Shares in European reinsurers slip in early deals with Munch Re, Swiss Re and Hannover Re down as much as 1.1 percent after Nomura cuts its ratings on all three firms and says it expects their earnings reinsurers to fall by 3 percent year-on-year in 2013.
Nomura says its earnings forecasts for the European reinsurers are now an average 8 percent below consensus for 2013 as it double downgrades Munich Re to "reduce" from "buy" and cuts Swiss Re and Hannover Re to "reduce" from "neutral".
The reinsurers are among the best performers in the sector year-to-date -- Swiss Re, Munich Re and Hannover Re have gained more than 30 percent in 2012 compared with a 10 percent rise on the FTSEurofirst.
In that time the broader European insurance sector has rerated to 13.6 times current price-to-earnings (PE), compared with 12.1 times last year, according to Thomson Reuters Starmine data, while the FTSEurofirst trades on 13.1 times current PE
Nomura says the reinsurers rerating has been based on the strong rate increases in 2012 as well as the perceived defensive nature from lower investment risk.
"We see the dynamics for 2013 deteriorating with downside risk from asbestos (claims) exposure (in the U.S.). We are concerned that some reinsurers may have to increase reserves as a result ... Therefore, we turn bearish on the European reinsurers, but maintain our bullish stance on the insurance sector overall," it says.
The earnings quality (EQ) score -- a measure of the sustainability of earnings growth based on recent past performance -- for Hannover Re and Swiss Re decreased to 67 and 54 respectively out of 100 after results in June, while Munich Re's EQ score is 42, below the industry median, according to Starmine data.
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