Reinsurance headwinds loom for Europe's multiline insurers after strong 2022

Europe's multiline insurance earning season will likely center on concerns about 2023 reinsurance coverage, even as the largest primary carriers are expected to report solid results for 2022.

Multiline carriers managed to navigate large losses, claims inflation and capital markets turmoil in 2022. But the "key focus" will be on how high reinsurance costs will impact their operating margins and how much risk exposure they keep on their own balance sheets, said Hadley Cohen, an analyst at Deutsche Bank Research.

Primary insurers will be paying more for less-comprehensive reinsurance coverage after reinsurers secured large price increases and more restrictive terms during the Jan. 1 renewal season, particularly for loss-affected property-catastrophe cover. The crunch is a bigger potential issue for Zurich Insurance Group AG than it is for Allianz SE, given their relative exposures, Cohen said.

The "drastically" higher prices mean that Zurich has likely dropped its catastrophe aggregate reinsurance cover, following a similar move by AXA SA in 2022, according to analysts at Bank of America. Still, the insurer likely redeployed its reinsurance budget elsewhere to manage earnings volatility, the analysts said.

Analysts will also be watching 2022 results for evidence of whether pricing in commercial and personal lines is keeping pace with claims inflation.

'Impressive' 2022 performance

In terms of full-year 2022 results, analysts expect AXA, Assicurazioni Generali SpA and UnipolSai Assicurazioni SpA to report year-over-year EPS growth, according to S&P Global Market Intelligence data. Allianz, Mapfre SA, Sampo Oyj and Zurich are projected to record declines. Nonlife combined ratio expectations are a mixed bag, with AXA, UnipolSai, Zurich and Sampo predicted to report year-over-year improvement in 2022 and the rest expected to see worsening ratios.

The four large-cap European composites — Allianz, AXA, Generali and Zurich — are expected to produce "an impressive set of updates" for full-year 2022 despite a tough macroeconomic environment, according to Bank of America analysts. They expect the four companies to average 7% operating profit growth in 2022, led by Zurich, with 15%. Solvency ratios will be around or above 200%, they said in a note to clients, suggesting overcapitalization and supporting returns of capital to investors.

Several analysts have AXA and Allianz as their picks of the bunch. Bank of America said both of those companies will deliver strong operating results and have attractive capital return stories. Analysts at UBS said multiline is its most-preferred subsector in all of European insurance, and they highlighted AXA as a top pick, saying that consistent share buybacks could lead to a stock re-rating.

A further positive for some is that claims from Hurricane Ian, the most costly natural catastrophe of 2022 for the insurance industry, are now expected to come in lower than originally thought, according to Michael Huttner, analyst at Berenberg.

While the big European multiline carriers should not expect a much easier ride in 2023, with continuing pressures from claims inflation and an uncertain economic outlook, their capital bases should help cushion them. Capital levels are "incredibly strong," Cohen said in an interview, making them "well positioned to weather capital market volatility."