Hannover Re shows growth appetite at 1/1, despite only slight price rises

Share

Hannover Re, one of the largest global reinsurance firms, displayed its appetite for growth at the key January 1st renewal season, achieving substantial growth in terms of premiums underwritten, even though price increases were only seen as slight overall.

hannover-re-logoThe major reinsurance companies including Hannover Re have all bemoaned the state of reinsurance pricing for at least five or six years, as pricing steadily decreased.

But it only takes one opportunity to grow and major reinsurers always seem to seize it, which has been evidenced repeatedly at renewals over the last few years.

January 2019 looks set to be no different, with major reinsurers growing their books despite pricing being perhaps 40% or more below where it sat six or so years previous.

Hannover Re said it achieved currency adjusted growth of its book amounting to 15.4% at the renewal, with particularly substantial growth in Asia and North America.

Overall,  the reinsurer said price levels improved slightly, but the renewal was healthy enough for Hannover Re to confirm its guidance targets.

In traditional property and casualty reinsurance Hannover Re’s renewal business rose by 15.4% on a currency-adjusted basis to EUR 6.4 billion of premiums (up from EUR 5.6 billion).

Slight rate increases were reported across loss free accounts, but Hannover Re noted double-digit rate increases in some other areas of its book where losses have affected accounts more.

“In the face of another burden of heavy losses, demand from both existing and new clients was solid,” explained Ulrich Wallin, Chief Executive Officer of Hannover Re. “Thanks to our good market positioning we were thus able to generate pleasing growth in the renewed portfolio at adequate conditions.”

Around 66% of Hannover Re’s book of traditional property and casualty reinsurance (excluding facultative reinsurance, insurance-linked securities (ILS) business and structured reinsurance) came up for renewal on 1st January 2019.

Interestingly, Hannover Re noted that the ILS market and alternative capital providers tool a “more restrained approach to the renewals” compared to a year ago.

However, the firm said ILS capacity remains a significant part of the market.

The question of whether traditional reinsurers have been restrained is an interesting one though. Given the way pricing declined, was bemoaned and said to be too low and has not yet recovered to anywhere near the levels the bemoaning began, it raises questions about the adequacy of price for a traditional reinsurance business model.

If it is sufficiently priced, as Hannover Re suggests from its appetite, then perhaps the ILS market should begin to push its capital efficiency a little harder once again? Just a thought.

In fact, Hannover Re acknowledges that, “Prices as at 1 January 2019 were commensurate with the risk or slightly improved.”

Although the reinsurer does highlight the importance of remaining selective and having a focus on minimum margins.

Hannover Re had EUR 5.551 million of premium up for renewal at 1/1 2019, renewing EUR 4.912 billion while treaties worth EUR 1.304 billion were either cancelled or renewed in modified form.

The firm saw opportunities for growth in major markets, growing 21.5% in North America, with price increases in loss affected accounts but also some price declined recorded in loss free areas as well.

The reinsurer noted that it expanded its customer base in North America, growing some property accounts and finding U.S. casualty business satisfactorily priced as well.

In Europe the reinsurer grew by 15.1%, citing improving market conditions and evidence of more discipline in the market. But in marine reinsurance a contraction was seen, by 7.7%, as Hannover Re cited ongoing competition.

In Aviation Hannover Re cited satisfactory conditions, with improving terms, resulting in 0.9% premium growth.

Hannover Re grew its credit and surety reinsurance and political risks book by 6.5%. While its UK and London Market book saw premium volume grew by 1.9%.

Asia and Australasia saw the most significant growth though, with Hannover Re reporting that its worldwide treaty reinsurance business grew by 28.8%.

But perhaps most surprisingly, to some, Hannover Re went for significant growth in natural catastrophe reinsurance underwriting business.

The area most affected by price declines over recent years saw some price increases in loss affected areas, although the firm noted that “the price impetus stemming from the large losses of 2017 faded somewhat as expected.”

Despite this, Hannover Re reported expanding its premium volume for non-proportional natural catastrophe business by 32.3% at the renewals.

Some renewals were even brought forward, the reinsurer said, helping it to grow the book as well. But it sounds like even had the availability of natural catastrophe reinsurance business remained static, Hannover Re would have grown its book considerably anyway.

“The subsequent rounds of renewals in 2019 should allow for more significant rate increases, given that a clearer picture of the results achieved by reinsurers is expected to emerge in the course of the year and the pressure on capital market investors will likely grow in light of market and interest rate factors,” the reinsurer explained.

So while reinsurers continue to express distaste for pricing throughout much of the year, it’s clear that given a chance to grow and especially when the ILS market was under a little more pressure, the opportunity was seized with both hands and growth achieved across the book.

The 1/1 renewals gave reinsurers a chance to rebuild some of their books, taking business back from some ILS markets and third-party capital.

The question, over the longer-term cycle, of price adequacy and whether their cost-of-capital can bear the risk and expected losses remains. But perhaps the complaining about rate declines was more for show and bluster than a serious reflection of the challenges their business models faced? Time will tell.

Else why write so much more business at rates that still sit far below where you began to bemoan them?

Hannover Re is clearly happy with the book it has underwritten and the profits it can deliver, while its shareholders likely will be too.

The company said its net income improved in roughly EUR 1.05 billion (up from EUR 958.6 million) in 2018 and continued to expect to hit a targeted EUR 1.1 billion for 2019, with single digit premium growth anticipated.

“In view of the favourable outcome of our main renewal season, we take an optimistic view of movements in prices and conditions in the current year and see good prospects for profitable growth in our property and casualty reinsurance portfolio,” Wallin said. “We have put in place a solid foundation for achieving the targets for the 2019 financial year.”

One side-effect of such significant growth though is a greater exposure to major losses.

Hannover Re said that it has raised its net large loss budget for the first time in three years, to EUR 875 million for 2019 compared to EUR 825 million, reflecting the growth in the underlying business.

However, it insists that its risk appetite remains unchanged.

Clearly rates are considered sustainable for Hannover Re, so clearly the ILS market with its capital efficiency should be able to achieve further growth once the hangover of loss impacts are dealt with.

It bodes well for the rest of the year, but does also signal an ongoing trend towards fewer, larger reinsurance firms may be the upshot of the consecutive years of price declines and strong competition.

The large and globally diversified appear to have the appetite for growth right at a time when the ILS market found its renewal more challenged, due to the effects of losses and trapped collateral. It will be interesting to see whether the rest of the big reinsurers also achieve significant growth and how the smaller reinsurers also fared at the renewals.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.

Read previous post:
Risk models may under-estimate real ILS market losses: Lane Financial

According to insurance-linked securities (ILS) focused consultancy Lane Financial LLC there is growing evidence that risk models used by ILS...

Close