June/July renewals will provide no relief – Morgan Stanley

The pressures on the European reinsurance sector mean that Morgan Stanley remains cautious in its operational outlook for the reinsurance sub-sector and it believes the June/July renewals will be tough. But it also notes that Swiss Re looks an attractive investment.

In a report entitled ‘Large Reinsurers: Capital returns remain key driver’ the investment bank states that the trends pressuring reinsurance rates continued in 1Q reporting and the June/July renewals are unlikely to provide any relief. “Further capital discipline will remain a key differentiator, we think, to support performance in 2015,” it said.

The report states that Swiss Re has the strongest capital return potential, a diversified earnings stream, and is the most attractive on valuation.

“In a challenging environment, we prefer Swiss Re for its diversification, and potential for further capital management action. We think the buyback announced at year-end reporting can continue for our forecast period, and note that Life Re and Admin Re are sources of growing earnings,” Morgan Stanley stated.

Its order of preference on the big European reinsurers is Swiss Re, Munich Re, Hannover Re, Scor. “We are Equal-weight Munich Re, which is also supported by high capital return potential, but remain cautious on the primary life business and exposure to low yields in Germany,” it said.

Commenting on the insurance space in Europe, the report said it is cautious. “We are negative on the European insurance space, as we think insurers' dividend is set to slow materially relative to the wider market, and concerns grow on capital.

“In a relative context, we believe that the reinsurers could see some support based on their excess capital positions.”