Europe's reinsurers hunt for growth outside P&C: Citi

By Aidan Gregory

March 12 - (The Insurer) - Europe’s big four reinsurers will address growing pressure to recalibrate excess capital this year by deploying it into new growth areas outside P&C or returning it to shareholders via dividends and buybacks, according to Citi.

In an interview with The Insurer on Tuesday, James Shuck, head of European insurance equity research at Citi, said reinsurers are under growing pressure to justify the size of their capital buffers at this stage of the cycle as P&C enters a period of market softening.

“For the reinsurers, they have to generate a narrative around where the growth comes from outside of traditional treaty P&C reinsurance,” said Shuck. "That will grow and shrink with the cycle, and I would not expect them to significantly increase their exposures there at this point in the cycle.”

In recent years, Hannover Re, Munich Re, Scor and Swiss Re have accumulated “a lot of capital” to support their growth amid strong demand for reinsurance, Shuck said, as well as to support reserving amid escalating social inflation of U.S. casualty claims.

"There is a question mark about how they deploy that capital into new growth dynamics,” said Shuck.

For Munich Re, which returned 4.6 billion euros ($5.0 billion) of capital last year, this growth is expected to come through M&A in specialty lines, while Citi expects Swiss Re to deploy more capital in its Corporate Solutions unit's facultative business and life and health, having resolved questions surrounding its U.S. casualty book last year with a $2.4 billion reserve increase. Scor continues to execute on its turnaround plan following a profit warning in July last year caused by large losses within its life and health book.

“Through a softening cycle you fill in the gaps and to get that kind of level of growth they need to start deploying some of the excess capital into new areas,” said Shuck. “I think we will see a combination of organic growth, M&A and some kind of multiyear approach to deploying excess capital. It varies company by company, but I don’t think we are looking at exceptional capital returns even at this year-end.”

“This year for the reinsurers is a story of gradually moderating rates, with risk-adjusted pricing coming under pressure from very good levels,” said Shuck. “At the same time no longer building resiliency reserves at Scor, Swiss Re and Munich Re to some extent.

“They just can't sit on the level of capital they've got forever,” added Shuck.