Hannover Re, one of the world’s leading reinsurance firms, reports its results this morning in which Chairman Ulrich Wallin acknowledges the increasingly fierce competition which was a hallmark of the non-life reinsurance market in 2013.
Wallin said that reinsurance premium growth at Hannover Re slowed appreciably in 2013, with gross written premiums at the firm increasing by just 1.4% during the year, a sign of the more difficult market environment. However Wallin puts the slow down in growth to Hannover Re’s focus on profit-oriented underwriting, its refusal to deploy capital at any cost.
Hannover Re, like all the other global reinsurance firms, has had to be especially prudent in its underwriting in recent months, particularly in property catastrophe and non-life reinsurance where the capital markets are making their presence felt. Pricing has declined across the board in catastrophe reinsurance business as new capital poured into the reinsurance market from third-party investors such as pension funds.
Wallin explained his firms prudence and why this is important; “This is based on our conviction that over the long term a prudent underwriting policy will help to strengthen your company’s competitiveness. This is all the more the case in a market environment that is notable for increasingly fierce levels of competition, particularly in non-life reinsurance.”
Hannover Re was positively impacted by low catastrophe losses in 2013, helping it to a record year-end result of EUR 895.5 million. Non-life drove much of the positive performance, despite the competitive market. Wallin said; “This performance was driven by a very good underwriting result in non-life reinsurance, which improved again on the previous year by EUR 63 million.”
While Hanover Re noticed major declines in rates across much of the non-life reinsurance market the firm recorded its best ever result in its non-life reinsurance segment, helped by a disciplined focus on underwriting business which satisfied its margin requirements and a lower than anticipated major loss expenditure during the year.
Hannover Re has adjusted its book during 2013 to help it to avoid the areas of the market where competition was highest and rates declined the most. Hannover Re’s key competitors Munich Re and Swiss Re have both also looked to portfolio adjustments in order to maintain underwriting return, avoid competition and price pressures at recent renewals.
Wallin acknowledged the growing influence of the capital markets, with third-party sourced capital from the likes of pension funds flowing into insurance linked securities and collateralized reinsurance and impacting rates, in the non-life reinsurance market.
Wallin said; “Increasingly fierce competition was a hallmark of the market environment in non-life reinsurance in the year under review. Most notably, the cash inflow from capital markets for the underwriting of reinsurance risks prompted sometimes considerable rate reductions from the middle of the year under review onwards.”
The high levels of competition forced Hannover Re to adjust its underwriting book as it sought to maintain its margins.
Wallin continued; “Against this backdrop, it was especially important for us to maintain a disciplined focus only on business that could be precisely evaluated and that satisfied our margin requirements. Premium growth consequently contracted markedly relative to the previous year.”
Hannover Re contracted its reinsurance renewal book in January even further, as it sought to maintain underwriting discipline and margin targets. Wallin hinted that Hannover Re has likely been moving away from treaties which it finds unattractive in the current market environment.
Wallin said; “In non-life reinsurance we put great emphasis on a disciplined treaty-based underwriting policy. With margins in overall business becoming ever tighter, we can show increasingly scant tolerance for poorly performing treaties. This was already evident in the treaty renewals as at 1 January 2014, when our premium volume contracted by a modest 2 percent.”
Demand for alternative reinsurance capital remained unchanged in 2013 with new reinsurance capacity continuing to enter the market as investors search for allocations to reinsurance linked investments within what has become a new global asset class. Hannover Re said that the pressure on pricing and conditions, particularly in natural catastrophe business, intensified further during the year as a result.
Competition was considerably more intense than in 2012, noted Hannover Re, with the supply of reinsurance protection exceeding demand resulting in consistent price pressure. Hannover Re has been able to avoid the worst of the pricing pressure, due to its disproportionately small exposure to U.S. property catastrophe risks, but with pricing pressure spreading it won’t be avoided completely.
Hannover Re leverages the insurance linked securities market for its own retrocessional needs through its ‘K’ quota share where it cedes a portfolio of its risks to the ILS market. In 2013 the K quota share was around $320m in size. Hannover Re also acts as a transformer and transfers clients risks to the capital markets in structured form, allowing it to benefit from the appetite for reinsurance among capital markets investors.
On catastrophe bonds, Hannover Re noted that issuance of cat bonds is a more attractive proposition now that pricing has declined so significantly due to demand. We have not seen Hannover Re issue its own cat bond since the Eurus deals so it would be interesting to see the reinsurer return for retrocession via a cat bond issuance. The firm has said that it expects to increase its retrocessional protection in 2014 to take advantage of market conditions.
On the other side Hannover Re has been an investor in cat bonds but notes that it has pulled back on this activity due to the sharp decline in pricing. The firm has increased its work with ILS investment funds in the collateralized reinsurance space in 2013, acting as transformer or fronting business for a growing number of these firms.
So for Hannover Re navigating the increasing competition in the reinsurance market has resulted in outstanding figures for 2013 but with the shadow of the capital markets pressuring pricing and resulting in ‘fierce competition’ 2014 may prove more difficult to navigate successfully.
For all of the large, globally diverse reinsurers, the ability to adjust portfolio and look to other lines for profit has been valuable in recent months. But should the reinsurance market begin to suffer heavy losses, say from an active hurricane season, while competition from alternative capital increases as more flows into the space, these global reinsurers could find the pressure on them growing considerably.
Looking ahead Wallin remains positive; “In view of the prolonged period of low interest rates and increasing competition, especially in non-life reinsurance, the general environment remains challenging. Thanks to our low cost of capital and administrative expenses, we nevertheless enjoy a tangible competitive advantage that will enable us to generate consistent results even in a softening market.”
It may be telling that Wallin mentions cost of capital as a key competitive advantage, it is considered one of the key advantages associated with alternative reinsurance capital and ILS. If the capital markets continue to flow money into reinsurance Wallin may find that the cost of capital becomes a key factor that reinsurers like Hannover Re are pressured to compete on in years to come.
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