Focus on reinsurance portfolio profitability, quality at Hannover Re

German reinsurance firm Hannover Re, one of the world’s leading globally diverse reinsurers, said that in view of the soft market conditions it would concentrate solely on preserving the profitability and quality of its non-life reinsurance portfolio.

With the non-life reinsurance market the focus of high-levels of competition, created by the over-capitalised traditional reinsurance market as well as growing levels of new capital from alternative sources, Hannover Re will not seek to grow in this area, expecting its premium volume to remain broadly stable.

This strategy differs from some other reinsurers, who have grown their premiums written or moved their focus into other areas of the non-life market, in an attempt to make up for declining premium rates across the property catastrophe reinsurance market. As the softening of rates spreads into other areas, such as casualty reinsurance, a hold, maintain and preserve strategy may turn out to be sensible in the current market.

As we wrote earlier, reinsurer Swiss Re has increased its underwriting of casualty reinsurance risks significantly, in an effort to grow premiums in the current market as well as to benefit from the longer-tail, by recouping the larger investment returns that are possible from investing the assets in this business.

Hannover Re differs again from Swiss Re in that it has not adjusted its investment portfolio this year and it is not placing a greater emphasis on the returns possible from its asset side, preferring instead to stick to its investment return targets, again adopting a preservation approach to its profits.

Hannover Re said this morning that it was “satisfied” with its results for the first half of 2014. However the reinsurers results were weaker than many analysts expected on the P&C side of its business and a hit to its combined ratio from Costa Concordia losses as well as aviation claims in Q2 triggered a share price fall today.

Hannover Re reported group net income for the first half was up 4.9% to EUR444m, compared to a year earlier. However the reinsurers operating profit came in very slightly lower than the first half of 2013. The non-life combined ratio is up a little as well, which further dented investor confidence it seems.

Hannover Re’s results statement said that the price softening and competition in the reinsurance market continues to bite:

Supply substantially exceeds demand in global non-life reinsurance, as a consequence of which competition has continued to intensify sharply in 2014. A key factor here – aside from the absence of market-changing large losses – is that healthy levels of capitalisation are enabling many clients to retain more risks for their own account. Furthermore, the increased capacities from the market for insurance-linked securities (ILS), especially in the area of US natural catastrophe covers, are leading to appreciable price erosion.

Despite this, Hannover Re CEO Ulrich Wallin remains confident in the firms ability to maintain its position in the marketplace. He said; “Once again our non-life reinsurance business delivered a pleasing result, showing that with our proven cycle management we are optimally placed to face up to the soft market conditions.”

Hannover Re said that reinsurance renewal conditions in June and July were difficult, with price declines evident across many property catastrophe regions, but the firm only reduced its non-life premiums written by just -0.5% as it sought out new opportunities, including a high-volume reinsurance treaty in China and further of activities in Southeast Asia.

In terms of investment income, Hannover Re said that it would not adjust its portfolio and would not be making significant adjustments to allocate to new asset classes, a different strategy to other reinsurers, with a focus again on stability and maintaining profits.

Hannover Re remains on track for its targets for 2014. In fact analysts at RBC Capital Markets highlighted the lower than expected losses experienced in Q2 and said that this could result in a reserve release, if loss levels remain low, helping the firm to achieve targeted combined ratio for the year.

A focus on quality and profitability should stand Hannover Re in good stead, as long as it is not being tempted to underwrite more risky business with all-encompassing terms. Preserving a profitable non-life portfolio should see the reinsurer through 2014 successfully, particularly as its life reinsurance portfolio profit continues to improve as well.