Reinsurers Best Positioned Post Brexit: Deutsche Bank

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

As the solvency ratios of European insurers and reinsurers fluctuate after the UK's recent vote to leave the EU, analysts at Deutsche Bank have highlighted reinsurers as the "relative safe haven" among European players in light of current, and further expected market volatility and uncertainty.

Unsurprisingly, the solvency ratios of European insurers and reinsurers declined in the days after Brexit, and while they were seen to recover, in part, the inherent uncertainty and expectation of further post-Brexit financial market volatility, requires attention.

A broad array of insurance and reinsurance players, market observers and analysts, and re/insurance news media, has discussed the current, and potential impact Brexit could have on the global insurance and reinsurance landscape.

For now, the majority of current solvency positions among European insurers and reinsurers remain within management target ranges, or as comfortable, according to Deutsche Bank. However, further market stress could begin to raise some questions for some firms, and in particular insurers, says Deutsche Bank, as reinsurers continue to show their resilience to market volatility.

"Reinsurers continue to offer a relative safe haven - given relatively high solvency ratios and relative robustness to market movements compared with other continental insurers, we continue to view reinsurers as a comparatively safe place to hide, where, barring any major natural catastrophes, dividend and buyback ambitions remain very much intact," said Deutsche Bank.

Of course reinsurance markets remain awash with capital and traditional reinsurers have been boosted by the lack of capital draining losses in recent years, providing them with additional resilience to the Brexit fall-out.

Deutsche Bank describes another Brexit stress scenario in its report, which includes a further 25% decline in equity markets, a further 35bps decline in risk-free rates, 100bps of credit spread widening, and a 50bps sovereign wealth widening.

Using this additional stress scenarios, Deutsche Bank explores what the solvency ratio of certain European insurers and reinsurers might be at year-end of 2016, highlighting those that have both strong and weak resilience to further market stress, in a post-Brexit environment.

"Unsurprisingly," says Deutsche Bank, "all four (Munich Re, Hannover Re (OTCPK:HVRRY), Swiss Re (OTCPK:SSREY), and SCOR) of the reinsurers screen well on this analysis and as such, we would expect them to continue to be perceived as relative safe havens through periods of market volatility."

Analysts at Morgan Stanley shared a similar view in recent days, noting that while Brexit may have heightened macro uncertainties, property and casualty (P&C) insurance remains a relative safe haven, in part due to the market's defensive nature.

Historically, explained Morgan Stanley analysts, at times of market volatility and uncertainty; P&C outperforms other financial sectors.

So despite a challenging and uncertain operating landscape for insurers and reinsurers, analysts have highlighted the stability and robustness of reinsurers in current financial market dynamics, and also noted that should the market come under further stress, reinsurers are likely the safest, and best positioned to respond and manage the situation.

Analysts appear confident that the P&C and reinsurance space is the safest place for investments in the wider financial markets, during current Brexit created market volatility and, should further stress impact the market the position of reinsurers becomes ever more concrete.

That being said, rates in the insurance and reinsurance space continue to decline, which, highlights how volatile and pressured other financial markets are in the current market climate, and supports the robustness of reinsurers at times of widespread market turmoil.

For equity investors Deutsche Bank's message could provide some respite from the gloomy uncertainty of a post-Brexit European re/insurance landscape, advising there's no reason to jump ship in the current environment, and that the big four European reinsurers are positioned well for further stress.

However, investors would be wise to keep an eye on further market developments and any negative movements, especially if catastrophe losses start to increase, which would exacerbate any further market volatility.

Of course, while the analysts are describing insurance and reinsurance equities as relative safe-havens during the Brexit fall-out, the insurance-linked securities (ILS) and reinsurance linked investments market once again can demonstrate its lack of correlation.

Should Deutsche Bank's stress scenario play out, the ILS fund market's performance would likely be completely unaffected, as the relatively uncorrelated nature of insurance linked investments would once again get displayed.

So for larger, institutional investors reading the analysts comments and thinking reinsurance might be a relatively safe-bet investment post-Brexit, perhaps taking a close look at the ILS market and investments such as catastrophe bonds might reveal even less correlation to the Brexit fall-out in financial markets, once again helping to make the ILS asset class even more popular.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.