German reinsurance company Hannover Re said in its third-quarter results this morning that it expects the competitive climate in non-life reinsurance, largely property catastrophe business, is likely to be sustained as we move into 2014.
The reinsurer announced lower profits in Q3 than a year earlier, with net income down to €205m from €265m a year earlier, but still beating analysts expectations. Operating profit stood at €291m for the quarter, compared to €420m a year earlier. Much of the decline is attributable to considerably lower investment income of €364m, down around 30% compared to its €499m in Q3 2012.
In terms of underwriting Hannover Re has done a good job of avoiding the areas of the business where rates have dropped so considerably, due to increased competition and inflows of alternative capital, helping it to grow its non-life premiums through selective underwriting and targeting of profitable lines and regions.
Hannover Re said that while U.S. catastrophe reinsurance business was impacted by rate reductions, it managed to achieve satisfactory pricing on other U.S. property lines as well as in Australia and New Zealand.
Hannover Re does not place too much emphasis on U.S. catastrophe reinsurance business, which has given it the ability to avoid being badly impacted by declines in rates in Florida and other regions where alternative reinsurance capital and insurance-linked securities have pushed down rates.
The reinsurer explained; “The decline in margins in US catastrophe business is of merely limited relevance to Hannover Re owing to the company’s below-average market share here.”
CEO Ulrich Wallin commented; “Our strategy of pursuing a selective underwriting policy continues to be of great importance in view of increasing competition and declining investment returns. With this in mind, we are prepared to relinquish business that we do not consider to be adequately priced – even if this leads to a reduction of our market shares in certain areas.”
Hannover Re’s underwriting result came in at €234.4m, compared to €169.7m a year earlier, with a combined ratio of 95%, compared to 96.5%, demonstrating that the reinsurers selective approach to underwriting has enabled it to continue to attract profitable business.
Looking ahead for the rest of the year, Hannover Re said that the intensely competitive climate in non-life reinsurance is likely to be sustained, bringing corresponding implications for both pricing and conditions. However it does expect the market to respond to losses from this year with rate increases, which could help the reinsurer given its focus on German catastrophe business.
Hannover Re also sees opportunity in non-life reinsurance from rising concentration of values in urban regions of the world as well the adoption of risk-based solvency systems in Europe and Asia. These two factors hold the promise of stable demand for reinsurance covers, explained the reinsurer.
Looking further ahead into 2014, Hannover Re does not expect there to be any let-up in the level of competition in the non-life reinsurance market, which it says will make it even more vital to focus on risk-appropriate business rather than to attempt to grow premium income.
Hannover Re is the first of the largest global reinsurers to report third-quarter results and what is clear is that, so far, the declines in pricing seen on U.S. property catastrophe reinsurance business have been avoidable through its globally diverse portfolio composition. As the competitive pressures in U.S. catastrophe business begin to spread to other regions and lines, a likely occurrence in a well-capitalised and highly competitive marketplace, it will be interesting to see if Hannover Re can continue the impressive underwriting results.