By Aidan Gregory

Jan 31 - (The Insurer) - Europe’s reinsurance stocks have delivered strong returns for investors over the past year due to the hard market cycle, strong demand for coverage and manageable losses. But valuations are likely to come under pressure in 2025 due to the prospect of softening market conditions, according to insurance analysts.

As of 31 January, Europe’s big four reinsurers have continued to trade up in 2025. Swiss Re is up 5.6 percent year-to-date, Munich Re is up 7 percent, Hannover Re has gained 4.6 percent and Scor is up 2 percent, despite the impact of the wildfires in Los Angeles, which are expected to cause around $30bn of insured losses.

With the exception of Scor, the sector has outperformed the 14.3 percent increase recorded by Euro Stoxx 50 over the past year, with Swiss Re gaining more than 41 percent, Munich Re adding 33.4 percent and Hannover Re returning 16.4 percent.

Scor’s share price has still not fully recovered from a profit warning in July last year caused by large losses in its life and health reinsurance division. Shares in Scor are still down 10.8 percent from one year ago, having rebounded by more than 46 percent from their low in August following the profit warning.

Having had such a strong run, the problem for the reinsurers is how they can continue to deliver such strong performance and capital returns for shareholders in a softening market.

“It starts with whether reinsurers will outperform in 2025,” said Darius Satkauskas, insurance equity analyst at KBW in London. “I don’t think so. I think company specifics matter. We like Scor here and we have an outperform on Swiss Re and Munich Re and an underperform on Hannover. When investors start seeing the rate declines that will come through the renewals presentations, they will start to extrapolate those trends and at some point, it will put pressure on combined ratios.

“There is very little risk to earnings because balance sheets are very strong, but the multiples are quite full and when you start seeing the direction of travel for combined ratios, investors may start to question why they are paying so much for these shares,” added Satkauskas.

For the German carriers in particular, the run of strong performance has led to their earnings multiples becoming increasingly rich, particularly given that the tailwind provided by the hard market cycle is coming to an end and a market softening is now widely expected.

According to Citi, Munich Re is currently trading at around 10.5x its 2025 forecasted earnings, while Hannover Re is on an even more expensive multiple of 11.5x. Swiss Re is trailing on 9.7x and Scor is on a discounted multiple of around 6x.

“We upgraded [Scor] immediately after the capital markets day in December,” said James Shuck, insurance equity analyst at Citi in London. “The stock is trading on 6x 2025 earnings, so the risk reward is very attractive. They’ve got third-party opinion on the life and health reserves, and P&C reserves. The slight unknown is the arbitration case with Covéa.

“It does seem like a lot of bad news is baked into the price and they have done a lot to address their risk concentrations, and the underlying earnings and buffer building under [CEO Thierry Léger] is the right thing. Scor is one of the best value plays in the sector at this point.”

KBW also sees Scor as the best bet among the big four European reinsurers in 2025, owing to the company’s efforts to move on from the profit warning last year and create a more stable balance sheet and resilient earnings stream, where it has made progress.

“The issue with the others is the high multiple at a time of impending soft market,” said Satkauskas. “With Scor, the market is yet to award an appropriate multiple for the earnings stream which will be less volatile than it was in the past, and the balance sheet is a lot more resilient than in the past.

“The capital position has improved beyond what people were hoping for in the first quarter and we may even reach the point where people will contemplate whether this company can start buybacks in the medium term, which was not the case a few months ago, so we like the set-up.”

In 2025, Swiss Re also remains cheap relative to Hannover Re and Munich Re and is also an attractive option following the decisive action the Swiss reinsurer took in November to increase its US liability reserves for P&C claims by $2.4bn.

The issue had caused a prolonged drag on the reinsurer’s valuation, and the market reacted positively to the announcement last year.

“The Germans are going to deliver the earnings no matter what because they have the buffers and the growth profile to do that, and they don’t disappoint,” said Shuck. “Swiss Re is trying to move that way by moving to the 90th percentile on P&C reserves and putting the casualty topic to bed. You’ve arguably got more earnings growth on Swiss Re at a lower multiple which is what makes it so attractive.”

Known unknown

There are question marks for the European reinsurers about how the damage from the LA fires will impact earnings and natural catastrophe budgets, particularly if there are more severe disasters later in the year.

According to Moody’s, the LA wildfires, which hit some of the world’s most valuable real estate, are expected to lead to insured losses of $20bn-$30bn. The rating agency expects reinsurers to pick up at least 30 percent of the total insured losses.

“The wildfires have caused tragic loss of life, widespread destruction of property, and mass evacuations,” said Moody’s in a report published in late January. “Reinsurers will see claims from primary companies under a variety of reinsurance coverages, including quota-share treaties and excess of loss property catastrophe coverages, as well as facultative and per-risk reinsurance.

“We expect the reinsurance sector to assume at least 30 percent of total insured losses,” added Moody’s. “Reinsurers will recalibrate their risk assessment and appetites, pricing levels, and terms and conditions for wildfire risk.”

While the reinsurers will inevitably pick up losses from the wildfires, it is still too early to say how severe the impact on natural catastrophe budgets and earnings will be, although there is not any major cause for concern yet.

Many insurers and reinsurers had already pulled back from insuring wildfire risk in California in recent years, reducing their exposures. And the rest of the quarter could be quiet in terms of natural catastrophes.

“I don’t think we will see too much earnings pressure at this point,” said Shuck, adding that in a normal year, around 20 percent of the annual catastrophe budget is absorbed during the first quarter.

The losses from the wildfires, while severe, are not enough to change the direction of travel towards a soft market for reinsurers.

“If the reinsurers took a disproportionate share of the wildfires,” said Satkauskas. “It would light a fire behind the rates momentum, and we are back in a hard market, but I don’t think that’s the case.”

Despite the stretched multiples, and the losses from the wildfires so early in the year, the European reinsurers are an attractive bet for 2025, with resilient earnings, strongly capitalised balance sheets and shareholder returns via buybacks and dividends.

“Reinsurers are not necessarily a bad place to hide if you’re worried about geopolitical and macroeconomic risks given the strength of the balance sheets” added Satkauskas. “This year will be about reappraising what is the correct multiple for such a company heading into the soft market. I don’t think the soft market chatter will end.”