Hannover Re sees reinsurance price pressures easing, ups target

German reinsurance firm Hannover Re, one of the top five reinsurers in the world, saw better than expected renewals in the first-half, citing a still competitive marketplace but with price pressures easing. The result sees the reinsurer increasing its full-year target.

Hannover Re has beaten expectations in its results announcement today, with net income up 19.7% at €531.9m, premium income up 21.5%, return on equity of 14%, losses up slightly but still only a combined ratio of 95.4% and impressive investment income, all leading it to raise its profit guidance for the year from €875m to €950m.

It’s an impressive result given reinsurance market conditions remain challenging. Hannover Re has grown its gross written premiums by 9.5% at a constant exchange rate, following the other large reinsurers which have also been expansive in recent months.

The results from Hannover Re, Swiss Re and SCOR all show large increases in business underwritten and assumed, which in a competitive marketplace is impressive. However this makes enterprise risk management increasingly important, as more risk is being assumed at much lower rates and more expanded terms. Something to watch.

Interestingly, Hannover Re stresses the continued profitability of the business it underwrites in its results statement and report, despite also stressing the continued challenges and high levels of competition in the reinsurance market.

Chief Executive Officer Ulrich Wallin commented; “The sustained strong profitability of property and casualty reinsurance shows that with our systematically pursued policy of selective underwriting we are well placed to tackle the conditions associated with challenging market phases.”

Large reinsurers are confident in their ability to select the right risks, without taking on too much exposure or leaving themselves open to accumulations due to very low pricing and much expanded terms and conditions.

Hannover Re is also positive as it has witnessed evidence of rate declines slowing and the emergence of a bottom, particularly in the U.S. property reinsurance market.

The reinsurer explained on property and casualty reinsurance; “While supply still outstripped demand in worldwide property and casualty reinsurance, the first signs of bottoming out began to emerge here on the rates side.”

Hannover Re was satisfied with the renewals in the first-half and the quality of the business it underwrote. However, the reinsurer acknowledged that “the general environment in property and casualty reinsurance remains challenging.”

Bright spots in territories such as Australia, Latin America and the Caribbean gave Hannover Re an opportunity to increase its market share in some cases.

On the U.S. reinsurance market, the reinsurer said; “In North America the pressure on rates and conditions remains undiminished due to the very good results booked in both the primary and reinsurance sectors in the absence of large losses.”

However, despite the challenging conditions Hannover Re has noted that price declines are slowing.

“The rate reductions were, however, smaller than anticipated and offer early hints of a bottom being reached. Stronger demand driven by the improved state of the economy is the key factor here,” the reinsurer explained.

There were even some rate rises on business Hannover Re underwrote; “In US property business rates for programmes in non-proportional reinsurance that had been spared losses declined by around 5%. For loss-impacted treaties, on the other hand, rate increases running into double-digit percentages were obtained in some cases.”

And on catastrophe reinsurance specifically, the reinsurer said; “The pressure on prices in US property catastrophe business eased compared to the previous year’s renewals.”

CEO Wallin explained that Hannover Re’s performance in the first half was; “all the more remarkable because the general environment facing the international reinsurance industry remains challenging.”

However, the pressure does remain with the capital markets and insurance-linked securities (ILS) players a threat, he said; “Property and casualty reinsurance, in particular, continues to be intensely competitive, not least owing to the entry of new capacity providers from the capital markets. The resulting negative impact on the rate trend in reinsurance business has been felt since as long ago as mid-2013.”

But of course, Hannover Re is itself a player in the ILS and collateralized reinsurance market, both in the fields of risk transformation and fronting services for ILS where it has grown its market share in recent months.

Helping Hannover Re to grow its business, in this challenging environment, are its ability to offer large, tailored solutions, and also new business won through its ILS work. Wallin said; “Our specialty unit for Insurance-Linked Securities substantially enlarged its business volume.

Interestingly, one less bright area for Hannover Re has been in its U.S. life and health reinsurance business, where both its mortality and lapse risk rates have been worse than forecast.

It will be interesting to see whether Hannover Re looks to retrocessionally protect this portfolio. The reinsurer could take advantage of demand for ILS to offload some of, or cap, its mortality and lapse exposures perhaps.

The reinsurer went into more detail on property and casualty reinsurance pressures in its half-year report, saying:

Property and casualty reinsurance continues to be fiercely competitive, with the supply of reinsurance coverage still out-stripping demand. The most important drivers here are the absence of market-changing large losses, the tendency among ceding companies to retain more risks for own account thanks to their healthy capital resources and the availability of additional capacities from the ILS market, especially in US natural catastrophe business. Taken together, these factors are putting prices and conditions under sustained pressure.

But despite the ongoing challenges and the pressure applied by the growing alternative capital market in reinsurance, Hannover Re believes the market is beginning to level off.

A trend towards some easing of the premium erosion can nevertheless be observed in certain lines and markets.

Hannover Re also notes that U.S. casualty reinsurance business remains “fiercely competitive” but with pressure on pricing easing in U.S. property catastrophe reinsurance it is likely that the casualty markets will also temper in months to come.

The reinsurer is now confident in its ability to beat its own forecasts for the year and expects strong results across much of its business, with growth in P&C reinsurance perhaps an unexpected bonus to be enjoyed by Hannover Re and its competitors this year. It’s clear that in late 2014 most of the major reinsurers were not expecting to be able to achieve bottom line growth in such a competitive marketplace.

It’s interesting that with pricing reaching the bottom of some ILS investors risk appetites, leading some of the top managers to stem inflows and maintain discipline, that the market has seemingly begun to level off as a result.

With still no major catastrophe losses to speak of, it had perhaps been expected that the pressure would continue to see prices declining steeply, but that doesn’t seem to have been the case.

January renewals will be telling, with some much of the global property catastrophe market up for renewal. Expansive players will get a chance to leverage their cost-of-capital and risk appetite on regions that haven’t renewed for a year, which could result in slightly steeper declines than seen in the U.S. mid-year renewals, which have really been the ground-zero for pricing pressure.

The fact that almost every company has reported an easing of price pressures, with some also citing a disciplined pull-back by ILS capital at the mid-year renewals, will give the market hope for a less pressure January.

Of course if the opportunities in January are attractive and meet ILS players risk appetites we could see new inflows of capital that could increase the pressure once again. The sentiment displayed by market participants in the coming months will likely be telling.