European Insurers May See ‘Golden Year’ as Disasters Push Prices

Europe’s biggest insurers and reinsurers, including Allianz SE (ALV) and Zurich Insurance Group AG (ZURN), are using last year’s losses from natural catastrophes and auto underwriting to increase policy prices.

Allianz, Europe’s biggest insurer, expects higher profit this year, helped by the “high single-digit price increase” it secured for German motor insurance in 2011. Zurich Insurance, Switzerland’s biggest insurer, reported that general insurance rates rose by more than 3 percent last year.

The record $105 billion of natural disaster claims that depressed earnings last year may give insurers and reinsurers that help them shoulder risks for clients the leverage to push through property and casualty price increases. That will help counter the effect of low interest rates, which are crimping investment returns. Yields on German 10-year bunds fell close to an all-time low this month.

“2012 could become a golden year for insurers and reinsurers off the back of last year’s high claims,” said Michael Haid, an equity analyst at MainFirst Group in Frankfurt. “Insurers and reinsurers need to show they can push through price increases if they want to assure investors they can succeed in the low interest rate environment.”

Net income at Munich-based Allianz may double to 5.29 billion euros ($7 billion) this year, according to the mean estimate of 23 analysts surveyed by Bloomberg. Only two of the 39 analysts who rated the stock in 2012 have sell ratings while 23 say buy, according to data compiled by Bloomberg.

Steady Process

Profit at Zurich Insurance, which had major catastrophe losses of $1 billion last year, is expected to climb 12 percent to $4.22 billion, according to analysts, who have 10 times more buy than sell ratings on the shares.

“Price increases that were pushed through last year will help net income this year,” said Stefan Schuermann, a Zurich- based analyst with Vontobel Holding AG. “Price increases are likely to continue in many markets, which is a slow, steady process.”

The 28-company Bloomberg Europe 500 Insurance Index climbed 9.8 percent this year, led by Swiss Re AG (SREN) and Munich Re with gains of 23 percent and 21 percent respectively. Allianz rose almost 15 percent and Zurich Insurance 13 percent. The index declined more than 13 percent in 2011.

Global property insurance rates “continued to firm” in the first three months of the year, underpinned by last year’s catastrophe losses, Marsh & McLennan Cos. (MMC), the world’s second- biggest insurance broker, said in a report this month.

‘Solid Growth’

Allianz is seeing “favorable price effects in several markets” and expects “solid growth” in its property-casualty segment, Chief Executive Officer Michael Diekmann said last month in the Munich-based insurer’s annual report. The company aims to boost operating profit by as much as 11 percent this year.

In motor insurance, Germany’s biggest segment of P&C coverage, premium income climbed 3.5 percent to 20.9 billion euros last year as the average policy price rose for the first time since 2004, the GDV industry association said on April 18. Motor insurance rates are still at a level comparable to the beginning of the 1980s, the association said.

Insurers are trying to cut costs and boost prices amid slowing economic growth and market turmoil, said Axel Lehmann, chief risk officer at Zurich Insurance.

Changing Times

“Since the end of the Second World War we have had continuous growth, but these times are changing,” Lehmann said in an interview. “To overcome declining investment income insurers need to cut costs, improve their underwriting and focus on risk-adjusted prices.”

Reinsurance rates rose in April 1 renewals, which focus on the Asia Pacific region, after last year’s losses from earthquakes and floods in Japan, Thailand and New Zealand, Marsh’s reinsurance broker Guy Carpenter & Co. said on April 5. About two-thirds of annual property and casualty reinsurance contracts typically come up for renewal in January, with the remainder renewed in April and July.

Munich Re, the world’s biggest reinsurer, expects more price increases this year, particularly in loss-affected regions. The firm’s aggregate losses from natural catastrophes almost tripled to 4.5 billion euros last year.

Primary property and casualty “prices are starting to rise, but are not yet enough to compensate for the interest rate decline,” Swiss Re, the world’s second-ranked reinsurer, said on April 17. Pricing trends are on an “improving track,” according to George Quinn, chief financial officer at Swiss Re, which had about $3.48 billion of large natural catastrophe claims in 2011.

Catastrophe Looms

While Aon Benfield estimates that natural disasters caused less than $3 billion of insured losses in the first quarter, compared with almost $53 billion in the year-earlier period, they remain a threat to earnings forecasts, said Christian Muschick, an analyst with Silvia Quandt Research in Frankfurt. The Atlantic hurricane season starts on June 1 and runs through the end of November.

“Whatever happens on the pricing front will be overshadowed by the magnitude of catastrophe claims,” said Muschick. “One major hurricane hitting the U.S. could knock down earnings in one swift blow. Higher prices surely won’t be able to counter that.”

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net; Carolyn Bandel in Zurich at cbandel@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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