The insurance industry escaped the worst of the floods that hit Germany, Hungary and the Czech Repub...
The insurance industry escaped the worst of the floods that hit Germany, Hungary and the Czech Republic last month but the impact of the deluge simply adds another negative to an already struggling sector.
Raj Shant, head of European equities at Newton, says the hits the insurance companies took as a result of the flooding were relatively light.
'A lot of people could not afford insurance and so didn't have any, especially in Eastern Europe, and a lot of those affected by the flooding who did have insurance were not covered for flood damage,' he says.
According to Shant, Alliance, the biggest direct insurer in Germany, reported damage claims totalling e500m, while Munich Re, the world's largest reinsurer, said its costs would probably be less than e500m. Swiss Re, Europe's second largest reinsurer, reported claims resulting from the floods at around Swiss francs 250m (e170.5m).
'So, all in all, it wasn't good for insurers, especially after last year, but it wasn't as bad as it could have been,' Shant notes.
The question, he says, is who will pay for the flood damage if the insurance sector does not? This will obviously be the taxpayer in each of the affected countries. German chancellor Gerhard SchrÃder has already announced tax cuts scheduled for next year will be shelved in order to meet the damage bill, Shant adds.
Some observers may see an element of schadenfreude in this, Shant says, as Germany could be in danger of breaking the terms of the Growth and Stability Pact with the other eurozone countries. This is an agreement between the EU countries, insisted upon by Germany, to control spending within the member countries. Germany, Shant says, had in mind countries such as Italy and Spain when drafting the agreement but is now in danger of breaching the agreement itself.
'The irony here is that the Germans were the most concerned with deficits but it is now their economy that is struggling with slow growth,' he adds.
The flood damage did little to affect Newton's view on the financial sector as it was underweight before the floods.
'Most insurers tend to make underwriting losses and make their gains on investments,' Shant says. 'This clearly has not been happening due to the poor markets. Within the sector, we prefer insurers with strong balance sheets and reserves.'
Andy Killean, investment manager at Britannic Asset Management, agrees the floods have not hit insurers as hard as expected and says a much bigger issue is whether any company will be forced to launch a rights issue due to the tough operating climate.
The insurance business has had an abysmal year and Britannic has been underweight the sector for most of 2002, he adds. Within financials, he prefers banks to insurance, although financials as a whole is underweight due to his negative stance on insurance. 'It is only a matter of time before we see rights issues from the weaker companies,' Killean says.
His benchmark index, the FTSE World Euro ex-UK, is down 23.6% for the year to date, in sterling terms, while the insurance sector is down 39.25% on the same basis.
Insurers not taken huge hit from floods.
Taxpayer will probably foot the bill.
Insurers with strong reserves stand out.
Floods negative for struggling sector.
Rights issue from weaker companies.
Sentiment remains negative.
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