Reinsurance firm Hannover Re has continued to grow its underwriting portfolio, despite the fact that it acknowledges the softened price environment and challenging state of the market as well as the pressure placed on it by competition from insurance-linked securities (ILS).
In its latest results, which you can read more about over at our sister publication, Hannover Re revealed gross premiums written growth across its entire business of +8.6%, while across the property and casualty reinsurance unit, where market conditions are most challenging, it actually grew its premium volume by a massive +17.3%.
But this is in a market environment that CEO Ulrich Wallins acknowledges, “remains challenging going forward.”
The company says that; “Market conditions in property and casualty reinsurance remain intensely competitive,” which it puts down to “An excess supply of reinsurance and additional providers from the insurance-linked securities (ILS) market, along with the absence of large losses,” together increasing pressure on prices and conditions.
But Hannover Re is experiencing most of its growth in structured reinsurance across the U.S. and Europe, not in the property catastrophe market, specialty reinsurance or any of the most pressured lines.
The structured reinsurance arena is one where the four major reinsurance firms can wield their scale and depth of expertise, putting together complex one-off solutions rather than bidding to play in the renewal cycle.
Hannover Re has also grown its work in ILS and catastrophe bond fronting and transformation, as it seeks to extract some profits out of one of the factors that it also deems as adding pressure to the marketplace.
Although Hannover Re is clearly also growing in more traditional renewal business as well, across other areas of property and casualty reinsurance.
The firm said that the renewals saw part of its North American portfolio renewed, along with natural catastrophe risks, and it reported +15% premium growth in the North American renewals, “despite the pressure on rates.”
That does suggest some growth in areas of greater competition and pressure, which in a soft market environment does suggest that the firm will be taking on a little more risk, for lower returns than it would have seen a few years ago.
Hannover Re is also retaining a little more business, likely in order to ensure it can extract sufficient underwriting profit in order to continue to make targets despite the lower pricing.
Market conditions are evident though, as they have been in the other major reinsurers results, with more risk taken on, but clearly lower underwriting results reported, all despite a much lower loss burden and generally healthy reserve releases.
It remains clear that there is generally a lower amount of profit available per unit of risk underwritten and it’s clear that the way companies are dealing with this is diverging, to a degree.
Hannover Re and SCOR are both growing their portfolios it would appear, while Swiss Re and Munich Re are currently doing the reverse, both pulling-back on premiums written, particularly in P&C reinsurance lines.
If we go back just a few years the main sector equity analysts and rating agencies were all saying that any companies looking to grow significantly in the current market environment could be viewed negatively. But while profits remain good, almost abundant still, there’s little to provide evidence that growing through the soft market is really an issue, to date.
Despite the divergence though, all four show evidence of the same effects of the soft reinsurance market, of generally lower profitability being extracted from their underwriting.
Over the longer term it will be interesting to see how the different strategies to growth, place in the value chain (primary or reinsurance), business lines and also how they manage their own retrocession and hedging needs, play into results at a time when loss activity ticks up and erodes profitability further.
Writing more risk, at lower returns, likely broader terms, while retaining more of it in order to extract more profit, could be deemed a risky strategy at the current stage of the cycle.
It’s going to be interesting to watch how the big four continue to navigate the reinsurance market and whether the pressure will become even more evident, before there is any sign of it easing off.