Hannover Re equates to an 11% 2022F EPS cut.
On the pandemic, analysts note that the other material change we made to their model is adjusting the allocation of pandemic claims in Life & Health Reinsurance.
While Jefferies is leaving the total cost unchanged at €300m, they now assume that these will be more front-end loaded, rather than evenly spread.
Therefore, they now assume that 40% will be booked in 1Q, 30% in 2Q, 20% in 3Q and 10% in 4Q, echoing the earnings pattern that the company expects for Hannover Re’s pandemic claims.
On the European storms, Jefferies expects a cost of €40m, taking into account the recent heavy rain and winter weather.
As these losses were likely still being reported at the end of the quarter, the company is factoring in €30m (75%) of these in 1Q and the remaining €10m (25%) in 2Q.
In doing so, Jefferies now presumes that ERGO P&C Germany will miss the annual combined ratio guidance of 91.0%, reporting 92.6% instead.
However, the analysts expect the business to remain on track in meeting the medium term targets.
On a more positive note, the company reported a rising in Bond yields, as they are a material positive for the legacy savings business of ERGO Life & Health Germany.
At a group level, the analysts expect that capital markets have added 7% pts to the Solvency II ratio. They added that rising yields also bring welcome relief to the German GAAP capital position by potentially reducing the cost of the ZZR.
Under IFRS, this may prompt management to realise fewer capital gains (as there is no need to fund the ZZR), though this is probably more relevant for 2Q.
