European insurers, bruised and battered by exposure to natural disasters last year in Japan, Thailand, Australia and New Zealand, are confident that 2012 can't be as bad, but they will still have to overcome lackluster financial markets, an unsolved euro-zone crisis and tighter regulations if they are to improve their profitability.
And, of course, as ever, they remain exposed to the uncertainties of nature when it comes to tornadoes, hurricanes, floods, tsunami and earthquakes--although catastrophes have eased, it is still early in the year.
The just-completed year was a rough one for European insurers and reinsurers--2011 has been described as the second-worst in history with up to an estimated $116 billion in insured damages. The highest on record was 2005, when strong hurricanes in the U.S. pushed the figure to $120 billion.
Still, over the past few weeks, the big players have expressed confidence in their own businesses going forward, bolstered by belief that geographic diversity will help them balance out risks from any one hit and signaling that they will be more cautious when deciding what policies to underwrite.
The industry is basically split into two groups insurers--life and property--and reinsurers, who take on policies from insurers looking to spread out their risks. They make their money through premiums collected on policies and through financial investments such as bonds and stocks, with high interest rates and soaring equity markets the ideal situations.
Key to any rebound is the ability to raise premiums after disaster-filled years, something that heavy competition may make difficult this time.
The 2011 reporting season was capped Wednesday with the results of venerable Lloyd's of London. The 324-year-old insurance market reported its first loss in six years and said that 2012 "remains challenging for insurers with tough economic conditions globally." The pretax loss of GBP516 million was attributed to Lloyd's members' exposure to major catastrophes.
Still, CEO Richard Ward said that huge catastrophe losses "don't happen every year."
"When we do have these significant claims coming in, yes, the market reports a loss. But when claims don't come in, the market reports a profit," he told Bloomberg TV.
Finance Director Luke Savage told Dow Jones Newswires that due to the uncertainty in investment markets, "we don't think there's going to be much in the way of investment returns to support underwriting."
Savage said general insurers are also in a "catch 22" situation where, despite the huge losses from catastrophes last year, they aren't able to raise rates as much as they want to.
Savage said "rates are still sluggish because of excess capital in the industry. It's going to be difficult to drive rates up," he said.
Excess capital-built up in previous low-claims years means that insurers have enough funds to back the offering of new insurance policies. That increases competition and makes it difficult to raise premiums.
That caution is echoed elsewhere, although it is mixed with optimism that 2012 should be better.
Giovanni Perissonotto, chief executive of Italy's Assicurazioni Generali SpA (G.MI), was upbeat last week, saying he is "hopeful we have reached the bottom" after reporting a 50% drop in net profit. Perissonotto said "caution" remained key for 2012 and that Generali would continue reducing the risk of its investment portfolio.
Likewise, Prudential PLC (PRU.LN), the U.K.'s largest insurer by market capitalization, two weeks ago posted a 4% rise in net profit and said it expects "to deliver continued relative outperformance in the medium-term," helped by the company's strong presence in growing Asian markets.
Meanwhile, major reinsurance player Swiss Re (SREN.VX), after it announced a strong increase in 2011 net profit last month, also pointed to the need for a solid geographic reach, saying that it will "seek to capitalize on the potential for reinsurance and insurance solutions in emerging and fast-growing markets in Asia and South America."
Similar cautious optimism regarding insurers came from analysts as well.
"They have relatively strong balance sheets and they have slimmed down their costs of operations. They're not in a bad place. Clearly, there's uncertainty on investment markets and the macroeconomy, but they're not banks," said Panmure Gordon analyst Barrie Cornes.
"Three years ago, they were lumped with banks and with all the uncertainty in financial institutions. But in reality, the concerns in the banking area didn't have a direct read-across to the insurance sector, and that proved to be the case," he said.
Swiss Re Chief Economist Kurt Karl said: "The positive side from the euro crisis is that it looks pretty well-contained at this point. With the European Central Bank's long-term refinancing operations and settlement of a Greek bailout, risks from the financial crisis have receded a lot. It looks like we have a mild recession in Europe but it's not severe, and we expect this to be over by the middle of the year."
Fitch Ratings Senior Director Federico Faccio said: "The general idea is that 2012 would probably be more stable in terms of market volatility than in 2011. Another reason why insurers may be positive is that their underwriting performance generally across Europe is improving in both the life and non-life businesses."
In recent years, insurers have been fretting over Solvency II, a new capital regime scheduled to be implemented in 2014. But recent changes in the text of the draft law appear to show that it may not turn out to be as Draconian as previously expected.
Various trade bodies have warned that some provisions being discussed among European lawmakers might force insurers to unnecessarily raise billions of euros to produce a buffer against risks.
Last week, insurers welcomed an amended draft of the rules which added an important provision on so-called "matching premiums," which could free life insurers from raising extra capital to cover spread risks related to holding long-term corporate bonds.
The current Solvency II discussions also center on whether the European Commission should deem other countries' solvency regimes as "equivalent" to Solvency II.
Without this "equivalence," European insurers may be forced to hold extra capital to cover their non-EU operations.
Analysts from Morgan Stanley said Friday that a political solution is possible. "It seems reasonable to assume the European Commission would have no desire to put European insurers at a competitive disadvantage relative to international peers," Morgan Stanley said.